Watching the success of its Asian counterparts acted as the catalyst for Malaysia to rethink its economy, reducing its dependence on natural resources and putting greater faith in the private sector, all while reducing government spending and keeping debt to a manageable level. The country's minister without portfolio, Idris Jala, describes the plan's progress. 

Idris Jala

For several decades after its independence in 1957, Malaysia rode on a high. The world sat up to take stock of this young nation’s potential to rise as one of Asia’s tigers-in-the-making.

Malaysia witnessed strong economic growth and, in a relatively short period of time, rose to the ranks of the middle-income countries. With a steadily growing gross domestic product [GDP] per capita based on resource wealth and an open, export-based economy, standards of living improved, as did access to high-quality education and public healthcare.

In the halcyon era of the 1970s, Malaysia’s per-capita income was higher than those of Taiwan and South Korea, displaying all the right precursors to break through to high-income status and perform its own economic miracle. We were, to some extent, a poster child for the high middle-income countries.

Out of the fast lane

Despite its initial resource advantages, a surge in economic growth and large improvements in logistics and supply chain management, Malaysia gradually slipped behind competing countries. Conversely, some resource-poor economies such as Taiwan and South Korea very quickly leapt forward into advanced nation status by the mid-1990s. 

Our neighbours epitomised the can-do innovative spirit of the Asia tiger in shoring up productivity, developing domestic enterprise and creating local technologies to fiercely compete in global markets. Malaysia, to some extent, trailed in their wake, unable to find a firm footing, as we battled with regional players to attract foreign direct investment and persuade multinationals to set-up shop in our country. We were clearly behind some of our neighbours in terms of human capital and hi-tech exports.

When the Asian financial crisis of 1998 occurred, it was a clear indication that Malaysia's days of easy success as a resource-rich country were over. We responded with strenuous efforts to restructure our economy, stabilise balance sheets and bolster domestic industrial companies. 

While these efforts were broadly successful, some carried the seeds of future challenges. Specifically, we created an expectation of indefinite government subsidies for energy and other goods. Such subsidies, always inefficient, were affordable only when the going was good.

Policy response

By the end of the 2000s, the world again faced a bleak economic scenario. The US sub-prime meltdown had triggered a global financial crisis, hitting Asia squarely in the gut. Malaysia was not spared. While we had successfully recovered from the Asian crisis, the global financial crisis of 2007-09 directly resulted in a burden of expanded government debt and deficits. It was against this cacophonic backdrop that, in 2009, Najib Razak became Malaysia's prime minister.

With our backs to the wall, we had to act fast and take bold, radical steps to arrest the slowdown, strengthen economic fundamentals and escalate efforts to grow our sectors to successfully compete with global players. There was no room for complacency and half-measures.

I said in 2010 that we would be a bankrupt nation by 2019 if we continued to increase our subsidies and borrowings, and our economy were to grow by less than 3% annually. Without doubt, continuing down that path would have condemned Malaysia to the same crossroads that Greece faces today.

In the past few months, we have witnessed a Greek tragedy, with the country's debt crisis billowing to epic proportions in unprecedented fashion within the EU. The first International Monetary Fund default by a developed country came close to forcing Greece’s exit from the eurozone and threatened the very foundations that the EU is built upon. As can be seen from the experience of Greece, financing growth with debt is unsustainable. Left unchecked, the end-game is not pretty. 

Against this backdrop, there is a need for a better model, one that promotes economic growth yet keeps government finances in check. After 2009, we undertook a ‘balancing act’ involving two key steps: progressively creating manoeuvring room by reducing our debt and deficit levels; and diversifying and restructuring the Malaysian economy while reducing commodity dependence. This act had the government and private sector each playing critical roles – the government creating macro-economic stability; the private sector creating economic growth. 

Room for manoeuvre

Top on the list of our macro-economic priorities were managing the twin challenges of excessive debt and swelling government spending while enabling the economy to grow strongly. The government was well aware of the difficult dilemmas ahead, and steeled itself to make tough policy reforms to get the country on a sound fiscal and monetary footing. 

Historically, some countries heading towards high-income status ended up getting in way over their heads when they overlooked debt management while pursuing growth. Gripped with 'high-leverage fever' they found themselves with little fiscal room to manoeuvre. 

I am convinced governments should avoid over-borrowing to finance short-term growth and instead adopt a balanced debt-to-equity model to stimulate economic growth and reduce deficits.

Malaysia made the decision to be prudent – we borrow just enough to ensure we do not over-leverage. The government cannot legally have debt above 55% of GDP under the 1983 Government Funding Act and the 1959 Loan (Local) Act. 

Debt ceiling as a discipline imposed upon the government allows for sufficient space to manoeuvre and mitigates external risks. We are not, therefore, over-borrowing and beholden to creditors or at risk of crippling the domestic economy. 

Presenting to an audience of finance ministers at Harvard University this year, I had proposed for governments to gradually reduce debts and deficits to get into a financial ‘safe zone’ where public debt as a percentage of GDP sits below 75% and deficit at 4% or below. Under the 11th Malaysia Plan, we have committed to progressively narrow national debt from 53.3% of GDP currently to 43.5% by 2020. Fiscal deficit will drop from 3.2% of GDP in 2015 to 0.6% by 2020. 

With the private sector leading the charge to draw in revenue and investments, the government can ease into its role as facilitator and problem solver, and focus on its fundamental duty – to safeguard citizen welfare.

Diversifying the economy

While creating macro-economic stability, governments must focus on enabling the private sector to thrive. It is the private sector – not the government – that is the vital engine for job creation, growth and investment. 

Malaysia's Economic Transformation Programme [ETP] was introduced in 2010 to do just that – to generate growth by encouraging and freeing up the private sector, particularly focusing on the 12 ‘National Key Economic Areas’ where we have comparative advantages.

Countries seeking sustainable economic growth need to be plugged into large and dynamic global markets and need to continually upgrade capabilities (Japan and Germany are examples of countries that have done this). Failing to do so makes it a matter of time before other countries catch up and flood the market with competitive products. For instance, South Korea has, in the past two decades or so, emerged as a leading innovator and even a dominant player in specific areas of telecommunications and technology. Countries that lose their competitiveness will find themselves in a conundrum – no longer winning in the export market and facing the real problem of negative trade and dwindling surplus.

Our growth strategy is anchored on economic diversification to mitigate risks, which is why the ETP focuses on reducing over-dependence on commodities by developing 12 key sectors in the economy. How do we do this? By bringing the government and the private sector together to collaborate at a closer level, reducing bureaucracy and fast-tracking decision making. 

The results

Our efforts have borne results. Between 2009 and 2014, Malaysia's gross national income per capita grew from $7590 to $10,660, edging towards our high-income target of $15,000 by 2020. Malaysia also recorded a 6% growth in GDP in 2014, trumping analyst predictions. Over the next four years, the Organisation for Economic Co-operation and Development [OECD] predicts that Malaysia will enjoy annual growth of 5.6%. In the past five years, annual investment in Malaysia has expanded 2.5 times. Year-on-year total investment hit new records, the bulk of which comes from the private sector.

Malaysia's debt is maintained below 53% and will be reduced to 43% by 2020. Since 2010, fiscal deficit as a percentage of GDP has been steadily reduced, from 6.6% in 2009 to 3.4% in 2014. We hope to be budget neutral by 2020. The proportion of government revenue from oil and gas was reduced from 39% in 2008 to 29% in 2014. This change arose not because oil and gas contracted, but because other sectors expanded. 

When we started the daunting task of Malaysia's national transformation five years ago, critics doubted the government’s ability to spring-board Malaysia beyond middle-income status. We are no longer stuck, and we are clearly moving out of its trap. The OECD predicts that Malaysia will achieve high-income status by 2020 as planned, ahead of its Association of South-east Asian Nations neighbours as well as China (2026) and India (2059).  

The past five years have been nothing short of a shake-up for Malaysia, where many long-held and traditional expectations of the public and private sector were tested. The great balancing act to keep spending in check while growing the economy lies in staying focused on key growth areas regardless of the noisy demands from competing interests.

Idris Jala is a minister in the Malaysian prime minister’s department, and the chief executive officer of the Performance Management and Delivery Unit.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter