Malaysia needs drastic decisions to reverse economic slowdown

KUALA LUMPUR, Aug 12 — Malaysia's newly-formed council of economic advisers met yesterday and reached a sober conclusion — that the slowing economy had the potential to be the most severe downturn in decades, worse than the 1997 Asian financial crisis.

It also agreed that:

• Clear and effective strategies to drive the economy must be introduced to lift the pall of pessimism currently enveloping the country.

• Malaysia's dependence on foreign labour is not sustainable and wages must be allowed to rise.

Council members noted that while the growth crunch 11 years ago was the result of a sharp spike in bad loans and lack of confidence in the banking sector, 2008's version was more complicated, a combination of slower growth, rising inflation, global economic turmoil and high crude oil prices.

A council member told The Malaysian Insider: "We cannot export our way out of trouble this time because our main trading partners are also experiencing a slowdown. Ten years ago, we just had to keep the ringgit stable, clean up the non-performing loans and consolidate the financial sector. Now we will have to revisit some fundamental assumptions about the Malaysian economy.

"One council member put it aptly, he said in 1997, we suffered a heart attack but today we have diabetes and a range of other diseases. The treatment has got to be effective. Otherwise, the complications will be severe.''

At the 3½-hour meeting, council members agreed that the country's low cost of labour model was no longer sustainable and that with 57 per cent of Malaysians earning below RM3,000 a month, the economy has to be restructured to allow wages to increase significantly.

To allow wages to increase, the country's addiction to foreign labour has to be addressed. They also argued that the time had come for an honest appraisal of the affirmative action programme, with several members noting that the leakages in the system had made Malaysia uncompetitive and not well-positioned to cushion any economic downturn.

The Malaysian Economic Council, headed by Prime Minister Datuk Seri Abdullah Ahmad Badawi, was formed by the government recently. Among its members are several ministers, senior civil servants, Bank Negara governor Tan Sri Zeti Akhtar Aziz and corporate figures including banker Datuk Nazir Razak, Datuk Azman Yahya, Datuk Andrew Sheng.

A smaller group comprising the ministers and senior civil servants will meet every week while the full council will come together once a month.

The council's formation was greeted with a mix of relief and cynicism. Relief that the government was finally willing to move outside its comfort zone to seek new growth strategies for Malaysia. Cynicism because the council appears unwieldy and includes several individuals who do not inspire confidence.

At their first meeting, the members also realised that they were facing a dilemma: they knew that some drastic measures will need to be taken to overhaul the Malaysian economy but also had to contend with the fact that Malaysians have a low threshold for pain.

"We are not like South Koreans who can take the pain of restructuring and lay-offs and come back stronger. Whatever the council recommends has to take into account that we don't have the stomach for drastic measures,'' said a government official, noting that this philosophy will have to followed in dealing with the overdependence on foreign labour.

He noted that in the past, the government's moves' to slash the number of unskilled foreign labour was resisted by industry because it was too severe.

"Workers would be repatriated, the construction industry would come to a halt and there would be a hail of appeals and the decision would be reversed. We will need a more thoughtful approach bearing in mind our low threshold for pain,” he said.

-TMI