February 8, 2013
Press Statement on the Forthcoming Release of the Report
The Penang Paradigm
prepared by the Penang Institute
Professor Datuk Woo Wing Thye
Executive Director, Penang Institute
The Penang Institute will shortly be presenting to the State and Federal Governments and to the people of Penang the Penang Paradigm, a comprehensive development agenda for Penang in the coming decade. After the Chinese New Year holidays, the Penang Institute will hold public consultations on the Penang Paradigm to solicit feedback from the people of Penang on how to improve the coverage, the analysis and the policy agenda in the report. The public consultationswill be held for two weeksin Penang Island and Seberang Perai simultaneously.
The Penang Paradigm seeks to strengthen the three key processes of:
- restoring economic dynamism to Penang;
- improving the liveability of Penang and the sustainability of its natural environment; and
- accelerating Penang’s social development to entrench social harmony and to widen social inclusion.
The key policies that we propose for Penang are also applicable to the rest of Malaysia at the national level in order to initiate these three socio-economic processes nationwide.
The Penang Paradigm report starts by diagnosing why Penang and Malaysia have been caught in the middle-income trap (i.e. failing to close the income gap with the rich countries) for the last fifteen years. It then combines the diagnosis with international experiences in catch-up growth, especially in East Asia and Latin America, to formulate the optimum development framework for Penang and Malaysia and to provide operational principles for the choice of government policies.
Understanding the Past to Guide the Future
There are presently a number of organizations that have offered various recipes to raise the growth rates of Penang and Malaysia. Most of these other recipes suffer from the analytical defect of not presenting diagnoses on why the economic growth rates in the 2000-2012 period are so much lower than the growth rates in the 1984-1996 period. Unless a policy recipe is prefaced with a credible explanation for this growth slowdown in Malaysia, the recipe is unlikely to be effective because it has failed to address the powerful negative influences of specific local circumstances: No responsible doctor would ever prescribe a cure straight from the textbook without examining the patient first.
The Penang Paradigm starts with the basic observation that sustained high growth is generated when there is synergistic interaction among the following three basic factors:
- ideas, which are based on knowledge of general development theory and of local circumstances; and on the attitude that freedom, dignity, and justice are inherent human rights;
- private investment, which is undertaken in a competitive market setting transparently supervised by a competent government; and
- public infrastructure, which takes the form of
- high-quality soft infrastructure such as a civil service that is not corrupt, and progressive social programmes that empower the disadvantaged with the wherewithal to be upwardly mobile; and
- cost-effective hard infrastructure such as low-cost, high-speed broadband and a comprehensive, rapid mass transit system.
There are three sets of national policies that have over the past three decades rendered Malaysia increasingly vulnerable to being caught in the middle-income trap (i.e. failing to close the income gap with the rich countries), and they are:
- the steady tightening of race-based socio-economic policies;
- the growing over-centralization of decision-making at the Federal level; and
- the increasing non-transparency of central governmental operations (which has directly contributed to the decline in the quality of governance institutions, e.g. judicial system).
Specifically, the socio-economic policies that are open to abuse by the rich and politically well-connected have contributed to (i) brain drain, which has reduced the capacity to generate good ideas for business, governance, the arts and literature; and (ii) capital flight, which has reduced the capacity to finance investment.
Furthermore, in the past three decades:
- the trend of centralization of decision-making at the Federal level has reduced the adequacy of infrastructure outside KL/Putrajaya: State Governments are not allowed to raise funds to finance local infrastructure projects, and most local infrastructure projects require Federal approval even when they are fully funded through State resources; and
- a steady decline in the transparency of central governmental operations has caused a long-term deterioration in public governance, e.g. the lack of open tender for public projects, and the 2000 ruling of the Federal Court under Tun Eusoffe Chin which made it easier to engage in the transactions of stolen property (a legal ruling was reversed only after almost a decade later).
The consequences for Penang from this over-centralization of power at the Federal level and declining transparency in central governmental operations are (i) gross under-investment in physical infrastructure, and (ii) inadequate provision of soft infrastructure, which are both needed for enabling economic development and for maintaining the liveability of the State.
The negative effects on GDP growth from the brain drain, capital flight, insufficient hard infrastructure, and sub-standard soft infrastructure were not seen prior to 1995 because they had been more than offset by massive inward FDI, and by large state and GLC investments, that were made easier by the post-1974 growth in oil and gas revenue.
However, the post-1990 expansion of globalization to the former Soviet empire, India and China has caused the proportion of global FDI received by Malaysia to drop significantly. This drop in Malaysia’s share of global FDI share, together with the weaker financial strength of the Federal Government and of the GLCs after years of mismanagement, have brought about an investment collapse in the 2000s, thus miring Malaysia in the middle-income trap for the last decade and a half.
The current Economic Transformation Programme (ETP) of the Federal Government can be criticised as amounting to an unsustainable jacking-up of total investment via large infrastructure projects (e.g. MRT in Kuala Lumpur) and GLC investments. The GDP growth rate in 2013 might be higher but this will likely be a temporary blip. The correct cure for Malaysia’s growth malaise is not an ETP-style macro-stimulus but post-WW2 West German-style structural reforms.
The Cure to Malaysia’s Stagnation is to Adopt the Root-and-Branch Reform Programme that Penang has Initiated and will continue as the Penang Paradigm
The Penang Paradigm emphasizes that restoration of economic dynamism alone cannot produce sustained high-income growth in Penang. This also requires that (i) Penang’s liveability and environmental sustainability be improved drastically; and (ii) social harmony and inclusion in Penang be strengthened dramatically. Only with progress on all three fronts – economic vibrancy, liveability and sustainability, and social development – will Penang become the balanced society that will be able to (i) nurture the generation of world-class ideas, (ii) afford the private investment to bring the business ideas to fruition, especially in the international market place, and (iii) provide the necessary public infrastructure to ensure the maximization of social welfare.
From March 2008 onward, the Penang state government has put into place three sets of policies to reduce the deleterious effects of the Federal policy regime in Penang:
- replacing crony capitalism with fair competition, e.g. having open tenders for public projects;
- beginning the process of decentralising decision-making, e.g. pushing for local council elections; and
- stopping the decline in the quality of government services, e.g. using CAT (competency-accountability-transparency) principles in governance.
The operational component of the Penang Paradigm is divided into strategies and targets for (i) economic dynamism, (ii) liveability and sustainability, and (iii) social development and inclusion. From 2013 onward, the Penang Paradigm proposes that the Penang State Government should implement concrete programmes to:
- strengthen the generation of creative ideas in Penang;
- boost private investment in Penang in high-tech green manufacturing industries and high-value modern services industries through public-private partnerships; and
- upgrade public services in hard and soft infrastructure.
In summary, the crux of the Penang Paradigm is to generate knowledge-led development of the State and the country. Therefore, among the very first actions of the Penang Paradigm is to greatly accelerate the generation of creative ideas in Penang by:
- enhancing human capital formation through:
- effective mobilization of talents born in low-income families by eliminating poverty, and
- State allocations to improve the school system; and
- retaining human talents and attracting human talents from elsewhere through strengthening
- the practice of meritocracy,
- the growth of high-wage industries,
- liveability and sustainability, and
- social harmony
The outcome for Penang from the implementation of the Penang Paradigm will be an international and intelligent State. Malaysia will have to adopt the same programme in order to become an international and intelligent country.
PROFESSOR DATUK WOO WING THYE
Executive Director, Penang Institute, George Town
Professor, University of California, Davis
Distinguished Professor, Fudan University, Shanghai
Cheung Kong Professor, Central University of Finance and Economics, Beijing
Director, East Asia Program of the Earth Institute at Columbia University, New York City
Non-Resident Senior Fellow, Brookings Institution, Washington D.C.