Debunking ETP: Widening Iincome Gap

Keynote Address by HE Anwar Ibrahim, Opposition Leader

The story our economy for the last decade or so has been one of missed opportunities and unfulfilled promises. Due to weak policy prescriptions and poor governance, growth has been limited to an average of 4.3% between 2000 and 2009; a far cry from the average 9.2% growth enjoyed between 1990 and 1997, relative to the pace of growth of neighbouring countries.

Admittedly, we are now more vulnerable to the vagaries of the global economy which is set to cast further gloom. Thus, the challenges are formidable. We can take the road that leads to gradual but certain economic doom; or we can choose the one that will take us and our future generations to a brighter and better future.

 

OBSOLETE ECONOMIC APPROACH

Back in 1997 when the Asian financial crisis erupted, I spoke in New York about the Schumpeterian doctrine of creative destruction and said that out of that would spring new growth for a more resilient future. Recently, in the aftermath of the 2008 crisis economist Nouriel Roubini echoed somewhat the same sentiment but focussed it on regulatory overhaul. To my mind, this has equal application to our economy.

In the past, we pursued a combination of economic practices ranging from liberal capitalism, state economic intervention to rentier arrangements. This quasi capitalism with heavy state involvement fostered greed, abuse and corruption as attested to by the Auditor General’s Reports year in and year out.

Malaysia cannot realise its economic potential if this system remains in place. If the present system breeds an inherent culture of corruption that steadily cripples our economy, Roubini’s challenge to go beyond the status quo deserves immediate attention.

Fortunately, we are in a position to take a bolder and more radical remedy compared to other nations. We are a rich nation; blessed with natural resources and strong camaraderie among our resourceful people.

The government’s reliance on PETRONAS to finance its operations is a double edged sword that may come to haunt us in the near future. Our gas production is forecasted to decline at an alarming compounded rate of 5% each year; so much so that by 2025 it is only a paltry 25% of 2010’s production. With only 5.8 billion of oil equivalent (boe) reserves as of 2010, our crude oil and condensate reserves will be completely exhausted in less than 25 years.

The days when PETRONAS can bankroll the country are long gone. In fact, the government should never have acquired the habit of spending our petrol money lavishly because the addiction is hard to break. Yet, in between 2006 and 2009, this government had spent RM236 billion of our petrol money (equivalent to 55% of the cumulative payments ever made by PETRONAS to the Federal Government since its founding) without any real impact on the economy.

This imprudence is extended to other government-linked companies (GLCs) too. A close scrutiny of the Entry Point Projects (EPPs) under the much publicised Economic Transformation Program (ETP) reveals that 77% of the supposedly private investments amounting to RM173 billion announced as of August 2011 will be funded by GLCs or firms with large GLIC (government-linked investment companies) shareholding.

Therefore, the stakes are much higher now. The nation’s wealth and our savings are tied to these mega expenditures with high exposure to corruption and mismanagement. The obsolete economic approach of quasi-capitalism spiked with a high dose of corruption must be dismantled. If radical change is what it takes to guarantee Malaysia’s prosperity, change we must.

 

MISGUIDED NOTION OF EQUITY

Over the last four decades, the ruling echelons have propagated the misguided notion that a re-apportionment of the equity ownership of the nation’s economy is a prerequisite to a stable economy and a harmonious Malaysian society. While we acknowledge the relative success of the NEP in terms of social mobility and opportunities provided to emerging Bumiputra entrepreneurs, we must recognise its flaws and abuse by the ruling establishment. What is more disconcerting is when the notion of equity is being exploited to justify the enrichment of ruling family members and their cronies. In this respect, the economist Mancur Olson made a devastating critique of leaders who use impressive new mantras such as privatisation and deregulation as a pretext to justify daylight robbery of public assets.

In spite of lucrative projects, shares allocations, issuance of permits and quotas obtained in their names, the majority and Malays and Bumiputras continue to be the most marginalised and disadvantaged group economically. They form three out of four Malaysian households earning below RM1,500 per month. This only confirms our assertion that the policy is clearly biased in favour of a small well-connected group of Malay elite.

At the macro level, our attempt to move the economy from commodity-based and low-cost manufacturing-based activities to higher value added, knowledge-based sectors has not been successful due to the gap in skills required of our workforce.

This creates a vicious economic conundrum. A workforce that is largely employed in commodity-based and low-cost manufacturing-based activities can only earn so much. Without a commitment from the government through a tripartite wage setting mechanism to improve wages, workers cannot leverage their collective bargaining with employers for higher wages. This in turn impairs their ability to embark on skill upgrading programs that will further condemn them to a life of low wage employment.

Let me say with full conviction that a Pakatan Rakyat government will radically shift our focus towards improving household incomes of Malaysian families because what we take home and put on our table matters more directly and immediately than the measure of wealth of a few Bumiputras billionaires.

WRONG EMPHASIS, WRONG CAPITAL

Any discourse on the misfortune of the economy is incomplete without recognising that the education system has a pivotal role in the former’s turnaround.

The World Bank’s most recent report should have been a strong wake-up call for everyone who is concerned about the future direction of Malaysia. It provides a glimpse of our universities’ weaknesses in equipping young graduates with the necessary soft skills and leadership attributes that can make them employable. The findings are alarming.

The report shows that there is a clear mismatch between industry requirements for employability with the level of adequate skills imparted to graduates by universities. 71% of employers which participated in the survey singled out poor English proficiency as the main reason for graduates’ failure to obtain jobs followed by lack of IT skills (70% of employers).

Nevertheless, while higher education reforms will remain topmost in Pakatan Rakyat’s agenda, it is also equally imperative to approach education reforms holistically especially when our children spend most of their formative years in schools.

Without any doubt, school reform is the key to Malaysia’s economic revival. Therefore, the prevailing success model that is taking hold in our schools which places too much emphasis on examination scores at the expense of character building and talent grooming has to be replaced with a more inclusive multiple success model where every child is allowed to grow up to pursue his or her vocation in life with full freedom. The strategic place of a school is to assist children to find their niche in life and provide the impetus for success.

A further delay to undertake educational reforms and to refocus our economic resources on our young population will only hasten a simmering economic dispossession among them. Out of 342,198 unemployed people registered with the Human Resources Ministry as of August 2011, 69.1% are youth below the age of 25 years. If the age bracket is widened to include people up to 30 years old, this number hits a staggering 90.1%. The fact that 51.4% of these young unemployed people graduated with at least a diploma is the strongest proof of the government’s failure to match education with economic requirements.

 

AN UNEQUAL SOCIETY

Our generation’s economic challenge is great. A combination of wage stagnation that cannot keep up with price increases coupled with a general malaise of the economy in the last ten years threatens to create a new permanent disadvantaged group in our society.

Unlike the yesteryears, they are no longer characterised by race or locality. They share the same economic hardships no matter where they are. They can be in towns and struggle to find a decent home for their family. They may be in semi urban parts of the country yet they too struggle with the high monthly car instalments, just like their brethren in towns.

Our economy and society are heading for a direct collision with the dispossessed underpaid working class and urban poor who struggle to make ends meet every day. They have a strong voice and they share a clear vision for this country. What they look for is equal opportunity, not a small preferential discount because they come from a certain race. What they want is self-respect for their contribution to the economy, so that they are compensated fairly and with dignity for their work. They will stand up against a system that seeks to entrench inequality and their voice will define our country in years to come.

In reality, Malaysia has not escaped from the torment of an unequal society. While some of the previous economic policies started in the 1970s have achieved a degree of success in creating a larger pool of professionals and middle class especially among the Malays and Bumiputras, the intra-ethnic socio-economic gap is as wide as ever.

This is the biggest economic challenge of our generation. Ignoring the socio-economic bearing from the emergence of this new class in our society is the biggest mistake any economic policy maker can make because the nation’s future stability and growth potential is fatefully tied to our ability to quickly address the widening income gap due to low wages.

 

ETP: FAILED POLICIES WITH NEW FACELIFTS

It is in this respect that the much publicised Economic Transformation Program (ETP) is such a let-down. Its attempts to camouflage the lack of a new radical economic approach with fanfare and repackaging are naive at best, irresponsible at worst.

ETP adopts the exact economic mould that had seen ballooning budget deficits over the last one decade. It continues to prop up crony-capitalism and rent seeking at a much amplified level. Most importantly, ETP’s failure to commit to clear economic and labour prescriptions to address low level of wages will one day be proven as its greatest flaw.

The most important facet of ETP is the 131 Entry Point Projects (EPPs) which include the estimated RM55 billion MRT project, developing 1Malaysia Malls at a price tag of RM2.2 billion, the RM4.3 billion River of Life project and so on. The list will grow very familiar after a while as more and more mega projects which claim to be able to generate billions’ worth of economic benefits are included. Some of these projects have been around much longer than KEADILAN has been.

Thus, a high proportion of the EPPs (upon which the success of ETP hinges on) are nothing more than large-scale infrastructure projects that will consume a large amount of public money either directly from the public coffers or through funding arrangements with GLCs/GLICs. If the previous mega projects’ track records are anything to go by, these EPPs also come with huge financial risks to the public due to this government’s poor corporate governance.

Indeed, there is also a risk that the diversion of public and GLC/GLIC funds into these EPPs may effectively reduce the nation’s flexibility to deploy fiscal means to manage the economy in the future as Malaysia continues to battle its deficit problems.

To reiterate our topmost concern, policy prescriptions built around status-quo are inadequate to address the economic challenges of today’s world.

ETP is the embodiment of the economic status quo that had propped up the ruling echelons. This approach has failed miserably. A continuance of such failure will have a devastating impact on the long term future of our economy as the much needed real and radical reforms are put off yet again.

 

 

INCORRECT ASSUMPTIONS: THE DEVIL IS IN THE DETAILS

If the very approach of ETP is suspect, the projections used to paint a rosy picture of what ETP can do for the nation is more alarming.

It has become the habit of this government to use questionable data and projections to mislead the public. During the last parliamentary session, I have questioned the wisdom and audacity of the Prime Minister to adopt unrealistically high economic growth forecasts for 2011 and 2012 in preparing the budget; to support his claim that the national deficit is being managed.

This unrealistic approach to economic planning has its mark all over the ETP targets and projections. It reconfirms our contention before that the great task of planning the economy has been reduced to number fudging when economic policies are treated as another subset of the political propaganda machineries.

I have specifically focused on two of ETP’s basic claims to demonstrate how figures have been manipulated to mislead the public. First is the claim that ETP shall create more high paying jobs by 2020 to propel Malaysia into the league of high income nations. Secondly, I will also prove that the stake the average Malaysians have in the economy will become lower by 2020 as ETP will effectively widen the income gap in our society.

ETP claims that it will be able to “reduce proportion of low-income workers and increase proportion of middle- to high-income workers” in 2020. The projected salary distribution for 2020 will see additional 2.8 million people earning more than RM4,000 per month, so it claims further.

However, as the saying goes, the devil is actually in the details. This projection adopts 2 highly questionable assumptions that have been proven incorrect in the past in spite similarly optimistic figures used at the time.

I question the premise that all workers’ wages will grow at an average rate of 3.6% each year in the period between 2010 and 2020; without which the projected salary distribution for 2020 as claimed by ETP is a falsehood.

Sources in and out of the government had pointed to a trend of slow growth in real wages. According to the Ministry of Human Resources, “wages growth in Malaysia recorded an average increase of 2.6% annu ally for the past 10 years while the cost of living has outpaced the wages growth”.

This is further verified by the National Employment Return Study of 2009, involving a sample of 24,000 employers and 1.3 million workers which found that 33.8% of the workers were paid below RM700 per month. If this were to be extrapolated nationally, it suggests that up to 34% of our workforce earn below the national poverty line.

The open admission by the Ministry of Human Resources that real wages growth in Malaysia is slow also concurs with other independent studies. For example, in the period of 1984 to 1997, the real wage growth in manufacturing and plantation was only 2.3% and 2.8% respectively.

Therefore, it is clear that the assumption for wage growth adopted by ETP at 3.6% is questionable. Without a radical change in the labour market and an overhaul of labour legislations in Malaysia, we cannot put hopes that on its own the wages will adjust upwards. A 3.6% annual wage growth assumption adopted by ETP is an over optimism that is divorced from the reality of economic hardships faced by our workforce.

Another fundamental flaw in the assumption used for ETP is the 2.8% average inflation for the period up to 2020. The inflation assumption is crucial to arrive at the magical target of RM48,000 gross national income (GNI) per capita by 2020 that has become the pillar of ETP. If inflation grows higher than 2.8% in the next few years, real wages will be lower and the GNI per capita target of RM48,000 is nothing more than a number on a fancy ETP brochure.

Much as we like to be optimistic that the nation can rein in inflation in an environment of high commodity and energy prices, we too have to be realistic if we are honest about the future.

The average inflation between 2001 and 2005 is 4.8%, reflecting the first energy price shock of 2003 that saw average crude oil prices moving beyond the psychological US$30 per barrel mark. The average inflation between 2005 and 2009 is even higher at 6.6% as a result of the 2008 crude oil price rally that saw the energy prices sky-rocketing throughout the world.

The environment of high energy and high commodity prices is here to stay. Realistically speaking, the days when the price of a barrel of crude oil is only US$20 is long gone and experts concur that it will settle at an average of US$80 per barrel for the foreseeable future, barring any future geopolitical shocks that may send the price sky-rocketing again.

Thus, we have to question the wisdom of adopting an over optimistic inflation projection of 2.8% over the next 10 years, when no economic, social and political indicators around us point to that direction. I dare say that while it may make ETP looks enticing to the public, it also makes a mockery of our intelligence.

The consequence that these flawed economic assumptions has on ETP is great. The premise that ETP can guarantee higher wages and deliver Malaysia to the path of high income nation status collapses instantly if we were to use more realistic assumptions detached from political spins and propaganda.

 

POORER MALAYSIANS IN 2020

The economic reality that awaits Malaysians in 2020 is harsh, if drastic reforms are not carried out immediately.

If we were to extrapolate ETP’s model using a range of inflation figures, the picture is not one of a prosperous Malaysia for all. It is a bleak Malaysia with more and more Malaysians falling below the poverty line. Malaysians in general will be poorer in 2020, going by ETP’s own projection.

At 4% inflation rate, even if real wages were to grow at the unrealistic 3.6% rate annually for the next 10 years, there will be an additional 1 million Malaysians earning below the equivalent of today’s RM1,500 per month in 2020.

At 6% inflation rate (lower than the average inflation of 6.6% in between 2005 and 2009), there will be an additional 1.7 million Malaysians earning below the threshold income of RM1,500 per month.

The implication of this on our society cannot be taken lightly and outlines the challenges we face and the urgency to address these challenges effectively.

Two-thirds of our population reside in urban areas in 2009. This will grow annually that by 2020, the national poverty line shall reflect closely the cost of living in urban areas. Certainly, the current RM700 national poverty line is obsolete. In many households in urban areas, families struggle to make ends meet with an income of RM1,500 per month.

Thus, the additional 1.7 million Malaysians earning the equivalent of RM1,500 per month in 2020 means that the plight and hardships of the urban poor will be a major economic challenge in 2020.

The additional 1.7 million urban poor will complete the bleak picture that ETP tries hard to gloss – that is by 2020, there will be between 7 million to 8.3 million urban poor with monthly earnings of RM1,500 and below; according to ETP’s own projections.

This means a significantly higher proportion of our workforce and population will fall deeper into poverty in 2020; based on ETP’s economic modelling.

The ramifications of this on the economy are numerous. It will certainly stretch the national resources to the maximum as the government’s obligation to provide direct assistance to the portion of our workforce and population in poverty will be ever increasing.

ETP’s claim that it will send Malaysians on a journey towards prosperity and high income will remain a claim in 2020. The journey will end in nightmare, if Malaysians do not change course immediately.

 

BUT THE RICH WILL GET RICHER IN 2020

Alarmingly, a closer scrutiny of the EPPs announced so far highlights a more sinister motive that will worsen the income gap in our society in 2020.

Based on the information provided in the official ETP documents and more details announced to the public at each EPP launching, one can construct a business model to ascertain the proportion of economic value going to the employees versus the profits retained by corporations. The comparison between employee compensation against corporation profits (measured in EBITDA) is central to the economic model adopted in ETP and its targets.

For example, the aspiration to achieve a high income nation status hinges on hitting a target of RM48,000 GNI per capita in 2020. GNI is defined as the gross domestic product (GDP) plus the net income from abroad.

Interestingly, the value-add from each sector or key projects included in ETP is calculated as the sum of EBITDA and employee compensation; on top of the usual measure of economic output produced.

Therefore, an analysis of employees’ share of the economic value generated from EPPs and projects spearheaded in ETP can be established easily.

The analysis holds no surprises.

It shows that ETP and EPPs will cause real wages to stagnate with only marginal increase over the years, while most of the economic benefits will be retained by corporations.

In 2009, with GNI of RM661 billion, the ratio of employee compensation to GNI is 40%. This simply means that 40% of the economic value generated by our economy goes to workers in the form of wages. By 2020, this ratio will drop to 33%.

This trend is apparent in any analysis that seeks to compare the trickle-down effect of ETP that goes directly to the population against profits retained by corporations. For example, the average salary per person will only increase by 36% in between 2009 to 2020, compared to corporations’ operating surplus increase of 158% in the same period.

In the final analysis, ETP is nothing more than a continuation of a flawed economic model mired with corruption and rent-seeking culture that rewards the ruling echelons at the expense of others. ETP’s such stubborn defence of the system will only create an even bigger economically dispossessed group in our society in the future.

Its promise to deliver a high income nation status by 2020 is also a fallacy. What it will achieve instead is to increase the combined net-worth of the richest 1% of the country while sending more and more Malaysians into economic hardship.

 

DEEPER ABYSS AWAITS

I conclude that the present economic policy framework that is glossed with fanciful abbreviations such as ETP and EPP, will send the economy to spiral down deeper into the abyss. Its continuous propagation of a morally bankrupt and corrupt rent seeking group will prove disastrous in the present volatile and challenging global economy.

Malaysians want higher wages, instead ETP gives them a declining share of the economic value they generate. Malaysians want better jobs, instead ETP will send additional 1.7 million Malaysians into poverty in 2020. Malaysians want a fair share of the wealth they create for the country, yet the wages increase they get is minute compared to the obscene profits retained by corporations; mostly with the right connections to the ruling elite.

Malaysians want a firm policy to address the issue of stagnated wages that threatens to impoverish more families than ever, yet until today the present government does not dare to commit to a national minimum wage. If the present government does not have the will to safeguard employees’ welfare whose votes decide the next general election, they certainly do not have the courage and wisdom to do what is right for the economy.

 

 

They want to transform the economy and Malaysia. I have no doubt that at the rate they are going they will succeed. The only question is what kind of Malaysia that comes out of that transformation.

One thing for sure – if ETP is allowed to go unhindered, most Malaysians will be poorer in a decade’s time unless change takes place immediately.

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