Saturday, August 20, 2005

Malaysia's Competitive Edge

Malaysia’s Competitive Edge: How to Get There.

Global business landscape is changing rapidly. Adam Smith predicted 200 years ago that businesses, in search of efficiency would relocate to wherever the lowest cost and most efficient location are. In this information age, location does not matter anymore, as long as there are the necessary infrastructures for Internet, no limits, no boundaries. American and European companies already relocate their back room operations to India; accounting, call centres, customer service/technical back ups etc and contracting their manufacturing to China.
What we as a nation should do to remain competitive – in the face of new competition from China and India?
Put our house in order first:
High quality education system – educated workforce are easily trainable. We must build the necessary infrastructure that produce educated workforce – not only educated but also creative. We do not want just yes-man – but people who are of critical mind and creative. Learn from Ireland – that country move from the poor man of Europe to one of the richest in just 3 decades. Chinese proverb says:
“ If you want to be prosperous for one year, grow grains.
If you want to be prosperous for 10 years, grow trees.
If you want to be prosperous for 100 years, grow people.”
From The Economist.
Remove barriers that were designed to protect and pamper local businesses and industries. Trade barriers only encourage monopoly pricing of goods with the consequence economic loss. Pampered businesses become uncompetitive in the global market – they would continue asking for protection until doomsday if we let them. The common people would suffer from high prices and loss of economic benefit.
Simplify our tax system. A low tax rate for businesses, e.g. 20% like in Ireland or Hong Kong encourage business investment. Higher investment rate would have positive flow on effect to the economy. In most Western countries, its citizens carry the burden of taxes, because their citizens enjoy the benefit of their taxes, in the form of government, defence and education. A high corporate tax is meaningless when multinationals (as most large companies are, even those domiciled in Malaysia) can evade taxes by inflating intercompany invoices. Ever wonders why multinational companies report most of their profits in the country of lowest tax rate?
Encourage R & D spending – I do not know the rule for R & D in Malaysia, but if companies were allowed to expense off its R & D spending in the year it occurred, instead of capitalising it and expense it over the life of the project, that would make a difference to their ability to compete in the marketplace.
Remove barrier to capital movement into and out of the country. Multinational companies that invest in a country would like to know that they can take their investment elsewhere if they need to. The existence of capital barriers is just like a big sign saying “Don’t Invest Here”. Therefore free floating the ringgit is desirable.
Transparency in governance and the way we run the government. For goodness sake, set the rules – but stick to it – no favouritism and bending the rules. In this regard we must treat everyone the same manner and equally.
Transparency and equality in our justice system. Make the law available to everybody with swift and fair justice system. Reduce backlog in civil and criminal cases. If swift and fair justice system easily available from village level up to the High Court, businesses and investors would be assured. We had a good background following the English legal system. But please get rid of repressive laws that were enacted to silence the communists. Laws that deny a group/person fair trial and justice do not give good image to the country. Look at Zimbabwe, is that a good example?

Once we have put our house in order, then we can move on, improve our competitiveness.

Increase our savings rate to optimum level. High savings rate would provide capital for business expansion.
Economist, Robert Solow calculates that optimal savings rate is about 50% of income. We may not be able to achieve that soon, but moving towards this target is desirable, given our current inflationary pressures.

Manage our resources carefully: water, air, land and forests. When pricing resources, due consideration must be given to the needs of future generations, other species (flora and fauna) and without detrimental effect or changes to the environment we live in. resources reflect our wealth, now and in the future. Our recent experience with drought and haze bring home the point that even the air we breathe and water for drinking are scarce resources.
Subsidizing and underpricing these resources only encourage wastage. A more effective way would be pricing these goods at market value, but subsidize those who cannot afford by giving them money to buy these goods. The same system could be used for petrol and diesel. Sell petrol and diesel at world market price, and give income top up directly to the poor – into their account.
When giving out licences to extract resources, be it water, fishery, land or minerals, we must not deplete our environment in the process.

Increase our talent pool.
As they say, however rich we are, if we do not know the value of our wealth, we would soon lose them. This is where a good education system that encourages creativity plays its part.
Western countries have realised lately that human capital – in the form of talented and hard working individuals is a form of wealth. That’s why USA, Canada, Australia and New Zealand are encouraging immigration of people from around the world. These countries set up point system, whereby the most desirable and demanded skills are allowed in.
The immigrants that these Western countries seeking are different than the foreign workers we have in Malaysia. We also need to attract talented migrants into the country – and revamp our ‘state of siege, keep them out’ immigration policies. We should encourage diversity, because diversity brings different viewpoint and ideas.
These are where our future competitive edge lie.

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