OBG talks to Former Prime Minister Mahathir Mohamad

 Former Prime Minister Mahathir Mohamad Mahathir Mohammed

Interview: Former Prime Minister Mahathir Mohamad

What has been the private sector’s response to the economic goals set out in the Economic Transformation Programme (ETP), and how is investment in the domestic economy being encouraged?

MAHATHIR MOHAMAD: The initial response was solid, but now we are finding that other ASEAN countries have also begun to implement similar policy goals and offer investment opportunities over the past three years. As a result, foreign direct investment (FDI), although still steadily coming in, is not increasing at the rates we hoped for when the ETP was first introduced. Another challenge is the fact that the collective body of individuals tasked with devising new policies and investment frameworks lack the business experience and knowledge of various sectors to properly execute them. Nonetheless, the federal government is doing its best to create new areas for investment, and individual states are following suit by creating and executing their own unique targets. At the same time, authorities are now more actively encouraging domestic investors, as many now possess the know-how and technology to innovate and bring their own products and services to the market. Increasingly we are going to see a greater balance between foreign and domestic investment, with the latter already playing a significant role in ETP projects.

As slower growth in advanced nations squeezes global demand, what challenges does Malaysia face in achieving developed nation status by 2020?

MAHATHIR: Certainly recent global economic circumstances have forced Malaysia to alter its approach in order to stay on track for its development goals. One important dimension to maintaining this growth has been a renewed emphasis on strengthening regional trade and commercial linkages. Another has been to ensure Malaysia continues to develop specialisations. Valued-added industries such as animation and solar power are two examples of areas where Malaysia has actively built new capacities with notable success. Malaysia should also continue focusing a substantial portion of human resource development on information technology and sub-sectors of this industry. Projects such as the multimedia super corridor, which offers special privileges and facilities for qualifying investors, have a long-term vision designed to attract intellectual capital rather than financial capital. Similarly designed programmes must be implemented as further liberalisation in other sectors continues apace.

How is the approach to investment evolving?

MAHATHIR: In the past, Malaysia’s approach to attracting FDI was centred on keeping costs as low as possible. This was best achieved through a favourable tax structure, and adherence to a liberal investment framework that allowed investors to maximise their returns.

The present day approach has matured considerably, as we now focus primarily on attracting high-tech industries, which in turn act as a driver for income growth amongst the local population. While we still aim to maintain competitive tax incentives, we are much more selective with regard to the type of industries that we look to attract. As the skill level of the collective workforce has improved, labour costs have risen to the point where we no longer compete with the traditional low-cost labour markets for which South-east Asia is most widely recognised. This has dramatically increased pressure on Malaysia’s education system to address the growing knowledge-based needs of local business and commerce. These demands coupled with liberalisation in the field of education gave rise to a vibrant private education sector that is now in the process of being rationalised with a focus on quantity over quality. Conversely, public institutions are still in need of reform.

What challenges exist in striking the right balance between promoting growth in higher education and providing quality education?

MAHATHIR: With Malaysia directing approximately 25% of its annual national budget to education, there is no limit to what public sector education can achieve. Public universities are slowly beginning to focus on meeting internationally recognised criteria. These efforts should see them begin to rise in the ranks of global indices quickly. Given that Malaysia is still a nation in its infancy in terms of education, the international recognition its institutions of higher learning have achieved is quite impressive. At the forefront of the many challenges that will come up as education reform continues are social integration and national unity. This has been central to many issues that Malaysia has faced in the past and will remain so for the foreseeable future. Public universities use Malay as the language of instruction, whereas most private universities use English, and as a result more students are opting for private universities. This may be something to keep in mind as the public sector looks to maintain its competitiveness.

What pressures is Malaysia likely to face with regard to fiscal policy as it aims to maintain its stable A rating from major international agencies?

MAHATHIR: When Malaysia first decided to operate under a fixed exchange rate regime following the Asian financial crisis the decision was met with a great deal of cynicism. However, in hindsight the fixing of the exchange rate actually helped to expedite the recovery. Then, after the economy stabilised, the government decided in 2005 to discontinue the ringgit’s peg to the dollar, opting for a managed float system. With China having recently gotten rid of its own currency peg, this move helped to avoid anticipated speculation on the ringgit’s exchange rate. This has ushered in an era of slight fluctuation. Although this has not been disruptive, I still believe there is no harm in continuing with a fixed exchange rate and gradually strengthening the ringgit at a sustainable pace. However, neighbouring countries will play a greater role, as we would have to be careful not to render ourselves uncompetitive. As a trading nation, the most important thing is for the government to actively monitor the exchange rate, which it has by and large done successfully since 2005.

What expectations do you have for pending multilateral trade agreements such as the Trans-Pacific Partnership (TPP), and how can Malaysia and ASEAN best capitalise upon them?

MAHATHIR: The raft of free trade agreements (FTAs) that Malaysia has signed in recent years required an approach tailored to each individual country. Especially when signing FTAs with developed nations, each agreement must be carefully crafted. Smaller countries must be prudent to ensure that the agreement does not undermine their own local capacities. If the FTA allows for certain reservations to protect select indigenous industries, it can be highly beneficial to all parties involved. Issues such as government procurement become particularly important when negotiating clauses within these agreements. Looking forward, the pending TPP must be examined carefully to understand the implications of the agreement and potential repercussions in order to avoid a mismatch. Given that the countries involved in the TPP have a unique range of economic sophistication, the due diligence required is unprecedented in its scope and intricacy.

Why is the recently announced goal of achieving gas market price parity by December 2015 necessary? How will this affect the power sector?

MAHATHIR: Many years ago, Malaysia decided to pursue a hydrocarbons-based energy policy that excluded nuclear power. At the time of implementation, we believed that utilisation would be spread equally between fuel oil, natural gas and coal. However, demand for gas grew disproportionally due to the fact that it is subsidised. This has resulted in 80% of present day electricity generation being derived from gas. The government obviously cannot sustain the sale of subsidised gas to fuel the nation’s power plants. Therefore, there is an urgent need to reduce our dependence on gas and diversify the energy mix going forward. The recently announced move towards market price parity is the most efficient way to drive such change.


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The Report

This article is from the Country Profile chapter of The Report: Malaysia 2012. Explore other chapters from this report.

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