Realizing Malaysia’s Economic Potential

May 18, 2011

By Nina Merchant-Vega

In a recently released report on Asia in 2050, the Asian Development Bank (ADB) predicted that seven Asian economies – China, India, Indonesia, Japan, South Korea, Thailand, and Malaysia – would be the drivers of Asia’s rise over the coming decades and that the region could account for more than 50 percent of global GDP in the next 40 years. The report warned, however, that these economies need to avoid falling into the “middle-income trap” – countries that stagnate at middle-income status and are not able to take the next leap to developed nation status – to enjoy such continued regional prosperity.

In fact, the middle income trap is already a serious concern for Malaysia. According to World Bank data, real GDP growth has slowed considerably, from an average of over 9 percent between 1990 and 1997 to around 5.5 percent between 1997 and 2008. In addition, domestic investment measured by gross capital formation as a percentage of GDP has also decreased drastically, from above 40 percent in the mid-late 1990s to below 20 percent in recent years.

Such large decreases in investment and growth rates in the last decade raise serious doubts about whether Malaysia can attain its goal of reaching developed nation status by the year 2020. In light of this, the Government of Malaysia has acknowledged the important link between good business environments to encourage private sector investment and favorable economic outcomes such as long-term growth and international competitiveness. To this end, the government has undertaken several initiatives to improve the business environment and encourage economic transformation.

One extremely important initiative has been the Special Taskforce to Facilitate Business or PEMUDAH (taken from its Malay name Pasukan Petugas Khas Pemudahcara Perniagaan), a national-level, public-private taskforce charged with improving the operating environment for the private sector. Established in 2007 by the prime minister, PEMUDAH uses the World Bank’s annual Doing Business report as an annual success benchmark and recommends improvements to Malaysia’s public services delivery system for the private sector.

Since its establishment, PEMUDAH has worked to enhance efficiency within the bureaucracy at the national level. For example, PEMUDAH launched One-Stop Centers (OSCs) that offer public access to information on development issues in local authorities across the country. Moreover, since 2007, Malaysia’s ranking in terms of ease of doing business has risen from 25th to 21st, indicating some tangible improvements in national competitiveness.

In addition to PEMUDAH, Malaysia’s government has established several other high-level national initiatives, including the Government Transformation Programme GTP) and Economic Transformation Programme (ETP),  to improve public service delivery and help move the economy up the value chain. The government envisions that the GTP will play an important role in improving the effectiveness of the Malaysian government, while the ETP will propel Malaysia’s economy into high-income status by revitalizing the private sector.

Taken together, these initiatives highlight how serious the government is about improving public service delivery and the business environment. Moreover, in the current economic climate, in which Malaysia is seeing its first major growth challenges since 1997, the government has recognized the need to continue down the path of improved public service delivery for private sector development.

It is against this background of public commitment that The Asia Foundation is working to complement the government’s initiatives with its pilot Malaysia Business Environment Index (BEI). The BEI is a Malaysia-specific diagnostic tool to benchmark and rank localities on various aspects of their local business environments. It is envisioned that the tool will also act as a local-level complement to the World Bank’s Doing Business report, which will provide the government with a local-level benchmarking to work in combination with its national benchmark.

The first of its kind in Malaysia, the pilot BEI is currently being implemented across six states and 11 localities in partnership with Monash University School of Business and Ratings Agency Malaysia (RAM), Inc. The BEI is the latest iteration of the Foundation’s efforts to assess local business environments through its Economic Governance Index (EGI) initiative. So far, we’ve conducted a series of EGIs in countries throughout South and Southeast Asia including Cambodia, Indonesia, Vietnam, Sri Lanka, and Bangladesh. The overall rationale for creating the EGI stems from the idea that economic governance and public service delivery impacts private sector development, independent of structural endowments such as location, infrastructure, and human capital. Therefore, good economic governance practices and efficient public service delivery explain why some sub-national units outperform others despite having similar initial endowments.

EGIs are composite indexes, based on a 100-point scale that scores the economic governance of each sub-national unit in a country. Sub-indices, such as entry costs, transparency and access to information, informal charges, and pro-activity of local leadership, for example, capture the key elements of the local business environment that can be influenced by provincial laws and public service delivery.

Each of these sub-indices is broken down into a series of indicators derived from a comprehensive, empirical firm-level perceptions survey and “hard data” from various published sources. The indicators are then scored, scaled, and aggregated to create composite scores for each sub-national unit.

EGIs support reform efforts by providing relevant economic governance information to three important groups: policy-makers, firms, and citizens. The aim of the EGI is to link these important groups to valid evidence in order to better diagnose problems, target prescriptions, and isolate the impact of policies and programs. Such evidence is crucial for implementing policies that improve the business environment.

In the Malaysia context, tools that measure institutional effectiveness like the new Business Environment Index are essential to maintain the country’s current momentum. In order to reach developed country status, middle-income countries have to strengthen institutions and public service delivery while encouraging entrepreneurship and innovation.

As the ADB report points out, local and national policy initiatives aimed at improving the business environment will have larger regional and global economic impacts. Thus, by improving the business environment at home and reaching its development goals, Malaysia will not only realize its own potential, but will also help the entire region realize a prosperous Asian century.

Nina Merchant-Vega is The Asia Foundation’s assistant director for the Economic Reform and Development program. She is a co-author of the new book, “Innovations in Strengthening Local Economic Governance in Asia,” published by The Asia Foundation. She can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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