The Economic Transformation Programme Economics Essay

By year 2020,the government had planned that Malaysia will become a high income economy by having the Economic Transformation Program. An agency to only supervised these programmes is under the Prime Minister Department of Malaysia which are Performance Management and Delivery Unit (PEMANDU). September 21, 2010 is the launching date for this programme, it is anextensive economic transformation plan to bring Malaysia’s economy into high income economy. 11 Economic Transformation Program-me projects and nine under three Economic Corridors with investments totalling RM26.09bil had been announced by our beloved Prime Minister, Datuk Seri NajibTunRazak.

It is expected to lift Malaysia’s Gross National Income (GNI) to US$523 billion by 2020, from US$6,700 to at least US$15,000 in raise per capita income, in order to be the World Bank’s doorstep for high income country. It is predicted that Malaysia will be able to be inline with the plan if GNI arises by 6% per annum. The 60% of the blueprint’s investment had been set to revitalize Malaysia’s private sector would, besides, from these 60 percent, 32% is from government linked companies and left with 28% more is from the government.National Key Economic Areas(NKEA) are called for various sectors for development.

Figure 1.0 shows the 11 ETP projects are in seven areas which focused on oil, gas and energy, Greater Kuala Lumpur/Klang Valley, communications content and infrastructure, business services, healthcare, tourism and education.

The location for the economic corridor projects are Sabah Development Corridor, Northern Corridor Economic Region as well as Iskandar Malaysia. The biggest in terms of investment is the to regenerate and revitaliseFurthermore,in the investment field,Malaysia had planned for a Greater Kuala Lumpur by remake “the old township of Petaling Jaya”. The plan in details are that the 40 acres (16ha) of PJ Sentral Garden City development will be a brand new green central business district of Selangor, supporting Kuala Lumpur and also cover the business hubs near by the city and state.

A project also had been planned with Nusa Gapurna Development SdnBhd that is expected to produce 36,828 jobs with a GNI (gross national income) impact of RM522.97mil. Another company is GPS Tech Solutions SdnBhd which is public transportation companies and authorities will work with to roll out a web and smartphone application to provide real-time tracking of public transportation. Moreover, buses with wireless connectivity will be provided through MyPUTRAS (Malaysian Public Transportation System).It costs about RM16.29mil project. MyPUTRAS (is) a free online smart portal and smartphone application which will cater real-time tracking of buses, include time of arrival and departure which make it more convenient to all public transport users.

The liberalisation of six sub-sectors under the Competition, Standards and Liberalisation strategic reform initiative. These sub-sectors are the legal services, medical specialist services, dental specialist services, international schools, private universities and telecommunications (Network Facilities Providers (NFP) and Network Services Providers (NSP) sector. Thus,it brings a total of 15 from 17 sub-sectors that were announced during the Budget 2012. Another field, engineering and architectural services, as well as quantity surveying (a new sub-sector), will be the amended legislation giving effect to the liberalisation is passed. This ETP are expected to RM10.1b boost gross national Income, in addition to 64,282 jobs created by 2020.

Investment is also one of the main attraction of Malaysia due to the global uncertainty.The strong economic growth had attract many foreign investors and had seen Malaysia as a developing country. Our economists had forecasted that Malaysia will have a strong domestic consumption that keeps expanding especially on our structural changes and also the projects that had been in Economic Transformation Programe.

The Performance Management and Delivery Unit (Pemandu) also believe that we also have to monitor the plan to be followed accordingly. They make a laboratory in order to know the progress of the ETP. In 2010, 131 entry point projects (EPPs) and 60 business opportunities have been identified in this laboratory in a period of 2 months by 425 people that involve in it between government and private sector .211 organizationshad taken place, which are Shell, Exxon-Mobil, MYDIN, Sime Darby, Genting Plantations, Petronas, PricewaterhouseCoopers, Celcom, Ericsson, Maybank, Tesco, Sunway Medical Centre, Masterskill University College, The Body Shop, AirAsia, Malaysia Airlines, RapidKL and Digi Telecommunications. It is approximated that these initiatives will generate RM500 billion of national income per year and create up to 2.2 million jobs by 2020. The private sector had contributed 92% ot the jobs opportunities.

National Key Economic Areas

Since 92% of the total investments will originate from private sector, the sector is much involved in the planning of this transformation blueprint. A workshop had been organised by Performance and Delivery Unit (PEMANDU) to identify the 12 National Key Economic Areas (NKEA). The NKEA is the key driver to the success of this program as such activities have the potential to contribute significantly to the growth of the economy of Malaysia.

Besides that, there are 131 entry point projects (EPP) identified under the NKEA, which includes a high speed railway connecting Penang to Singapore and MRT in Kuala Lumpur. Economic activities that are categorized as NKRA will be prioritized in government planning and funds allocation. Policies will be amended to facilitate fast track implementation of such activities, including liberalizing the market and removal of bottlenecks.

With this policy, private companies are invited to get involved, with PEMANDU pushing for the implementation to speed up the implementation. Among the companies that are involved in the transformation programme are YTL, Shell Malaysia, Airasia, HovidInc, Select-TV, Exxon-Mobil, Dialog Group, TenagaNasional, Cisco. As an example, in oil, gas, and energy sector, that is the strength of Malaysia’s economic growth. As of 2010 the energy sector has been an essential part of Malaysia’s economic growth and it contributes 20 percent of GDP.

Another strength is the palm oil industry.As of 2010 ,the fourth largest component of the national economy is belong to Malaysia and contribute to RM53 billion of gross national income. The industry cater the value chain from plantations to processing. The development of this industry is largely for private and remains heavily oriented towards plantations. With the contraints in land available to continue the evolution of plantations, the government craving to boostcompetency in production and focus on adapting great value through downstream activities. The Palm Oil NKEA is purposely forgiving high impact in total contributions to national income from the palm oil industry by RM125 billion to forecasted RM178 billion by 2020. The government aims that 41,000 new jobs will be created in this field.

Palm oil related EPPs which focused more on upstream productivity and downstream expansion. These EPPs will focus on replanting of aging oil palms, mechanising plantations, stringently enforcing best practices to enhance yields, implementing strict quality control to enhance oil extraction, and developing biogas facilities at palm mills to capture the methane released during milling. Downstream expansion and sustainability will be achieved by capturing the lucrative market segments that focus more on refined products such as oleo-derivatives, food, health products, and bio-fules. These projects are believed will require funding of RM124 billion over the next 10 years with 98 percent of the funding coming from the private sector as being said by the government.

The government has given renewed focus to Malaysia’s international economic relations, including liberalization and increasing interaction with the global economy. This approach is understandable for a small, open economy that is particularly dependent on export-driven growth, and faces considerable pressure to attract FDI and increase its exports. Malaysia no longer takes a rigid, narrow stance in choosing its economic partners – having decided not to confine itself to one particular global orientation, be it east or west – and is signatory to several FTAs through ASEAN. These include FTAs that ASEAN concluded with China, India, Australia, New Zealand, Japan and Korea. Beyond this, Malaysia has also entered into bilateral agreements with Japan, India, New Zealand and Pakistan.

Reform in other areas will be equally essential. Government procurement, intellectual property rights and the opening of the domestic financial market (as well as other services) will each have to be addressed. Hopefully, the government will also be nudged into fulfilling the state’s traditional role of providing citizens with greater access to education, health care, housing and a good public transportation system.

First, the attempt to forge links with economies as diverse as China, Pakistan and Chile can be criticised for lacking focus. A slower rate of global engagement might have been preferable, but the international race to conclude FTAs would have excluded Malaysia, had this strategy not been pursued. The government wanted to seize the opportunity to cast its net wider for overseas markets, and the 2008 crisis pushed Malaysia to explore such opportunities. In effect, Malaysia may be seeking membership in a multiplicity of arrangements without any overarching strategy. But to define the objective of entering into an FTA as solely to secure more markets is naïve.

Second, the government has given a special priority to developing links with Islamic economies. The Developing 8 Preferential Agreement (with eight developing Islamic countries) and the Trade Preferential System among the Organisation of the Islamic Conference countries are two particularly relevant agreements that Malaysia has ratified in this regard. Sidelining economic relations with Islamic economies, even when the rationale is questionable, can evoke sensitivities among certain quarters of the policy community, but Najib has deftly sidestepped these issues and has forged ties as much with Pakistan as with China. It would, of course, be hugely myopic to ignore China or India in Malaysia’s international economic relations.

The government strategy for global economic engagement has been criticised on several grounds, and as negotiations for the TPP and the EU-Malaysia FTA progress, opposition could mount. Nevertheless, early successes will put Malaysia in good stead to pursue a dual approach of increasing interactions with the global economy while implementing strong domestic reforms.

Fiscal Policy in Malaysia

Malaysia follows an explicit fiscal policy rule that disallows an operating deficit in any given year. This aims at making a credible commitment to long term fiscal sustainability by applying discipline to annual budgets. As mentioned before in this report, the implementation of Economic Transformation Plan to move towards high income has proven to be vertically taken off with most targets has been achieved and exceeded within the span of more than 2 years. Based on the executive report by bank Negara Malaysia (BNM), Malaysia is moving from a resource based economy into more service centric economy as most of high-income nations globally.

Fiscal policy can be further explained as the use of government spending and taxation to further influenced the economy. It is typically to promote a sustainable growth of economy in the long run as well as stabilizing the macroeconomic post crisis such as expanding spending, tax cutting to further stimulate a recovering economy. In the longer term, the government can foster a sustainable economy by improving infrastructures, providing better education and scholarship to boost the professional participation among the public, encourage public participation in corporate as well as academic.

In the short term the fall in exports was offset by an unprecedented fiscal stimulus programme launched over two rounds started in 2008. In the total government’s countercyclical measures amounted to an estimated RM67, 000,000,000, which were allocated to support private enterprise. The second package which was announced on March 2009, set aside RM 5,000,000,000 to support firms that need access to working capital, with specific involvement in tourism, aviation and auto industries. As such, Malaysia is sought to speed up the implementation of existing infrastructure projects such as the extended rail of Light Railway Transit (LRT), Mass Rapid Transit (MRT), targeting in particular the expansion of high speed broadband network, and also airport upgrades.

Although Malaysia has relatively low debt to GDP ratio of around 50%, the global issue of sovereign debt with Greece in early 2010 is likely to put pressure on Malaysia to introduce fiscal tightening measures to prevent increased lending cost. The fiscal deficit target for 2010 has been revised to 5.3% taking into consideration RM12,000,000,000 supplementary budget and the revised 2010 GDP. The 2009 budget gap reached 7% of GDP, largely due to fiscal stimulus plan. The level of government expenditure is forecasted to decline faster with the government promising to introduce an efficiency drive and reduce the subsidies on fuel, food and education. This measure would help to reduce the structural and fiscal deficit, ensuring the government’s consolidation efforts have a permanent impact. The spending target set for 2010 is RM 201,700,000,000 in 2010 and the fiscal deficit is expected to decline to 5.3%.

Formulation of Fiscal Rules

Basically there are 3 major types of fiscal policy rules. First is the balanced-budget or deficit rules comprises of 3 balance between the overall revenue and expenditure; or limit on government deficit as proportion of GDP. Another one is balance between structural and expenditure, and balance between current revenue and current expenditure. The second type of fiscal policy rules is the borrowing rules which prohibits on government borrowing from domestic sources as well as prohibits government borrowing from central bank; or limit on such borrowing as a proportion of past government revenue or expenditure. The third and last fiscal rule is debt or reserve rules which limits on stock of gross government liabilities as a proportion of GDP and target stock of reserves of extrabudgetay contingency funds (such as social security fund) a a proportion of annual benefit payments.

In achieving a strong commitment to fiscal sustainability as well as in ensuring the sustainable long term growth, Malaysia is facing implementation constraint; however there is need to adjust the existing procedure to result in enhancing its efficiency. Flexibility can be incorporated into fiscal rules by expanding the horizon for budget formulation including the application of fiscal rules; to cover the course of a business cycle would provide the economy with improved shock-absorptive capacity. For instance, the rule on the annual operating budget for Malaysia could be modified from one year to allow an operating deficit during an economic downturn while observing the balance over the course of a business cycle. It often takes awhile to implement the spending measures, and may be in effect even longer than needed. This would require a medium-term fiscal framework for planning and forecasting.

Second, the government can introduce contingency measures during the budget process. It can be either to add stimulus or withdraw as it required. This could include the elimination of a surtax and introduction of a stabilization fund. Although a cut increase in capital spending is effective, but it should be used only as a last resort. This can be triggered during budget execution if actual budge performance deviates significantly from the planned path. Similarly, the scope of stabilizers can be improvised by a more progressive tax system. For instance, tax on high-income household at a higher rate than off the lower income household. There are two types of taxes that can be imposed which are levied to transfer fund from private to public use namely direct taxes levied from income, profit and wealth as well as indirect taxes such as excise duty, sales taxes, quit rent and so on.