As a change of guard takes place in Petronas, we need to take a holistic view of the prospect of Malaysia's future without oil money. Tengku Razaleigh Hamzah has written something about the key principles and values of and, some transitional issues involving Petronas here. Anyway, this is what I wrote on October 29, 2008:
A future without oil money
Clearly, Malaysia's economic managers are now forced to recalculate the 2009 Budget assumptions. The deferment of the Eurocopter deal is the most high-profile response to the expected decline in Federal government revenue. We can expect more of such measures come November 4, when Najib as MOF1, takes to the floor of the Parliament.
But, this is the immediate future. We should be even more concerned about the near-distant future.
In the not-too-distant future of, say, 2012 or 2014, Malaysia's oil spigots are expected to run dry. What does this mean for a Malaysian nation that has enjoyed the oil largesse since 1974? If oil revenues constitute 44% of the Federal government revenues in 2008, wouldn't that mean that Federal government revenues will decline significantly, even if Petronas has oil revenues from non-Malaysian sources?
This is a real spectre that all Malaysians need to accept in the next four to six years.
.
Strategies to deal with an oil-less future
I believe that when Najib spoke of liberalising elements of the NEP, he has been adequately briefed to be fully aware of an oil-less future for Malaysia. In a sense, looking at ways to liberalise elements of the NEP is the pragmatic and, highly necessary, strategic and tactical view.
I believe that the effect of the mooted NEP liberalisation is directed at foreign direct investment (FDIs). The Malaysian government needs to highlight the highly liberal and decentralised FDI strategies of competitor countries like China. The autonomous economic zones stretching from the Pearl River delta to Shanghai did not become the factory of the world by accident. In the 1990s, Beijing empowered provincial governments with very wide discretion even on equity structures and land ownership for FDIs. This strategy was highlighted by Kenichi Ohmae to be one of the key success factors for coastal China's economic leap. Our economic managers may have this in mind.
Key elements of the Malaysian economy
In a future where oil revenues as a contributor to the Federal government has declined, Malaysia's economic growth drivers will, more so than ever, have to come from:
1. Industrial-manufacturing base.
2. Primary industries such as palm oil and rubber.
3. Tourism.
4. Services sector, encompassing banking and finance, especially Islamic finance will become even more prominent since Kuala Lumpur is already recognised as a centre for Islamic banking. But, do not, for one moment, forget that Singapore is already equally recognised as a center for Islamic banking. That's competition for you.
One of the key routes that all nations take to foster economic growth, Malaysia being no exception, is the search for good quality FDIs. That was the idea that drove the numerous Economic Corridors under the Badawi Administration. But, as I have previously stated in earlier blog posts, at Malaysia's present stage of development, such Corridors are no more than mere venue-providing and construction opportunities for a select few. Underlining such an approach is the ready supply of cheap labour for low-skill assembly, soldering and packaging.
Industrial-manufacturing activity
Let's face it. Most of Malaysia's E&E (electrical and electronics) exports are generated by FDIs. While the Ministry of International Trade and Industry has crowed about this sector for years and years, the truth is that Malaysia is only a venue provider and a supplier of cheap labour. The FDIs can uproot themselves at any time. I saw with my own eyes how, despite having spent ten years in Malaysia, the giant US toy manufacturer, Mattel, uprooted itself from the North Port, Port Klang area within months to relocate in Indonesia. It paid all severance and retrenchment benefits and left. We are a mere budgetary item for the multinational companies (MNCs).
.
That leaves us with surgical gloves and furniture. In the case of furniture, Malaysia suffers from poor industrial design or, even the lack of it. As I said in a previous post, industrial design is a key value chain element. But, we are short of it. It is a skill that can be learnt. But is our education system churning out the correct type of skill sets?
Primary industries
Let's look at rubber. Natural rubber, as far as I'm aware, has certain unique properties that makes it the only shock absorption material for heavy loads such as bridge spans. Natural rubber has properties that maintain its quality in high-performance tyres that are put in punishing conditions such as Formula One racing cars, aircraft and, even the Moon Rover. Synthetic rubber falls apart under extreme conditions.
.
But, what happened to Dunlop tyres owned by Sime Darby once upon a time? Non-rubber producing countries have global brands like Michelin, Goodyear, Silverstone and, even the Korean Kookmin. What happened? Dunno. We only tap rubber, smoke them into SMRs and sell them semi-processed.
.
Let's look at palm oil. Extract the palm oil and it becomes crude palm oil (CPO). Add additional processes and it becomes oleochemicals. Then it can be processed into margarine, soap and cooking oil. Wonderful.
The only problem is, all the world wants is palm oil in CPO form. The oleochemical part is usually done in the importer countries. It is a prime candidate for import substitution industries in the importer countries.
By the way, most of Malaysia's palm oil based soap brands are non-Malaysian. Owned by the Japanese-owned Kao or, the US-owned Procter & Gamble or, the European-owned Unilever.
Tourism
This is one possible bright, shining star. But we need to clean the public toilets and, get the taxi drivers not to overcharge.
Education is a key factor
Seriously, Malaysia needs to move up the value chain. Dr M mystically describes this as making Malaysia a high cost centre. By high cost, Dr M means moving up the value chain.
There seems to be a disconnect in the minds of the Minister of Education(MOE), the Minister of International Trade and Industry(MITI) and the Minister of Finance(MOF). Let me help to connect the dots.
To move up the value chain, we must start with Primary and Secondary education. Two key elements are needed:
1. English language proficiency is crucial. Teaching Mathematics and Science in the English language is crucial. This will allow Malaysians to be assimilated into the modern world of knowledge and, into the modern economy.
2. More resources must be put into training teachers to become more proficient in English. The current crop of teachers come from a 100% Bahasa Malaysia medium. Forget about investing in ICT, computer labs and all that nonsense. We need software NOT hardware.
After the Secondary education level, Malaysians must have the option of going to vocational schools to learn mid-level technical skills or, pursue tertiary or high-level skills at the universities. Here, a sound command of the English language will be a significant advantage.
Why is it so difficult for MOE, MITI and MOF to take this holistic view and jointly tell the Malay, Chinese and Indian tribes that teaching English in Mathematics and Science secures the future of their children and, advances the economy of Malaysia by ensuring that their children will get higher pay due to higher skills?
Employment and entrepreneuring
With higher skills, Malaysia will move up the value chain to become the high cost centre that Dr M spoke of. This means higher incomes and more high-level jobs for Malaysians.
It can be jobs from the FDIs. It can be jobs from Malaysian SMEs that produce components such as solar cells and, possibly, nanobots.
In a future without oil money, money can only come from our brains. And, if Malaysian brains are not properly prepared, the shock of becoming poor or, less rich can be a dangerous threat to social stability and national security.
A future without oil money
Today, oil money, courtesy of Petronas, constitutes 44 per cent of Federal government revenue. Oil revenues is the single largest contributor to the GDP of Malaysia.
We are all aware that world oil prices have declined to less than half of its high-point of USD145 per barrel. We are also aware that the Malaysian government used US$125 per barrel of oil as its benchmark price for the 2009 Budget to estimate the revenue it assumed it would earn.
Clearly, Malaysia's economic managers are now forced to recalculate the 2009 Budget assumptions. The deferment of the Eurocopter deal is the most high-profile response to the expected decline in Federal government revenue. We can expect more of such measures come November 4, when Najib as MOF1, takes to the floor of the Parliament.
But, this is the immediate future. We should be even more concerned about the near-distant future.
In the not-too-distant future of, say, 2012 or 2014, Malaysia's oil spigots are expected to run dry. What does this mean for a Malaysian nation that has enjoyed the oil largesse since 1974? If oil revenues constitute 44% of the Federal government revenues in 2008, wouldn't that mean that Federal government revenues will decline significantly, even if Petronas has oil revenues from non-Malaysian sources?
This is a real spectre that all Malaysians need to accept in the next four to six years.
.Strategies to deal with an oil-less future
I believe that when Najib spoke of liberalising elements of the NEP, he has been adequately briefed to be fully aware of an oil-less future for Malaysia. In a sense, looking at ways to liberalise elements of the NEP is the pragmatic and, highly necessary, strategic and tactical view.
I believe that the effect of the mooted NEP liberalisation is directed at foreign direct investment (FDIs). The Malaysian government needs to highlight the highly liberal and decentralised FDI strategies of competitor countries like China. The autonomous economic zones stretching from the Pearl River delta to Shanghai did not become the factory of the world by accident. In the 1990s, Beijing empowered provincial governments with very wide discretion even on equity structures and land ownership for FDIs. This strategy was highlighted by Kenichi Ohmae to be one of the key success factors for coastal China's economic leap. Our economic managers may have this in mind.
Key elements of the Malaysian economy
In a future where oil revenues as a contributor to the Federal government has declined, Malaysia's economic growth drivers will, more so than ever, have to come from:
1. Industrial-manufacturing base.
2. Primary industries such as palm oil and rubber.
3. Tourism.
4. Services sector, encompassing banking and finance, especially Islamic finance will become even more prominent since Kuala Lumpur is already recognised as a centre for Islamic banking. But, do not, for one moment, forget that Singapore is already equally recognised as a center for Islamic banking. That's competition for you.
One of the key routes that all nations take to foster economic growth, Malaysia being no exception, is the search for good quality FDIs. That was the idea that drove the numerous Economic Corridors under the Badawi Administration. But, as I have previously stated in earlier blog posts, at Malaysia's present stage of development, such Corridors are no more than mere venue-providing and construction opportunities for a select few. Underlining such an approach is the ready supply of cheap labour for low-skill assembly, soldering and packaging.
Industrial-manufacturing activity
Let's face it. Most of Malaysia's E&E (electrical and electronics) exports are generated by FDIs. While the Ministry of International Trade and Industry has crowed about this sector for years and years, the truth is that Malaysia is only a venue provider and a supplier of cheap labour. The FDIs can uproot themselves at any time. I saw with my own eyes how, despite having spent ten years in Malaysia, the giant US toy manufacturer, Mattel, uprooted itself from the North Port, Port Klang area within months to relocate in Indonesia. It paid all severance and retrenchment benefits and left. We are a mere budgetary item for the multinational companies (MNCs).
.That leaves us with surgical gloves and furniture. In the case of furniture, Malaysia suffers from poor industrial design or, even the lack of it. As I said in a previous post, industrial design is a key value chain element. But, we are short of it. It is a skill that can be learnt. But is our education system churning out the correct type of skill sets?
Primary industries
Let's look at rubber. Natural rubber, as far as I'm aware, has certain unique properties that makes it the only shock absorption material for heavy loads such as bridge spans. Natural rubber has properties that maintain its quality in high-performance tyres that are put in punishing conditions such as Formula One racing cars, aircraft and, even the Moon Rover. Synthetic rubber falls apart under extreme conditions.
.But, what happened to Dunlop tyres owned by Sime Darby once upon a time? Non-rubber producing countries have global brands like Michelin, Goodyear, Silverstone and, even the Korean Kookmin. What happened? Dunno. We only tap rubber, smoke them into SMRs and sell them semi-processed.
.Let's look at palm oil. Extract the palm oil and it becomes crude palm oil (CPO). Add additional processes and it becomes oleochemicals. Then it can be processed into margarine, soap and cooking oil. Wonderful.
The only problem is, all the world wants is palm oil in CPO form. The oleochemical part is usually done in the importer countries. It is a prime candidate for import substitution industries in the importer countries.
By the way, most of Malaysia's palm oil based soap brands are non-Malaysian. Owned by the Japanese-owned Kao or, the US-owned Procter & Gamble or, the European-owned Unilever.
Tourism
This is one possible bright, shining star. But we need to clean the public toilets and, get the taxi drivers not to overcharge.
Education is a key factor
Seriously, Malaysia needs to move up the value chain. Dr M mystically describes this as making Malaysia a high cost centre. By high cost, Dr M means moving up the value chain.
There seems to be a disconnect in the minds of the Minister of Education(MOE), the Minister of International Trade and Industry(MITI) and the Minister of Finance(MOF). Let me help to connect the dots.
To move up the value chain, we must start with Primary and Secondary education. Two key elements are needed:
1. English language proficiency is crucial. Teaching Mathematics and Science in the English language is crucial. This will allow Malaysians to be assimilated into the modern world of knowledge and, into the modern economy.
2. More resources must be put into training teachers to become more proficient in English. The current crop of teachers come from a 100% Bahasa Malaysia medium. Forget about investing in ICT, computer labs and all that nonsense. We need software NOT hardware.
After the Secondary education level, Malaysians must have the option of going to vocational schools to learn mid-level technical skills or, pursue tertiary or high-level skills at the universities. Here, a sound command of the English language will be a significant advantage.
Why is it so difficult for MOE, MITI and MOF to take this holistic view and jointly tell the Malay, Chinese and Indian tribes that teaching English in Mathematics and Science secures the future of their children and, advances the economy of Malaysia by ensuring that their children will get higher pay due to higher skills?
Employment and entrepreneuring
With higher skills, Malaysia will move up the value chain to become the high cost centre that Dr M spoke of. This means higher incomes and more high-level jobs for Malaysians.
It can be jobs from the FDIs. It can be jobs from Malaysian SMEs that produce components such as solar cells and, possibly, nanobots.
In a future without oil money, money can only come from our brains. And, if Malaysian brains are not properly prepared, the shock of becoming poor or, less rich can be a dangerous threat to social stability and national security.
