Speech by the Lim Guan Eng, Penang Chief Minister in the investPenang Industry Dinner at Penang Golf Club on 10th April 2014
Emerging Penang In An Emerging Asia: Escaping The Middle-income Trap
A very Good Evening,
It is indeed a pleasure speaking to you in this special occasion tonight on Business and Investment Updates in Penang.
Penang is one of the top three tourist destinations and investor location of choice in Malaysia. For the first two months of this year Penang airport domestic arrivals recorded a 33.4% increase compared to the same period last year whilst foreign airport arrivals recorded a 8.23%. Penang was the top foreign direct investment (FDI) state in Malaysia for the period of 2010 to August 2013 amounting to RM 19.7 billion or nearly 20% of Malaysia’s total FDI of RM 103 billion.
Apart from being the investment location of choice of almost all of the top electronics, L.E.D., medical devices and aerospace companies in the world, Penang has been recognised as a cost-competitive location by the International Institute for Management Development 2012 World Competitiveness Yearbook. There is no doubt that Penang is slowly emerging in an emerging Asia.
However is this enough to escape the middle-income trap? Following the World Bank’s definition of middle-income status (countries with per-capita income of US$1,036-US$12,516 (RM41,052), there are eight countries that fall into this category in East and South Asia: Malaysia, Thailand, Indonesia, the Philippines, Vietnam, China, India and Sri Lanka.
In the simplest sense, the middle-income trap denotes a situation where developing economies that have achieved middle-income status find it challenging to compete with low-income economies whose resource-driven growth is backed by low-cost labour and capital, and advanced economies whose productivity-driven growth is supported by innovation.
Sandwiched between the two, prior economic strategies no longer remain effective at producing economic growth of yesteryears. Coupled with governance problems that impede the necessary institutional and policy changes needed to graduate into the ranks of advanced economies, the result is a steady decline and an eventual stagnation in economic performance.
Further challenges also emerged, such as social cohesion, a sizeable group of young population in search of employment, as well as the failure to eradicate poverty, primarily in lagging countries. Fundamentally, the middle-income trap is an economic governance issue. Undeniably, policy paralysis is the biggest impediment to growth, especially the failure to address issues of public integrity, Social justice, economic prosperity, democratic accountability, political dignity.
The Penang state government has worked hard to implement people-centric policies to address these socio-economic justice issues and recognising political rights to allow us to live with dignity. Most importantly we believe that national unity can only be achieved and social harmony can only exist when we celebrate our diversity and respect our differences.
A more inclusive and sustainable growth strategy will be needed, and this essentially means exercising economic reforms are crucial. Some key structural challenges facing emerging markets include; infrastructure investment, increasing innovation through research and development and promoting entrepreneurship, and investing in human capital by way of revamping education systems in order to produce highly-skilled workers and professionals, among others to effect productivity on a broader scale.
Preparing Penang For The Future.
External shocks will bear significant impact on Malaysia and Penang, being that our economy is still largely dependent on export-oriented manufacturing. Whilst it is impossible for anyone to predict the financial markets, it is important to remember two things:
1. A rising tide lifts all boats; and
2. Only when the tide recedes do you discover who is swimming naked.
As a responsible government in Penang, we believe in being prepared. For when the day comes that the tide turns, we do not want to be caught naked but instead be the best equipped amongst our peers. In other words, I am talking about strengthening our financial position.
Since taking over in 2008, the Penang state government established a budget-based administration and governance based on the principles of CAT (Competency, Accountability and Transparency). Through the implementation of open competitive tenders for all public procurements and tenders, requiring all state elected representatives to make public declaration of assets and full disclosure of government contracts signed with the private sector, making CAT governance of competency accountability and transparency our core values.
Thus Penang have been able to record budget surpluses every year without increasing any rates, increase our state assets by 50% from RM800 million to RM1.2 billion, rescue a local government(Seberang Perai Municipal Council) from bankruptcy within only one year and more importantly reduce our state debts by 95%. These achievements have been corroborated by Transparency International as well as the annual Auditor-General’s reports.
As we move forward, the government is upgrading from a budget-based administration that plugs leakages and cuts waste or inefficiencies to an outcome-based administration which stresses on positive impact and difference to the stakeholders that generates economic growth (pro-growth), creates employment opportunities (pro-jobs) and foster equitable justice (pro-poor).
Penang believes that economic growth alone is not enough if income inequality is not reduced through equitable distribution of wealth. 40 years after Arthur Okun’s book of “Equality and Efficiency:The Big Tradeoff”,International Monetary Fund’s economists have concluded that reducing inequality accelerates not reduces economic growth not in occasional spurts but sustained growth.
Hence, Penang is not only the first state in Malaysian history to wipe out corruption but also the first state to wipe out poverty. Adopting the unconditional cash transfer or UCT model of topping up all families whose monthly household incomes are below the poverty line of RM790 per month, Penang has managed to free itself from absolute poverty. Now, we are focusing on reducing relative poverty through cash aid and providing affordable home ownership by building 20,000 affordable housing units throughout the state in addition to another 20,000 units more from the private sector supply.
Penang has relied on the twin economic engines tourism whether medical, education or recreation in nature and manufacturing in electrical and electronic sectors, automation, medical devices and aerospace. However, the key to future economic success is not an over-reliance on one sector but to seek convergence of not only the manufacturing sector but also both the services and government sector.
Penang is investing in the shared services sector through a RM 3.3 billion Business Process Outsourcing and Information Technology Outsourcing(BPO-ITO) hub that will see the creation of tens of thousands of high-paying and knowledge-intensive jobs. Already, global financial services firm Citibank has opened their Global Citigroup Transaction Services centre here, employing more than 1,000 local employees with an annual volume of 20 million transactions worth USD5.8 trillion.
In addition to Citigroup, other companies that have set up their shared services here include Wilmar, Air Asia, HIS, Atmel, Toll Forwarding and Jurong Shipyard. In total, the IT-BPO Hub will comprise of 74 acres of IT-BPO Park in Bayan Lepas, a planned development of 7 acres BPO Prime in Bayan Baru for ICT companies and a 100,000 sqft Creation Animation Triggers (CAT) in the George Town heritage enclave.
In pursuit of our goal to become an international and intelligent city, we have taken the important steps of institutionalising the fundamentals of rule of law, good and clean governance, as well as integrity in leadership. Following on from that, we have established outcome-based administration that focuses on creating a rising tide that lifts all boats. However building and retaining human talent will be critical.
Decentralization Of Education To Give More Power To Schools To Decide How To Improve On Their Students’ Performance.
Malaysians should be "alarmed" that their children were doing worse in school than children in Thailand and Vietnam, which are poorer than Malaysia. The Programme for International Students Assessment or PISA 2012 ranked Malaysian students at 52 out 65 as compared to Vietnamese students ranking of 17 out of 65.
Malaysia's poor PISA results contradicted BN’s claim that Malaysia has a world class education system on par with United Kingdom highlighting instead the weakness of our school system despite education receiving the largest share of national budget annually. Global management consulting firm McKinsey suggested what schools need to do after studying 25 of the world's school systems, including the top performers in PISA tables.
As reported in The Edge, schools need to do three things:
• get the best teachers;
• get the best out of teachers; and
• step in when pupils start to lag behind.
This is where the Malaysian Education Ministry needs to invest in if Malaysia wants to meet its objective of being in the top third in the PISA ranking. Based on the total amount spent on education per student in the six to 15 years age range, over a 10 year period(eduex) that is above the per capita GDP.
Almost all of the performers in the top third spend more than 100% in eduex above their pcGDP. The OECD average is 147%. Malaysia on the other hand is at the bottom of the PISA spectrum and spends the least amount compared with all the countries listed in the chart – a mere 12% on eduex above pcGDP. Even Thailand with a lower pcGDP than us, spends 43%. It is ironic that Malaysia's education budget allocates a huge amount for education, but lags behind. It is time we give some attention to students in the 6 to 15 years range.
Malaysia must be bold on decentralisation to give more power to schools to make their own decisions based on their local circumstances. There is no one six-fit-all education system. After you cannot teach a fish how to climb trees. Further, schools can be more efficient by grading them on performance and merit which will compel them to seek better trained teachers. Ultimately it is the school teachers that makes the difference and can inspire students towards excellence.
Education is our lifeboat to the future. Not only can it reduce inequality, it can provide mobility and opportunity to all. Only a sound education foundation can provide ladders of opportunity and escalators to mobility. Penang state government is adopting a 3-prong approach towards strengthening our education system:-
Giving annual funding to existing half-funded vernacular and religious schools;
Building Learning centers that focus of STEM teaching of science, technology, English and Mathematics; and
Attracting world class universities as well as adopting the German vocational school system within multi-national corporations.
These are huge challenges and success is yet uncertain. But we must be willing to try and invest in education. For only when we boldly invest in the future then can we win the future. In summary winning the future for Penang requires 5 critical success factors.
Good governance that is competent, accountable and transparent (C.A.T.);
Encourage human capital formation;
A functioning rule of law;
Building up communications infrastructure
A livable Penang with a dynamic art and cultural environment that is cleaner, greener, safer and healthier
Making Penang cleaner, greener, safer and healthier will be crucial towards realizing our vision to transform Penang into an international and intelligent city. Our ambitious plans will be reliant on our one and only resource, our human talent. We believe in your energy, expertise and entrepreneurship will help Penang escape the middle-income trap and provide high paying jobs.
LIM GUAN ENG