Monday, February 08, 2010

Preconditions that are key to high income

Good article by the STAR Managing editor P Gunasegaram.

Friday January 29, 2010
Preconditions that are key to high income


Smashing through the middle-income barrier requires nothing more than following a few basic tenets – and sticking to them.
NEXT month, the great secret will be revealed. The Government will tell all about how it plans to move us into higher income. You can be sure it won’t happen overnight; the mechanics require certain preconditions.
We can have the best brains and the most renowned consultants advising us to come up with the most elaborate of plans, wonderful execution programmes and a system of monitoring and feedback. But if some preconditions are not met, the plan is doomed to failure even before it starts.
Here are 10 of them. They are by no means exhaustive but they are a good place to start. If you are one of those who say that these are simply not possible, then my reply would be that then we will have no high income.

1. Open things up and go for more growth per person. High incomes are derived from two things – greater production of all kinds of goods and services and especially those which we can produce better than others, and ensuring that the higher income gets distributed across the board. We should pull out all stops to greater growth, working more smartly and rewarding productivity in the process. We must move away from labour intensive economic activity to get a more value-added person. Everything in bureaucracy must be geared towards this. The other preconditions relate to this all-important first precondition.

2. Encourage all businesses small or big. In fact, small and medium businesses account for more of a country’s production than the big ones and need even more encouragement and incentives. For too long, we have concentrated on attracting large labour intensive but knowledge deficient activities such as assembly of microchips. And we gave these foreign investors huge tax breaks. In many cases the tax breaks simply went to the host countries these companies came from which taxed them instead. We need to encourage all kinds of investors – the corner café, the flower shop, the computer service etc. These are the businesses which improve the quality of life and generate greater income in the process.

3. Have automatic approvals. It is important to cut the discretion of officials. This discretionary power gives rise to all sorts of abuses and delays. If I want to open a restaurant, the licensing should be automatic so long as I have met the current list of conditions. Action should only be taken against me if I have not met the conditions. In effect, it will do away with licensing and promote the free and unfettered operations of all legitimate business.

4. Cut bureaucracy right to the bone. The whole idea of a bureaucracy is not to block but to facilitate. It is to serve the public, not to become a hindrance to the public at every turn and corner. The civil service must work in partnership with the private sector. The days of patronage politics and profits must be put firmly behind us. And, yes, do have open tenders, bids, auctions and etc to maximise government resources.

5. Think domestic. It is ironic that we still favour foreigners over locals in terms of incentives that we give for investment and other things. The Malaysia My Second Home programme, for instance, allows a person to come into the country and bring in a car tax-free! Now no retired Malaysian who keeps his money here and stays here gets that kind of treatment. Is it any wonder then that money is leaving Malaysia? We must encourage our locals first and foremost without discrimination.
6. Set up a technocracy. It is a pity that most of our ministers are politicians first and technocrats second. In fact, many of them have absolutely no idea of what their ministries are about, and do not have any special knowledge or training. Civil servants have been repeatedly frustrated in their jobs by meddlesome ministers who want to show they have power. We must put technocrats in key positions. Ministers must be instructed to take care of the big picture and let the technocrats get on with their jobs.

7. Revamp education. Education cannot be right when we feed ill-equipped students into a mediocre higher education system and produce graduates who can’t find jobs. We must think in terms of equal opportunities in all areas but especially in education because we need good, well-trained people to improve productivity. Good people start with good education. Period.

8. Go for services. Yes, manufacturing and related industries are important, but it is the services sector which is the main component of the economy, accounting for close to 60%. Thus it is in services that we should concentrate our efforts. There is tremendous potential in tourism, education and health which are yet to be fully and intelligently harnessed.

9. Fight corruption like your life depended on it. Indeed, all our lives, or at least their quality, depend on us uprooting and getting rid of widespread corruption once and for all. The worrying thing is that corruption in Malaysia has got much worse over the years with corruption among politicians being the worst of all. We must take an uncompromising stand against it. It is no coincidence that the most developed countries in the world also have the least corruption.

10. Encourage excellence. We must bring forth a culture of excellence. This of course has strong links with education and learning. Performance must be linked to rewards. In the 60s we had the best hospital in South-East Asia (Universiti Hospital in Petaling Jaya) and among the best universities (Universiti Malaya). But we have just let things deteriorate and rot.
In short, it is not just a plan which will help us escape the middle income trap – a situation where a country’s income grows rapidly with things like foreign investment and low costs and then stagnates because it can’t make the transition to growing on its own. The preconditions are basic but it needs an unprecedented change in attitudes.

> Managing editor P Gunasegaram says if we don’t meet quickly at least eight of the 10 preconditions above, we will be stuck in the middle-income trap for some time to come.


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29 Jan 2009