Look beyond Budget 2017 to boost growth, competitiveness

The 2017 Budget that will be unveiled tomorrow has riveted the nation’s attention more so this year than before. Not only has the use of social media greatly raised awareness and participation in the budgetary process, but the broadening of the taxpayer base through the consumption-based Goods and Services Tax (GST) has widened interest on what, why and how the revenue collected by the government should be spent.

The heightened public interest is a welcome sign of more participation by interest groups and citizens.

An increasingly sophisticated taxpayer base is important to ensure sound fiscal policies, good governance and effective administration of the economy.

Just like a more demanding domestic market is one of the four determinants in Porter’s theory of national competitive advantages, a demanding populace will enhance the quality of the budgetary process in ensuring the efficient allocation of scare resources among the people’s competing needs and priorities.

While the 2017 Budget will provide greater clarity on the nation’s fiscal position and complement the monetary policies already in place to sustain growth, it is important to sustain the pace of economic reforms or the so-called ‘third arrow’ growth strategy popularised by the current Japanese prime minister in addressing the country’s two decade long growth stagnation.

Structural economic reforms cover many areas. The principal ones are those that seek to improve the institutional and regulatory framework to support growth, boost productivity and enhance competitiveness. These include measures taken to reduce or eliminate impediments to fundamental drivers of growth.

They typically involve liberalising labour, product and service markets to encourage investment, job creation and productivity improvements.

Effective structural reforms boost the country’s competitiveness, growth potential and adjustment capacity. In other words, structural reforms are key to the country’s long-term economic health.

Identifying binding growth constraints

Given the wide-ranging areas for reforms, it is essential to identify the structural policy gaps and prioritize those that yield the maximum payoff in terms of boosting growth. An indication of Malaysia’s policy gaps can be discerned from the recently published World Economic Forum’s global competitiveness index for 2016-2017.

Of the twelve pillars of competitiveness, four pillars are ranked substantially lower than the overall country ranking. These are health and primary education, technological readiness, higher education and training and macroeconomic environment.

In the health and primary education pillar, the country’s rankings for incidences of tuberculosis and HIV and their impact on business fall in the bottom third quartile despite being ranked overall in the top quartile as the world’s 25th most competitive nation.

Likewise, its primary education enrolment rate showed a sharp decline to 77th position from 41st position in the previous, suggesting that other countries are making significant strides relative to Malaysia.

In the technological readiness pillar, the country’s internet bandwidth and fixed broadband internet subscriptions are similarly ranked in the third quartile.

In higher education and training, the country’s secondary and tertiary education enrolment rates also lie in the third quartile suggesting the need for focused efforts to boost enrolment rates.

On macroeconomic environment, both the government budget balance and government debt level are ranked in the third quartile, thereby reaffirming the need for the government to stick to its medium term fiscal framework.

What should be Malaysia’s ‘third arrow’?

Besides the selective fixes indicated above, the country’s low female participate rate, high redundancy costs and less flexible wage determination are found to impede labour market efficiency. While the country is dogged by brain drain, its rankings on capacity to retain talent and to attract talent remain high. This contradiction suggests other soft factors underpinning the country’s talent outflow.

To reduce talent outflow, an expansion of talent attraction and retention capacity is needed to absorb the rising number of university graduates which is projected to increase further given its current low ranking in tertiary education enrolment rate.

The ‘third arrow’ therefore should be aimed at enhancing the investment environment to boost growth, job creation and productivity. Among the problematic factors cited in the executive opinion survey accompanying the global competitiveness report, corruption and inefficient government bureaucracy remain the top recurring themes.

Structural policy reform efforts should address these concerns although certain problems such as ease of access to loans are driven by other policy objectives such as ensuring prudent debt levels among households and businesses.

Implications for businesses

By directing the ‘third arrow’ at promoting competition, rejuvenating stagnating companies, unleashing entrepreneurship and catalysing investment through improving the business climate, not only will the country’s growth potential be raised but its transformation into a high value, innovation-driven and dynamic economy will be assured.

Business leaders and employees on the other hand will have to contend with higher pressures to adapt, innovate and compete in a more open and liberal environment.

Given that structural reforms involve the fabric of the economy a national discourse may be needed to elicit inputs from all stakeholders as well as to monitor the effective implementation of structural reform policies.


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