Obama gets down to business in Malaysia

Author: Shankaran Nambiar, MIER

President Obama’s two-day visit to Malaysia is a feather in Prime Minister Najib’s cap. But it is a decoration that carries certain obligations given the implications of what Obama has conveyed.

The decision to include Malaysia as part of Obama’s Asia tour was strategically timed since the Trans-Pacific Partnership (TPP) agreement is still being hotly debated there.

Obama made it clear that ‘the United States is once again playing a leadership role in the Asia Pacific’. He qualified this statement by adding that ‘a key part of our strategy is expanding our ties with Southeast Asia, and that includes Malaysia’.

The United States generously extended its resources to assist Malaysia in its MH370 search and rescue operations, demonstrating its keenness to support Malaysia in a time of need. It also shows the United States’ interest in making its presence in the region felt.

In Obama’s eyes, Malaysia has a pivotal role to play in the region both by virtue of its geography (‘Malaysia is central to regional stability, maritime security and freedom of navigation’) and its economic progress.

The United States expects Malaysia to be its partner in helping to pursue growth and development in ASEAN. This strategy will open up more opportunities for American business in the region. It will also attract more foreign direct investment into the region, create more employment and provide more business opportunities for local suppliers and vendors.

But the United States needs a partner that will equally share burdens. This means Malaysia will have to espouse the same values as the United States — at least as far as notions of economic liberalism and governance are concerned. Cooperating as partners of equal standing implies that Malaysia should aim to be an economy that is more competitive, productive and innovative.

However, Malaysia’s ability to be innovative has been called into question.

Frederico Gil Sander, a World Bank economist, has remarked that the country’s sub-standard education system would affect the quality of human capital in Malaysia. He suggests that this would be a constraint to becoming a high-income nation.

Productivity measures the efficiency of goods and services production. In addition to the efficient use of labour and capital, innovation also contributes to higher productivity. Having only a small pool of skilled labour would be an impediment to higher productivity gains arising from the use of knowledge and innovation.

This casts a shadow on Malaysia’s prospects as a regional leader that can be counted on to drive growth in the region. It also puts in doubt Malaysia’s ability to work with the United States in achieving a vibrant ASEAN.

The question of competitiveness is a complex one. Malaysia has made much progress in becoming a competitive destination for investment and business. This is undeniable and has been proven by its rankings in various indices. It has been necessary for Malaysia to reinvent itself as a business-friendly economy to ensure its survival as a nation due to its small domestic market and limited technological capabilities.

The spectacular development that Malaysia has attained raises the bar of expectations. The regional environment is more competitive today: it is not sufficient to merely be a provider of fiscal incentives, subsidised utilities and an abundant supply of poorly skilled labour to attract investment. Even less so if one wants to attract high-quality investment.

The TPP is one strategy that offers Malaysia the possibility to stand ahead of the pack in this respect. Coupled with the proliferation of trade agreements that some of Malaysia’s neighbours have signed, an agreement that gives an added edge becomes something of a necessity.

Obama’s visit can be read as a nudge to remind Najib to take the TPP seriously. This demands reconfiguring the domestic economic environment.

Presently, government procurement is used as a policy instrument to address national policy concerns. It is a route to encourage the growth of bumiputera (Malay) entrepreneurship. State-owned enterprises in Malaysia, scantly disguised as government-linked companies (GLCs), enjoy specially carved out markets and privileges. The TPP will put a stop to this.

Bumiputera businessmen, by and large, would feel threatened by the TPP. This places a huge burden on Najib’s shoulders. He will have to effectively convince them that the way ahead depends on sacrificing sure short-term gains for uncertain long-term benefits. Rarely in the world of business can one avoid risks and trade-offs.

Obama also declared that prejudices against people from different religions and race have no place in the modern world. ‘Malaysia won’t succeed if the non-Muslims do not have the same opportunity’, he said.

Extending these remarks to the world of economics, it is clear that the Obama administration would frown on discriminatory behaviour that undermines the efficient workings of the market, as well as practices and acts that limit productivity and the fair reward of economic contribution.

The United States, in effect, has forewarned Malaysia that it expects a different economic culture to prevail. The Obama administration expects political and economic liberalism to pervade Malaysian society.

Malaysia’s progress has brought greater demands on itself. Investors expect a higher degree of transparency than that practiced now, better government delivery mechanisms, less government participation in business and, above all, a corruption-free environment.

If more investment is to flow into the country, the traditional requirements will no longer suffice. Investors expect much more from Malaysia. And so too does the TPP. This is the sharp road that has to be taken to reach developed-country status.

Obama has used the right signs to indicate what the TPP demands; and Najib seems accommodating. Still, he has to convince a resistant domestic constituency that this is the direction in which the world is moving.

Mahathir Mohamad, the former prime minister, holds a diametrically opposed view, as does Perkasa, an influential hard-line pro-Malay organisation. Both think that the TPP will damage Malaysia; and Mahathir has lashed out against the need to give the non-Malays a level playing field domestically.

Obama’s visit to Malaysia was a definite success for Najib. But whether Najib will enjoy success in the follow-up to Obama’s visit is another question altogether.

Shankaran Nambiar is a senior research fellow at the Malaysian Institute of Economic Research, and author of the recently published book, The Malaysian Economy: Rethinking Policies and Purposes. The views expressed are his own.

An earlier version of this article appeared in the Edge Financial Daily.