Malaysia no longer stuck in middle-income trap?

Stuck in the middle-income trap 

Attributing the positive development to the various reforms undertaken via the multi-year economic transformation programme (ETP), the Datuk Seri Idris Jala,(pic) CEO of Performance Management and Delivery Unit (Pemandu) points out that Malaysia’s GNI at US$10,570 (RM42,340) per capita last year is now only 15% away from the high-income-economy benchmark of US$12,475 per capita.

KUALA LUMPUR: Malaysia is no longer stuck in the middle-income trap, as its gross national income (GNI) is now progressively growing towards the high-income benchmark as defined by the World Bank, says Datuk Seri Idris Jala.

Attributing the positive development to the various reforms undertaken via the multi-year economic transformation programme (ETP), the CEO of Performance Management and Delivery Unit (Pemandu) points out that Malaysia’s GNI at US$10,570 (RM42,340) per capita last year is now only 15% away from the high-income-economy benchmark of US$12,475 per capita.

This compared with a gap of 33% between Malaysia’s GNI of US$8,280 per capita in 2010 and the then high-income economy threshold of US$12,276 per capita.

“As a result of the things we have been doing since 2010 and up to now, we have become completely unstuck (from the middle-income trap), with the gap (in Malaysia’s per capita GNI against the high-income threshold) now narrowed down to just 15%, compared with 33% in 2010,” Idris, who has been leading Pemandu, which is an agency under the Prime Minister’s Department, since 2010, said.

“The gap was even wider before 2010, and we could never close the gap for many years, resulting in many economists and financial experts proclaiming that Malaysia is stuck in the middle-income trap, and would not be able to become a high-income nation by 2020 unless we become unstuck,” he said in his keynote address on the Public Private Partnerships panel discussion here yesterday.

The panel discussion, jointly organised by research and publishing company The Business Year and education services provider Brickfields Asia College, was themed “Innovation as Driver for Local Economic Empowerment”.

According to Idris, Malaysia had managed to transform its economy, as a result of implementing innovative strategies. He said the Government remained confident of closing the GNI per capita gap and achieving the high-income target by 2020.

Under the ETP, the target was to achieve a GNI per capita of US$15,000 by 2020.

Meanwhile, in addition to GNI growth, Idris said Malaysia was also making good progress in the fiscal-sustainability space, as evident in the narrowing of the Government’s budget deficit and the continued manageability of its debt level.

The reduction of Malaysia’s fiscal deficit to 3.2% of gross domestic product (GDP) last year from 6.6% of GDP in 2009, for instance, was an indication of a stronger and more sustainable financial position. The country’s fiscal-deficit-to-GDP ratio was expected to reduce further to 3.1% by the end of 2016.

The Government debt-to-GDP level, on the other hand, would remain below the self-imposed limit of 55%. It stood at 53% last year.

“We have reduced subsides and implemented the goods and services tax (among the various economic reforms) to achieve fiscal sustainability,” Idris said.

“We have also put in a lot of effort to stimulate private investment growth” he added, noting that private investment growth had outpaced public investment since the launch of the ETP.

Idris said while there were still challenges in implementing economic reforms, Pemandu would continue to monitor closely the progress made by various government ministries.

“We are tracking all the investment projects one by one ... we want to make sure that all these projects are being implemented just as we said they would,” Idris said.

On the moderate growth of the country’s economy and gradual pace of fiscal-deficit reduction, Idris said these were a result of deliberate policy to ensure that Malaysia did not grow at the expense of accumulating more debts, or had its budget deficit cut drastically at the expense of the country’s economic growth.

Through this balancing act, Idris said, Malaysia had managed to stay in the “safe zone” in terms of debt-to-GDP and fiscal deficit levels while maintaining a steady growth path. - Cecila Kok The Star

But in the same article, Danny Quah, professor of economics and international development at the London School of Economics, disagreed that Malaysia had moved past the middle-income trap.

Quah maintained his position on Saturday, at a panel discussion organised by Sunway University in Petaling Jaya.

He told the university’s students that Malaysia had been going after “low-hanging fruits” in policymaking, resulting in it being trapped in the middle-income status.

“We are now in a situation where we are in a good place, but we’ll not get past it to gain fully developed country status in Malaysia’s own mould,” he said.

Quah is of the view that Malaysia has become complacent about its achievements, and that the nation suffers from what economists call the “natural resource curse”.

The economist pointed out that only about one million out of the 30 million people in the country are paying income tax, noting that this small fiscal base would be unsustainable moving forward.

The problems are an unclear direction, lack of leadership commitment, high-level plans that are not practical, rigid implementation, a silo mentality and work approach, public demands and inputs not adequately obtained, poor accountability, and a lack of transparency and trust deficit.

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Malaysisia changes over the last 42 years; quanity yes, quality?

The ascend to the throne of our new King, 42 years after he was last installed, is a time to reflect on our achievements.

I WAS at the installation of our new King the other day. Twice as King, he has seen Malaysia change from what it was then and now. He also mentioned in his speech that he witnessed the efforts of the Prime Minister at that time, Tun Abdul Razak, the father of our current Prime Minister.

I sat in the audience, reflecting on some of the positives that have taken place in our country and took some notes on my Blackberry.

The key thought that ran through my mind was how much things have changed over the last 42 years. Here’s how much:

·We moved from a low-income, high-poverty country to a high-middle-income economy. Our next transformation is to become a high-income, developed country with quality of life for everyone.

·Our infrastructure has increased by leaps and bounds. Roads and highways have been built and traverse all parts of the country. We are putting in a mass rapid transit system in Kuala Lumpur to take us to the next level.

·We have modern retail outlets – supermarkets, hypermarkets, shopping complexes, malls and entertainment outlets and we are helping mom-and-pop stores to modernise too.

·We are moving towards greater freedom in all spheres with the repeal of the Internal Security Act, establishing clear rights for peaceful assembly and affirming the rights of online expression and social media liberties, amongst others. The Government has also made amendments to Printing Presses and Publications Act, while the Prime Minister is also talking about changes to the Sedition Act.

·Religious freedom has actually taken strides forward. There is now explicit statement of freedom to import (instead of implicitly before) and publish the Alkitab (the Bible). Indeed, since the 10 points resolution, many Alkitab have been imported and printed locally, without any difficulties with the authorities.

·We have moved to an extensive “social welfare” system e.g free primary and secondary schools, virtually free public health system, and one of the lowest consumer prices for fuel, LPG cooking gas, sugar, electricity, flour, gas, and so on with high subsidies from the Government.

·We have moved to greater focus on rural poor. Under the transformation initiatives, for low-income groups, three million lives were positively impacted in 2010 and 2011.

·We have put up an explicit and substantive roadmap to transform Malaysia further. We will build upon the great achievements we have made between the times of the rules of our current King and work towards our vision 2020 - to make our country a developed one with its people earning high incomes.

Considerable achievement

Just to show the extent our achievements over the last 42 years, I have constructed a table of some key indicators. You can see for yourself how much things have changed, even if you accounted for the fact that a ringgit went a much longer way then.

Our income as a nation – gross national income at the prevailing prices then - increased 64 times over the last 42 years, which is fantastic considering that the population growth over the same period was just 1.6 times.

It’s not surprising therefore that per capita income went up 25 times over the period, a considerable achievement even after taking into account inflation and the drop in value of money.

‘We are putting in a mass rapid transit system in Kuala Lumpur to take us to the next level.’

 

One of the most telling effects of this is that the incidence of poverty has been brought down from nearly half of the population to less than four for every 100 people in the country. That’s tremendous.

The number of schools increased but the impact here would have been understated because while additional schools were built, existing schools would have increased their enrolment considerably.

There was a massive explosion in universities. In 1970, the universities were all public and there were only three. The latest figures indicate that private universities now outnumber government ones almost two to one with 20 public universities and 39 private ones.

A similar situation was seen for hospitals with private hospitals increasing from 46 to 239 while government hospitals rose more moderately from less than 80 to 137.

Average life expectancy, assuming equal numbers of males and female, increased by 17% to 74.1 years, reflecting vast improvement in health levels, which is reinforced by the sharp over 80% drop in the infant mortality rate to seven per 1,000 live births.

World confidence in the Malaysian economy too increased over the 42-year period and this is well-supported by foreign direct investment flows in 2011 of an excellent RM33bil which was 150 times more than that in 1970.

Who would have believed 42 years ago, that Malaysia would make such major achievements in an extremely challenging environment of uncertainty posed by the 1969 racial riots and the drastic and controversial steps that the Government took then to redress racial imbalances and eliminate poverty?

But despite the scepticism and the lack of confidence then, we succeeded and succeeded well. Yes, we could have done better, but then we can always do better and anyone could have done better. What counted was that we met our major targets.

We find similar scepticism now to our efforts to make yet another great transformation, a giant stride to become a developed nation with its citizens earning high incomes and enjoying a better quality of life than ever before.

Promising figures

We aim to do this in a bit more than eight years in a rather challenging and competitive environment. And I dare say we know how to do it. We have it pretty much mapped out in quite some detail.

The initial figures are promising, despite all the nay-saying which continues to give me the transformation blues. But yes, we will rise above the blues as we did before and make this a better nation for each and everyone of us.

The results for 2010 and 2011 are great with most of our targets not just met but exceeded, often by a lot. See the comprehensive annual report on economic and government transformation in the Performance Management and Delivery Unit (Pemandu) website for details.

Rome wasn’t built overnight, likewise Malaysia too. We are blessed as a country. Whilst we know there are shortcomings, we also need to count our blessings even as we overcome the shortcomings and other obstacles.

And we shall overcome – of that I am very sure.

Transformation Blues - By Idris Jala

Being grateful is Love, the simple things?

Datuk Seri Idris Jala and the Kelabits have shown that being grateful is a way of showing real humility but it should not be mistaken as being subservient.

THERE was an elderly Kelabit man who had never seen a TV set in his life – not until he visited his son’s modern house.

He sat on the sofa and watched the news and his son noticed that the old man paid special attention to reports on the floods in Kelantan, especially the deaths due to drowning.

The father turned to his son and asked why there were deaths? He was shocked when he was told it was an annual occurrence.

“Why didn’t they just move away from the river? Our people would have just moved to higher ground,” he said.

This story was related to a group of about 30 analysts and journalists at a briefing on Thursday by probably the most famous Kelabit of all, Datuk Seri Idris Jala. The old man was his father Henry Jala.

“That’s how our people are. Our tribe has moved to near the Kalimantan border just to get away from the floods,” said Idris, who is the boss of Pemandu – the government unit set up to implement the New Economic Model and the various transformation programmes.

Pemandu is the acronym for Performance Management & Delivery Unit of which Idris is the chief executive officer. He is also a Minister in the Prime Minister’s Department.

He readily admits his bias towards the rural transformation programme and the key initiative to build basic infrastructure for the rural folk.

“Till today, my village has no electricity supply. Fifteen years ago, our longhouse was burnt down because a woman forgot to put out a candle before going to sleep,” Idris told the audience as he expounded the virtue of the Government Transformation Programme and the Economic Transformation Programme.

(The acronyms of GTP, ETP and Pemandu has become synonymous with Idris.)

The Kelabits, numbering some 5,000, are probably the most successful bumiputra community in Sarawak.

It has been reported that at least 90% of the Kelabits are literate and that some 10% of them have obtained diplomas, degrees, post-graduate degrees and professional qualifications. At least another 1,000 have sat for their Form Five examination.

Besides Idris, the community has got doctors, lawyers, police officers, engineers, millionaire businessmen and top state civil servants.

Ask any Sarawakian about Kelabits, and they will speak of them in a respectful tone with full admiration.
After all, many of the older ones are well-known warriors and war veterans.

One could even say that pound for pound, the Kelabits are the most highly successful community in the country despite their small number.

Idris had told another audience at a more informal setting at Tapis Rouge – a restaurant cum mini-theatre owned by celebrity Datin Seri Tiara Jacqueline – that his people who lived in the Bario Highlands, although led a simple life, were ambitious.

A widely travelled man, Idris told of his life in Holland and Britain and how our country was not that lacking.

“I have always considered my life very blessed. I constantly remind myself that Malaysia has got a lot going for it.

“While we look admiringly at the roses far away, we must not forget the roses that are in our own garden,” he told his audience at his Blues Jam session at Tapis Rouge.

Idris said his favourite quote on this came from management guru Dale Carnegie which went: “It is tragic when we put off living. We dream of a magical rose garden over the horizon and miss the roses blooming outside our windows”.

The strain of leading the Government’s charge to transform the nation into a high-income and developed nation shows on Idris face but his bubbly self seems to shine through whenever he gets his hands on a guitar.

In his closing remarks to the 300-odd friends and supporters who turned up to hear him sing and play the guitar, Idris reminded them that Malaysians must learn to count their blessing and “learn to love the simple things like music, family and roses”.

Come Monday, the 2011 annual reports of the ETP and GTP will be submitted to Prime Minister Datuk Seri Najib Tun Razak live on TV at 8.30pm.

> Executive Editor Wong Sai Wan is still looking forward to a trip to the Bario Highlands to see for himself the Kelabits in their own environment.

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Who will solve MAS’ operational problems?

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The deal with AirAsia reads like the rationalization of the airline industry but does little or nothing for Malaysia Airlines' operations

Image via WikipediaWhile MAS has award-winning products and services, a competitive cost base, and only slightly below average load factors, our yields are dramatically lower than our competitors. – Idris Jala then CEO of MAS in February 2006 before turning around the badly ailing airline within a year.

AT the end of the day, the alliance between Malaysia Airlines (MAS) and AirAsia achieved via share swaps between their major shareholders does nothing by itself to improve MAS’ operations (see our cover story this issue for full details).

In fact a misguided overemphasis on MAS focusing on being a premium full service carrier (FSC) can have dire consequences on its revenue and viability as we shall explain.

What is clear from the figures in the chart is that the national airline has a severe revenue management crisis, which it must solve or perish. The yields broadly track the airline’s operational profits.

The problem with the yield and hence revenue is not the product, for MAS is rated consistently among the top airlines in the world for service.

The problem is not capacity utilisation because seats are on average filled three quarters, despite increases in capacity.

The problem is pricing. Despite a good, and even excellent, product it is not able to price it properly and this is reflected in its yield, which is the revenue per revenue passenger km flown (sen per RPK – the average amount an airline gets for flying a paying or revenue passenger one km.). Hence there are no profits but losses now.



If we look at the RPK in the chart for the first quarter of this year, it is back to what it was in the first quarter of 2006 after Datuk Seri Idris Jala joined MAS in December 2005. Idris’ quote above in February 2006 shortly after he took over is exactly applicable to MAS today, over five years later!

An examination of the chart shows that since Idris came in to MAS in December 2005, MAS had experienced a relentless increase in both RPK as well as revenue per available seat km or RASK (available seat km is a measure of capacity obtained by multiplying seats available by the kms flown and totalling them) up to end-2008.

The increase in RASK at the same time indicates that the seat factor (how much seats are filled, obtained by dividing the RPK by the ASK) or capacity utilisation was maintained at healthy levels.

Maximising revenue is a function of trying to control three key variables – capacity, capacity utilisation and fares. When any one of these increases, revenue increases if the other two at least stay where they are. The ideal is when all three increase simultaneously.

The issue is complex to say the least and is at the heart of the profitability of any airline. Costs, in contrast, are much easier to control and quantify. But in revenue management you need to have a good feel for what price you can charge without affecting capacity utilisation.

For this you need very good people who can feed the right information to some of the most complicated and complex modelling systems in airline operations. And you need to be constantly refining this because the situation changes all the time and from day to day.

Most FSCs like MAS have a basic fare to fill most of their seats. But with an average seat factor of say 75%, one quarter of the seats are empty and wasted if they are not utilised. They target these seats to be sold too, often at lower prices, because they bring in revenue at the margin almost all of which goes straight to profit because it is incremental.

Now here’s the paradox: MAS, like any other FSC, must in areas where the load factor or capacity utilisation is low compete on the back-end or economy class with the low cost carriers (LCCs). Not to do so would make it severely uncompetitive as an airline.

If the flights are likely to be full, MAS should move to higher prices and if they are not, than the airline has to offer discounts – sometimes considerable discounts – to fill up the seats and improve capacity utilisation. The conditions for these seats are like for LCCs – inflexible schedules and early bookings but low price.

The trick is to do this without actually cannibalising your current base customers who are willing to pay a premium for flexibility and full service and to charge a rate the market can bear for the front end – business and first class where demand is not that price sensitive.

Now, lets look at the chart again. MAS’ yields increased steadily and peaked in the fourth quarter of 2008 for a gain of 60% in just three years and exceeding even that of Singapore Airlines, indicating excellent revenue management.

It took a massive dip in 2009 along with other airlines in the aftermath of the global financial crisis which started in the last quarter of 2008. Most airlines recovered after that but MAS did not. Idris left in the third quarter of 2009 to head the Performance Management and Delivery Unit and become a Cabinet minister.

Singapore Airline’s yield in 2009 fell to 25.7 sen per RPK from 31.3 sen per RPK (at current exchange rates), down 18% and MAS’ fell from 32.9 sen per RPK to 23.4 sen by the fourth quarter of 2009, down a massive 29%. But in the first quarter of this year, SIA’s was back up to 29.9 sen per RPK but MAS’ continued to languish at 22.7 sen, even lower than that at the height of the crisis!

The difference between SIA’s and MAS’ yield now is a massive 7.2 sen. MAS has estimated in the past that one sen in yield translates to about RM500mil in revenue a year. That means that if MAS can increase its yield to that of SIA’s – not impossible, it has done it before - that’s an extra RM3.6bil in revenue.

Since this is incremental, it means an operating profit of over RM3bil assuming MAS’ operating profit this year is likely to be less than RM600mil!

That is basically the problem at MAS – its yields have not recovered post the world financial crisis which affected airlines very badly in 2009. If MAS focuses on getting its yield back while keeping costs down, it’s back in business and in a great big way too.

MAS is an airline. The argument that ancillary services will make most of its money is false, although that income is useful. It can and must make money from the airline operations, although there will be cyclical downturns.

The guy (or gal) who will turn MAS around has to understand airline fundamentals and if he has no experience in how pricing affects revenue in the airline world, he must learn pretty fast. And he has to be pretty fixated on costs and have a good eye for market opportunities. Someone like Idris.

Back to the deal. It is good for AirAsia, some of it for good reasons and some for bad reasons. It is good because AirAsia can get routes and compete with MAS on the long, medium and short haul. But bad if the intention is to cut competition through uneconomic means.

MAS should be able and allowed to compete on economic terms with AirAsia in the same way that AirAsia can – the competition must cut both ways. That is the key to a more vibrant airline sector. If MAS can increase its revenue overall and make money by offering cheaper fares on some routes, they must be permitted – and indeed encouraged – to so.

By all means collaborate via common procurement, maintenance, training and the like to bring costs down but allow full economic competition on pricing. Don’t carve the market out rigidly but let the markets overlap on the fringes as they do in reality.

Let MAS be a full service carrier on all sectors but with the liberty to compete on pricing when the economics dictate it. Let AirAsia do its low-cost thing – which it has done so well and with so much benefit for travellers – wherever it wants to and give it access to any route it wants.

And let Firefly do what it will from Subang with no restriction, meaning it does not have to be an FSC.

Then we have the best of both worlds – the most collaboration to bring down costs with the most competition to keep efficiency up, deliver excellent service and low fares. Then we will truly recognise the three elements in this equation – the two airline groups and the customers without whom the first two don’t exist.

Managing editor P Gunasegaram would like to quote another turnaround man Lee Iacocca, the one who took Chrysler back to profits against all odds sometime back: “In the end, all business operations can be reduced to three words: people, product, and profits.”