Rationalisation of Subsidies – the other alternatives
By Dr. Sivamorthy Shanmugam (Advisor, MIBA)
Members of Malaysian Indian Business Association (MIBA) hailed Datuk Seri Idris Jala on his frank and sincere comments on the economic situation of Malaysia and noted that Malaysia is one of the worlds highest subsidized countries with 4.7% of GDP compared to Indonesia 2.7%, Philippines 0.2% and OECD countries at 1.5% at an average.
On the other hand the government debt has reach a record of RM 362 billion in 2009. The agreed formula should focus on growing the economy (hereby increasing revenue / GDP) government cost cutting measures and gradually reduce the subsidies over a period of time. As step in right direction the government must initiate measures to improve the business environment inorder to attract FDI’s and boost the domestic investment. This is critical as during the period 2000 to 2008, the amount of FDI grew by average of 3.9% as against an average growth rate of 14.8% inflows into the region. Another indicator is the declining share of private investment to GDP from 34.9% of GDP in 1997 to 10.9% in 2008. The private sector participation as engine of growth has dwindled to below 10% of GDP from 30% of GDP at its highest. There was further erosion of economic competitiveness when the outflow of capital in 2008 is RM 117 billion and another RM 54 billion for the first half of 2009.
What does the above statistics reveal? – that there are structural problems in the economy that must be addressed urgently in an accountable and transparent manner. The “Think Tank” in our association has raised the following issues as relevant factors that need to be considered.
- NEP framework of 1970 – 2009 is inconsistent with knowledge led growth and focuses on redistribution of income and not enough on generation of income. The real cost of NEP that has drained federal governments financial resources comes in the form of inflated government contract project cost overruns, agriculture subsidy schemes cost of making opportunities in business entrepreneurship, education and scholarship to substandard applicants, concession discounts and pink slips and property ownership. The worst effect of the NEP regime is the prevalence rampant corruption which has weakened and created ineffective institutions across all branches, namely legislation, judiciary and the executive.
Foreign Labour Dependency has slowed down productivity, depressed wages impeding human capital and remittances overseas amounted to 1.5% or GDP each year. It must be noted that 75% of Malaysian workforce are low skilled and 25% of our highly skilled workers migrate – leading to massive brain drain.
Malaysians boasts of one of the largest bureaucracy in the world with about 1.3 million in 2009 and civil servants remuneration amounting to RM 41 billion. The following table indicates the magnitude of the bloated bureaucracy which suffers from “poor public delivery syndrome”.
- Comparison of No of Civil servants to 1 million population.
- Malaysian 4.68
- Thailand 2.06
- S.Korean 1.86
- Philippine 1.81
- Indonesia 1.79
- Laos 1.24
The government needs to promote innovation creativity and high value activities by intensifying Research & Development.
- Government Linked companies with about 36% of the total capitalization has to fulfill the Malay Agenda. This means priority of contracts and staff employment is skewed towards fulfilling the Malay Agenda. Inspite of various GLC’s transformation programmes to improve profitability, the GLC’s are we still recording massive losses. This can be translated into shortfalls in collection of the corporate tax revenue for the government. Companies taken our by government trust agencies, PNB and GLC’s have actually shown declining profit trends and losses after takeover. This is another dangerous trend as well managed companies just disappear from the commercial landscape.
MIBA strongly endorses the pillars of One Malaysian Concept, highlighting Unity in Diversity, Economic competitiveness and Government for all. We also endorse gradual subsidy reduction over period of time and governments political will to focus on fighting corruption, removing wastage and improving public sector delivery efficiency as an overall strategy to improve the financial status of the country.
About the author: DR. SIVAMOORTHY SHANMUGAM is the ADVISOR, OF MALAYSIAN INDIAN BUSINESS ASSOCIATION ( MIBA ) and been recently installed as the President of Rotary Club of Johor Bahru. He run’s his own Tax Consultancy firm M/s CNM TAXLINK SDN BHD, 17-03, SUSUR DEWATA 1, JALAN DEWATA, LARKIN PERDANA, 80350 JOHOR BAHRU (TEL :- 07-2387263 / 07-2387507, FAX :- 07-2387261)
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