PROMISING FUTURE

Malaysia 2019 | ECONOMY | VIP INTERVIEW

TBY talks to Firas Raad, Country Manager Malaysia of the World Bank, on investor confidence, the National Industry 4.0 Policy Framework, and human capital.

How do you assess the measures taken by the Malaysian government in the 2019 budget to restore fiscal buffers, improve governance, and regain consumer and investor confidence?

It is important to see the budget and policies for 2019 within the context of Malaysia's broader development narrative. The development model of this country has traditionally been based on an export-oriented strategy which has worked well for many decades. Recently, however, questions have been raised about the appropriateness of this model going forward and how Malaysia can shift to a new development model to further climb up the income ladder and reach high-income and developed country status. Part of this challenge is boosting education outcomes and productivity growth to ensure that Malaysia's human capital is ready to propel it into that reality. When the new Government assumed power, there were a number of challenges it had to confront, and the budgetary cycle was an opportunity for it to unveil its policy directions vis-a-vis these challenges. In the near term, it had to manage its budget and fiscal position, grow the economy, give confidence to the private sector, and protect the vulnerable in society. The government knew it had to strike a careful balance, and we were fairly pleased that the budget included a number of pragmatic elements. On the revenue side, the Government introduced some positive measures related to taxation and strengthening its administration. It also signaled there would be a greater emphasis on good governance, accountability, and transparency. Naturally, there are ongoing challenges. Malaysia's tax revenues as a percentage of its GDP are relatively low at 16-17%, whereas in OECD countries it is typically over 30%. Moreover, about 20% of fiscal revenues come from the oil sector. This poses certain vulnerabilities for the Government in the potential event of an external oil shock. Looking at the budget within a broader economic context, we are still fairly positive as the economy still rests on strong fundamentals.

What are your expectations around the impact of the National Industry 4.0 Policy Framework on the performance of Malaysia's manufacturing industries?

In October 2018, the National Industry 4.0 Policy Framework for Industry 4.0 was launched, which was a positive initiative by the Government. Its success will ultimately rest on the ability of firms, particularly SMEs, to adopt new digital technologies. This framework will have to tackle issues like providing credit to firms that need it and getting connected digitally. Our recently-completed report on Malaysia's Digital Economy found that the country was doing fairly well in terms of connectivity and e-services, both on the government and individual levels. The digital adoption rates of firms in Malaysia, however, are relatively low compared to other countries in the region. One key factor impacting the digital economy was the comparatively high prices for fixed broadband services and a lack of competition. The Government is now encouraging greater competition in the telecoms sector, which is leading to lower prices for fixed broadband and higher digital adoption among firms. There is also the question of human resources: giving these firms access to an adequate supply of talent can help them make the next leap forward.

How do you assess the efforts of the government to reform TVET?

In a general sense, looking at the labor market and unemployment rate, the overall storyline is fairly encouraging. But beyond that, youth unemployment remains an issue to be tackled. This is where programs like TVET can play a role in supporting fresh graduates make the school to job transition. The challenge in this sector is fragmentation as there are many programs scattered across different agencies. Taking a holistic view and streamlining the programs to ensure the quality of trainers and programs, and also encouraging young Malaysians to go down this track are important factors. We see an issue of an over-supply of programs but insufficient demand for them. In Europe, some Governments have been fairly successful in integrating different programs, so Malaysia could potentially find value in emulating some of these systems to ensure TVET can help upskill current and future youth and enable them to meet the challenges of the future job market.

You have argued that Malaysia needs to do more to promote better learning outcomes. How does the World Bank support Malaysia toward realizing higher human capital?

Human development outcomes around the world need to improve if we are to meet the Sustainable Development Goals (SDGs) by 2030. Over the last two decades, there has been a real emphasis on the development of human capital by various organizations. There has also been a recognition that we are not moving fast enough as a community of nations to meet the challenges of human capital accumulation, particularly in health and education. In the health domain, there are twin challenges of infectious diseases and non-communicable diseases. On the education front, the World Bank has published several reports that attempt to raise the alarm. Our latest World Development Report highlighted that enrolment rates are insufficient as an indicator of progress; we also have to look at learning outcomes. When we did so, it was startling to see how many countries are not focusing enough on ensuring that school children are actually learning in class. To that end, the World Bank introduced the new Human Capital Index in 2018 which provides a measure of the future potential of a child born today given the prevailing human development conditions in her or his country. We used data to create a composite index and ranked countries according to their respective scores. It is both astonishing and encouraging that four of the top five performers of the HCI came from the East Asia and Pacific region. Malaysia did well in certain areas but lagged behind in other areas. The two areas where improvements are needed are in childhood stunting and the quality of education. As of now, one in five children in Malaysia are stunted, and we are encouraging the Ministry of Health and others to delve into this issue. The data however, shows that it is not so much an issue of income that is affecting childhood stunting, as it is pervasive throughout urban and rural areas and among income levels. Other countries that have been able to solve this problem, such as Peru, have shown that it requires multiple strategies and interventions by different government agencies to tackle this issue. Another area of concern is the quality of education. The country's most recent scores in education do not compare as well as those of its aspirational peers, such as Hong Kong, Taiwan, or South Korea. We hope to support the Government in its efforts to make improvements in this critical area for development.