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| Malaysia plans new economic model for growth |
| 20-MAR-2010 Intellasia | The Edge Malaysia |
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| 20 Mar, 2010 - 7:04:00 AM |
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Malaysia is considering proposals to end its subsidy regime and phase in a new goods and services tax as it begins dismantling a four-decade race-based economic system that has deterred foreign investment.
The economic regime adopted after race riots in 1969 has given a wide array of economic benefits to the 55 percent Malay population, but investors complain it has led to a patronage-ridden economy that has resulted in foreign investment increasingly moving to Indonesia and Thailand.
The reform proposals have been seen by the cabinet and will be reviewed again before prime minister Datuk Seri Najib Razak presents them at the Invest Malaysia conference this month in a bid to woo foreign investors, a government source who has seen the plans told Reuters.
"The proposal cites political implications for some of the measures and calls for the government to make some tough decisions," said the source, who could not be named because of the controversial nature of many of the policies. The government last weekend abandoned politically sensitive plans to introduce a goods and services tax (GST) just weeks after it halted implementation of petrol price hikes aimed at cutting its subsidy bill and electricity price rises.
The new reform plans, drawn up by an influential government advisory body, say the government will end price controls and subsidies, mainly for fuel, food and power "with minimal exceptions".
"The savings should then be allocated to widen the social safety net for the bottom 40 percent of households," said the source.
Malaysian power tariffs are half those of neighbouring Singapore, according to a recent report by investment bank Maybank.
A series of policy flip-flops in recent years had dogged Malaysia's reform efforts and the country had seen net foreign direct investment outflows to the tune of RM26.1 billion over the past two years. Malaysia attracted 31 percent of the total foreign direct investment that went to Malaysia, Indonesia and Thailand in 2008 versus half of that total in the 1990-2000 period, according to UN data.
The stock market had languished and foreign ownership dropped to 20.4 percent of market capitalisation at the end of 2009 from 26.2 percent at the end of 2007, according to official data.
Malaysia will seek to position itself in high-growth industries under the new reform proposals, aiming to achieve per capita gross national income of $17,000 (RM56,270) by 2020, which would make it a developed nation by World Bank standards. Countries such as South Korea and Singapore have already made that leap.
Without a radical reshaping of its economy and a move away from low-value added electronics exports and labour intensive commodities industries, Malaysia risks losing ground to the likes of China and Vietnam and not making it to developed nation status, a recent World Bank report said.
It is unclear how far the proposals will go in reshaping Malaysia's social system, blamed by some political analysts and economists for fostering graft and an uncompetitive economy.
At present, the majority Malay population gets a variety of benefits from cheap loans and discounts on property to preferential access to education as well as preferential equity in companies.
The government has repeatedly sought to reassure Malays who are its core voter base that their rights would not be eroded. It is still reeling from record losses in national and state elections in 2008.
It could keep that pledge in part by sticking to guarantees in the constitution that give Malays a proportion of scholarships, university places and business licences.
The report said a backlash against the proposed reforms could come from industries that have enjoyed protection from competition as well as from politicians whose constituents did badly out of the planned changes.
Before being formally implemented in June, the plan will be opened for discussion by the public and interest groups.
Malaysia depends on oil giant Petronas for almost half of federal government revenues and has announced plans to cut the budget deficit, which last year came in at more than 20-year high of 7.4 percent of gross domestic product, to 5.4 percent this year.
http://www.theedgemalaysia.com/business-news/161883-malaysia-plans-new-economic-model-for-growth.html
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