Malaysia 2.0: What Will It Take

1. Malaysia 2.0:What Will It Take Shahid Yusuf Kaoru Nabeshima DRG World Bank July, 2007

2. Malaysia 1.01970-2007 • Resource-based growth – tree crops, tin, petroleum • FDI supported processing and assembly of manufactures • Main driver of growth: exports • Principal sources of comparative advantage: low wages, low overheads, political and macro stability, adequate infrastructure, acceptable business environment, and steadily improving manufacturing capability

3. Worrying Developments • External competition increasing, especially from China, India, and Vietnam • Rate of GDP growth has slowed and below potential; private investment low • TFP increase modest, innovativeness weak • Growth potential of industrial processing becoming exhausted and that of tree crop agriculture is limited • Quality of labor skills not improving, technical manpower emigrating • FDI below past levels

4. Why the Next Ten Years Are So Critical • Current petroleum resources running out: could impact on budget, imports, and domestic production costs • Technological race accelerating and cost of catching up increasing • Low wage, low tech model not viable for a $5,000 per capita economy ($10,000 PPP) • Growth and export competitiveness depends on productivity, innovation. Incremental process innovation must be complemented by significant design and product innovation • Raising quality of technical skills and innovation capability can take a decade, at least

5. Models for the 2.0 Economy • Finland: Resource rich • Switzerland: industrial tradition, multiple lucrative niche activities, location • Ireland, Israel, Taiwan (China): Resource poor, large diaspora • Korea, Singapore, Shanghai: Resource poor

6. Key Elements of Successful Models • Strong development agencies with focused strategies: all economies except Switzerland • Heavy emphasis on high quality secondary and tertiary education with priority for S&E. Reliance on elite universities, meritocratic and intensely competitive system. Excellence of general schooling supported by targeted vocational and technical training • FDI led industrialization and upgrading of industry supported by government skills development, technology, infrastructure, and exchange rate policies: Ireland, Singapore, Israel, (Shanghai) • Domestic corporate sector led industrial upgrading supported by public spending on infrastructure and services: Korea, Taiwan (China), Switzerland, Finland, (India)

7. Key Elements of Successful Models • Industrial upgrading linked to increased spending on R&D, mainly by private sector • Deep pools of knowledge workers. All economies have between one and three clusters • Significant role of diaspora and immigration of knowledge workers, providers of risk capital: Israel, Ireland, Taiwan (China), (Shanghai)

8. From 1.0 to 2.0: Building Blocks for Malaysia • Manufacturing capability in MNC subsidiaries and some GLCs/local companies in electronics, chemicals, engineering, and agro industries • Skilled manufacturing workforce especially in electronics, petrochemicals • Good transport, energy, and IT infrastructure • Institutions supporting IP, standards, certification and accreditation • Strong incentive regime for FDI, R&D, investment • Financial system and domestic savings • Cluster-based, concentrated development in a few urban centers with high standards of livability

9. Transition to 2.0:How Long Would It Take? • Building domestic corporate sector: 20-30 years, including for India/China • Building innovation capability: 20 years • Building world class, business service providers: 20 years

10. Missing Elements • Industrially and geographically focused strategy and strong agency to play coordinating/implementing role • Major domestic corporations to upgrade, diversify, and globally market Malaysian products • Weak entrepreneurship, few new starts and private venture capitalists to assist new firms • World class universities and research institutes to provide technology leadership, facilities, and opportunities for diversification and hybridization • Deep, diversified base of domestic SMI suppliers. MNC related vertical integration limited • Support from Malaysian diaspora or immigration of foreign S&E workers • Urgency

11. An Action Plan:Five Year Horizon • Identifying 2-3 growth driving industries with long-run potential • Working with corporate sector to make Malaysian companies into world class providers with international brand recognition • Developing clusters of SMIs to backstop these activities in 3 urban centers.– e.g. new, high tech manufacturing in Penang/NE, ITES in KL/Klang Valley, medium tech/traditional industries in Johor • Augmenting capabilities of existing labor force through targeted professional and vocational training using PSDC and other models • Building a multimodal transport system to tightly link three urban regions to create strongly integrated system

12. An Action Plan:Ten Year Horizon • Improving quality of secondary level schooling, especially science, math, and communication skills • Developing 2-3 world class universities and upgrading quality, basic research and early stage technology development in steps: a new breed of motivated and educated students needed for Malaysia 2.0 • Issues to be addressed: longer-term financing, competition among institutions, finding teachers, changing mindset and attitudes of students • Cultivating strengthening university-industry links to reinforce technology-led strategy • Engaging and attracting back talented, experienced, wealthy, and well-connected members of Malaysian diaspora

13. Concluding Remarks • Industrial countries are aiming for 3.0. Competition at 1.0 is intensifying. Striving to achieve 2.0 is not an option for Malaysia. It is a necessity

14. Thank You