DIRE STRAITS
It's all about education, stupid
By Anil Netto

PENANG - Malaysia's economic planners are banking on a turnaround in global economic conditions in the second half of next year to achieve what look like overly optimistic projected economic growth figures for 2002.

The 2002 budget unveiled in parliament on Friday projects economic growth of 4-5 percent for 2002.

Over the past year, Malaysia has been overly optimistic in its economic forecasts. After recording a heady 8.3 percent growth in 2000, the government had initially projected 7 percent growth for 2001, but that has been revised twice to the present 1-2 percent.

Even before the September 11 attacks in the United States, private analysts had projected that growth this year would be probably only 2 percent at a time when the government was forecasting 5-6 percent. The latest estimate of 1-2 percent growth for 2001 still appears too optimistic. A more realistic projection would be growth of 0.5 percent, zero growth or even a recession.

But the government is obviously hoping that its moves to boost consumer spending and pump-prime the economy will compensate for flagging export sales. Much will depend on how soon and whether the additional 7 billion ringgit (US$1.8 billion) in pump-priming stimulus packages announced earlier this year will filter down through the economy.

To improve consumer spending, the government has sliced income taxes by 1-2 percent, and awarded 850,000 civil servants a 10 percent pay hike and a half-month bonus (with a minimum payout of 1,000 ringgit). To make up for the loss in revenue, it has raised petrol and diesel prices by about 10 percent and hiked up taxes on cigarettes and tobacco by 20 percent.

Critics have pointed out that the tax cuts will benefit the higher income groups most. Those with annual chargeable incomes of 250,000, for instance, will save 3,800 ringgit in taxes compared with tax savings of only 200 ringgit for those with chargeable incomes of 20,000 ringgit.

Still, the budget has been generally seen as pragmatic and balanced though there was some disappointment that the corporate tax rate was not cut.

The key question now is whether the projected growth of 4-5 percent for 2002 is achievable. Much will depend on whether the turnaround in the global economy materializes in the second half of next year. The government is hoping that the electronics sector - Malaysia's main revenue earner - will recover soon. It appears to be counting on higher fiscal spending in the United States on military electronics equipment for surveillance and communications to boost the recovery process.

The budget projects that the manufacturing sector will expand by 6.5 percent in 2002 after recording an estimated growth of just 0.2 percent this year. That could prove beyond reach as Malaysia's main export markets - the United States, Japan and Singapore - are all experiencing slumps in varying degrees.

Total exports are expected to decrease by 10.8 percent in 2001 as the merchandise and the current account surpluses fall again.

One area where the government could do better is in the construction industry. It has forecast growth of only 4.3 percent for 2002 in this sector (compared to 4.9 percent in 2001). An economist in a TV panel discussion said he couldn't understand why this figure was so low when there is an insatiable demand for low-cost houses, which are in short supply. A massive low-cost housing construction program could help jump-start the construction industry and provide other spin-off benefits.

But despite the concerns over flagging external demand, Malaysia's macroeconomic fundamentals look fairly sound. There is a projected current account surplus of 25.1 billion ringgit for 2001, a balance of payments surplus of 0.5 billion ringgit for the year, external reserves of US$30 billion (enough to finance 4.7 months' retained imports or 6.3 times higher than the country's short-term foreign debts) and an official inflation rate of just 1.3 percent for 2001.

Worryingly though, the nonperforming loans ratio for the first six months of 2001 crept up to 8.3 percent from 6.3 percent at the end of 2000 - though this was said to be due to a "reclassification" of loans to aid the banking restructuring process.

Perhaps the most pressing concern - and this is something that the budget alone cannot tackle - is how Malaysia is going to climb up the technological ladder when its human resource skills level is still wanting. The budget makes some attempt to address this concern. Some 900 million ringgit is allocated for rural schools with 100 million ringgit for six new rural matriculation colleges. It allocates 205 million ringgit for the computerization of schools - a sum that seems inadequate when some 5,000 schools throughout the country still lack sufficient PC facilities.

But no amount of money spent on education will be enough when what is needed is a qualitative revamp of the education system. Almost everything related to the education system - the selection of teachers and lecturers, their training, the curriculum and teaching methodology (which does not encourage students to think and to be creative) - needs an overhaul.

Malaysia badly needs a competitive edge over its regional rivals in its human resources skills level to draw in much-needed new investment. Indeed, in the long run, a revamp in the Malaysian education system would do more than any budget package to take the country to a new level of economic competitiveness and self-reliance.