RECENTLY, the International Monetary Fund (IMF) warned the world economy will usher in an era of slow growth.
Major economies, except for the US, are not doing well. On good days, the Euro Zone experiences a slow growth rate of less than one per cent and when the going gets tough, it even experiences negative growth.
It is not any better for Japan with a growth rate of less than two per cent. Only the US experiences a more steady growth rate of about 2.3 per cent.
From 2002 to 2012, the average annual growth rate for China was 10.4 per cent — ranked No.5 in the world. On the other hand, Malaysia experienced a growth rate of 5.1 per cent — ranked No. 53 in the world — during the same time. In 2013 and 2014, China’s growth rate dropped to 7.7 and 7.4 per cent respectively while Malaysia experienced a growth rate of 4.76 and six per cent. It is estimated that the growth rates of China and Malaysia will slow down further in the next few years. Since the 2008-9 European and American debt crises, China has become a major growth driver, and to a certain extent, led the growth of commodity-exporting countries. If China enters a moderate-growing state, it will mean a considerable decrease in the need for commodities such as Malaysia’s oil palm.
China’s slowdown will have a considerable impact on Malaysia. In 2014, China accounted for 17 per cent of Malaysia’s total exports while Singapore accounted for 14 per cent. As for Malaysia’s imports, Singapore accounted for 12.5 per cent and China 1.9 per cent.
Singapore, being an importing and exporting country, also has strong relations with China.
China’s rapid growth continued for about 30 years before finally entering a moderate-growth state while Malaysia long entered this state after the 1998 currency crisis. In comparison, the period for Malaysia’s rapid growth was much shorter — only about 10 years.
When a country grows rapidly, it will enter a moderate-growth state sooner or later, and eventually a slow growth state. In countries like many of those in Africa, this shift will not even occur and they may experience negative growth.
This involves a “starting point advantage” and an “advantage of backwardness.” If a country starts at a low point and understands how to utilise this “advantage of backwardness” such as China, Taiwan, South Korea or Japan, then this country can rapidly grow. But, after the exhaustion of this advantage, room for improvement is limited.
This so-called “advantage of backwardness” refers to still-developing countries taking advantage of existing mature generic system and technology from advanced countries to accelerate national development. Being ready-made, a country can develop much quicker but when development reaches a higher stage and when factors of production such as land, labour and environmental costs gradually rise, upgrades are needed to cope with the rise.
If not, the country will fall into the middle-income trap. In the 1990’s Malaysia had already encountered this bottleneck and failure to break through this misfortune has resulted in the long-term wage stagnation today.
In recent years, due to the sharp increase in production costs, China has taken measures such the introduction of more stringent labour contract laws, the repeated raising of minimum wage, the emphasis on environmental protection, and in 2009, the introduction of a massive four-trillion yuan project.
The combined effects of these measures, debt and overcapacity have forced China’s transformation. But compared to the Malaysian economy, China has an advantage of a large-scale economy, a more complete industrial system, not to mention many rural areas; central and western regions in China have yet to be fully developed.
With this, China’s moderate-growth rate should persist for a longer period. But in the long run, to sustain a high income, China still has to rely on independent innovation, its own brands and increase the value of their products and services and also establish a more complete industrial system of their own.
In addition, China has so far remained highly dependent on external demand and export-oriented investments to promote growth but if it were to promote domestic demand-driven growth, then there is still much hope to maintain this period of moderate-growth.
Malaysia, owning a small scale economy and ancient domestic policies, will probably need to further promote liberalisation and internationalisation for there to be true transformation. But since liberalisation and internationalisation involves complex changes in the distribution of benefits, I am afraid it may be difficult to achieve large-scale liberalisation and internationalisation.
The more likely future, based on the current path, is a Malaysia that will not “weep until it sees the coffin.” Basically, in Malaysia, there are no upgrades towards industries, no improvement towards employee skills.
Under these conditions combined with the slow growth rate, the introduction of the Goods and Services Tax (GST) will bring a passive effect towards the already diminishing domestic demand and may eventually “kill the goose that lays the golden eggs.” (From Oriental Daily)