Wednesday, February 15, 2012

Malaysia’s new links in the global economic system

The Najib government has given renewed focus to Malaysia’s international economic relations, including liberalisation and increasing interaction with the global economy.

This approach is understandable for a small, open economy that is particularly dependent on export-driven growth, and faces considerable pressure to attract FDI and increase its exports.

Malaysia no longer takes a rigid, narrow stance in choosing its economic partners — having decided not to confine itself to one particular global orientation, be it east or west — and is signatory to several FTAs through ASEAN. These include FTAs that ASEAN concluded with China, India, Australia, New Zealand, Japan and Korea. Beyond this, Malaysia has also entered into bilateral agreements with Japan, India, New Zealand and Pakistan.

The groundwork for many of these FTAs was laid before Prime Minister Najib Razak assumed office. But more recently — and more ambitiously — Najib appears to be the motivating force behind Malaysia’s participation in the Trans-Pacific Partnership (TPP) and the proposed EU-Malaysia FTA.

No cost-benefit analysis on these agreements has been placed in the public domain. But, given the inadequate state of Malaysia’s technological expertise, human capital, and production structure, Malaysia may not gain significant economic benefits. Also, the Malaysian economy would, presumably, accrue more substantial economic gains from the TPP and the EU-Malaysia FTA if they were implemented in conjunction with domestic reforms such as greater transparency and the emergence of a more market-driven economy.

Najib does seem willing to undertake at least some of the required domestic reforms. But to be effective the reforms must be radical, fundamental and stringent. At the risk of speculating, the improved human rights measures that Najib wants to introduce could also be a means of preparation for the TPP and EU-Malaysia FTA.

Reform in other areas will be equally essential. Government procurement, intellectual property rights and the opening of the domestic financial market (as well as other services) will each have to be addressed. Hopefully, the government will also be nudged into fulfilling the state’s traditional role of providing citizens with greater access to education, health care, housing and a good public transportation system.

Najib seems to espouse an approach to international economic engagement that is global in vision and domestically oriented in reform. This is in line with his rhetoric of being ‘glocal’, whereby action in the global economic arena is rooted in domestic reform.

But Najib’s approach to global economic relations has also raised a number of questions and criticisms.

First, the attempt to forge links with economies as diverse as China, Pakistan and Chile can be criticised for lacking focus. A slower rate of global engagement might have been preferable, but the international race to conclude FTAs would have excluded Malaysia, had this strategy not been pursued. The government wanted to seize the opportunity to cast its net wider for overseas markets, and the 2008 crisis pushed Malaysia to explore such opportunities.

In effect, Malaysia may be seeking membership in a multiplicity of arrangements without any overarching strategy. But to define the objective of entering into an FTA as solely to secure more markets is naïve.

Second, the government has given a special priority to developing links with Islamic economies. The Developing 8 Preferential Agreement (with eight developing Islamic countries) and the Trade Preferential System among the Organisation of the Islamic Conference countries are two particularly relevant agreements that Malaysia has ratified in this regard. Sidelining economic relations with Islamic economies, even when the rationale is questionable, can evoke sensitivities among certain quarters of the policy community, but Najib has deftly sidestepped these issues and has forged ties as much with Pakistan as with China. It would, of course, be hugely myopic to ignore China or India in Malaysia’s international economic relations.

Najib’s strategy for global economic engagement has been criticised on several grounds, and as negotiations for the TPP and the EU-Malaysia FTA progress, opposition could mount. Nevertheless, early successes will put Malaysia in good stead to pursue a dual approach of increasing interactions with the global economy while implementing strong domestic reforms.

Shankaran Nambiar is Professor of Development Economics at Manipal International University.
An earlier version of this article was published in the Edge Financial Daily.East Asia Forum

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