NATIONAL CONFERENCE ON THE NATIONAL VISION POLICY, THE EIGHTH MALAYSIA PLAN, AND PRIVATISATION 27-28 AUGUST 2001, SUNWAY LAGOON HOTEL, PETALING JAYA K-ECONOMY: BASIS FOR MALAYSIA S ECONOMIC TRANSFORMATION By Dr. Victor Wee, Senior Director, Economic Planning Unit Introduction The development of a knowledge-based economy is crucial for the country to sustain rapid economic growth and increase its international competitiveness to achieve the objectives of Vision 2020. Malaysia was one of the fastest growing countries in the world. During the last 40 years, its economy grew at an average rate of 6-7% per annum on a sustained basis. Now, it faces a difficult and challenging global environment. There is keen competition among the developing and developed countries for foreign direct investment, which had been an important stimulus for economic growth in the 1980s and 1990s. Malaysia s faces competition from both ends of the development spectrum: the low-wage developing countries, such as China and other East Asian developing countries and the developed countries with their control of capital, technology and knowledge. The global knowledge revolution means that knowledge and information have become key to competitiveness and growth. The successful transformation of our country into a knowledgebased society provides us a good opportunity to leap-frog to a higher level of growth and competitiveness. Malaysia At Crossroad The challenge that we face at the global front is substantial. The new rules of the borderless world create their own regional advantage and threaten our past track record of rapid economic growth. China, India, Latin America, and Central Europe, with the access of huge markets threaten the manufacturing-led growth that Malaysia had been enjoying for the last 30 years. In the Information Age, value can migrate offshore to other with unprecedented speed and ease. The challenge for Malaysia is this: If the country successfully transforms itself into the K- economy, its potential growth will move into a new and higher trajectory. This offers unparallelled 1
opportunity for economic growth and prosperity and accelerate the achievements of Vision 2020 goals. However, if it continues with its current structure of production, it is possible that the country s impressive growth track record can very quickly become history. TFP Contribution to GDP Growth Economies can grow in two ways either input-driven growth (labour and capital) or productivitydriven growth. Last three decades, more than 75-85% of the Malaysia s GDP growth resulted from input of labour and capital, and less than 25% from total factor productivity (TFP). This contrasts with the productivity led growth of Ireland, Japan and Hong Kong, where productivity accounted for 45-55% of growth. For the OPP3 period (2001-2010), TFP contribution is targeted to rise to 42.5%. In other words, there should be a significant increase in TFP for the economy to grow at the targeted 7.5%. What happens if TFP were to remain at the level of the last decade? If the contribution of labour and capital to GDP growth continues to be maintained at 1.6% and 2.7% as assumed under OPP3, then the economy would only grow at 6.1% during the decade and not at the 7.5% targeted. In other words, the OPP3 growth target assumes a significant rise in TFP, which will contribute an additional 1.4 percentage points to GDP growth. What factors can contribute to the increase in TFP? Improving technology and know-how, innovation, improving the quality of manpower, superior management techniques, removal of bottlenecks and regulations that constrict growth. Moving to the K-economy and increasing the knowledge content of all our activities is the key to raising the TFP. Changing Global Game The Information Age over the last few years has changed the global game--and changed its rules for continued success. In the Industrial Age, the leaders included nation-states, such as United States, United Kingdom, Germany and Japan. The Information Age has changed the configuration from nation-state to what some strategists would call, the region-state. Some of the region states that have emerged in the West are Silicon Valley, San Diego/Tijuana, Pacific Northwest, Northern Italy, and the Rhone-Alps. In the East, the region states are Hong Kong/Shenzen, Taiwan/Fujian, Singapore/Johor/ Batam. The Information Age is driven by private capital and autonomous networks of independent private enterprises. The new game now involves welcoming foreign capital and world-class companies and expertise, as well as aiming for regional prosperity. By establishing strategic alliances it is 2
possible to capture and create value across borders. Unlike the Industrial Age where change occurs gradually over decade, in the Information Age change occurs suddenly within months. Four Strategic Challenges Malaysia s future growth will have to be led by productivity arising from the more efficient use of physical capital, manpower and knowledge. Increasing overall productivity and adaptability will be fundamental for Malaysia s transition to the K-economy. This process can only be achieved by developing the appropriate human resource. Malaysia will need to be more integrated with the global system by developing alliances with world-class universities and research institutions, enhance knowledge of foreign languages and cultures, and tapping more effectively into global knowledge systems, through joint research, strategic alliances, and scholastic publications in reputable journals. The government should build the infrastructure for the K-economy and improve the function of the markets in order to unleash the creative power of markets, while the private sector should be proactive in increasing its knowledge capability and knowledge content of its activities as well as raise its international competitiveness to a new threshold. Malaysia on the Value Chain One of the major area for structural change is concentrating on activities with higher value added. Malaysia s manufacturing business is largely concentrated on production, with limited up stream activities as well as downstream activities, where a major portion of the value added can be derived. At this portion of the value chain, we face increasing competition from other developing and transition economies in the core production activities, which will squeeze further the margins derived from our manufacturing activities. In order to generate high growth rate and raise the returns that Malaysians derive from their productive activities, it is important for us to move into the knowledge-intensive upstream and downstream activities, such as R&D and product development design as well as use ICT in distribution and marketing activities. Moving to the K-economy does not mean abandoning our traditional production or agricultural activities. Instead, we enrich all activities with knowledge and move the value added of these activities to a higher threshold. Of course, it also means developing new knowledge-intensive industries in the country. 3
Malaysia on the Knowledge Wheel The knowledge wheel shows Malaysia s preparedness for the K-economy. It is based on 25 indicators on computer infrastructure, infostructure, education and training, as well as R&D and technology. The wider the spread on the wheel, the more prepared it is in becoming a K-economy. In this wheel Malaysia is compared with the US, which ranks top on the K-economy Development Index. Malaysia s is at the 17th position in 3 of the 4 components of the KDI. It is relatively better at 16th position for R&D and technology and this is attributed to our large exports of electronic and electrical goods. K-Economy Initiatives Malaysia is not starting from a clean slate. By 1996, the country launched the NITA and the MSC, which were among the first initiatives towards developing a knowledge-based economy. The MSC provides an ideal IT and multimedia environment as well as a global test-bed to enable Malaysia to be in the main stream of activities necessary to attract knowledge workers, technopreneurs and high technology industries. The First Wave Flagship Application including e-government, multipurpose card and smart schools are currently being implemented. New programmes and projects for the Second Wave Flagship Application are also being identified. To date, the Government has also initiated efforts in the areas of human resource, S&T and R&D and infostructure and financing. But a lot more remains to be done in these areas. Major Policy Thrusts The OPP3 has identified the major policy thrusts to make the transition to the knowledge-based economy, as follows: Building the knowledge-based economy manpower base by reviewing the education and training system, introducing a system for life-long learning and undertaking a brain-gain programme; Intensifying S&T and R&D initiatives towards strengthening the national innovation system; Accelerating the development of infostructure; 4
Restructuring the financial system to provide appropriate types of financing for knowledge activities; Raising the knowledge-content in the agriculture, manufacturing and services sectors to strengthen their performance and dynamism; Getting the private sector to prepare themselves with greater urgency for the knowledgebased economy as well as to exploit the opportunities that will be generated; Reinventing the public sector to become knowledge savvy; Fostering the ethical utilization of knowledge; and Taking affirmative action to bridge the digital divide between income, ethnic and age groups, urban and rural communities and across regions. Educational Attainment The Government has invested much in education and training over the years and the overall level of educational attainment has improved markedly. However, the percentage of those with tertiary education, which is critical to drive a knowledge-based economy, is still small at 13.9 per cent. As a result, much more effort will be made to increase the enrolment at the tertiary level. The Eighth Malaysia Plan allocates around 20% of the development expenditure for education and training. The target is to raise the proportion of the labour force with tertiary education to at least 35% by 2010. Enrolment at the tertiary level of the age cohort 17-23 years increased to 25 per cent following the substantial allocation provided for tertiary education, but it is still lower compared with many of the NIEs. Scientific Manpower In addition, enrolment at the first-degree level in public institutions continues to be biased towards the arts courses. For the knowledge-based economy to be realized, we also need to create a critical mass of S&T manpower and this requires us to increase enrolment in these fields. Enrolment in S&T only accounted for 31 per cent of total enrolment in 1999. Building the K-Economy Manpower The previous slides emphasise the importance of continuing our efforts in human resource development. The quality of human resource will indeed be the cornerstone that will determine how fast the country can develop as a K-economy. 5
In recognition of this, the education system from pre-school to tertiary level will be reviewed. The areas include the curriculum; teaching methods; enrolment at the tertiary level; as well as the quality of the teaching profession. Given the rapid pace of change of technology and industrial, the teaching of core competencies will be emphasized. The Government is focusing on vocational and technical education and training to produce the required skills. Teaching methods will also be modified to promote creativity, originality, innovation, and thinking and analytical skills, and there will be greater use of IT. Efforts will also be taken to increase enrolment at the tertiary level, particularly for S&T courses. The quality of the teaching profession will be improved by attracting better-qualified people into the teaching profession and providing continuous training to them. This will require the review of the scheme of service to make it more attractive. Public Sector R&D Expenditure S&T and R&D are important determinants of innovation and knowledge generation. Malaysia s R&D expenditure was 0.4 per cent of GDP and a significant proportion of this expenditure went to the agricultural sector. The expenditure into industrial R&D is very low compared with the Newly Industrialized Economies (NIEs) and emerging economies. Our S&T and R&D efforts were partly constrained by the lack of a critical mass of scientists and engineers. Intensifying S&T and R&D To provide the impetus for S&T and R&D initiatives, the public sector will adopt an integrated national approach in the utilization of R&D resources. Under the Eighth Malaysia Plan, public sector allocation for S&T has been increased to RM4.7 billion compared with the expenditure of RM2.6 billion under the Seventh Plan period. R&D efforts will be refocused to the areas where Malaysia has already built its strength and where the opportunities for growth and leadership are highest. Initiatives will also be taken to strengthen domestic capability to undertake R&D. To improve diffusion of research findings and increase its commercial applicability, there will be greater collaboration among public research institution, universities and industry clusters. A sum of RM610 million has been allocated under the 8MP to facilitate commercialization of research findings. 6
In addition, the Government in partnership with industry and NGOs will undertake programmes to promote S&T awareness and appreciation. Accelerating Infostructure Development Malaysia will upgrade its communications and multimedia infrastructure to be world-class to support the rapid flow of information at competitive prices. Efforts will also be taken to ensure equitable distribution of communications infrastructure and services to underserved areas. To promote local content development, the Government will provide incentives to individuals and institutions of learning. Related regulatory framework will also be reviewed to allow greater flexibility. Efforts to further strengthen the legal and institutional framework will continue. Some of the areas that will be looked at are a framework for the orderly operation of electronic activities and the protection of privacy and security. Infostructure Key Penetration Performance In terms of infostructure, Malaysia is an emerging global hub and universal provider in terms of its ICT penetration, quality of services, content and infrastructure, and access. However, depsite the considerable progress achieved in communications and multimedia, Malaysia lags behind the NIEs and the developed countries in terms of the availability of communications infrastructure, ICT penetration rates, development of local content, and security of infostructure networks. Most of the telecommunications network development is concentrated in the Klang Valley and the major urban centres in the west coast of the Peninsular. In 2000, the telephone penetration rate was 28.6 per 100 population for urban areas. In rural areas, the penetration is less than half at 11.7 per 100 population. Restructuring the Financial System The banking system will introduce innovative lending instruments and develop capability to assess future cash flow potential of knowledge-based projects. Efforts will be taken to strengthen the venture capital industry. The Government will encourage the inflow of foreign venture capital funds and consider increasing foreign equity ownership in VCCs to tap foreign expertise. The management of Government venture capital funds will be outsourced to reputable VCCs, including foreigners. Capital market development will be accelerated, in line with the Capital Market Master Plan. 7
Raising Knowledge Content in Sectoral Activities While all sectors of the economy are expected to become more knowledge-intensive, the agriculture, manufacturing and services sectors will be the focus as they offer extensive scope for further innovation and application of new technologies. In the agriculture sector, biotech modifications will be used to increase yield and quality. Efforts will also be taken to enhance Malaysia s position as a leader for agriculture research particularly for tropical food production. In the manufacturing sector, efforts will be taken to accelerate the transformation to technologyintensive production processes, produce high-end products and identify niche products. The supporting cluster industries and services will also be developed. In the services sector, efforts will be taken to modernize and enhance efficiency as well as develop new service products. Preparing Private Sector for Change The Government will also take measures to ensure that SMEs are brought into the main stream of the knowledge-based economy. In this regard, we will formulate programmes to accelerate the creation of a critical mass of capable, progressive and efficient SMEs. The private sector will continue to be the engine of growth in the knowledge-based economy. They must take a global view as markets will become virtual and borderless as well as make greater use of e-trading and e-business tools. The private sector will also need to create new value by developing capacity to undertake R&D, product development and innovation, as well as package, market and distribute their products efficiently. To succeed, they will have to adopt best practices and benchmark themselves at a higher level than the best firms in their respective industries. Efforts must also be taken to develop a sufficient number of high quality technoprenuers to drive firms. Firms must also be more willing to take risk and venture into new areas that will be generated by the knowledge-based economy. Reinventing the Public Sector The knowledge-based economy will place greater demands on the public sector. Besides providing the appropriate environment, the public sector must also act as a catalyst for the private sector. 8
Among the key tasks of the public sector are maintaining a stable macroeconomic environment, making available the basic infrastructural facilities and developing an education and training system capable of supplying the knowledge manpower. There will be efforts to build the legal infrastructure for the knowledge-based economy and the regulatory underpinnings for freer and more competitive markets. The public sector will also be directly engaged in implementing strategies to narrow the knowledge gap. In order to perform its role effectively, the public sector will need to reinvent itself by using advanced IT and multimedia technology and adapt its mind set to the new operational processes. The creation of an e-government will also be expedited. Concerted programmes will also be introduced to upgrade knowledge and skill level of public sector workers. Fostering Ethical Use of Knowledge With the advent of the Global Information Age, a new code of ethics is needed to ensure that the knowledge that is freely and readily available is positively used to bring well-being and prosperity rather than create havoc and destruction. Serious consideration will be given to ensure that the knowledge acquired will be utilized in a positive and ethical manner and is beneficial to the individual and nation. As part of the effort to reinforce positive values through the education and training system, students will be taught the importance of using knowledge properly for the purpose of increasing understanding and well being. To deter the abuse of knowledge and computer crimes, the implementation and enforcement of IT-related laws will be strengthened. Digital Divide Placing the K-economy agenda on the fast track will raise concerns about the digital divide. We do not want the development of the K-economy to result in widening disparities among the various segments of the Malaysian society. The focus will, therefore, continue to be on ensuring widespread diffusion of ICT and access to rural areas and disadvantaged groups. Computers and Internet access will need to be accessible to everyone. According to the survey of the internet users, there is little difference in the use of internet among the various ethnic groups in the major urban areas. However, there is a big difference in internet usage among the major urban centres and rural areas. 9
In addressing the issue of digital divide within the country, the Government has taken several initiatives such as the computerization of rural schools and provision of Internet access in strategic locations. However, gaps exist in telephony development and disparity of Internet access between states. There is also the lack of local content given that majority of the population is Bahasa Malaysialiterate, and this has restricted access to source of information. There is, therefore, a need to accelerate implementation of programmes to improve access and narrow the equity gap. Bridging the Digital Divide To ensure that the knowledge-based economy does not widen economic disparity, affirmative action as in the NEP and NDP will be continued. In this regard, the focus will be to ensure widespread diffusion of ICT and access to rural areas and disadvantaged groups. Computers and Internet access will be made more affordable. There will be a programme to develop local content to increase access to information, particularly in Bahasa Malaysia. The Government in partnership with the private sector will introduce ICT literacy programmes to educate targeted population groups. Government will also provide appropriate opportunities and financial assistance to the disadvantaged to be active participants in the knowledge-based economy. Efforts will also be taken to create greater awareness on the importance of the knowledge-based economy, particularly among the poor and the lower income group. Conclusion The knowledge-based economy offers a platform to achieve sustainable rapid growth and remain globally competitive in the medium and long term. In order to make the transition to the knowledge-based economy, it is important to address the constraints and resolve them swiftly. While Malaysia has set some of the basic foundations of a knowledge-based economy, efforts will accelerated in the key areas of HRD, S&T and R&D, infostructure, financing and equity to bring the nation closer to developing the K-economy. 10