Ten ways to boost competitiveness (The Star)

# P. Gunasegaram is managing editor at The Star. This article is an abridged version of a talk he gave recently at Khazanah Nasional’s Megatrends Forum.



Education, trade issues among important factors

MALAYSIA needs to focus on the basics to increase overall competitiveness. Here are 10 ways in which the country can improve its overall competitiveness. Where possible the factors are linked to the global credit crisis.

1. Education. No country has managed to climb up the competitiveness ladder without producing a core group of highly educated and competent people in all areas of the economy. The main problem is the poor and deteriorating public school system caused by a lack of good, motivated teaching staff, not facilities. It calls for a total overhaul of how teachers are recruited, trained and motivated.

Throughout all my school years and after, I have noticed that when the headmaster was good, so was the school — no matter the lack of resources or the poor calibre of teaching staff. An immediate measure will be to retrain headmasters and formulate key performance indicators for them, and empowering them.

2. Opening up the Economy. We should encourage foreign direct investments, not only in manufacturing but also in services too, for example in tourism and education. But I am not a fan of attracting excessive foreign portfolio funds into the stock and money markets. Such short-term inflows can flow out just as easily and cause major instability when they do. Witness the steeper fall in Asian stock markets recently despite the main problem being in the US. We should put a lower cap on foreign portfolio investments.

3. Removing trade barriers. Trade barriers make us rather inefficient. For instance, we are without a doubt the most inefficient car producer in the world because of the low scale of manufacture. The motor industry survives simply because of high tariffs levied on imports and therefore there is no push to get the industry to either become more competitive or to merge with other large-scale manufacturers to get access to technology and scale.

Being able to source anything from anywhere in the world will make the country more competitive and will force industries and services to come up to international standards in terms of quality and price. Those days, we had Penang as a free port, now we have Pulau Langkawi, and I think Pulau Tioman. Why not make the whole of Malaysia free? It would help bring down prices.

4. Judicious removal of subsidies. Subsidies, especially of petroleum and related products, are not only a huge cost to the Government but represent a serious misallocation of resources which could have been used for other purposes. Evidence is that subsidising oil prices helps much more the higher income group which uses a lot more of the dwindling resource than the lower income group. Painful as it may initially, subsidies must be unwound.
The problem of a poor and deteriorating public school system requires an overhaul of how teachers are recruited, trained and motivated

5. Revising the tax structure and collection. Our personal income tax and corporate tax rates are still too high relative to many other countries. At the same time, we give away far too many tax incentives to foreign investors. In some cases, these tax benefits are not even effectual because the foreign companies pay taxes in their home countries — we end up letting other countries collect the taxes instead.

We can lower tax rates but at the same time remove excessive incentives to capture tax income. Inland Revenue has to pay more attention to getting more people into the tax net by looking at the assets they own and asking them to account for how they got it if they don’t pay taxes.

Also, to curb speculation on the stock market, capital gains on the stock market and on derivative products should be taxed, with the rate going down the longer the investments are held. In the light of the current crisis, this also provides an audit trail of transactions and may prevent abuse through financial engineering.

6. Tightening up contracting and procurement procedures. During times of crisis, we have this habit of rushing out to cut projects, some of which may actually be badly needed. It is much better to take this time of crisis to tighten up contract and procurement procedures. Instead of the fat margins some of the suppliers have been given in the past, squeeze the margins because there is real hunger for business and there is a lot of idle capacity. I dare say if we do that we will still have the money to undertake the projects without having to scrap any. The crisis is the perfect opportunity to tighten up contract and procurement procedures.

7. Cutting red tape. This is a perennial problem and more should be done to facilitate approvals for businesses and streamline licensing requirements. Local councils should be made to function more efficiently while easier approvals for knowledge workers should be given. It is ironic that foreign labourers find it much easier to get entry as workers when compared to highly qualified white-collar professionals.

8. Improving infrastructure. I really don’t think we have first world infrastructure all over the place. Case in point is the very poor Kuala Lumpur public transport system which had sporadic and spotty improvements that still could not keep pace with the requirements of commuters. What is needed is a good demographic study to ascertain future needs and a plan which fits in with that.

The overall effort should include a comprehensive programme in all key cities for working space, living and recreational areas and for a good transport system to link all of them. The current crisis is an opportunity to engage in some counter-cyclical spending to keep economic activity up. The right kind of investment in infrastructure spending will improve our competitiveness considerably in future years.

9. Refining New Economic Policy requirements and reviewing others. I recall after the 1985 recession the Government relaxed equity and other requirements under the NEP for a range of investments. That will make us more competitive in terms of attracting new investments. Extending those incentives to local companies will also help promote economic activity and make them more competitive as well.

Meantime, we must hold all contractors and service providers — whether bumiputra or not, whether politically linked or not — to high standards of work and completion. Too much money is squandered by improper monitoring.

10. Becoming less obsessed with racial quotas, both implicit and explicit. There are many quotas, some stated and others not. If you look at government service, one can’t help but note that there is a preponderance of bumiputras at all levels. Ditto for government universities, and many government companies. We really need to make better use of all the manpower available in the country. We must move towards a performance-driven culture using all resources available to us.