Shifting Economic Paradigm with Mr Jeremy Lim – KSInsights Feb 2024

Published on 05 Mar 2024

1. Can you provide a brief overview of your background and expertise in analyzing economic systems, particularly focusing on the concept of political capitalism within the Malaysian context?

To some extent, I am a self-taught development economist and political theorist. My first degree was in mechanical engineering before pivoting to a master’s in development studies at the University of Cambridge in 2021. Before that master’s, I had read and researched the middle-income trap in Malaysia as part of my job and academic interest, as well as read from various socialist and heterodox economists. My dissertation was on delineating the periods of Malaysian development and analysing the economic and political contradictions within them that led to new economic phases.

I recently started looking into ‘political capitalism’ after two sociologists sparked a debate about the US political and economic system. They defined this term as a new regime of accumulation for the US, one in which “raw political power, rather than productive investment, is the key determinant of the rate of return.” I didn’t agree with their diagnosis but I thought this adage was truer in Malaysia where the popular perception was that political connections could make or break your business.

2. Can you provide insights into the prevailing business and economic practices in Malaysia, particularly regarding its focus on labor-intensive industries? What factors contribute to Malaysia’s tendency to prioritize such industries over tapping into more advanced sectors?

No one can really blame businesses for staying away from risk when what they want is stability and predictability. In most cases, safe and stable sectors are those that would be more labour-intensive rather than capital-intensive — sectors like construction, plantations, hospitality and retail. Advanced sectors like precision manufacturing that require the use of robotic assembly lines and clean rooms are extremely capital-intensive and risky given the economies of scale involved. If one decides to build up a semiconductor fabrication firm from scratch, one would have to consider that returns on that investment might not be seen for decades, or never be seen at all given the competition out there globally. Its not really more complicated than that.

Governments, in the interest of developing national industries, would usually step in to subsidise expenditure into these riskier but more long-run rewarding sectors. Economist Ha-Joon Chang like to bring up the fact that Alexander Hamilton back in 1791 was already thinking in terms of industrial policy through the setting up of a national bank to promote manufacturing.

The Malaysian government did this for a time until it retreated after the 1985 recession and relied on foreign capital from East Asia to incentivise industrialisation, then they mostly fled after the Asian Financial Crisis. Now, the incentives to develop capital-intensive manufacturing for advanced product categories are few and far between.

3. Why do you think Malaysia finds it challenging to transition towards advanced industries despite efforts to diversify its economy? Are there specific barriers or constraints that hinder the development of advanced sectors within the Malaysian context?

I think it’s because we now live in a world where many of the most advanced segments of manufacturing have a few dominant players that have stuck around far longer than they should have. New entries into fields like cars and semiconductors are becoming rarer and rarer. The only entrants are players who have massive state backing like BYD and Tesla. The days of the flying geese model of industrial development are long gone; Japan, Korea and Taiwan never gave up and passed down their productive capacity in the automotive and electronics sectors to the next generation (Malaysia, Thailand and Indonesia). Malaysia for a time believed it was following in their footsteps but after the Asian Financial Crisis, policymakers and industrialists here had a rude awakening to the new reality of the model being broken.

For Malaysia, it seems like after the Crisis, the policy sphere has never returned to the idea of industrialisation, and specifically heavy industrialisation seriously. It feels like they consider it a war they have thoroughly lost. That was also the height of the neoliberal era – heading into the 2007-8 Global Financial Crisis – when any government interference was all bad and markets were all good so policymakers here were also influenced by that. All the talk about the digital economy was rather premature to me given that we didn’t have a critical mass of skilled workers who could transition us to the digital stage of development. Globally now, there is more openness to discuss industrial policy again with the qualified success of China moving beyond its cheap manufacturing to advanced sectors and the Biden administration’s efforts with reshoring under the Inflation Reduction Act. The Malaysian government should consider picking one or two sectors and betting big on them to generate our comparative advantage in the global market.

4. How does the status quo of prioritizing labor-intensive industries over advanced sectors affect the economic well-being of the Malaysian people? Are there disparities or shortcomings in terms of job quality, income distribution, or overall economic growth resulting from this approach?

One of the most striking ways this shows up in the national statistics is the labour share of income which stood at 32.4% of GDP. Even a country as unequal as the United States has a labour share of income of 69%. This figure for Malaysia translates to low wages for the vast majority of Malaysians. This has stemmed largely from the lack of unionisation, 5.8% of the workforce and less than 2% of the workforce covered by collective agreements.This lack also means greater precarity for workers in terms of job protections and democratic participation in production.

Historically, trade unions would fight employers for higher wages and generate an indirect incentive for firms to invest more in labour-saving machines. While this certainly reduces the number of jobs available overall, the remaining jobs will be of greater quality in terms of physical toll on the body and wages, and increase economic productivity – measured as output per worker. Aside from these, the now higher-skilled workers are more likely to start their own spinoffs or subcontracting firms. All of these effects of greater unionisation benefit the economy as a whole.

5. Shifting gears, there’s a growing discourse around empowering local municipal elections as a means to drive economic development at the grassroots level. How do you see this approach potentially reshaping the economic landscape in Malaysia, particularly in terms of job creation and community empowerment?

I think decentralising decision-making would be the best way to ensure more even economic growth rather than have it all centred around Klang Valley and Penang. If municipalities were empowered to develop infrastructure and social services that help them grow their niche industries, Malaysian workers would be better off. Other countries have experimented with participatory budgeting where residents of a town or municipality gather up demands and requests for things like road repairs, a new bridge or community centre, and more community engagements. Democratic practices like these allow residents to become invested in the future of their town and become more aware of how it can be steadily enhanced. All this would allow for more responsive governance to build and recirculate community wealth as in the Preston Model.

6. Building upon the concept of local empowerment, what specific job roles or sectors do you envision being expanded or introduced through such initiatives? How can the government leverage local resources and talents to create diverse job opportunities beyond the traditional labor-intensive industries?

My first go-to on this is nearly always food and agriculture, just because its demand is largely inelastic – everyone needs to eat no matter where you are in the country. On this count, I think the government has the right idea by putting a lot of funding into smart farming and trying to make agriculture appealing to young people. You may see a temporary rise in the price of food items but that would in the medium term be balanced out by the increase in incomes.

Small producers in rural spaces cannot compete with the economies of scale needed to make things like nails, wooden boards or plastic tools. But for food, shortening the time and distance food needs to travel from its production site to a plate creates a lot of economic value and also tremendous nutritional benefits. Nearly all localities used to grow something before other industries displaced them. Local and indigenous knowledge could be retrieved to enhance farming efforts, combined with a minimal degree of automation and mechanisation. Local governments can subsidise or loan equipment to new farmers to help them kickstart their initiatives in exchange for a portion of the harvest. Communities can work with local municipal offices to develop cooperatives and institutions that generate demand for the produce, either within the district or outside. Other products and sectors that might work in this way would be traditional handicrafts, furniture and other artisanal goods.

7. Could you provide examples of non-traditional job roles that could be prioritized under a strategy focused on empowering local communities? How might roles such as town psychologist/psychiatrist, early childhood education provider, or town cleaner contribute to both economic prosperity and social well-being?

Town planners and urbanists would be the first thing that comes to mind. Second would be social workers and non-school educators. There is plenty of talk about the coming aging population crisis but very few plans or actions to address it seriously. Both these sets of professions would help with the crisis and further deepen community wealth within small towns and villages. Many of these communities lack the basic services needed to raise a family, childcare, education, healthcare, and functional green spaces.

Paying for these jobs to kickstart the rejuvenation process will have to come from the government coffers and taxes but in time, these communities would hopefully be able to generate revenues from the non-traditional sectors like agriculture, tourism and artisanal goods. I envision there would have to be some degree of relocating the elderly closer to towns and cities so that social services are easier to access but the stress of that move could be alleviated by good urban planning and design.

8. From a practical standpoint, what are the feasibility considerations associated with implementing initiatives aimed at expanding non-traditional job sectors in Malaysia? Are there potential challenges or obstacles that need to be addressed in order to realize this vision?

Any policy will encounter short-term trade-offs or deliver pain to certain sectors or groups of people. An initiative to grow food locally within a town or municipality could hurt retailers and distributors in the short run while they adjust to the drop in demand. It will take time for the greater incomes from wealthier smart farmers to generate demand for new goods and services within the area. Policymakers would do well to think about the first-, second-and third-order effects of specific interventions and plan for them as best they can. I don’t expect them to predict everything but planning for the worst and learning from the mistakes of others is how to minimize the damage to ordinary Malaysians.

Plans that genuinely alters people’s way of life require a ton of research and extensive consultation. Now what we have is developers decide what people should want and building it, hoping that locals buy into it rather than asking them. If policies are capable of being responsive, I feel pretty certain that people will pitch in more about what they want and hope to see.

9. How do you anticipate these alternative job creation strategies impacting overall economic growth and development in Malaysia? Are there potential synergies or trade-offs between fostering non-traditional job sectors and sustaining growth in existing industries?

At the moment, I do think we have surplus labour that should be absorbed into these non-traditional sectors. We could certainly afford fewer people to be delivery riders for food and parcels, and more of them in smart agriculture or artisanal goods — I’m thinking more of production rather than just retail here, social services and niche tourism. These can generate overall economic growth through productive and care-based services but there will likely be smaller margins. In the absence of adequate levels of profitability, the government must step in to prevent a further spiral of depopulation in small towns and villages. Again, there may be short term pain from adjustment in demand and supply chains but on the whole it still means more economic activity and higher incomes.

10. As we wrap up our discussion, what do you see as the key priorities or next steps for Malaysia in terms of reimagining its economic strategies and promoting inclusive growth? Are there specific policy recommendations or initiatives that you believe should be pursued to achieve these objectives?

I will not even need to go as far as a reimagining because I think a return to industrial policy is needed and much more acceptable now than ever before. We have relied for far too long on the market to deliver better public goods and greater inclusive development, and it has not played out as many hoped. The government will have to step in to push markets and firms to fulfil development objectives like revitalising rural and suburban communities, creating high-skill jobs and building strategic industries. Whether it should be an inward- or outward-looking approach to production, I am more with Prof Jomo about giving more priority to the national economy rather than just exports and foreign direct investment. There is evidence in the gross fixed capital formation numbers – a good substitute for investment within the economy – that there is plenty of local capital to be mobilized if the government can create the right conditions to induce investment domestically.

11. Lastly, is there any final insight or message you would like to share regarding the intersection of economic development, community empowerment, and government policies in Malaysia’s evolving economic landscape?

In Malaysia and unlikely parts of the West, people do not need to be reminded that politics and economics are interconnected and quite inseparable. However, in our context, many Malaysians only think about the two subjects exclusively in terms of corruption and cronyism. I would encourage people to think more deeply about how politics and the state or government shape our everyday lives, how we decide our work and consumption, and how much leisure time and freedom we have. What I mentioned earlier about local governance and expanding community wealth is a clear example of how municipal politics can play a positive role in society.


Date

05 Mar 2024