Identifier
Created
Classification
Origin
06KUALALUMPUR797
2006-05-02 08:10:00
CONFIDENTIAL
Embassy Kuala Lumpur
Cable title:  

9TH MALAYSIA PLAN: AMBITIOUS AGENDA AND CHALLENGING IMPLEMENTATION

Tags:  ECON EFIN ETRD EINV PREL MY 
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VZCZCXRO0368
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0797/01 1220810
ZNY CCCCC ZZH
P 020810Z MAY 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 6537
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUEHC/DEPT OF COMMERCE WASHDC
RUEHGV/USMISSION GENEVA 1375
RUEHC/USDA FAS WASHDC
C O N F I D E N T I A L SECTION 01 OF 05 KUALA LUMPUR 000797 

SIPDIS

SIPDIS

TREASURY FOR OASIA AND IRS
STATE FOR USTR - WEISEL AND JENSEN
STATE FOR FEDERAL RESERVE AND EXIMBANK


STATE FOR FEDERAL RESERVE SAN FRANCISCO - TCURRAN
USDOC FOR 4430/MAC/EAP/J.BAKER
USDA FAS FOR OA/BIG, ITP/AAD
GENEVA FOR USTR

E.O. 12958: DECL: 04/27/2016
TAGS: ECON EFIN ETRD EINV PREL MY
SUBJECT: 9TH MALAYSIA PLAN: AMBITIOUS AGENDA AND CHALLENGING IMPLEMENTATION

REF: 2005 KUALA LUMPUR 03692

Classified By: Economic Counselor Colin Helmer. Reasons: 1.4 (b) and (
d).

SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 05 KUALA LUMPUR 000797

SIPDIS

SIPDIS

TREASURY FOR OASIA AND IRS
STATE FOR USTR - WEISEL AND JENSEN
STATE FOR FEDERAL RESERVE AND EXIMBANK


STATE FOR FEDERAL RESERVE SAN FRANCISCO - TCURRAN
USDOC FOR 4430/MAC/EAP/J.BAKER
USDA FAS FOR OA/BIG, ITP/AAD
GENEVA FOR USTR

E.O. 12958: DECL: 04/27/2016
TAGS: ECON EFIN ETRD EINV PREL MY
SUBJECT: 9TH MALAYSIA PLAN: AMBITIOUS AGENDA AND CHALLENGING IMPLEMENTATION

REF: 2005 KUALA LUMPUR 03692

Classified By: Economic Counselor Colin Helmer. Reasons: 1.4 (b) and (
d).

SUMMARY
--------------


1. (C) Prime Minister Abdullah recently unveiled the Ninth
Malaysia plan (9MP) which envisages spending RM 220 ($60
billion) of government and private development funds during
2006-2010 and targets an average economic growth rate of
6.0%. 9MP identifies five key areas, such as improving
Malaysia's human capital, becoming a knowledge-based economy,
and investing in key infrastructure, in which Malaysia must
improve to achieve its goal of becoming a developed
industrialized nation by 2020. Analysts are confident that
the infrastructure projects, projected rate of economic
growth, and some technology projects will unfold as planned,
but deem projects in other areas, such as education and
agriculture, to be unrealistic. While laudatory in their
public comments, Malaysian economists we have spoken to in
private are disappointed with the plan. They also question
the GOM's ability to implement the reforms needed to attract
a higher level of foreign direct investment. 9MP calls for
Malaysia's private sector to take the lead in further
developing the country, but our sources doubt Malaysian
leaders will give private industry the freedom to transform
the economy. Prime Minister Abdullah views 9MP as his top
economic initiative, is aware of the challenge of
implementation and is taking steps aimed at improving follow
up. End Summary.

Five Key Thrusts
--------------


2. (U) The 9MP lays out five broad goals that Malaysia is to
meet by 2010 to keep on schedule for the "Vision 2020" goal
of becoming an industrialized, developed nation by the end of

the next decade. The economists with whom we met agree that
these goals are well laid out, pragmatic, and correctly
describe the path Malaysia needs to travel. They are: to
move the economy up the value chain; to raise the capacity
for knowledge and innovation and nurture a "First Class
Mentality;" to address persistent socio-economic inequalities
constructively and productively; to improve the standard and
sustainability of quality of life; and to strengthen
institutional and implementation capacity.

Show Me the Money
--------------


3. (U) The 9MP will provide about RM 220 billion (US$60
billion at RM 3.65=$1) of government and private development
spending during 2006-2010. Approximately 40% of this is
allocated to what the GOM defines as economic programs, 40%
to social programs, 12% to security and 8% to general
administration. Funding for the subsectors that follow will
come from either the social or economic segments of 9MP.
Although the 9MP budget is 17.6% higher than the previous
plan, 35% of 9MP's budget is earmarked for finishing up 8MP
projects that were not completed during the last five year
plan.


4. (SBU) About 23% of 9MP funding will be devoted to
infrastructure and utilities development projects, an
increase of 21.2% over the 8MP. As compared to Mahathir-era
plans with their large infrastructure projects, PM Abdullah
chose to cut the pie into many small projects so that more
construction contractors might participate. According to Dr.
Yeah Kim Leng, Managing Director and Chief Economist at RAM
Consultants Group, the GOM conducted cost/benefit analyses to
identify projects that would produce a higher return on
investment. This apparently was not done in the past.


5. (U) Although human capital development has been one of
Abdullah's stated priorities, and despite media reports
suggesting education was one of the big winners in the plan,
education and training will receive only about 20% of the
total budget. This is about the same as in the preceding
5-year plan (8MP) developed by Abdullah's predecessor,
Mahathir Mohamad. New initiatives include strengthening the
national (public) schools so that they become the "School of
Choice" for all races in Malaysia.


6. (U) Agriculture, one of Abdullah's favored sectors, will
receive about 6% of the funding -- a 70% boost over 8MP.
However, 9MP sets a goal of transforming Malaysia into a net
food exporter by 2010, which outside analysts believe is
impossible given control over land use by the individual
states and the higher returns from land uses other than food
and livestock production. Biotechnology will get 1%, 2.5
times more than it received in 8MP.

Ambitious Growth Targets
--------------


7. (U) In its last five-year plan, the GOM projected an
average economic growth rate of 8%, but the actual rate
during 2000-2005 was about 4.5%. In the background to the
9MP, government analysts place partial blame for the
shortfall on the U.S.: "Global growth slowed due to a
decelerating United States of America economy, and dampened
electronics demand, exacerbated by the attacks of September
11, 2001. Overall economic performance remained sluggish
until the second half of 2003, weighed down by the invasion
of Iraq and the regional outbreak of Severe Acute Respiratory
Syndrome."


8. (C) The government is targeting a more modest average
annual growth rate of 6% during 9MP. The economists that we
interviewed (a mixture of academics, investment advisors,
consultants, and think tank researchers) voiced a variety of
opinions about that target, with Yeah of RAM asserting, "this
is eminently achievable." Dr. Mohamed Ariff of the Malaysia
Institute of Economic Research presented a study to the GOM
where he argued for a 5-6% growth rate as opposed to the 7-8%
that many ministers supported. He maintains that it is
better to aim lower than to fail to meet the target. The
chief economist at CIMB agrees that 6% is within Malaysia's
grasp. Wong Chee Seng, chief economist at ECM Libra
Securities, is much more negative, saying "The government
will not meet its targets. It moves too slow." University
Malaya professor Andrew Sheng (formerly chairman of the Hong
Kong Securities Commission and Bank Negara Assistant
Governor) disagrees. Looking at regional growth estimates
from the International Monetary Fund, he wonders why the GOM
did not set the growth bar higher. He believes that Malaysia
should link its growth to China and India by exploiting
complementary business opportunities.

Seeking Private Help
--------------


9. (C) The 9MP calls for the private sector to lead growth,
aided by the public sector in its role as facilitator and
regulator. Our economic contacts agree with this idea, but
observe that it will require a significant increase in
private investment, both domestic and FDI. Under 9MP, the
GOM projects private investment to grow at an annual rate of
11.2% and public sector investment at 5% -- rates that are
inconsistent with recent trends. Under the 8MP, private
investment actually contracted about 1% each year. Changing
this situation would require the GOM to give the private
sector more freedom from regulation and control than its
socioeconomic objectives for the bumiputera (ethnic Malay)
community currently allow. For example, the current
requirement that 30% of equity and employment be reserved for
bumiputeras is a significant investment disincentive. As
Yeah put it, "Why would you want to do all the work of
setting up a business in Malaysia only to have to turn 30% of
it over to someone else?"


10. (SBU) One of PM Abdullah's signal economic achievements
has been to shrink the government's budget deficit, now down
to 3.8% of GDP. 9MP appears likely to slow further progress
on deficit reduction. According to Wong, Abdullah concluded
that too many people depend on government contracts to keep
applying the screws to expenditures. At the end of the 9MP,
the overall federal government fiscal deficit is forecast to
be RM 107.6 billion, or 3.4% of GDP, assuming the government
can meet its growth targets. The majority of our contacts
are not overly concerned with this change in fiscal stance.
Sheng argues that it is reasonable for a developing country
such as Malaysia to pursue deficit spending on infrastructure
projects that will generate growth. The difficulty in the
past, he says, has been large public projects that do not
offer a good return on investment.

Ambitious Development Goals
--------------


11. (U) Some examples of the sort of investment that
University Malaya's Sheng sees as positive are biotechnology
research, ICT infrastructure (such as high-speed internet and
more training in schools),and development spending on
tourism. Sheng sees these as high-growth projects with the
potential to leverage more investment and business for
Malaysia in the future. Pointing to India and its
back-office outsourcing, Sheng asks, "Why shouldn't Malaysia
be able to offer similar services at a competitive price? We
have the education, English language, and with this type of
incremental investment, we can do business with New York via
the internet." He is similarly enthusiastic about the plan
to promote the tourism sector, which in 2005 drew 16.4
million tourists and generated RM 32.4 billion (US$ 8.8
billion) -- 80% more than export earnings from palm oil, six
times more than rubber, and only 30% less than the oil and
gas industry.


12. (C) Some of 9MP's ambitious goals are so lofty as to
appear unachievable in five years. For example, the plan
calls for Malaysia to increase the percentage of university
professors with PhDs to 60% from the current level of 20%.
Time and resource constraints, coupled with the fact that
highly educated workers can do better elsewhere, make
achieving this goal unlikely. As Wong of ECM Libra noted
bluntly, "I tell my children to stay in New Zealand. What
opportunity does a Malaysian educated abroad have here?"


13. (C) Some of the agriculture goals seem equally
unrealistic. For example, the government proposes to
increase rice production by approximately 50% by 2010.
According to Ministry of Agriculture Deputy Secretary General
Zulkifli Idris, the prime minister pushed for sharp
production increases to benefit Malay farmers in the
politically sensitive northern states. Traditionally,
Malaysia has grown about two-thirds of the rice it consumes
domestically, importing the remainder from low-cost producers
like Thailand and Vietnam. Although the cheap imports allow
the GOM to maintain low fixed retail prices for urban and
rural consumers, the government loses money on every ton of
rice produced domestically: it pays direct subsidies to
farmers while Bernas (the government-linked monopoly rice
importer and the main marketer of domestically produced rice)
buys locally produced rice at a higher price and sells it at
low, government-fixed retail price. Working-level contacts
indicate that the sharp rice production increase in 9MP is
unrealistic, and Zulkifli admitted as much in his statements.
Nonetheless, the planned investment in such areas as
improved irrigation, mechanization, and farmer organizations
in the northern states will likely have a political payoff
for Abdullah.

NEP Rides Again
--------------


14. (U) With the publication of the 9MP, Prime Minister
Abdullah also went firmly on record in support of maintaining
the National Economic Policy (NEP). The NEP was introduced
in 1970 with the goal of transferring at least 30% of
Malaysia's equity and wealth to bumiputeras through
affirmative action policies favoring the Malay majority's
participation in the economy. The NEP was initially intended
to have been completed in 1990, but when the target was not
met the government replaced the NEP with the National
Development Policy (NDP). With 9MP, Abdullah has pledged to
continue these policies through 2020 with the hope of finally
achieving the 30% goal.



15. (U) The 9MP will try to raise the bumiputera equity stake
to 20-25% in 2010 from 18.9% in 2005. The plan also seeks to
narrow the income gap between bumiputeras and ethnic Chinese
from a ratio of 1:1.64 in 2004 to 1:1.50 in 2010, and between
bumiputeras and ethnic Indians from 1:1.27 in 2004 to 1:1.15
in 2010. It also sets a target of halving the country's
overall poverty rate from 5.7% in 2004 to 2.8% in 2010, and
completely eliminating "hardcore poverty" in 2010.


16. (C) Non-government economists support these goals
publicly but deplore them in private. Some challenge the
reliability of the government's data. For example, a
significant amount of publicly listed shares are held under
nominee accounts, many of which are bumiputera-owned, but the
government considers all of them non-bumiputera. Others
decry the added cost of business the NEP policies place on
private investors and the disincentive they pose to FDI.

Implementation - GOM versus Private Industry
--------------


17. (U) Since the 9MP roll-out, the government has generated
a steady media buzz about the importance of effective
implementation of the plan. Abdullah has publicly promised
to fire any civil servants who get in the way. But the GOM
and industry have different ideas of what constitutes good
implementation. The GOM has announced that 9MP will feature
better governance, world class project management, increased
due diligence, less corruption, and speedy disbursement of
funds. In a recent speech, Effendi Norwawi, Minister in the
Prime Minister's Department for Economic Planning and
Abdullah's point man for the 9MP, explained that the GOM
wants to work in partnership with the private sector. He
emphasized Abdullah's personal commitment and noted the
creation of a new agency, the National Implementation Action
Body (NIAB) to monitor the performance of agencies
implementing major projects under the 9MP. Abdullah will
head the organization, with Deputy Prime Minister Najib Razak
as deputy chairman and ministers with specific 9MP authority
sitting on the council. It will meet every two weeks and,
according to Effendi, Abdullah will be demanding progress
reports.


18. (C) The prime minister's own office is set to receive a
large allocation under the 9MP. Although there is no detail
as to how the funding will be spent, 9MP sets aside RM 26.5
billion (13.2% of the total) for Abdullah's department - a
threefold increase over 8MP (RM 7.3 billion and 4.3%). The
public spin on these figures is that the resources will
enable the prime minister to focus on his key goals and move
the process along. In private, however, economists voice
concern over the potential for abuse of funds.


19. (C) When the private sector talks about good
implementation, they hope the GOM will remove the mass of
government red tape and regulation that increases costs and
scares away investment, both local and foreign. Minister
Effendi himself related a story about a hotel venture that
required 73 different licenses before it could open. Some
took so long to obtain that the operator needed to repeat the
application process because they only lasted for a year.
Yeah detailed a similar process in Penang, saying "at least
at the international level, there is MIDA to be one-stop
shopping for the licenses. A Malaysian investor must deal
with both state and local regulations and the government
needs to move to change this quickly." But few economists
believe that the GOM will move decisively to cut red tape and
reduce its economic meddling. Sheng compared Malaysia to
China: "In Shanghai, they were trying to take some business
from Hong Kong and the manufacturer asked if they could move
his product from China to the distribution point, including
customs, in 24 hours. Shanghai's mayor was able to make this
happen. Would that be the case in Malaysia?"

Economists Not Overly Optimistic
--------------


20. (C) Comment: Successful implementation of the 9MP is
Abdullah's top economic priority, but the economists we
surveyed are not optimistic that he will be able to achieve
all his goals for the plan. While they see some good
initiatives, they do not see bold steps that would lift
Malaysia back up to the growth rates of the late 1980s.
There is a sense of urgency in both the senior levels of the
government and among senior economists that Malaysia is at a
crossroads. Wong suggested that, "there are two camps in the
government, the ones who see that if we do not make changes
that we will settle into second class and the others who are
happy with the way things are." Sheng, in a presentation to
senior business leaders, government managers and economists,
argued that Malaysia was in a similar situation as the U.K.
and Japan in the early 1980s. The U.K. was not doing well
and opted to open its financial sector to bring in FDI and
investment. Japan, in contrast, tried to hold onto its
manufacturing lead and
did not open to foreign investment. He suggested that
Malaysia might want to examine how the two nations are faring
today and consider its options. End Comment.
LAFLEUR