Chapter 4: The MIER Years Episode 3: Policy Waltz

Suleiman Mahbob

The view of Mt. Cook from the lounge of the Hermitage Hotel set in the plain of the glacier valley of the famous New Zealand mountain was tourist-poster perfect.  It was early summer in the second year of MIER’s establishment, and I was a guest of the New Zealand government under its ASEAN visiting fellows programme, to acquaint myself with policy research in that country’s economic reform plans.  The Mt. Cook visit was a welcome respite from the heavy schedule of meetings with Kiwi economists.  Tim Hazeltine was a NZ scholar we engaged later, at the suggestion of Frank Flatters, as our consultant for MIER’s research on Competition Policy in 1989, which laid the foundation for the Competitions Act that was introduced by the Malaysian government years later when Suleiman Mahbob, my successor as the second director of MIER, who shepherded the legislation, rejoined the civil service as secretary general of the domestic trade and consumer affairs ministry in early 2000.  

At the time of my visit, New Zealand was in the throes of Rogernomics, a Kiwi version of Reaganomics, a liberal economic reform programme introduced by the finance minister in the then ruling conservative government.  More than twenty years later, at a meeting with Wahid Omar, minister in charge of the EPU in Najib’s administration, attended by Michelle Gyles-McDonnough, the Resident UNDP Representative for Malaysia, which together with EPU sponsored the first Malaysian Human Development Report 2013, we were asked by the minister which country would serve best as a model of economic reform.  I spontaneously answered New Zealand, which had gone through the sometime painful adjustments in its economy from those early days.  Still later at an official lunch given by the local UNDP office for Helen Clark, the visiting Adminstrator of UNDP in its New York headquarters, and attended by the likes of Saifuddin Abdullah, Hasmy Gam and Wan Saiful of IDEAS, I asked Ms Clark, who was a Labor prime minister of New Zealand before her UN appointment, what was the secret of New Zealand’s success in economic reform; she simply responded that it was the dramatic increase in women’s labour force paticipation.  Shoot Rogernomics, it is that simple!  Here we are now in the throes of our own “Najibnomics”, so dubbed by Dzulkifley  Ahmad, the former director of Pas research, the set of economic “transformation” programmes under the New Economic Model (NEM) introduced by Prime Minister Najib Tun Razak.   I wonder how close we are now to New Zealand’s success story.

From that New Zealand trip thereon, MIER embarked on a swirl of policy research on topics that were part of the economic reforms sought as the end of the NEP approached in 1990.  Some of the reform issues addressed by MIER in that hectic 1988-90 period were already incorporated into the UMNO Youth Economic Recovery Plan in 1986.  The tax reform package was further refined, including Ismail Salleh’s favourite tax self-assessment proposal and the PAYE (“pay as you earn”) system which were quickly adopted by the government.  But the value-added tax (VAT) idea, hotly debated in the Tax Reform Conference organized by MIER in 1988, took another twenty-six years to be adopted by the government until introduced by Najib’s administration in 2014.  Each time it was brought up in the annual Budget dialogues, the government drew back from a decision to implement it for being ill-timed politically.  When the goods and services tax (GST) was finally adopted in 2014 for implementation in 2015, even after 166 countries had already adopted it, controversy still accompanied it for its bad timing as the people were facing rising costs of living at this time. 

MIER proceeded with several other significant policy studies in that space of three years.  The results and recommendations of the policy studies would either be presented at the annual NOC conferences  or special seminars held during the period.  A study on private education, where private education providers had pioneered the twinning programes with overseas colleges and universities since 1981, was undertaken by a team including Mei Ling Young, which results were presented at a Consultative Conference on Private Education in 1989, covering issues of graduate unemployment and the skills mismatch, issues still plaguing the Malaysian post-secondary education today.  As a result of the “White Paper” on private education, many training programmes were reactivated and led some way to the revival of some of the 600-odd dormant licences for private education.  

In 1996, during the time when I was the Member of Parliament for Wangsa Maju, the government moved four significant legislation on private education that led to a vibrant expansion of private education industry in the country.  Today enrollment in the private education sector is equal to that of the public colleges and universities.  While the private education drive had led to a major rise in students coming from overseas, and more tertiary education places could be provided for Malaysians, some would say that the response in quantity was actually too much such that the quality of education provided had begun to deteriorate in both the public and private sector.  For its own part, MIER introduced the National Clearing House for Graduate Employment (NCHGE) Project to complement the "Isi Penuh" campaign in the public service sector side, to address the graduate unemployment problem then emerging in the private sector side, a pioneering effort before the recent advent of the likes of JobStreet as a result of the Internet Revolution.  The Public Services Department however showed much interest in the Pascal-based software developed by Chan Huang Chiang, my old student in USM, for the CHGE project.

Research on the Malaysian business cycle we carried out in MIER led to identification of a 10-to-12 year building cycle over the last two periods, and point to a growth expansion in public infrastructure and real estate in the coming decade of the 90s.  This new building cycle was what underpinned the high-growth era of Malaysia with GDP average annual growth rates in excess of 8% throughout the nineties.  A JICA colleague had anticipated required investment in the energy sector, which was brought on by the electricity blackout, some said deliberately engineered, of 1988.  This had supported the case for privatization of electricity generation by independent power producers subsequently as part of the overall privatization policy of the government.  

We also launched during this highly active period of research a monthly Economic Monitor that tracks the short-term movement of the economy using the methodology of  leading economic indicators developed by Geoffrey Moore and his colleagues at Brookings Institution in the US.  The date base of monthly indicies for the analysis of leading, concurrent and lagging indicators of the Malaysian economy was provided by the previously existing SEPHIA data set collected by Mokhtar Thamin and his team, at the time when he was Dean of the economics faculty in MU and a member of MIER’s Advisory Panel,  which we had updated.

At the same time MIER also initiated studies of longterm economic transformation using input-output tables for Malaysia available then.  In collaboration with Chan Huang Chiang, who had by then returned to USM with his own regional science doctorate from Penn and was appointed a research associate of MIER, I produced the “Tunneling from Both Ends” paper presented in the 1989 NOC conference, which examined the impact of transforming the Malaysia inter-industry structure to reflect a more advanced economy like that of South Korea. We were able to demonstrate that the petrochemical industry followed by the construction sector had the highest potential inter-industry multiplier impact and the most significant contribution to Malaysia’s industrialization beyond the electronics sector which was the mainstay of Malaysia’s industrialization experience in the 70s and 80s. The eighties was the start of the country’s heavy-industries  industrialization program under the Mahathir administration with the establishment of Hicom, Perwaja Steel project and the controversial Proton national car project.  For its part, the use of input-output tables enabled MIER to undertake long-term economic projections to add to its existing bread and butter short term annual econometric forecasts as part of its policy research mandate.  Now under the institute’s current director,  Zakaria Ismail, a social accounting matrix (SAM) specialist, use of input-output analysis and CGE modelling has become a standard tool of economic policy research in MIER.

A comparative study on new forms of foreign investment for the OECD Development Centre in Paris in 1989 organized by Charles Oman, its resident consultant (who coincidentally was the external examiner for Mohamed Abdul Khalid’s PhD thesis that was published last year as “The Colour of Inequality”) for which I had undertaken the Malaysian case study, led to the commissioning by MIER of a pioneering report on the services sector in Malaysia, undertaken by Sieh Mei Ling of the University of Malaya, that provided base data for government negotiations in the Uruguay Round of multileteral trade talks that led to the establishment of the World Trade Organization (WTO), which also saw the formal entry of the emerging economic giant, China, into the world trade arrangement.  Controversy continued to accompany trade talks in which Malaysia participated including the non-conclusiveness of the subsequent Doha Round and the debacle of the Rio talks over environmental issues.  Strategic trade issues and the rise of regional and bilateral free trade agreements (FTAs and BTAs) became the order of the day, tracked by controversial issues over pharmaceuticals led by India and Brazil, Japan’s agricultural retrictions and intellectual property and public procurement stand-offs that are still hotly debated such as in the Trans Pacific Partnership Agreement (TPPA) today.  Haflah Shafie, who became my deputy, carried much of our international trade policy research tasks, especially on TRIPs and non-tarriff performance issues.  Later KA Mohamed  Arief, a former economics dean of University of Malaya who became the third MIER executive director in the late nineties, carried on the burden of international trade research issues for MIER.

Fu-chen Lo, my UNCRD colleague of old, finally left the East West Centre in Hawaii in 1986, and on my recommendation had taken up a senior research post in the newly established Asia Pacific Development Centre (APDC)  in Kuala Lumpur, headed by Shaari Jabbar, a former INTAN director.   APDC was set up by the UN ESCAP on the recommendation of an expert group led by Rajni Kothari an Indian political scientist and included KJ Ratnam, my old colleague from USM.  With Fuchen, I continued our collaboration since UNCRD days with study of regional economic cooperation, especially on ASEAN, which enabled me to work with Mari Pangestu of Indonesia, who went on to become a trade minister in Megawati’s cabinet, Chia Siew Yue of Singapore and Narongchai of Thailand who also became subsequently a Thai finance minister.  The Fuchen Lo collaboration enabled us to publish a book on the Future of Asean Economic Cooperation.  Of course, this year 2015 will see the launch of the ASEAN Economic Community, which is the culmination of a nearly fifty year journey amongst Southeast Asian nations into a 600 million strong common market and regional economic powerhouse.

It was while doing the routine update for the 1990 economic forecasts that was presented in the NOC 1989 conference while checking against the most recent economic data released by Bank Negara in March 1990, that the MIER forecasting team came across a discrepancy in the capital account of the Malaysian balance of payments numbers that could not be simply lumped into the Errors and Ommissions column in order to balance the national accounts for the previous year.   Ho Ting Seng pointed out to me at the time that even after several re-checks he could not reconcile this discrepancy of some RM19.0 billion when he applied the standard stock-flow of funds analysis to the capital account.  We therefore had to conclude that this RM19 billion was “missing” through capital flight or some illegal capital transfer, and it was so announced to the media.  That week the magazine Asiaweek carried the story.  

Shortly thereafter I was called by the Deputy Governor of the central bank, Lin See Yan, to clarify and explain the situation.  At the meeting he offered that the discrepancy was due to a revaluation of the basket of currencies against the Malaysian Ringgit.  At the time I thought that the clarification was reasonable enough coming from such an authoritative source, and agreed to write a letter to Asiaweek editors to explain the issue, in effect retracting the “missing” ringgit claim.  The responsible reporter was not too happy about this reverse to the magazine’s published story, which was subsequently reported in an editorial  news analysis carried in the following week’s issue.   When some months had elapsed later and news of Bank Negara’s losses on its currency speculation against the British sterling, accompanied by a reprimand by the Bank of England for the Malaysian central bank trading adventure, to the equivalent tune that we had reported lost earlier, I realized that I was in error in prematurely accepting BNM’s explanation.  In reality the missing funds were actually paper losses to the currency trade that at the time were not yet realized in the books of Bank Negara.  This episode brought home to me very clearly the hazards of the type of work that MIER undertook routinely in attempting to provide an accurate perspective on the workings of the Malaysian economy, that we should trust our numbers, and pursue our analysis as professionally as was possible without compromise, fear or favour.

In the midst of this period of churning and workover of policy research in MIER, in various areas as the Malaysian economy consolidated its recovery, and searching for alternative policy yet to come to expand beyond the New Economic Policy as the latter came to its formal end in 1990, I received another tragic family news - the unexpected death of my younger brother Munar.  He had resumed his job as a cook on one of the MISC ships, after a series of unsuccessful attempts trying to secure a land-based business venture, to which I had tried in my limited financial capacity to help.   Just prior to his death he had written that he was finally coming home for good to settle down and marry a Sarawakian girl of his choice who would remain unnamed until his return.  That evening in December of 1988, after completing the dinner chores and hoping to relax, he descended down the rope ladder on the side of the ship.  He had come down that same rope ladder earlier in the morning to buy provisions for the evening meal, but as fate would have it the rope this time snapped, causing him to plunge into the sea through the gap between the ship and the pier. Munar, six feet tall and heavy, must have instantly died when the back of his head hit the stone edge of the pier, carrying the name of his fiancée with him.   He had just turned 35; yet another Imam Ghazali lesson in the folly of long range plans.

Except in MIER’s case: in order to fulfill its research mandate, it had to continue to peer and probe beyond the long-term horizon in search of the policy recipe to fulfill the nation’s development hopes and aspirations for the future.

Chapter 4: The MIER Years, Episode 4: Son of the NEP