AFTER the pandemic and Ukraine war, what’s next for emerging markets including Malaysia?

       What policies would help emerging market (EM) economies cope with post-pandemic resilience and strategic positioning to deal with environmental, social, governance and the coming geopolitical tensions?

       The pandemic exposed all the social injustices arising from the poor and under-privileged having lack of access to vaccines, online facilities, finance and safe jobs or income.

       The Ukraine war disrupted global food and energy supplies as Russia and Ukraine account for roughly 10% of global supply of oil and gas, 6% of world wheat and fertilisers and also strategic inputs for selected industries.

       Crises seem to be looming from all directions. The Federal Reserve has raised interest rates by 75 basis points to try and control inflation before it becomes entrenched.

       As Europe struggles to recover from the Ukraine war, supply constraints plus inflation suggest that the world may be slipping into stagflation – slow growth and stubbornly high inflation.

       Perfect storm

       The perfect storm of the pandemic, Ukraine war and climate warming exposed all the structural defects in national and global economic policies which were not corrected when the 2008 global financial crisis (GFC) broke out.

       Rich countries used loose monetary and fiscal policies to avoid the political pain of fundamental structural adjustments in labour, technology and social areas.

       Monetary printing through quantitative easing was painless, as there was no inflation in sight.

       Fiscal policies did not raise taxes, but increased welfare payments in order to keep the masses happy.

       As former European Commissioner Jean-Claude Juncker said honestly for a politician, “We all know what to do, we just don’t know how to get re-elected after we’ve done it.“

       Politics is itself a structural bottleneck to getting things done for people and the planet.

       Malaysia has come out of the recent pandemic and Ukraine war with record-high palm oil prices, peak crude oil prices and its tech industry running at full capacity. But like other EM economies, several long-term structural issues have to be confronted.

       Eight issues

       The 12th Malaysia Plan 2021-2025, published last year by Malaysia’s economic planners identified eight issues:

       > low productivity among micro, small and medium enterprises

       > low quality of investment

       > slow structural economic transition

       > widening development gap between states

       > low share of compensation of employees

       > limited gains from global value chain

       > disruption of the medium-term fiscal consolidation

       > adverse impact of economic growth on environment.

       Low growth and productivity have been plaguing the Malaysian economy since the 1990s.

       In 1995, real gross domestic product (GDP) growth rate was spectacular at 10%, but the 1998 Asian financial crisis cut growth to minus 7.4%.

       By 2000, growth rebounded to a lower range range of 6% to -7%, and after the 2008 GFC, growth slowed to around 5%, only to have the 2020 pandemic hit growth to negative 5.6%.

       In the 11th Plan period 2016-2020, growth averaged only 2.7%, as against the Plan’s target of 4.5% to 5.5% range.

       Growth was painfully low, because labour productivity averaged 1.1% in the last five years.

       This stemmed from a combination of low investment levels by the private sector, large imports of cheap foreign labour and failure of training and re-skilling policies rather than education per se.

       As the world’s 25th ranked trading nation and manufacturing accounting for half of exports, Malaysia is well plugged into global supply chains.

       According to the IMD World Competitiveness Report, Malaysia has slipped from 22nd place in 2018 to 32 by 2022.

       Malaysia has a high reliance on foreign labour, estimated at around 15% of its labour force, mostly unskilled.

       In terms of education, the country spent 7.5% of GDP on education between 2001 and 2003, but this has fallen to 4.2% by 2019.

       Cheap labour

       Since Malaysia has exported a considerable amount of professionals and skilled workers to Hong Kong, Singapore and further abroad, the country is in a curious position of exporting high value skills and importing cheap labour, which in turn suppresses domestic wages.

       Thus, it is not surprising that the top five economic issues identified above by the country’s planners are to do with lack of confidence of the private sector to upgrade to high productivity, high-wage innovative and technological investments.

       Instead of upgrading productivity through mechanisation, palm oil companies simply moved to invest in Indonesia using their ample land and cheap labour.

       The oil and gas industry has been hurt by low prices. Investment in the manufacturing sector has only recently increased, with the signature US$7bil (RM30.82bil) investment by Intel in expanded semiconductor facilities in Penang.

       Two factors stand out in terms of structural adjustments. First, private sector confidence is a pre-requisite for future inclusive development as a shared partnership over the long term.

       This is a political issue arising from the country’s long-standing debate over whether its New Economic Policy focused on affirmative action needed to be adjusted.

       The second is a people-oriented development policy, aimed at diversity in terms of skills and comparative advantages.

       The first indicator is the decline in average private investment in current prices between 2016 and 2020 of 7.5%.

       The second is the fact that the eastern states of Sarawak and Sabah, the most richly endowed with low population but highest ethnic diversity, had real GDP growth rates of 0.9% and 1%, respectively, compared with the national average of 2.7%.

       Regional disparities have widened since these two states joined Malaysia when they enjoyed much higher relative standards of living.

       In the days when delivery of physical infrastructure were expensive, such disparities are somewhat understandable.

       Smart villages

       But with increasing digitisation and micro-energy sources (wind, water and solar), it is surprising that there is not a concerted effort to develop “smart villages” in the rural areas, where villages could be digitally connected to get education, retraining skills, health advice and new income opportunities.

       To tackle the complex challenges in the post-pandemic age, investment in people who are more flexible and resilient in meeting high volatility and adaptable to climate change must be the way to go.

       Which bring us to politics as the bottleneck to change.

       Until there is a wide and inclusive conversation on the future of the country, it will be difficult to unify the politics and agree on an inclusive agenda for change.

       That is the real challenge in the post-pandemic era.

       Andrew Sheng writes on global issues from an Asian perspective. The views expressed here are the writer’s own.