Penang as an entrepreneurial state

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Chief Minister Lim Guan Eng talks about Penang as a high income model for Malaysia at Merton College in Oxford University.

Chief Minister Lim Guan Eng at the T. S. Eliot lecture theatre, Merton College.

Penang is the second smallest state in Malaysia, with a land size of only 1,048sqkm and a population of 1.7 million people, and no natural resources of its own. But it has progressed to achieve high income economy status through good governance, rule of law, integrity in leadership and sheer human talent.

The World Economic Forum Human Capital Report defined a high income economy as one whose Gross Domestic Product (GDP) per capita reaches US$12,467 or RM40,841 based on the then exchange rate of RM3.27 for US$1 in 2014. Penang was expected to achieve a GDP per capita of RM42,251 based on a population of 1,681,922 people and a GDP of RM71,063mil by this year. Penang’s GDP per capita of RM42,251 would have exceeded the benchmark of RM40,841 to become a high income economy.

However, I wish to lay an important caveat that the precipitous drop in the value of the ringgit, due to extraneous factors such as the 1MDB RM42bil financial scandals, on world currency markets makes Penang technically not a high income economy this year. Instead of RM40,841 as the benchmark to achieve high income status, the drop in the ringgit means that the benchmark has been increased to RM50,000. Of course, should the value of the ringgit recover, hopefully by next year when all the political and financial scandals are resolved, then Penang can be restored to our rightful status as a high income economy.

The term “entrepreneurial state” is associated with Mariana Mazzucato, and she is now one of the key economic advisers to the newly elected leader of the Labour Party, Jeremy Corbyn, together with other economic h e a v y we i g h t s including Nobel Prize winner Joe Stiglitz; Thomas Piketty; and Merton College’s very own Prof Simon Wren-Lewis, a faculty member at the Blavatnik School of Government.

Mazzucato’s primary argument is for a wealth-creating agenda based on collaboration among “wealth-creators” involving not just business, but also workers, public institutions and civilsociety organisations. She makes a strong proposition that the state can lead the way in investing in risky areas, especially in R&D, innovation and retraining and upskilling, which the private sector would not touch. This is a strong counterpoint to the current mainstream thinking, i.e. “those who govern best govern least” and “let the private sector do its job”.

We are shaping a progressive economic policy that is investment-led, inclusive and sustainable to create wealth through a public-private partnership that drives longterm growth and productivity.

In Penang, we are shaping a progressive economic policy that is investment-led, inclusive and sustainable to create wealth through a public-private partnership that drives longterm growth and productivity. In many respects Penang is an ent repreneuri a l state, except that we do not believe in becoming involved in market outcomes, especially competing with business in accordance to our mantra of “the business of government is not to get into business”. We see ourselves providing a catalytic role in providing public goods and services and basic communications infrastructure, and spurring the development of key risky industries. But in other areas, especially where the private sector has a proven track record, the role of the government is to reinvent the government and leave business to the private sector.

Many would associate Penang with a number of things: a rich, diverse culture; a thriving electronics and electrical (E&E) industry and, of course, our wonderful food. But very few would think of fish farming when thinking about Penang. It would surprise you to learn that this industry grew from basically nothing in 2008 to an RM1.2bil ringgit industry seven years later!

Much as I would love to claim credit, this amazing transformation was done without spending a single penny; it was merely dependant on reinventing the government. The previous government benefited its cronies with one or two chosen individuals being given thousands of hectares of sea, which they then sublet to genuine operators under the classic rentier system. This is described by some as predatory capitalism.

We stopped this crony capitalistic practice and gave permits only to owneroperated fish farms measuring up to a maximum of 8,000sqm each. Rental was fixed at RM3,600 annually. Furthermore, we instituted a checklist system where approval must be given if all the boxes are ticked. The approval must be given within three months.

This was how a billion-ringgit fish farm industry was born out of nothing at all. We merely enabled the fish farming industry by giving the licences to genuine owner operators; we empowered them by making the permit approval process much more transparent, and the result was the enrichment of these firm farm operators and their employees.

Of course, Penang is much more than just fish farms. We are Malaysia’s industrialised state with more than 95% of our GDP derived from manufacturing and services. Even though we are a small state making up only 5.5% of Malaysia’s population and less than 0.5% of its land mass, we punch above our weight by contributing 7.4% to the nation’s GDP, seven per cent of the total port container traffic and 12.3% of foreign tourist arrivals. Penang also contributed about 22% of Malaysia’s balance of trade surplus in 2014. Our economic growth rate is expected to be 6.2% this year despite the travails of the present economic climate.

Penang has long been part of the network of global cities. We were established in the 18th century as a trading port by the British and prospered initially trading spices, then rubber and tin. Today we are an open economy and a favourite destination for foreign investors. From 2008 to 2014, we managed to achieve RM48.2bil worth of investments, which is 93% higher than the RM24.9bil invested from 2001 to 2007.

With over four decades of electronic product industrial experience, Penang is the most industrialised state in Malaysia and has been labelled the “Silicon Valley of the East”. For example, Intel runs one of its global R&D hubs in Penang with over 2,000 local engineers doing R&D alone, and Penang was Intel’s first offshore manufacturing facility, set up back in the 1970s. Besides, Citibank runs its global credit transaction services from Penang with an annual value of US$7.2tril. We are also the main medical tourism hub in Malaysia, housing the regional headquarters for B Braun, the German medical device company.

One of the reasons why we are able to punch above our weight is our human capital. They are the key drivers for much of our economy, especially in the services sector and also in the high value-added manufacturing sector.

But human capital is a highly scarce resource. In Penang, our unemployment rate is running at a national historic low of 1.2%, despite a net migration rate, with worker shortages being our main concern. Despite our low unemployment rate, the major employers in the state are constantly complaining about not having the workers with the right kinds of skills and aptitude.

To address this issue, we recently launched a sponsorship agreement together with the Penang Skills and Development Centre (PSDC) to support a German Dual Vocational Training (GDVT) programme in the state, which does on-the-job teaching and training in the factories

Not only does the Penang state government sponsor the fees of these students, they also obtain a monthly stipend of the minimum wage of RM900 from the participating companies. This dual concept of learning while working generated a world-class workforce in Germany. By partially funding this training programme, we want to demonstrate that a world-class vocational programme can be a proven path to high income and high value-added jobs, especially in the manufacturing sector.

Developing human capital does not only happen in university classrooms or in the workspace. The best brains in the world need to be stimulated, challenged and nurtured from the earliest stage. To this end, we facilitated the creation of the Penang Science Cluster (PSC), a state government initiative in collaboration with the private sector to establish Penang as a centre of excellence for science and technology by creating a science-based culture to inspire and encourage innovative thinking, especially among the younger generation.

The PSC is the main organiser of the annual Penang International Science Fair (PISF), the largest science fair in Malaysia. Its successful work with kids, teaching them robotics, is a testimony to the co-operation between the public and private sectors as well as civil societies. The one big difference is that the state government, after providing seed money and helping to lead the scientific initiative, will then withdraw and allow the private sector to sponsor and run it, compatible with industry needs of the skill-sets and the type of technology required. Through these unique partnerships and collaborations, a new generation of scientists and innovators can be enabled; companies both large and small can reach deep into the talent pool and students and employers can be enriched as a result.

The area of human capital development is one where the state can play an entrepreneurial role. Technical and vocational education and training (TVET) has been largely ignored by the private higher education sector because of the perception that it is unprofitable, that there is no market among fee-paying students for these programmes and that TVET is associated with poorly performing students. In Penang, we know that to win the future we must invest in education and show that a profitable and sustainable market for TVET can exist.

Ideas for good governance and progressive policies are not created by accident. Input is needed from various stakeholders, practitioners, public officials, civil society agents and think tanks. Any progressive agenda only succeeds if the policy ideas work. We have established a state think tank to explore new ideas: Penang Institute, which is headed by Dr Lim Kim Hwa from Cambridge University.

We are working with international organisations such as the Aga Khan Trust for Culture to introduce communitybased urban regeneration projects which have changed the landscape of George Town, a Unesco World Heritage Site. Today, tourists throng the streets of George Town, soaking up the “unique architectural and cultural townscape without parallel anywhere in East and South-East Asia” – reasons for award according to Unesco.

In this, the state government plays the role of enabling the heritage city to take on a new phase in its development. To give the tech start-ups an additional boost, the state government launched an accelerator programme known as @CAT in an elegant historic building within George Town’s heritage enclave, offering very low rates for coding classes and for students and start-up entrepreneurs to gain access to mentors and shared services. @CAT hopes to accelerate tech start-ups by applying the three new fields of Big Data Analytics (BDA), cloud computing and Internet of Things (IoT). We spent RM20mil without expecting any returns, but are confident that we can create new synergies in the future for new and existing industries.

In addition, the state government is also rejuvenating the historical central market of Sia Boey to be a Heritage Arts District with RM100mil, which will include a public art museum. Learning from the successful urban regeneration of Southbank in London, the aim of this project is to preserve and upgrade the heritage market and buildings, and at the same time introduce artistic venues into the centre of the city. Using art and culture as a catalytic economic driver is a first in Malaysia.

I believe that all these initiatives are important to provide an inclusive growth platform for those who are talented in this creative sector; however, while talent is universal, opportunity is not. We must try to match talent with opportunity. To succeed, a government must grant freedom – not just freedom of expression, but also freedom of equal opportunity and freedom from undue interference from the government.

Freedom works in Penang, and it is one of the key elements that determine how a small economy can harness the energy, expertise and entrepreneurship of our people. The only way to escape the middle income trap is through innovation, investing in education and rules-based institutions. In Penang we have the 3Ts of establishing creative clusters with Talent, Technology and Tolerance of new ideas.

In a fast growing economy like Penang, the government must always be aware that there will inevitably be those who fall between the cracks and do not enjoy the full benefits of a competitive marketplace. As part of our plan to eliminate hardcore poverty, soon after taking office in 2008, we put in place an income top-up scheme that would give families whose total earnings are below the Poverty Line Income (PLI) of RM790 per month a top-up payment of between RM100 and RM790 per month. With this one move, hardcore poverty has been effectively eliminated in the state.

However, we are aware of the unintended consequence of cash handouts as it cultivates a dependency culture and most importantly it does not break the cycle of poverty. Therefore, my government is ending unconditional cash transfers and transitioning towards conditional cash transfers whereby those receiving aid from the state must also ensure their children are in good health, getting the right vaccinations, attending schools and achieving improving grades.

To support the talented but needy students to pursue their dreams, we have also launched the Penang Future Foundation Scholarship programme with a simple proviso that the scholar has to work in Penang. The work can be in the private as well as the public sector.

In addition to this, we also made rubbish collection as part of a strategy to provide decently paid jobs to those at the bottom 40%. It has been often repeated in Malaysia that no citizen would want to work in jobs that are dirty, difficult and dangerous, such as rubbish collection, but when we offered jobs at RM1,500 per month (which is RM600 more than the minimum monthly wage of RM900) for the job of a rubbish collector, we had 10 times more applicants than the 2,500 positions available. And all these were Malaysian applicants, not foreigners. So instead of awarding contracts to private contractors who would then employ foreigners as rubbish collectors, we asked MPSP to take back a portion of these jobs and offer them to locals at a higher salary. The plan worked, and even though we are spending 40% more than before, at least we can say that we are feeding 2,500 families rather than allowing the profits to be enjoyed by private contractors.

To have inclusive growth, we must also ensure sustainable growth to the environment. The state government has promoted recycling and was the first state in Malaysia to ban the distribution and use of free plastic bags. As of 2014 Penang has already reached a recycling rate of 32.8%, which is the highest in Malaysia. By 2020 we aim to achieve 40%, which is twice the national target of 20%. We also intend to lay dedicated bicycle lanes throughout the state.

Similar to the UK, affordable housing in a land-scarce place like Penang is in short supply. We have set aside a public fund of up to RM1bil to build affordable housing in the state. And we are able to pay for these affordable housing schemes because we auctioned off a piece of land on Penang Island via an open tender to the highest bidder. We were praised by the Auditor General Malaysia and singled out by Transparency International for our transparent open tender government procurement system.

We could afford many of these progressive schemes aimed at the bottom 40% only because we were able to improve government finances significantly. Our cash reserves have increased by 50% and our debt has been reduced by 90% since we took over the state government in 2008. From 2008 to 2013 our total surpluses came up to RM453mil, from which we have spent RM287mil on social welfare programmes to help the needy and other vulnerable groups within the state. We spend up to 12% of our annual budget on these socially inclusive programmes.

The low unemployment rate is translated to households in Penang enjoying household income growth of 7.6% annually between 2012 and 2014. As a result of these progressive policies, our Gini Coefficient has been reduced from 0.42 in 2009 to 0.37 in 2012, an improvement of 11% over three years. While Penang’s Gini Coefficient is better than Malaysia’s rate of 0.42, we still have some ways to go before we reach the Scandinavian levels of income inequality.

The present debt crisis has shown that income inequality cannot be solved by free markets. Free markets are said to be better than the state in the provision of goods and services except a pro-market “rule of law”. However, investment in public goods such as infrastructure, basic social services, R&D and innovative technologies can only be done by the “entrepreneurial state”, provided that the state exits at the earliest opportune moment to prevent undue interference. We are still learning to grapple about when to exit so as not to throw good money after bad or divert resources from other worthwhile ventures.

In the short time which I have been given, I have tried to paint vignettes of how Penang’s development is based on certain principles that are based on good governance and transparent decision-making, enabling skills and education, empowering with rights and responsibilities and enriching the people by sharing economic wealth.

While we are focused on providing a better life for our voters, we realise that we can only win the future by investing in education. While embracing the challenges of globalisation, we will not shy away from preparing the young for the future and preparing the future for our young.



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