Optimistic economic outlook for Penang and Malaysia

Penang’s and Malaysia’s economy is more tied to the global economy than most of us think. However, the la er is undergoing profound changes and whatever rebound that takes place will not benefit different parts equally. Malaysia should therefore increase ties with more buoyant parts and extract itself from declining parts.

CLUEDO SUSPECTS is a card game of logical deduction – information regarding a mysterious crime is spread within a few players and each player attempts to solve it by receiving limited hints from the other players in each turn. The truth here is: solving the mystery of Penang’s economy is not as far from playing the card game as many perceive it to be. Penang, Malaysia and the world are, to an extent, like three interlocking cogs of a machine, turning and ticking in a harmonic motion. More often than not, we find that looking at what is happening around the world and in Malaysia is looking at what is happening in Penang.

Those who loudly proclaim Malaysia as a relatively localised economy are likely to have arrived at such a conclusion by juxtaposing the proportion of local consumption (63%) and the proportion of net export (19%) of Malaysia’s Gross Domestic Product (GDP) in 2010. By peering at the economy through such an analytical lens, transactions between Malaysia and the world would no doubt seem somewhat insignificant.

This is misguided. The proportion of net export is in no way an indication of how dependent Malaysia is on other countries. Only the proportion of export alone is, and as of 2010, it amounted to 101% of GDP. Net export is calculated because GDP is only meant to include economic activities which have taken place on Malaysian soil; there- fore, it necessarily subtracts import (foreign production) from export. For every RM2 contributed by local residents, a little more than RM3 is injected into Malaysia from other countries.

Malaysians (and Penangites too, as we shall see) should cast their sights far into the other parts of the world. It is difficult not to notice the dark clouds that are still looming on the horizon – the US’s sluggish recovery and stubbornly high rates of unemployment, ill-performing Britain, sovereign debt issues across Europe, Japan’s earthquake and nuclear crisis, political uprising in North Africa and the soaring of gold, oil and commodity prices. ough Malaysia’s export sales have rebounded from an all-time low, they are still miles away from reaching the pre-financial crisis level in 2008.

However, there appears to be a silver lining in the small negative gure of net factor income from abroad (three per cent) found in Malaysia’s national account. Investments made by Malaysia in other countries have reaped returns at a level almost identical to that of foreign direct investments in Malaysia. The gap between GDP and Gross National Income (GNI, an indicator that measures all incomes owned by Malaysia, be it on national or foreign soil) has been closing in recent times. With Malaysia’s direct investment abroad standing at RM15bil higher than foreign direct investment in 2010, it is hoped that the trend of net factor income will be reversed.

And to explain why Penang’s economy is linked to Malaysia’s, two words would suffice: fiscal federalism. Penang has abdicated any sort of in uence on the country’s macroeconomic tools such as interest rate, currency, taxes and foreign reserves. As such, it is only inevitable to find parallels between the many economic indicators of both Penang and Malaysia, such as export and import details. The 3/12 and 12/12 pressure curves in Figures 1 and 2 (quarterly and annual turning point trackers developed by the Institute of Trend Research) that are plotted alongside the data prove just that.

By virtue of the relationship, it is possible to use projected national data to speculate on Penang’s future GDP per capita, for if Penang’s population and share of national economy remain as forecasted or fixed, then Penang’s annual growth rate must also be a constant relative to that of the nation. If, however, the growth rate in Penang deviates from its projected path relative to the nation, then the state’s share in the national economy will naturally fall off its track. Especially when Penang’s Gross Regional Product (GRP) has already been targeted at 8.9% of the nation’s GDP under the 10th Malaysian Plan, speculating Penang’s growth rate in 2015 becomes all the more simple, unless of course, the 8.9% target has somehow not been followed.

Assuming that the population growth rates for Malaysia and Penang are 1.7% and two per cent respectively, the table below shows projections made:

These values paint a rather rosy prospect for Penang (with per capita ratio ahead of national average) and, in a less obvious way, Malaysia. According to a recent study done by the National Bureau of Economic Research (NBER), countries that are open to world trade and have consumption of more than 60% of GDP and purchasing power parity (PPP) per capita below US$16,740 such as Malaysia, could achieve six to eight per cent of annual growth. Passing this mark of per capita income, however, annual growth rate appears to have fallen to the range of three to five per cent. If this is true, the government should be cautious to not undervalue the currency.

That Penang and Malaysia are deeply plugged into the world economy should not delude us into thinking that all we can do is sit passively and pray for an economic rebound. The world machine is far from operating like a single cog, and Malaysia has the choice of extricating itself from cogs that have declined in speed and building sustainable trading ties with more buoyant countries such as China and India.

But even if Malaysia fails in that aspect, 2011 can act as a year of respite that would pave the way for internal consolidation and some painful economic adjustments. Penang may also be better off turning its attention to state-level issues such as logistics and labour. Given the system of scal federalism, there is simply no point in sweating over macroeconomic policies.

Ooi Koon Peng was awarded the International Leader of Tomorrow Scholarship, and is now pursuing an undergraduate degree at the University of British Columbia in Canada.

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