Malaysia's Efforts to Liberalize Economy Could Cause Short-Term Pain

The government of Malaysia knows that, in the current global economic situation, it must innovate to survive. Its traditional manufacturing base is threatened by competition from lower-wage countries. The country is promoting a new economic model that would use technology to increase development and is investing in developing high-end products and a highly skilled workforce. Still, economists say Malaysia's economy continues to lag behind developed neighbors because of government policies that stifle competitive market forces.

Halimaton Hamdan, a professor of nanotechnology at the Technical University of Malaysia, has developed a process to extract silicon dioxide from rice husks. Rice husks are what is left over after the grain is harvested. Silicon dioxide is a key ingredient in a number of products, from cement to insulation. Hamdan says providing a cheap source of this material from a locally available and abundant source is the kind of innovation Malaysia needs to compete in a global economy.

"We can come up with value-added products. So this is the advantage and cut a lot of costs at the same time and it will benefit, at the end, because the application of this product is going to support the technology, because it is a green process and at the same time, hopefully, we can provide materials for our local construction buildings and things like that," said Hamdan.

Hamdan's work is being funded by the government. It is part of the country's drive to make Malaysia more competitive in the global economy.

Economist Yeah Kim Leng says Malaysia's past success in building a vibrant middle class is threatened by low demand for from the United States and Europe, following the global economic crisis, and by low-wage competitors in Vietnam and Cambodia. He says the country's only option for future growth is to follow the model of developed neighbors like Singapore, Taiwan and South Korea.

"These countries have invested tremendously in human resources, having very open as well as meritocracy-led economies that impact on polices that emphasize a lot on science and technology," he said.

Malaysian cities, like Kuala Lumpur, already have the infrastructure needed - modern buildings, good public transportation and high-speed electronic communications - to support a growing technology sector.

The Malaysian government's investment in research is also starting to pay off. In addition to Hamdan's work, students and professors are also developing new medical technology to detect heart and hearing problems. Hamdan says, although this research has succeeded in developing new, innovative technology, the private sector has been slow to utilize it for commercial application.

"The main challenge is trying to convince especially the industry, because in the past it's very difficult for us [in] the local [community] to convince the industry that we have a product that can be commercialized," he said.

However, Malaysia's main challenge is making its economy more competitive. For four decades, the government employed a policy of racial preferences for ethnic Malays. The policy's goal was to close the gap between rich businessmen, mostly Chinese, and the poor, who were mostly Malay. Kim Leng says, although the policy succeeded in creating a vibrant Malay middle class, it also stifled competition.

"Some good policies, over time, become bad policies, if they are not changed, if they do not keep up with things," he said.

Last year, the government announced a new policy weakening a requirement that companies reserve 30 percent of their shares for ethnic Malays. Leng says, in the long-term, liberalization of the economy will create new jobs and opportunities but, for now, the country's traditional manufacturing base will continue to shrink.

"In the short term there will be pain. There will be objections to opening up the markets. There will be the need for government
intervention to elevate, not to rollback, this liberalization or expansion, market expansion, but actually to assist these industries in coping with an intensified competition from these countries," he said.

He says, over time, equal opportunity could turn Malaysia's ethnic diversity into an economic advantage. The language and cultural links between Chinese and Indian ethnic minorities, in particular, could help increase economic ties between Malaysia and the two largest economies in Asia.