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### Viewing cable 06KUALALUMPUR797, 9TH MALAYSIA PLAN: AMBITIOUS AGENDA AND CHALLENGING IMPLEMENTATION

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06KUALALUMPUR797 | 2006-05-02 08:10 | 2011-07-11 00:00 | CONFIDENTIAL | Embassy Kuala Lumpur
Appears in these articles: http://www.malaysia-today.net/mtcolumns/41819-wikileaks-9th-malaysia-plan-ambitious-agenda-and-challenging-implementation

`

    VZCZCXRO0368
    PP RUEHCHI RUEHDT RUEHHM RUEHNH
    DE RUEHKL #0797/01 1220810
    ZNY CCCCC ZZH
    P 020810Z MAY 06
    FM AMEMBASSY KUALA LUMPUR
    TO RUEHC/SECSTATE WASHDC PRIORITY 6537
    INFO RUCNASE/ASEAN MEMBER COLLECTIVE
    RUEATRS/DEPT OF TREASURY WASH DC
    RUEHC/DEPT OF COMMERCE WASHDC
    RUEHGV/USMISSION GENEVA 1375
    RUEHC/USDA FAS WASHDC

` `

    C O N F I D E N T I A L SECTION 01 OF 05 KUALA LUMPUR 000797

    SIPDIS

    SIPDIS

    TREASURY FOR OASIA AND IRS
    STATE FOR USTR - WEISEL AND JENSEN
    STATE FOR FEDERAL RESERVE AND EXIMBANK

    STATE FOR FEDERAL RESERVE SAN FRANCISCO - TCURRAN
    USDOC FOR 4430/MAC/EAP/J.BAKER
    USDA FAS FOR OA/BIG, ITP/AAD
    GENEVA FOR USTR

    E.O. 12958: DECL: 04/27/2016
    TAGS: ECON EFIN ETRD EINV PREL MY
    SUBJECT: 9TH MALAYSIA PLAN: AMBITIOUS AGENDA AND CHALLENGING IMPLEMENTATION

    REF: 2005 KUALA LUMPUR 03692

    Classified By: Economic Counselor Colin Helmer.  Reasons: 1.4 (b) and (
    d).

    SUMMARY
    -------

    ¶1. (C) Prime Minister Abdullah recently unveiled the Ninth
    Malaysia plan (9MP) which envisages spending RM 220 ($60
    billion) of government and private development funds during
    2006-2010 and targets an average economic growth rate of
    6.0%.  9MP identifies five key areas, such as improving
    Malaysia's human capital, becoming a knowledge-based economy,
    and investing in key infrastructure, in which Malaysia must
    improve to achieve its goal of becoming a developed
    industrialized nation by 2020.  Analysts are confident that
    the infrastructure projects, projected rate of economic
    growth, and some technology projects will unfold as planned,
    but deem projects in other areas, such as education and
    agriculture, to be unrealistic.  While laudatory in their
    public comments, Malaysian economists we have spoken to in
    private are disappointed with the plan.  They also question
    the GOM's ability to implement the reforms needed to attract
    a higher level of foreign direct investment.  9MP calls for
    Malaysia's private sector to take the lead in further
    developing the country, but our sources doubt Malaysian
    leaders will give private industry the freedom to transform
    the economy.  Prime Minister Abdullah views 9MP as his top
    economic initiative, is aware of the challenge of
    implementation and is taking steps aimed at improving follow
    up.  End Summary.

    Five Key Thrusts
    ----------------

    ¶2. (U) The 9MP lays out five broad goals that Malaysia is to
    meet by 2010 to keep on schedule for the "Vision 2020" goal
    of becoming an industrialized, developed nation by the end of
    the next decade.  The economists with whom we met agree that
    these goals are well laid out, pragmatic, and correctly
    describe the path Malaysia needs to travel.  They are:  to
    move the economy up the value chain; to raise the capacity
    for knowledge and innovation and nurture a "First Class
    Mentality;" to address persistent socio-economic inequalities
    constructively and productively; to improve the standard and
    sustainability of quality of life; and to strengthen
    institutional and implementation capacity.

    Show Me the Money
    -----------------

    ¶3. (U) The 9MP will provide about RM 220 billion (US$60
    billion at RM 3.65=$1) of government and private development
    spending during 2006-2010.  Approximately 40% of this is
    allocated to what the GOM defines as economic programs, 40%
    to social programs, 12% to security and 8% to general
    administration.  Funding for the subsectors that follow will
    come from either the social or economic segments of 9MP.
    Although the 9MP budget is 17.6% higher than the previous
    plan, 35% of 9MP's budget is earmarked for finishing up 8MP
    projects that were not completed during the last five year
    plan.

    ¶4. (SBU) About 23% of 9MP funding will be devoted to
    infrastructure and utilities development projects, an
    increase of 21.2% over the 8MP.  As compared to Mahathir-era
    plans with their large infrastructure projects, PM Abdullah
    chose to cut the pie into many small projects so that more
    construction contractors might participate.  According to Dr.
    Yeah Kim Leng, Managing Director and Chief Economist at RAM
    Consultants Group, the GOM conducted cost/benefit analyses to
    identify projects that would produce a higher return on
    investment.  This apparently was not done in the past.

    ¶5. (U) Although human capital development has been one of
    Abdullah's stated priorities, and despite media reports
    suggesting education was one of the big winners in the plan,
    education and training will receive only about 20% of the
    total budget.  This is about the same as in the preceding
    5-year plan (8MP) developed by Abdullah's predecessor,
    Mahathir Mohamad.  New initiatives include strengthening the
    national (public) schools so that they become the "School of
    Choice" for all races in Malaysia.

    ¶6. (U) Agriculture, one of Abdullah's favored sectors, will
    receive about 6% of the funding -- a 70% boost over 8MP.
    However, 9MP sets a goal of transforming Malaysia into a net
    food exporter by 2010, which outside analysts believe is
    impossible given control over land use by the individual
    states and the higher returns from land uses other than food
    and livestock production.  Biotechnology will get 1%, 2.5
    times more than it received in 8MP.

    Ambitious Growth Targets
    ------------------------

    ¶7. (U) In its last five-year plan, the GOM projected an
    average economic growth rate of 8%, but the actual rate
    during 2000-2005 was about 4.5%.  In the background to the
    9MP, government analysts place partial blame for the
    shortfall on the U.S.: "Global growth slowed due to a
    decelerating United States of America economy, and dampened
    electronics demand, exacerbated by the attacks of September
    11, 2001.  Overall economic performance remained sluggish
    until the second half of 2003, weighed down by the invasion
    of Iraq and the regional outbreak of Severe Acute Respiratory
    Syndrome."

    ¶8. (C) The government is targeting a more modest average
    annual growth rate of 6% during 9MP.  The economists that we
    interviewed (a mixture of academics, investment advisors,
    consultants, and think tank researchers) voiced a variety of
    opinions about that target, with Yeah of RAM asserting, "this
    is eminently achievable."  Dr. Mohamed Ariff of the Malaysia
    Institute of Economic Research presented a study to the GOM
    where he argued for a 5-6% growth rate as opposed to the 7-8%
    that many ministers supported.  He maintains that it is
    better to aim lower than to fail to meet the target.  The
    chief economist at CIMB agrees that 6% is within Malaysia's
    grasp.  Wong Chee Seng, chief economist at ECM Libra
    Securities, is much more negative, saying "The government
    will not meet its targets.  It moves too slow."  University
    Malaya professor Andrew Sheng (formerly chairman of the Hong
    Kong Securities Commission and Bank Negara Assistant
    Governor) disagrees.  Looking at regional growth estimates
    from the International Monetary Fund, he wonders why the GOM
    did not set the growth bar higher.  He believes that Malaysia
    should link its growth to China and India by exploiting
    complementary business opportunities.

    Seeking Private Help
    --------------------

    ¶9. (C) The 9MP calls for the private sector to lead growth,
    aided by the public sector in its role as facilitator and
    regulator.  Our economic contacts agree with this idea, but
    observe that it will require a significant increase in
    private investment, both domestic and FDI.  Under 9MP, the
    GOM projects private investment to grow at an annual rate of
    11.2% and public sector investment at 5% -- rates that are
    inconsistent with recent trends.  Under the 8MP, private
    investment actually contracted about 1% each year.  Changing
    this situation would require the GOM to give the private
    sector more freedom from regulation and control than its
    socioeconomic objectives for the bumiputera (ethnic Malay)
    community currently allow.  For example, the current
    requirement that 30% of equity and employment be reserved for
    bumiputeras is a significant investment disincentive.  As
    Yeah put it, "Why would you want to do all the work of
    setting up a business in Malaysia only to have to turn 30% of
    it over to someone else?"

    ¶10. (SBU) One of PM Abdullah's signal economic achievements
    has been to shrink the government's budget deficit, now down
    to 3.8% of GDP.  9MP appears likely to slow further progress
    on deficit reduction.  According to Wong, Abdullah concluded
    that too many people depend on government contracts to keep
    applying the screws to expenditures.  At the end of the 9MP,
    the overall federal government fiscal deficit is forecast to
    be RM 107.6 billion, or 3.4% of GDP, assuming the government
    can meet its growth targets.  The majority of our contacts
    are not overly concerned with this change in fiscal stance.
    Sheng argues that it is reasonable for a developing country
    such as Malaysia to pursue deficit spending on infrastructure
    projects that will generate growth.  The difficulty in the
    past, he says, has been large public projects that do not
    offer a good return on investment.

    Ambitious Development Goals
    ---------------------------

    ¶11. (U) Some examples of the sort of investment that
    University Malaya's Sheng sees as positive are biotechnology
    research, ICT infrastructure (such as high-speed internet and
    more training in schools), and development spending on
    tourism.  Sheng sees these as high-growth projects with the
    potential to leverage more investment and business for
    Malaysia in the future.  Pointing to India and its
    back-office outsourcing, Sheng asks, "Why shouldn't Malaysia
    be able to offer similar services at a competitive price?  We
    have the education, English language, and with this type of
    incremental investment, we can do business with New York via
    the internet."  He is similarly enthusiastic about the plan
    to promote the tourism sector, which in 2005 drew 16.4
    million tourists and generated RM 32.4 billion (US$ 8.8
    billion) -- 80% more than export earnings from palm oil, six
    times more than rubber, and only 30% less than the oil and
    gas industry.

    ¶12. (C) Some of 9MP's ambitious goals are so lofty as to
    appear unachievable in five years.  For example, the plan
    calls for Malaysia to increase the percentage of university
    professors with PhDs to 60% from the current level of 20%.
    Time and resource constraints, coupled with the fact that
    highly educated workers can do better elsewhere, make
    achieving this goal unlikely.  As Wong of ECM Libra noted
    bluntly, "I tell my children to stay in New Zealand.  What
    opportunity does a Malaysian educated abroad have here?"

    ¶13. (C) Some of the agriculture goals seem equally
    unrealistic.  For example, the government proposes to
    increase rice production by approximately 50% by 2010.
    According to Ministry of Agriculture Deputy Secretary General
    Zulkifli Idris, the prime minister pushed for sharp
    production increases to benefit Malay farmers in the
    politically sensitive northern states.  Traditionally,
    Malaysia has grown about two-thirds of the rice it consumes
    domestically, importing the remainder from low-cost producers
    like Thailand and Vietnam.  Although the cheap imports allow
    the GOM to maintain low fixed retail prices for urban and
    rural consumers, the government loses money on every ton of
    rice produced domestically: it pays direct subsidies to
    farmers while Bernas (the government-linked monopoly rice
    importer and the main marketer of domestically produced rice)
    buys locally produced rice at a higher price and sells it at
    low, government-fixed retail price.  Working-level contacts
    indicate that the sharp rice production increase in 9MP is
    unrealistic, and Zulkifli admitted as much in his statements.
     Nonetheless, the planned investment in such areas as
    improved irrigation, mechanization, and farmer organizations
    in the northern states will likely have a political payoff
    for Abdullah.

    NEP Rides Again
    ---------------

    ¶14. (U) With the publication of the 9MP, Prime Minister
    Abdullah also went firmly on record in support of maintaining
    the National Economic Policy (NEP).  The NEP was introduced
    in 1970 with the goal of transferring at least 30% of
    Malaysia's equity and wealth to bumiputeras through
    affirmative action policies favoring the Malay majority's
    participation in the economy.  The NEP was initially intended
    to have been completed in 1990, but when the target was not
    met the government replaced the NEP with the National
    Development Policy (NDP).  With 9MP, Abdullah has pledged to
    continue these policies through 2020 with the hope of finally
    achieving the 30% goal.

    ¶15. (U) The 9MP will try to raise the bumiputera equity stake
    to 20-25% in 2010 from 18.9% in 2005.  The plan also seeks to
    narrow the income gap between bumiputeras and ethnic Chinese
    from a ratio of 1:1.64 in 2004 to 1:1.50 in 2010, and between
    bumiputeras and ethnic Indians from 1:1.27 in 2004 to 1:1.15
    in 2010.  It also sets a target of halving the country's
    overall poverty rate from 5.7% in 2004 to 2.8% in 2010, and
    completely eliminating "hardcore poverty" in 2010.

    ¶16. (C) Non-government economists support these goals
    publicly but deplore them in private.  Some challenge the
    reliability of the government's data.  For example, a
    significant amount of publicly listed shares are held under
    nominee accounts, many of which are bumiputera-owned, but the
    government considers all of them non-bumiputera.  Others
    decry the added cost of business the NEP policies place on
    private investors and the disincentive they pose to FDI.

    Implementation - GOM versus Private Industry
    --------------------------------------------

    ¶17. (U) Since the 9MP roll-out, the government has generated
    a steady media buzz about the importance of effective
    implementation of the plan.  Abdullah has publicly promised
    to fire any civil servants who get in the way.  But the GOM
    and industry have different ideas of what constitutes good
    implementation.  The GOM has announced that 9MP will feature
    better governance, world class project management, increased
    due diligence, less corruption, and speedy disbursement of
    funds.  In a recent speech, Effendi Norwawi, Minister in the
    Prime Minister's Department for Economic Planning and
    Abdullah's point man for the 9MP, explained that the GOM
    wants to work in partnership with the private sector.  He
    emphasized Abdullah's personal commitment and noted the
    creation of a new agency, the National Implementation Action
    Body (NIAB) to monitor the performance of agencies
    implementing major projects under the 9MP.  Abdullah will
    head the organization, with Deputy Prime Minister Najib Razak
    as deputy chairman and ministers with specific 9MP authority
    sitting on the council.  It will meet every two weeks and,
    according to Effendi, Abdullah will be demanding progress
    reports.

    ¶18. (C) The prime minister's own office is set to receive a
    large allocation under the 9MP.  Although there is no detail
    as to how the funding will be spent, 9MP sets aside RM 26.5
    billion (13.2% of the total) for Abdullah's department - a
    threefold increase over 8MP (RM 7.3 billion and 4.3%).  The
    public spin on these figures is that the resources will
    enable the prime minister to focus on his key goals and move
    the process along.  In private, however, economists voice
    concern over the potential for abuse of funds.

    ¶19. (C) When the private sector talks about good
    implementation, they hope the GOM will remove the mass of
    government red tape and regulation that increases costs and
    scares away investment, both local and foreign.  Minister
    Effendi himself related a story about a hotel venture that
    required 73 different licenses before it could open.  Some
    took so long to obtain that the operator needed to repeat the
    application process because they only lasted for a year.
    Yeah detailed a similar process in Penang, saying "at least
    at the international level, there is MIDA to be one-stop
    shopping for the licenses.  A Malaysian investor must deal
    with both state and local regulations and the government
    needs to move to change this quickly."  But few economists
    believe that the GOM will move decisively to cut red tape and
    reduce its economic meddling.  Sheng compared Malaysia to
    China: "In Shanghai, they were trying to take some business
    from Hong Kong and the manufacturer asked if they could move
    his product from China to the distribution point, including
    customs, in 24 hours.  Shanghai's mayor was able to make this
    happen.  Would that be the case in Malaysia?"

    Economists Not Overly Optimistic
    --------------------------------

    ¶20. (C) Comment:  Successful implementation of the 9MP is
    Abdullah's top economic priority, but the economists we
    surveyed are not optimistic that he will be able to achieve
    all his goals for the plan.  While they see some good
    initiatives, they do not see bold steps that would lift
    Malaysia back up to the growth rates of the late 1980s.
    There is a sense of urgency in both the senior levels of the
    government and among senior economists that Malaysia is at a
    crossroads.  Wong suggested that, "there are two camps in the
    government, the ones who see that if we do not make changes
    that we will settle into second class and the others who are
    happy with the way things are."  Sheng, in a presentation to
    senior business leaders, government managers and economists,
    argued that Malaysia was in a similar situation as the U.K.
    and Japan in the early 1980s.  The U.K. was not doing well
    and opted to open its financial sector to bring in FDI and
    investment.  Japan, in contrast, tried to hold onto its
    manufacturing lead and
     did not open to foreign investment.  He suggested that
    Malaysia might want to examine how the two nations are faring
    today and consider its options.  End Comment.
    LAFLEUR

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