(Also published on The Malaysian Insider)
Capital intensity is very low in the ETP so far. An increasing level of capital investment per employee (CIPE) is an essential part of economic development. Higher CIPE usually translates into higher salaries due to the higher skills and productivity associated with working with more efficient machines and technology. Therefore, the ETP is expected to have high CIPE.
PEMANDU is not doing much better than BAU. On the surface, the RM571,000 CIPE of the ETP projects last year is above the average RM554,000 achieved by the Malaysian Industrial Development Authority (MIDA) in the last five years of business-as-usual (BAU). However, the ETP total includes the MRT and RAPID mega-projects. Stripping these out, the CIPE of the remaining ETP projects is a mere RM305,000 — well below what MIDA has been achieving.
Electrical & Electronics (E&E) EPPs seem low-end. PEMANDU may say the headline comparisons are unfair as the ETP includes projects that may not be as capital intensive as the manufacturing projects under MIDA’s purview. But then, even in the E&E sector, we find that the ETP projects brought in a mere RM429,000 CIPE last year. MIDA delivered more than that in four out of the previous five years, the 2009 crisis year excluded.
The ETP will not transform the lives of ordinary Malaysians. Notice that PEMANDU’s communiqués focus on investment numbers and projects. There is hardly any mention of the types of jobs created. That could be because most of the jobs are low-skilled. The bottom 36 per cent of ETP jobs will pay just RM1,122 per month in today’s terms. And as we show in today’s focus paper, the low capital intensity of the ETP projects underlines the lack of real transformation.
● The ETP is not doing better than business-as-usual (BAU, as PEMANDU puts it) in attracting high-value investments.
● Excluding the MRT and RAPID mega-projects, capital intensity per employee in the ETP projects is a mere RM305,000.
● MIDA achieved a much better RM554,000 average capital intensity in the last five years!
● Rising capital intensity per employee is an essential part of economic development. In this regard, the ETP is certainly far from transformative.
Previously, in our dissection of the 2011 Annual Report of the ETP:
Part 1 (The “D”ata in our DEEDS framework) highlighted how PEMANDU very adroitly masks the fact that real national income growth last year was below its target;
Part 2 (“E”xecution) unearthed the shocking case of PEMANDU lying and taking “100 per cent” credit in its Annual Report for a RM1.9 billion wafer fab plant that was never built;
Part 3 (“E”nterprise) uncovered the startling gap between committed and actual investments. The RM12.9 billion of actual investments is a mere 7 per cent of the RM179 billion committed investments that PEMANDU prefers to emphasise;
Part 4 (“D”iversity) revealed that PEMANDU’s “recalibration” of the ETP figures is better described as a massive collapse. The incremental GNI (Gross National Income) and job creation numbers were slashed by 45 per cent and nearly 20 per cent respectively. Were some EPPs selected based on grossly exaggerated forecasts?
Socio-economic impact — the ETP is for the elites
This week, in our series critiquing PEMANDU and the Economic Transformation Program (ETP) 2011 Annual Report, we tackle the socio-economic impact of the ETP. We had earlier highlighted that:
1. The ETP will take us further away from sustainable high-income status. Workers’ share of national income under the ETP will be just 21 per cent compared to 28 per cent currently. The share that goes to corporations will be 74 per cent, much higher than the current 67 per cent;
2. The ETP will perpetuate income inequality. Of the small 21 per cent share of ETP national income going to workers, the top 15 per cent of wage earners will take 40 per cent of all wages. The bottom 36 per cent will have to make do with just 12 per cent of total wages;
3. A significant number of ETP jobs pay poorly. The average wage of the bottom 36 per cent of ETP jobs is just RM1,122 per month in today’s terms.
The ETP Roadmap Report was published in October 2010. Now, less than 18 months into this Roadmap that is supposed to take us to high-income nation status, PEMANDU slashed the job creation numbers by nearly 20 per cent in the ETP Annual Report but has not told us which jobs were lost and how this will affect the distribution of income under the ETP.
Capital intensity is a measure of economic development
In the absence of information from PEMANDU, we use capital intensity as an indicator of the types of jobs that the ETP created in 2011. An increasing level of capital investment per employee (CIPE) is part and parcel of the economic development process. Developed economies have a higher level of CIPE compared to less developed countries.
Higher CIPE usually translates into higher salaries due to the higher levels of skills and productivity associated with working with more efficient machines and technology. For example, multinational enterprises in Japan tend to employ a higher amount of capital per worker and this is associated with higher productivity and wages. MIDA, the Malaysian Industrial Development Authority, has this to say in its 2011 report:
The CIPE ratio of manufacturing projects has registered an increasing trend … This reflects the general trend towards more capital-intensive, high value-added and high technology projects.
Given the ETP’s promise of transformation, we would expect the capital investment per employee of its projects to be significantly higher than those of MIDA-approved projects which had been driving business-as-usual (BAU, as PEMANDU puts it) growth before PEMANDU came along.
Overall investment per job in the ETP is abysmal
The CIPE ratio is not the only measure of the kinds of jobs which will be created as a result of certain levels of capital investment. But it is an important measure, and on this metric, the latest data from the 2011 ETP Annual Report shows a dismayingly low level of capital intensity.
The RM571,000 CIPE of the ETP projects is only slightly above the RM554,000 average achieved by MIDA in the last five years between 2006 and 2011. The amount of CIPE in the ETP does not seem to promise transformation or high-income jobs beyond what MIDA has achieved.
The headline numbers actually flatter the ETP, because the ETP total is boosted by mega-projects. Just two mega-projects — the MRT and the RAPID project — comprised more than 50 per cent of the total committed investment of the ETP as at the end of 2011.
Stripping these two mega-projects out, the capital investment per employee of the remaining EPPs is a minuscule RM305,000 — which is about half the RM554,000 CIPE that MIDA-approved projects averaged from 2006 to 2011!
The Electrical & Electronic EPPs seem low-end
Of course, PEMANDU may say that we are unfairly comparing rambutans to durians, as the nature of the ETP is such that it includes many projects that may not be capital intensive in the same way as the manufacturing projects that are under MIDA’s purview. Let us then focus on the Electronics and Electrical (E&E) sector. The ETP projects under the E&E NKEA (National Key Economic Area) brought in a mere RM429,000 capital investment per employee in 2011. This pales in comparison to MIDA’s achievements. Excluding the 2009 crisis year, MIDA achieved a CIPE range of RM414,000-RM520,000 in the past five years. In fact, except for 2009, MIDA outstripped the ETP’s RM429,000 in four out of the past five years.
Anecdotal evidence supports the view that some Entry Point Projects (EPPs) are far from transformative. For example, industry sources tell us that the LFoundry EPP planned to relocate old equipment from its plant in Germany to produce 200mm wafers in Malaysia. State-of-the-art wafer fabs such as in Singapore are already producing more technologically advanced 300mm wafers.
The ETP will not transform the lives of ordinary Malaysians
The very low capital investment per employee is one important indicator of the fatal flaw of the ETP — that it will not transform the lives of the vast majority of Malaysians.
Notice that PEMANDU’s communiqués focus on investment numbers and projects. There is hardly any mention of the soft infrastructure necessary to take us to sustainable high-income status. For example, what skills and job types will be required in the 3.3 million jobs that the ETP promises to create? Accountants? Lawyers? Electrical engineers? Chemical engineers? Tour guides? Plumbers? Plantation workers? Doctors? Nurses? Technicians? Farmers?
Information on the types of jobs that the ETP will create is crucial to other divisions of the government as well as ordinary Malaysians. For example, surely the Ministry of Education and Ministry of Labour would need to tailor their education and human resource policies to dovetail with the ETP. Malaysian youths and adults planning their own education and careers will also find such information very useful.
PEMANDU’s silence on this matter could be because most of the jobs that the ETP promises to create are low-skilled. That the ETP consists of EPPs that are generally not transformative is not surprising as:
Many of these EPPs are “recycled” projects using past or existing business models which are far from being game changers;
These projects were selected in a lab environment where truly innovative ideas are unable to flourish.
Instead of being transformative, the ETP is, at best, just a very slick repackaging of old ideas. These “recycled” projects cannot be expected to result in transformative change or high-income jobs.
What should PEMANDU do?
PEMANDU has shifted goal posts, set low targets and misrepresented data in order to present a rosy picture of how well the economy is doing. This is a disservice to all Malaysians, especially to the poorest and least educated who have been deluded into believing the government can drive the economy.
Part 6 next week concludes with our recommendations.
Earlier this year, we published a series assessing PEMANDU and the ETP on the goals, plans and targets stated in the ETP Roadmap document. To facilitate constructive discourse and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, and GNI surrounding the entire GTP, we evaluated PEMANDU and the ETP on its DEEDS — Data transparency, Execution, Enterprise, Diversity and Socio-Economic Impact. The 8 Focus Papers in this Critique of the ETP Series, together with related infographics and a powerpoint presentation can be found at www.refsa.org. — REFSA (Research for Social Advancement)
* Dr Ong Kian Ming holds a PhD in Political Science from Duke University and Economics degrees from the University of Cambridge and the London School of Economics. He is attached to UCSI University, which has been named as the project owner of two entry point projects (EPPs). To avoid any potential conflict of interest, he will not make references to or analyse these two EPPs.
* REFSA (Research for Social Advancement) executive director Teh Chi-Chang holds a first-class degree in Accounting & Financial Analysis from the University of Warwick, an MBA from the University of Cambridge and the CFA (Chartered Financial Analyst) charter. Prior to joining REFSA, he headed highly-regarded investment research teams covering Malaysia, and was himself highly-ranked as an analyst.
Read Dr. Ong’s critiques of the ETP in full here.