A critique of Dr. Bruce Gale’s “Economic Reform in Malaysia: The Contribution of Najibnomics”

Media Statement by Dr. Ong Kian Ming, Member of Parliament for Serdang, on the 6th of September 2017

A critique of Dr. Bruce Gale’s “Economic Reform in Malaysia: The Contribution of Najibnomics”

I must admit that I was somewhat taken aback to read that Dr. Bruce Gale had written a book on Najibnomics that was, on the whole, praiseworthy of the economic reforms which took place under the Najib administration. The first time I came across Dr. Gale’s name was via his first book “Politics and Public Enterprise in Malaysia (1981)” which I believe is based on his PhD thesis which he wrote as a student at Universiti Kebangsaan Malaysia (UKM). Since then, Dr. Gale has written a number of other books and is, as far as I know, based out of Singapore doing political risk consulting. I did not want to respond to the arguments made in the book until I had read the entire book, which I managed to do over the holiday weekend. It is not a long book, only 99 pages, much of it comprising of budget highlights, various initiatives under the Economic Transformation Program (ETP) and key economic policy initiatives under the Najib administration, much of which I was already familiar with. Suffice to say, after finishing the book in approximately 2 hours, I found major gaps in Dr. Gale’s analysis of Najibnomics which I will now highlight.

Dr. Gale defines Najibnomics as “the practice of increasing the resilience of an economy by pressing ahead with macroeconomic and administrative reforms regardless of their short-term political cost”. He argues that Najib made the difficult decisions to introduce the GST, withdraw subsidies and introduce structural reforms even though he knew they were going to be politically unpopular so that the economy could be on a sounder footing in the longer term. This argument is not new. These are the basic tenets of the “Washington Consensus” model espoused by the International Monetary Fund (IMF) and the World Bank which was shoved down the throats of developing countries during times of economic crises in return for financial aid from these international lending institutions. The problem with this traditional argument in support of such ‘austerity’ policies is that firstly, they don’t examine the damage done to individuals and families, especially those with lower incomes, and secondly, they don’t analyse the devil in the details.

(i) Withdrawal of subsidies but where are the mitigation measures now?

In Najibnomics, Dr. Gale focused on the withdrawal of subsidies for three items – sugar, petroleum and the electricity tariff. He ignored the impact of the withdrawal of subsidies on other necessities such as flour and cooking oil as well as toll prices, just to name a few. And he failed to discuss the ‘mitigation’ measures that were supposed to cushion the blow of taking away these subsidies.

I still recall way back in 2010, when Dato’ Idris Jala, who was then the Minister in charge of PEMANDU, made the case that the impact of the subsidies would be cushioned by targeted ‘mitigation’ measures. For example, in place of the petrol subsidy, each person with a motorcycle that is less than 250 CC would receive an annual subsidy of RM54 while each person with a small car (less than 1000 CC) would receive an annual subsidy of RM126. To cushion the impact of the increase in toll prices, he promised a 20% rebate for heavy toll road users (more than 80 transactions per month). To cushion the impact of the price rise in sugar, flour and cooking oil, poor families would receive a cash rebate of RM20 in the first year and an unspecified discount through the MyKasih card in the 2nd year. These mitigation measures disappeared in 2011 (or were never implemented) leaving consumers, especially the more vulnerable groups, financially worse off. Hospital treatment charges and university school fees were also raised as part of this subsidy ‘rationalisation’ plan.

Source: Powerpoint Presentation by Dato’ Idris Jala on the 27th of May, 2010 at the Subsidy Rationalization Open Day[1]

(ii) The significant increase in off-budget expenditure items

Dr. Gale praised Najibnomics for improving Malaysia’s overall fiscal position i.e. reduction of the budget deficit and of government debt as a % of GDP. But he fails to even have a single mention of the rise in off-budget spending as well as the increase in contingent liabilities under the Najib administration.

Contingent liabilities or debt by government owned and government controlled entities which are fully guaranteed by the federal government increased from RM96.9 billion in 2010 to RM187 billion in 2016, an increase of RM90.1 billion or 93%. In comparison, the total budget expenditure increased by only 31.5% during the same time period, from RM203 billion in 2010 to RM267 billion in 2016, representing an increase of RM64 billion. If Dr. Gale believes that the GST was necessary to improve Malaysia’s public finances in the long run, shouldn’t he have at least discussed the long-term impact of the rise in these contingent liabilities? Especially since some of the big ticket contingent liabilities such as the expenditure for the LRT extension and the upcoming LRT Line 3, the MRT Line 1, Line 2 and possibly Line 3, the East Coast Rail Link (ECRL) and the High-Speed Rail (HSR), will have to be eventually financed directly by the federal government?

This does not even include the financial gymnastics used by the federal government to artificially maintain the government debt to GDP ratio below the 55% level. For example, the Ministry of Finance shifted approximately RM27.9 billion in development expenditure from the budget to a 99% MOF Inc owned private company called Pembinaan PFI Sdn Bhd from 2010 to 2013.[2] This reduced the budget expenditure in the short run but would increase the long-term interest payments incurred by the government over the next 20 years.

This does not include the RM10 billion spent by Pembinaan BLT Sdn Bhd, another 100% MOF owned private company, to build new police quarters and facilities which the government will have pay a yearly rental to.[3]

This does not take into account the RM22 billion of housing loan debt incurred by civil servants which was shifted to the Public Sector Home Financing Board, another 100% MOF owned entity.[4]

Given Dr. Gale’s familiarity with the public sector in Malaysia, it is utterly surprising that his analysis would exclude such big-ticket items that would inevitably affect the Malaysian government’s financial position moving forward, since a significant amount of the interest on this off-budget debt will have to be serviced by the federal government either directly or indirectly.

(iii) The rapid rise in the budget allocation of the Prime Minister’s office

Dr. Gale was quick to point out the increasing share of the budget being taken up by petrol subsidies and argued that this misallocation of resources had to be curtailed i.e. the petrol subsidy needed to be removed. But he totally ignored the fact that the allocation to the Prime Minister’s Department grew significantly under Najib’s watch. The total budget allocation (operating and development expenditure) allocated to the Prime Minister’s Department grew from RM12.2 billion in 2010 to RM 20.3 billion in 2016, an increase of 66.5%. Recall that during this time period, the overall budget only increased by 31.5%. In other words, the allocation to the Prime Minister’s Department grew more than twice as fast as the total budget expenditure! Why wasn’t this potential misallocation of resources investigated by Dr. Gale despite the spotlight which opposition politicians have shone on this expenditure year after year?

(iv) How widespread was Najib’s efforts at economic liberalisation and increasing competitiveness?

Dr. Gale is quick to point to policies such as Najib’s decision to scrap a 30% requirement for ethnic Malay ownership of investments in 27 areas as examples of economic liberalisation under the Najib administration that were potentially politically unpopular but would lead to long term positive outcomes and greater competitiveness in the Malaysian economy. But he failed to highlight the areas which Najib did not liberalize and failed to make more transparent.

He left the structure of Public Private Partnerships (PPP) alone which allowed unfair concession agreements to continue and for new ones to be signed. He failed to renegotiate the lopsided toll concession agreements which partly contributed to additional government expenditure via compensation to the toll concessionaires in lieu of toll price increases and later, to toll price increases when the government eventually withdrew this subsidy. He allowed new toll concession contracts to be directly negotiated and signed without any public disclosure of the terms and conditions. The MRT Line 1 and Line 2 projects were awarded directly to the Gamuda-MMC consortium without an open tender and the most expensive infrastructure project in Malaysia to date, the RM55 billion East Coast Rail Line (ECRL), was awarded to a Chinese company without a public tender.

(v) Over reliance on the annual reports produced by PEMANDU

Dr. Gale quoted statistics and examples liberally and copiously from the Economic Transformation Program (ETP) and the Government Transformation Program (GTP) annual reports as evidence of Najib’s success in administrative and economic reform. He took these statistics such as the KPIs which showed a significant reduction in crime and the roll out of the various Entry Point Projects (EPPs) which were ‘shovel ready’ at face value. Never did it occur to him to attempt to verify the accuracy of these statistics and figures.

I stand by the critiques of the Economic Transformation Program (ETP) which I co-wrote with Teh Chi Chang and published under the think tank REFSA in 2012. In fact, many of our predictions have been proven right. Our critique that some of the multi-billion Entry Point Projects (EPPs) such as the RM10 billion Karambunai Integrated Resort in Sabah and the RM3 billion Tanjong Agas Oil and Gas and Logistics Industrial Park in Pekan, Pahang did not make financial sense and would prove to be ‘dud’ projects have been right on the mark.[5] This is not the right place to do a complete re-evaluation of the ETP but suffice to say, Dr. Gale did not do his due diligence in this area. Even the checks from the so-called ‘Independent Review Panel’ on the ETP was a creation by PEMANDU which calls into question the extent to which the panel was truly independent.

(vi) Overlooking the 1MDB and Felda Global Ventures (FGV) scandals

Dr. Gale knew, even before he started writing this book, that he needed to deal with two elephants in the room, one larger than the other. The first was the 1MDB global scandal and the other was the mismanagement which occurred in Felda Global Ventures (FGV). In his Preface, he stated that both these scandals ‘are not the subject of this study’. He justified this by stating that ‘1MDB and FGV were conceived as corporate strategies, not macroeconomic reform programs’. I would disagree.

Dr. Gale’s entire premise of Najibnomics was that the decisions taken by Najib have put the country on a sounder economic footing in the long term. But what if we are forced to continue to pay up for the debts of 1MDB moving forward? The US$6.5 billion which 1MDB owes to the London-based and Abu Dhabi controlled International Petroleum Investment Company (IPIC) may have to be paid for by the Malaysian government over the next 5 to 10 years. We must also not forget that the Malaysian government could have directly benefitted from auctioning off the valuable real estate in what is now the Tun Razak Exchange (TRX) and Bandar Malaysia and collecting the proceeds rather than selling these two parcels of land on the cheap to 1MDB so that they could resell the land in order to cover up their own mountain of debt. We must not forget that the Government Pensioners Fund (KWAP) was asked to buy over SRC International which had incurred a debt of RM4 billion (and hardly any valuable assets) from 1MDB.

The Malaysian government will also be liable for the losses and debts incurred by FGV. If FGV needs a bailout, the federal government has to step in either directly or indirectly via FELDA. This too will have a long-term effect on the financial position of the federal government.

If Dr. Gale wants to point us towards administrative reforms under the GTP (which includes a National Key Result Area on reducing corruption) and towards global competitive rankings, then he cannot ignore how these reforms were ignored in the case of 1MDB and FGV.

(vii) Are we better off in the long run?

Dr. Gale’s definition of Najibnomics is that Najib’s economic legacy has been a positive one for Malaysia in the long-run. I beg to differ.

In 5 to 10 years’ time, when our contingent liabilities have surpassed RM300 billion and when our debt servicing takes up more than 20% of our federal budget, will Dr. Gale still sing praises of Najibnomics? What if the government is forced to raise the GST to 10% or beyond in order to pay for the debts incurred during the Najib administration? Of course, this scenario may not come to pass but the possibility that it may occur has been completely ignored in Dr. Gale’s treatment of Najib’s economic legacy.

Dr. Gale gives credit to Najib’s decision making process partly due to his training as an economist at the University of Nottingham. Indeed, he draws attention to the fact that “Najib is the first trained economist to head the government in the nation’s history”. This is not the place to question what aspects of economics Najib learned while he was studying at the University of Nottingham many moons ago or how he applied this knowledge during his career in politics and as Prime Minister. But I do wish that Dr. Gale had used his many years of training in writing about politics and economics to provide us with a more critical and comprehensive examination of Najibnomics and its long-term impact on Malaysia.

Dr. Ong Kian Ming
Member of Parliament for Serdang

[1] http://www.thestar.com.my/news/nation/2010/05/27/idris-jala-msia-must-cut-subsidies-debt-by-2019-or-risk-bankruptcy/

[2] http://www.themalaymailonline.com/malaysia/article/putrajaya-confirms-pembinaan-pfi-debt-pile-near-rm27b#HfILshAg8w3pwCIR.97

[3] http://www.thestar.com.my/business/business-news/2011/01/13/pembinaan-blt-plans-rm10b-sukuk/

[4] http://www.thestar.com.my/business/business-news/2016/06/11/malaysias-debt-burden-eases-as-loans-shifted-to-mortgage-agency/

[5] http://www.refsa.org/focus-papers/a-critique-of-the-etp-part-3-iii-doubtful-epps-doubtful-achievements-and-due-diligence/