1 Malaysia 2.0: What Will It Take Shahid Yusuf Kaoru Nabeshima DRG World Bank July, 2007

2 Malaysia Resource-based growth – tree crops, tin, petroleum FDI supported processing and assembly of manufactures Main driver of growth: exports Principal sources of comparative advantage: low wages, low overheads, political and macro stability, adequate infrastructure, acceptable business environment, and steadily improving manufacturing capability

3 Worrying Developments External competition increasing, especially from China, India, and Vietnam Rate of GDP growth has slowed and below potential; private investment low TFP increase modest, innovativeness weak Growth potential of industrial processing becoming exhausted and that of tree crop agriculture is limited Quality of labor skills not improving, technical manpower emigrating FDI below past levels

4 Why the Next Ten Years Are So Critical Current petroleum resources running out: could impact on budget, imports, and domestic production costs Technological race accelerating and cost of catching up increasing Low wage, low tech model not viable for a $5,000 per capita economy ($10,000 PPP) Growth and export competitiveness depends on productivity, innovation. Incremental process innovation must be complemented by significant design and product innovation Raising quality of technical skills and innovation capability can take a decade, at least

5 Models for the 2.0 Economy Finland: Resource rich Switzerland: industrial tradition, multiple lucrative niche activities, location Ireland, Israel, Taiwan (China): Resource poor, large diaspora Korea, Singapore, Shanghai: Resource poor

6 Key Elements of Successful Models Strong development agencies with focused strategies: all economies except Switzerland Heavy emphasis on high quality secondary and tertiary education with priority for S&E. Reliance on elite universities, meritocratic and intensely competitive system. Excellence of general schooling supported by targeted vocational and technical training FDI led industrialization and upgrading of industry supported by government skills development, technology, infrastructure, and exchange rate policies: Ireland, Singapore, Israel, (Shanghai) Domestic corporate sector led industrial upgrading supported by public spending on infrastructure and services: Korea, Taiwan (China), Switzerland, Finland, (India)

7 Key Elements of Successful Models Industrial upgrading linked to increased spending on R&D, mainly by private sector Deep pools of knowledge workers. All economies have between one and three clusters Significant role of diaspora and immigration of knowledge workers, providers of risk capital: Israel, Ireland, Taiwan (China), (Shanghai)

8 From 1.0 to 2.0: Building Blocks for Malaysia Manufacturing capability in MNC subsidiaries and some GLCs/local companies in electronics, chemicals, engineering, and agro industries Skilled manufacturing workforce especially in electronics, petrochemicals Good transport, energy, and IT infrastructure Institutions supporting IP, standards, certification and accreditation Strong incentive regime for FDI, R&D, investment Financial system and domestic savings Cluster-based, concentrated development in a few urban centers with high standards of livability

9 Transition to 2.0: How Long Would It Take? Building domestic corporate sector: years, including for India/China Building innovation capability: 20 years Building world class, business service providers: 20 years

10 Missing Elements Industrially and geographically focused strategy and strong agency to play coordinating/implementing role Major domestic corporations to upgrade, diversify, and globally market Malaysian products Weak entrepreneurship, few new starts and private venture capitalists to assist new firms World class universities and research institutes to provide technology leadership, facilities, and opportunities for diversification and hybridization Deep, diversified base of domestic SMI suppliers. MNC related vertical integration limited Support from Malaysian diaspora or immigration of foreign S&E workers Urgency

11 An Action Plan: Five Year Horizon Identifying 2-3 growth driving industries with long-run potential Working with corporate sector to make Malaysian companies into world class providers with international brand recognition Developing clusters of SMIs to backstop these activities in 3 urban centers.– e.g. new, high tech manufacturing in Penang/NE, ITES in KL/Klang Valley, medium tech/traditional industries in Johor Augmenting capabilities of existing labor force through targeted professional and vocational training using PSDC and other models Building a multimodal transport system to tightly link three urban regions to create strongly integrated system

12 An Action Plan: Ten Year Horizon Improving quality of secondary level schooling, especially science, math, and communication skills Developing 2-3 world class universities and upgrading quality, basic research and early stage technology development in steps: a new breed of motivated and educated students needed for Malaysia 2.0 –Issues to be addressed: longer-term financing, competition among institutions, finding teachers, changing mindset and attitudes of students Cultivating strengthening university-industry links to reinforce technology-led strategy Engaging and attracting back talented, experienced, wealthy, and well-connected members of Malaysian diaspora

13 Concluding Remarks Industrial countries are aiming for 3.0. Competition at 1.0 is intensifying. Striving to achieve 2.0 is not an option for Malaysia. It is a necessity

14 Thank You