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Oleh/By : DATO' SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : HOTEL NIKKO, KUALA LUMPUR
Tarikh/Date : 11/01/96
Tajuk/Title : THE 1996 NATIONAL ECONOMIC FORUM
It is indeed a pleasure for me to be here today among
the distinguished members of the economic fraternity to
officiate the opening of the 1996 National Economic Forum
entitled "Reducing the Balance of Payment Deficit: Challenge
and Response".
2. Once again Malaysia is being warned by economists and
even by Malaysian businessmen that its economy is
overheating. This time the principal sign of overheating is
said to be the deficit in the balance of payment which has
gone up to RM18 billion from a total trade figure of RM383.4
billion approximately.
3. The solution according to the experts is to slow down
the economy. For eight years now the Malaysian economy has
been growing at well over eight percent per annum. This,
according to the experts, has caused the balance of payment
deficit and therefore overheating.
4. If the economy is made to grow at a lower rate, then
the deficit will disappear and the economy will cool down,
or the cooling down of the economy will result in the
deficit being reduced.
5. One of the instruments for slowing down the economy is
to increase the interest rate and to take other fiscal
measures. With the higher cost of money, investments and
consumption would be reduced and growth would therefore be
slowed. Overheating would be dampened and would disappear.
Presumably the economy would be restored to good health with
the trade deficit turning into a surplus or it would at
least be balanced.
6. However we know only too well that many countries with
low rates of growth are not economically healthy. Some
developing countries with low or negative growth have been
forced to rely on aid. Poverty abounds and public amenities
and infrastructure are deficient. Unable to exploit their
own resources themselves through lack of capital and
knowhow, they have to accept foreign ownership of their
mineral resources, agricultural and forest lands and their
fishing potentials.
7. Capital formation is negligible. The currency
depreciates as the inflation becomes uncontrollable. More
and more money is needed in order to buy less and less
imports. Foreign debts increase and become more costly as
the currency devalues against the borrowed currency.
Reliance on foreign aid brings the country to its knees with
a begging bowl in the hand. The country becomes hardly
recognisable as a nation. International agencies of all
kinds and foreign powers literally take over the economy and
even the political direction of the nation.
8. But then one would say that a poor developing country
is not a good example of the benefits of low growth. But
the health of the rich is not any better when growth is low.
We see these developed countries suffering high unemployment
rates, inflation, stagnation and deficits in the balance of
payment. The political climate is not healthy either.
Governments are changed in rapid succession with no
improvement in either the political climate or the economic
performance. Indeed in some of these developed countries
low growth is often accompanied by riots and demonstrations
and loss of productivity. One is hard put to think of this
situation as being better than high growth with full
employment and stability even though there is a balance of
payment deficit.
9. The relationship between growth and payment balances is
not constant. Low growth in many European and North
American countries are accompanied by high deficits in the
balance of payment. But low growth in Japan does not result
in a deficit in the balance of payment. Instead the big
trade surpluses persist.
10. When Japan was experiencing high growth, Malaysia's
trade with that country was roughly balanced. But now that
Japan is experiencing low growth Malaysia's trade deficit
with Japan actually increases. Today Malaysia's deficit in
trade with Japan amounts to RM19.5 billion i.e more than
Malaysia's total trade deficit. In other words, Malaysia
has a favourable trade balance with almost all its trading
partners. It is the deficit with Japan that is causing the
negative imbalances in Malaysia's total trade. If the trade
with Japan is corrected then there should be no deficit in
Malaysia's trade.
11. Clearly trade balances and the performance of the
economy are not directly related. Correcting one will not
rectify the other.
12. Still some would continue to say that sustained high
growth is not healthy. If there is no inflation, high
growth can result in rising property prices. If for some
reason the property prices collapse then the economy would
plunge into a recession.
13. Japan's present economic problem is due, at least
partly, to the collapse of property prices. Similarly a
collapse of property prices in the mid-80's resulted in a
recession in Hong Kong.
14. Property prices in Malaysia have gone up but they are
nowhere near those of Japan or Hong Kong. In fact they are
so low compared with Singapore that a lot of Singaporeans
are snapping up houses and commercial buildings. Such is
the cheapness of Malaysian property that the Government has
to step in and impose a tax on foreign purchases so as to
reduce their attractiveness to foreigners.
15. But to return to the problem of the balance of payment,
there is obviously some connection between the deficit and
Malaysia's high economic growth. But the bigger import bill
is largely for investment in increased production for
export. Capital goods are needed if Malaysia is to produce
more goods for export. Similarly most Malaysian
manufactured goods contain a fair amount of imported inputs.
16. The building of Malaysian infrastructure and the
production of building material such as steel and cement
also require imported inputs. Yet without this
infrastructure Malaysia would not be attractive for export
oriented manufacturing. For example, much of the cost of
plants for power generation is due to imported machinery.
Without adequate power supply the economy will fail.
Infrastructural inadequacy is another sign of overheating.
Slowing down growth may help but it is not the ultimate
solution. The real solution is to improve infrastructure.
17. Then there is the problem of transportation. Although
Malaysia is now able to produce motor vehicles, the imported
CKD packs still constitute a large component of the motor
vehicles. And most of these motor vehicles are sold
locally, thus failing to mitigate the imported cost.
18. The so-called bulky purchases such as aircrafts and
ships also result in outflows of funds. Yet if these are not
purchased Malaysia would not be able to earn anything at all
from the travelling of Malaysians and the freighting of some
of its exports.
19. Of course the bigger the trade, i.e. both import and
export, the bigger is the freight and insurance bill. With
the growth of trade, the cost of freight and insurance which
accrue largely to foreign companies will increase, thus
contributing to the deficit.
20. More Malaysians travel abroad than foreigners come to
Malaysia. In addition a large number of Malaysians study
abroad, paying board and lodging and fees to foreigners.
The outflow due to Malaysians going abroad to study or to
tour far exceeds the earnings from inbound tourists and
other travellers. Travelling abroad is possible because
Malaysians have money to spend as a result of the growth in
the economy. But the cost of travel and studying abroad
enhances the deficits in the trade balance.
21. With better incomes Malaysians can afford to expend on
imported luxuries, including cars, furniture and jewellery.
Again Malaysian money flows abroad.
22. The rapid growth of the manufacturing and construction
sectors as well as other sectors has resulted in a shortage
of labour. Foreign labour has to be brought in. And the
foreign workers naturally repatriate most of what they earn
here, thus contributing to the outflow of funds.
23. Yes, it would seem that the growth of the Malaysian
economy has contributed to the deficit in the balance of
payment. But is it necessary that it must result in such an
outflow? If Japan's and Korea's growth has not, why should
Malaysia's growth be accompanied by the deficit?
24. Like all things there is no single or simple reason for
the deficit in trade. A whole lot of factors have gone into
the making of this deficit. This is clear from what has
been enumerated. Similarly if the balance of payment is to
be corrected, a lot of things have to be done.
25. Merely slowing down growth is not the answer since many
countries with slow growth have also been faced with balance
of payment deficits. Fiddling with the interest rates is a
two-edged weapon. Increasing it would dampen investments
and consumption. But it will result in inflation. While
total trade may decrease and with it the import bill, but as
a percentage of total trade, the import bill can still
remain high and the deficit uncorrected. Exports will cost
more and become uncompetitive. This will cause a reduction
in export earnings without reducing the deficit. The end
result may be an intractable depression.
26. Devaluation may bring about an increase in exports.
But when a lot of the inputs for the goods produced are
imported, the reduction in production cost would not be as
much as the percentage of the devaluation. Unless the
increase in the exports balances the percentage of
devaluation, the export earnings would actually be less than
before devaluation. In the meantime imports will cost more
thus keeping the import bill high. Again this will not
reduce the deficit unless imports are drastically reduced.
But imports of materials and components, as well as
machinery for export oriented and domestic production cannot
be reduced much without affecting exports and aggravating
the deficit in the trade balance.
27. Slowing down growth, fiddling with interest rates and
the exchange rates are not the solution to the deficit in
the balance of payment problem. The solution lies in
increasing exports and reducing imports. How do we do this?
28. In the production of rubber, palm oil, cocoa, timber,
petroleum and even tin Malaysia never depended upon nor
cared about the local market. All these raw materials are
produced for the world market. Consequently export earnings
from these products, though smaller than the manufactured
goods, are actually more wholesome. This is because their
production does not involve imported inputs. Naturally the
more we export these products the more will be the
contribution to the reduction in the deficit. Unfortunately
we cannot increase the export of these products much
more without depressing the prices. Indeed we don't have
much land left for plantations.
29. The export of manufactured goods from Malaysia is
mainly by foreign-owned industries. These industries are
largely based on the assembly of imported components. Thus
with the increase in the production and exports of these
manufactured goods, there is an increase in the import of
components. The imported cost must be deducted from the
export earnings in order to arrive at the true export
earnings of the nation.
30. To overcome this more of the components must be
produced locally. The stress must be on local components if
the export earnings are to be maximised.
31. Malaysian manufacturers on their own or in joint-
venture with foreigners tend to produce largely for the
domestic market. Because the domestic market is small they
cannot achieve economies of scale. Their cost is higher and
they rely on Government support and protection in order to
sell locally. Since they cannot and they don't export their
high cost products and on the other hand a portion at least
of their inputs is made up of tax-exempt imported items,
they increase the import bill without contributing to export
earnings.
32. To overcome this, Malaysians must manufacture in
sufficient quantities in order to maximise economies of
scale and market only a fraction of the products locally.
Export must be maximised. Then Malaysian-owned industries
will not deprive Government of tax revenue but will increase
the nation's export earnings while reducing imports.
33. This strategy of manufacturing for export should apply
to most Malaysian-owned industries. Cement and other
building materials, steel and steel fabricated components,
plastic products, ships, motor vehicles including buses,
trucks and motor cycles, electrical appliances and
components, products using locally produced raw materials
such as rubber, timber and palm oil; all these and many
others must be produced in large quantities in order to
maximise economies of scale, stimulate support industries,
minimise imports and earn export earnings.
34. Malaysian companies operating abroad should help by
sourcing their requirements as much as possible from
Malaysia.
35. The enlarged volume of exports will require adequate
transportation facilities. This means that goods should be
carried on Malaysian carriers and should use Malaysian ports
and airports and be insured by Malaysian companies.
36. As I mentioned earlier, today more Malaysians travel
abroad than foreigners travel to Malaysia. Whereas only 10
percent of the Japanese go abroad every year, 30 percent of
Malaysians travel abroad yearly. Mostly they are vacationers
and students. Since students stay for very long periods
abroad, the drain on foreign exchange by them is very big.
37. To counter this outflow, domestic tourism must be
highly developed. Tourist destination in Malaysia must have
all the amenities and "products" to entice as many
Malaysians as possible.
38. To reduce the number of students going abroad more
educational institutions must be set up within the country.
They must be of high quality and where necessary twinning
with foreign institutions or partnerships in the setting up
of branch campuses should be encouraged. Indeed Malaysian
educational institutions should be designed to attract as
many foreign students as possible so that we will earn
foreign currency even as we reduce the expenditure on our
students going abroad.
39. These are some of the things which can be done in order
to reduce the import bill and increase export earnings, thus
mitigating the balance of payment problem. There are many
other things that we can do in order to achieve this. And
all these things can be done without having to slow down
the economic growth or to fiddle with interest rates.
40. It is counter-productive to talk loosely about economic
growth and overheating without really identifying the signs
of overheating and taking measures to improve them.
41. Malaysia must continue its high growth path but it must
correct the balance of payment deficit through the right
measures. The chances are good that given the correct
approach the balance of payment deficit will be corrected.
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