Sunday 22 November 2009

The Malaysian Resource Curse: William Leong Jee Keen. MP Selayang

The Malaysian Resource Curse

Pump priming : Wrong Diagnosis

Prime Minister Najib Tun Razak announced that the government will prime the economy with an additional RM1 billion monthly till the end of 2010 in a bid to bolster the country’s economy. Unfortunately, allocating RM200 billion under the 2010 budget or pump priming the economy will not return Malaysia to economic competitiveness. Malaysia’s economy was ill long before the sub-prime implosion and the consequent global financial crisis. Najib Tun Razak will not be able to redress Malaysia’s economic woes unless and until he and the Barisan Nasional Government has the honesty and courage to deal with the Malaysian Resource Curse and have the political will to carry out the necessary fundamental structural reforms.

The Dutch Disease

Malaysia has exhibited the classical symptoms of the “Dutch Disease” or “the Resource Curse”. The term “Dutch Disease” was coined in 1977 by the Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959, culminating in the world’s biggest public-private partnership, N.V. Nederlandse Gasunie between Esso (now ExxonMobil) Shell and the Dutch government in 1963 only to see the rest of its economy shrinking. It refers to the paradox that countries with an abundance of natural resources specifically resources like minerals and fuels, tend to have less economic growth and worse development than countries with fewer natural resources. The Dutch Resource Curse is an economic concept to explain the relationship between the exploitation of natural resources and a decline in the manufacturing sector combined with moral fallout. The concept explains that an increase in revenues from natural resources will de-industrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. It also leads to the public administrators getting entangled with business interests.

Political Corruption

One of the negative effects of the Dutch Disease is that it is often easier for a natural resource rich government to maintain authority through allocating resources to favoured constituents than through growth-oriented economic policies and a level, well regulated playing field. Huge flows of money from natural resources fuel this political corruption. The government has less need to build up the institutional infrastructure to regulate and tax a productive economy so the economy remains undeveloped.

Rent Seeking Behavior

Another negative effect is the creation of rent seeking behavior. “Rent seeking” in this sense does not mean the usual payment of a lease but stems from Adam Smith’s division of income into profit, wage and rent. Rent seeking behavior is distinguished from profit seeking behavior in that in profit seeking behavior, entities seek to extract value by engaging in mutually beneficial transaction. On the other hand, in rent seeking behavior, entities seek to extract uncompensated value from others without making any contribution to productivity through manipulation and exploitation such as by gaining control of land and other pre-existing natural resource or by imposing burdensome regulations or other governmental decisions that may affect consumers or businesses.

Loss of Entrepreneurial Skills
The rationale for identifying rent seeking as the problem in economies suffering from the Dutch Resource Curse is that resource revenues constitutes vast wealth and when individuals or groups of individuals attempt to take control over it, they become less entrepreneurial. Rent seeking activity involves several detrimental aspects. First the attempts themselves are time consuming and draw valuable labour hours from productive, innovative activities. Talent is wasted in the pursuit of existing wealth instead of being employed at producing new growth. Second when the activities are successful, the wealth may be disposed of in ways that are not conductive to growth. If the wealth is spent for personal consumption abroad for the successful rent seeker and it is not invested in domestic technological progress and human capital, growth suffers. Few individuals acquire wealth to act for the common good. The country’s resource rent is converted to luxury items, not research and development. So growth stagnates. Rent seeking degenerates into corruption which discourages investment and limits growth. 

Rich become Richer

Think of Ghana and Zambia, countries abundantly endowed with minerals or oil and gas has swung from booms to busts and back again. Their politics are hopelessly corrupt. The central government, far from being an effective regulator, serves as the handmaiden to a group of powerful oligarchs, making it easier for the rich to become richer while the poor become poorer. Now think of Malaysia.

The Malaysian Resource Curse

Malaysia’s economic growth is a three legged growth model based on:-
  • Manufacturing trade
  • Commodity trade
  • Public sector economy

Petroleum and natural resources provides 40% of the Malaysian government’s revenues. This in turn supports the largest public sector economy in Asia with 27% of the GDP. Malaysian manufacturing exports are under structural pressures and are losing competitiveness. The real effective exchange rate (REER) appreciated 11% between 2005 and 2008. This has led to competitiveness erosion of the manufacturing sector. The natural resources sector provided the revenues to allow the Government to sustain economic growth through government spending. This has reduced the urgency to increase productivity and allowed marked inefficiencies to set in; the erosion of education standards, distortion and suppression of the labour market and sustaining unprofitable and ineffective affirmative action policy projects. The end result is the erosion of manufacturing exports and a fall in inward FDI that will undermine the economy.

Underperformance in Education Standards

The oil and gas revenue driven economic growth lulled UMNO and the Barisan Nasional Government to misconstrue the importance of maintaining excellence in our education system. This allowed misguided and mismanaged policies to turn our schools and universities into factories churning out unemployed and unemployable graduates. This has resulted in our nation suffering a severe underperformance of our education standards. Malaysia tertiary enrolment and completion ratio has lagged that of some of our Asian counterparts. At 28.6% and 15%, Malaysia’s gross tertiary enroll ratio and completion ratio are 7% and 6% lower than the average expected of economies with similar level of GDP per capital. This means Malaysia is having a tertiary skills shortage. This point to Malaysia lacking the necessary skills and knowledge human capital essential to move the Malaysian economy up the value added chain.

Skills Mismatch

With the labour force growing, unemployment rate has stayed range bound at around 3% and with the skills shortage, graduates surprisingly continues to make up an increasing proportion of the unemployed group from 15.2% in 2000 to 25.1% in 2007.  The Government in answer to a question I posed in Parliament gave the following breakdown of unemployed graduates:-
·      In 2004, there were 4,594 unemployed graduates of which 163 were Chinese, 207 were Indians and 4,060 were Malays;
·       In 2005, there were 2,413 unemployed graduates of which 31 were Chinese, 70 were Indians and 2,186 were Malays;
·      In 2006, there were 56,750 unemployed graduates of which 1,110 were Chinese, 1,346 were Indians and 50,594 were Malays.
·      In 2007, there were 56,322 unemployed graduates of which 1,348 were Chinese, 1,401 were Indians and 49,075 were Malays.
·      In 2008 (as of June) there were 47,910 unemployed graduates of which 1,403 Chinese, 1,569 Indians and 49,075 were Malays.

This suggests that we have a problem of graduate skills mismatch.

Singapore in comparison has its universities design their curriculum in collaboration with the industry players. The majority of the students are offered jobs before they graduate and 82% are employed within 3 months of their graduation.

Labour force a key business constrain

The education gaps have led to skills shortage and skills mismatch. 42% of Malaysian businesses rate the unavailability of a skilled labour force as the most severe business constraint compared to 37% in East Asia and 35% globally. The shortage of skilled labour is compounded by shortsighted and misconceived immigration policies. These policies instead of attracting the talented and the best and the brightest, discourages and prevents them from working in the country. The rejection of Vijay Singh’s citizenship application and the resulting loss to the nation of a world golf champion is one example. The thousands of tertiary graduate and professional foreign spouses of Malaysians being consigned by these immigration policies to become housewives is another. These same policies are the causes for the severe brain drain suffered by our nation. Due to the skills shortage, we will be unable to move the economy up the value added chain.    

Falling FDI

The net inward FDI in Malaysia has been in decline. As net FDI in the region (China, India, Singapore and Thailand) continues to climb, Malaysia has experienced a downward trend from the peak in the early 1990s and is now in negative territory. The net FDI stood at -3.8% of GDP in June 2009 from +2.4% of GDP in June 2004. Malaysia has fallen from 67th in the Inward FDI Index in 2006 to 71st in 2008. The outward FDI has exceeded the inward FDI for the past 3 years and this trend is expected to continue and increase in the future.

Loss of Manufacturing Trade Surplus  

Malaysia manufacturing trade surplus of machinery and transport equipment fell from USD 10.5 Billion in 2000 (11.2% of GDP) to USD 9 Billion in 2008 (4.1% of GDP). In comparison China had a trade surplus for the same period from USD 9.3 Billion to USD 231.3 Billion, Korea USD41.2 Billion to USD 119.1 Billion, Taiwan USD 19 Billion to USD 45.1 Billion and Singapore from US 11.2 Billion to US 22.9 Billion.

 Suffering in Silence

We are in the throes of the Malaysian Resource Curse. The rent seekers have privatized and created monopolies of every conceivable resource and amenity in the country from roads, to bridges, water, electricity, disposal of rubbish and sewerage. Petronas revenues have been used to pay for mega personal enhancing projects such as the Petronas Twin Towers where US 1.6 Billion (RM5.6 Billion) was spent to enjoy the brief moment of fame in owning the tallest building in the world. Petronas money was again used through 40% equity in Putrajaya Holdings to pay the total costs of building the new Federal administrative capital of Putrajaya amounting to RM11.831 Billion. There many more of such project in the past decade. The public have been suffering in silence as the Malaysian Resource Curse takes its toll. 


Malaysia no doubt is affected by the global financial crisis but its problems have a deeper underlying cause. It is this underlying cause that has to be addressed. The Malaysia Resource Curse must be exorcised. There are many resource rich countries that have escaped and avoided the disease.

The key is governance. Well governed countries find ways to insulate their economies from the down side of commodities and natural resources trade. Resource rich countries such as Norway has shown that this can be done by adopting straight forward economic fundamentals, sound monetary policies, and having open trading and investment regimes.  The enforcement of laws against corruption is a basic requirement. The strengthening of political and economic institutions by giving effect to the democratic institutions and constitutional guaranteed fundamental liberties is another. Investing in education and infrastructure will increase competitiveness of the manufacturing sector. Sadly these have been ignored by the Prime Minister in his push for pump priming.

A global investor said that if Najib and Barisan Nasional do not recognize the Malaysian Resource Curse and do not have the political will to address it, neither he nor any other investor is going to put money into Malaysia. Without the structural reforms, pouring RM 1 billion a month into the rent seeking economy is just pouring good money down the drain. How long can the Malaysian public continue to suffer in silence?

William Leong Jee Keen
Member of Parliament Selayang
7th October 2009       


  1. Salam HH,

    What YB William Leong wrote are very relevant, but writting alone will not get the desired results when the parties concerned are only interested in self enriching to the max, giving away what have you to fathers, mothers, brothers, sisters and cronies and what not. Not forgetting the real SOBs are the so called 'Pegawai Khas'these are the people that need to be crucified when the time comes.
    Having said that, it would be best if the same be implemented by the Selangor State Govt and show what economy for the people and the country is all about, otherwise it's all the same, NATO!

  2. A good and comprehensive article, outlining the weaknesses and complacency of our arrogant govt in facing the imminent economy danger that's soon to befall the nation. The UMNO stooges are still in a comfy dreamland presuming that the nation is safe in their control, everything they do are perfectly right, all things are in good shape and on the right track to economy bloom. We can't blame these political skunks for they possess the screwed-up mentality either by genealogical inheritance or by infection through the dictatorial bigtime father of corruption. Therefore, all that we often hear from these UMNO bigots are - Saya pantang dicabar, Jangan main api, Jangan uji kesabaran kami, Kami mempertahankan ketuanan bumi, Perjuangan untuk bangsa,negara dan agama, Jangan mempertikaikan polisi kerajaan, Rakyat harus menghargai bantuan kerajaan etc.
    Do they know who their real enemies are? Do they realise that the actual enemies are among and within themselves? For all we know, these UMNO goons worry not for the nation, care not for the rakyat but only themselves. Whatever happens to the country is not important as long as it does not affect them, obstructing them any way in plundering the wealth of the nation. The natural resources the country possesses are the fortunate strength that keeps it afloat. It is quite obvious to us that 'ignorance' is very much alive in the govt. As the author says, if the govt do not recognize the Malaysian Resource Curse and do not have the political will to address it, the country will be heading for economic and political disaster.

  3. When you use the phrase "labor shortage" or "skills shortage" you're speaking in a sentence fragment. What you actually mean to say is: "There is a labor shortage at the salary level I'm willing to pay." That statement is the correct phrase; the complete sentence and the intellectually honest statement.

    Some people speak about shortages as though they represent some absolute, readily identifiable lack of desirable services. Price is rarely accorded its proper importance in their discussion.

    If you start raising wages and improving working conditions, and continue doing so, you'll solve your shortage and will have people lining up around the block to work for you even if you need to have huge piles of steaming manure hand-scooped on a blazing summer afternoon.

    Re: Shortage caused by employees retiring out of the workforce: With the majority of retirement accounts down about 50% or more, most people entering retirement age are working well into their sunset years. So, you won’t be getting a worker shortage anytime soon due to retirees exiting the workforce.

    Okay, fine. Some specialized jobs require training and/or certification, again, the solution is higher wages and improved benefits. People will self-fund their re-education so that they can enter the industry in a work-ready state. The attractive wages, working conditions and career prospects of technology during the 1980’s and 1990’s was a prime example of people’s willingness to self-fund their own career re-education.

    There is never enough of any good or service to satisfy all wants or desires. A buyer, or employer, must give up something to get something. They must pay the market price and forego whatever else he could have for the same price. The forces of supply and demand determine these prices -- and the price of a skilled workman is no exception. The buyer can take it or leave it. However, those who choose to leave it (because of lack of funds or personal preference) must not cry shortage. The good is available at the market price. All goods and services are scarce, but scarcity and shortages are by no means synonymous. Scarcity is a regrettable and unavoidable fact.

    Shortages are purely a function of price. The only way in which a shortage has existed, or ever will exist, is in cases where the "going price" has been held below the market-clearing price.