Khazanah Megatrends 2007

The Next 50 years: Staying Ahead

Opening Keynote Address

by

Tan Sri Nor Mohamed Yakcop
Minister of Finance II, Malaysia

1 November 2007

Sheraton Imperial Hotel,
Kuala Lumpur

Tan Sri Md Nor Yusof
Chairman of Khazanah Nasional Berhad Exco

Dato' Azman Mokhtar
Managing Director, Khazanah Nasional Berhad

Distinguished guests,

Ladies & Gentlemen.

Introduction

1. 50 years ago, as a newly independent nation, Malaysia was expected by many to fail. Other newly independent countries, such as Ghana, Nigeria, Sri Lanka and Myanmar were tipped to succeed, primarily given their wealth of resources and the level of education. 50 years ago, Malaysia was but a poor nation with more than 50% living in poverty and the economy was overly reliant on 2 commodities - tin and rubber. In addition, Malaysia's multi-ethnic society was also seen as a potential risk factor, an impediment to success. The odds were certainly stacked against us.

2. Today, 50 years later, the Malaysian economy has one of the best records anywhere in the world, by whatever measure - whether in terms of the eradication of poverty, provision of basic needs for the rakyat, development of infrastructure, and in terms of sustained economic growth. Over the last 50 years, the Malaysian economy has grown rapidly, achieving an average GDP growth rate of 6.3% per annum. This rapid economic growth has truly benefited all segments of the population. Poverty has been reduced to below 6%, As milestones of our progress, Malaysia's trade in terms of value reached RM 1 trillion in 2006 and the market capitalization of Bursa Malaysia exceeded RM 1 trillion this year and continues to rise to new record levels. Malaysia has undergone a transformation into a modern industrialized and diversified economy, using our own formula of blending a strong state role with market institutions.

Ladies and Gentlemen,

3. The question that we face today as we look forward to the next 50 years, is whether Malaysia has what it takes to continue on this path of success. To address this question, we need to first analyse the secrets of our past success - what enabled such a remarkable transformation during a short period of 50 years. Was it just an accident or good fortune? Do we continue to possess these qualities? Are these qualities still relevant in the new world of today? What additional qualities do we need?

Recipe for past success

4. As a start, 50 years ago, we had the benefit of inheriting institutions from the British, amongst others the system of Government, law, civil service and education. Whilst useful, this was by no means sufficient given the experience of other former British colonies over the past 50 years.

5. An abundance of natural resources has been suggested as key to our success. From rubber and tin to timber, palm oil and crude oil, indeed we are blessed nation. However, if we look around the world, a wealth of natural resources has actually proven a curse for many countries. In the extreme, it has been the cause of wars and instability in some countries. And in many other cases, the abundance of natural resources is not enjoyed widely and thus, such countries remain poor economically.

Ladies and Gentlemen,

6. My personal theory is that the key ingredient to our success has been the role of Government and the strength of leadership. We have had, since Independence, a pragmatic and disciplined Government. This has been combined with sincere and courageous leaders, who have always championed national interest. I would contend that it was through this approach taken by the Government and our leaders that Malaysia has been able to fully leverage on our endowments - both in terms of natural resources and human capital. It is by no accident that Malaysia today is a prosperous and peaceful nation.

7. Allow me to elaborate on this point. The Government has always been pragmatic in advancing the nation and has never been hostage to ideology. At the time of Independence in 1957, the post Merdeka Government chose to preserve the inherited capitalistic economic structure and adopted a pro-business policy stance. Whilst today, this would appear a natural choice, one must recall the situation then, when everyone was joining the bandwagon of socialism.

8. When property and commodity prices collapsed in 1986, we needed to boost Foreign Direct Investments (FDI). In spite of the dictates of the NEP, we showed pragmatism by relaxing various requirements on equity participation and foreign ownership.

9. The Government's pragmatism is also well exemplified by our exchange rate policy. When the US first moved away from the Bretton Woods system, Malaysia then was amongst the first countries to adopt a floating exchange rate. Not for ideology but it best served our interests as a trading nation. Then during the 1997 Asian Financial Crisis, Malaysia adopted a fixed exchange rate as a practical, if somewhat unorthodox solution to the crisis situation. We have since refloated the Ringgit, showing that we do not dwell on fighting yesterday's battles.

Ladies and Gentlemen,

10. From Tunku Abdul Rahman to Datuk Seri Abdullah Ahmad Badawi, we have been blessed with sincere leadership that was non-racial in approach and always saw the forest instead of the trees. And interestingly we have always had the right leader at the right time. They were optimal during the periods they were Prime Ministers.

11. Our leaders have also been courageous. This is well demonstrated in times of adversity, whether it was Tun Abdul Razak in responding to the 1969 racial riots or Tun Mahathir in leading the country through the Asian Financial Crisis. Courage goes beyond times of crisis. It allowed our leaders to advance national interests, sometimes making decisions against conventional wisdom. For instance, instead of sticking to comparative advantage, we proceeded to transform aggressively our economy from a commodity based economy into an industrial one, which enabled Malaysia to leapfrog to a higher trajectory of growth.

12. Discipline has been a cornerstone of our Government and we have consistently managed the economy prudently. We had never borrowed from the Central Bank, even in times of crisis. Whilst we may incur budgetary deficits, we have never borrowed for operating expenditure, such as salaries and rent. We have only borrowed for developmental expenditure, which is self financing in terms of building infrastructure and capacity for future economic growth.

New Challenges
Ladies and Gentlemen,

13. The happy combination of natural and economic factors, sincere and brave leadership, together with a pragmatic attitude towards development, an ability to admit mistakes and switch gear, has enabled Malaysia to be transformed from a typical poor third world country 50 years ago to what it is today. However, we cannot afford to be complacent. We face new challenges in today’s globalised world, in which the competitive landscape has changed combined with unrivalled mobility of both financial and human capital.  

14. First, the global competitive landscape has indeed changed with the emergence of China and India, as the new juggernauts of the 21st century. Then there are countries such as Vietnam, which have begun to emerge strongly, and are now attracting FDI in large amounts, providing competition to Malaysia for lower value added products given its lower cost base. Then at the higher end of the value chain, there are countries, such as Singapore and Dubai that have decided to be very open economies, focusing on speed of delivery. There is no stopping these countries and Malaysia has to figure out how to position itself in this new and changing economic landscape.

15. Second, there is significantly greater mobility of financial capital. There is a tremendous scale to global liquidity today. Capital no longer emanates solely from developed nations. The success of China and the wealth of oil in the Middle East, has added to the pool of capital looking for investments. While this obviously presents an opportunity, the owners of capital are however, spoilt for choice. We are but one of many open economies today competing for investments. Today, capital is much more fickle and foot loose than it was fifty years ago. Not only in portfolio investment, but also in FDI, - they do not form permanent relationships, although one should not describe these investments as one night stands!

16. Third, there is greater mobility of human capital. The best talents in the world, no matter where they are based, are being attracted by offers that are difficult to turn down. The challenge facing countries like Malaysia is not only in attracting knowledge workers from abroad, but also in retaining our people from seeking greener pastures elsewhere.

Going Forward
Ladies and Gentlemen,

17. Given these and many other challenges staring down on Malaysia as we take the tentative steps into the 21st century, do we, as a nation, have what it takes to harness the forces of globalisation to achieve our Vision 2020? The answer, to me, is clearly yes. However, it requires the collective efforts of the country on key priorities, in order to make the most of our endowments. To ensure continued success as a nation, it is my view that Malaysia's strategy moving forward, from an economic dimension requires a focus on the following:

1. "Staying the course" - maintaining the momentum of transformation;
2. Building institutional excellence;
3. Responding to globalisation by developing competitive niches, which are integrated into the global value chain;
4. Leveraging on diversity;
5. Nurturing and retaining the best and brightest; and
6. Redefining the role of Government - particularly, in the context of facilitating the private sector to be the engine of growth

18. Allow me now to explain each in turn. First, in terms of staying the course, we need to maintain the key ingredients of our past success. The qualities of a sincere and brave leadership, together with a pragmatic and disciplined approach are still needed, even more so in this fast changing world. The rapid economic growth of the past was primarily achieved through structural transformation of the economy. The challenge is to sustain the momentum of transformation. In today"s rapidly changing and dynamic world, mere incremental change will result in Malaysia being overtaken. 50 years ago, we were a new nation and very much "underdogs" compared to other newly independent countries, which had better resources However, then our spirits were burning and we were driven towards nation building.

19. An analogy would be a new football team starting out at Division 3 (as in Third World country), which through fighting spirit, talent and hard work, had climbed the ranks and reached the Premiership. So now what? The challenge is different: the team would need to sustain being in the Premiership and aspire at least to rise to mid table, knowing that the football clubs above will do their best to stay there and those below are particularly hungry to be promoted to the Premiership.

20. Valuable lessons can be gained from Manchester United, which in it"s hey days of the 90s was winning every possible trophy. Sir Alex Ferguson was able to however continue motivating his millionaire football stars to keep fighting. There was no place for complacency nor for inflated egos within a team. The team was convinced and united into a paranoia that the world was against them. Perhaps staying the course requires a rallying cry, a common "enemy" to battle or a "burning platform" to unite and focus the country's efforts. Malaysia is no longer an underdog, we have achieved significant development milestones and thus, need to consolidate our gains and continue transforming to stay ahead. Particularly, in the context of globalisation, we need to be focused on the external challenges and less preoccupied with domestic issues. We need the hunger and united drive over the long run to embark upon the path of transformation towards becoming a developed nation.

Ladies and Gentlemen,

21. The second area of focus, is institution-building. To stay the course over the long run, we need enduring institutions of excellence. Indeed, the defining feature, which separates developed countries from developing countries, is the role of institutions. Many developing countries have individuals with calibre, but without institutional support, the nation will not be able to optimize on their strength.

22. On the topic of institutional excellence, allow me to give you the example of a termite mound. For full details on this, you will need to watch Sir David Attenborough's documentary on it but suffice to say, termite mounds are one of the many wonders of the natural world. A colony of termites, numbering in its millions, is capable of building a termite hill up to 6 metres tall, which in terms of the scale of termites is far more impressive than us building the Petronas Twin Towers. Whilst it may appear a random pile of mud, it is in fact a complex structure complete with atmospheric control, food storage, housing and even areas for agriculture (as termites cultivate fungi). To survive, termites need to maintain a constant temperature inside despite fluctuating temperatures outside from day to night. This is achieved through special design features of the termite hill in addition to actions taken by the termites on an ongoing basis, such as opening new vents, to maintain the temperature. The amazing thing however is that no individual termite would have any idea of the overall design of the termite hill, nor of how its individual actions fits in with the overall temperature control function. Nevertheless, each termite effectively lives by a "code" which results in being able to work together with millions of other termites over multiple generations of termites to achieve success in building and maintaining the termite hill. The ambition of building an institution is not unlike a termite hill colony, whereby one aspires to equip individuals through common values to contribute over the long run towards building a larger and greater good for the benefit of the community.

23. We have good examples of institutional excellence at Bank Negara Malaysia, the Securities Commission and Petronas. We must ensure that we continue to build a greater number of strong institutions to enable the continuation of our values that have benefited us during the last fifty years, to ensure sustained development by facilitating long term planning and reform and to ensure that national interests are not hijacked by individual interests. The objective of creating institutions of excellence is, inter alia, to institutionalize professionalism, hard work, integrity and a sense of responsibility. If the institutionalization of such values can be achieved at all levels, there is no limit to what we can achieve moving forward.

24. It is with this philosophy in mind that YAB Prime Minister initiated the GLC Transformation Programme. The success thus far achieved goes beyond shareholder gains. Given the pervasive presence of GLCs across business critical industries such as power, telecommunications, transportation and financial services, the improvements in GLC service performance translates to Malaysia becoming a more competitive place to do business. By institutionalizing a culture of excellence and high performance into GLCs, a momentum of transformation has been initiated and there is no turning back.

Ladies and Gentlemen,

25. The third key strategy requires Malaysia to develop competitive niches integrated into the global value chain. But what exactly does this strategy involve?

- First, it means being really good at what we choose to do; with a flat world, failing to be globally competitive will render us irrelevant;

- Second, as a small nation, we cannot expect to compete head on against the scale and might of regional giants such as India and China. Thus, we need to focus on specific niches; and

- Third, a niche in itself would not be complete in itself and thus, needs to be part of a bigger value chain.

26. In terms of a real world example, having a competitive niche is not unlike assembling a certain part of a computer such as hard drives, for which Malaysia has leading global manufacturing operations. Currently, the components within a computer are akin to the United Nations membership, whereby many parts are being produced in many different countries, each specializing in its own areas. This is the flat world that Thomas Friedman refers to. All the countries involved in the production chain are interdependent on each other for continued success. Thus, the need to build bridges and effective partnerships.

27. In embracing globalisation, we need to be pragmatic and focused on furthering the national interest. To move forward, it may be necessary for our companies to forge partnerships with global companies - clearly, this needs to be with the right partner, at the right time and with the right terms. We must be open to forging win-win partnerships, which may necessarily involve give and take, towards focusing on certain niche areas.

28. As a country, Malaysia clearly has a number of potential niche areas, which leverage on Malaysia's endowments and capabilities such as Islamic Finance, Business Process Outsourcing and Palm Oil. Each of these areas requires building strong partnerships with the rest of the world.

29. Which brings us to our fourth key strategy, leveraging on diversity. This strategy is key in terms of integrating to the global economy and building bridges and effective partnerships.

30. One of the ingredients of Malaysia's success has been our ability to make full use of our human capital. Whilst some other countries, underutilize the better half of their population, women in Malaysia face no glass ceiling. In the Government, we have women as ministers, members of parliament and senior civil servants.

31. Our multi-ethnicity once thought to be a risk factor to stability is in fact a tremendous asset -  the potential of which has not yet been fully exploited. Particularly in the context of being networked and integrated into the global economy, we couldn't be better endowed. Our major races naturally offer the opportunity to build bridges with China, India and Indonesia, which are the largest and fastest growing nations in the region. We share a brotherhood of religion with the Middle East, which is now booming with oil revenues. Last but not least, we have the advantage of the English language and the network to Commonwealth countries. Leveraging on our diversity is key to building partnerships in this globalised world.

32. In the globalised world of today and tomorrow, with the rise of China and India, Malaysia is uniquely positioned to be able to network effectively and be integrated into the global economy given the various Malaysian industries will continue to benefit from the rise of China and India, particularly our oil and gas industry, palm oil and tourism. Malaysia is well positioned in terms of proximity to the major markets of China and India and will benefit from the "China plus one" and "India plus one" strategies adopted by many MNCs seeking to back up locations for their operations.

33. Whilst Malaysia itself is a relatively small country, ASEAN as a region is a formidable market with a young population in excess of 550 million. Through greater integration, the ASEAN countries are moving towards leveraging on ASEAN as a single regional market. We need to create from among our corporate champions, ASEAN wide companies to fully embody the potential of a large single market.

Ladies and Gentlemen,

34. The fifth key strategy, of nurturing, attracting and retaining the best and brightest is critical in the context of increasingly mobile human capital. In today's flat world, physical factors of production are less of a factor for competitiveness. It is human capital that is the key competitive advantage. It is by having the best that we can become competitive. Further, it is the best means to respond to changing global economic opportunities on the upside and at the same time, to respond to any crisis.

35. Malaysia's best and brightest can rival the best in the world. We continue to see our Malaysian thrive in the top universities in the world and succeed in international careers with MNCs and in the financial centres of the world. We also have entrepreneurial talent - for example, the late Tan Sri Lim Goh Tong built a global company within the span of a lifetime. 

36. Our challenge is to attract, nurture and retain the very best to contribute and work here in Malaysia. This of course will be a work in progress because the attractions for first class knowledge workers out there are overwhelming. To start, we must be willing to pay what it takes but that alone is not sufficient. Khazanah Nasional in my opinion has implemented the right template in its human resource management. Khazanah leverages on diversity by ensuring a representative diversity of new employees. However, once employed, promotions are based purely on performance. This is important because we will not be able to attract and retain the best if we impose any glass ceilings.

37. A key part of the GLC Transformation success story has been about empowerment. Notwithstanding some appointments made to senior management, the improvements in GLC performance have been largely achieved with the same pool of employees. With the right culture, motivation and empowerment, we have been able to get the best out of our people. Similarly, when recruiting people to join the revolution, the key question asked is not about pay or contract terms but on seeking assurances that there will be empowerment to implement change.

38. Key in strengthening our attractiveness to attract and retain talent is to provide viable income, in addition to providing empowerment and prospects based purely on merit.

Ladies and Gentlemen,

39. The final strategy relates to redefining the role of Government. One important aspect of this change is the recognition of the role of the private sector as the engine of growth. Datuk Seri Abdullah Ahmad Badawi has repeated this phrase many times, but the significance of this phrase, in the context of policy change, has not been fully grasped.

40. During the first 50 years of nationhood, the Government needed to play a stronger planning role and have a pervasive presence in the economy - not only as regulator but also as developer, investor and active participant. The Government needed to drive the economic transformation, invest in infrastructure and operate utilities to support the transformation, in addition to leading certain economic sectors. At the same time, the Government's pro-business stance facilitated the development of a vibrant private sector.

41. The private sector has matured and demonstrated its efficiency, especially in identifying and capitalising on economic opportunities. Particularly in a rapidly changing environment of globalization, a dynamic and responsive private sector driving the economy is pivotal to ensure Malaysia's continued competitiveness. Going forward, the Government's role will evolve - towards increasingly being focused as regulator and to facilitate business enterprise. The Government will continue to facilitate an environment of market-based incentives to reward those who invest and are competitive. This is important to avoid the risk of misallocation of resources to industries.

42. With the boundaries drawn between the public and private sector, increasingly the direction of the economy will be driven by the private sector. The policy of the Government in enabling the private sector to be the engine of growth reflects the Government's confidence in the efficiency and dynamism of the private sector.

43. Towards a more private sector driven economy, the Government has focused on engaging the private sector on multiple levels:

- First, Private sector investment is continuously pursued through reduction in corporate tax (from 28% in 2005 to 25% in 2009) and the removal of real property gains tax.

- Second, New growth industries have been identified, (such as Islamic Finance and Biotechnology) and new growth regions such as Southern Johor, are being promoted through comprehensive fiscal packages in addition to supporting infrastructure.

- Third, the delivery system is being enhanced through consultative processes, such as PEMUDAH and the cost of doing business is being reduced through simplifying regulation.

- Fourth, public private partnerships are being established through private sector participation in the process of certification of building completion. Similar to good parenting, this is achieved through mutual trust and accountability. In addition, the Prime Minister has championed PFI projects.

44. The evolution of the roles of the Government and the private sector is obviously still work in progress, in terms of ensuring competitive forces work well and lead to an optimal allocation of resources. But the direction is absolutely clear. The private sector will be the engine of growth, with the Government there to support by facilitating a conducive environment for business.

Conclusion

45.  In conclusion, I have set out the key strategies towards achieving greater success in moving forward in today's globalised world. It requires a strategy that first, builds on the success of the previous 50 years. But with the challenges of globalisation today, it requires a renewed focus on building excellent institutions and establishing competitive niches integrated into the global economy. To do this, we need to leverage on our human capital  - take advantage of our diversity and have the best and brightest work in Malaysia. We have already taken many steps in this direction, including a change in the role of Government, towards fully harnessing the private sector as the engine of growth. Globalisation requires a globalised outlook and strategy - I am confident we have the capacity and passion to continue transforming to stay ahead.

Thank you.

( Tan Sri Nor Mohamed Yakcop )
1 November 2007
Kuala Lumpur