Malaysia Reaching Wawasan 2020

Wawasan 2020 or Vision 2020 was first set out by the long running Malaysian Prime Minister Mahathir bin Mohamad in 1991. The vision was for Malaysia to achieve high income country status by the year 2020 and become one of the few countries to ever make the transition from the developing to the developed world. In Mahathir’s estimation, Malaysia would have to grow by some 7% per annum over 30 years to achieve this lofty goal.

Last month, the Malaysian government unveiled its budget which allocated significant amounts of investment into a number of high impact projects designed to help the country reach this 2020 target. However, 20 years since the goal was first laid down, questions remain about whether Malaysia can reach this target or whether it should even try.

In 2010, the World Bank defined the high income threshold for a country as a GNI per capita of $12,276. The World Bank estimated Malaysia’s per capita GNI at some $7,900 in the same year. However, this high income threshold is a moving target. If we assume trend growth of 2.5%p.a. in developed nations across the next decade, then Malaysia will have to reach a GNI of some $15,714 - roughly double its level today. To achieve this, Malaysia will require growth of some 7% per annum.

This ambitious target is certainly theoretically achievable. Singapore, one of the few countries to ever make the leap from third to first world, grew its GNI by some 18% per annum between 1987 and 1990 achieving the GNI growth levels that Malaysia requires to become a high income nation in less than 4 years. However, the world in the late 1980s was a much different world than the one we live in today. World economic growth was far higher and there was much less competition from other developing markets, allowing wages to increase without fear of losing jobs to the likes of China or Vietnam.

Indeed, Malaysia’s growth rate has slowed down to 5.6% per annum since the year 2000. As Malaysia makes the transition from low-tech manufacturing and a purely export orientated model to one based on advanced technology and services, its growth rate will inevitably reduce.

The Malaysian government has recognised this slowdown in growth and Prime Minister Najib Tun Razak has outlined a number of high impact projects - from a high speed rail link to Singapore to a MYR 53 billion ($16.9 billion) MRT system for Kuala Lumpur. However, many of these projects will not be in place until the later part of the decade and are unlikely to boost Malaysia’s competitiveness in the near term.

There are a number of other factors that may also hamper the government in its efforts to transform the economy to reach developed nation status in 10 years. Firstly, the Malaysian government has a significant debt loading. The cost of stimulating the economy during the recession has left the country with a fiscal deficit in 2010 of 5.6%. While the government is looking to reduce this significantly across 2011 and 2012, the country now has a debt loading of 52.40% of GDP. While many developed nations would envy these figures in the current crisis, we must remember that as a developing nation Malaysia pays a far higher interest rate to service its debt levels than many developed nations. Malaysian 3 year bonds yield some 3.1% compared to the UK at around 0.89% and the USA at just 0.49%.

While Malaysia’s fiscal position is stable at present, assuming the economy continues to grow, the government is unlikely to be able to afford the type of mega investment projects that have contributed to growth in the past.

The government also faces a significant challenge in the face of Malaysia’s declining oil production. Malaysia reached peak oil production in 2004. The country produced more than 800,000 barrels per calendar day. However, this level has dropped off significantly. In 2010, Malaysia produced just 500,000 bcd; for much of the year the country was a net importer. As Malaysia continues to grow, it will require more energy. To reach high income status in 2020, the country will have to consume around 900,000 bcd. Even the most optimistic forecasts will have Malaysia production at less than 300,000 bcd in 2020. This need to import so much energy is likely to place a significant drag on GDP growth. The government will also lose substantial revenues from the Malaysian national oil company, Petronas, which has historically been used to fund large scale infrastructure projects, further reducing the government’s ability to act.

No one doubts the economic success Malaysia has achieved since independence in 1957. The Wawasan 2020 goal outlined by Mahathir in 1991 was in part motivated by the hostile relationship he often shared with Singapore Prime Minister Lee Kuan Yew.

However, in recent years the relationship between these two countries has become markedly better. Simply aiming at an income level by a certain point in the future may not be the most sensible policy for Malaysia. High growth nations, such as Singapore in the past and China today, create their own problems. Income disparity as well as environmental degradation can place real hardships on the poorest of people and lead to political instability. Targeting a more sensible, sustainable growth strategy is likely to make more sense for a nation with such a broad spectrum of different cultural, religious and social groups.

In conclusion, Malaysia will reach the goal of becoming a high income nation. However, it is likely to happen after 2020. In the long term, it is probably better for the people of Malaysia to reach this goal with a slightly longer, more sustainable trajectory.