Welcoming speech by Penang Chief Minister Lim Guan Eng at the 4th Penang in Asia Lecture by Professor Jeffrey Sachs
First of all, I would like to congratulate the Penang Institute for putting together yet another successful Penang in Asia lecture. Today, we are indeed most honoured to host a respected humanitarian and world-renowned economist, UN Special Advisor on the Millennium Development Goals Professor Jeffrey Sachs.
Professor Sachs’s brief sojourn here in Penang is timely. This is because Penang, and indeed Malaysia, is now at a crossroads, with the looming backdrop of the current global financial crisis casting a grim shadow.
It began in 2008 with the meltdown of the US housing and banking sectors, followed by some of the greatest financial bailouts seen in history. Today, the crisis has since enveloped the world as nation after nation becomes afflicted by economic and financial turmoil. Europe faces a sovereign-debt crisis while export-dependent Asia is beset by sustained economic contraction.
And due to our significant dependency on exports and hence our exposure to international shifts especially in the electrical and electronics sector, Penang was initially hard-hit. In 2009, we were reeling from a huge drop in GDP growth as demand decelerated in our traditional Western export markets. However, thanks to sheer effort and a never-say-die attitude, we managed to not only recover but bounce back in style in 2010. Not only did we achieve a 10 per cent growth rate, we also recorded the largest total investments ever achieved in a single year, worth RM12.2 billion. We then followed this up with a RM9.1 billion performance in 2011. In the last two years, we have blazed a trail as the country’s number one investment destination.
However, we cannot afford to rest on our laurels. In this new globalised century where borders are seamless and communications virtually instantaneous, there is not a second to lose especially for an ambitious city-state such as ours.
It is generally agreed that smart and innovative cities will provide the catalytic factors for economic growth. After all, productivity thrives in an urban setting which facilitates the flow of goods, people and knowledge. Hence, Penang’s quest towards becoming an international and intelligent city hinges on our ability to transform into a connected agglomeration of various centres of excellence in our core competencies, a comfortable and liveable environment which attracts talent, and a sustainable city with an inclusive economy.
I would like to take this opportunity to expound on the last point.
Inclusivity and the Millennium Development Goals
Malaysia is seeking to become a high-income economy by the year 2020. The stated target for achieving this status is a GNI per capita of USD 15,000. However, in our zeal to attain this magic figure, we must not lose sight of the greater picture.
There is no point in attaining high-income status when there are people among us who are still living in poverty and squalor. It is a moral issue that forms the basis of the United Nations Millennium Declaration in 2000, and consequently the eight Millennium Development Goals (MDGs) which commit all UN member-states to:
Eradicating extreme poverty and hunger,
Achieving universal primary education,
Promoting gender equality and empowering women,
Reducing child mortality rates,
Improving maternal health,
Combating HIV/AIDS, malaria, and other diseases,
Ensuring environmental sustainability, and
Developing a global partnership for development.
These eight goals are a duty of every responsible government and is focused on equality – equality of access, equality of opportunity, equality of availability of resources, equality to affordable services and perhaps equality of being respected with human dignity. As a state government, our powers are limited and we are not able to facilitate the development of every area mentioned, but we certainly do what we can.
When we first formed government in 2008, one of our immediate goals was to address the issue of poverty. I am pleased to report that in our first year alone, we were able to eradicate hardcore poverty in Penang, by ensuring that every family in the state is able to get by with a minimum household income of RM500 a month. This figure has since been revised and as of last year, no family in Penang now goes by with less than RM600 a month. By 2015, we hope to accomplish our own mini Millennium Development Goal in wiping out poverty entirely by ensuring a minimum household income that is higher than our national poverty line indicator (PLI) of RM720 a month.
Besides our success in tackling hardcore poverty, we have also ensured the provision of economic facilities and social opportunities for the people. We have embarked on a string of people-centric social welfare programmes to ensure that the downtrodden are taken care of by giving financial aid to targeted groups such as senior citizens, single mothers, the disabled, schoolchildren and new-born babies. In addition, we have also provided free bus services and subsidised dialysis treatments in order to ease the burden of the urban poor.
In promoting gender equality and empowering women, Penang has also taken the lead by introducing Gender Responsive Budgeting in both our local councils. We have also appointed women to key positions in the government, including the first lady mayor in Peninsular Malaysia – and now both mayors of Penang Island and Seberang Perai are ladies, besides helping to foster a female labour force participation rate that is far higher than our country’s average.
In the last few years, we have made gender mainstreaming an important agenda, allocating resources for the establishment of two state-sponsored quality child care centres, a Women’s Service Centre to provide counselling, legal advice and aid for women in crisis, as well as the formation of the Penang Women’s Development Corporation (PWDC).
With our limited powers and resources, we have managed to achieve all this because we believe that a government’s role is to empower its citizens.
Widening inequality
However, true empowerment of the people cannot occur without a situation of economic solidarity. As it is, income inequality is worsening in Malaysia. According to a 2010 World Bank report, the bottom 40 per cent of our workforce earns only 14.3 per cent of total income while the top fifth reaps nearly half of the pie. Our rich-poor gap has in fact risen to be the highest in Asia after Papua New Guinea.
While the rich in our country continue to expand their wealth, we have an appalling situation in which one third of Malaysian workers currently earn less than RM700 a month. To make matters worse, we are currently experiencing a situation of negative income growth, where in the last decade the growth rate of wages has actually been lower than the rate of inflation.
The problem lies in the fact that the bulk of our national income goes to corporate profits. Employee wages only make up 28 per cent of national income, whereas the figure is 40 per cent in Singapore and 51 per cent in Canada. This is due in part to policies that encourage low-skills foreign labour that suppress the wage market and a lack of attenton to upskilling and enhancing domestic workers.
As a result, a disproportionately high amount of our country’s wealth is concentrated in the hands of the corporate elite, with very little distribution to the people who actually move the economy – the average worker.
This is a challenge that our country must face carefully. It is increasingly believed that inequality is an impediment to economic growth. Recent empirical reports for example have pointed out that widening income disparity directly correlates to slower job creation and shortened spells of economic expansion, thus affecting growth over time.
In fact, some have even suggested that inequality may have a stronger effect on growth compared to other factors such as foreign investment, market accessibility, and the strength of political institutions. This is because inequality is a fundamental fracture in a society. When the gap is wide enough, it will lead to reduced educational and economic opportunities for a large segment of the population. When social mobility is inhibited, it will be virtually impossible for a country to achieve sustained momentum, and in our case, to leapfrog out of the “middle-income trap” that we are stuck in.
In addition, growing inequality may even result in political instability, as we have seen in the Middle East. In the cases of Tunisia, Egypt, Libya and Syria, the uncontainable levels of income inequality have resulted in a tipping point which sparked the revolutionary Arab Spring.
While inequality is seen to be an obstacle to sustained economic growth, studies have shown that the presence of equality can actually produce more efficient outcomes. For example, equality of opportunity in health and education will directly protect and enhance the pool of available human capital, strengthening its operational capacity and thus enabling value-added economic growth.
Meanwhile, gender equality opens up a demographic dividend by providing female workers to make up for the shortfall caused by an aging population. Penang is adopting initiatives towards gender equality by providing equal opportunity to women especially appointment to top positions. Penang is also providing child care centres to enable young or middle-aged working mothers a career.
Hence, the objective is clear – inequality is an evil that must be mitigated, lest we fall into the vicious cycle described by Joseph Stiglitz, who said that “increasing inequality means a weaker economy, which means increasing inequality, which means a weaker economy.”
Monopolies increase inefficiency
Another problem with widening levels of inequality is the fact that it is often a symptom of a larger systemic problem called state monopoly capitalism. Professor Sachs terms it “corporatocracy”.
Whatever you call it, it refers to the control of economic and political systems by big businesses or corporate interests, in most cases in collusion with the state. Such a scenario is a breeding ground for inequality. This can be seen in Wall Street where affluent bankers who failed get bailed out with taxpayer money because they are “too big to fail” whilst ordinary folks lose their house and jobs.
In Malaysia huge billion ringgit loans to cronies get written off such as Perwaja Terengganu Sdn Bhd’s RM1,626 million from the Federal government whilst the ordinary people have to pay to the last cent or go bankrupt. The prevailing rent-seeking structure has produced a monopolistic system that benefits a select group of cronies benefiting from directly negotiated contracts and sweetheart deals.
Take the independent power producers (IPPs). In the 1990s, five companies with no experience in the power sector were given contracts to sell power to the government. The arrangement was simple: the projects would be fuelled by gas subsidised by Petronas, financed by bonds acquired by the EPF and guaranteed profits through a long-term compulsory power purchase agreement with electricity provider TNB. In the end, we ended up with a power surplus because TNB is forced to purchase expensive electricity that it didn’t need from the IPPs, whose profits are financed by gas subsidies amounting to tens of billions of ringgit.
It is the same story with the highway toll concessionaires who are given contracts through direct negotiations and not through open competitive tenders – in effect a sweetheart deal. Just imagine that PLUS, the operator of the North-South Expressway, which cost RM6 billion to build in the 1980s, has as of December 2010 already recouped RM24 billion in toll collections and government compensation. Yet they were recently granted a concession extension until 2038!
And then we have the latest Automated Enforcement System (AES) 1Malaysia cameras, a lucrative contract which effectively commercialises traffic summons and enriches the concession holders by paying them on a commission basis based on the number of traffic summons issued. In other words, the more summons issued the more profits earned, turning traffic summons into an insidious cash cow instead of a deterrent for traffic offences.
In all the above examples, it is clear who benefits and who loses out. The system is structured to favour a select group of crony capitalists, while the people at large have to bear the burden of inefficiency. Hence, this contributes to a further widening income gap in Malaysia.
The five elements of a successful economy
Whether it is in Malaysia, the Middle East, United States or Europe, the fundamentals of a successful economy are the same. I would like to posit that there are five fundamental characteristics of an economy that works:
First, it must be socially inclusive. As Gandhi once said, a nation’s greatness is measured by how it treats its poor, imprisoned and weak. Hence, it is incumbent upon any government to ensure the wellbeing of the urban poor and other socially-marginalised groups. In this, the Millennium Development Goals provide a good guide.
Second, it must be sustainable. Natural resources are finite and increasingly costlier. With half the world’s population now living in urban centres and developmental needs ever-increasing, it is crucial to ensure that all future development is sustainable. This will require the active engagement and commitment of all stakeholders, from the public sector to the private individual.
Third, there must be economic solidarity. Inequality of opportunity must be addressed, not only for moral reasons but also because greater equality will result in better economic outcomes. If we are able to address issues such as the cost of education, healthcare and access to infrastructure, we will be able to raise disposable income and lower the opportunity bar, which will then empower the people and produce a better, smarter and more entrepreneurial workforce.
Fourth, monopolies must be broken. A major distortion on the economy is the scourge of rent-seeking crony capitalists that result in gross inefficiencies that are eventually transferred onto the ordinary person. Markets must be allowed to operate efficiently.
Lastly, there must be clean governance. We must be free from the biggest bane of all – corruption. What is required is institutional stability, administrative integrity and a competitive environment based on the rule of law.
When I first became Chief Minister, my first line of action was to introduce a new guiding principle – Competency, Accountability and Transparency. Based on these core principles, we became the first state in Malaysia to introduce open competitive tenders for all public procurements and supplies. By implementing open competitive tenders, we effectively eliminated the opportunity for corruption. We have also taken an unprecedented step in disclosing government contracts with the private sector.
In addition, we have passed the Freedom of Information Enactment which allows disclosure of government contracts for public scrutiny. And to top it off, we have also become the first state in Malaysia to have the entire state executive council (EXCO) including the Chief Minister make a full public declaration of assets.
These are some of the measures that we have implemented in order to introduce a new culture of clean, transparent and accountable governance.
And we have seen the results. In the last few years, not only has Penang topped the investment charts in the last two years with 28 per cent of total national foreign direct investment (FDI), we face a worker shortage instead of unemployment, has a vibrant manufacturing hub and an exciting tourist destination, a UNESCO World Heritage City due to our multi-cultural harmony and is now the most livable city in Malaysia.
Our anti-corruption efforts have not only garnered accolades from the Auditor-General’s annual reports for our record budget surpluses annually and successful debt reduction by 95%, Penang is also the only state government in Malaysia to be praised by global anti-corruption watchdog Transparency International.
However the most important policy tool is getting our education right. Despite education being a Federal matter, the state government has adopted a 3-prong approach by giving money to schools from kindergarten level, attracted a top foreign university with curriculum run by the No.1 women college in USA Smith College and setting up a Learning Centre to provide remedial tuition for weak or poor students.
There is huge potential for the rest of the country if we get our policies right. We must be policy-based not a police-state. What is required is a vigilant government that is committed towards ensuring the five elements of social inclusivity, sustainability, economic solidarity, anti-monopoly and clean governance. And most important there must be freedom from fear to set free the forces of creativity and innovation. Thank you.
