The Twelfth Biennial Economic Convention of the Malaysian Economic Association, Kuala Lumpur, 8 September 1993
I thank Persatuan Ekonomi Malaysia, especially Tan Sri Dr. Lin See Yan, for inviting me to address this conference. It is the good fortune of our country that there has always been a fruitful and creative interaction between policy makers and the professional economists. Over the years both parties have benefited from these interactions. The views and even criticism from the economists help us sharpen our focus on critical issues; while the implementation of our specific policies helped the economists to test their hypothesis and amend them whenever falsified by the results. On a more practical level, the submissions of the economists, during the annual pre-budget dialog whether they are on macroeconomic management or on specific fiscal or monetary measures, have always been helpful.
The frequent interactions between our policy maker on one hand and the experts and various interest groups on the other hand, has made the process formulating policies truly participatory. Our strong sense of realism has enable us to adjust our policies in response to changing scenarios, or even instituting pro-active measures in anticipation of new trends in the international scene. In fact the greatest challenge to policy makers are to take pro-active measures, those that are some times apparently in contradiction with the conventional wisdom.
The Look East Policy is one of the many policies received with skepticism and even cynicism in its early days. It is one of our earliest policy aiming at diversification of our markets and reducing our dependence on traditional trading partners in the West. Today our economy is achieved a respectable degree of resilience, sustaining high growth, at time when some of our major partners are experiencing the longest recession since the Second World War. The volume of our trade with East Asia has increased substantially in the last few years and will continue to increase as regional integration accelerated. This is further added by credible perfomance in non-traditional markets.
Apart from exploring into new areas, major thrust of our policy is to enhance our economic fundamentals. While the economy has improve in all most all front, the difficulties in our services sector persist. Thus we are indeed pleased that the MEA had chosen a most appropriate and topical theme, "The Malaysian Services Sector," for this biennial convention.
Over the last three decades, the Malaysian services has been left to develop "automatically." As we grow and diversify, from being an exporter of primary commodities to a manufacturer of industrial goods, the services sector was allowed to develop more or less in relation to the magnitude and direction of the growth in other lead sectors of the economy, namely manufacturing and agriculture. By now, it is obvious that this strategy cannot continue. Our desire for higher growth and the consequent need to embark on a high technology oriented phase of industrialization requires greater efforts to develop an efficient and comprehensive domestic services sector. A developed status by year 2020 necessitates a higher share of services in total production. In 1992, the services sector in the Malaysian economy accounted for only 44 per cent of the GDP. The ratios are much higher for advanced countries and for services-oriented countries like Singapore and Hong Kong.
In the past, Malaysia had appropriately accorded priority to the manufacturing sector, since the comparative advantage of the nation continued to remain in the production of goods. But it is now evident that the simultaneous impetus to develop the services sector is crucial. We have lately been experiencing infrastructural constraints and skill shortages. Allocation of resources to the manufacturing sector becomes inefficient, unless infrastructure for social amenities, like education and training, and distribution facilities (shipping and transport) are also made available. The excess demand for services has been increasingly met from abroad. Over the last decade, Malaysia has always recorded a deficit in its services account of the balance of payments, averaging between RM9 billion and RM12 billion annually or between 11 and 14 per cent of the GNP.
The services deficit has persistently eroded the surpluses in the trade account and during periods of weak trade performance, the services account has caused the current account to move into a deficit position. Even in the good years, Malaysia needs to have at least a RM12 billion surplus in the merchandise account to finance the services deficit and maintain a neutral current account position. The policy implications are clear. The services sector is too important to be left to develop "automatically." Many critical areas in the services sector must be addressed urgently and simultaneously. These areas are inter-related. Effective planning calls for services sector policies to be addressed as a package rather than on a piecemeal basis. This is the task facing the Cabinet Committee on Services set up early last year under the chairmanship of the Prime Minister to assess and implement the various proposals received.
Recent measures to develop services focussed mainly on shipping and shipping-related services. We have already abolished import duties for selected categories of ships and gazetted the North Port of Port Klang as a Free Commercial zone as of April 1, 1993, to boost its role as a load centre for the country and eventually to serve as an entrepot port for the region. On the financing side, the Government has launched the Shipping Finance Fund. This fund of RM800 million will make available financing to big and small operators in the shipping industry. By this measure we expect a surge in the Malaysian ownership of vessels plying international and domestic routes.
To date, the Cabinet Committee's multi-pronged strategy to develop the services sector also included enhancing the business and professional services sector. Towards this end, besides promoting merchandise trade, the Malaysian External Trade Development Corporation was given an additional responsibility to promote the export of professional services. Trade Commissioners abroad will be directed to gather information on the opportunities available for Malaysia to export professional services. The Government is also encouraging greater use of local services by Malaysians. The Operational Headquarters incentives which previously had only been granted to the manufacturing sector were extended to selected services sectors with effect from January 1, 1993. With these measures and more coming onstream, the prospects for the services sector seem more promising.
The private sector must also play its role. The ability of services firms to contribute to economic growth will depend not only on actions taken by the Government but also on strategic decisions taken by the private sector. Over the next few years, the Government will be setting the agenda of measures to accelerate the growth of services. The private sector can respond in two ways. Firstly, it can assist the public sector fine tune this agenda to realize positive results. Secondly, it should allocate greater investments in the services sector. In both approaches, it is critical for the private sector to enhance efficiency and competitiveness to compete in the services industries. This is more important if it wants to penetrate new markets, especially in the newly-emerging economies such as Indochina, Myanmar and the People's Republic of China.
Development of the services sector is made more urgent by the likely conclusion of the Uruguay Round of the Multilateral Trade Negotiations. Malaysia, must therefore be ready to meet greater pressures from foreign participation in this area. Although Malaysia has a relatively "open" services sector, we intend to relax further the rules governing foreign entry. It must be noted that the services sector in Malaysia is not excessively regulated as it is. For most sectors, the national equity guidelines apply, stipulating maximum foreign equity participation at 30 percent. Indeed, foreign participation in certain key services sectors in Malaysia is much higher. In the banking and insurance sub-sectors, for example, foreign presence and market shares are quite high due to historical reasons.
The way forward to a developed nation status requires competitive services to enable efficient production of goods and its quick delivery. Much of these services are now sophisticated and require investments in new technology. Taking cognizance of these requirements, Malaysia has offered to open the door wider to foreign participation in its services sector. In the latest round of the GATT negotiations, we have agreed to treat foreigners on par with our local operators. In addition, we have offered to expose more subsectors to foreign firms, from a low 29 to a high of 57. This cuts across all non-financial services as well as selected financial activities. Malaysians, however, should not be unduly concerned with greater foreign participation. Instead, such foreign entry will provide the necessary competitive environment needed to nudge us forward and to accelerate the development of the services sector. The Uruguay Round should therefore, be used to our advantage. The new Framework Agreement on Services, when concluded, would provide the transparency element to make it easier for both Malaysians and foreigners to conduct services business. Greater foreign participation through the agreement will, in addition to enhancing competition and helping upgrade our own efficiency, open more doors for Malaysians to operate services businesses abroad. There are many areas where Malaysians can be competitive abroad, the most obvious being construction and professional services. Here, we need to be more aggressive to establish a foothold in foreign countries. In this way, Malaysians can ensure long-term inflows of profits and dividends to offset outflows accruing to foreigners operating in Malaysia.
On that note, I now have the great pleasure to declare open the Twelfth Economic Convention of the Malaysian Economic Association.