With the slower and uncertain global economic growth, any economy that is trade-oriented, such as Malaysia, will face a moderation in its economic expansion, however hard it attempts to compensate such moderation with domestic demand.
In this regard, the Malaysian economy is estimated to have expanded by more than four per cent in the last quarter, lower than its annual growth for 2015 as a whole.
Several projections for the global economy as a whole were not that bright and the recent Brexit result adds uncertainty to the prospects.
In such a situation, only countries with large population, and therefore significant domestic demand, such as Indonesia, China and India, can do better. The poll by the Economist Magazine (July 9-15, 2016) shows that China and India will experience an economic growth of 6.6 per cent and 7.5 per cent this year respectively, given their big domestic market.
Nevertheless, however good economic expansion in developing economies is, it usually does not have much power to propel the world economy, if the developed economies, such as the United States, Europe and Japan, do not register an equally significant growth rates. The poll referred earlier predicts that the growth of many developed economies this year is much subdued, with the US expected to register a growth of 1.8 per cent, Britain 1.5 per cent, France 1.4 per cent, Japan 0.5 per cent and Germany 1.3 per cent.
With this scenario, it is not surprising that the authorities in Malaysia are trying hard to push for stronger domestic demand by implementing several construction projects, such as the Mass Rapid Transit, the Petroleum Complex in Pengerang in Johor and the Pan-Borneo Highway.
Generally, these construction infrastructure projects have significant forward and backward linkages with the domestic economy, thereby pushing production in several economic sectors.
Additionally, such projects will open up new areas for development and promote greater connectivity within the country, hence promising potential for balanced spatial growth and greater sharing of the benefits of economic growth.
The US experience during the last major depression indicated that the building of interstate expressways and turnpikes helped push the economy, while bringing the reach of economic development to a greater number of people.
The government is right in pursuing this strategy of economic growth, provided, of course, the financing of such projects are well-planned and structured without burdening government finances. The private sector resources, as illustrated in the surplus on the external balance of payments, indicate that the nation has the resources to undertake the projects, but they must come from the private sector.
Strategising economic growth by focusing on development projects, however, has its limitation. It is still part of an input-driven economic growth strategy that critics used to amplify in the 1990s when examining the spectacular growth of East Asian economies. In other words, the more you invest, the higher is the resultant economic growth, the early experience of Russian economic growth.
Such growth stimulus, as initiated by the government, needs to be compensated by more private sector initiatives through innovation, research and development, and productivity-enhancing programmes if such resultant growth is to be sustained.
Coming out with new products and services, and venturing into new markets are among the immediate possibilities of private entrepreneurship to synergise the growth impulse created by physical development projects of the government.
The industrial incentives under the Malaysian Investment Development Authority, together with other supports in the form of training for workers and a competitive ringgit, should give industrialists and traders some perspectives of the kind of support they can get from the public sector and how they can harness opportunities for greater production of goods and services.
This complementarity between the public sector policies and programmes and the private sector initiatives must be explored fully to give the extra mileage to the nation’s economic expansion. In a way, this complementarity is well observed in the experiences of South Korea and Japan as they surged forward to become economic powerhouse of the world.
Of course, our experiences with them differ. While they rely much on domestic entrepreneurship and world markets, we rely more on foreign direct investments to industrialise our economy from import substitution stage to export-oriented industrialisation. Now that we are promoting services-oriented industries, our attractiveness as an investment centre may have to move towards more of skills and productivity.
Indeed, with the highly competitive investment environment in the world, and as we mature into a post- industrial economy, our factor of productivity, especially human resources, shall be the lynchpin and the deciding factor of our economic growth, notwithstanding the attractiveness of our industrial incentives, which, by now, are taken as given, as others are providing the same facilities, if not more.
Tan Sri Dr Sulaiman Mahbob is chairman of the Malaysian Institute of Economic Research