Public Forum: Budget 2020 – Making Shared Prosperity a Reality

On 19th September 2019, a public forum was held by the Institute for Democracy and Economic Affairs (IDEAS) at Auditorium Rimba Ilmu, University Malaya, titled, “Budget 2020 – Making Shared Prosperity a Reality”. The event featured presentations and a panel discussion on the issues that Malaysia currently faces and policy proposals relevant to the title of discussion.

The panel included Dr Jeyakumar Devaraj of Parti Sosialis Malaysia, YB Tuan Nik Nazmi, MP Setiawangsa, Professor Dr Jomo Kwame Sundaram, Senior Research Advisor at Khazanah Research Institute and Laurence Todd, IDEAS Director of Research. The discussion was moderated by Tricia Yeoh, Senior Fellow at IDEAS.

Initiating the discussion, Laurence Todd gave an overview of the policy proposals put forward by IDEAS and potential challenges that stand in our way to have the “Shared Prosperity” vision. He began by focusing on the conceptualization of the ‘sharing’ concept and highlighting us the income inequality trend in the Malaysian economy by providing concrete statistics from Khazanah Research Institute. He elaborated that although the relative inequality in Malaysia has been on the decline since the 1970s, however, in absolute terms, inequality between the bottom 40 and top 20 has actually widened. He stated that the wages have not kept up with improvements in labor productivity, especially in the lower paying sectors. Furthermore, he commented that although inflation in recent years have been stable,  the lower income households have been struggling with the rising costs of living. Laurence further stated that the wealth ownership in Malaysia is poorly distributed; adding that there are significant disparities across regions and between sectors.

Next, Laurence brought our attention to the ‘prosperity’ side of today’s topic. He first highlighted that Malaysia has indeed undergone successful industrial transformation and integration into global value chains. However, there are certain questions raised in these aspects. They are the degree of technology transfer and growth in value-added. It should be noted that the factor accumulation drove Malaysia’s growth while productivity growth played a lesser role in Malaysia. Laurence stressed that the “further gain of Malaysia will come from the productivity growth rather than factor accumulation”. Laurence also pointed out that a significant government footprint still remains in the economy, for example, 40 % of share on KLCI market is by government stock market capitalization. Thus, the big question is tied to the openness of the trade and the result of the existing government footprint in our economy. He elaborated that our local firms are not competitive enough to develop competitive products considering that the domestic market is limited. He opined that the FDI is still crucial but it should not be the sole focus; hence the key to spur further growth is to ensure that the private sector is given space to innovate and it cannot be addressed solely by government intervention.

Laurance added that there is still uncertainty in several free trade agreements, such as the free trade agreement with the EU over the palm oil issue, negotiation on the ratification of the CPTPP and that all these uncertainties pose a shaky investment climate. The challenges of the “shared prosperity” are the constraints faced by the government due to the RM 1 trillion debt, expenditure deficit in the budget 2019 and the narrow tax bases. How the revenue can be generated despite all these challenges is the tough question to be resolved. He proposed that the ultimate goals of the shared prosperity is to achieve the broad-based sustainable income growth, to have a distributed ownership of wealth, to have a fair tax system and to create an open, market-based economy.

Laurence put forward 4 main proposals by IDEAS in his speech to contribute to the policy disclosure of the “Shared Prosperity”. Firstly, he proposed the Living Wage Tax Credit (LWTC) by the introduction of tiered corporate tax incentives to encourage minimum pay rises. This means that the company should be encouraged to voluntarily increase the wage based on the market condition and they should be subjected to gaining tax incentives by doing so. The second proposal is to introduce Employee Equity Schemes (EES) by encouraging the employees to own a share in the company. Third, he proposed that Malaysia should move to the Capital Gains Tax System (CGT) to widen the tax base progressively. Last but not least, Laurence suggested to have a comprehensive government divestment strategy. The central idea of this government divestment is to gradually move the government ownership to the ownership of the people.

Professor Dr. Jomo Kwame Sundaram’s presentation was titled “Developmental, Counter-cyclical fiscal policy urgently needed”. Professor Jomo began by presenting about the bleak outlook on the world economy. He stressed that an expansionary fiscal policy is urgently needed. He argued that countercyclical fiscal policy can play a large role in stabilising the economy, and added that there are no good macroeconomic reasons to pursue austerity measures. Moreover, Professor Jomo suggested that the fiscal stimulus is to provide economic stabilisation in the short term, which then fosters long-term growth. Furthermore, he states that how public funds are spent will affect the quality of growth recovery during times of recession. He recommends that public funds be directed towards social protection, financing universal health care, promoting investment and technology. Lastly, he cautioned that compromised government spending discredits all public policies.

Dr Jeyakumar Devaraj of Parti Sosialis Malaysia, kicked off his presentation by showing the figure on the low productivity in Malaysia’s economy. He reiterated the fact that “bullying” goes on in the value chain during the comparison of productivity between Malaysia and the US for example. The share of wealth is not captured by Malaysian workers because they come in on the basis of low wages and find it difficult to ask for higher wages as there will be a shift in demand elsewhere. He then questioned whether the prosperity created is accrued to our workers or being siphoned out. Besides that, he advocated that wealth can be created in two ways. The first being an increment in wages at a steady pace, and the second by using the increase in wealth as a ‘social net’ to share prosperity. Finally, he emphasised the impact of leveraging the competitiveness of ASEAN countries to attract foreign direct investments (FDI) by lowering corporate tax rates and how Malaysia’s government expenditure as a percentage of GDP has been continuously declining. This posed as a worrying measure as the government would then not have enough funds to carry out any further transactions.

YB Nik Nazmi presented on how the growing income inequality is a major global challenge. He proposed that inequality is both an inter-ethnic and intra-ethnic issue. He expressed his concern on the inequality within the Bumiputera community. The wide inequality between the top and the bottom is obvious as 50% of the funds are held by only 1% of the contributors in Tabung Haji. The current scenario is that around 77% of the households have less than five thousand ringgit in their savings account; this translates to the widening disparity between the top and the bottom as there are some policies in the ASB and the Tabung Haji that are more easily to be capitalized by the top. He pointed out that the lack of domestic private investment and the over-reliance of debt to fuel private consumption proved to be unsustainable. YB Nik Nazmi also posited that the minimum wage should be RM 1,500 per month as promised by the PH government and Malaysia should find ways to move out from the low cost and low wage economy. This requires a shift to a more need-based approach in the economy.

To close the panel, Tricia Yeoh summed up the discussion with four major talking points. She began by asserting the fact that the government plays a crucial and enabling role in promoting a healthier business climate. She further pointed out that companies also hold a shared responsibility in taking the next step forward to share their prosperity to others. Ultimately, it all boils down to the state of the economy and how Malaysia can strategize itself and fit into the global economy in order to combat the challenges that it is facing to share the prosperity.

More information about the proposals put forward by IDEAS can be found here.

Presentation from Laurence Todd can be downloaded here.

September 19, 2019

10.00 am – 12.00 pm

Auditorium Rimba Ilmu, Taman Botani Rimba Ilmu, Institut Sains Biologi, Fakulti Sains, Universiti Malaya

2019-09-23T17:19:03+00:00 23rd September 2019|Previous Events|Comments Off on Public Forum: Budget 2020 – Making Shared Prosperity a Reality