Tuesday, March 6, 2012

Idris Jala Addresses The ETP Income Targets

There’s a lot of criticisms aimed at the ETP’s (actually the NEM’s) income targets – I’ve been one of them, at least insofar as how it’s been discussed publicly is concerned. One of the bigger issues is the fact that the target’s really nominal income in USD, but everybody talks about the real (inflation-adjusted) growth in Ringgit.

So, setting the record straight (excerpt):

Minister Idris Jala invites you to write to help to build M'sia

…The first thing I would like to explain is the concept of income, which is key to the entire concept of transforming into a high-income country. At what level of income do we become developed and achieve high income? How do we do it? How do we measure this? And can we achieve it?

A lot has been said about how we measure income and the level of income in 2020, and how we have not taken the right things into account. It's been said that we have used the wrong measures. We have not.

Intentionally, we have used globally accepted definitions and methodologies, i.e. the World Bank approach and benchmarks. Without getting too technical, we used the current definition for high-income countries in nominal terms and then using projected inflation rates, derived what it would be in US dollars in 2020.

Hence, the figure of around US$15,000 per person was arrived at RM48,000 based on a projected exchange rate of RM3.20 to the US dollar. The current rate is close to RM3 which means that if this rate prevails, the target will be lower at RM45,000. In 2009, our income, using prevailing exchange rates, was US$6,700 per capita. Yes, we have a long way to go but we are well on the way.

From here, we project the population at 2020 and multiply that by the income per capita to obtain the total income of the nation in 2020, in nominal terms.

Working backwards, we then estimate the growth rate needed to get there, again in nominal terms.

Then we take out the projected inflation rate from this figure to arrive at the real rate of income increase that we need for the nation as a whole to achieve high-income status which is on average around 6% annually, assuming all other factors hold equal.

“Real” here means the income is adjusted for inflation and reflects the actual rise in income even after taking into account price increases. The real gross national income or GNI is just the real gross domestic product plus net income from abroad.

Our methods are rigorous and our results were reviewed in January 2012 by an international accounting firm and a globally renowned panel of experts.

The latter also shared outside-in feedback and global best practices. We have no interest in deceiving anybody on how we are performing.

That is how we set the target…

…The next thing is getting there. Basically, we identify all the major projects on hand and estimate their contribution to economic and, ultimately, income growth. We don't pretend that these are accurate but they are the best estimates we can get. No country in the world can accurately measure and predict with precision its economic growth.

These estimates are also targets. If we can meet them year-to-year, we are on our way. If we run short we have to do more, and if we are doing very well we can lift up our hands to the heavens and give our thanks to God. It's a moving, dynamic target and it changes all the time.

I’ve nothing to add to this. Nobody should seriously expect to accurately hit an economic target ten years out – unless you’re a consultant.

We’re talking here of the dynamic interactions of 28 million people, linked to an even larger system involving 7 billion people, all doing their own thing and affecting each other. There’s too much uncertainty involved, too many things that can go wrong or right – the economy is not a machine, with a manual on how it works.

People might start having too many babies (changes the denominator), the USD might tank…or boom (changes the conversion rate), commodity prices might zoom…or crash (changes the numerator and inflation), more women might start working (increases income, without changing the denominator). In Malaysia, there are 7 million people of working age, mainly women, who aren’t part of the formal labour force.

Economic theory and practice can be a guide, but let’s be practical – at the current state of our knowledge, that’s all it can be. Changing the assumptions underlying the NEM/ETP/10MP will change the numbers, but so what? I think we’ll hit the high income target early, but then I never thought of the high income target as a goal important in itself.

It’s something to work towards, for all it implies in terms of being a prosperous society (from top to bottom), not for the status of being a high income economy. I think if there is a real criticism to be levelled at the NEM/ETP/10MP, it’s the structural issues that are not being addressed, like the distribution of income and its underlying causes like access to education. Unless these issues are addressed, we may find that greater “prosperity” will be confined to those lucky few who have the opportunity, skills and knowledge to benefit from our new found “status”.


  1. We need you to head the EPU.This Pemandu nonsense must be put to rest immediately.Lets go back to a more sensible economic planning covering all issues rather than enriching the rich.

  2. I beg to differ on the subject of structural issues. Competition Law came into force, Standards Act amended to allow for additonal standards agencies to accelerate adoption of international standards and creation of local standards, further liberalisation of 17 sub-sectors in progress, improved tax adminstration has resulted in RM25.3b in additional revenue, threshold for e-bidding in procurement reduced to RM50k, 405 business licenses identified for elimination this year, minimum wage to be announced soon, private sector retirement age will be raised to 60 along with easing of hiring & firing laws, GLICs are divesting to avoid crowding out the private sector. NKEAs are also helping the poorer and more rural folks - high-value paddy, oil plant replanting, modernising sundry stores. And pray tell, how are all these not addressing structural issues and only enriching the rich? Facts are facts, you wonder why people refuse to acknowledge and continue to attack ETP destructuvely (HIshamH is not one of them) and hiding behind anonymity to boot...

  3. Now this is rich..Pemandu claiming credit for 2011 increase in tax revenues.
    And standards are nothing new.Problem is enforcement.Thats not addressed.Same story with Competition Act..where was it hiding in MAS/AA deal.E-bidding threshhold?Was that applied to WCE?Kidex?MRT? infact was there any bidding at all?
    And on the rural initiatives...all were in the works before Pemandu was born and no real new investment or ideas.TUKAR is a joke:512k jobs..about 70 per outlet.Check your numbers.

    The facts are simple.And hope you understand your own data.Out of the 800 bil projected GNI wage component is only 21%.Compared to current 30% thats bad but compared to other High Income Economies of 50% its pure conspiracy.

  4. Thank Hisham for the insight. I would like to invite you to my lecture with my students at Faculty of Economics, University Malaya. Would this be possible? Tq

    Best regard
    Dr Fatimah Kari, UM.

  5. I dont know what anon10.44 and anon3.24 is getting at, other than just plain rambling.
    hishamh's comments are very fair. we can't expect the govt to do everything, it's time to galvanise the private sector and ETP provides policies towards that.
    I also agree on his point about distribution of income, but there are signs towards that with BR1M putting money directly into ppl's pockets where they need it. Education is also being tackled within the spheres of ETP and GTP.
    The next step is to rollback the subsidies and implement GST to improve public finances which has been announced - unfortunately too much politicised by those eyeing for power.

  6. observer
    isn't anon referring to disparity and the failure of the ETP program? Examples are ;

    20% CE/GNI compared to other high income Economies of 50%.7 mil workers programmed by ETP to earn less than 1.5k per month.And EPPs focused in certain areas with little investment in rural areas.

    Think its the Pemandu guys who are talking w/out facts.

  7. anon11:43
    that's the whole point when hishamh said:
    "Nobody should seriously expect to accurately hit an economic target ten years out – unless you’re a consultant"
    .. and ..
    "Changing the assumptions underlying the NEM/ETP/10MP will change the numbers, but so what?"

    So what? I wonder if economists & politicians can simulate a model for Msia to become 50% CE/GNI and 100% workers earning more than 1.5k, then it will magically come true. End of the day, private sector needs to make it work - hence focus & competitiveness is key, which is the bedrock of ETP.

  8. If it is not realistic to forecast 10 yrs fwd why is Idris Jala emphasising ETP is a program n not a plan?And if GNI is the bedrock,shldn't both components i.e CE n EBITDA given the same focus?EBITDA n wages both needs enablers n policy frameworks.

  9. Hi Kok Peng,

    I've just read through this entry and the following exchange. I agree that PEMANDU has done a lot of good in galvanising the private sector in terms of contributing to the EPPs and therefore private investment, although I don't know how much of interest-capture there was during the process (I wasn't at the Labs, and therefore cannot comment).

    However, when it comes to structural issues in economic development a lot of the time the artefacts of development become confused with what constitutes development itself. While all the measures you mentioned are laudable - we do need a Competition Act, we do need to raise our standards to the international level, and it's good that sundry stores are being modernised - these are artefacts/signs of development, they don't necessarily signify that development/structural transformation is taking place.

    For these 'artefacts' of development to signify 'real' development, the Competition Act (not to mention other laws) would have to be enforced without fear or favour, adherence to international standards would lead to our firms being able to break through current regulatory impediments and gain footholds in developed (high-standards) countries and the modernising of the sundry stores is also accompanied by an enrichment of the rural economy that is linked to urban markets.

    I think what HishamH is also hinting at when he talks about structural transformation is one of Malaysia's core challenges - human capital. Malaysia is facing a skills shortage on the top-end and falling labour force participation rates across the board. While this may not seem like such a huge issue now, eventually this will be a real barrier to economic transformation. While obviously there are no quick and easy solutions (apart from things like incentives for returning diaspora etc.) there really is a need to work on this now, and not let the chase for "quick wins" detract us from this issue. The challenge of human capital needs to be tackled at the root: we do need a reform of our education system, that goes beyond 'improving student outcomes' - we actually have to ask ourselves if those outcomes are the correct ones to measure.

    Just my two cents, and hope this doesn't come off as a 'destructive attack'.

  10. Nadia, thanks for the comments.

    One of my fears is that we're creating jobs without providing for people to fill them. That raises the disparities in incomes between the top of the distribution (where demand has gone up) while reducing the demand for unskilled/low-skilled labour. In fact, this has been slowly happening over the past couple of decades due to technological change (no more clerical typists needed for instance), but the process looks likely to accelerate.

    Any changes to the education system will only be felt at least a decade from now at the earliest - which leaves a skills/jobs gap in the meantime. One of the initiatives that's was proposed by the NEAC was to start up a retraining/reskilling fund to handle this, but intervention costs for mature workers (i.e those in the workforce right now) are likely to be costlier, hence I think the proposed amounts (about a billion or two) is unlikely to be enough.

    That's one big reason why I support a minimum wage, but I don't think that will be enough either. What we need is at the very least a rudimentary social safety system - there will be losers in this transformation process, and it's only just that as the rest of us get ahead, those left behind are provided for.

    Having said that, the participation rate has actually been slowly creeping up over the past couple of years.

  11. Hisham, thanks for the info on labour participation - for some reason I thought there was a decline (something like 2000:65% compared to 2010:60%).

    Have we seen the assumptions and calculations re: the minimum wage. I suspect this will have more of an impact in the informal sector (which by some estimates is probably about 35-40% of workers). As with all policy measures though, it's enforcement that will count.

    And excellent point on the social safety net.

  12. The NWCC has kept things close to the vest. i could probably find out, but since it's all going to be revealed come Labour Day (just a month away), I don't think its worth the effort.

    BTW, the current LFP based on the latest monthly data is about 65.1%. The 2010 LFP was skewed by us recovering from the recession (monthly values ranged from about 61%-64%).