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”.