CHAPTER 1 - SUSTAINABLE GROWTH WITH RESIL IENCE I. II. III. IV.

INTRODUCTION CHALLENGES TO LONG-TERM GROWTH DEVELOPMENT THRUSTS OF THE NATIONAL VI SION POLICY CONCLUSION

Chapter 1

Sustainable Growth With Resilience

CHAPTER 1

Sustainable Growth With Resilience

I.

INTRODUCTION

1.01 The Third Outline Perspective Plan (OPP3), which constitutes the second decade of development under Vision 2020, focuses on building a resilient and competitive nation. During this period, efforts will be made to raise the quality of development and generate high sustainable growth, bringing prosperity for all. National unity remains the overriding goal of development and the diversities of Malaysians - ethnic, lingual, cultural and religious - will be taken into account in forging a harmonious, tolerant and dynamic society. Socioeconomic development policies, which contributed to enhancing the quality of life of Malaysians, will continue to be given priority. 1.02 The formulation of the Plan incorporates a review of the progress of the Second Outline Perspective Plan (OPP2) as well as lessons learnt from the 19971998 Asian financial crisis. The policies and strategies are aimed at building upon the countrys existing strengths, addressing its limitations and constraints, and facing the challenges of global competition. As in the past, the Government will continue to pursue a holistic approach to economic development, which is essential in ensuring stable growth, promoting harmony among ethnic groups, and enhancing national integration. Various views and contributions were considered, including the report of the Second National Economic Consultative Council (MAPEN II), which comprised representatives from different segments of society. 1.03 The OPP3 has been formulated based on a policy that will be called the National Vision Policy (NVP). The NVP, with national unity as its overriding objective, is aimed at establishing a progressive and prosperous Bangsa Malaysia which lives in harmony and engages in full and fair partnership. Economic growth will be promoted alongside efforts aimed at poverty eradication and restructuring of society. Social, economic, and regional imbalances will be narrowed. The development policies to improve material welfare and raise the level of 3

prosperity will be accompanied by efforts to instill positive social and spiritual values as well as concern for the environment to maintain the long-term sustainability of the countrys development.

II. CHALLENGES TO LONG-TERM GROWTH 1.04 Malaysia faces challenges at both the global and domestic fronts. Globally, the rules of competition have changed with the onset of the Information Age and a more integrated global economy as well as greater liberalization of the markets. A countrys competitive advantage is no longer dependent on factors such as labour, land and natural resources, but on its potential to produce, acquire, utilize and disseminate knowledge. The availability of knowledge enhances the potential for lower-cost developing countries to move into high value-added products at a faster pace and enables new entrants to compete with established producers. With their huge domestic markets, these countries threaten to undermine the comparative advantage in some areas of manufacturing that Malaysia enjoyed for the last 30 years. On the other hand, the industrialized countries, which are focusing on knowledge as an important input in their production processes, have increased the share of high-technology industries in their total manufacturing value added and exports. They are more advanced in terms of human resource, technology, research and development (R&D), innovative capability and infrastructure. Consequently, Malaysia will have to intensify its efforts to stay ahead of the more dynamic developing countries and catch up with the developed countries. 1.05 In this decade, the move towards greater liberalization will lead to increased market opening by individual countries and benefit those who are in a position to take advantage of the process. With the reduction of tariff barriers, market borders will become technically non-existent. Coupled with the pervasive use of the Internet, businesses will be able to source for inputs, components and services, and get quotes from suppliers at the most competitive price anywhere in the world at a negligible marginal cost. The reduction in communications cost will help to globalize production and capital markets, increase competition and innovation, and speed up the diffusion of new technology through trade and investment. Malaysian industry and trade entities will, therefore, have to urgently build capability to contend with foreign competitors in the domestic market and enhance their export competitiveness. Malaysian businesses will need to become more receptive to know-how, increase their skills and creativity as well as identify their commercial potential. 4

1.06 Domestically, the contribution of TFP will have to increase at a faster rate and the efficiency of capital will need to be enhanced. This is because the contribution of labour to growth will slow down in the future and the high investment rate in the 1990s is neither sustainable nor efficient. As a long-term strategy for sustained economic growth, it is imperative that the country shifts from input-driven growth to productivity-driven growth so that the sources of economic growth are derived endogenously. Greater emphasis will be placed on building Malaysias human capital, productivity and capacity for knowledge absorption and utilization. Productivity-driven growth based on rich knowledge content and efficiency will enable the country to achieve sustainable growth with low inflation and price stability. Furthermore, it offers unparalleled opportunity for improving the well-being of Malaysians more rapidly to achieve the goals under Vision 2020. 1.07 The Asian financial crisis in 1997-1998 has highlighted the importance of increasing resilience in an integrated global environment where the flow of capital, trade and information transcend national borders. Events in one country can have tremendous repercussions in another part of the world through complex, criss- crossing networks and lagged effects. Malaysia is exposed to these external effects because its economy is integrated with the rest of the world. While it is not possible to be completely insulated from external shocks, there is a need to strengthen Malaysias economic, financial and social resilience so that it is able to withstand global volatility and risks without being derailed by them. 1.08 The cyclical downturn in the demand for semiconductors in the mid1990s highlighted the risks of relying on a narrow range of products or a small group of markets. Although the electronics industry was an important factor in Malaysias spectacular recovery from the 1997-1998 financial crisis, there is a need to identify new growth areas, while broadening and deepening existing ones, so as to widen the range of exports and strengthen the sources of domesticallygenerated growth as a strategy to increase economic resilience. 1.09 In building a resilient nation, the tasks of strengthening unity and nurturing a more tolerant and caring society will rank high on the national agenda. In respect of distributional objectives, while major strides were made in bringing down the incidence of poverty, the achievement in the restructuring of society was less satisfactory. The percentage of Bumiputera corporate equity ownership in 1999 declined slightly over the 1990 position, raising the issue of sustainability. Bumiputera are still under-represented in high-level occupations. Although Bumiputera businesses in both the corporate and non-corporate sectors have 5

grown in number, they are mainly small and proportionately fewer than nonBumiputera businesses. Bumiputera entrepreneurs are lagging in terms of the level of technology utilization and management expertise. The challenge is to address these weaknesses in a significant way in order to make greater progress with regards to the distributional objectives.

III.

DEVELOPMENT THRUSTS OF THE NATIONAL VISION POLICY

1.10 The NVP will build upon the efforts initiated under the countrys past development plans and strengthen the basis of transforming Malaysia into a fully developed nation as envisaged under Vision 2020. Besides having an economy that is competitive, dynamic, robust and resilient, Malaysia aims to be a united nation, with a confident society infused by strong moral and ethical values, living in a society that is democratic, liberal, tolerant and caring, equitable, as well as progressive and prosperous. 1.11 While the NVP incorporates the key strategies of the New Economic Policy (NEP), namely, eradicating poverty irrespective of race and restructuring society, and the National Development Policy (NDP), which emphasizes balanced development, it also introduces new policy thrusts. Developments in both the domestic and global fronts necessitate a change in the mindset of policy makers, implementors and all other stakeholders involved in development. It also underlines the need to learn, unlearn and relearn as well as to do things differently including using innovative means, in order to be effective and achieve the developmental goals. The public sector will be more proactive and efficient, and undertake measures that enhance the competitiveness of the private sector. 1.12 The new policy dimensions introduced in the NVP are as follows: t developing Malaysia into a knowledge-based society; t generating endogenously-driven growth through strengthening domestic investment and developing indigenous capability, while continuing to attract foreign direct investment (FDI) in strategic areas; t increasing the dynamism of the agriculture, manufacturing and services sectors through greater infusion of knowledge; t addressing pockets of poverty in remote areas and among Orang Asli and Bumiputera minorities in Sabah and Sarawak as well as increasing the income and quality of life of those in the lowest 30 per cent income category; 6

t achieving effective Bumiputera participation as well as equity ownership of at least 30 per cent by 2010; t increasing the participation of Bumiputera in the leading sectors of the economy; and t reorientating human resource development to support a knowledgebased society. 1.13 The policy is directed towards strengthening the nations capacity, capability and resolve in meeting the challenges ahead. It emphasizes the need to build a resilient and competitive nation, as well as an equitable society to ensure unity and political stability. The efficiency and productivity of all economic activities will be increased to enhance Malaysias competitiveness. In addition, economic disparity among and within ethnic groups, as well as between strata and regions will be addressed to bring about unity and stability within the Malaysian society. The private sector will spearhead economic growth, while the public sector will provide the supportive environment and ensure the achievement of the socioeconomic objectives. 1.14 The key thrusts under the NVP are as follows: t building a resilient nation by fostering unity, inculcating the spirit of patriotism, nurturing political maturity, cultivating a more tolerant and caring society with positive values, raising the quality of life as well as increasing economic resilience; t promoting an equitable society by eradicating poverty and reducing imbalances among and within ethnic groups as well as regions; t sustaining high economic growth by strengthening the sources of growth, the financial and corporate institutions as well as macroeconomic management; t enhancing competitiveness to meet the challenges of globalization and liberalization; t developing a knowledge-based economy as a strategic move to raise the value added of all economic sectors and optimizing the brain power of the nation; 7

t strengthening human resource development to produce competent, productive and knowledgeable workforce; and t pursuing environmentally sustainable development to reinforce long-term growth.

Building a Resilient Nation 1.15 Malaysia has a good track record of weaving its ethnic and cultural diversity into a cohesive national fabric, which serves as a great source of strength, dynamism and creativity. The central task of development is to continue this mission of forging a united nation, based on fairness and prosperity, with abundant opportunities for all and removing socioeconomic differences among and within ethnic groups on the back of a strong and resilient economy. Fostering Unity and Spirit of Patriotism 1.16 National unity continues to be the goal of socioeconomic development given the multi-ethnic, multi-religious, multi-lingual and multi-cultural nature of the Malaysian nation. Although the launching of OPP3 coincides with more than four decades of experience in nation building, the duration is short when viewed in the context of the history of nations. Multi-ethnic societies are particularly fragile entities and decades of nation building efforts can be erased should narrow parochial considerations dominate or groups within the polity perceive a sense of alienation or being marginalized. 1.17 To be resilient and internationally competitive, the unity of Malaysias diverse population is an indispensable precondition. All policies, programmes and projects will be guided by this fundamental requirement as the active and total participation of all groups and regions are essential to ensure the success of socioeconomic development and nation building efforts. Disparities and inequities among and within ethnic groups and regions will be addressed so as to preserve the unity of the Malaysian nation. 1.18 Despite the rapid pace of internationalization of values and practices in the social and cultural domain, Malaysians must preserve their national identity and heritage. Only with the preservation of this identity will the Malaysian population be in a position to cope with the rapid changes and withstand the negative fallout from globalization. The spirit of patriotism will be harnessed 8

to instill pride of being a Malaysian and in doing things and achieving successes as Malaysians. The commercial practices of Malaysian companies should be beyond reproach whether they operate domestically or internationally. Values that conform to the best traditions and encourage the pursuit of excellence and the highest standards of ethical propriety will be promoted. Nurturing Political Maturity 1.19 Continued social and political stability will be crucial for the realization of Malaysias development objectives. It is important for Malaysians to practise a mature consensual, community-oriented democracy without being sidetracked into parochial interests and extremism in views, whether religious, sectarian, political or otherwise. It is through the spirit of greater tolerance and cooperation that Malaysia develops political maturity, which is fundamental for continued stability. In addition, Malaysians should possess a strong desire for the nation to prosper as well as be willing to protect the nation from any form of domestic and international threat. For the country to become a fully developed nation by 2020, all Malaysians must place the interest of the nation above narrow political objectives and strive forward together in order to bring the nation to greater heights. Cultivating a Tolerant and More Caring Society 1.20 The social institutions will be strengthened by cultivating a more caring society and culture, where individuals place the needs of the social system before themselves and where the welfare of the people revolves around strong and resilient family units. A society that is imbued with caring traits and fosters tolerance and acceptance for diverse traditions will contribute to a united and harmonious Malaysian society. Efforts will be made in moulding civic and national consciousness as well as inculcating values in line with the Rukunegara, the national ideology. 1.21 In building a caring society, emphasis will be placed on values such as familial values, neighbourliness, strong religious values, moral integrity, peace, love, cooperation, honesty, punctuality, hard work, discipline, honour, and consideration for others. The family unit, schools, workplace and religious and social organizations must instill and constantly reinforce values that make the individual more caring and respect the rights of his fellow citizens. A caring society has the family as its core, and must entail love for the young and 9

consideration of the welfare of the elderly and disabled, including through the provision of social services. There should also be greater concern and respect for the environment and public property. At the same time, the spirit of voluntarism will be nurtured. Community-based organizations will be encouraged to pursue activities that involve Malaysians of all ages and ethnic groups in activities that forge bonds transcending ethnic, religious and cultural considerations. Raising Quality of Life 1.22 The Government will ensure that all Malaysians enjoy and benefit from the opportunities available, including education, employment and access to social services. Every attempt will be undertaken to ensure better coverage and improvement of social amenities for all households. The measures include enhancing access to social and physical amenities, such as education and skills training, improved working conditions and harmonious industrial relations, as well as promoting better health and environmental quality. Malaysians will be encouraged to participate in the creative and performing arts as well as adopt a healthy lifestyle. In addition, sports will be emphasized as a means of building the discipline and character of Malaysians as well as encouraging tourism. Building Economic Resilience 1.23 Appropriate measures will continue to be introduced to develop greater economic resilience to enable the country to withstand the negative impact from external shocks. Macroeconomic stability will be enhanced by addressing all imbalances and potential areas of vulnerability. Efforts will continue to be made to strengthen Malaysias economic fundamentals by ensuring stable prices and exchange rate, having adequate level of savings as a source of investible resources, and maintaining surpluses in the fiscal and external accounts. As macroeconomic management will become even more challenging in the borderless global economy, an early warning system to take preventive measures will be established. At the international level, Malaysia will continue to promote the establishment of a regional self-help and support mechanism for crisis prevention and ensure macroeconomic stability. Malaysia will also continue to work towards ensuring that the views of the region are heard in global discussions on the reform of the international financial architecture. 1.24 The corporate sector at large will need to strengthen itself by focusing on their core activity, taking a longer term perspective of their investments, improving efficiency and productivity as well as enhancing their administrative 10

and financial management capabilities. They must also aspire to achieve a higher standard of professionalism and maintain their credibility and integrity. Corporate sector restructuring efforts initiated at the end of the OPP2 period will be accelerated. Efforts will also be taken to further strengthen the financial sector through better prudential supervision and regulation, enhancing risk management and developing the domestic capital markets. In addition, information on economic and financial affairs will be improved to increase market discipline and enhance decision-making.

Promoting an Equitable Society 1.25 Malaysia will continue the strategy of developing a united and equitable society, which is important for social and political stability and the achievement of national unity. In this respect, the two-pronged strategy of poverty eradication irrespective of race and the restructuring of society will continue to be implemented. This strategy will be pursued within the context of rapid growth so that no particular group or segment of society will experience any loss or feel a sense of deprivation. Restructuring of Society 1.26 During the OPP3 period, the emphasis of the distributional policy will be to achieve effective Bumiputera participation and equity ownership of at least 30 per cent by 2010. In this regard, measures will be taken to introduce new programmes, and reorientate, consolidate and streamline existing programmes as well as improve the delivery mechanism. This will include the creation and promotion of Bumiputera ventures in the manufacturing and dynamic services sectors. In the manufacturing sector, efforts will be taken to increase Bumiputera participation in electrical and electronics, pharmaceuticals, bio-technology, composite and advanced materials, chemical and petrochemical, transport equipment and food industries, while in the services sector emphasis will be given to wholesale and retail trade, tourism, air and sea transport-related services, education, health, and consultancy and professional services. The enabling environment for Bumiputera to participate effectively and meet the challenges of liberalization and globalization will also be enhanced. At the same time, efforts will be taken to promote effective Bumiputera participation in the knowledge-based economy. Other measures that will be taken to increase Bumiputera ownership include the continued implementation of the privatization programme, the review and streamlining of Bumiputera institutions and trust agencies, the effective management of unit trust schemes and the development of Malay reserve, wakaf, Baitulmal, native and customary land. 11

1.27 Employment restructuring will continue in all sectors and occupations to reflect the ethnic composition of the population. Steps will be taken to increase the proportion of Bumiputera in professional and managerial categories. At the same time, non-Bumiputera will be encouraged to apply for jobs in the public sector. As education and training is an important instrument for employment restructuring, the capacity of the higher education institutions will be increased to enhance the accessibility of Bumiputera students to pursue higher education, particularly in professional, management and advanced technical areas. 1.28 In building a Bumiputera Commercial and Industrial Community (BCIC), attention will be directed towards developing Bumiputera entrepreneurs who are resilient, self-reliant and world class. Past efforts in this direction generated modest results because the entrepreneurs were engaged largely in the traditional sectors. There is a need for them to venture into high value-added and hightechnology activities. Existing packaged programmes to develop the BCIC will be strengthened, among others, by expanding the vendor and franchise development programmes as well as the venture capital schemes. However, agencies implementing the programmes for developing the BCIC will be required to establish an exit policy to enable entrepreneurs to move out of related programmes to make way for new entrants. Poverty Eradication and Income Distribution 1.29 Poverty will be a less pressing issue during the OPP3 period because of the significant progress made in reducing poverty during the earlier perspective plan period. The incidence of poverty will be reduced further to 0.5 per cent by the end of 2005. Efforts will be focussed on tackling pockets of poverty in remote areas and among the Orang Asli and other Bumiputera minorities in Sabah and Sarawak as well as increasing the income of those in the low-income group, particularly the lowest 30 per cent. All poverty eradication programmes will be consolidated under the Skim Pembangunan Kesejahteraaan Rakyat, which will include creating income-generating projects, providing greater access to basic amenities, and inculcating the concept of self-reliance. To reduce the income gap among households, education and training programmes will be made more accessible to those from the lower income group. The private sector and non-governmental organizations (NGOs) will support and complement these efforts. Regional Development 1.30 The principal thrust of regional development will focus on enhancing regional balance through rapid development of the less developed states. In the 12

OPP3 period, efforts will be taken to diversify the economic base of the slower growing states into manufacturing and services. Emphasis will be given to encourage the development of downstream activities in the agriculture sector, especially in the handling, processing, packaging and marketing of agro-products, and the development of agro-based industries. 1.31 The growing urban population is expected to create additional demands for public services and social amenities in the urban centres. New strategies will be required to enhance the capacity and capability of local authorities to face the challenges ahead. This will include strengthening the management of local authorities and the implementation of Local Agenda 21, which was launched in 1999, in line with the Rio Declaration. This programme aims at promoting the participation of local authorities, municipalities and all stakeholders at the local community level in the planning and implementation of sustainable development projects. The Local Agenda 21 which was initially launched in four local authorities, which, initially will be extended to other local authorities by 2002. Greater community participation in promoting urban well-being will also be encouraged. The development of indicators for comparing and evaluating urban quality of life with international benchmarks is expected to improve the provision of quality services by the local authorities. 1.32 Several strategies for rural development will be adopted to reduce the urban and rural disparities. They include strengthening rural institutions, greater use of information and communications technology (ICT) in rural areas and improving the linkages between urban and rural economies. Rural communities will be regrouped into small townships to facilitate the provision of infrastructure facilities and services. Efforts will be undertaken to improve the supply of water and electricity to the remote areas through innovative ways. In addition, the development of indicators for rural quality of life will facilitate the close monitoring of the quality of life of the rural population.

Sustaining Economic Growth 1.33 There is a need to achieve sustainable rapid economic growth to become a developed nation by 2020 as well as to effectively meet the distributional objectives. The manufacturing and services sectors are expected to lead economic growth by generating new areas of investment as firms expand their activities along the value chain and move up the technology ladder. The performance of the agriculture sector will be enhanced by the substantial expansion in food 13

production. The development of the knowledge-based economy, while spawning new activities, will also bring productivity improvements and enhance competitiveness as well as contribute towards broadening the economic base and shifting out the production possibility frontier. While FDI will continue to be encouraged in selected areas, domestic investment will become the main driver for growth in line with the shift to an endogenously-led growth strategy.

Strengthening Sectoral Dynamism 1.34 The growth of the agriculture, manufacturing and services sectors will be further promoted during the OPP3 period. With regards to the agriculture sector, the focus will be on increasing food production to meet the growing domestic demand as well as for exports. For this purpose, the private sector will be encouraged to undertake medium- and large-scale commercial farming, facilitated by the establishment of permanent food production areas and agro-technology parks. The use of modern technology and farming methods will be intensified to enhance productivity and quality as well as reduce the cost of production. Market research will also be intensified in order to identify customer preferences and establish new marketing channels as well as to venture into export markets. In addition, special emphasis will be given to the restructuring of the smallholder sector particularly those engaged in uneconomic size holdings both in food as well as plantation crops with the view of increasing their income. 1.35 In the manufacturing sector, new growth areas in high technology manufacturing will be identified for further development, taking advantage of the infrastructure that has already been put in place. Product innovation and R&D will be emphasized. The cluster-based industrial development approach will also be applied to the new growth areas. The focus will be on raising value added by developing indigenous design and branding, as well as expanding into downstream activities such as marketing, distribution, packaging, product customization and delivery, and the development of other manufacturing-related activities. 1.36 In services, efforts will be intensified to develop the tourism, education, health, finance, ICT and transportation sectors to become internationally competitive and world-class. The development of the knowledge-based economy is also expected to accelerate the creation of new service industries such as in software and content development as well as enable the country to develop its strength in internet-based delivery systems, such as in commerce, banking, brokerage, 14

news, entertainment and courier services. The rapid development of the services sector during the OPP3 period is expected to significantly narrow the deficit in the services account of the balance of payments and further strengthen the external position of the economy. Promoting Domestic Private Investment 1.37 Domestic private investment will be promoted to unleash its growth potential so that a greater portion of wealth creation and profits will be retained in the country. While strengthening economic resilience, this will also set the stage for shifting to an endogenously-driven growth strategy by building indigenous capability to develop advanced technology as well as new products and services. To support the rapid increase in private domestic investments, the Government will provide a conducive environment in terms of the institutional and legislative framework as well as an efficient physical infrastructure. It will also ensure a stable macroeconomic environment and a more comprehensive financing infrastructure as well as provide customized incentive packages for strategic investments. The privatization programme will continue to serve as a vehicle to increase the proportion and scope of private sector participation in the economy. In addition, domestic investors will be encouraged to collaborate and forge strategic alliances with foreign partners in order to gain expertise, market access and specialized services. 1.38 To raise the level and quality of domestic investment, the private sector will be encouraged to expand into downstream and upstream activities; innovate by offering new and superior value in existing and new markets; build customer allegiance with customer-oriented production and marketing; acquire and use more technology; and develop a more creative and skilled workforce. The role of science and technology (S&T) as well as R&D will be emphasized in order to increase overall productivity and develop a strong industrial base. Encouraging FDI 1.39 Malaysia continues to be an attractive location for FDI in view of its substantial manufacturing base that is becoming increasingly sophisticated, as well as political stability, good legal framework, excellent infrastructure and telecommunications system, pro-business policies, good public administration, and a skilled and educated workforce with facility in foreign languages. The country will build on these strengths and continue to attract FDI, not only in 15

the manufacturing and related sectors, but also in strategic sectors such as in ICT, energy, port management and the financial sector. In addition, foreign investors will be encouraged to invest in human capital and undertake technology transfer, as well as provide expertise in management to raise national competitiveness and strengthen the countrys position in the international value chain. Pursuing Prudent Fiscal and Monetary Policies 1.40 The Government will continue to pursue a prudent fiscal policy. The overall fiscal deficit will be kept at a sustainable level so that the countrys external debt servicing ratio remains within a manageable level. The Government will return to the fiscal surplus policy with the recovery in private demand. Government expenditure will continue to focus on infrastructure for capacity expansion and the provision of social services. The tax system will be further strengthened to generate revenue, promote growth, savings and investment as well as achieve equity and efficiency. In addition, tax administration and compliance will be improved to expand the revenue base of the Government so as to enable it to raise the quality of social services and attract high calibre personnel into the public service. 1.41 The monetary policy will be directed towards promoting long-run growth with price and financial stability. In coping with the global environment characterized by uncertainty, monetary policy will be flexible and proactive in order to respond to new challenges effectively. The challenges will include managing the rapid movement of speculative and destabilizing short-term capital flows and adapting to the structural transformation of the economy and financial system, financial innovations and the emergence of new payment mechanisms such as e-money. Accordingly, monetary policy will be increasingly conducted through marketbased instruments to enhance effectiveness. Steps will also be taken to improve the dissemination of information to the market to increase transparency in relation to the conduct of monetary policy. In addition, the development of the bond market will allow more effective open market operations and reduce reliance on the more direct instruments of monetary policy. The Government will continue to maintain an exchange rate regime that is non-distortionary and provides a stable environment for trade, investment and growth. Strengthening the Banking Sector 1.42 A strong and resilient banking sector is a prerequisite for sustainable economic growth. A three-pronged approach will be adopted, which includes 16

creating stronger domestic banking institutions, strengthening the supervisory framework and instilling market discipline by market players and consumers. The consolidation of domestic banking institutions into 10 banking groups raised their capital base and size to improve the ability of the financial institutions to absorb risk, achieve economies of scale, and enhance the risk management expertise of the banking system. The supervisory framework and prudential guidelines governing the banking system will be continually enhanced to promote prudence and minimize systemic risk. 1.43 To instill market discipline in the banking system, greater product and institutional transparency will be introduced, which will enable consumers to make informed decisions on banks and banking products. New modalities in bank regulation will be explored, including using a market-driven approach in allocating risks and resources. Market participants will be required to provide greater disclosure and increase transparency and discipline. In addition, the supervisory authority will be vigilant in containing excessive risk-taking activities, minimizing moral hazard and protecting consumer interests. 1.44 To chart the strategic direction of the banking sector, the Financial Sector Master Plan (FSMP) will be implemented. The FSMP proposes the necessary regulatory framework to increase the resilience, competitiveness and dynamism of the Malaysian financial system. There will be a gradual and progressive liberalization of the sector at a pace that is consistent with the institutional and regulatory framework as well as the requirements of the economy in order to create a more efficient, competitive and market-driven financial sector. 1.45 Measures to identify and remove impediments to progress will be implemented, beginning with infrastructure improvements and increasing the intensity of domestic competition, so as to allow best institutions to flourish. This will be accomplished by building the capabilities of domestic institutions and increasing the incentives for these institutions to drive performance. In addition, steps will be taken to meet the socioeconomic objectives with the least possible distortion as well as to promote a more market-driven consumer protection infrastructure. 1.46 The programme under the FSMP will be implemented in phases over the OPP3 period, subject to achieving specified milestones and safeguards. This is to allow domestic banks to grow in capacity and strengthen their infrastructure before introducing new foreign competition. In the case of the insurance sector, deregulatory measures will be initiated to build domestic capabilities and strengthen 17

financial resilience, corporate governance and consumer protection mechanisms. The deregulation of incumbent players will be accelerated in order to promote greater competition within the domestic market. Development of the Islamic banking and takaful sector will first involve the strengthening of the operational and institutional infrastructure. This will be followed by greater competition and upgrading of the infrastructure, as well as raising the performance standards through progressive liberalization. Broadening and Deepening the Capital Markets 1.47 An important lesson from the 1997-1998 financial crisis was the need to diversify risks in the economy by developing alternative sources of financing and reducing over reliance on the banking sector. Private debt securities and secondary trading in the Government securities market will be further improved to complement the stock market. An active private debt securities market will be able to accommodate large and more complex funding arrangements to allow companies to obtain long-term fixed rate of financing at a lower cost than bank credit. In addition, the venture capital industry will be further developed to provide equity capital to knowledge-based start-ups with high risks but yield good returns. 1.48 In terms of the stock market, efforts will be taken to improve the dissemination of corporate information and educate investors, particularly the retail players, so that investment decisions are made based on fundamentals. The players in the capital market will also need to understand fully the risks involved and adopt effective risk management systems to deal with new risks that may arise. Capital market activities will be supported by strong and internationally competitive intermediaries and institutions. To address these areas and chart the strategic directions for the capital market development over the longer term, the Capital Market Master Plan (CMP) will be introduced. 1.49 Under the CMP, Malaysia is envisaged to establish a world-class capital market that is internationally competitive in all core areas to support the countrys capital and investment needs, as well as to be a highly efficient conduit for the mobilization and allocation of funds. This effort is supported by a strong and facilitative regulatory framework that enables the capital market to perform its functions effectively and provides a high degree of confidence to its users. To develop internationally competitive market institutions, a single Malaysian exchange and a single Malaysian clearing house will be established. The funding instruments and markets will be broadened and deepened through the development and enhancement of alternative capital raising avenues such as the corporate bond 18

market and venture capital. The stockbroking industry will be consolidated and a new category of intermediaries known as universal brokers will be created to develop a more competitive market for integrated financial services and prepare the industry for liberalization. Malaysia will be developed as an international Islamic capital market centre as part of the effort to build upon the countrys competitive advantage. 1.50 The investment management industry will be further deregulated to increase its effectiveness. The pension funds will be reviewed to allow for the development of a higher number of industry players with greater access to funds available for management. To promote a more conducive environment for investors, the framework for corporate governance will be strengthened and shareholder value recognition will be enhanced. A full market-based regulatory framework across all capital market segments will be adopted to ensure that market processes and disciplines complement the broad regulatory objectives as well as facilitate greater competition and innovation in the market place. Strengthening Corporate Governance 1.51 Measures introduced by the Government to reduce corporate abuses and stock market volatility as well as to strengthen the position of minority shareholders were aimed at improving transparency and overall corporate governance. In recognition of the need to further enhance the standards of corporate governance, the Malaysian Code on Corporate Governance was adopted to bring about stronger, more responsible, transparent and accountable management in line with international best practices. The Code contains recommendations on the principles and best practices for good governance; strengthening the overall regulatory framework for listed companies; training and education of corporate participants in Malaysia to prepare them for the implementation of the recommendations as well as measures to protect minority shareholders. During the OPP3 period, the Government will create greater awareness of the Code and encourage the private sector to conform to this. With the adoption of the Code, the corporate sector will move towards greater self-regulation, and this will be supported by improvements in the legal and regulatory environment to promote the culture of corporate excellence.

Meeting Global Competition 1.52 Competition at the global and regional levels is expected to intensify following implementation of the World Trade Organization (WTO) and the 19

ASEAN Free Trade Area (AFTA) commitments as well as the intensification of bilateral initiatives. Rapid advancements in ICT will intensify competition. Malaysia will continue to participate actively in these multilateral arrangements and fulfill its commitments for market openings. While it will continue to support the process of liberalization, it will be committed to do so at a pace that it is comfortable with and consistent with the institutional capacity of the country and its development objectives, so that the process is mutually beneficial. In this regard, Malaysia will participate in consensus-building initiatives with likeminded countries to be able to negotiate effectively. 1.53 Domestic industries will need to enhance their productivity, efficiency and innovative capability to meet global competition. Policies relating to trade, industry and technology will be streamlined so that domestic industries and enterprises can respond more effectively by producing goods and services that can successfully compete in the local and overseas markets. FDI will be leveraged upon to improve efficiency, enhance competitiveness and gain access to international markets. To monitor and provide direction for increasing Malaysias competitiveness, a National Council on Competitiveness will be established. Increasing Productivity 1.54 Productivity improvement is central to Malaysias economic growth and competitiveness. To raise productivity, greater efforts will be made to upgrade skills, adopt better management and organizational techniques, upgrade R&D and S&T as well as produce high quality and customized goods. The private sector will also be encouraged to seek internationally recognized quality standards including the accreditation by the International Standards Organization and other bodies. The knowledge content of products, services and internal processes must be substantially enhanced and accompanied by strong work culture and positive attitudes. The culture of excellence and the quest for continuous improvements will be promoted and targeted at individuals as well as business entities. Wage increases will have to be supported by improvements in productivity and work performance so that Malaysians can enjoy a higher standard of living without inflation. Initiatives will also be taken to reduce the cost of doing business so as to enhance competitiveness and productivity. The Government will continually assess and review the various cost components, including taxes, utility rates and fuel, transportation and labour costs to ensure that Malaysia remains costcompetitive. 20

Strengthening S&T and R&D 1.55 To maintain the competitiveness of Malaysian industries and to benefit from the knowledge-based economy, it is crucial to strengthen the environment for innovation and knowledge. The Government will re-examine existing innovation systems to be in line with future requirements. Attention will be given to improving creativity and innovativeness of the education and training delivery system, enhancing S&T and R&D, and ensuring the availability of financing facilities. The Government will promote a culture of innovation as well as networking and clustering among stakeholders to enhance technology infusion. Efforts will be made to increase collaboration between public sector research institutions and the private sector for effective development, dissemination and commercialization of R&D. 1.56 In order to encourage S&T and R&D activities, the Government will provide the appropriate environment and active support to nurture and accelerate the growth of patents, trademarks and copyrights. Appropriate regulation will also be introduced to protect intellectual property rights in the context of the rapid development in computer-mediated networks and global information infrastructure which will enable the downloading of copyright materials. Developing Entrepreneurial and Technopreneurial Capacity 1.57 As a traditional trading nation, Malaysians have been endowed with entrepreneurial skills. These skills, however, are inadequate to meet the requirements of an economy in an environment of increasing globalization and rapidly changing technology. Malaysian enterprises will face increasing competition from entrants in the domestic market as well as in the international market. To succeed, Malaysian businesses and corporations will need to be quick to access knowhow as well as be able to identify the commercial potential of the opportunities that arise and take calculated risk. Entrepreneurs must be prepared to use the latest knowledge and technologies, operate and manage businesses in different cultural milieus, have superior negotiation skills and be able to forge strategic alliances. They will need to marshal their knowledge, skills and creativity to improve their products and services and raise their productivity. In this connection, the Government will support private sector initiatives to strengthen entrepreneurial capacity as well as encourage the growth of technopreneurs. In addition, the ongoing efforts to develop Bumiputera entrepreneurs will focus on enhancing resilience and self-reliance so that they can compete in the domestic and international markets. 21

Developing World-Class Companies 1.58 Malaysian firms should think global and look beyond the domestic market. During the OPP3 period, the focus will be on developing world-class Malaysian companies that can act as role models for other Malaysian companies to pursue excellence. These companies should benchmark against world-class standards, adopt international best practices and promote a culture of excellence and productivity within their organizations. The competitiveness of firms depends on their ability to seek opportunities and source for inputs, components and services at the most competitive costs. Domestic businesses will be encouraged to establish symbiotic relationships with foreign partners to gain market access, technologies and know-how as well as other inputs including packaging and brand identification to enable Malaysian goods to compete in global markets. Developing Local SMEs 1.59 Small- and medium-scale enterprises (SMEs) serve as a strong foundation to anchor the nations industrial sector and provide the necessary base upon which future industries can be developed. In the development of industrial clusters as envisaged under the Second Industrial Master Plan (IMP2), SMEs will evolve as key suppliers and service providers to leading industries. For SMEs aspiring to go into the global market or become suppliers to multinational companies, they must be committed to meet the highest standards of performance on a sustainable basis and move their manufacturing processes to a higher level through continuous R&D and skills and technology upgrading. To stimulate the growth of SMEs, the investment threshold under the Industrial Coordination Act (ICA) will be reviewed. 1.60 SMEs will be encouraged to quickly integrate into IT-based manufacturing, focusing on all key segments of the manufacturing value chain, from designing to marketing. They must adopt the best manufacturing practices that are universally recognized and accepted, so that they can excel in their core strengths and be able to integrate with cross-border collaborations that characterize the international production network. In that integration process, Malaysian SMEs will be encouraged to work towards establishing and strengthening their own niches in the market and emerge as market leaders in their own right. 22

Establishing a World-Class Public Sector 1.61 A world-class public sector is important to support rapid economic growth and ensure improvements in the standard of living and quality of life. It is, therefore, necessary to take steps to attract and retain personnel of high calibre so that public administration, public services, economic management as well as the protection of national interest at international fora can be conducted at the highest level of proficiency. There will be selective recruitment of personnel including those with specialized skills, experience and outstanding track record. The capability of existing workers will be upgraded to raise the quality of public service to be world-class. A competency-based human resource management approach will be adopted. 1.62 The programme to reform the public sector will be further strengthened during the OPP3 period. It will be aimed at inculcating a culture of excellence in the public sector, based on the core values of quality, productivity, innovation, integrity, discipline, accountability and professionalism. Efforts will be made to continuously increase productivity, improve the delivery system and discard procedures and regulations that become inappropriate. Emphasis will be given to strengthening the monitoring mechanism as well as the capacity to ensure that projects are implemented according to schedule and meet their intended objectives. Efforts will also be taken to improve the administration of the regulatory and approving bodies at the Federal, state and local levels so as to facilitate private sector growth and wealth creation, protect public interests, and improve the wellbeing of Malaysians. The role of the public sector as a regulator to safeguard public interest will also be strengthened in the context of further privatization during the Plan period. 1.63 Principal strategies to advance administrative reforms in the Malaysian public service include providing more customer-oriented services, improving system and work procedures, upgrading the use of ICT, strengthening publicprivate sector cooperation, improving organizational structures and human resource development, enhancing accountability and discipline and inculcating values of excellence. The public sector administrative reform agenda will continue to incorporate a wide range of best practices that have been applied and tested worldwide. The various initiatives under the quality movement as well as the e-government project will ensure that the public service keeps abreast with service-oriented developments internationally and incorporates the best management practices. 23

Developing a Knowledge-based Economy 1.64 The knowledge-based economy is where the acquisition, utilization and dissemination of knowledge provide the basis for growth. The development of a knowledge-based economy involves enhancing the value-added of all productive activities through knowledge utilization, in addition to creating new knowledgeintensive industries. It will strengthen Malaysias competitiveness and open up new opportunities for the country. Among the opportunities are increased global trade and investment, better access to technology, the possibility for leapfrogging to catch up with developed countries, the availability of a platform to build strategic alliances with key players in selected industries as well as expanding existing and generating new areas of investment. The increased use of knowledge, coupled with a better skilled workforce will also contribute towards improving productivity levels and shifting the production possibility frontier outwards. 1.65 The developments in and utilization of ICT and e-commerce will facilitate the establishment of an efficient and up-to-date information system to support trade and investment. This will allow Malaysians to seek new markets and trading partners for their exports, source the most competitively-priced inputs, and set up their enterprises abroad to enhance competitiveness. The knowledgebased economy will generate new activities for investment within existing and new industries as a result of the introduction of high-technology and knowledgeintensive production processes. 1.66 To develop a knowledge-based economy, a master plan to facilitate the process will be introduced. Among the critical areas that will be addressed are human resources, S&T and R&D, infostructure and financing. In addition, efforts will be taken to change the mindset of all segments of society, particularly the corporate sector to be more receptive to the adoption of ICT in business transactions and in-house operations. The culture of acquiring knowledge on a continuous basis will be promoted to develop a learning society. While efforts are taken to build a knowledge-based economy, parallel measures will be introduced to ensure that this development does not lead to a knowledge divide, particularly between the rural and urban communities and different income groups. 1.67 The knowledge-based economy will require the public and private sectors and the NGOs to work in a close collaborative partnership. The platform for such collaboration already exists under the Malaysia Incorporated mechanism, with the Malaysian Business Council at the apex. The public sector will assume a supportive role by providing a conducive environment as well as acting as a 24

catalyst for the private sector to spearhead the development of the knowledgebased economy. The protection of the intellectual property rights as well as privacy and security will be strengthened to encourage innovation and improve information flow. The Government, private sector and NGOs will collaborate to narrow the digital divide between the rural and urban areas as well as different income groups so that those who are less privileged have equitable access to the new opportunities generated by the knowledge-based economy .

Strengthening Human Resource Development 1.68 Malaysias capability and capacity in acquiring and utilizing new knowledge and technologies will be determined by the quality of its human resource. A competent, disciplined and highly skilled labour force with strong ethical and moral values and commitment to excellence must be developed. To face the challenges of globalization, Malaysians will have to be equipped with a strong base in education and training and possess a range of generic skills, including communication and linguistic abilities. Efforts will be made to increase accessibility to education and training and reduce the performance gap between urban and rural schools. More schools with better teaching and learning facilities as well as hostels will be built in rural and remote areas to provide a more conducive environment for students. Besides maintaining a high level of competency in Bahasa Malaysia among students, the level of proficiency in English as well as other foreign languages will be raised. 1.69 To meet the requirements of the knowledge-based economy, there will have to be a paradigm shift in the policies and strategies of human resource development. The education and training system will be reoriented to be more effective in imparting skills as well as focus on areas required by the economy. The Government will give priority to improving facilities and infrastructure and intensifying the use of ICT in all schools and institutions. Greater emphasis will also be given to raising the standard of the teaching and learning of mathematics, science and foreign languages. 1.70 Private sector participation will be further encouraged to complement public sector efforts in the area of tertiary education to provide greater number of places to meet the increasing demand from qualified students as well as to meet the human resource requirements particularly in the area of S&T. The Government will, however, ensure that these institutions provide quality education at reasonable rates. 25

1.71 Malaysia will also be developed into a regional centre of educational excellence. The capacity of public tertiary institutions will be increased and they will concentrate on programmes in new technologies and disciplines. While the private institutions will be encouraged to develop niche areas to attract foreign students, the public universities will develop centres of excellence and act as the springboard for innovation and development of indigenous technology. Universities will be encouraged to collaborate with industry in order to undertake research with commercial potential. To ensure that all tertiary institutions have international standing, a rating system based on norms comparable to reputable universities will be developed to rank these institutions. 1.72 Lifelong learning will be introduced to continuously upgrade the quality of the workforce which must keep pace with changing technology so that structural unemployment is minimized. Distance education and virtual learning will be developed as an important element in continuing education in the workplace. In this regard, the private sector will be encouraged to provide enterprise-based training, distance learning programmes and web-based learning, especially in technical areas. 1.73 The Government will also promote the development of the creative and performing arts and nurture talents in these areas. This is in line with efforts to preserve and promote the rich Malaysian cultural heritage as well as cultivate a society that is appreciative of the arts. The development of the arts will not only provide the avenue for talented individuals to excel in their fields but also contribute to the vibrancy of the Malaysian lifestyle. Outstanding Malaysian artists and performers will also be given the opportunity to fully develop their talents and achieve international recognition.

Developing a Generation of Resilient Youths 1.74 To meet the challenges arising from rapid economic development and globalization, and contribute effectively to nation building, youths will need to be equipped with appropriate skills and knowledge as well as the right values. Their access to education and training will be improved with particular emphasis on achieving a high level of literacy in information technology (IT) so that they can participate in the opportunities that are generated in the process of development. Efforts will be taken to enhance the entrepreneurial and management skills of youths to instil interest in business at an early stage and increase the number of youths involved in commerce and industry. Emphasis will also be given to nurturing a generation of young and dynamic leaders who are able to mobilize youths to contribute positively to the nation. 26

1.75 Youths will be properly guided to develop the right values and attitudes. They will be taught to respect their parents, elders, teachers, the institutions and laws of the country. While striving for self-improvement, they must be imbued with the spirit of volunteerism and the eagerness to contribute to society and the nation. Their level of civic-consciousness must also be raised. The pursuit of knowledge and the quest for excellence will need to be nurtured as core values. Youths should also be instilled with strong moral and ethical values and abstain from activities that work against their personal well-being and the welfare of the nation. Efforts will be intensified to ensure that they do not involve in vices such as drug abuse, gambling, gangsterism and other criminal activities. 1.76 In addition, youths should participate more actively in sports as well as excel to achieve international standards, bringing glory to the nation. Basically, these core values will hold youths in good stead to withstand negative influences and exercise good judgement in the choice of lifestyle and social practices. Towards this end, the family and community as well as the NGOs and youth organizations will need to play a more active role to complement the efforts of the Government.

Enhancing the Role of Women in Development 1.77 A resilient and competitive economy cannot be created unless the full potential of all its members is utilized. Towards this end, opportunities in employment, business and social activities will be made available without gender bias. Greater access to training and retraining will promote employment opportunities and greater occupational mobility. Information pertaining to the labour market and opportunities for advancement in education and business will be made more accessible through the use of ICT. At the same time, the participation of women, particularly those with family commitments, will be enhanced by more extensive use of flexible working hours, the provision of crches at workplaces as well as enabling them to work from home. 1.78 Entrepreneurship among women will be promoted actively by providing greater access to information on starting businesses. Banks and financial institutions will be encouraged to provide credit to assist women who want to venture into business. This will be complemented by efforts to develop women entrepreneurs through the provision of assistance to develop home-based business. The relevant Government organizations at the Federal, state and local levels as well as women organizations will organize courses to promote entrepreneurship among women. 27

All forms of gender-based discrimination and bias that inhibit the fullest contribution of women will be identified and progressively eased out either by legislation or education.

Pursuing Environmentally Sustainable Development 1.79 During the OPP3 period, the Government will strive to ensure that the environment is clean, healthy and productive as well as capable of sustaining the nations needs and aspirations. The Government will explore opportunities for multiple benefits, identify and implement measures that are prudent and costeffective, in order to move Malaysia towards a more sustainable and resilient future. Socially and environmentally sustainable economic development will be realized by adopting an appropriate mix of policies, practices and technologies that will build upon the synergies between the environmental and economic systems. In addition, the Government will continue to closely monitor developments taking place on global environmental issues as they may have a bearing on Malaysia, including imposing restrictions on our development and trade policies. Domestically, Malaysia will take steps to fulfil its Conventions, Protocols and other international environmental obligations and to ensure that its programmes and projects are in line with its commitments.

Integrated Approach and Strategies 1.80 During the OPP3 period, emphasis will be placed on addressing environmental and resource issues in an integrated and holistic manner. The challenge will be to identify prudent, cost-effective, and adaptive management approaches that yield multiple benefits for a more sustainable future. These approaches will, among others, be geared towards addressing the challenges of providing access to clean water, providing adequate food without excessive use of chemicals, using more organic fertilizers, providing energy services without environmental degradation, developing healthy urban environments, and conserving critical natural habitats and resources. 1.81 The management of land resources will be further improved through more integrative land-use planning. The National Biodiversity Policy will form the basis for integrating and consolidating biodiversity programmes and projects in the country. Efforts to manage forests sustainably will be intensified and multipleuse forestry expanded. Steps will be taken to formulate integrated river basin 28

management plans to improve water quality and supply as well as manage water resources. To ensure sustainability of coastal resources, integrated coastal management plans will be introduced in all states.

Reducing Pollution Intensity 1.82 A critical challenge will be to reduce energy, materials, pollution and waste intensity of urban-industrial activity. Measures to influence the choice in technology and management of new urban and industrial investments will be put in place, including steps to promote the reduction, re-use and recycling of materials. The Government will go beyond controlling pollution at source and adopt preventive measures that include the policies that drive down energy, materials, pollution and waste intensity of urban-industrial activity in a process of continuous improvement. This will require moving from the current pollution abatement and clean-up paradigm and technology-retrofit approach to one where technology itself is the source to prevent pollution and cut resource intensity. Efforts will also be taken to encourage the recycling of materials.

Increased Use of Economic Instruments 1.83 The Government will continue to implement the Polluters Pay Principle, and intensify enforcement efforts to ensure that environmental laws and regulations are complied with. However, these measures will be complemented by the use of innovative economic and tax instruments, including the removal of distortions and barriers that impede efforts in improving environment quality and optimal natural resource use.

Environmental Performance Standards 1.84 Efforts will also be channelled at promoting environmental performance measurement as a basis for harnessing market forces and community engagement in addressing environmental issues. Once environmental and resource issues are identified, measured and tracked, including through the use of sustainable development indicators and various environmental standards such as ISO 14000 and other standards, then the environmental intensity of economic activity becomes more susceptible to the force of the market and society at large, through consumer demand, community pressure or supply-chain management. 29

IV.

CONCLUSION

1.85 For the success of the OPP3, there should be total commitment of all Malaysians, a change in the mindset and a sense of urgency in the face of increasing competition in the years ahead. To build a resilient and competitive economy, the Government will continue to be responsive and business-friendly and adopt appropriate market-oriented policies and incentives. The business community should be willing to take risk, invest in R&D, be able to adapt quickly to changes and adopt new technology, particularly in the context of the knowledge-based economy. The workforce should be disciplined, productive, committed and willing to learn and improve continuously. The Government, complemented by the private sector, will continue to ensure a united and equitable society through its poverty eradication and distributional policies. Above all, the society should stand united and remain resilient in facing the challenges of the decade.

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