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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : New Economic Policy (Part 4)



(2) Implications of the NEP on economic growth (cont'd)

(c) The NEP results in brain drain
Brain drain is when a country's highly educated population emigrate to other countries, usually countries that offer better economic or/and social opportunities. Based on a study conducted by the IMF in 1998, until 1990, Malaysia ranked the highest (as a percentage of population) in terms of persons with tertiary education emigrating into OECD countries. She registered a staggering figure of 29.4% - see table 1. Besides the fact that such individuals are highly educated, the fact that they have been successful in obtaining permanent residence status in OECD countries implies that they possess scarce and wanted talent. Therefore, the implication here is that a large chunk of the cream of the crop, who would have been major contributors to her economic advancement and development have ironically been lost to the more advanced countries.Discussion on the effects of the NEP on economic growth is crucial because it is intertwined with a host of other factors, which affect the living standards of present and future generations of Malaysians. Hence, prior to analysing the effects of the NEP on economic growth, we will first examine the extent to which Malaysians' living standards have improved over the course of the NEP.

Table 33: Migrants with tertiary education as a percentage of home country population

In addition, as at 1990, the number of Malaysian immigrants in Australia was a massive 66,822. More appalling, in 1998, a local leading English newspaper published a study, which estimated that the number of undocumented Malaysian migrants into Australia was an astounding 1.0 mln. Additionally, between 1997 and 2005, 8,941 Malaysians emigrated to New Zealand and between 1991 and 2004, 8,850 Malaysians emigrated to the UK.

Having established that Malaysia suffers from acute brain drain, 2 salient issues need to be addressed:

  1. What are the implications of a brain drain on economic growth? and
  2. Is the NEP necessarily at fault for Malaysia's high migration rate?
(i) What are the implications of a brain drain on economic growth?
Generally, the most frequently sited costs arising from brain drain are loss of knowledge and scarce skills and loss of tax revenue. Because it is difficult to quantify the exact cost of emigration from a country's economic growth point of view, for the purpose of this discussion, the costs of emigration will be discussed within the context of the development of the IT industry, an industry that is perceived as a necessity in moving up the value chain. In a study conducted by the OECD, the cost of training a single IT worker is RM600,000. Recognising the high cost involved in grooming IT professionals from scratch, Australia encouraged overseas full fee paying IT graduates to apply for permanent residence in mid-1999. In 1999-2000, 83 permanent residence applications from Malaysian IT graduates were approved. If the OECD estimate is accurate, the emigration of the 83 IT graduates alone is worth RM49.8 mln, illustrating the economic loss Malaysia experienced from emigration.

Additionally emigration constrains economic growth because it results in the shortage of highly-skilled workers who are essential in realising ambitious plans such as the Multimedia Super Corridor, which policymakers have cited as an important part of Malaysia's development plans. Thus, despite the government having committed a large amount of resources to the development of such projects, the emigration of highly skilled individuals resulted in a shortage of relevant expertise and inhibits Malaysia from realising her ambitious plans. In addition, to overcome such shortages, the country resorts to employing foreign workers, which in the case of Malaysia has not benefited the economy.

Having established that Malaysia suffers from brain drain and that this in turn leads to loss of economic growth, the more pertinent issue at hand is the extent to which the NEP should be blamed for Malaysia's brain drain.

[ii] Is the NEP necessarily at fault for Malaysia's high emigration rate?
The problem of brain drain is not peculiar to Malaysia. It is a common problem amongst developing, less developing and the even developed countries, due to the fact that other developed countries offer more promising opportunities for highly skilled labour. Because of this commonality, it is extremely complex to conclusively and undisputedly prove that the problem of brain drain in Malaysia can be, in fact, attributed to the NEP. Nevertheless, anecdotal evidence has generated daunting responses.

It was earlier discussed in section (a) that the NEP deprives deserving Malaysians of higher education and that because of this phenomenon, many, whose parents can afford to send them abroad, commonly seek higher education in developed countries such as Australia, the UK and the US. This phenomenon has several repercussions. First, Malaysia loses large amounts of precious foreign exchange, which our Central Bank devotes much of its attention to preserving, as the Malaysian Ringgit is exchanged for foreign currency for payment of university fees along with other living expenses. Secondly, and more importantly, is that a significant proportion of Malaysians (our guesstimate is that the figure stands at approximately 75%-80%), both Bumiputra and non-Bumiputra who have gone abroad for further studies, are unwilling to return to Malaysia. Why?

A common response from those who have emigrated is that they are unwilling to return to a country where biases prevail over meritocracy and due recognition is rarely given to those who deserve it. It is held that the NEP openly shows preferential treatment to selected groups, while blatantly discriminating against others under the guise of promoting greater equality.

Sadly, the general consensus is also that despite the fact that Malaysia is supposedly home, they feel less alienated in the foreign countries because the degree of discrimination (both implicit and explicit) is less blatant. Moreover, the majority of those who do return to Malaysia only do so due to lack of choice, as they were unable to find employment in the foreign country and consequently, were unable to get their visas renewed or due to various personal and family reasons like aging parents. Even then, they continue to seek opportunities to qualify for permanent residence status in other countries.

Similarly, the others who did not study abroad but have emigrated from Malaysia commonly cite giving up on a country that does not appreciate nor recognise their effort as the primary reason for migrating.

Table 34: Inflow of Msian Immigrants into Australia

Tables 34 and 35 show the number of immigrants from Malaysia to Australia and the United States respectively for selected years. In Australia's case, the number of Malaysian immigrants plunged in the early stages after independence and subsequently, skyrocketed upon the implementation of the NEP. As for the United States, prior to 1980, the number of Malaysian migrants was relatively low. However, after 1980, there was a sudden influx of Malaysian immigrants into the US.

Table 35: Inflow of Malaysian Immigrants into the US

While we acknowledge that such evidences are not "scientifically" conducted, the perception of Malaysia being a country which does not function based on meritocracy as a consequence of the NEP is too widespread to be ignored. It is peculiar that Malaysian policymakers have yet to take this problem, which is becoming increasingly threatening to the country's future, seriously. Therefore, since the general consensus obtained through anecdotal evidence is the fact that the injustice is the primary reason for emigration, it is only logical to attribute much of the blame of Malaysia's loss of economic growth, arising from brain drain, to the NEP. This is because it has been earlier established in Section (i), which tackled the issue of national unity, that the NEP displays extreme injustice by showing extreme preferential treatment to certain groups, while discriminating against the rest.

(d) The NEP deters FDI
It is an undisputed fact that foreign direct investment (FDI) contributes significantly to the economic growth and development of a country, especially that of developing economies such as Malaysia. According to a study conducted by Japan's External Trade Organisation (JETRO), it was discovered that there is empirical evidence to prove that FDI in Malaysia's manufacturing sector has positively contributed to Total Factor Productivity (TFP), a component of growth that is associated with greater levels of productivity and efficiency.

The said JETRO study cited FDI's contributions to TFP at 2 levels:

  1. Foreign companies, which entered Malaysia, were generally considered more productive than local ones for 2 reasons:

    Foreign manufacturing firms in Malaysia were generally export-oriented firms, making productivity a criterion for survival since they are forced to compete in the international arena; and

    Firms are unlikely to venture into international markets in the first place unless they are superior to local firms in aspects such as production technology and management know-how.
  2. The entry of foreign firms could increase the productivity of local firms for 2 reasons:

    If foreign firms compete with local firms, the entry of the often better equipped and more experienced foreign firms intensifies competition, and thereby, forces local firms to improve their productivity levels in order to remain competitive; and

    Local firms may gain the benefits from spillover of technological know-how, be it through direct or indirect transfer of knowledge, especially if local firms are complementary to foreign ones.
Having established the importance of FDI to economic development and growth, we will now analyse the degree of validity of our argument that the NEP indeed deters FDI, and thereby, contributes to Malaysia's relative loss of economic growth.

As discussed in Section 1, which dealt with the implications of the NEP on national unity, the Industrial Coordination Act (ICA) 1975 was enacted with the objective of advancing Bumiputra interests although there was no explicit mention of its coherence with NEP objectives. This is because, along with a whole host of other criteria, which were in line with the NEP, the ICA stipulated that all manufacturing firms that had paid-up capital of more than RM250,000 (later increased to RM2.5 mln) were required to comply with the 30% Bumiputra ownership requirement. Figure 18 shows that upon the implementation of the ICA, FDI plunged by 38.9% and failed to recover to the 1974 level until the 1980s. To make matters worse, Malaysia decided to launch a second round of import-substitution policies in the early 80s, deterring FDI again, just when it was on the verge of recovering.

Figure 18: FDI

However, in 1986, controls on FDI were liberalised dramatically when Malaysia encountered her Depression, causing policymakers to realise that the tightly regulated environment, along with the import-substitution strategy, was unsustainable and detrimental to economic development. As such, export-oriented policies were reinforced, whereby incentives and exemptions were granted to firms that manufactured products for exports. With the relaxation of the ICA requirements, FDI inflows surged (see figure 19), illustrating the extent to which the ICA deterred FDI inflow.

Figure 19: Share of foreign companies' fixed assets in manufacturing sector

Thus, because the ICA, which was part and parcel of the NEP, played a major role in deterring valuable FDI inflows, the NEP is a prime reason for Malaysia's loss of economic growth and development.


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MEH: New Economic Policy (Pt5)>>