TODAY'S budget, to be tabled by Prime Minister Datuk Seri Dr Mahathir Mohamad, is significant in more ways than one.
I mentioned in my commentary on Wednesday (“Prudent budget with many goodies”) that the Prime Minister is in a good mood and expectations of goodies for the rakyat are not misplaced. This is understandable given that this will be Dr Mahathir's last budget and that a general election is on the horizon.
With the economy rebounding, the Prime Minister can afford to be generous in his farewell budget.
But so many sectors and interest groups have come out with their “wish list” that the government is having problems managing these expectations.
The government may be able to satisfy expectations if there are 100 wishes. But if there are 500 wishes, then a lot of people are going to be disappointed.
So my advice is: lower your expectations. The budget will contain many goodies, but certainly not enough to satisfy everyone.
But expectations of tax cuts and relief should not distract us from the importance of Budget 2004.
It signals a generational change. Dr Mahathir has been Prime Minister for 22 years and has radically transformed the Malaysian economic landscape.
In 1981, rubber and tin were the pillars of the economy; today it's services, oil and exports.
But it's time to take a serious look at where the economy is heading and whether it is properly equipped to meet the challenges of globalisation. Our future prosperity depends on how we position ourselves in a fiercely competitive world.
Basically, Malaysia needs to re-look at its value chain.
The economy has gone through a number of phases since national independence 46 years ago. We moved into manufacturing starting with import substitution, then exports of textiles and shoes, then electronics.
But, throughout, this manufacturing/export orientated policy hinges on two factors – foreign direct investments (FDIs) and cheap labour, first local then foreign.
Our export policy has been so successful that today Malaysia is among the top 20 trading nations; our total trade is worth more than the total trade of the sub-continent countries of India, Pakistan, Bangladesh, Nepal and Sri Lanka combined.
But this success has its drawbacks. For one, the Malaysian economy is too dependent on the external environment. Our trade is equivalent to 2½ times our gross national product, compared with 30% for the United States.
Basically, Malaysia provides only the location and infrastructure for the FDIs; there is very little local input or value-added.
Also, many foreign investors, particularly in the electronics and export sectors, hardly pay any tax because of the many tax breaks available to them.
With FDIs moving to China and (very likely in future) India, Malaysia needs to change its economic strategy. FDIs are still welcomed, especially in services and high-tech industries, but realistically, we should not expect a lot of FDIs in the manufacturing sector.
Therefore, we need to grow our own industries and help them to compete in the global market place.
Instead of leaving it to his successor, Datuk Seri Abdullah Ahmad Badawi, Dr Mahathir has decided to announce this policy shift in Budget 2004. This will make it easier for Abdullah to implement the structural changes when he takes over.
Apart from promoting new growth industries, such as education, health, tourism and knowledge-based enterprises, Budget 2004 will single out the small- and medium-size enterprises (SMEs) for special attention.
They will be the future drivers of the economy. The budget will encourage them to grow and export.
Malaysian manufacturers will be given incentives to develop brands that can compete in the international market place.
Currently, we have some great brand names: Petronas (oil), Shangri-la (hotels), MAS (airlines), Royal Selangor (pewter and gifts), Sime Darby (trading), YTL (utilities), Maxis (telecommunications) and Maybank (financial services). There are literally dozens of other Malaysian companies or brands which have world-class potential, some of them quite small, but with innovative, cutting-edge or niche products.
I like to comment on speculation that the government will be divesting more assets (including listing more government-owned companies on the stock market) to raise revenue and to add liquidity to the KLSE.
This is a good move. The government is holding on to too many assets and is currently a bit tight for cash. Divestment will unlock the values of these assets while helping to keep the budget deficit within manageable limits. I believe the deficit will be under 4% of gross domestic product compared with 5.6% for 2002.
The nation's immediate and medium-term prospects look promising enough.
Dr Mahathir is leaving behind a strong economy but one that needs a fair bit of restructuring to remain competitive. It's Pak Lah's responsibility to build upon this success.