MICPA 51st Anniversary Commemorative Lecture

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MICPA51st Anniversary Commemorative Lecture

• The New Economic Model and the Role of
  Accountants
• Andrew Sheng
• Member, NEAC
• Kuala Lumpur
• 20 April 2010
• All views expressed here are personal to author.

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Introduction The NEM principles and policy
direction

• Five Key Questions
• Where are we? Malaysia is suffering from
  lacklustre private investment, lack of
  innovation, a low-skilled labour force, and
  governance structure which is not conducive to
  business development.
• Whats happening around us? The global landscape
  is changing with leading countries exhibiting a
  new set of distinguishing characteristics.
• Which advantages do we have? Malaysia exhibits a
  host of advantages, including biodiversity and a
  natural resource base, strategic location in a
  high growth region, a well-established
  manufacturing base, and an attractive standard of
  living.
• Where do we want to be? Malaysia wants to be an
  Advanced Nation, meaning a high income, inclusive
  and sustainable economy, by year 2020.
• How do we get there? The NEM will be enabled by
  key actions involving political leadership and
  Rakyat preparedness, driven by a set of strategic
  initiatives.

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Section I

• I. Where are we?
• II. Whats happening around us?
• III. Which advantages do we have?
• IV. Where do we want to be?
• V. How do we get there?
• The NEM Strategic Initiatives

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Post Asian Crisis, our growth rate has been
mediocreWe are no longer a clear leader in the
region
n
Average annual GDP growth
Pre-crisis 1990-1997
Post-crisis 2000-2008
China
China
Malaysia
Vietnam
Singapore
India
Vietnam
Malaysia
S. Korea
Singapore
Taiwan
Indonesia
Indonesia
Philippines
Our growth rate is now equivalent to that of our
neighbouring countries
Thailand
S. Korea
India
Thailand
Philippines
Taiwan
US
UK
UK
US
Japan
Japan
Average 6.0
Average 5.0
Source BCG, The conference Board Groningan
Growth and Development Centre, Total Economy
Database 2009
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Major concerns voiced out by potential
investorsMainly on the lack of talent and red
tape

• Two main recurring themes voiced out by
  stakeholders during consultative engagement
  groups
• Available talent and skills not forthcoming from
  Malaysia. Potential firms are finding it hard to
  justify setting up operations in Malaysia due to
  the appropriate lack of skills being available
• Highly bureaucratic administration and overly
  cumbersome red tape increases the cost and time
  invest and do business in Malaysia comparatively

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Talent is lacking and wanting Human capital has
been leaving the country and we are not nurturing
enough local talent
Number of skilled expatriates in
Malaysia 2000-2008 no. of workers
Graduates from IPTA and IPTS in degree
programme 2002-2007 no. of graduates
83,119
82,700
18
72,065
17
68,035
Technical
of workers
62,211
17
57,107
9
26
31
16
Science
32
12
34
29
30
Arts
57
CAGR -9
58
52
55
58
49
2007
2002
2003
2004
2005
2006
Graduates from technical and vocational schools
1999-2009 no. of graduates
Total
Services
Manufacturing
Construction
Other
Education
Source BCG, DOS, NER 2008
Source MOE and MOHE
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Present Malaysian workforce and jobs not
conducive for growthEducational profile of
workforce and jobs are cause for concern going
forward
Malaysia 80 of workforce educated up to SPM
level only
Jobs Only 25 of Malaysian jobs are in the
higher skilled bracket. Developed nations have
higher proportion
Source Malaysia DOS, Korea International
LabourOrganisation, Taiwan Department of
Statistics
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Dominance of low skill levels across almost all
industriesThis denotes the daunting work to
upgrade skills to move up the value chain
Malaysian Labour force 2007 in thousands
1,871
1,807
1,450
1,246
972
858
537
487
257
Source DOS, EPU Economic Model
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Doing business in Malaysia is difficult thus
losing out comparativelyInstitutional structures
and processes impede investments
Global ranking according to Doing Business 2010
report Malaysia losing out on all counts
Ease of Doing Business Starting a Business Dealing with construction permits Registering property Trading across borders Enforcing contracts
Singapore 1 4 2 16 1 13
New Zealand 2 1 5 3 26 10
Hong Kong 3 18 1 75 2 3
US 4 8 25 12 18 8
UK 5 16 16 23 16 23
Thailand 12 55 13 6 12 24
Japan 15 91 45 54 17 20
S. Korea 19 53 23 71 8 5
Malaysia 23 88 109 86 35 59
Source World Bank
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We continue to lose out to our Asian
neighboursWe spend less on scientific research
Country scientific infrastructure ranking Country scientific infrastructure ranking Country scientific infrastructure ranking
Ranking 1997 2008
China 28 6
Indonesia 35 25
Malaysia 24 28
India 29 29
Expenditure on RD ( of GDP)
Ranking based out of 55 countries
Source DOS Malaysia, World Bank and IMD, BNM
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Low wage growth for majority of workers
constrains consumption58 of households have
income less than RM3,000 per month
Top 20 earners
Top 20 earners gradient trend line in tandem
with GDP per Capita
Income Gap Widening. Greater Disparity in
Distribution
Middle 40 earners not much better than bottom 40
Majority 80 earners lags GDP per Capita growth
drag on economy
Bottom 40 earners having the slowest growth
Source NEGG various Household Income Surveys,
BNM Data. All in 1999 Constant Prices
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These deficiencies are preventing us from moving
forwardFundamental reform is long overdue
Education sector failing to deliver talent to the
economy
The lower income group (ltRM 3,000) is falling
behind and not realising its potential
contribution
Private sector short-sighted
Perception of high levels of corruption
We are trying to compete globally with
significant handicaps
Ineffective and siloed government bureaucracy
impeding investment
Labour market distortion impeding productivity
Controlled pricing system that results in gross
misallocations
Loss of top talent from Malaysia
Ethnic-based economic policies encouraging
rent-seeking and patronage
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Section II

• I. Where are we?
• II. Whats happening around us?
• III. Which advantages do we have?
• IV. Where do we want to be?
• V. How do we get there?
• The NEM Strategic Initiatives

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Global dynamicsThe post-crisis global
environment is changing very fast
LEADERSHIP
GOVERNANCE

• Economic epicentres shifting to China India
• Fast, nimble high-income ICT competitors, e.g.
  Korea, Taiwan, Israel

• National governance becoming more bottom-up
• Public Private partnership collaboration
• Trade barriers continue to come down but
  bilateral and regional trade blocs are increasing

• Resource-rich countries, such as Canada,
  Australia, and Middle East prospering

• Internet changing information transparency and
  discourse

PEOPLE

• Skills and talent more mobile
• Values and incentives clashing
• Security and well-being jeopardised
• Hunger for greater inclusiveness and equality

PLANET
PROFITS / PRODUCTIVITY

• Branding, networks, distribution and supply
  chains determine profits

• Climate change

• Excess consumption and waste depleting
  non-renewable natural resources
• Sustainable growth comes from nurturing healthy
  ecosystems

• Technology and innovation drive productivity and
  profits for high value services
• Speed to market is critical

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Section III

• I. Where are we?
• II. Whats happening around us?
• III. Which advantages do we have?
• IV. Where do we want to be?
• V. How do we get there?
• The NEM Strategic Initiatives

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We are blessed and well bestowed with gifts Rich
in culture, biodiversity and natural resources
Mega-diverse countries

• Malaysia has a rich array of ethnicities, with
  diverse cultures spread across the Peninsula,
  Sabah and Sarawak
• Malaysia is one of the 17 mega-diverse countries
  identified by the United Nations Environment
  Programme (UNEP) as harbouring the majority of
  the earths species. Some 60 of Malaysia remains
  forested
• Malaysia is well-endowed with natural resources
  in agriculture, forestry and minerals

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Our country is strategically located in a high
growth region Perfectly located as a potential
hub with added speed to market advantage
Real GDP growth 2008

• Bilateral trade between Malaysia and China was
  US53.5 billion in 2008, a 15 increase over 2007
• Bilateral trade between Malaysia and India set to
  exceed US10 billion in 2009
• China, India and East Asia are likely to be major
  sources of new FDI/FPI as they seek currency
  stability, access to natural resources and niche
  markets that reinforce bilateral ties
• Malaysia has inherent characteristics (e.g.
  language networks) that can develop tourism and
  industry links that tap into MCI growth

China 9.0
MENA 5.1
Malaysia 4.6
India 7.3
Indonesia 6.1
Australia 2.1
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We have reached the current level of development
with low povertyWe have a strong foundation to
move up the value chain
,
Per capita GNI at current prices 1970-2007 USD
USD

• All ethnic groups recorded progress in poverty
  reduction and average incomes
• The past approaches have focussed on the
  two-pronged NEP eradication of poverty
  irrespective of race and the restructuring of
  society to correct the identification of race
  with economic function
• Absolute poverty was above 40 in 1970, but
  declined to 3.6 in 2007 - despite slower growth
  in the post-2000 period
• The income disparity ratio for the last 30 years
  between the Bumiputera and non-Bumiputera has
  narrowed

Malaysia has been classified as upper-middle
income since 1992
Incidence of poverty 1970-2007
Gini coefficient
Incidence of Poverty ()
Source EPU and NEAC Analysis
The Gini coefficient is a measure of statistical
dispersion of income or wealth. The closer the
Gini coefficient is to 0, the smaller the
dispersion - or the greater the wealth equality.
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Section IV

• I. Where are we?
• II. Whats happening around us?
• III. Which advantages do we have?
• IV. Where do we want to be?
• V. How do we get there?
• The NEM Strategic Initiatives

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The Goals of the New Economic Model
(NEM)Aspirations of a united and advanced nation
in line with the 1Malaysia concept
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What it would mean for the RakyatWith inclusive
programmes to support the low income and
vulnerable groups affected

Benefits for the Rakyat

• Fulfilling jobs with good wages
• Attractive homes in safe surroundings with good
  public facilities
• High mobility with low environmental impact
• Excellent health care, accessible by all
• Access to high quality education in every
  community in the country
• Advancement based on merit and effort
• A better Malaysia for future generations from a
  sustainable economy
• Fair and respectful treatment by government
  agencies, regardless of status
• Safety net for the vulnerable, especially when
  impacted by national transformation

Specific programmes are needed to help the bottom
40 in particular

• Extra effort is needed to ensure the low income
  group, especially those in rural areas, have
  access to quality social services especially
  education which will help improve their
  livelihood
• A proper social safety net must be created to
  help the low income group hardest hit during the
  NEM transition period to cope with changes
• Extra efforts to ensure small and micro
  businesses have access to funding

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To get there, we need to do things differently
New ApproachWe know where we are where we want
to be, so how do we bridge the gap?
Old Approach New Approach
1 Reliance on capital accumulation Productivity and economies of scale drive growth
2 Centralised strategic planning Grant autonomy with accountability to government institutions
3 US/Europe/Japan orientation Expand orientation to Asia and Middle East
4 State-led accumulation/ industry champions Private sector-led/ level playing field
5 Equity of outcome/ preferential access Equality of opportunity to draw out the best out of all Malaysians but ensuring the inherently disadvantaged are given due support to enable them to compete
6 Restrictions on foreign skilled workers to protect locals Embrace networks of skilled professionals
7 Picking sectors for growth Create economic growth by leveraging on the inherent capabilities of firms
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Advanced countries achieve growth through K-based
activitiesTo do so, four pre-conditions are
required that do not yet exist in Malaysia
The NEM will result in these conditions
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Section V

• I. Where are we?
• II. Whats happening around us?
• III. Which advantages do we have?
• IV. Where do we want to be?
• V. How do we get there?
• The NEM Strategic Initiatives

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The New Economic Model (NEM) The policies and
strategic initiatives
Enabling Actions
Strategic Initiatives
Outcomes
Coherent big push to boost transformation and
growth

1. Improve functioning of labour market
2. Increase private sector profile
3. Re-engineer public institutions
4. Improve the national talent base
5. Transform economic structure and technological
   base
6. Reform fiscal framework

Break logjam of vested interests through
political will and leadership
High Income
Middle Income Trap
Prepare Rakyat for change
Sustain- ability
Inclusive- ness
Risk
Downward Spiral
Feedback Review, Revise
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The enablers for launching the NEMPolitical
leadership and Rakyat preparedness
Actions enabling change
Resistance to change
Strategic Initiatives of the NEM
Break logjam of vested interests through
political will and leadership
Protected industries, employersof foreign
labour, licence holders, subsidised input users
and experts at doing business the old way

1. Improve functioning of labour market
2. Increase private sector profile
3. Re-engineer public institutions
4. Improve the national talent base
5. Transform economic structure and technological
   base
6. Reform fiscal framework.

Prepare Rakyat for change
Politicians, representing constituents who feel
that they are not benefiting from the NEM
Coherent big push to boost growth
People who have enjoyed subsidies, government
grants, secure jobs and a stable lifestyle
Me before Malaysia attitude looking at own
interests first
1Malaysia attitude united for the benefit of the
whole country
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Leveraging on Well Placed SectorsHigher income
for business owners and employees
Selected Sectors - Non Exhaustive List
www.neac.gov.my
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The New Economic Model (NEM) How best to
describe the Nation in 2020
www.neac.gov.my
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Section V

• I. Where are we?
• II. Whats happening around us?
• III. Which advantages do we have?
• IV. Where do we want to be?
• V. How do we get there?
• The NEM Strategic Initiatives

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Strategic reform initiatives are imperative
Cross cutting Issues across all industries to
address the economic downward spiral

• Institutional Reforms
• Reforming the Government Delivery System
• Legal and Regulatory Framework.
• Improve functioning of labour market
• Removing Distortions, Impediments and Regulatory
  Framework.
• Improve the national talent base
• Foreign Retention and Attraction
• Domestic Production of Local Talent to Meet the
  Demands of the Industries in the Future.
• Transform economic structure and technological
  base
• Fostering Innovation and Managing natural
  resources
• Reform fiscal framework.
• Reviewing the Pricing, Incentives and Subsidies
• Increase private sector profile
• Balance between public and private sector roles

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Transforming MalaysiaThe Two Pillars of the
National Transformation Programme
1Malaysia People First, Performance
Now Preservation and Enhancement of Unity in
Diversity
Government Transformation Plan (GTP) Effecti
ve Delivery of Government Services
Economic Transformation Programme (ETP) New
Economic Model A High Income, Inclusive And
Sustainable Nation
10th 11th Malaysia Plan Roll-Out Macroeconomic
growth targets expenditure allocation Implementa
tion of Governments Development Programmes
www.neac.gov.my
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Role of Accountants

• The Service Sector is key to development of the
  Knowledge Society
• Accountants play a major role in the Knowledge
  Economy, from data classification, verification
  to data analysis
• Accounting skills are a core competence of
  Malaysia, but how much have we leveraged this?

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Should we Export Accountants or Increase
Outsourcing Income?

• By relying on old model of cheap clerks and smart
  partners, we are exporting our talent abroad due
  to higher overseas pay.
• Why dont we invest in clusters of accounting
  talent to do outsourcing high value accounting
  work in Malaysia?
• Why dont we do more research in Accounting Value
  added services, such as data-base management and
  conversion of accounting data into business data,
  eg. IFRS and XBRL?

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Example Market Niche in Knowledge Value Added

• IAS, IFRS, Basle II, IOSCO standards are getting
  more complex and do not fit most emerging markets
  and SMEs.
• Conversion of raw accounting data into business
  and user-friendly language is major business,
  e.g. XBRL
• Can we build on IFRS for SMEs to develop export
  income from services?

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IFRS for SMEs

•  On 9 July 2009 the IASB published an
  International Financial Reporting Standard (IFRS)
  designed for use by small and medium-sized
  entities (SMEs).
• SMEs are estimated to represent more than 95 per
  cent of all companies. The standard is a result
  of a five-year development process with extensive
  consultation of SMEs worldwide.

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Why did the IASB undertake this project?

• Full IFRSs were designed to meet the needs of
  equity investors in companies in public capital
  markets, they cover a wide range of issues,
  contain a sizeable amount of implementation
  guidance and include disclosures appropriate for
  public companies.
• Full IFRS too complex and costly for SMEs, which
  are more focused on assessing shorter-term cash
  flows, liquidity and solvency.
• Full IFRSs impose a burden on SMEs a burden that
  has been growing as IFRSs have become more
  detailed.
• IASBs twin goals were to meet user needs while
  balancing costs and benefits from a preparer
  perspective.

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We can replicate this work across other areas

• Develop Malaysia as centre of excellence in
  accounting and information upgrading
• We need strong research Professors of Accounting
  and clusters of accounting RD
• Just servicing the financial centres in Hong Kong
  and Singapore in data conversion/outsourcing
  could be a viable business, let alone capture of
  new businesses in Middle East, China and India.

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Accountants can help transform the HR skills
landscape

• Accountants bridge the gap between theorists
  (e.g. economists) and ground-level implementation
• Feedback from the accounting profession crucial
  in the area of implementation of NEM key to
  transformation of the economy transparency,
  accountability, execution.
• Malaysian accountants must continually upgrade
  not only to service, but to lead, national
  transformation.

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Questions to as_at_andrewsheng.net
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National Economic Advisory Council