Southeast Asia and the WTO: Malaysia. Lee Keng Bin Former Chairman, Asian Chamber of Commerce

Transcription

1 Southeast Asia and the WTO: Malaysia Lee Keng Bin Former Chairman, Asian Chamber of Commerce The Impact of the Financial Crisis on the Agricultural Sector in Malaysia The financial crisis, which began in mid-1997 with the speculative attack on the East Asian currencies, including the ringgit, has affected all sectors of Malaysian society, individuals as well as businesses. The depreciation of the ringgit has had mixed effects on the performance of the agricultural sector in Malaysia. The volatility and resulting decline in the exchange rate of the ringgit vis-à-vis major world currencies has negatively affected the stability and security of the country s food supply. As a result, the country s food import bill has continuously increased. Total food imports have increased from RM 3.5 billion in 1985, to RM 7.7 billion in 1995, and RM 10.0 billion in The instability and volatility of the exchange rate has put a strain on Malaysia s foreign exchange reserves and resulted in import inflation. The effect on individual commodities varied. There was little effect of the ringgit depreciation on rubber prices since they are quoted in ringgit. Rubber prices rose due to exporters adjusting them upwards. The ringgit depreciation has had varying effects on rubber products. Dry rubber-based industries, such as rubber tires and footwear, have been adversely affected because they have high import content and are oriented towards the domestic market. However, latex-based products, such as gloves, condoms and catheters, that use local materials and are sold in US dollars, have benefited. The palm oil price is quoted in US dollars and it rose significantly, affected by strong world demand for vegetable oils and Indonesia s export ban on palm oil as of January The price of logs and sawn timber are on a downward trend due to falling demand in Japan and continued negative sentiments in Europe towards tropical wood. The furniture industry however is enjoying high profits because export prices are quoted in US dollars and 80% of the materials are obtained from local sources. The State of Recovery from the Financial Crisis Issues and challenges As a result of the crisis there is an acute labor shortage leading to high employment of immigrant workers. It is estimated that about 300,000 hectares of rubber holdings are untapped and 30,000 hectares of palm oil have not been fully harvested. Labor productivity in agriculture is only about 60% of productivity in the manufacturing sector. There is a need to reduce employment in agriculture and increase productivity. 0

2 Malaysia also suffers from a limited availability of suitable land, and low productivity due to uneconomic holding sizes. It is estimated that there are presently about 400,000 hectares of idle agricultural land in Malaysia. Land for agricultural activities is limited due to conversion for industrial, residential and urban uses. There is intense competition in the global marketplace resulting from trade liberalization. For Southeast Asia, the implementation of agreements under the World Trade Organization and the Common Effective Preferential Tariff (CEPT) Scheme of the ASEAN Free Trade Area have created greater competition. Malaysia s main export commodities, such as rubber and palm oil, face increasing competition from emerging low cost producers. They also continue to face discriminatory tariffs and non-tariff barriers. Malaysia suffers from an increased cost of production stemming from intersectoral competition for resources. The development of high value-added resource-based products is still limited and exports mainly consist of primary and intermediate products. 70% of the total raw materials used in the food processing industries are imported. Lack of domestic production coupled with inconsistent supply has resulted in many small and medium scale agribusinesses operating below capacity. There is a need to further strengthen cross-sector linkages, especially between support and downstream industries. Revitalizing primary commodities and resource-based industries Malaysia s primary commodity sectors are rubber, palm oil, forestry, and other minor crops such as cocoa and tobacco. In 1997, the sector accounted for 8% of the country s total exports of RM 115 billion and 10.5% of total export earnings of RM 221 billion. Due to higher production costs and wage levels, Malaysia is losing competitiveness in natural rubber. Hectare use in rubber has declined due to conversion to palm oil and other urban uses. The export value of palm oil is sensitive to exchange rate fluctuation. Further price increases in palm oil could force substitution to other oils, such as soya oil and rapeseed oil. The sub-sector is also facing the higher cost of imported fertilizer and labor shortages. Log supply will decline in the future, as the states adhere to the limits set under the National Forestry Policy. Under the Seventh Malaysia Plan, the quota is reduced to 45,000 hectares (compared with 52,250 hectares under the Sixth Malaysia Plan). For rubber products, the latex-based products industry is benefiting from the ringgit depreciation, but firms are finding it difficult to gain access to workers. Due to the gradual reduction in import tariffs on tires, tire manufacturers are losing local market share to imports from Indonesia and Thailand. They are also facing higher costs in imported materials and a downturn in local demand for tires. 1

3 Malaysian firms are heavily dependent on middlemen to market the furniture industry abroad, since US firms are dominant in international marketing circles. These middlemen use Thai and Indonesian prices as leverage to push down prices of Malaysian furniture. There is uncertainty over the supply of rubber wood, which accounts for nearly 80% of the materials used in furniture making. Malaysia s resource-based industries include rubber-based products (tires, footwear, gloves, condoms and catheters); palm oil-based products (oleo-chemicals, margarine, soap, detergents and personal care products); and wood-based products (sawn timber, veneer, plywood products, furniture and moldings). These resource-based industries account for 17% of total manufacturing value-added and 10% of the 2.3 million employed in manufacturing activities. The National Economic Recovery Plan (NERP), prepared by the National Economic Action Council (NEAC) and launched in July 1998, provides a comprehensive framework for economic recovery, including steps to counter the negative effects of the ringgit depreciation and stock market collapse. The NERP has six objectives, 40 action items and over 580 detailed recommendations. The objectives of the Plan are to stabilize the ringgit, to restore market confidence, to maintain financial stability, to strengthen macroeconomic fundamentals, to continue the socioeconomic agenda, and to restore sectors badly affected by the crisis. The immediate and medium-term measures recommended under the NERP to revitalize the agricultural sector are intended to meet two broad objectives. The first is to take advantage of the positive impact of the ringgit s depreciation to promote output and exports. The second objective is to provide a reprieve to industries that are adversely affected by rising import costs and decreasing demand. The immediate measures include reviewing the funding for rubber replanting and providing fiscal incentives for promoting the export of rubber products and furniture. It includes establishing bilateral payment arrangements with non-traditional markets such as China, the Middle East and the Commonwealth of Independent States (CIS) that offer good prospects for the export of Malaysian primary commodities and resource-based products. These measures also include providing clear policy directions on immigrant labor and establishing an effective institutional machinery to divert surplus labor from the construction and services sectors to the plantations and resource-based industries that need workers. Last, it includes a review and extension of the duration of work permits for skilled immigrant workers. Medium-term measures include encouraging the rehabilitation of 300,000 hectares of abandoned rubber small-holdings through strategies such as mini-estates whereby adjacent units are consolidated. The hectares employed in palm oil, particularly in Sabah and Sarawak, will be increased. We are also encouraging research and development through the Palm Oil Research Institute of Malaysia (PORIM) aimed at expanding and improving the present use of palm oil, its production efficiency and quality of products, as well as maximizing the palm oil tree s full potential. 2

4 Additional R&D efforts being encouraged through PORIM include a zero-waste strategy on using trunks, fronds and empty fruit bunches in the manufacture of pulp, paper, medium density fibre-board, and furniture. PORIM is also being encouraged to explore the use of palm oil mill effluent as fertilizers, which would reduce the fertilizer import bill. Lastly, other medium-term measures include intensifying the promotion of edible (margarine, non-dairy creamers) and non-edible uses (cosmetics, detergents) of palm oil in food technology and the oleo-chemical industry to reduce imports and increase exports. We are also providing industrial land at reasonable prices for the expansion of the furniture industry. State of the recovery from the financial crisis The Malaysian economy has recovered from the severe contraction of The recovery was largely the result of a series of government measures, including the adoption of an expansionary fiscal policy, an easing of monetary policy, and the adoption of selective exchange controls to insulate the Malaysian economy from externally generated risks and vulnerabilities. Malaysia has come a long way in recovering from the crisis. The economy has not only recovered from the deflationary impact of the crisis but it has also performed better than we had initially expected. Real Gross Domestic Product (GDP) has recovered, with an annual growth of 5.8% in 1999, and a projected growth of 7.5% in The GDP for the first and second quarters of 2000 also registered a growth of 11.7% and 8.8% respectively. The turnaround in real GDP growth has been accompanied by a significant strengthening of our macroeconomic fundamentals. The balance of payments, boosted by stronger export volumes, recorded a significantly larger surplus. This has contributed to a significant increase in the nation s foreign exchange reserves. The economic recovery has been achieved in an environment of low inflation and improving employment prospects. The country s per capita income has also risen to RM 12,883, almost equivalent to the level of average yearly earnings before the crisis. Banks have also recovered. In May 2000, only 6.5% of total loans in the banking sector were non-performing, compared with 11.4% in September Similar to Malaysia, all countries in the region are on the path towards economic recovery. The Philippines and Thailand are projecting 4.5% growth in their GDP for the year 2000, while Indonesia is forecasting 3%, and Singapore is expecting 8%. The International Monetary Fund recently reported that the momentum for economic recovery in Asia is projected to continue this year and should become evenly balanced across most of the countries in the region. See Table I for a comparison of Economic indicators for the countries in the region. 3

5 National Agricultural Policies First and Second National Agricultural Policies The First National Agricultural Policy [NAP1] was in place from This era saw a rapid expansion of the manufacturing sector, altering the relative importance of the agricultural sector in the economy. The overall development of the agricultural sector during this period was beset with problems, including labor shortages, rising wages, and increasing competition of land for other uses. Favorable policies towards industrialization also created conditions that were not attractive for agricultural investment and which led to the outflow of resources from agriculture. During the Second National Agricultural Policy [NAP2], from , a greater emphasis has been placed on addressing productivity, efficiency and competitiveness issues in the context of sustainable development and linkages with other sectors of the economy. The policy outlines strategies for expanding food production, a greater role for the private sector, marketing reforms and accelerating agriculturallybased industrial development. The National Forestry Policy was also revised in 1992 to place greater emphasis on the importance of biological diversity, conservation and sustainable management of forests for the well being of current and future generations. Also during that time period, establishment of the WTO and the rapid liberalization of agricultural trade opened agricultural and forestry sectors to increased competition and new market opportunities. The 1998 financial crisis made the currency market highly vulnerable to speculation. The depreciation of the ringgit has resulted in significant increases in the price of agricultural inputs and food items, which has given rise to high inflationary pressures. The NAP2 has not adequately addressed these issues and challenges. The situation calls for the formulation of new policies and strategies to strengthen the agricultural sector s ability to deal with external factors and enhance its global competitiveness. Third National Agricultural Policy [NAP3], The Third National Agricultural Policy [NAP3] covers the period 1998 to 2010 and is set to provide the policy framework for the future growth of the agricultural sector into the next millennium. The overriding objective of NAP3 is the maximization of income through optimal utilization of resources in the sector. This includes maximizing agriculture s contribution to national income and export earnings, as well as maximizing producers income. Specifically, the objectives of the Policy are to enhance food security, increase the productivity and competitiveness of the sector, deepen linkages with other sectors, create new sources of growth for the sector, and conserve and utilize the country s natural resources on a sustainable basis. 4

6 Macroeconomic framework The agricultural sector is expected to achieve a growth rate of 2.1% per annum during the NAP3 period. The contribution of the agricultural sector to GDP is expected to further decline from 13.5% in 1995 to 7.2% in Contributions to total agricultural value-added from rubber, cocoa and timber are expected to decline, while contributions from palm oil and food commodities are expected to increase. New sources of growth are expected to emerge in agriculture, resulting from various initiatives to promote new products and emerging industries such as agro-forestry, biotechnology products, specialty natural products, bamboo, rattan, floriculture and aquarium fish. The total workforce in agriculture will decline from 1,524,000 workers in 1995 to 980,000 workers in Labor productivity is expected to increase from RM 10,650 to RM 22,780 per worker during the Plan period. Malaysia has an emphasis on labor-saving technology, innovations and more efficient farm management practices. The Government is pursuing agricultural growth through moderate expansion of land and intensification of land use. We expect a substantial reduction in rubber and cocoa land use. Most of these areas will be replaced by agro-forestry, palm oil, fruit and vegetable cultivation. Strategic approaches and policy thrusts The Malaysian Government has implemented several strategic approaches and policy thrusts, including: (a) Agro-forestry approach This approach views agriculture and forestry as mutually compatible and complementary. Therefore providing a scope for joint development that can bring about mutual benefits. This approach will enable policy formulation to address resource constraints such as land, labor and raw material availability. (b) Product-based approach In this approach, key products and markets are identified based on market demand, preferences and potential. These demands and preferences are translated into strategies for upstream primary agricultural production to enhance the production and marketing of agricultural and forestry products. This approach is adopted to reinforce and complement cluster-based agro-industrial development through the strengthening of both inter and intra-sectoral linkages, including the development and expansion of intermediate and supporting industries. (c) Meeting national food requirements 5

7 This policy thrust aims to enhance domestic food production through large-scale production by the private sector. (d) Enhancing competitiveness and profitability in agriculture and forestry Another thrust aims to enhance competitiveness of the agricultural sector through improvements in productivity, developing and strengthening markets, removal of market and trade distorting measures, formulation and implementation of high quality and safety standards and selective development of agricultural and forestry enterprises based on present and potential competitive strengths. Reducing labor inputs in agriculture and forestry will also strengthen the competitiveness and profitability of the sector. (e) Enhancing the integrated development of the food and industrial crop sub-sectors There are resources within the industrial and food crop sub-sectors that can be exploited for an integrated development of both sectors. These resources include land, labor and waste as well as by-products that can be used to produce value-added products. (f) Strengthening the economic foundation A strong requisite economic foundation is necessary to support and sustain the development of existing core agricultural and forestry industries and to initiate the growth of new ones. These include continuously upgrading the quality of human resources, development of indigenous R&D capabilities and technology including information technology, adequate and modern physical infrastructure, efficient business support services, financing and incentives, and an enabling institutional framework. (g) Adopting sustainable development Sustainable management and utilization of resources will be the guiding principle in pursuing agricultural and forestry development in Malaysia. Rules, regulations and incentives will be strengthened to encourage environment-friendly agricultural and forestry practices, to minimize the negative impact of these activities on the environment. Economic foundation To realize the objectives of NAP3 will require a stronger economic foundation to further increase the efficiency, productivity and competitiveness of Malaysian agriculture. This will require the continuous development of key elements of our economic foundation, including: (a) Human resource development Here our approach is geared towards using less labor in agriculture. This reduction will be attained through the cultivation of new crops that require less labor inputs, mechanized and automated production systems and processes, the use of labor- 6

8 saving technologies and the reduction of labor intensive agricultural enterprises. We must also focus on the supply of skilled manpower in the R&D, entrepreneurial, managerial, and operational workforce levels for new and emerging areas. We need to strengthen our agricultural and forestry education to meet high tech nature of agriculture, and we should continue to adopt a liberal policy on the recruitment of foreign workers for the agricultural sector. (b) Technology We intend to focus on intensifying the use of existing conventional technologies, as well as developing the potential and the application of new and emerging technologies. (c) Infrastructure development Infrastructure will be developed that promotes precision agriculture. In addition, an integrated management system is needed for crop production that uses site-specific data to maximize yields and employs inputs more efficiently, decreases environmental impacts and increases farmers profit margins. (d) Financing and incentives The government will continue to provide incentives for private sector R&D, warehousing facilities, human resource development, and commercialization of R&D outputs. Incentives will also be provided for the export of consulting services, the provision of quality and safety testing services, and the development of an agricultural information technology system. (e) Input industries Competitive agricultural production depends on the efficient supply of external inputs such as fertilizers, agricultural chemicals, seeds, planting materials, feeds, and agricultural machinery and equipment. Efforts will be undertaken to improve efficiency in the input industry. (f) Business support services Efforts will be undertaken to further strengthen support services in the areas of agricultural marketing, extension, advising and consulting, credit, insurance, information and logistical services such as warehousing, distribution and transportation. (g) Institutions Both public and private sector institutions in agricultural development need to further strengthen their collaboration and cooperation to make the sector more resilient and competitive, in order to meet the challenges of globalization and the liberalization of agricultural trade. 7

9 (h) Public/private sector collaborative mechanism In April 2000, Malaysia established a Public/Private Sector Coordination Council on Agriculture to oversee and co-ordinate the implementation of NAP3. The Council is headed by Prime Minister Dato Seri Dr. Mahathir bin Mohamad. The Council comprises relevant Cabinet Ministers, Chief Ministers of all states, the Chief Secretary, the Governor of Bank Negara Malaysia, senior government officials, and representatives of private sector organizations involved in the agricultural, fishery and livestock industries. The Government also established a dedicated secretariat in the Ministry of Agriculture and the Ministry of Primary Industries to provide institutional support for the Council, and a one-stop center in the Ministry of Agriculture to serve the needs of the private sector. It also strengthened the role of Agro-link and Integrated Commodity Information Services (ICIS) as efficient providers of local and global information, and as a tool for rapid communication by all parties involved in agricultural development. (i) Federal-state cooperation Consultations between the Federal and State Governments will be improved through the establishment of a high level Planning and Implementation Committee, and a dedicated Secretariat to follow through on decisions of the Committee. (j) Role of farmer and fishermen associations Malaysia is urging the active participation of these organizations as business entities within the agricultural sector. (k) Role of governmental institutions The Government must encourage greater private sector investment, support the development of competitive and sustainable agricultural industry, accelerate the development of information intensive and knowledge-based agricultural industries, and maximize land utilization for agriculture. It must also improve efficiency and effectiveness of water resource management and utilization for agriculture, protect Malaysia s agriculture from foreign pests and diseases, safeguarding human health and promoting sustainable agriculture, as well as reallocate resources in line with the new functional responsibilities of government departments and agencies. Future Prospects The agricultural sector will remain strategically important as a provider of food and raw materials for agro- and resource-based industrial development during the NAP3. The emphasis on agricultural development will shift from a commodity-based approach to a product-based approach that focuses on production of agricultural products based on market demand and potential, and on consumer preferences. 8

10 Complementing the product-based approach, an agro-forestry approach will be adopted to optimize resource use and maximize returns. The rich biological resources of the country will be conserved, managed and sustainably utilized for the development of new products and future industries, as new sources of growth for the agricultural sector. With this, Malaysian agriculture is set to increase its productivity, expand its competitiveness, deepen its linkages with other sectors, and venture into new frontiers. Malaysia and the WTO Malaysia is heavily dependent on foreign trade. It needs a strong multilateral institution with workable multilateral trade rules to govern international trade. The WTO is beneficial to industry and business as it ensures a predictable and stable environment for conduct of trade under conditions of fair and equitable competition. With its improved dispute settlement mechanism and trade policy review mechanism, the WTO is in a much better position than the GATT was to deal with the protectionism which confronts international trade. The WTO acts as a defensive instrument, not only for developing countries, but also for smaller developed countries against potential bullying and intimidation. It is also a means to challenge unilateral or arbitrary action taken by economic giants like the US and the EU. Several countries wanted the Seattle Ministerial Conference to launch a new round of trade negotiations to commence in 2000 and be completed within three years. The proposed negotiation areas included agriculture and services; new areas, such as nonagricultural tariffs, investment rules, competition policy, transparency in government procurement and trade facilitation; in addition to WTO rules on anti-dumping and Trade Related Intellectual Property Rights (TRIPS). Malaysia argued that the priority for the WTO s work program should be the built-in agenda and that the agenda for any new round of negotiations should be realistic and manageable. Malaysia expressed reservations on several new areas proposed for negotiation in the new round. The Malaysian private sector, globalization and the new economy The globalization and liberalization of markets under the WTO require that Malaysia continue to compete, not only in the global market in goods, but also in services and in attracting investments. While the nation will benefit from globalization, Malaysians must be ready and alert to any negative impacts that can threaten national interests. A study of the Economic Recovery in Malaysia for the first half of 2000 (conducted in August 2000 by the Associated Chinese Chambers of Commerce and the Industry of Malaysia) concluded that one of the major weaknesses in the Chinese business community is placing too much reliance on domestic markets. It threatens to hamper their ability to face the challenges ahead that will arise from trade liberalization. 9

11 Generally, businessmen who only focus on domestic markets will be adversely affected by trade liberalization. On the other hand, trade liberalization will provide local exporters with larger markets to sell their products. Overall, even though the Chinese business community has not fully prepared itself for globalization and the new economy, it is optimistic about the challenges arising therefrom. 10