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ECONOMIC INTEGRATION; CHALLENGES TO MALAYSIA 26/4/2010 @ NCCIM Forum on “A Strong China: Implications and Challenges” Crowne Plaza Mutiara, Kuala Lumpur Steven C.M. Wong Assistant Director-General Institute of Strategic and International Studies (ISIS) Malaysia [email protected] Stabilisation, recovery & reform: Crisis management (2008) demand management (2008-present) institutional/ regulatory reform (?) • Liberalisation globalisation financialisation • Inflated asset & commodity prices (bubbles & speculation) • Resource misallocation – capital hoarding, risk/reward tradeoffs impact on “real activity” • Shape of recovery remains open question significant residual risks (see, IMF, World Economic Outlook, April 2010) • Significant shifting of liabilities to next generation -5.0%> -1.0%~-<5.0% HUN, <-3.0%> Deflation 3.0%~<-1.0% Output Growth - 2010 -1.0%~+<1.0% AUT, CHE, ESP, ITA, NLD, SWE, TWN, -1.0%~<+1.0% AUT, CHE, DEU, ESP, JPN, MYS, NLD, TWN 10.0%> DEU, ESP, FRA, HUN, ITA, USA 7.5%~<10% BRA, CAN, GBR, IDN, PHL, RUS, SWE -10%> GBR, ESP, JPN, USA -10.0%~<-5% FRA, HUN, IND, ITA, NDL, MYS, RUS, THA, VNM 0%~25% AUS, [CHN], RUS 25%~50% CHE, BRA, ESP, IDN, KOR, MEX, MYS, SWE, THA, TWN Unemployment 5.0%~<7.5% AUS, AUT, CHE, IND, JPN, MEX, NDL, TWN Fiscal deficit (% GDP) -5%~<0% AUS, AUT, BRA, CAN, CHE, [CHN], DEU, IDN, KOR, MEX, PHL, SWE, TWN Public debt (% GDP) 50%~75% AUT, IND, NDL, PHL, VNM +1.0%~+<5.0% +5.0%> AUS, CAN, , DEU, FRA, GBR, KOR, MEX, MYS, BRA,[CHN], IDN, IND, JPN, PHL, RUS, SGP, VNM THA, USA Inflation +3.0%> +1.0%~+<3.0% AUS,CAN, [CHN], FRA, BRA, IDN, IND, KOR, GBR, HUN, ITA, SGP, MEX, PHL, RUS, VNM SWE, THA, USA 2.5%~<5.0% [CHN], KOR, MYS, SGP, VNM <2.5% 0%~+<5% SGP +5%~+10% 75%~100% CAN, DEU, FRA, GBR, HUN, SGP, USA, 100%> ITA, JPN Off-shoring, outsourcing & ownership concentration: Fragmentation of value chain to continue but business concentration to increase • Dominance of financial capital (M&A, private equity, etc.) • Ownership & control of key technologies and IP • Ownership & control of natural resources • Trade in goods flattened/competitive/”normal” profits • Trade in service industries contoured/imperfect/ “excess” profits • New frontiers – knowledge, services, investment rules, etc. Managing the differential & eastward shift in economic gravity: Divergence, unease, tensions and low-level conflicts (so far). Key question is how to avoid missteps and escalation • Economic growth between East & West: high unemployment + low/no job recovery economic stagnation/political consequences • Bilateral currency (esp. RMB) & trade (e.g. tires, steel, chickens, etc) pressure • Decoupling of business cycles/economic growth – more myth than reality at present sustainability @ risk • Conflation of economic, political & security interests regional architecture & institutions essential US EU China Nominal GDP US$14.25t $14.25t (PPP) Nominal GDP US$16.45t $14.79t (PPP) Nominal GDP US$4.91 $8.76t (PPP) Share of World GDP (PPP) 20.5% Share of World GDP (PPP) 21.2% Share of World GDP (PPP) 12.5% Nominal GDP/capita US$46,380 $46,380 (PPP) Nominal GDP/capita US$38,457 $29,729 (PPP) Nominal GDP/capita US$3,678 $6,567 (PPP) Impact of final demand on China’s V-A 2000 Domestic demand Business Cycle Correlations with China 2006 Pre-Crisis 79.4 69.7 Intra-regional 1.8 2.8 US 6.6 7.1 EU 3.8 6.4 Japan 3.6 3.0 Rest of world 6.5 13.2 Impact of final demand on East Asia’s V-A Domestic demand Post-Crisis Asia* -0.379 0.549 G7 -0.304 0.580 US 0.490 0.517 Japan -0.633 0.477 Inter-regional Business Cycle Correlations Asia-G7 0.084 0.611 Asia-US 0.233 0.715 Asia-Japan -0.618 0.647 68.9 64.3 Intra-regional 5.8 6.8 US 7.3 6.6 Asia*-G7 0.619 0.537 EU 4.7 5.8 Asia*-US -0.345 0.724 Japan 4.1 3.2 Asia*-Japan -0.633 0.477 V-A: Value-Added Source: G.Pula & T. Peltonen (January 2009) *Excluding China Source: S.Y. Kim, J.W . Lee & C.Y. Park (June 2009) “STEADY-STATE??” “BIDIRECTIONALITY” RATE OF RELATIVE EXPANSION RATE OF RELATIVE CONTRACTION “BALANCING FACTOR” Eg. BRI, etc. • It is essential for Malaysian policymakers to adopt systems thinking and not formulate piecemeal policies Systems thinking recognises that the component parts of a system can best be understood in the context of relationships with each other and with other systems, rather than in isolation • There must be clear objectives based on strategic national interests, realistic priorities and logical decision-making Malaysia cannot afford to engage in the global politics of alignment, balancing or exclusion. By paying attention to its economy & development, it can still wield considerable middle power influence • Economic integration may be a necessary (i.e. non-optional) condition for economic growth but is not sufficient Malaysia requires economic integration; non-participation equals peripheralization. But without vibrant investment and innovation, economic integration merely leads to a hollowing-out • Formal economic integration must go beyond the superficial and symbolic if it is to truly encourage economic dynamism Economic arrangements that have neither depth nor speed are not substantive and will be of little interest to the private sector • China is a complex country with extraordinary strengths & weaknesses and represents both threats and opportunities It is not very helpful to regard China in mono-dimensional terms. Like all countries it is a composite of many qualities, some which are to Malaysia’s advantage and others not. • One of Malaysia’s most important challenges will be to locate itself in a global/regional economic sweet spot. China is a growing part of the global economy. For Malaysia to distance itself from it owing to competitive pressures is negative and ultimately debilitating. Steven C.M. Wong Assistant Director-General Institute of Strategic and International Studies (ISIS) Malaysia [email protected]