Agenda Daily


The New Economic Model, said to emphasis a high-value and high-income approach, must not under any circumstance ignore the development of the rural sector, as this would have an adverse effect on bridging the rich-poor gap among the people.


DEPENDING ON HOW THE PROMISE MADE by Prime Minister Datuk Sen Mohd Najib Abdul Razak to give equal emphasis to rural development under the New Economic Model (NEM) is crafted and implemented, it would either lead to large-scale improvement of the rural sector or the worsening of the rural-urban gap.

Mohd Najib was quoted by the Press on March 21 as saying in Kuala Lipis, Pahang that the NEM would give equal emphasis to rural development as it would to other sectors.

Despite the best of intentions, the real efforts to lift the rural sector to anywhere near its urban counterpart have not been totally effective a full four decades after the New Economic Policy (NEP) was crafted and launched by Mohd Najib’s father, the late Tun Abdul Razak Hussein.

The failure to eradicate poverty irrespective of race and raise the Bumiputera corporate wealth to 30% had, in recent years, been used by opponents of the affirmative plan to call for its abolishment.

What these urban-based, pseudo-economists have failed to acknowledge or are deliberately playing down is the fact that the NEP had transformed the economy of the rural sector from its pre-independence subsistence nature to one that is market-driven. But because more money is spent on the urban sector, the rural-urban gap has not only remained but is threatening to further widen.

Although the rural development drive initiated by Abdul Razak has significantly lifted the living standard of rural folk, the rural-urban disparity remains. In fact, in the post-1997/98 regional financial crisis, the poverty level rose temporarily.

Towards the end of the 8t1~ Malaysia Plan and the beginning of the 9th Malaysia Plan in 2006, rural poverty had once again been brought down — to 11.9% — compared to 2.5% among urban households.

Conversely, since the Bumiputeras, who form the bulk of the country’s population, live in the rural areas, poverty is highest among them.

The 9th Malaysia Plan report put Bumiputera poverty in 2004 at 8.3% compared to 2.9% for the Indians and 0.6% for the Chinese.

The poorest states happen to be Bumiputera- dominated states, although some of them are rich in natural resources. Leading the pack is Sabah followed by Terengganu, Kelantan, Sarawak and Kedah.

Bridging the urban-rural economic divide

IF indeed the NEM is going to be colour-blind, as many of its supporters are demanding, then the government must first recognise the many colours, shades and hues that make up the Malaysian socio-economic tapestry.

To close these gaps, more efforts and capital have to be spent on developing the rural sector where the majority of the people, in particular the Bumiputeras, still live.

Although urbanisation has been rapid, it will be a while before the urban population overtakes that of the rural areas.

Furthermore, with town and cities becoming congested and polluted, the solution is to bring more development to the rural areas so that the rural-urban drift can be halted or, at the very least, slowed down.

Unless more socio-economic projects are targeted for the rural areas, there is the likelihood that the Government’s Transformation Programme (GTP) and the NEM, which emphasise the high-value and high- income approach, may worsen the standard of living of rural inhabitants.

Mohd Najib told the Press after launching the Rural Development Ministry’s 50th anniversary celebrations that an additional RM750 million had been set aside for rural development.

Under the GTP, RM18 billion has been allocated for rural development over a three-year period.

A larger capital outlay is also needed to make the rural economy more productive and competitive if the government plans to press ahead with the removal of subsidies, failing which there’s a risk that the rural population may be further impoverished.

Rallying Bursa

ANOTHER major policy decision of the Mohd Najib administration as it turns two is to rearrange the investment priorities of state-controlled funds.

Thus, what started off as a normal policy statement by Khazanah Nasional Bhd some months ago that it would be paring down its holdings in government- linked companies (GLCs), has now become a full-blown government policy.

The sovereign fund and the Employees’ Provident Fund (EPF) have since been ordered to hasten the divestment of GLC shares purportedly to widen access to Bursa Malaysia by foreign fund managers.

The National News Agency,Bernama, on March 24 quoted Mohd Najib, who is Finance Minister, as saying in Hong Kong that the government had directed Khazanah and the EPF to hasten the divestment of their equity holdings in GLCs ‘to make the capital market more attractive to foreign fund managers.’

The key consideration, as the Prime Minister’s statement implies, is to free up the GLC shares now held by Khazanah and the EPF so that foreign fund managers can gobble them up.

While not underestimating the importance of Bursa Malaysia in attracting foreign capital, I wonder if it is a good thing to compel Khazanah and the EPF to part with their GLC shares.

Or that foreign fund managers should be so favorably treated, bearing in mind that only months earlier they had unloaded their Malaysian stocks in panic, causing prices to fall, which, in turn, forced the local funds like Khazanah, the EPF and Permodalan Nasional Bhd to step in to stop the slide.

I would have thought that the government would be more persistent in encouraging and making it easier for foreign direct investments (FDIs) to flow in and create new wealth and employment for the country.

Granted that foreign fund managers can bring in large amounts of capital in a short span of time and thereby boost the rally on the Bursa further, the effects on the economy will not be significant compared to FDIs.

The foreign fund managers will not be creating new wealth. They will merely be partaking in the existing wealth, unless they participate in new capital-raising exercises by Bursa-listed companies.

In need of viable investment alternatives

THE GLCs are state-owned companies, which are intended to benefit the people, especially the taxpayers who initially funded them.

They enjoy favourable treatment from the government via contract allocations and. Occasionally, preferential loans.

Thus, to compel Khazanah and the EPF to sell their GLC shares so that the foreign fund managers can own them does not make great sense.

Golden shares that the government holds in these companies may guarantee theoretical ownership but may not guarantee management and operational independence.

Of immediate concern is where will Khazanah and the EPF reinvest the proceeds from the sales of the GLC shares?

Maybe the divestment by Khazanah is timely and justifiable as it is an open secret that the Treasury is in need of a quick top-up.

But what about the EPF? How will it generate income to pay dividends to its contributors if it is compelled to sell high-yielding GLC shares?

Unless the government has viable alternatives for Khazanah and the EPF — like giving them the authority to invest freely abroad — they may in future not be able to raise sufficient profits to reward their stakeholders.

Even if the government allows them to invest a larger sum abroad, the arithmetic does not add up well. While on the one hand foreign capital may flow into the country, on the other, the local capital flows out.

To neglect the likely negative impact of the divestment on the stakeholders, in particular the EPF contributors, could be a serious miscalculation. It can only be hoped that the government has in store equally profitable alternatives for Khazanah and the EPF.

Disposing GLC shares

TIMING-wise, it is appropriate for Khazanah and the EPF to dispose their GLC shares. The prices of GLC shares have been on the rise partly because Khazanah and the EPF have been mopping them up.

When it is known that Khazanah and the EPF are selling them, their prices are bound to fall unless the sales are made on a negotiated basis with the buyers paying premium for the blocks they are buying.

Nobody should fault Khazanah and the EPF for building up their holdings of GLC shares. It’s a well- known fact that when prices were low and the Bursa was in need of institutional support, the government had tacitly encouraged local funds to increase their holdings of GLC shares.

Furthermore, as wholesale investors, Khazanah and the EPF are attracted to large profitable counters, and much of today’s large companies on the Bursa are GLCs.

Filling the government’s coffers aside, the divestment of GLC shares by Khazanah and the EPF must not be purely for the purposes of further fueling the uptrend on the Bursa or to give foreign investors a bigger slice of corporate ownership.

On the contrary, The government should be careful not to artificially promote speculative interest in GLC stocks and risk losing control over them to foreign investors.

Also, bear in mind that some of the funds we are inviting to the Bursa could be our own money taken out of the country in recent years and deposited in offshore financial centres like Singapore and Hong Kong. They are now coming back disguised as foreign capital.

It is understandable Mohd Najib, as Finance Minister, is in a hurry foreign fund managers to return to the Bursa he must also acknowledge that these very same people had taken flight from the

Bursa only month ago

Their exit had been cited Bank Negara Malaysia as the reason for the massive US$ 29.1 billion (RM101.8 billion) decline in its international reserves last year.

One way to help Khazanah and the EPF to offset the decline in their share investments is to give them a free hand to invest in new or re-issued initial public offerings (IPOs).

It is an emerging trend here in Malaysia that majority shareholders are taking their companies private and, some years later, making fresh IPOs to raise capital as well as to make quick capital gains. Tycoon T Ananda Krishnan did that with Maxis and is now doing the same with Astro All Asia Networks Plc.

Not only are Khazanah and the EPF in need of large, profitable counters to invest in, but other state- linked fund management companies like PNB and the Pilgrims’ Fund are also on the hunt for investment opportunities.

It would be morally compelling to give them the first right of refusal to buy GLC shares to be sold by Khazanah and the EPF if they haven’t yet exceeded their ‘quotas’ of such shares.

The EPF, which this year declared a higher payout to its contributors on account of improved share prices, may not be able to repeat the performance if it is forced to sell its GLC stocks and no alternative investment avenues are offered by the government.

One possible solution is for the government to issue bonds to the EPF since the government clearly needs money to fund development under the NEM and the upcoming 101h Malaysia Plan.

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