Oil and gas windfalls: Malaysia

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oil and dieselOur oil and gas resources are rapidly depleting. Enough has been wasted and Tony Pua urges the government to invest now in the country’s human resources.

Malaysia is a country blessed with abundant natural resources.  In particular, we are thankful that the country is rich in oil and gas, which created Malaysia’s sole representative in the Fortune 500, Petroliam Nasional Berhad (Petronas).  For the financial year ending March 2007, Petronas achieved a record profit before tax of RM76.3 billion thanks to record high crude oil prices, which has jumped from under US$25 per barrel to above US$70 within the space of four years.  

Of greatest importance was the fact that Petronas contributed RM53.7 billion to our national coffers in taxes, royalties, dividends and export duties last year.  Contributions from Petronas and other oil and gas companies operating in Malaysia were budgeted to make up some 46.8 per cent of government revenue for 2007.  This represents a steep increase from about 30 per cent in 2006 and 25 per cent in 2004.  These statistics indicate Malaysia’s heavy reliance on the oil and gas industry today.

Malaysia’s abundance of oil and gas resources is akin to striking a lottery.  It is a one-off affair and, at some point in time, our reserves will run dry.  According to Oil & Gas Journal, Malaysia held proven oil reserves of 3.0 billion barrels as of January 2007, down from a peak of 4.6 billion barrels in 1996. These reserves will last us for only another 20 years or so.

What’s worse, Malaysia is expected to become a net oil importer by 2010 assuming a conservative growth of 4 per cent in petroleum products consumption.  Our trade current account surplus has also been boosted significantly by oil and gas-related products, which constitute more than 11 per cent of our exports. The frightful acceleration of dependence on our limited oil and gas resources places the country’s economy at great risk

Malaysia must not fall into the trap of what economists call the “resource curse”, whereby countries endowed with natural resources fare worse than those without such resources.  The oil-rich but poorly developed Middle East countries may be contrasted with countries with scarce natural resources such as  Hong Kong, Singapore and Switzerland.

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Dutch-disease and rent-seeking

This appears to be closely related to the phenomenon known as the Dutch disease. The Netherlands in the 1960s, after the discovery and depletion of oil and gas in the North Sea, was plagued with unemployment and an unproductive manufacturing sector due to the adverse side effects of such a discovery.

What is perhaps most worrying for Malaysia, with its reliance on natural resources overshadowing the other productive sectors of the economy, is the resulting “rent-seeking economy”, in which influential parties within and without the government focus their efforts on securing a a larger share of the economic pie instead of creating a bigger pie.

Oil and gas, for example, is wealth which does not in itself create employment.  The right to manage this wealth, however, lies in the hands of the government of the day.  This concentration of distributive control over wealth leads to vastly disproportionate amount of resources spent on lobbying and rent-seeking activities, which will, in turn, reduce efforts in raising our other productive sectors as well as human capital.  Associate Professors Ricky Lam and Leonard Wantchekon of Northwestern and New York University respectively labelled this phenomenon the political Dutch disease.

In Malaysia, we are certainly seeing the impact of the political Dutch disease.  With rampant rent-seeking activities as well as political patronage, large amounts of economic and financial leakages are beginning to surface.  Earlier this year, Second Finance Minister Nor Mohamed Yakcop disclosed in Parliament that the recent bailout of seven privatised projects has cost the government RM11 billion, including the Putra and Star LRT transport systems and Malaysia Airlines System costing RM7.7 billion and RM2.8 billion respectively.  This amount works out to close to 70 per cent of the original cost of these projects.

Not included in the above lists are projects such as the Matrade building and the Middle-Ring Road II, which had repair bills of RM120 million and RM70 million over their original cost of RM167 million and RM120 million respectively.

More recently, we have seen how just completed government projects such as the Immigration office in Putrajaya, the mega-court complex in Jalan Duta and the renovated Parliament house require desperate resuscitation efforts.

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Whilst the bailout packages and the repair bills have worked out to huge sums of money, its impact on the economy appears to be minimal at first glance.  The country’s gross domestic product (GDP) has continued to grow at a healthy rate of around 5 per cent per annum for the past few years.  But the GDP growth rate masks the fact that we have been increasingly reliant on our God-given natural resources for revenue, which has in turn cushioned the impact of wealth dissipation arising from non-value-adding rent-seeking activities.

Hence, we fear that with Malaysia becoming a net oil importer very soon and with oil reserves lasting only for the next two decades, these leakages if left unchecked will soon have a major impact on the country’s economy.  This impact will be aggravated by the fact that the other productive sectors of the economy reliant on human capital such as the manufacturing and hightech sectors remain insufficiently developed to replace the economic contribution from our oil and gas sector. This stagnancy is due to complacency or neglect.

Invest in human resources

Faced with such a possibility, Malaysia must re-think its strategy on enhancing human capital.  The two ministries of education must be applauded for their efforts to fine-tune our educational institutions to achieve the human capital goals such as the setting up of “cluster schools” as centres of excellence. Education Minister Hishammuddin Hussein has also recently announced that some 27 per cent of the education-related infrastructure projects under the Ninth Malaysia Plan have either been completed or are under implementation.

But our efforts on hard infrastructure must be matched equally, if not more, with soft infrastructure such as the quality of teachers, the rigour in our course syllabus and examination standards.  No cost must be spared, for example, in bringing the best teachers and lecturers from around the world to teach in our local schools and universities populated with the cream of the crop.  

Misguided nationalistic philosophy must be cast aside in favour of a pragmatic policy in areas such as attracting the world’s top academics to head our institutions of higher learning.  Within our educational institutions, performing teachers and academics must be granted their due reward, financial and otherwise, as further incentives for themselves and others to continue to excel.  It is of great irony that even Malaysian academics who were never in contention for top positions in Malaysian universities are head-hunted as vice-chancellors or faculty deans at the world’s top universities.

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In our quest to develop and retain our human capital, no stone must be left unturned and no sacred cows must be left untouched.  Then and only then, will Malaysia be able to diminish its reliance on natural resources and depend instead on her people’s creativity, resourcefulness, intelligence and productivity to drive the country’s continued development.  While oil wells may one day run dry, our population will only continue to grow and renew itself.

Therefore, it is critical that the Government sets aside or even legislates that a substantive portion of our windfall from oil and gas is kept under lock and key, with the sole purpose for investment in human capital, over and beyond our typical expenditure on education and training. This way, the funds will be prevented from being expensed to an unproductive and wasteful rent-driven economy.  To quote Economics Nobel Prize winner, Joseph Stiglitz, “abundant natural resources can and should be a blessing, not a curse. We know what must be done. What is missing is the political will to make it so.”

Tony Pua, a former CEO and founder of a listed IT company and now opposition politician, runs a blog on education in Malaysia. 

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