Haven’t you ever wondered why Malaysia with all its glorious resources, is not more developed than it is today? This has been called the “Paradox of Plenty” – my piece which was published in theSun on the 25th November 2011.
The Paradox of Plenty
The paradox of plenty refers to resource-rich countries that had slower economic growth and worse development outcomes than those without. At first glance, it does not look like we have been hit with this “resource curse”. But a deeper analysis might show otherwise.
The Malaysian story of growth and development has been romanticised over the years, having successfully reduced poverty to very low levels. Its economic growth also surpassed many Southeast Asian neighbours in the 1980s and 1990s (except our island neighbour down south, of course). Even now, Malaysia scores fairly decently on international indices measuring the ease of doing business, human development and competitiveness levels, moving up or down several notches each year.
But an alternative way to view it is: Given our geographic advantage, abundance of resources, language and cultural diversity, we could have achieved a great deal more. Over the past few years, this problem has been acknowledged by various quarters and coined into catchy phrases such as being stuck in the “middle-income trap” and the need to “move up the value chain”. Simply put, it is a culture of mediocrity that has led to this rather dull mode of stagnation.
High Oil Dependence
But it is not just by chance that we are sluggish. One of the most important factors that must be considered is Malaysia’s unhealthy dependency on oil and gas resources. Almost 40 percent of our national revenue comes from oil and gas revenues.
The recently released World Bank’s Malaysia Economic Monitor reiterated this burgeoning problem, stating that although higher oil prices have driven revenues higher, this also means that Malaysia’s dependency on oil has increased. Over the past five years, petroleum-related revenues “averaged 38 percent of all revenues”.
There are several implications for this. First, oil prices are volatile, which means that our national fiscal position is exposed to such global uncertainty. Government developmental expenditure would be highly dependent on what happens to the oil and gas market internationally.
Second, Malaysia is falsely lulled into believing that our national balance sheet looks fairly healthy. It is crucial to look into non-oil growth to examine the activity of real economic and industrial sectors, where in the case of Malaysia, “the non-oil primary deficit has roughly doubled over the past five years to almost 20 percent of GDP in 2009” (World Bank, 2011). Is our non-oil sector growing at a much slower pace, but having gone unnoticed because of the oil sector’s growth?
Third, there is a risk that these plentiful funds are made use of with less stringent oversight and caution. In Malaysia, it is impossible to tell what our oil money is used for specifically, because all revenues are pooled together into a consolidated fund, which contributes to all government spending. For example, would government embark on mega-projects if we did not have oil money to fund them?
Note that Petronas controls 84 percent of Putrajaya Holdings Sdn. Bhd. Petronas also financed and built a private healthcare facility Prince Court Medical Centre in Kuala Lumpur, with costs estimated at RM544 million. Although one argument is that the country’s resources ought to be used for national development, these commitments must be prioritised. Such new business investments must be adding value to the core petroleum business and not burden Petronas (and the country) with additional costs.
Responsible Resource Management
Talking about oversight into oil money, the Petroleum Development Act 1974 actually gives sole discretionary power over the management of Petronas to the Prime Minister, Section 3 (2) reading, “The Corporation shall be subject to the control and direction of the Prime Minister who may from time to time issue such direction as he may deem fit.”
Many countries control for the unpredictability of oil prices by having sovereign wealth funds (SWF), or oil stabilisation funds, which compensate for revenue shortfalls, save for future generations, and invest in physical or human capital for future economic growth. Norway is probably the best example of having a successful SWF, whose operations are strictly controlled and monitored by the Parliament, to which it reports three times a year. On the flipside, Nigeria is an example of a country whose Excess Crude Account (ECA) “will soon be empty of the sizeable windfall profits collected during the recent period of high oil prices” (Gillies, 2010), mainly because the fund was not protected from the short-term political pressures to spend.
The closest Malaysia has to this is a “Kumpulan Wang Amanah Negara”, or National Trust Fund, which has RM5.43 billion as at June 2011. But for the fund to fulfill its purpose, Malaysia must resist the use of windfall profits from petroleum money by present politicians intending to stay in power. Depleting resources should be used for both current and future generations.
Transparency is crucial. A Revenue Watch Index placed Malaysia in the “Partial Revenue Transparency” category, scoring only 48.4 out of the full 100 points. This index measures public accountability by both government and oil companies, in the extraction of oil and gas resources. This was reportedly due to an absence of legislation providing for disclosure of information in the oil and gas sector. Relatively little is publicly disclosed such as contracts and agreements. Also, Parliament does not have the authority to ratify contracts.
Malaysia must therefore have better monitoring of natural resource accounts and the National Trust Fund by government together with civil society. With steadily depleting oil and gas reserves, the non-oil sectors must play the more important role in contributing to national income. Responsible resource management is the only way to ensure a sustainable and promising future for Malaysians in the long-run.
