A realistic budget strategy will demand major policy changes. There is a clear need to jettison failed policies and these replaced by measures and instruments that are relevant to meeting new challenges. National interests must be placed ahead of narrow partisan interests that are focused on rent seeking and protection of an oligarchy. First and foremost the budget frame- work will need to address the restoration of macro-economic stability without which a sustainable recovery cannot be attained. Secondly, macro-economic and other policies must aim to improve the nation’s competitiveness in an increasingly globalized world economy. Third economic policies must meet head on the concerns of the poor and the disadvantaged. These are general principles upon which a realistic budget must be formulated.

Restoring and sustaining macro-economic stability must remain a paramount concern. Achieving this objective demands the removal of distortions that have emerged in the recent past. First and foremost, it is important that Malaysia is able to once again attract foreign capital inflows. Capital controls and the ringgit peg have outlived their usefulness and must be now removed. They act as a deterrent to investors. Their continuation is taking a heavy toll by raising the level of uncertainty in the minds of investors. The danger of volatile capital flows affecting stability is no longer present. There are other safeguards that can be put in place, such as currency hedges. In any event Malaysian reserves, amounting to over six months of imports, are sufficiently large to ward off short-term currency fluctuations. Furthermore, were all export receipts remitted to Malaysia, currently not the case, there would be ample foreign exchange to meet foreign currency needs. Removal of the ringgit peg will in all likelihood reduce the cost of imports without unduly affecting export competitiveness since the import content of Malaysian manufactures is in excess of two-thirds of exports.

The low interest rate policy followed by Bank Negara has not visibly led to increased loan demand. It has indeed had a perverse effect by making saving deposits unattractive. It is for these reasons that exporters have tended to maintain large foreign balances. It is time for interest rates to be set by markets. Indeed, with inflation rising, it will be necessary to raise interest rates.

In Part I of this article, the point was made that the current fiscal deficit is unsustainable. As noted, the scope for revenue increases is limited and would in any case be counterproductive to the need to encourage both consumption and private investment. Reducing the overall deficit will therefore need to be tackled through carefully selected expenditure cuts, particularly in the development budget.

The development budget must cease to be a pork barrel from which funds are channeled to cronies either as bailouts or in the form of new projects, in many cases economically non-viable. The budget 2001 must be pruned of extravagances. Obvious candidates are the East Coast Highway, the Causeway Bridge, new airport extensions, Putrajaya and Cyberjaya. The nation has over invested in costly infrastructure. It is time to take a pause and aim to improve utilization of existing capacities. On the other hand the nation has not invested sufficiently in education and in building up human capital essential to the long-term competitive edge that the country desperately needs. It is now time to rectify this.

The cost of development projects is inordinately high in part because of lack of transparency and corruption. Open bidding and transparency in awarding projects would eliminate corruption and reduce costs. It is time the Government rescinds current practices and adopts instead more open and competitive practices. Savings resulting from such a move could then be channeled towards lifting the standard of living of the poor and the disadvantaged. It is indeed shameful that after 43 years of independence and almost two decades of high economic growth, there are over a million Malaysians that live on incomes of US$1 (RM 3.80) per day. This blot on the nation’s economy is unacceptable and cannot and must not be tolerated any longer.

The budget must also address the long-standing issue of giving plantation workers a living wage based on monthly emoluments. The time has also come to introduce a minimum wage.

The public sector cannot act as the engine of growth over the medium term. Policies in that direction implemented in the 1970s and early 1980’s demonstrated the futility of building prosperity through such means. Indeed, countries such as India and China , to name but two, have turned their backs on such policies. Present policies pursued by the BN government, with reverse privatization, or large public sector stakes are damaging to long run prosperity. Such prosperity must be built by a vibrant and competitive private sector. Restoring the debt-ridden private sector to health will demand special attention.

Malaysian prosperity of the 1990s was built on the growth of the private sector. However, the 1997 East Asia crisis revealed the hollow and flimsy fabric. The domestic corporate sector was built on high levels of debt. The crisis demonstrated in stark terms the dangers of debt dependence. Yet the lessons have not been learnt. Such corporate restructuring as has taken place since the onset of the crisis, has largely been in the form of short- term bank loans being replaced by medium term debt in the form of bonds. Corporate balance sheets tell the story only too well. Excessive debt, be it in terms of bank loans, or other borrowings including bonds, must be reduced. New capital injections must be in the form of equity capital, both domestic and foreign. However, such injections are unlikely so long as minority interests are not adequately protected and all policies are designed to protect vested interests beholden to those in power. Efforts at Corporate restructuring will fail until and unless there is a radical shift towards the introduction of greater accountability and transparency in corporate management. To this end, Daim will need to come forth with a clear package of policies that increase confidence in the functioning of the private sector. He needs to announce in no uncertain terms that there will be no more bailouts, that corporate managers who fail will be held to account.

Of late there has been much hype over the K- Economy. While it is true that the nation’s economic future will lie with harnessing emerging technology and intangible capital and in remaining competitive, the mix of policies in place to promote a k-economy are at best confused. The government assumes that the pouring of billions into infrastructure in Cyberjaya and the Multi-Media Super Corridor is the only condition for success in creating a K-based economy. In taking this stance, it is wholly mistaken. There is no guarantee whatsoever that the availability of infrastructure will lead to massive investments by international and domestic investors. There are key missing ingredients – namely venture capital and a pool of highly skilled labour. Neither is available. To correct these gaps, the Government must take steps that address both the short term and longer-run issues. In the short-term it should seek to establish a Venture Capital Fund that would operate without bureaucratic restrictions. To fill the skill gap, it must relax immigration and other controls that prevent enterprises from tapping foreign countries that have large pools of technologically skilled workers. In the longer term, much more needs to be done to build up the educational system at both the secondary and tertiary levels. To this end, public investment is required. The budget must therefore provide the necessary resources.

The k-economy is not likely to take-off unless and until other steps are taken. Restoration of credibility in the judicial system is a necessary pre-condition. Dispute resolution through a credible judicial system, speedy disposition of disputes and respect for intellectual capital are critically important to establishment of a investor-friendly environment.

The BN Government has claimed over the years that it has been pro-development and brought prosperity to the nation. In support it has cited the rapid rise in per capita incomes and the reduction in the levels of poverty incidence. These assertions are partially valid. Available out dated official numbers indicate that there are well over a million Malaysians that live on a daily income of less than US $1 – the internationally accepted yardstick for measurement of absolute poverty. This is clearly a failure of policy and an indictment of the BN’s failure to correct this blot on the nation’s record. While there is no denying that Malaysia is better off than its neighbours, it can and it must do better.

Eliminating absolute poverty must take precedence over all other concerns. It was a key target of the NEP when that policy was adopted almost a generation ago. It is time to redirect the nation’s attention to the issue. It is within the nation’s means to ensure that abject poverty is eliminated. It requires political courage and a willingness to put into effect new policies. Such policies must be centred around three basic instruments, namely the introduction of a safety net programme directed at targeted vulnerable groups, the introduction of a minimum wage, and the granting of a monthly wage to plantation workers. Over the years the BN government has parried such demands by suggesting the need for studies. The time has come for immediate action. Daim should announce as part of the budget the adoption of these measures in the coming year.

Malaysia is at a critical point in its economic evolution. It must make critical choices. The time has come to jettison policies that are damaging. Guaranteeing long term prosperity demands the adoption of policies that are rational and address the core concerns. Business as usual is no longer an option.