MALAYSIA is looking to transform its economy in pursuit of high-­income status. However, the public sector’s disconnect from the private sector’s activities is hampering the transformation drive, says ­Professor ­Datuk Dr Noor Azlan Ghazali.

He expresses concern that ­economic transformation initiatives —  while seeing some successes — have only deepened the ­focus on economic sectors that are ­already strong, such as oil and gas, palm oil and electrical and electronics (E&E).

This has not been accompanied by development of new, more complex industries. A key hurdle is that private sector players are not moving in tandem to push the frontiers of innovation.

“Malaysia has a lot of quality engines [of growth and innovation]. But the engines are not connected,” says the economist, who is also Universiti Kebangsaan Malaysia (UKM) vice-chancellor.

While the government has been a key driver of development for ­decades, it is now time to relook into how progress is pursued, Noor Azlan adds. “A lot of the focus now should be shifted to getting all players and all institutions — be they private or public — connected and aspiring together.”

Failure to do that thus far has restricted Malaysia’s ascent up the value chain via strategic discovery of new products for export.

The failure to get the players to coordinate is among the constraints on the country’s growth aspirations as highlighted in the book titled Malaysia at a Crossroads: Diagnosing the Constraints to High-Income Status launched last week.

The study was commissioned by PNB Research Institute and led by Noor Azlan, Mpumelelo Nxumalo, economist-in-residence at UKM’s vice-chancellor’s office; and Jared Glanz-Berger, lead consultant of Bright Vision Consulting Sdn Bhd.

Among others, the study points out that Malaysia has yet to obtain a comparative advantage against wealthier neighbours and other high-income countries when it comes to making products such as machinery, equipment and chemicals.

Specifically, the study cites a 2015 paper by the International Monetary Fund, which concluded that a lack of local technology creation is restraining Malaysia’s growth.

Comparing Malaysia to South Korea, the 2015 paper found that Malaysia was getting 220 US patents in 2013 compared with South Korea’s 300 in 1990.

Malaysia also spends less on ­research and development, coupled with a lower share of graduates in engineering, manufacturing and construction, according to the paper. This exacerbates the domestic challenges when it comes to product discovery and innovation.

As a result, while Malaysia has moved away from primary sector products such as garments and went deeper into E&E products between 1990 and 2010, the country has yet to significantly add newer, more sophisticated activities as new growth engines.

That should be a cause for concern, according to the researchers. The study argues that fundamental economic transformation requires the discovery of new sources of growth via innovation — a key characteristic of high-income economies.

Innovation is a contextual process that should flow from Malaysia’s existing capabilities and these can be leveraged to develop higher-value adjacent industries, they add.

While it may be instructive to study successful economic transformations such as South Korea’s shift to a high-income country, ultimately Malaysia must find its own growth path to high income.

“We don’t want to fall into the trap of isomorphic mimicry,” Noor Azlan tells The Edge.

Originally a biological term, isomorphic mimicry has been used to describe economies or institutions that seek to imitate other successful peers without actually developing the functionality of the economies they are copying.

“You can learn but you cannot simply cut and paste. The model has to be suited to that particular location or country that we are looking at,” Noor Azlan says.

“Otherwise, we may end up looking like a high-income economy without having the actual functions of one.” His fellow researcher Mpumelelo agrees, adding: “It’s not about looking like South Korea. It’s not about suddenly investing in ports and shipyards and making cruise ships, for example.”

“Rather, it’s solely about pushing the frontier of what you are,” he says, adding that this entails examining new sectors that can entered into by leveraging existing skills and capabilities as opposed to starting from scratch in a completely unrelated industry.

Facilitating the discovery process would require risk capital that takes a long-term perspective towards innovation and its inherent attrition rate.

This represents another hurdle: Consolidation of major sectors, such as plantation, under big government-linked companies has created an incentive to retain the status quo as opposed to pushing the boundaries of innovation.

“We need to overcome this capital rationality,” says Dr Nungsari Ahmad Radhi, Prokhas Sdn Bhd managing director, at a panel discussion at the launch of the study findings. “The challenge is how to shift the trajectory while keeping shareholders happy.”

In addition, existing protectionism within specific industries in Malaysia is also hindering discovery by curbing competition, according to another panellist Shakira Teh Sharifuddin, country economist at the World Bank (Malaysia).

“Raising productivity alone is insufficient,” Shakira says. “Beyond productivity, we should also look at other factors such as female labour participation and raising investment levels.”

One question that arises is what frontiers are ripe for Malaysia to push. What adjacent industries are promising enough to look at for developing?

There is no simple answer, the researchers say. “It is not about which sector you become ­stronger in, but it’s about what you do in each sector,” Noor Azlan says.

He adds that based on their study, there are about 200 products with sufficient adjacency for Malaysia to pursue and develop based on existing capabilities.

“The only thing is that you need some right policies [from the government] to push players toward these particular products,” Noor Azlan says.

Successfully aligning all players toward a common direction will be key to a successful transformation, he adds. It also means aligning academic research to tackle challenges and problems faced by industry players as well as reconfiguring talent production to suit developing industries.

Using a hypothetical foreign direct investment coming into the country as an example, Noor Azlan explains that the issue is not only about meeting the immediate relocating needs of the investor but also how it can be interlinked with local institutions, universities and communities.

“Let’s take the solar industry, for instance. The top five solar players in the world are already in Malaysia. But how many universities are preparing talent for the solar industry?”

“So, transforming the nation requires all compartments of the nation to come forward and do their part together,” he adds.