GOVERNANCE MARCH 2021 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES Malaysia’s Experience with NATIONAL DEVELOPMENT PLANNING Looking Back, Looking Ahead CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY MARCH 2021 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES Malaysia’s Experience with NATIONAL DEVELOPMENT PLANNING Looking Back, Looking Ahead Disclaimer © 2021 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Table of Contents Acknowledgements..........................................................................................................................................6 Acronyms...........................................................................................................................................................7 Executive Summary...........................................................................................................................................8 CHAPTER 1: Introduction.....................................................................................................................................................12 CHAPTER 2: The Renewed Global Interest in National Development Planning.............................................................14 CHAPTER 3: The Nuts and Bolts of NDP in Malaysia........................................................................................................16 3.1 Malaysia’s Approach to NDP..................................................................................................................18 3.2 The Institutional Architecture of NDP....................................................................................................19 3.3 Relationship Between Planning and Budgeting.....................................................................................23 3.4 Plan Implementation and Monitoring.....................................................................................................23 3.5 Establishment of Parallel Mechanisms...................................................................................................24 3.6 Major Turning Points in Malaysia’s NDP.................................................................................................24 CHAPTER 4 : Assessment of Malaysia’s NDP System........................................................................................................26 4.1 A Framework for Assessing the NDP Process.......................................................................................27 4.2 Outcomes of Planning............................................................................................................................28 4.3 NDP in Malaysia: A Balance Sheet ........................................................................................................44 CHAPTER 5: The Future of Planning in Malaysia...............................................................................................................50 References.......................................................................................................................................................54 Annexes...........................................................................................................................................................57 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 5 Acknowledgements This paper was prepared by Deryck R. Brown (Co-Task Team Leader, Senior Public Sector Specialist), Jeeva Govindasamy (Co-Task Team Leader, Public Sector Specialist), Carmen Loo (Economist), Kenneth Simler (Senior Economist), and Yew Keat Chong (Economist). Taufiq Zin (Senior Economist at the Central Bank of Malaysia), Wei San Loh (Research Analyst), Rowena Sta. Clara, and Li Shen Liew (Program Assistant) provided valuable assistance. The work was carried out under the guidance of George Addo Larbi (Practice Manager, GGOES) and Alma Kanani (Practice Manager, EEAG1). The staff of the Economic Planning Unit (EPU), particularly the Macroeconomics Division led by Puan Zakiah Jaffar, provided important insights and guidance for the preparation of the paper. The team thanks Dato’ K. Yogeesvaran for his valuable contributions and for arranging focus group meetings and interviews with former senior officials. The team is also grateful to the many former and current Malaysian Government officials, members of the business community, and others, who willingly gave their time to meet with the team for discussions. This includes Tan Sri Dr. Rahamat Bivi Yusoff, Tan Sri Saw Choo Boon, Tan Sri Ramon Navaratnam, Dato’ Dr. Gan Khuan Poh and Mr. Surrendren Sathasivam (Director of the Macroeconomics Division, EPU). The team appreciates the comments of Lauchlan Munro (Associate Professor, School for International Development and Global Studies at the University of Ottawa), Souleymane Coulibaly (Program Leader/Lead Economist), Rajni Bajpai (Lead Public Sector Specialist), C. Bernard Myers (Senior Public Sector Specialist), Tuan Mihn Le (Lead Economist), and Safuwan Samah on earlier drafts of the paper. Finally, the team thanks the technical editor, Lachlan McDonald, for his assistance in ensuring the paper is publish-ready and reader-friendly. Disclaimer: The paper is based on an assessment made by the World Bank in 2019. The paper has since been updated where relevant. 6 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Acronyms AFC Asian Financial Crisis NDP National Development Planning B40 Bottom 40 NDPC National Development Planning BNM Bank Negara Malaysia Committee CBA Cost-benefit Analysis NEAC National Economic Advisory Council CI Creativity index NEM New Economic Model CSDU Civil Service Delivery Unit NEP New Economic Policy DE Development Expenditure NKEA National Key Economic Areas DNP Department of National Planning NPC National Planning Council DOSM Department of Statistics Malaysia NTP National Transformation Program EC Economic Council NVP National Vision Policy ECLAC Economic Commission for Latin OBB Outcome-based Budgeting America and the Caribbean OE Operating Expenditure EPU Economic Policy Unit OPP Outline Perspective Plans ETP Economic Transformation Program PEMANDU Performance Management and GDP Gross Domestic Product Delivery Unit GEFC Global Economic and Financial Crisis PFI Public Finance Initiative GLCs Government-linked Companies PIMA Public Investment Management Assessment GNI Gross National Income PPPs Private-public Partnerships HIPC Heavily Indebted Poor Country PRSP Poverty Reduction Strategy Papers IAPGs Inter-agency Planning Groups PSD Public Service Department ICU Implementation Coordination Unit R&D Research and Development IMF International Monetary Fund RM Malaysian Ringgit KSU Chief Secretary to the Government SDG Sustainable Development Goals KPIs Key Performance Indicators SINERGIA National System for Monitoring and M&E Monitoring and Evaluation Evaluation M40 Middle 40 STEM Science, Technology, Engineering, MAMPU Malaysia Administrative and Mathematics Modernization and Management TVET Technical and Vocational Education Planning Unit and Training MDG Millennium Development Goals TWGs Technical Working Groups MIDA Malaysian Investment Development UKAS Public Private Partnership Unit Authority VM Value Management MOF Ministry of Finance MP Malaysia Plan MTEF Medium-Term Expenditure Framework MTR Mid-term Review Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 7 Executive Summary Executive Summary 8 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Executive Summary This paper describes and evaluates Malaysia’s experience with National Development Planning (NDP). It discusses Malaysia’s approach to national planning and how it has successfully driven economic transformation and helped strengthen social cohesion. In particular, it highlights the strengths of the NDP regime, including the strong political support, institutional consistency and the importance placed on engagement and consultation. The paper also highlights the remaining challenges, including effective implementation, institutional misalignments and resourcing challenges, set against a backdrop of rapid economic, social and political change. The results of the assessment should be of interest and relevance to the growing number of countries that have made (or are considering) a return to planning, or countries that are aspiring to undertake their economic transformation. Malaysia stands out for its strong economic performance and resilience over a period of 60 years which delivered rapid and inclusive economic growth to its diverse population. Since achieving independence from the United Kingdom in 1957, the country has successfully diversified its economy from being one primarily based on agriculture and commodities to one that now hosts robust manufacturing and services sectors and is a leading exporter of electrical appliances, electronic parts and components. Since 1970, real GDP expanded by 6.4 percent per annum on average, lifting incomes and resulting in marked declines in both poverty and inequality. While the economy was severely affected by the 1997-98 Asian Financial Crisis (AFC), it was on an upward trajectory thereafter, averaging growth of 5.1 percent from 2000 to 2018. Partly as a result of its pursuit of NDP, Malaysia is an upper middle-income country with a diversified, open and modern economy that is now poised to become a high-income, industrialized economy. Indeed, GDP per capita not only exceeds the ASEAN average but is now higher than in some OECD countries. These transitions are clearly reflected in – and are a reflection of – the priorities articulated in the early national development plans. Significantly, NDP in Malaysia also played an important role in promoting not just economic but also social development. Following the “race riots” in May 1969, in which ethnic tensions escalated into violence with significant loss of life, a key objective of Malaysia’s development plans centered on promoting unity and social harmony through the redistribution of income against a backdrop of continuous growth. What the Malaysia case illustrates is that development is a continuous exercise requiring foresight, long-range planning, strong institutions, stable management and leadership, and building capacity in the human resources of a country. The objective of any government must be to improve on the country’s economic performance. That means a deliberate set of objectives targeting people, processes and systems to create the conditions for growth and development. NDP has always been a central feature of Malaysia’s economic policy-making and has been guided by a variety of instruments that cover the long, medium- and short-terms. Long-range vision statements, known as Outline Perspective Plans (OPPs), envision what the economy and society should look like in the future and lay out benchmarks over a 10-20-year time horizon. Medium-term five-year plans, known as “Malaysia Plans” (MPs) lay out the strategies, policies, programs and projects necessary to realize the vision. The annual budget then elaborates on specific strategies, programs and projects, and allocates resources for their implementation. Occasionally, special plans have been devised to steer crisis situations or develop specific sectors, such as the National Economic Recovery Plan (1998) that guided Malaysia’s recovery through the AFC, Industrial Master Plans, the Privatization Master Plan, the Financial Sector Blueprint (2011-2020), and more recently, the PENJANA Economic Recovery Plan that was launched to navigate the COVID-19 pandemic. After many years during which NDP had virtually been abandoned following its heyday in the 1960s and 70s, recent years have seen renewed interest in NDP globally. More than 80 percent of the global population now lives in a country with a national development plan in one form or another, including countries across the income spectrum. This reflects the growing awareness that systematic development planning has a number of useful practical applications; in particular supporting a more ‘holistic’ and coherent approach to policy-making, prioritization and public spending. Strategic development plans are also important for effective external engagement with the international donor community, multilateral development banks as well as the private sector. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 9 Executive Summary A key point about Malaysia’s planning system is not just that the country planned, but that it implemented its plans over an extended timeframe for the most part. It has had a stable and consistent institutional architecture and has kept its national planning apparatus intact even while liberalizing the economy. In the last few years, the Malaysian government has been guided by the strategic vision outlined in the Vision 2020 (1991-2020) and the New Economic Model (NEM) (2011-2020). Perhaps the most influential long-term vision, though, has been the National Economic Plan (1971-1990), which set the defining tone for Malaysia’s socio-economic development and continues to underpin socioeconomic policy to this day. The country is currently at the tail-end of implementing its 11th MP covering the period 2016–2020 and is preparing to launch its 12th MP for 2021-2025. This paper describes Malaysia’s planning apparatus, including the institutional architecture and the approach to planning that has evolved over many years. It highlights some of the major shifts, decisive turning points and success factors in Malaysia’s long experience with planning, and comments on the vital relationship between planning and budgeting. It then assesses the country’s national planning system in two ways. First, by borrowing an analytical framework that offers a typology of national development plans, it considers the process used for plan development/preparation; whether the plans are “socially embedded”; the type of evidence, data and technical analysis used; and the level of rationality underpinning the plans. In this way, it complements other scholarly work on the resurgence of planning. Second, by examining the outcomes of planning, focusing on four key areas that cut across all MPs since 1970: (a) macroeconomic progress, (b) sectoral development, (c) public investment management, and (d) social progress in relation to poverty reduction and income inequality. An important caveat is that not all the progress achieved is attributable to planning per se, but planning has unquestionably had an impact. One of the main factors of the success of NDP in Malaysia has been the strong, high-level political commitment to NDP. Similarly, there has been an unwavering commitment to stay the course during testing times. Malaysia’s planners have, moreover, fostered a highly consultative process, providing avenues to procure public opinion via the submission of memoranda, including through social media. This helped ensure that the plans became socially embedded. The Malaysian government deftly backed its development aspirations, both with its own development expenditures and by incentivizing private sector development in certain sectors, which helped to shepherd in a rapid process of industrialization and continues to underpin the structural transformation of the economy towards higher value-adding knowledge economy and services. Nevertheless, Malaysia faces a number of challenges going forward as the country approaches the end of its long-term Vision 2020 and the 11th MP (2016-20). In particular, the capacity and role of the EPU have eroded over time, while a number of disconnects between planning and budgeting continue to create inefficiencies in resource allocation. As the types of development challenges and level of complexity facing the country rise exponentially, the planning tools and systems employed in the past may no longer be appropriate to meet the challenges of the future. As Marshall and Reiter (2013) put it, “what got you here won’t get you there!”. Planning doubtless remains a useful discipline, though it is not without its limitations as the economy becomes more sophisticated. Malaysia’s planners may therefore wish to consider ways to recalibrate their planning process to deal with contemporary challenges and achieve the country’s socio- economic goals. Instituting a more agile and nimble approach that harnesses market forces, shifting the focus from the center to the sub-national level and moving to a shorter planning horizon are among the options that may be considered. 10 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Executive Summary Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 11 Chapter 1: Introduction CHAPTER 1 Introduction 12 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 1: Introduction National development planning (NDP) has returned to center stage in development as we have witnessed a renewed interest in NDP in the past decade. After many years during which economies let NDP lapse, the number of countries with national development plans rose steadily in recent years, climbing from 62 in 2006 to 116 in 2016, to 134 in 2018.1 Roughly 80 percent of the global population now lives in a country with a national development plan in one form or another.2 These do not just include developing countries but also some of the fastest-growing emerging economies in the world. NDP enjoyed its heyday in the post-independence period of the 1960s and 1970s. National development planning facilitated resource transfers to engender structural transformation, underlining the state’s role in post-colonial societies and economies. This was the era of the “developmental state” when, depending on the ideological orientation of a particular government, national development plans sought to foster development by directing both public and private investment toward industries and sectors that would promote economic growth. During this period, which also coincided with the United Nations Development Decades, NDP was inspired by the successful experience of “indicative planning’ in developed Western economies such as France and the Netherlands, the “imperative planning” model of more centrally-planned economies associated with the Soviet Union and other communist countries, or by the early successes with “directive planning” in some developing countries, such as India. Development planning is sometimes credited with creating the “East Asian miracle” that gave rise to the “Asian Tigers” (Japan; Taiwan, China; the Republic of Korea; Hong Kong SAR China; and Singapore) (Powell, 2005). Many countries worldwide employed NDP—with varying degrees of success—as a way of accelerating the development process in a coordinated fashion in response to citizens’ expectations and demands, particularly the drive for rapid industrialization and job creation. However, despite its relevance in the world of practice, it has received insufficient attention in the literature on governance and public administration (Telch et al., 2020). By the 1980s, however, NDP had begun to lose its appeal among developing countries. Some have argued that NDP always had a checkered history and was a failure in many parts of the world, particularly in Africa (see Boettke, 1994; Easterly, 2002). It was further discredited by the neo-orthodox economics of the Thatcher-Reagan era; it was then all but abandoned with the collapse of the Soviet Union and the fall of communism. This was reflected, for example, in the dismantling of the planning apparatus in many countries and the integration of the planning function into finance ministries, as well as the almost complete disappearance of planning from academic discourse and training programs. This paper focuses on Malaysia’s experiences with NDP, which may be relevant to the growing number of countries that have made (or are considering) a return to planning or those aspiring to transition from one income level to the next. Such countries could benefit from the lessons of Malaysia’s experience in forming a more nuanced understanding of not just how planning works but why it has worked effectively in the Malaysian context and how these lessons could be adapted to their own contexts. The first half of the paper, which is largely historical, describes the defining features of contemporary planning in Malaysia and critically reviews some of the successes and positive outcomes of planning. The second half, which is more forward-looking, points to some of the remaining challenges and shortcomings of the Malaysian planning system and offers suggestions on the repositioning of planning in an upper-middle-income country that has undergone rapid economic development in recent decades and stands on the threshold of achieving high- income, advanced economy status. 1 Out of a total of 195 economies. 2 Chimhowu et al., 2019. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 13 Chapter 2: The Renewed Global Interest in National Development Planning CHAPTER 2 The Renewed Global Interest in National Development Planning 14 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 2: The Renewed Global Interest in National Development Planning Several reasons explain the resurgence of NDP. Chimhowu et al. (2019) and Munro (2019) emphasize that the reintroduction of NDP was not an imposition by international financial institutions (IFIs) such as the World Bank or International Monetary Fund (IMF) but was, instead, internally-driven as countries initiated new planning processes themselves. Indeed, Chimhowu et al. (2019) suggest that the reemergence of planning passed almost unnoticed by the IFIs. In their view, there are four main reasons why countries have gravitated back toward development plans. First, many countries that currently have plans are former beneficiaries of the Heavily-Indebted Poor Country (HIPC) initiative. Under HIPC programs, countries were required to produce Poverty Reduction Strategy Papers (PRSPs); the discipline of preparing PRSPs and monitoring performance laid the foundations and built the capacity for planning.3 Second, an NDP is a useful tool for pursuing separate but related global goals and complying with international commitments, which emphasize systematic development planning and a holistic approach to policymaking (Herman, 2018).4 Third, in a minority of countries, NDP is a way of developing an ideological counter-narrative to the international development consensus centered around poverty reduction and the Sustainable Development Goals (SDGs) (Munro, 2019). Fourth, from an economic standpoint, planning can help manage the downside risks and uncertainties inherent in globalization. The desire for sustainable growth was another factor contributing to the renewed interest in development planning in several countries. A resurgence of NDP in Africa in the late 1990s—mainly focused on social development goals—has carried through to the present. In Latin America and the Caribbean, where economic growth failed to close development gaps, the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC) views the reemergence of planning as a “revindication of the state’s role in the development process” to support sustainable and inclusive growth over the longer term (UNECLAC, 2015). Countries conducted a dialogue on “rediscovering planning as a driver of the national development agenda, which are adopted in an increasingly participatory way” (Barcena, 2013). Countries in Asia have also incorporated the SDGs by mapping them to goals and targets in their own national development plans (UNESCAP, 2017), and countries in the European Union, including Ireland and Sweden, have produced sustainable development plans that allow them to track progress on a range of development goals. In recent decades, a series of transformations has altered the general conditions in which economic policymaking operates, changing the context in which NDP has re-emerged. Increased cross- country engagement and public-private partnerships necessitate well-developed plans. For development partners, including multilateral development banks, development plans remain important bases for their engagement in a country as projects with clear outcomes linked to the country’s development priorities are generally preferred. Development and sector plans have also supported the rise of public and private sector partnerships as a mode of financing—particularly for infrastructure projects—by identifying priority investments that are secure, certain, and profitable (Maine and Nash, 1987). 3 It should also be pointed out that the World Bank had promoted the Comprehensive Development Frameworks (CDFs) during the Wolfenson era. See, for example, Mallaby, Sebastian, 2004. The World’s Banker; A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations. New York: The Penguin Press. (Chap. 9). 4 Such global initiatives include the Millennium Development Goals (MDGs) agreed in 2000, the Sustainable Development Goals (SDGs) agreed in 2015, as well as a host of other international agreements, such as the OECD Declarations on Aid Effectiveness (Paris, Accra, Bhusan), the Addis Ababa Action Agenda of the Third International Conference on Financing for Development and the Paris Agreement on Climate Change. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 15 Chapter 3: The Nuts and Bolts of NDP in Malaysia CHAPTER 3 The Nuts and Bolts of NDP in Malaysia 16 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 3: The Nuts and Bolts of NDP in Malaysia Malaysia’s adherence to an NDP process partially explains its rapid economic development. Since gaining independence in 1957, Malaysia has successfully diversified its economy from being primarily based on agriculture and commodities to one that now hosts robust manufacturing and services sectors and is a leading exporter of electrical appliances, electronic parts, and components. The country has experienced rapid and inclusive economic growth, with real GDP expanding by 6.1 percent per annum on average since 1970. Today, Malaysia is an upper-middle-income economy and one of the world’s most open economies, with a trade-to-GDP ratio averaging over 130 percent since 2010. These transitions are reflected in—and are a reflection of—the priorities articulated in the first national development plans. In Malaysia, NDP began in 1950 with the Draft Development Plan of Malaya produced by the British colonial administration, followed by two five-year Malaya Plans immediately after independence, and then eleven subsequent five-year Malaysia Plans (MPs). The initial post-independence plans focused heavily on stimulating growth, diversifying the economy, boosting industrial development, and integrating and unifying the nation. This led to significant progress in economic growth, rural development, and infrastructure investment. However, little emphasis was placed on the distributional aspects of growth and addressing socioeconomic imbalances (see Annex 1, which lists the main focal areas of Malaysia’s plans). Following the “race riots” in May 1969, in which ethnic tensions escalated into violence with significant loss of life, a key objective of Malaysia’s development plans centered on promoting unity and social harmony through the redistribution of income against a backdrop of continuous growth. A key point worth noting about Malaysia’s planning system is not just that the country has planned but that, for the most part, it has implemented 5 its plans. Unlike many countries that discontinued planning and dismantled their planning apparatus after the heyday of NDP in the 1960s and 1970s, Malaysia— and others in Southeast Asia, including Thailand and the Philippines—kept its national planning apparatus intact even while liberalizing the economy. Many developing countries have either not prepared plans or produced development plans that were shelved almost as soon as they were launched. Many have been plagued by the notorious “planning-implementation gap,” where only minor aspects of plans have been implemented. By contrast, Malaysia has been formulating and implementing five-year national development plans for more than 60 years and shows no signs of abating. As the 11th MP, covering 2016–20, winds down, the country is preparing to launch its 12th MP for 2021–25. 5 As measured by project completion rates monitored by the Implementation Coordination Unit (ICU). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 17 Chapter 3: The Nuts and Bolts of NDP in Malaysia Another notable feature of Malaysia’s planning system has been stability and consistency in the institutional architecture. This is notwithstanding some evolution over time in response to changes in the external environment, economic structure, leadership, external shocks, and domestic disruptions. The next section briefly describes Malaysia’s contemporary planning system and recent developments, including the key actors and the mechanics of the planning function. 3.1 Malaysia’s Approach to NDP In Malaysia, NDP has a three-tiered time horizon covering the long, medium, and short terms (figure 1). 6 Long-range vision statements, known as Outline Perspective Plans (OPPs), envision what the economy and society should look like in the future and establish benchmarks over a 10–20-year time horizon.7 In many respects, the core objectives of these OPPs have been national unity and growth with equity. The five-year MPs put forward the medium-term strategies, programs, and projects necessary to realize the vision in the OPPs. In addition, special plans of varying durations have occasionally been developed to navigate crises or address specific sectors or policy objectives. Examples include the National Economic Recovery Plan (1998) that guided Malaysia’s recovery through the Asian Financial Crisis (AFC), the Industrial Master Plans, the Privatization Master Plan, the Financial Sector Blueprint (2011–20), and more recently, the PENJANA Economic Recovery Plan that was launched to navigate the COVID-19 pandemic. The third tier of planning—covering a single year—is the annual budget, which elaborates on specific policies, strategies, programs, and projects, and allocates resources for their implementation. FIGURE 1: Three-Tiered Planning Horizon in Malaysia Long-term Planning • Outline Perspective Plans (>5 years) (10-year horizon) • Vision 2020 (1991 - 2020) Re ects long-term framework of development • New Economic Model (2011 - 2020) • National Transformation 2050 (2021 – 2050) Medium-term Planning (3-5 years) • Five-year development plans (e.g. 11th Malaysia Plan, 2016 - 2020) Translates long-term framework • Mid-term reviews of the ve-year plans into policy, strategy, projects within development allocation Short-term Planning • Annual Budget by the Ministry of Finance (1-2 years) (every October) Implements policy, strategy and • Annual Report by the Central Bank of projects within annual budget Malaysia (every March) allocation Source: Economic Planning Unit, Malaysia. 6 This is sometimes referred to as a ‘Russian doll’ system of planning in which the short-term plan is encapsulated in the medium- term plan which is, in turn, embedded in the long-term vision or OPP. 7 Notable OPPs include the New Economic Policy (NEP, 1971–90), National Development Policy (NDP, 1991–20), the National Vision Policy (NVP, 2001–10), and the New Economic Model (NEM, 2011–20). Note that the NDP or Vision 2020 was a long-term vision spanning 30 years while the NVP and NEM both had a 10-year time horizon. 18 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 3: The Nuts and Bolts of NDP in Malaysia Perhaps the most influential long-term vision has been the New Economic Policy (NEP) (1971–90), which continues to underpin socioeconomic policy in Malaysia. The NEP was the main policy document that guided NDP in the aftermath of the 1969 race riots. It aimed to foster national unity and nation-building by eradicating poverty irrespective of race or geographical location and the restructuring of the society to eliminate the identification of ethnicity with economic function or occupation.8 Four aspects of restructuring were outlined: (i) restructuring of employment patterns; (ii) ownership of corporate share capital; (iii) the creation of a Bumiputera commercial and industrial community; and (iv) the establishment of growth centers in rural areas.9 The NEP, which corresponded to the period of the 2nd through 5th MPs, set a defining tone for Malaysia’s socioeconomic development (see Annex 1). Indeed, the aims of the NEP continue to this day, with it having come to be associated with state intervention and ‘affirmative action’ mainly in favor of the Bumiputeras. From 1991, the National Development Policy (NDP, more commonly known as Vision 2020) provided the impetus for the 6th through 11th MPs. Launched by then-Prime Minister Mahathir bin Mohamad in 1991, Vision 2020 promised to transform Malaysia into a prosperous society and competitive economy and to achieve developed country status in 30 years. Its focus was on the total development of the Malaysian citizen and society—economically, politically, socially, spiritually, psychologically, and culturally. Vision 2020 is built upon the NEP in key respects. For instance, it was accepted that economic and social justice must go hand in hand and continuing the affirmative action programs started under the NEP would be necessary to build an equitable society. A developed Malaysia would have a robust middle class and provide full opportunities for the “bottom third” to climb their way out of relative poverty. Vision 2020 also promised that Malaysians would be four times richer in real terms by 2020 than they were in 1990. In presenting the vision to the Economic Council, Prime Minister Mahathir described a competitive economy as sustainable, diversified, dynamic, robust, nimble, technologically proficient, and resilient. Significantly, the prime minister acknowledged the state’s interventionist role in the economy and business, in providing the legal and regulatory framework for rapid economic and social development, and in developing the necessary physical infrastructure to facilitate investment (Mohamad, 1991). Vision 2020 was later supplemented by the National Transformation Program (2011–20), intended to lead Malaysia to become a high-income, inclusive, and sustainable nation. 3.2 The Institutional Architecture of NDP NDP in Malaysia is generally centralized, led and coordinated at the highest political and bureaucratic levels. It became centralized at the federal level during the 1960s. Prior to that, some states also undertook their own economic planning. Centralization was deemed necessary for better coordination of policy measures to achieve the national economic and social objectives. National Planning Council and the National Development Planning Committee At the apex of the national planning apparatus has been the National Planning Council (NPC), made up of Cabinet ministers responsible for the key economic ministries. The NPC, chaired by the prime minister, has ultimate responsibility for what is included in Malaysia’s development plans. At the level of senior officials, the National Development Planning Committee (NDPC) has been the main bureaucratic locus for national planning concerned with formulation and implementation of the five-year development 8 Certain ethnic groups were associated with specific occupations. For example, the ethnic Malays and other indigenous groups (referred to as the Bumiputera—literally, “son of the soil”) were predominantly rural small farmers; Indians were principally agricultural estate workers; while the Chinese were generally businesspeople (see Jomo, 2005; Mokhtar, Reen, and Singh, 2013). 9 Although the NEP was promulgated in 1971, the specific targets were only defined in 1976. The goal was to shift the equity ownership from 63.3 percent foreign-owned, 32.3 percent non-Bumiputera Malaysian, and 2.4 percent Bumiputera, to 30 percent foreign-owned, 40 percent non-Bumiputera, and 30 percent Bumiputera (Rasiah and Shari, 2001). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 19 Chapter 3: The Nuts and Bolts of NDP in Malaysia plans, acting as a clearinghouse for new proposals and initiatives, and resolving any disagreements between ministries, departments, and agencies. The NDPC comprises key center-of-government agencies and is chaired by the Chief Secretary to the Government (KSU)—the country’s most senior civil servant—and includes senior officials (such as Secretaries-General and Directors-General) from the Economic Policy Unit (EPU), the Ministry of Finance (MoF), the Bank Negara Malaysia (BNM, Malaysia’s Central Bank), and the Department of Statistics Malaysia (DOSM).10 Senior officials from other central agencies and line ministries also attend NDPC meetings. EPU The EPU has been the core of Malaysia’s planning system since 1961. Originally called the Economic Secretariat, the EPU was reorganized, expanded, and renamed in 1961 and located within the Prime Minister’s Department.11 The EPU’s roles and responsibilities have remained largely unchanged over the past 60 years. The EPU, responsible for leading the planning process and coordinating across government, has always held a privileged position in the overall planning function. As the secretariat for the NDPC, the EPU is responsible for ensuring the quality and integrity of the planning process and the plan itself. It not only leads the preparation of MPs but carries out the underlying analytical work to inform the deliberations of the NDPC and other special planning bodies. For example, the EPU initiates special studies, prepares ‘master plans,’ and carries out mid-term reviews (MTRs) of the five-year plans (Aznam Yusof and Bhattasali, 2008, p. 31). Notably, the EPU has the mandate, authority, and resources to perform the development planning coordination function. The EPU also prepares and manages the development (or capital) budget. While ad hoc economic decision-making bodies have sometimes been created in response to specific economic crises, such as those in 1997–98 and 2008–09, these did not threaten the EPU’s role or displace it in any way. In terms of organizational structure, the EPU comprises 20 sections and four sub-sections (figure 2). With over 500 professional and support staff, the unit is overseen by a Director-General, a high-ranking government official reporting to a minister in the Prime Minister’s Department. Four divisions led by Deputy Directors-General are organized around the major themes of the EPU’s work: sectoral, macroeconomics, policy, and human capital. 10 The three centers for macroeconomic policy have traditionally been the EPU, MoF/Treasury, and the BNM. The EPU has responsibility for the formulation of the five-year development plans and the mid-term reviews of those plans, as well as the long- term plans (OPPs). Fiscal policy—including taxation and budget preparation—is under the MoF’s purview. The BNM is responsible for monetary policy and exchange rate policy (Aznam Yusof and Bhattasali, 2008). 11 Following the May 2018 general elections, when the Barisan Nasional ruling coalition lost to the Pakatan Harapan after almost 61 uninterrupted years in power, the EPU was upgraded into a full ministry—the Ministry of Economic Affairs—before being changed back to the EPU in March 2020. 20 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 3: The Nuts and Bolts of NDP in Malaysia FIGURE 2: Organizational Chart - Economic Planning Unit Minister in The Prime Minister's Department Deputy Minister's in The Prime Minister Department DIRECTOR GENERAL OF EPU DEPUTY DIRECTOR (SECTORAL) DEPUTY DIRECTOR (MACRO) DEPUTY DIRECTOR (POLICY) DEPUTY DIRECTOR (HUMAN CAPITAL) INFRASTUCTURE & SERVICE INDUSTRY 1MALAYSIA TRAINING UTILITIES SECTION SECTION REGIONAL HUMAN CAPITAL SCHEME (SL1M) DEVELOPMENT SECTION DEVELOPMENT SECTION MACROECONOMICS AGRICULTURE SECTION DISTRIBUTION SECTION ECONOMIC COUNCIL MANAGEMENT SECTION SECRETARIAT SERVICES SECTION MANUFACTURING SOCIAL SERVICE SECURITY & PUBLIC CIVIL SERVICE DELIVERY CORPORATE INDUSTRY, SCIENCE & SECTION ORDER SECTION TECHNOLOGY SECTION UNIT/TN50 COMMUNICATION UNIT ENVIRONMENT NATIONAL DEVELOPMENT ENERGY SECTION ECONOMICS & PLANNING COMMITTEE & POLICY INTEGRITY UNIT NATURAL RESOURCES & BUMIPUTERA DEVELOPMENT UNIT SECTION K-ECONOMY SECTION INTERNATIONAL COOPERATION SECTION VALUE MANAGEMENT DEVELOPMENT BUDGET STATISTICS UNIT Guideline SECTION SECTION Direct control Indirect control INFORMATION LEGAL SERVICE SECTION MANAGEMENT SECTION Source: Economic Planning Unit, Malaysia. Stakeholder Consultation Formulating a national development plan entails a considerable amount of coordination among government ministries, departments and agencies, and outside stakeholders. As the premier planning agency for the whole country, the EPU manages much of this process.12 An additional layer of coordination is required at the state level, where implementation takes place. Moreover, concerns over inter-ethnic conflict remain central to issues of growth and development. While the early years of planning tended to be more top-down, mainly driven by a technocratic elite, the process became more consultative in the wake of the 1969 race riots. This inclusive process continued over time, to the point where some argue Malaysia now provides an example of a workable approach to building consensus in a culturally heterogeneous environment (Aznam Yusof and Bhattasali 2008, p. 24–25). Inter-Agency Planning Groups (IAPGs) and Technical Working Groups (TWGs) are the main channels of stakeholder consultations with the private sector, civil society groups, and citizens. The EPU considers feedback and policy recommendations from these channels and adjusts the five-year plans’ goals and strategies accordingly. The IAPGs and TWGs are organized along thematic lines, with the former addressing policy and strategy and the latter focusing on the more detailed, technical aspects. Examples of themes/topics covered by the IAPGs are macroeconomics, human capital, environment, manufacturing, services, and public sector delivery. The membership for IAPGs and TWGs typically draws on all the relevant government agencies, as well as the state-level planning units. Membership in IAPGs was opened up to the private sector (mostly industry associations and not individual firms), civil society organizations, and academia starting with the 10th MP. In the 11th MP, focus groups were also introduced as an additional engagement mechanism. In addition, the EPU collaborated with the relevant agencies that developed more 12 Plan preparation is initiated by a call circular issued by the EPU inviting ministries, departments, and agencies to participate in the planning process and outlining the inputs required and timing of the inputs. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 21 Chapter 3: The Nuts and Bolts of NDP in Malaysia focused plans in other areas—services and logistics sectors, for example—to ensure consistency with the broader five-year plan.13 For the 11th MP, there were 12 IAPGs, 42 TWGs, and 140 focus groups. Figure 3 presents the array of consultative mechanisms used in the preparation of the 11th MP. FIGURE 3: Institutional Planning Mechanism Ministry of Economic Central Bank Department Finance Planning Unit of Malaysia of Statistics Feedback on policy • Call Circular/Guideline/Policy Statement recommendations and • Macroeconomic framework * Eleventh Malaysia Plan, 2016 - 2020 • 12 Inter-Agency Planning Groups * strategies through IAPGs and TWGs Inter Agency • 42 Technical Working Groups Planning • 140 Focus Groups Group (IAPG) • Engagement with nearly 6,000 stakeholders over 18 months Adjustment National Prime Minister's and Economic Development Parliament Planning Special Cabinet Matching Planning Unit Committee Committee Programmes and development projects proposal Other State Private Sector Ministries Agencies Governments & Civil Society Source: Economic Planning Unit, Malaysia. The government also seeks stakeholder feedback through other platforms, such as the EPU’s website (during MTRs) and the 1Malaysia Call Centre. The latter was launched in 2012 to provide a single platform for Malaysians to voice any inquiry, complaint, or feedback to the government. However, in undertaking the MTR of the 11th MP in 2018, during which the government also drafted an updated policy framework for the remaining two years of the plan, public consultations were not undertaken, perhaps due to the short time frame given to complete the review.14 13 Plans in more focused areas have also been developed by the relevant agencies. Examples of these are the Services Sector Blueprint, the Logistics and Trade Facilitation Masterplan and the Sustainable Consumption and Production Blueprint. 14 To be clear, the EPU had undertaken the MTR prior to the May 2018 general elections and had to make fairly drastic changes to the MTR as the new administration sought to embed its policy priorities in the MTR. 22 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 3: The Nuts and Bolts of NDP in Malaysia 3.3 Relationship Between Planning and Budgeting One aspect of the EPU’s mandate that distinguishes it from many other planning agencies is the responsibility to prepare the development (capital) budget.15 Figure 1 (see section 3.1) illustrates the linkages between the long-range visions, the five-year medium-term plans, and annual budgets. There are clear lines of responsibility in the budgetary process between operating expenditure (OE), which is prepared by the MoF per the provisions of the Financial Procedures Act (1957), and development expenditure (DE), which is prepared by the EPU within an agreed ceiling determined by the MoF. While ministries, departments, and other government entities each prepare their own projects and programs, the EPU has overall responsibility for ensuring consistency with the development plan and setting the ceilings for new projects. Budgets for projects and programs are allocated on two-year rolling plan cycles to enable greater flexibility in selecting and managing projects, with annual reviews to ensure linkages between planning and implementation. This process entails very close cooperation and collaboration between the EPU and the MoF in coordinating both the DE and OE budgets. Changes or cost variations to ongoing projects must be referred back to the EPU’s Development Budget Section for review and clearance. With the potential challenges of this approach in mind, reforms have been introduced to improve development budgeting and ensure better linkages between national strategies and the budget process. For example, in 2010 Malaysia began introducing Outcome-Based Budgeting (OBB), a performance- based budgeting system, to better link high-level national strategies to specific budget programs and activities. In addition to improving harmonization between medium-term plans and annual spending, OBB was intended to offer a more evidence-based rationale for making budget decisions across an array of competing policy and program areas. While the “front-end” program and results structure of OBB has been well developed in Malaysia, the stages related to performance reporting and performance evaluation have been less advanced (Myers et al., 2018). 3.4 Plan Implementation and Monitoring The Implementation Coordination Unit (ICU)—also in the Prime Minister’s Department—is the agency responsible for coordinating and monitoring the implementation of the five-year MPs. The ICU’s role is to ensure that planned projects are executed effectively and efficiently within the allocated time and budget. The ICU utilizes a Project Monitoring System (the SPPII, an IT-based monitoring tool) to monitor and support the life cycles of all programs and projects and perform outcome-based analyses to ensure projects achieve their intended objectives cost-effectively and sustainably. The ICU’s analysis and impact studies are intended to allow for reflection on the government’s implementation capacity and the design of better plans and projects in the future. The ICU uses inputs from line ministries to monitor the implementation of projects across MPs by tracking their physical progress and financial expenditures of projects. It generates monthly status reports for the NDPC, which are also used by central agencies like the EPU and other line departments.16 However, while expenditure and completion progress are important measures, they do not always give a complete and accurate depiction of effective implementation. For example, the World Bank’s recent assessment of Malaysia’s agriculture sector revealed that underspending in one program since 2011 led to a reduction in the budget allocation in subsequent years. However, the underlying reason for the underspending was not investigated, and while budget execution rates subsequently improved, the program fell behind in achieving its targets for job creation and investment commitment (World Bank, 2019a). 15 A similar situation exists in Colombia where the Department of National Planning (DNP) is also responsible for the capital investment budget while the recurrent budget is the responsibility of the Ministry of Finance. Within DNP, the Office of Public Investment and Finances is in charge of leading the process of formulation and implementation of the investment projects at the national level as many of the goals of the National Development Plan are delivered through the implementation of investment projects. This makes the allocation of the capital budget a decision process on development expenditure that must be supported by performance data (see Stolyarenko, 2013). 16 For scale, the 10th MP (2011-2015) had an allocation of US$57.5 billion, and about 64 percent of its 11,979 projects were completed. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 23 Chapter 3: The Nuts and Bolts of NDP in Malaysia 3.5 Establishment of Parallel Mechanisms Malaysia created a number of ad hoc economic decision-making or advisory bodies in response to the 1997–98 AFC and the 2008–09 Global Economic and Financial Crisis (GEFC). While the main format of the NDPC has remained unchanged, these two major economic crises provided the impetus to create additional economic advisory or decision-making fora to enable the government to respond to the economic downturn more rapidly and efficiently. For example, the National Economic Advisory Council (NEAC), later known as the Economic Council (EC), was a special Cabinet Committee created in 2008 in response to the impact of the global economic slowdown on Malaysia, which later focused on formulating the New Economic Model (NEM) to transform Malaysia into an advanced economy by 2020. Policies emanating from these ad hoc bodies are sometimes absorbed into the five-year plans and the national budgets. While the EPU continued to be the central agency in development planning, parallel mechanisms emerged, especially during the last 10 years of the Barisan Nasional government under the leadership of Prime Minister Najib Razak (2009–18). In addition to the NEAC, perhaps the most significant— and controversial—institutional innovation was the establishment of a delivery unit called the Performance Management and Delivery Unit (PEMANDU), which was intended to accelerate the implementation of high-priority projects. However, PEMANDU also became involved in designing policies and setting new development priorities, including the National Transformation Program (NTP), Economic Transformation Program (ETP), and the Government Transformation Program (GTP).17 While these parallel mechanisms had some advantages, they also created confusion among stakeholders and the traditional development planning nodes in the central agencies, as well as in government ministries. This is explained in further detail in Section 4.3 below. The renewed focus on regional economic development in the mid-2000s prompted the creation of Regional Economic Development Authorities. Initially, planning in Malaysia was undertaken at both the federal and sub-national (state) levels, though coordinated through the central NDPC. The EPU also coordinated with the state economic planning authorities. The new Regional Economic Development Authorities meant that there were additional stakeholders in the planning process who also provided bottom-up input on economic and social priorities of development planning from the subnational level. 3.6 Major Turning Points in Malaysia’s NDP Several decisive turning points changed the policy focus, structure, and process of NDP in Malaysia (figure 4). The evolving institutional and policy landscape also changed how the MP is prepared, documented, presented, and communicated to citizens. There were also significant changes to the format and style of presentation of the development plans that are worth noting, particularly over the past decade. Some of the main changes have been: 1. From vertically-oriented, sector-based strategies to cross-cutting “development thrusts.” Until the 9th MP (2006–10), all five-year plans were organized by economic sector (manufacturing, services, agriculture, tourism) with policies and strategies linked to the relevant ministry. This led to clear ownership and lines of accountability for the projects that fell under each chapter. Beginning with the 10th MP (2011–15), however, the EPU changed the approach by basing the plan on development thrusts or common goals, such as enhancing inclusiveness, improving well-being, strengthening human capital, pursuing green growth, and re-engineering economic growth. The change was an 17 PEMANDU is now a private sector consulting firm incorporated under the name PEMANDU Associates. Some of its previous functions were transferred to a public sector entity called the Civil Service Delivery Unit (CSDU), housed in the EPU, but CSDU was disbanded in 2018 (see World Bank, 2017). 24 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 3: The Nuts and Bolts of NDP in Malaysia effort to disrupt the siloed culture and replace it with a culture of collaborative coordination. The shift to a horizontal approach required reorganization of the planning document to integrate the strategies of multiple ministries. Each ministry had to identify its space and relevance within the thrusts and figure out how to implement them with other ministries. FIGURE 4: Major Shifts in Malaysia’s NDP • Top-down approach to NDP Pre-1969 • Laissez Faire • Active government intervention 1969 • From "top-down" to a more consultative approach Race Riots • Introduction of long-term plans (OPPs) in addition to ve-year plans Mahathir • Rapid economic growth prior to Asian Financial Crisis (AFC) in 1997 Mohamad’s • Created National Economic Action Council (NEAC) to address AFC term • Private sector led economy, leaner public sector, privatization (1981-2003) Ahmad • Change in EPU leadership weakened its power Badawi’s • Initiated creation of regional corridors and included them in the MPs term (2003-2009) • Initiated drafting and inclusion of a Biotech chapter in the plan • Introduced parallel mechanisms to map the development of Malaysia Najib Razak’s • Organized the National Economic Advisory Council (NEAC)—prepared the New Economic Model term • Created PEMANDU to speed up the delivery and implementation of the development plan (2009-2018) • Introduced Blue Ocean Strategy as basis for the Malaysia National Development Strategy (MyNDS) 2. From detailed narratives to simple graphics. As in other countries, Malaysia’s five-year development plans were traditionally thick documents full of impenetrable text with no attempt to make them reader-friendly.18 Plans were made more accessible to the public starting with the 10th MP, containing less detail and shorter narratives, colorful graphics, and photographs. The key performance indicators (KPIs) and targets associated with each development thrust became more prominently highlighted, with more concise summaries produced for public consumption. Accompanying strategy papers for each sector and development area—containing details on issues, challenges, and implementation— were made available online for the 11th MP. 3. The practice of including detailed budget allocations in the plan was discontinued. Previous plans had outlined the proposed DE budget allocations for each five-year period, both by ministry and state. As it became increasingly challenging for the MoF to forecast and commit to an exact five-year DE allocation, only the indicative cumulative DE allocations were published by the EPU from the 10th MP onwards. Allocations by ministry and state were still prepared but only used internally for planning purposes. The MoF decides the annual DE ceiling, determined by the availability of government revenue and other financial commitments. To further facilitate greater flexibility in allocating resources, the EPU also began adopting a two-year rolling plan from the 10th MP to enable the re-prioritization of projects as needed. It also helped avoid the over-commitment of resources to slow-progressing projects, reducing the bunching of projects toward the end of the five-year period. 18 They were jokingly described as “door stoppers” even by those who produced them. Indeed, the planners themselves often wondered whether anyone ever read these documents; consistent with the siloed approach described above, each ministry could get away with reading only the chapter related to its operations. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 25 Chapter 4: Assessment of Malaysia’s NDP System CHAPTER 4 Assessment of Malaysia’s NDP System 26 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System We assess Malaysia’s NDP system in two parts. The first part is mainly about the process and the plan itself, applying an analytical framework developed by Chimhowu et al. (2019) that offers a typology of national development plans. The second part reviews selected results and outcomes of Malaysia’s NDP, focusing on four standard components that cut across all MPs between 1970 and 2016, and evaluates each against the aspirational targets set in the MPs. These are: (i) macroeconomic progress; (ii) sectoral development; (iii) public investment management; and (iv) social progress in relation to poverty reduction and income inequality.19 4.1 A Framework for Assessing the NDP Process Planning is a political act, a theory (of change), and a technical discipline for creating a sense of future (UNECLAC, 2015). NDPs are not merely instruments of governance but also political declarations within the purview of both professional civil servants and politicians. As such, a good planning document is developed using technical approaches and the clear formulation of political goals and objectives while being mindful of the interests of different groups in society that have to be involved in the process of setting strategic national goals. This means that the planning function should not be restricted to those within the bureaucracy alone; it calls for the full participation of civil society organizations, the business community, and other stakeholders, including the political parties represented in the legislature that can articulate the interests of the public. The involvement of the private sector, in particular, can enrich the planning process, given its ability to bring to bear a real-world approach in planning and economic policymaking. A national plan that fails to take into account the balance of interests in a society potentially creates a distorted picture of the future and misrepresents the society’s aspirations and expectations. This can be prevented through a more collaborative approach to planning, although at additional time and money costs to the state. In their 2019 paper, Chimhowu et al. (2019) analyzed 107 national development plans and generated a typology of plans based on their process and characteristics. The typology sorted plans mainly based on their underpinning rationalities, the degree to which they are evidence-based, their coherence, and social embeddedness. Their framework yielded four types of plans: (i) Type A—top-down, with strong evidence but limited social embeddedness, (ii) Type B—bottom-up and collaborative, with strong evidence and high social embeddedness, (iii) Type C—top-down and disjointed, with weak evidence and limited social embeddedness, and (iv) Type D—bottom-up, but with weak evidence and limited social embeddedness.20 Malaysia’s NDP regime has well-developed and formalized consultative processes, although its main directions are determined at the top. Malaysia’s planning model in the 1950s and 1960s employed mainly a top-down approach, with the EPU working assiduously to analyze masses of data and produce a national plan that was technically sound but elicited little inputs from the public. Such plans were seen as blueprints prepared for the benefit of citizens or, alternatively put, planning for the people.21 Following the race riots in 1969, Malaysia’s plans started to adopt a more collaborative rationality. While the NPC and NDPC still determine the plan’s general framework and direction—and the EPU still coordinates—it is developed through extensive consultations with other ministries, agencies, states, the private sector, and the public through channels such as the IAPGs, TWGs, and social media (see Section 3.2). This enables planning officials 19 Other important social aspects encompassing education and human resources, health and housing have also been included in the MPs but are not being covered here because of time and resource constraints. 20 For more information on Chimhowu et al (2019)’s analytical framework, please see Annex 2. 21 This is akin to what Chimhowu el al (2019) deems is a “Type A” plan (see Annex 2). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 27 Chapter 4: Assessment of Malaysia’s NDP System to develop a better understanding of the issues at a grassroots level, gather feedback on current policies and strategies, and test new ideas and solutions. Over time, the presentation of the plans has also become more reader-friendly and graphic, with clearly exhibited KPIs and targets (see section 3.6). As a result, the MPs have become more embedded in the political and social fabric and also more communicative in nature. The EPU’s strong mandate allows it to effectively coordinate NDP and provide the underlying technical analysis. A firm mandate, as well as past investments in human capital development and data collection systems, have enabled the EPU to effectively coordinate planning with central agencies such as the MoF, BNM, ICU, and the DOSM, as well as with other line ministries and non-government stakeholders, to prepare the national plan and identify programs, projects, and DE requirements. The technical capabilities of EPU staff, assisted by the information flow through its consultative and collaborative efforts, have ensured that plans remain evidence-based, data-driven, and supported by high-quality technical analysis. The EPU has maintained this core role despite the creation of parallel agencies and decision-making bodies. The ICU’s monitoring and evaluation of MP implementation also provides additional evidence and feedback into the NDP process. Overall, Malaysia’s recent national development plans broadly fall into the Type B category of the Chimhowu et al. (2019) analytical framework, as they are collaborative, evidence-based, and have, over time, become increasingly communicative and easy to access. Type B plans are the most common of the 107 plans the paper studied and are typically developed using a broad-based consensus of shared values and aspirations for the future, although at additional time and monetary costs. They contain evidence of wider consultations with groups outside of the central government and include a balance of economic and social priorities, often using terms such as “inclusive growth” and paying attention to specific groups such as women, youth, or the elderly. These plans are also usually communicative, publicly-available, and with easily digestible information for the general public. Type B plans are commonplace in the era of “new” national development planning, where technical expertise is valued, and plans are perceived more as a tool for communication and negotiation of national priorities and visions with internal and external stakeholders. While Type B plans are a close fit to an “ideal-type” plan, ultimately, their success and credibility rely on the ability and capacity to finance, implement, and commit to it. One of the essential tasks of governance is securing trust in and building up the credibility of the planning process and then implementing the projects and programs outlined in plans. Without this, planning activities lose their meaning and run the risk of being unable to influence the behavior and decisions of citizens, states, businesses, and other stakeholders. Due to their collaborative and communicative nature, Type B plans typically have the ability to draw high-level political commitment, leading to better prospects for implementation. Resource allocation for Type B plans is also usually closely aligned with their outlined priorities. In this direction, Malaysia has undertaken efforts to better align its annual budgeting with the medium-term national strategies using a common results framework through OBB.22 The tabling of the NDP alongside the development budget in Parliament also lends credibility to the plan and ensures it is not seen merely as a document containing aspirational statements. The overall efficiency of Malaysia in implementing the plans is discussed further in Section 5. 4.2 Outcomes of Planning23 Some of Malaysia’s most significant socioeconomic achievements during the past 60 years occurred against the backdrop of NDP. These achievements include a significant decline in poverty rates, improvement in literacy, upward social mobility, rural development and urbanization, reduction in 22 See Section 3.3 for more info on OBB. 23 All analysis and charts in the paper were completed in 2019, as per the disclaimer in page 6. 28 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System the mortality rate and increased life expectancy, improved access to electricity, water, education, and health facilities, as well as the modernization of infrastructure such as roads, highways, ports, and airports. Universal access to primary education was introduced in 2003, and government expenditure on education is now almost 5 percent of GDP. In terms of the macroeconomy, Malaysia experienced a six-fold increase in per capita GDP in ringgit terms between 1970 and 2017. The country’s economic structure was transformed from a reliance on agriculture to manufacturing and, more recently, to services and the digital economy. These impressive achievements have made Malaysia a leader among Southeast Asian economies. While Malaysia’s planners attribute the country’s macro- and socioeconomic achievements to its development planning machinery, other factors—economic, political, and social—were also critical. The role of development planning in the mobilization of efforts to advance Malaysia’s economic and social aspirations is evident. However, the progress observed over the years could not have materialized without high-level political commitment, the availability of resources, and the capacity to implement. In a nutshell: the ability to translate the plans into action and outcomes. Macroeconomic Outcomes Development planning typically involves projections for macroeconomic growth rates and employment creation targets. Growth projections are usually based on an econometric model and translated into a macroeconomic consistency framework that takes into account variables such as the state of the economy, export growth, national income, planned and potential investment. As with all forecasting, it is impossible to predict everything that will happen in the future with any degree of accuracy. Because there will always be uncertainties and unanticipated events, planners must prepare for any eventuality. Although GNI per capita has been on a consistently upward trajectory since the time of the 1 st Malaya Plan (1956–60) (figure 5), a broad comparison of the medium-term GDP growth targets set out in subsequent MPs with actual outcomes reveals that Malaysia has been consistently underachieving on its aspirational targets since the mid-1990s (figure 6). The gaps between the average GDP targets and the actual outcomes ranged from 3.0 percent during the 7th MP (1996–2000) when the economy was severely affected by the 1997–98 AFC, to 0.7 percent in the 10th MP (2011–15). This underperforming trend is expected to persist into the 11th MP (2016–20) period, as average GDP growth is projected to be marginally below the lower bound of the plan target range of 5–6 percent.24 This performance stands in stark contrast to the 2nd – 5th MPs between 1971 and 1995, in which the average GDP growth targets were either achieved or surpassed in all but one plan period (4th MP, 1981–85).25 It is important to point out, however, that the aspirational growth targets set out in the plans were reviewed and often adjusted during the MTRs, which would typically take into account changes in the economic environment that might negatively impact on the ability to meet those targets and warrant adjustment. This practice applies equally to the public investment program in terms of the composition of projects and the DE allocated for the remaining plan period. The underachievement of growth targets since the 2000s could be partly attributed to the overestimation of contributions from private investment and export activity (table 1). The overestimation of private investment was particularly notable in the 8th MP (2001–05) when private investment was targeted to grow at an average of 19 percent per annum but recorded average annual growth of only 3.9 percent. The export sector has also been consistently underachieving against its targets since the mid- 1990s, with the largest difference in growth rates registered in the 10 th MP (2011–15) when the growth target was 7.2 percent per annum, but actual growth was 1.6 percent per annum. 24 Real GDP growth averaged 4.8 percent in 2016–19. Before COVID-19, the World Bank’s 2020 real GDP growth forecast for Malaysia was 4.6 percent; that has now been revised to a contraction of -3.1 percent to reflect the impact of the pandemic. In the 11th MP MTR, the government revised the average annual GDP growth rate for the remaining two years of the plan to between 4.5 and 5.5 percent, supported by sustained domestic demand, mainly from private consumption. 25 This coincided with the collapse of the global commodity trade prices in the mid-1980s. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 29 30 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 1956 1st Malaya Plan (1956-60) Focus: Rural development, rubber industry, emergency expenditure, defense, security 4 5 6 7 8 9 10 1961 2nd Malaya Plan (1961-65) Focus: Rural development, employment generation, economic growth, economic diversi cation, social services 2nd MP (1956-70) 1971-75 rural development Post-independence 1st Malaysia Plan (1966-70) 1966 Focus: Racial harmony, economic growth, employment Laissez faire economy with some generation, economic diversi cation, population planning Source: World Bank staff analysis 3rd MP 1976-80 1971 2nd Malaysia Plan (1971-75) Focus: 1st Phase of NEP-Eradication of poverty, restructuring of society, OPP1 4th MP 1981-85 3rd Malaysia Plan (1976-80) 1976 Focus: 2nd phase of NEP-Eradication of poverty, Chapter 4: Assessment of Malaysia’s NDP System restructuring of society, private sector-driven (1971-90) 5th MP 1981 4th Malaysia Plan (1981-85) Focus: Implementation of NEP, revitalize agriculture Growth with equity sector, plivatization, heavy industry New Economic Policy (NEP) 1986 6th MP 1986-90 1991-95 5th Malaysia Plan (1986-90) MALAYSIA Source: World Bank staff analysis using data from MPs, DOSM. 1991 6th Malaysia Nan (1991-95) 7th MP Focus: Sustained growth, balanced development 1996 National (1991-00) 7th Malaysia Plan (1996-00) GNI Per Capita (Constant 2010 US$) 8th MP Focus: Balanced development, productivity-driven growth 1996-00 2001-05 Development Policy FIGURE 5: GNI Per Capita, 1956–16 Balanced development Percent change (average, year on year) 2001 8th Malaysia Plan (2001-05) Focus: Knowledge-based economy 9th MP 2006-10 2006 9th Malaysia Plan (2006-10) (2001-10) A resilient & Vision 2020 Focus: Value chain, human capital, competitive nation Total development socio-economic inequities National Vision Policy Target FIGURE 6: Real GDP Growth: MP Targets versus Actual Outcomes 10th Malaysia Plan (2011-15) 2011 Focus: Government Transformation Programme, New Economic Model, Economic Transformation Programme Actual Outcome 10th MP 11th MP 2011-15 2016-20 National 2016 11th Malaysia Plan (2016-20) (2011-20) Focus: Inclusiveness, well-being, infrastructure, (economically, politically. Socially. Spiritually, psychologically & culturally) green growth New Economic Model Transformation Policy Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System Table 1: Real GDP Growth: MP Targets versus Actual Outcomes 7th MP 8th MP 9 th MP 10 th MP 11th MP* 1996–2000 2001–05 2006–10 2011–15 2016–20 Expenditure Component Private Target 7.4 7.4 6.9 7.7 6.4 Consumption Actual 3.4 6.8 6.6 7.1 7.1 Public Target 7.0 7.7 5.3 4.8 3.7 Consumption Actual 3.2 10.1 5.5 6.9 3.0 Target 7.8 19.0 11.2 12.8 9.4 Private Investment Actual -5.0 3.9 5.9 12.2 4.8 Target 0.6 1.1 5.0 5.0 2.7 Public Investment Actual 7.2 3.8 5.5 2.9 -4.1 Target 10.9 6.8 7.1 7.2 2.1 Exports Actual 8.9 5.6 2.5 1.6 2.8 Target 9.5 7.8 7.9 8.6 2.3 Imports Actual 5.4 6.2 3.9 3.1 2.6 Economic Activity Target 2.4 3.0 5.0 3.3 3.5 Agriculture Actual 1.8 4.3 2.7 2.7 1.0 Target 2.3 3.3 3.4 1.1 1.3 Mining Actual 2.5 2.6 -1.7 1.3 -0.3 Target 10.7 8.9 6.7 5.7 5.1 Manufacturing Actual 9.0 6.9 2.8 4.8 4.8 Target 10.2 6.5 3.5 3.7 10.3 Construction Actual -0.2 0.3 6.0 10.7 4.6 Target 8.4 7.7 6.5 7.2 6.9 Services Actual 5.9 6.2 7.2 6.3 6.2 Target 8.0 7.5 6.0 6.0 5.0 – 6.0 GDP Actual 5.0 4.8 4.5 5.3 4.8 GNI per capita** Target 14,788 17,779 23,573 26,420 54,100 (end-period, RM) Actual 13,939 19,951 27,819 36,710 - Below target; Exceeded target * The actual figures are the latest estimates for 2016 – 2019. (at 2015 prices); **At current prices. Source: World Bank staff analysis, using data from MPs and DOSM obtained with the assistance of the Macroeconomics Section of the EPU. While the MP growth targets are understandably and deliberately aspirational, this persistent pattern of underachievement reflects the inherent challenges of setting and managing realistic macroeconomic goals. For example, a continued under-estimation of the post-crisis effects in global investment and trade on domestic investment and export activity (for example, a cyclical weakness in global or regional demand for Malaysia’s manufactured and commodity exports), or unforeseen structural factors constraining export growth (such as the structural shift in the electrical and electronics industry since the late-2000s toward smart devices, reducing export demand for traditional personal computers and parts) could have partly contributed to the overshooting of targets for private investment, export activity, as well as in the manufacturing sector. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 31 Chapter 4: Assessment of Malaysia’s NDP System By contrast, Malaysia surpassed the targets outlined in the two previous MPs in terms of employment growth (figure 7). Strength in employment between 2006 and 2015 can be partially attributed to the continued momentum in job recovery and creation in 2010 following the GEFC, and the encouraging growth in the female labor force participation rate, which remained almost flat in 1995–2010 at about 45 percent, then steadily increased to 55.6 percent by 2019. FIGURE 7: Employment Growth: MP Targets versus Actual Outcomes 4.5 Target Actual (2016-19) 4.0 3.5 3.0 2.5 2.0 1.5 1.5 1996-00 2001-05 2006-10 2011-15 2016-20 7th MP 8th MP 9th MP 10th MP 11th MP Source: World Bank staff analysis using data from MPs, DOSM. Sectoral Outcomes A second feature of Malaysia’s NDP has been the promotion of economic development by identifying industries and sectors that can best contribute to growth (picking “winners”) and “steering” private investment into them. This is commonly done by offering investment incentives, subsidies, credit (directly or through state-run financial institutions) on favorable terms, and providing adequate, modern infrastructure (such as transportation networks and high-speed internet). It also assumes that civil servants who are technical staff of the planning agency can somehow attain the knowledge necessary to pick “winners”—a notion challenged by many economists.26 The question, then, is whether Malaysia’s planners were able to effectively direct resources to particular industries and sectors in such a way that maximized consumer welfare, created employment, or produced goods and services for export, generating foreign exchange for investment, savings, and international trade. 26 Some (e.g. Wade, 1990 and Krugman, 1994) argue that development is rooted in free markets and not by state industrial development planning. Krugman argues convincingly that “strategic trade policy on behalf of some industries is in effect a strategic policy against others.” Powell (2005) further contends that this means channeling resources to particular industries and argues that “whether it is done by taxing some and transferring to others or by rigging interventions so that market decisions direct resources to the favored industry, coercive interference is the basis.” 32 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System Through its policy reforms, the Malaysian government was able to signal to investors and transform the basic structure of the economy, though with some limitations. In seeking to diversify the economy away from being primarily agriculture-based and toward alternative sources of growth such as manufacturing and services, the government introduced fiscal incentives, liberalized trade and investment, and deregulated some sectors such as education. The growth targets set for construction, manufacturing, and services, in particular, were ambitious, though they were seldom attained (see table 1). Nonetheless, these sectors were clearly the main economic drivers by the 1990s, confirming that the country had successfully moved away from being a producer of commodities and natural resources toward greater industrialization. Indeed, the active promotion of particular industries through the use of incentives has been a feature of Malaysian industrialization policies even before independence. Manufacturing led the rapid growth recorded from 1970 to 1997, rising as a share of GDP from 13.3 percent in 1970 to around 30 percent in 1997. The manufacturing sector was also key in the recovery from the 1998 recession associated with the AFC (Kanapathy, 2001). The essential features of Malaysia’s policy evolution and the phases of its industrial development from the pre-independence era to recent times are described below: 1) As early as 1958, through the Pioneer Industries Ordinance, Malaysia pursued an import-substitution industrialization strategy, introducing tax and fiscal incentives and providing subsidies to infrastructure services including water, electricity, and transportation in industrial estates to diversify the economy, minimize imports and create employment opportunities. 2) In the early 1960s, Malaysia provided modest tariff protection and liberal investment incentives to promote the establishment of businesses, particularly in the manufacturing sector. The government created institutions to provide loans to enterprises engaged in manufacturing activities and established an agency to oversee the manufacturing sector, which is now known as the Malaysian Investment Development Authority (MIDA). 3) By 1968, as the focus shifted to export promotion, the Investment Incentives Act (1968), which replaced the earlier ordinances, extended incentives to other companies not considered pioneer industries. Export processing zones and free trade zones were also established to support export- oriented industries (Yağci and Ardiani, 2017). 4) These strategies matured by the 1980s, and the government further improved on the investment incentive legislation through the introduction of the Promotion of Investment Act (1986), which extended incentives for other sectors such as agriculture and hotels and tourism. Several Industrial Master Plans were crafted through this period to serve as roadmaps for industrialization. A second phase of import substitution and export proportion was introduced as a strategy to accelerate the diversification of the economy and further support growth in export-oriented manufacturing, in particular electronics and electrical components; the focus was on reducing excessive reliance on intermediate and capital imports and creating better linkages with the manufacturing sector (Yağci and Ardiani, 2017). 5) In the mid-1990s, the government shifted its focus to the higher value-added knowledge-based economy. The services sector in general—but education and health, in particular—were recognized for their high growth potential, not simply as a support to the manufacturing sector (Kanapathy, 2001). The biotechnology sector was also identified as having substantial growth potential. In addition to investing heavily in these sectors, the government later followed a path of deregulation and privatization, giving rise to a proliferation of private educational and health institutions, which helped increase Malaysia’s foreign exchange earnings. The shift in emphasis to tertiary sectors coincided with a peak in manufacturing’s share in GDP in 2006, at 26 percent, and its subsequent decline. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 33 Chapter 4: Assessment of Malaysia’s NDP System Since the start of its planning era in the 1950s, the Malaysian government also invested heavily in social services—including education and health—and infrastructure. During the 1st to 10th MPs, cumulative DE expenditure on infrastructure, education, and health ranged from one-quarter to almost half of total DE expenditure. This reveals the enduring importance attached to investing in human capital and infrastructure in the country’s development. Figure 8 shows that the DE spending on social services, which included spending on education, health, housing, and social and community services, has almost doubled from 15 percent in the 2nd MP to 26 percent in the 11th MP. Within social services, the share of spending on social and community services has grown six-fold (see figure 9). FIGURE 8: Share of Development Expenditure Components 100% 3 3 2 3 4 3 9 8 6 5 15 16 25 26 26 27 26 80% 33 32 40 60% 68 65 58 63 48 59 57 40% 47 50 39 20% 16 22 14 15 12 13 11 11 12 8 0% 1971-75 1976-80 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 2016-17 2MP 3MP 4MP 5MP 6MP 7MP 8MP 9MP 10MP 11MP Defense and Security Economic Services Social Services General Administration Source: World Bank staff analysis using data from MPs, DOSM. FIGURE 9: Share of DE Components within Social Services 100% 5 8 11 15 16 17 13 22 19 22 30 80% 15 11 12 16 33 7 14 8 44 9 14 13 17 11 14 15 60% 9 13 6 40% 66 62 59 57 54 50 54 55 20% 40 44 0% 1971-75 1976-80 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 2016-17 2MP 3MP 4MP 5MP 6MP 7MP 8MP 9MP 10MP 11MP Education Health Housing Social & Community Services Source: World Bank staff calculations using data from MoF. 34 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System FIGURE 10: Employment by Sector, Modelled ILO Estimates 70 62.6 60 % of total emploment 50 46.2 40 31.4 30 27.0 20 22.4 10 10.4 0 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 Agriculture Industry Services Source: World Development Indicators. The structural transformation of the economy from a reliance on agriculture to manufacturing, and later services, resulted in increased employment and incomes. Moreover, with a significant employment multiplier, the growth in services also generated secondary employment in other service sectors across the economy. As the agricultural share of total employment has declined since the 1990s, manufacturing has remained broadly stable, while the services share has trended noticeably upward (figure 10). A renewed focus on regional economic development in the early 2000s during the period of the Badawi administration saw the creation of five regional economic corridors. The concept of regional corridors was intended to address the imbalances and disparities between Malaysia’s regions, as well as attract investment to designated areas, changing the landscape through spatial planning. While the regional corridors were able to attract investment and create employment—and drive cross-border development like in the Northern corridor—their performance has been varied and uneven. The approach was criticized for duplicating the responsibilities of traditional regional authorities such as Jengka in Pahang, PERDA in Penang, KEJORA in Johor, and Ketengah in Terengganu. There were also issues of overlap with investment promotion agencies such as MIDA and InvestKL that were tasked with attracting investments nationwide. It also created an uneven playing field where large state-owned enterprises and government-linked companies (GLCs) could crowd-out private sector investment opportunities. Public Investment Management Planning exerts a major influence on growth through public investment. As Rajaram et al. (2014) observe, “the models of economic growth that motivated five-year plans and industrialization strategies … were heavily dependent on high levels of public investment ….” Public investment refers to government expenditure on either (i) public economic infrastructure or (ii) social infrastructure, which becomes public physical assets once completed. Public infrastructure is the preferred form of fiscal investment and is recognized as an important catalyst to economic growth. However, for public investment to have this impact on growth, development plans need to be realistic, operational, consistent at different levels—national, sectoral, sector/sub-sectoral investment plans—and fiscally sustainable (Kim et al., 2020). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 35 Chapter 4: Assessment of Malaysia’s NDP System Malaysia’s public investment program, which includes both capital projects and some soft development activities that don’t involve durable assets, is carried out primarily through its NDP. This allows for the strategic guidance essential for project identification and prioritization to be more aligned with the achievement of national objectives. Consistently-high levels of public investment—averaging 9–10 percent of GDP for over 20 years—have enabled the accumulation of the stock of infrastructure and supported input-driven growth. Public investment has also been an important counter-cyclical measure, helping to offset weaknesses in private investment, which has been anemic since 1998, and keeping total investment above 20 percent of GDP.27 Public investment will continue to be a foundation of future NDPs, but DE has been falling as a share of GDP since 2010 despite nominal increases in spending. This decline has weighed on public investment, which in 2019 fell to 6.3 percent of GDP, its lowest level since 1990. The softening in DE reflects weaknesses in federal government DE, which has been on a downward trend both as a share of GDP (figure 11), falling from 6.3 percent in 2010 to 3.5 percent in 2019, and also as a share of total government spending, decreasing from 25.8 percent to 17.1 percent over the same period. Over the past several years, reductions in federal government DE have affected most sectors, with the exception of education and health (table 2). In general, the weakness in DE partly explains why the total investment share of GDP in Malaysia is low for its current stage of development and below levels in some advanced economies when they were at a similar stage of economic development. FIGURE 11: Downtrend in Federal Government Development Expenditure 7 6.3 6 5.0 5 4.8 4.1 3.9 4 3.5 3.5 3.4 3.5 3.3 3 3 1 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Federal Government Development Expenditure (in % of GDP) Source: Department of Statistics, Malaysia, Bank Negara Malaysia, World Bank Staff Calculations. 27 Based on Public Investment Management Assessment (PIMA) Briefing to Malaysia, 2017. 36 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System Table 2: Federal Government Development Expenditure by Sector, 2016–18 Change Share RM million (%) (%) 2018 20191 20202 2018 20191 20202 2018 20191 20202 Economic 36,103 28,820 31,019 49.3 -20.2 7.6 64.4 53.7 55.4 of which: Transport 17,004 11,209 12,195 63.0 -34.1 8.8 30.3 20.9 21.8 Trade and industry 2,512 3,022 2,446 -33.9 20.3 -19.1 4.5 5.6 4.4 Energy and public utilities 2,254 2,584 4,338 -8.9 14.6 67.9 4.0 4.8 7.7 Agriculture and rural development 2,133 2,310 2,973 -3.9 8.3 28.7 3.8 4.3 5.3 Environment 1,665 1,945 1,734 -19.2 16.8 -10.8 3.0 3.6 3.1 Social 12,873 15,010 15,068 3.6 16.6 0.4 22.9 28.0 26.9 of which: Education and training 6,505 8,020 7,864 3.2 23.3 -1.9 11.6 14.9 14.0 Health 1,773 2,258 2,898 20.6 27.4 28.3 3.2 4.2 5.2 Housing 1,285 1,830 1,491 63.7 42.4 -18.5 2.3 3.4 2.7 Security 4,929 6,689 6,557 -7.6 35.7 -2.0 8.8 12.5 11.7 General administration 2,190 3,181 3,356 -25.5 45.3 5.5 3.9 5.8 6.0 Total 56,095 53,700 56,000 25.0 -4.3 4.3 100.0 100.0 100.0 Share of GDP (%) 3.9 3.5 3.5 1 Revised estimate. 2 Budget estimate, excluding 2020 Budget measures. Source: Department of Statistics, Malaysia, Bank Negara Malaysia, World Bank Staff Calculations. There are several plausible explanations for why the capital share has declined. 1. Rising OE due to an expansion in the size of the public service and a concomitant rise in the wage bill has crowded out the available funds for DE. Physical and social infrastructure assets create OE— for example, by stimulating employment in new schools, hospitals, and other facilities. In Malaysia, however, higher wage expenditures appear to be correlated with increased fiscal deficits rather than crowding out of other expenditures.28 Instead, there is a positive relationship over time between wage expenditures and capital expenditures, suggesting that concerns over higher wage spending automatically reducing spending on growth-enhancing infrastructure may be exaggerated. This finding does not detract from the importance of ensuring that the considerable resources spent on personnel yield commensurate results in government outputs. 2. Revenue has not increased commensurately with expenditure growth, limiting the funds available to cover expenses. This trend would suggest that all expenditure—both DE and OE—needs to be rationalized, and that policy measures are required on the revenue side, such as the introduction of a broader and more progressive tax framework. 3. A policy shift geared towards attracting private investment in public sector infrastructure projects combined with the contracting fiscal space have led to an increased reliance on PPPs. While this had the potential to crowd-in private financing, it also created contingent liabilities for the state. 4. The country’s infrastructure development over the past 60 years has been so significant that it has reached a natural saturation point. We may be witnessing a normal tapering off of public investment. However, this is unlikely as there is still an infrastructure deficit, particularly in East Malaysia. 28 There is no formal national comparison of the relationship between the level of the wage bill and fiscal deficits. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 37 Chapter 4: Assessment of Malaysia’s NDP System A 2017 Public Investment Management Assessment (PIMA) carried out by the IMF revealed that while Malaysia has done well in turning resources into infrastructure, and institutional strength and effectiveness are generally high, a number of gaps exist that can undermine spending efficiency. 29 Among these are: 1. Fragmentation in project selection and weak appraisal. If there are multiple channels for the selection of public investment/capital projects (national development plans, state-owned enterprises, public- private partnerships), then projects do not have to undergo a uniform assessment and decision- making process. Additionally, the project appraisal and selection processes lack a strong assessment methodology; the criteria are considered too general to distinguish among projects according to the quality of project documentation or preparedness for implementation. The depth of technical review conducted by central agencies and line ministries is often inadequate, with responsibility being shifted to individual line ministries and standard appraisal tools, such as cost-benefit analyses (CBA), which is neither mandatory nor optimally used (despite guidelines and procedures being in place). The result is inconsistencies in project quality, allocations that are not based on proper weighing of priorities, and delays in project implementation. It also weakens linkages between the broad national priorities with some PPPs. Making appraisal tools available has not enabled them to fully overcome these challenges. The Creativity Index (CI) introduced by the EPU in 2016 encourages ministries to consider socioeconomic impacts and relative priority of proposed projects but was not intended as a substitute for traditional, rigorous CBA. Other processes, such as Value Management (VM), are used in practice to include technical review of design, scope, and risks to project readiness for major projects above RM50 million in value (roughly $10 million), with the aim of increasing the project’s value for money and mitigating risks. As VM occurs after the project has already been selected for funding, it provides less incentive for ministries to design sound projects. 2. Overlap of project appraisal and budgeting decisions and the creation of fiscal risk. This often makes the timeframe for project review too short to ensure that projects are ready for implementation and will deliver results. The absence of requirements for detailed project design before financing decisions are made lends itself to cost overruns and causes delays in implementation. Projects can also create fiscal risks, which are not adequately monitored or controlled. This includes off-budget projects and projects that create a substantial claim on OE over the medium-term. 3. Issues with budget execution and project implementation. Ministries and agencies know the cumulative multi-year DE requirements at the individual project level, based on the approved project cost. However, they face uncertainty over the annual DE allocation provided by the MoF as it depends on the government’s expected revenue and affordability in any given year. Moreover, while the introduction of the two-year rolling plans and the alignment with the two-year budgets is a significant step, project allocations by year are not always included. The lack of a full life-cycle of cost in the budget limits the ability to make full cost comparisons of projects and can obscure the optimal project implementation timeline. 4. Gaps in assessing projects pre- and post-implementation. While the ICU is adept at monitoring and evaluating (M&E) and reporting on physical projects, including those tagged as “sick projects” (a category used to describe projects facing implementation challenges), M&E of non-physical projects is more challenging. Further, it is unclear if the existing M&E arrangements are able to sufficiently cover all of the development programs and projects outlined in the current plan while giving adequate attention to those still running from previous plans. We return to the issue of M&E below. 29 The PIMA can be a useful gauge of the NDP system’s effectiveness and efficiency in turning resources into economic and social infrastructure. 38 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System 5. Challenges with evaluating cost-effectiveness. Limited competition in many infrastructure markets and regulated prices below cost-recovery make it difficult to ascertain the real costs of the services that are provided by public corporations. Given the declining federal government DE, a more efficient use of government resources for public investment is important. While federal government DE is not the only source for public investment, it is still an important source that is directly linked to the achievement of broader national objectives and priorities. Some of the recommendations from the 2017 PIMA remain relevant for improving the national planning system. Measures to better align sectoral investments with the broad national strategy could include improving the coherence on the timeline between the national plans (by the EPU) and the sectoral plans prepared by the respective ministries and agencies; requiring more upfront details on costing, including the introduction of life-cycle planning into budgets; and basing plans on a medium-term approach to sector budget allocations. Among the recommendations for strengthening other aspects of the capital budgeting process and quality of public investment projects are more stringent project selection and separation of project appraisal from the budget allocation process, with only appraised projects being included in the project pipeline or public investment program. Social outcomes Perhaps in the area of social development more than in any other area, the caveat must be stated upfront that it is difficult to say with certainty that the observed progress is a direct result of the country’s NDP. While the role of development planning in advancing Malaysia’s economic and social aspirations is evident, there is a clear possibility that the progress achieved over the years may not have been the direct consequence of national planning. The lack of consistent empirical and evaluative evidence on the linkages makes attribution difficult to establish. This section on social outcomes recognizes the significance of the NDP machinery in laying out measures to address and reduce extreme poverty, but it is not clear if the same machinery has been able to effectively tackle emerging issues and challenges related to poverty, inequality, and inclusiveness. Malaysia has made considerable progress in reducing income poverty as a result of rapid and inclusive economic growth. Malaysia was one of only 13 economies that sustained average annual GDP growth of at least 7 percent for at least 25 years after World War II (Aznam Yusof and Bhattasali, 2008). In Malaysia’s case, the high-growth period spanned three decades (1967 to 1997), with rapid growth resuming after the 1997–98 AFC. Poverty reduction was driven not only by the pace of growth (annual growth of GDP per capita of 4.0 percent from 1970 to 2017) but also its inclusive pattern, as income growth rates were significantly higher among lower-income Malaysians (figure 12). FIGURE 12: Growth Incidence Curve for Malaysia, 1984–2016 4.0 Growth rate of household income per capita 3.5 Annualized over 1984-2016 3.0 Median 2.5 Mean 2.0 1.5 Growth 1.0 incidence curve 0.5 0.0 0 10 20 30 40 50 60 70 80 90 100 Percentile of income per capita Source: Ravallion (2019). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 39 Chapter 4: Assessment of Malaysia’s NDP System Absolute income poverty in Malaysia fell dramatically in only two generations. The percentage of households living below Malaysia’s national poverty line fell from 49.3 percent in 1970 to 8.5 percent in 1999 and 0.4 percent in 2016. Without diminishing this accomplishment in any way, it would be premature to say that monetary poverty has been eradicated in Malaysia. Most countries increase their absolute poverty threshold as they become richer, reflecting the norm that the minimum socially-acceptable standard of living increases as overall living standards improve in the population more generally. In 2020, Malaysia updated the real value of its national poverty line for the first time since the 1970s. At the new income poverty threshold, an estimated 5.6 percent of Malaysian households lived in poverty in 2019, down from 7.6 percent in 2016. The implication is that the impressive trend in poverty reduction over the past 50 years still holds, but that the levels of poverty are higher than previously reported because the minimum standards for well- being have increased as Malaysia has developed. Significant progress has also been made in non-income aspects of reducing poverty and enhancing well-being, such as access to basic amenities, life expectancy, and literacy. Poverty is multidimensional and extends beyond income to more qualitative measures of economic and social welfare. According to the DOSM, Malaysia’s life expectancy at birth, for example, increased significantly from 64.2 years in 1970 to 75 years in 2018. During the same period, the infant mortality rate declined from 39.4 to 6.9 per 1,000 live births. The literacy rate climbed from 58 percent in 1970 to 94.7 percent in 2015, while the population- to-doctor ratio fell from 4,493 in 1970 to 554 in 2017. The pupil-teacher ratio in primary schools also fell from 31 in 1970 to 11.7 in 2017. According to EPU data, in 1970 only 48.0 percent of houses had treated water, and only 44 percent had electricity; by 2015, these percentages had risen to 95.1 and 99.9 percent, respectively.30 Rapid income growth since 1970 coincided with significant reductions in income inequality. As the economic pie grew, the share accruing to lower-income Malaysians also rose. In 1970, the richest 20 percent of households captured more than half (55.7 percent) of total income, while the poorest 40 percent received only 11.5 percent. By 2019 these relative shares had narrowed to 46.8 and 16.0 percent, respectively.31 Relative income inequality, as measured by the Gini index, declined from 51.3 in 1970 to 40.7 in 2019 (DOSM, 2020).32 The decomposition of the reduction in relative inequality reveals that income inequality declined both between the three main ethnic groups (that is, the relative differences in group averages) and within those three ethnic groups. As seen in figure 13, in 1970, average household incomes of Chinese and Indian Malaysians were higher than average Bumiputera incomes by factors of 2.3 and 1.8, respectively, with these multiples dropping to 1.4 and 1.2 by 2019. Although relative income inequality has declined, the absolute gaps in income have increased. The most common inequality measures (Gini, Theil, income shares, and so on) are relative measures that reflect income levels of one group (low-income, ethnic group, region) in proportion to another measure, like the national average. In a growing economy, it is common for the absolute differences in incomes to increase even as relative differences decrease. For example, a 10-percent increase in income for a low-income household may yield lower incremental income in ringgit terms than a 2-percent increase for a high-income household. Figure 14 compares the trends in the relative (standard) Gini index with the absolute Gini index. 30 In recognition of poverty’s multidimensionality, the 11th MP introduced a Multidimensional Poverty Index (MPI)—encompassing health, education, household amenities and income dimensions—as one of the metrics for monitoring progress. However, like Malaysia’s national monetary poverty line, the MPI thresholds in the 11th MP are appropriate for countries at much lower levels of development than Malaysia. The MTR of the 11th MP reported that only 0.86 percent of Malaysian households were multidimensionally poor in 2016. It is therefore of limited use as a monitoring tool because it is already almost zero at the beginning of the 2016–20 planning period, making it nearly impossible to measure any improvement. 31 It should be noted that the older data published by DOSM are not always comparable over time. Sabah, Sarawak and Labuan were not included in the HIS data until 1976, and non-citizens were included in the data until 1987 but not thereafter. 32 The income measure that DOSM uses when calculating the Gini index (and most statistics) is different from that employed in most countries. DOSM uses total household income instead of household income per capita and weights by the number of households instead of by the population size. When using the more common approach on the same survey data the estimated Gini index is 1–3 percentage points higher than DOSM’s estimates, depending on the year, but the trends over time are the same. DOSM’s data are cited here solely because the microdata required to recalculate the Gini are only available from 2002 to 2016. 40 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System FIGURE 13: Average Income by Ethnic Group, 1970–2016 Bumiputera income (%) 2.8 Share of average 2.3 1.8 1.3 0.8 1970 1974 1976 1979 1984 1987 1989 1992 1995 1997 1999 2002 2004 2007 2009 2012 2014 2016 2019 Bumiputera Chinese Indian Source: World Bank staff calculations FIGURE 14: Relative and Absolute Gini Indices, 1970–2016 2.4 Gini index of household income inequality 2.0 Absolute Gini index 1.6 1.2 0.8 Relative Gini index 0.4 0.0 1970 1980 1990 2000 2010 2020 Source: Ravallion (2019). Note: The absolute index is scaled to equal the relative index in 1970. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 41 Chapter 4: Assessment of Malaysia’s NDP System Malaysia’s income growth has slowed in recent years, and recent evidence suggests that growth is also becoming less inclusive. Figure 15 disaggregates household income growth by percentiles of the income distribution in each of three recent 2–3-year periods between 2008 and 2015. In all three periods, the incomes of the top 20 percent grew approximately 6 percent per year after adjusting for inflation. In contrast, the real household income growth rates varied considerably across the three periods for the bottom 40 percent (B40). The income per capita of B40 households grew at annual rates of 8–11 percent from 2008 to 2011, and a staggering 11–15 percent from 2011 to 2013. By 2013–15, however, income growth rates among the B40 were about the same as those of other income groups and even marginally lower than those in the middle 40 percent (M40). This echoes the flattening of the relative Gini index in figure 14. More recently, the 2019 Household Income Survey showed that from 2016 to 2019, the Gini index increased and the B40’s share of total income decreased, a reversal of earlier trends (DOSM, 2020).33 The reasons for the sharp drop in the inclusiveness of Malaysia’s household income growth are still not well understood. FIGURE 15: Growth Incidence Curves, 2008–15 Annual growth in real household income per capita 16 2008-2011 2011-2013 14 2013-2015 12 10 8 6 4 2 0 0 10 20 30 40 50 60 70 80 90 100 Percentile of Real Household Income per Capita Source: World Bank (2018). Despite the progress noted above, income inequality in Malaysia is high relative to advanced economies, and Malaysians perceive inequality as a problem. Although relative inequality in Malaysia has decreased over the past five decades and is lower than in some other Asian countries, it remains high compared to the high-income economies that Malaysia aspires to emulate (figure 16). Moreover, according to the Pew Research Center Global Attitudes survey, 77 percent of Malaysians think the gap between rich and poor is a “big problem”—up from 75 percent in 2013 (figure 17). 33 The growth rates for 2015–19 are not shown in Figure 17 because survey microdata were not yet available to the team. 42 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System FIGURE 16: Gini Index, based on disposable incomes 50.0 47 48 45 45.0 41 41 41 42 40.0 38 34 35.0 31 32 33 30 30.0 26 25.0 20.0 15.0 10.0 5.0 0.0 ng 4) et Tu re er n e Un Aus an M ted ralia (2 s pp (2 y 2) Ch (2 ) a 13) 7) Av ea EC K y 9 sia te m e G de ag an Si 01 o in 01 la 200 00 Ph na rk p D or ay Sta 0 ap m er Ja e t (2 Sw ( Th es nd in i ai al Vi O ili Source: World Bank (2018). Ethnic dimensions to income inequality remain and should be addressed, but broad-based policies are likely to have a greater impact. It is important to recognize that challenges related to Malaysia’s multi-ethnic society have not disappeared, including in how they affect household income opportunities. For example, Lee and Khalid (2014) present evidence that ethnic Malay job market candidates receive fewer calls for interviews than similarly-qualified ethnic Chinese candidates. Moreover, Bumiputeras remain over- represented in the poor and vulnerable groups. Nevertheless, given the evidence as well as the analysis that income-based inequality in educational attainment and outcomes also surpasses remaining gaps based on ethnicity, broader policies for raising incomes of the bottom of the income distribution are more likely to provide the largest gains in reducing inequality and promoting shared prosperity. FIGURE 17: Response to the Query “Is the gap between the rich and the poor …?” 50 46 45 41 40 34 35 31 30 25 2013 20 17 18 2014 15 10 5 4 5 3 1 0 Very Big Moderately Small No Problem NA Problem Big Problem Problem Source: Pew Center Research. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 43 Chapter 4: Assessment of Malaysia’s NDP System 4.3 NDP in Malaysia: A Balance Sheet There are both positive and negative aspects of Malaysia’s experience with NDP. This section presents a balance sheet of these and what they mean for Malaysia’s NDP system going forward. Key Success Factors Supporting Malaysia’s NDP 1. On the positive side, the strong, high-level political commitment to NDP has been a key factor in the country’s successful NDP. No government or prime minister since independence has seriously questioned the need for NDP or deviated in their commitment to long-term visions and five-year medium-term plans as the basis for implementing their agendas. As a matter of fact, because the EPU fell directly under the Prime Minister’s Office and reported directly to him (until a minister in the Prime Minister’s Office was appointed to oversee the EPU), all MPs were led by the prime ministers themselves. Even during the NTP, where there was an initial disconnect between it and the NDPs, the programs and projects were still implemented within the five-year planning and implementation mechanisms. The new government also chose to stick to— and indeed restore—the importance of central agencies and their role in development planning. Other countries such as Indonesia, for example, do things differently by appointing powerful coordinating “super ministers” (responsible for finance, trade and industry, human resources/human capital development, agriculture, and so on) who are independent and come from outside the political mainstream. That may be possible in a presidential system but may not be politically feasible in Malaysia’s Westminster-style parliamentary system. The convention of presenting five-year plans and MTRs to parliament for endorsement also contributed to enhancing accountability, social embeddedness, and commitment to implementation. 44 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System 2. High-level political commitment was matched by what can only be described as a best endeavor commitment to stay the course during testing times. Regardless of which prime minister was in office and despite short-term economic shocks—such as the oil shock in 1980; the global recession in 1985; the AFC in 1997–98; and the GEFC in 2008–09—the government has been agile enough to respond to changing domestic and global circumstances while sticking to its development goals and long-term vision. This has ensured the achievement of development goals and delivered prosperity to citizens. For instance, the goal of eradicating poverty has been achieved, while the country is on course to achieve the goal of becoming a developed country (though this may be delayed by a few years). 3. Malaysia’s planners have fostered a highly consultative process, ensuring plans have been socially embedded. This consultative process helped to ensure that the right programs were introduced, created a sense of ownership and greater acceptance of the plan, eased implementation, and garnered political and community support. Over time, the plans have also become more communicative, reader-friendly, and easily accessible to the public. 4. The Malaysian government sought to back development aspirations with resources to the extent possible. While lack of fiscal space has affected the ability to follow through on plans during economic downturns, the policies and strategies under each plan were largely translated into programs and supported with adequate financing—whether through DE, OE, Public Finance Initiatives (PFIs), or the private sector. Although resources were sometimes limited, programs and projects had to be prioritized, and more often than not, those that were deemed to provide the best outcomes for the country were given resources. 5. Malaysia’s experience illustrates the importance of linking plans directly to the budget. The EPU has the mandate to approve the development projects and their costing, which puts them in a strong position to ensure that priority projects and programs identified in the plan receive adequate levels of funding within the available resource envelope. And there have been additional institutional, data, and monitoring and evaluation innovations introduced to check on value for money. 6. The government had a monitoring mechanism in both the ICU as well as MTRs, which have played important roles in recalibrating five-year plans. While these mechanisms have been able to keep the implementing agencies on their toes and feed into the national budgeting process, due to the large number of programs, comprehensive evaluation is limited to the major key programs. 7. There was, by and large, the capacity to implement (though this weakened over time). The capacity of line ministries and agencies to implement the development plan was critical in ensuring the effective and timely delivery of programs. Central agencies like the EPU, MoF, ICU, Malaysia Administrative Modernization and Management Planning Unit (MAMPU), and the Public Service Department (PSD)—the latter two both in the Prime Minister’s Department—also played a significant role in the capacity building of line ministries in areas such as project management, financial management, project monitoring, administrative reforms, and human resource management— functions which are considered essential for the ministries’ capabilities to implement the plan. 8. With the exception of the race riots in 1969, the country has enjoyed peace and political stability since independence, critical to ensuring effective development planning and implementation. Planning failed in some countries—particularly in Africa and, to a lesser extent, Latin America— because of frequent coups d’état or changes in government that often derailed the implementation of any given plan through to completion or triggered policy reversals. In the case of Malaysia, however, continued peace and political stability provided the environment for undisrupted economic growth. Although there were changes in leadership, the fact that the Barisan Nasional party was in office for 60 years allowed the government to focus on nation-building, enabled resources to be maximized for development, and provided a conducive environment to attract private sector participation and investment. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 45 Chapter 4: Assessment of Malaysia’s NDP System Weaknesses and Remaining Challenges Although much has been achieved through the NDP system, many challenges have arisen over the years. Even Malaysian planning officials recognize that the system is far from perfect. Regarding the weaknesses, there are essentially two inter-related issues: (a) quality of planning inputs and processes; and (b) quality of implementation and outcomes. Some of the challenges to NDP relate to the increasing complexity of Malaysian society and economy, new demands that emerged precisely because of the progress achieved, and the inability of public institutions to keep pace with change. Some of the key challenges experienced are discussed below. 1. Although the EPU has been at the center of the Malaysian planning process for more than 60 years, both its capacity and its role have gradually been eroded. The degree to which the EPU’s capacity to carry out NDP has been degraded over the years has been underestimated. There is no question that the EPU has nurtured some of Malaysia’s best talent, but it has not escaped the general deterioration in the overall quality of the civil service. As the World Bank (2019) noted in its June Malaysia Economic Monitor : “Malaysia’s public service continues to be characterized by a rigid, over-centralized [human resource management] system, with a lengthy recruitment process and other sub-optimal practices. The over-centralization of the system limits the strategic role that central agencies should play to detect, strategize, and respond to emerging issues and challenges that may affect the capabilities of the public service. Recruitment is based on “schemes of service” that are very well-established but that are predominantly career-based rather than position-based. By contrast, advanced countries increasingly utilize competency frameworks to recruit candidates with the appropriate level of skills, knowledge, and capabilities into the public service and to ensure adherence to high moral and ethical standards for their appointment and promotion”. Thus, the EPU does not have control over the type and caliber of staff assigned to work there and lacks the resources to invest extensively in specialized training for staff. While those at very senior levels may have relevant qualifications and experience, those at the working level lack the appropriate training and depth of experience in different sectors and may be ill-equipped to handle the kind of complexity and challenges facing the country today. It is therefore not unreasonable to question whether EPU staff add real value to the planning process or whether they merely compile technical inputs received from the line ministries, where the real sector expertise now resides. The occasional creation of parallel planning bodies—though often serviced by the EPU acting as a secretariat— has contributed to the agency’s diminution in the eyes of other government entities and the public over time and fundamentally altered the coherence of the planning process. Two examples are worth noting. First, as Malaysia embraced public-private partnerships in the 1990s, infrastructure projects financed through this modality were managed through the Public-Private Partnership Unit (UKAS) up until 2008. This essentially offered ministries an additional channel for submission of capital (development) projects. By eroding the EPU’s role in determining priorities and selecting projects for public investment and circumventing processes that ensure rigorous cross-agency technical consultations, deliberations, and reviews, it may have undermined the achievement of broader policy goals and even contributed to a reduction of the funds available for development purposes. The second example is in the establishment of PEMANDU, a delivery unit focused on facilitating monitoring the performance of high-impact projects and initiatives in the National Key Economic Areas (NKEAs) under the ETP. PEMANDU proved effective in a number of ways, including through the initiation of the well-received “policy labs” as a way of convening relevant stakeholders and focusing their attention on resolving specific problems. It also introduced a sense of urgency in the implementation of projects and improved delivery of outcomes by creating incentives at all levels through rigorous monitoring and reporting of KPIs. However, it also caused broader institutional misalignment. In particular, a number of overlaps were created with traditional agencies involved in the five-year planning process, and a parallel funding stream was created for 46 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System development projects created under the NKEAs. Despite some synergies, this proved disruptive in some areas of implementation, as it caused confusion among implementing agencies through the creation of separate action plans (ETP and the 11th MP), governance arrangements, and reporting requirements. Moreover, the NKEAs and additional KPIs diverted ministries’ resources and placed a heavy reporting burden on them, sometimes at the expense of other longstanding priorities. 2. Malaysia’s long experience with NDP has resulted in a fine-tuned and well-coordinated system, but its efficiency and agility have been tested in unforeseen circumstances. The emergence of parallel mechanisms, such as the NEAC during the AFC, may have enabled swifter policy responses during periods of economic crisis or unexpected events. Their persistence over time, however, has resulted in additional financial, technical, and bureaucratic costs, and their continued existence suggests some level of duplication and, by extension, inefficiency. Ultimately, the impact of parallel mechanisms on efficiency may be an artifact of the motivation for their creation in the first place. Political leaders in search of quick solutions during crises may feel the need to tap into the experience of those at the front lines of business and finance and may view the planning apparatus as being perhaps too slow and “clunky” to yield the immediate results they are looking for. Others may simply be distrustful of the bureaucracy and have a preference for more decentralized mechanisms outside of the central government’s purview. 3. Although the EPU has fostered a highly consultative, bottom-up process of planning, some have argued that this is largely perfunctory. More emphasis is placed on the process than on genuine consultation. This applies not only to citizens and civil society organizations but also— and especially—to inter-governmental relations. The highly centralized (and politicized) nature of federal-state relations in Malaysia, in particular, means that development allocations are mostly centrally-determined. This was not an issue when one party governed in almost all the states, but the situation changed after general elections in 2008, when the Barisan Nasional, the ruling party since independence, lost its two-thirds majority in parliament as well as the key states of Penang and Selangor to the Opposition. DE allocations to these states came under scrutiny and were the source of heated debate. Considerable variations in basic needs—there are poorer states which still lack potable, pipe-borne water, electric power, proper schools, or health facilities—are not outcomes that appear consistent with proper and sustained bottom-up planning approaches.34 This is a weakness that can shake the very foundations of Malaysia’s NDP as the states become more assertive and demand a greater share of the national resources.35 4. Despite having well-formulated planning processes and impressive planning documents, effective implementation of policy priorities has been—and continues to be—a challenge for the Malaysian government (World Bank, 2018). The key questions here are whether Malaysia is a “capable state,” what does it take to be a capable state, and can a state be equally capable over time? The public administration aspects of implementing large, complex strategies like the five-year plans for an almost high-income country like Malaysia and translating complex, multi- dimensional strategies into desired outcomes are rather different today from even 20 years ago and can prove to be enormously difficult. Over its 60 years of experience with NDP, much has been achieved, but the increasing level of complexity involved in implementing projects and programs has tested the government’s institutional capacity for implementation. Like other countries in a similar income bracket, Malaysia often struggles to transition to service delivery systems that can accommodate these larger and more complex demands. It underscores the point that capacity is 34 Less than 50 percent of the citizens of Jeli in Kelantan, for example, has access to pipe-borne water into their homes and must depend on gravity and tube wells. The same applies in Sabah, Sarawak and Kedah. 35 It is instructive to note that India’s National Planning Commission and its whole planning apparatus were dismantled in 2014 precisely because centralized planning was seen as a negation of federalism. The creation of the successor entity, the National Institution for Transforming India (NITI Aayog) in 2015 was, at least in part, ostensibly intended to give the states greater autonomy in planning. See Reddy and Reddy 2019, Ch.12. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 47 Chapter 4: Assessment of Malaysia’s NDP System not static and needs to be constantly upgraded to ensure that the bureaucracy is actually able to meet the expectations of a growing middle class, deal with contemporary challenges, and deliver on plan objectives. However, plans have rarely acknowledged these capacity challenges or propose actions to address them, and this will need to change. 5. Ensuring a shared vision between implementing agencies and enhancing coordination remain impediments to progress. Ministries and agencies are expected to turn the broad policy measures in five-year MPs into actionable programs, projects, and activities and do so in a coordinated manner that avoids overlaps and duplication. However, the presence of multiple levels of government— central agencies, ministries, and agencies at the federal level, state governments, districts, and local councils—makes coordination and cooperation a challenge. One of the biggest hurdles seems to be the lack of appreciation and understanding between the national and sub-national level policy objectives and priorities. This is further complicated by the difficulty of enabling ministries and agencies to shed their less effective or redundant programs in light of changing policy directions and priorities. 6. Notwithstanding the EPU’s control of the DE budget, there have been times when disconnects between planning and budgeting have led to projects, programs, and priorities identified in the plan being starved of necessary resources. This has been the result of misalignments between planning and budgeting as well as exogenous economic shocks, as was the case during the 5th MP in the mid-1980s when oil prices collapsed, resulting in under-performance in the achievement of targets. Conversely, there have been examples where the actual DE has exceeded estimates due to the inclusion of projects not contained in the original plan. The introduction of OBB was supposed to have addressed this issue, but it has proved persistent. 7. One explanation for the above-mentioned disconnect is that the five-year plan is constructed by setting out the broad vision without a rigorous consideration of the resource envelope needed to implement strategies. The resource requirement is only seriously considered and examined when ministries submit their programs and projects along with the resource requirements during the budget examination period. Sometimes only ongoing programs are considered due to a lack of resources, with very little left to address changes in policies or implement new strategies. The DE funding for new projects to implement the new and revised policies and strategies in the 10th and 11th MPs, for example, was very limited as between 80 to 90 percent of the DE allocation was to fund projects continued from earlier plans. The DE took the brunt for the expansion in OE. 8. Although there is a rigorous process for examining the budget requests from line ministries, there are weaknesses that result in sub-optimal resource allocation. This is evident in the agriculture sector, where the structure of the economy has shifted away from agriculture, yet substantial resources are still allocated to the sector, particularly in terms of human capital and the persistence of a large number of government agencies in the sector. The continued allocation of DE and OE is seen to be one of the contributing factors. In education, Malaysia has consistently invested about 20 to 25 percent of its development expenditure on education and training, with most of it still being used on physical infrastructure development, whereas the expectation was for it to be spent on soft infrastructure such as improving teacher training, teaching quality and curriculum development.36 36 Even though the same party was in office for over 60 years, the education outcome was also affected by policy reversals as almost every Education Minister took a different approach to education policy. At one point, there were as many as 6 ministries involved in TVET education. 48 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 4: Assessment of Malaysia’s NDP System 9. Gathering information and conducting evaluations to generate inputs for decision-making remain a challenge. The greatest shortfall is in the absence of useful information about the effectiveness and costs of programs and policies. The lack of rigorous impact evaluation has also weakened the EPU’s ability to demonstrate success. The sheer size and number of programs and projects (the 11th MP has about 4,000 active programs during Rolling Plan 1) make it difficult to undertake a wide-scale impact evaluation within the stipulated plan period. Resources to undertake evaluations that measure impact are also scarce, and the MTR provides only limited opportunity for recalibration. The introduction of the outcome-based evaluation in 2009 saw a selected number of projects being assessed for impact, but this is usually limited to large and critical projects or programs, and non-physical projects are excluded altogether. For most programs and projects, monitoring is focused on financial compliance and not the achievement of objectives. 10. Even with its systematic NDP process, Malaysia has not been able to address several important development goals. This includes areas such as: • Human capital development. Although achievements have been recorded in improving literacy rates, universal access to education and increase in the minimum years of compulsory education, quality of education and skills training, performance in STEM subjects, and the employability of graduates has not produced the expected results. The outcome for technical and vocational education and training (TVET) has also been far from satisfactory in terms of quality, mismatch with market requirements, excess physical capacity, and duplication. Ingrained weakness in the DE allocation process is the main reason for these shortcomings. • Labor market. The labor market does not work as has been assumed in the five-year plans. For instance, although a comprehensive foreign labor policy has been drawn up since the 9th MP, competing interests and a lack of political will has stood in the way of an orderly implementation. • Research and development (R&D) and innovation. Despite substantial resource commitments to R&D, this is another area where Malaysia lags. Resources have been spread thin over too many areas of R&D, are lacking in focus, and are not market- and outcome-driven. There are also too many government institutions involved (more than 60 were counted in 2016). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 49 Chapter 5: The Future of Planning in Malaysia CHAPTER 5 The Future of Planning in Malaysia 50 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 5: The Future of Planning in Malaysia As it pursues its goal of becoming an advanced, high-income country, Malaysia must reflect upon the adequacy of its institutional and policy framework, including the NDP system. The MTR of the 11th MP and the call circular for the 12th MP were strong indications that NDP remains relevant for achieving national priorities and development goals. Given the commitment to the SDGs,37 this calls for a redoubling of efforts to improve performance overall. At the same time, policy actors involved in NDP are aware of the limitations in tackling complex policy issues and have been examining ways to make the planning system more effective. It has been suggested that once a country has achieved a certain level of development or a certain quality of life, there is no need for a comprehensive approach to national planning, as suggested by the experience of Korea. While advanced countries are no longer producing comprehensive NDPs, it does not mean that the planning function has been discarded. Given this context, the section of this review considers the future of planning in Malaysia. While Malaysia’s NDP continues to evolve and respond to the changing environment, integrating lessons learned from past implementation experience can be valuable for future policy development and prioritization (World Bank, 2018). The Malaysian experience illustrates that planning approaches and concepts are not static. However, it is unclear whether previous reviews focused on key learnings from operational and implementation aspects of the planning chain, consisting of planning, budgeting, implementation, monitoring, and evaluation. The relationship between the planning system and the public service is critical, and the current capacity and potential contribution of the public service and human resource management systems need to be factored into future planning in a more comprehensive way. More careful thought should be given to institutional challenges such as the design of goals and indicators, governmental coordination mechanisms, and the monitoring of and accountability for progress, all of which are relevant issues in connection with the 2030 Agenda (ECLAC, 2015, p. 18). Striking a better balance between the comprehensiveness of the planning process (horizontal and vertical planning) and the quality of implementation will be important. The central challenge is one of managing systems of increasing complexity and sustained dynamism and, as the global environment continues to become much more volatile and uncertain, the familiar long-term vision complemented by medium-term five-year plans may not be nimble enough given the rapid pace of change – economic, technological and otherwise. The COVID-19 pandemic underscored this as it has forced some countries to revise their plans by refocusing on measures aimed at mitigating the crisis and spurring recovery. Countries like Korea and France have discontinued the practice of comprehensive and systematic medium-term NDP but have not abandoned planning per se; instead, Korea is focusing on tools of macroeconomic management such as the Medium-Term Expenditure Frameworks (MTEFs),38 while France continues to develop both general and special-purpose strategies and has restructured its central agencies for improved performance.39 Malaysia might consider whether some variant of the medium-term plan might be more suitable to its contemporary needs and circumstances. For instance, Malaysia might consider deepening its rolling plan approach by planning within a three-year instead of a five-year time horizon; or planning for the first two years in very great detail, for the third year in less detail, and for the outer years in very broad strokes, with an annual review process that enables the revision of plan targets and KPIs based on changes in the global, regional and domestic economic environment. 37 Malaysia has aligned its commitment to the SDGs with its national development planning process by mapping the NDP’s action plans, initiatives, and outcomes to the SDGs’ goals, targets, and indicators. This exercise began with the 11MP and is expected to continue with the subsequent MPs. 38 Medium-term expenditure frameworks are an approach to budgeting and public financial management that takes a strategic forward-looking approach to establishing priorities and allocating resources and addresses well-known shortcomings in annual budgeting. When implemented well, an MTEF can restrict public expenditure to the resources available, budget allocations reflect spending priorities and public goods and services are delivered cost-effectively. For a comprehensive review and assessment of MTEFs, see World Bank, 2013. Beyond the Annual Budget: Global Experience with Medium-Term Expenditure Frameworks. Washington, D.C.: The World Bank. 39 France, the home of “indicative planning,” stopped developing national plans since the late 1990s. In 2013 the Strategic Analysis Center was replaced by the Commissariat Général à la Stratégie et à la Prospective (General Commissariat for Strategy and Forecasting), established as a single brain center tasked with forecasting, strategic analysis and assessment of various long-term development scenarios). For more information see: http://www.briefmag.com/le-cgsp-devient-france-strategie.html Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 51 Chapter 5: The Future of Planning in Malaysia The credibility and relevance of the planning system in the future will rely on the Malaysian government’s ability to set realistic targets and then implement, monitor, and evaluate them. The purpose of setting targets is not only to articulate aspirational goals but also to be able to learn from failure about the constraints to achieving the targets. The analysis presented above shows that Malaysia almost never achieved the macroeconomic targets set out in its MPs, and, while accepting that they were aspirational, there can be no denying they were also wrong. To be sure, Malaysia is not alone in this respect; one of the criticisms of India’s National Planning Commission was that its contribution to the promotion of growth was not easy to assess, but the actual performance of the economy consistently fell short of targets (Reddy and Reddy, 2019, p. 205). The MTR process of NDPs can be strengthened to better serve this purpose, but it will require more focused, frequent, and timely M&E. Also, some of the reforms and strategies outlined in the development plan can be significant and ambitious and may extend beyond the planning horizon. The use of intermediate outcome indicators or milestones could also help citizens understand and anticipate how the plan’s targets will be achieved in stages. A more frequent review could also be useful to detect the needed policy and target course corrections. A more rigorous targeting and forecasting process, with checks and balances in place, can improve the chances of Malaysia achieving its macroeconomic targets. While setting aspirational targets helps to create a positive tone, it is also important that targets be realistic to manage the expectations of citizens and firms and to enable the government to set more credible fiscal and national budgeting frameworks. The use of a forecast range as practiced in the 11th MP and its MTR is commendable given the inherent uncertainty associated with forecasts, especially over a five-year period. Continued internal reviews and updates—and possibly publishing the revised targets and the underlying assumptions—are also advisable to signal the awareness of and adaptability to the changing economic environment and facilitate public trust.40 Checks and balances could also enable a more realistic setting of targets; for example, through the reconciliation and comparison of internal forecasts against those of other local and international organizations. The translation of global and regional outlooks into domestic forecasts, such as the impact of world trade on Malaysia’s exports and private investment, could also be improved. Building and institutionalizing M&E capacity, not just within the EPU but also in line ministries and at the state level, is essential. Providing technical support to strengthen M&E at both the national (agency) level and sub-national level, especially as it relates to the construction of indicators and the use of tools such as the logical framework, will also go a long way toward improving the overall quality of target- setting, measurement and the use of data and evidence. It is also worth considering the incorporation of an upgraded ICU into the EPU as a dedicated arm for M&E.41 Understanding the strengths and limitations of the planning system is important to ensure practical solutions in trying to meet socioeconomic goals and addressing complex policy issues such as identifying new growth sectors. The future of planning will eventually come down to its ability to be effective and to satisfactorily provide the required foresight, direction, solutions, resourcing, and implementation arrangements. Cost is also an important consideration. On the social side, the set of emerging issues and complex problems associated with poverty and inclusiveness requires a more targeted and nuanced approach when using the NDP apparatus. Rather than focusing on issues of poverty and inequality more broadly, five-year plans should address socioeconomic development gaps in the lagging regions, states, and sub-states, and leave the issues of growth sources and spatial planning to other, more 40 The EPU has pointed out that the challenge of frequently publishing revised targets is that there is no suitable window to do so between the annual budget announcement by MOF and the publication of the BNM annual report. Both events see the announcement of economic growth targets for the current and following year, and so having more frequent updates might only serve to confuse the public even more. 41 In Colombia, for example, a country whose planning tradition and apparatus goes back as long as Malaysia’s, the Department of National Planning (DNP) has legal responsibility for reporting evaluation results and a National System for Monitoring and Evaluation (SINERGIA) was created in 1994. The Directorate of Evaluation of Public Policies, a unit established within the DNP, is the technical secretariat for SINERGIA. SINERGIA consists of two parts: (i) Monitoring of the National Development Plan, SISMEG; and (ii) the National Evaluation System, SISDEVAL, which evaluates public policies and programs more generally. 52 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead Chapter 5: The Future of Planning in Malaysia practical plans that will need to be developed at the sub-national level by those closest to the ground. For instance, the federal government might consider allowing states to take the lead in identifying most (though not all) state-level development projects and co-financing development projects using their increased annual allocations and existing state budgets. The promises of the current administration to share oil revenues, if implemented, could make this a real possibility for some states. For the sake of effectiveness, the distance between planners and beneficiaries should be shortened through devolution and development priorities set at the state and sub-state levels so the latter would have a stake in them. This will help to avoid any possible principal-agent problems and can be achieved through administrative and procedural measures (such as delegation) to avoid the need for amending the Federal Constitution, which would be an uphill political endeavor. In the economic sectors, planning might not always deliver the intended results given the dynamics of market forces. It might be time to consider reducing the state’s role in industrial policy. There is consensus that, by planning, the country has successfully transformed and diversified its economy from a commodity- dependent to an industrialized, manufacturing- and services-based economy. But successful development of industry sectors in this next wave of economic transition—the so-called Fourth Industrial Revolution or Industry 4.0—is likely to be better promoted through markets, competitiveness, and innovation and less through NDP. Malaysia and the other East Asian economies that are the most market-oriented are generally also the ones that have achieved higher rates of economic growth. It may be time, then, to consider easing off the proverbial accelerator. As a corollary, the roles and functions of the Regional Economic Development Authorities (corridors) need to be reconsidered and rationalized to remove the additional layer of bureaucracy and duplication. Malaysia’s NDP system can, therefore, be refocused to put more emphasis on interventions that create and promote the right environment to achieve the country’s socioeconomic goals. This can include those that promote and unlock potential for growth and shared prosperity—creating the right environment for doing business, job creation, and uplifting living standards, developing human capital (via education, health investments), and strengthening social protection to ensure that the benefits of rising prosperity are broadly shared, which is a clear priority of Malaysians. Given the overarching reach of the national planning system to the policy and institutional space, its role in contributing to economic governance can also be significant. Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 53 References Aznam Yusof, Zainal, and Bhattasali, Deepak. 2008. “Economic Growth and Development in Malaysia: Policy Making and Leadership.” Commission on Growth and Development Working Paper; No. 27. Washington, DC: The World Bank. Barcena, Alicia. 2013. “Development Planning is Back”. Interview. November 19, 2013. 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Springer, Singapore. 56 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead ANNEX 1 Annexes Five-Year Development Plans in Malaysia Plan Period Goals Draft Development Plan 1950–55 Social Services, infrastructure, trade and development Rural development, rubber industry, emergency expenditure, defense, First Malaya Plan 1956–60 security Rural development, employment generation, economic growth, Second Malaya Plan 1961–65 economic diversification, social services Racial harmony, economic growth, employment generation, economic First Malaysia Plan 1966–70 diversification, population planning 1st Phase of NEP – eradication of poverty, restructuring of society, Second Malaysia Plan 1971–75 OPP1 (1971–90) 2nd Phase of NEP – eradication of poverty, restructuring of society, Third Malaysia Plan 1976–80 private-sector driven Fourth Malaysia Plan 1981–85 NEP Mid-Term Review of the Revitalize agriculture sector, privatization, heavy industry Fourth Malaysia Plan Fifth Malaysia Plan 1986–90 Sustain growth, balanced development, Vision 2020 (1991), OPP2 Sixth Malaysia Plan 1991–95 (1991–2000) Seventh Malaysia Plan 1996–2000 Balanced development, productivity-driven growth Eight Malaysia Plan 2001–05 OPP3 (2001–10), knowledge-based economy Ninth Malaysia Plan 2006–10 Value Chain, human capital, socioeconomic inequities Government Transformation Program (GTP), New Economic Model Tenth Malaysia Plan 2011–15 (NEM), Economic Transformation Program (ETP) Eleventh Malaysia Plan 2016–20 Inclusiveness, well-being, infrastructure, green growth Source: Lee and Lee (2017). Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead 57 ANNEX 2 An Analytical Framework for Evaluating National Development Plans In their paper, Chimhowu et al (2019) show that there is a renewed interest in NDP, with more than 80% of the world’s population now residing in a country that practices NDP. The paper analyzes 107 ‘new’ national development plans globally by generating a typology of plans based on their characteristics and content. They find that the ‘new’ national development plans veer more toward being a tool or process to communicate and negotiate national aspirations with internal and external parties, rather than an entirely top-down, state-led blueprint produced for the people. The typology presented in the paper categorizes plans into four types: FIGURE A1: Functional Classification of National Development Plans Type A (26% of plans studied) Type B (42%) • Largely top-down • Largely bottom-up • Rational blueprint • Communicative rationality • Strong evidence base • Strong evidence base • Limited social embeddedness • Social embedded Type C (12%) Type D (20%) • Largely top-down • Largely bottom-up • Disjointed blueprint • Communicative rationality • Weak evidence base • Weak evidence base • Limited social embeddedness • Social embedded Source: Chimhowu et al (2019) i. Type A: Top-down, expert-led, strong evidence base but limited social embeddedness Usually produced by technical teams in central agencies and combines rigorous technical analysis with credible commitment given the strong linkages between the plan and expenditure program. Plans exhibit evidence of consultations with the wider public. There is also limited importance placed on global objectives, such as the Paris climate change agreement or the SDGs. ii. Type B: Bottom-up, collaborative, strong evidence base and high social embeddedness Combines sound technical analysis and a high degree of consultation with stakeholders and, therefore, has a high degree of social embeddedness. Like type A plans, the government has a credible commitment to the plan. Resource allocation is closely aligned with the plan’s priorities, and the plan is usually communicative and written in an accessible language for multiple audiences. iii. Type C: Top-down, weak evidence base, disjointed and with limited social embeddedness Usually underpinned by a linear rationality, but with weak technical analysis. Exhibits limited social embeddedness and moderate-to-low political commitment. Plans are usually produced by countries with weak state capacity and where social actors are excluded from the policymaking process. Plans tend to have mainly political objectives and priorities, while issues of human development, poverty reduction and improved living standards are deprioritized (Munro, 2019). iv. Type D: Bottom-up, weak evidence base and with limited social embeddedness Easily accessible, broad-based and with evidence of engagement with wider society, but presents poorly translated or superficial visions. Scale of projects proposed do not match scale of challenges identified. Plans often produced by countries that have experienced economic or political instability, and are primarily political documents to build consensus, advance social cohesion and communicate that the government is doing something about the nation’s issues, with little intention to meaningfully achieve the presented goals. 58 Malaysia’s Experience with National Development Planning: Looking Back, Looking Ahead CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY