Malaysia far from ‘failed state’ but brain drain worsening, says US think-tank

The think-tank noted that little progress has been made towards achieving the prime minister’s aims of meritocracy. — Reuters pic

KUALA LUMPUR, Aug 2 ― Malaysia’s continuing economic growth has kept it moderately safe from being ranked a “failed state” in the latest global survey of 177 countries by the Fund for Peace (FFP) but the US public policy think-tank also noted an increasing loss of talent due to citizens seeking better livelihoods abroad.

FFP is an independent think-tank founded in 1957 and based in Washington D.C. that is working “to prevent violent conflict and promote sustainable security” worldwide by focusing on conflict assessment and early warning on transnational threats, peacekeeping, and security and human rights issues.

Malaysia placed 110th and earned an above average mark of 68.5 points out of a maximum 120 points on the Failed States Index Score this year, an annual ranking of 177 nations based on their levels of stability and capacity, it said in the latest survey released last month.

The FPP’s Failed States Index was first published in 2005.

It noted that Malaysia’s economy grew 5.1 per cent last year, but it noted that although the “growth has remained strong, uneven development remains an on-going challenge”.

The country scored 6.4 out of 10 points, with 10 being the worst on uneven development marker, which pointed to a weak position and earned it 105th spot out of 177 nations.

“The Uneven Development score improved slightly but remains high as the central government has not completely phased out preferential treatment for ethnic Malays,” the index said.

The survey also said Malaysia’s 4.4 points on the Human Flight score, which it noted was moderate but put the country at 124th place, which signalled outflow of talent was worsening in a five-year trend outlook.

“A slight worsening of the Human Flight indicator suggests that more Malaysians are seeking better livelihoods abroad,” it reported.

“The Human Flight score increased substantially as social and economic reforms have not produced many changes. While the current prime minster has publicly stated his support for eliminating preferential treatment for ethnic Malays, little progress has been made,” it said.

Malaysia scored 6.5 points for legitimacy of the state, which FPP marked as weak and was worsening in a five-year trend outlook.

“A number of promised legal enactments remain frozen in the political process and restrictions on the freedom of expression continue to be imposed on the Malaysian populace, worsening the Human Rights and Rule of Law indicator score by a 0.5 margin,” it said.

“The Legitimacy of the State score has remained consistent at an elevated level since 2006 as a consequence of continued resentment on the part of the minority Indian and Chinese populations toward policies that are preferential toward the ethnic Malay population,” it added.

The index also noted Malaysia’s high score of 6.4 points for group grievances, which looks at the tension and violence between groups and the state’s ability to provide security.

“The Group Grievance score remains high as political actors attempted to stir ethnic tension and resentment in advance of the special elections,” it said.

While the Barisan Nasional (BN) coalition led by Umno has managed to stay in power since independence in 1957, FPP said the results of the 2008 general elections prompted the ruling government to “react aggressively when faced with mass demonstrations in favour of election reform in July 2011”.

10 Countries Facing the Biggest Brain Drain

Brain drain, also known as human capital flight, is a serious issue in many parts of the world, as skilled professionals seek out work abroad rather than returning to work in their home country. Many are driven away by high unemployment, but issues like political oppression, lack of religious freedom and simply not being able to earn a big enough paycheck also play a significant role in exacerbating brain drain. The phenomenon is not only a serious economic issue (both in that the country loses workers and the money it put into training them in college), but one that often puts the health and safety of the nation’s citizens at risk, creating long-term and potentially disastrous results for countries with high brain drain rates spanning several decades.
Here we’ve compiled a list of some of the nations that have been hardest hit by brain drain in that past few years. While some are making progress in reversing the process, others are seeing numbers rise and citizens migrating in larger numbers every year. These nations, often those in the developing world, must make major economic and social changes if they hope to retain their best and most skilled workers over the long term.

1. Ethiopia: Ethiopia produces a large number of qualified professionals, especially in the medical field, but is experiencing one of the worst brain drains of any country in the world. Attracted by better prospects overseas and in other African nations and pushed out by political persecution, Ethiopia’s best and brightest haven’t been sticking around after graduation. A recent study presented at the National Symposium on Ethiopian Diasporas revealed some shocking numbers, with the country losing about 75% of its skilled professionals over the past ten years. This exodus of highly qualified professionals has had a huge impact on the country, leaving it with too few physicians, engineers and scientists to fill positions the country desperately needs to thrive economically.
   
2. Nigeria: Nigeria is another African nation that has suffered due to a massive brain drain. With much of Nigeria still essentially a developing nation with unreliable power and few resources, higher level science, engineering and medical professionals often find little to motivate them into staying, especially with job offers from the U.S. and European nations exerting a powerful pull. Since Nigeria’s brutal civil war in late 60s, the country has bounced between military governments and dictatorships, pushing out between 11 and 17 million people. Today, over 2 million Nigerians live in the U.S. alone, and of these about 20,000 are doctors and over 10,000 are academics. That’s a heavy loss for a nation that so desperately needs qualified professionals to rebuild and improve its own resources.
   
3. Kenya: High unemployment rates, lack of resources and other factors have made Kenya one of the top brain drain countries in Africa. With fewer than 30% of Kenyans who study overseas returning to work in Kenya, the nation is feeling the hurt of losing so many skilled professionals. The Kenyan Medical Association has warned that emigration of medical professionals may make it impossible to provide health care to the country’s residents – and the situation is already pretty dire. As of 2002, the public sector medical field had only 600 doctors and 70 dentists available to treat over 28 million citizens. With somewhere between 500,000 and 1.8 million Kenyans working and living overseas, the country is trying desperately to find a way to lure some of these citizens back home where their skills are much needed.
   
4. South Africa: Years of unrest, high crime rates, AIDS and lack of jobs have combined to make South Africa’s brain drain a serious problem. Over the past three years, the country has lost over 100,000 workers, with an additional 70% of skilled South Africans saying they are considering leaving the nation. Losing so many skilled workers has a ripple effect, with the loss of each skilled professional costing about 10 unskilled jobs. Currently, the country is working to not only keep residents from leaving once they’ve completed their training, but to also attract professionals from other nations to South African businesses. Though there is still a long way to go to make this a reality.
   
5. Iran: In 2006, the IMF ranked Iran the highest in brain drain among 90 countries (both developed and less developed), with over 180,000 people leaving each year due to a poor job market and oppressive social conditions. In fact, it is estimated that over 25% of Iranians with post-secondary degrees live and work abroad, adding up to a total of 4 million Iranians living overseas. While the outflux of Iranians was scoffed at in the early 80′s by government officials, today Iran is doing more to keep their skilled professionals at home, creating several national foundations aimed at improving the conditions for students in the sciences and increasing the number of graduate programs. Why pay attention now? Iran’s brain drain is estimated to cost the country over $50 billion each year in economic losses.
   
6. China: China has become a major player in global economics, but despite a rapidly growing job force, it is having trouble hanging on to qualified professionals. Many believe the reason lies in censorship and lack of freedoms (including the one child policy), but whatever the true cause, 70% of Chinese students who study overseas never return to their homeland. Since 1978, over 1 million Chinese students have headed to universities located abroad to get their degrees, yet fewer than 275,000 have returned. In fact, many foreign schools actually work to attract Chinese students, only exacerbating the problem for a nation in need of top scientists and researchers. The Chinese government has worked hard to reverse the trend, providing top-tier students in science and engineering with a large number of incentives, yet the numbers are only growing larger. By the end of this year, the nation could see well over 200,000 students leaving.
   
7. Mexico: Mexican immigration is a big issue in the U.S., with tens of thousands of illegal immigrants crossing U.S. borders each year. Yet a large portion of Mexican immigrants don’t fit this stereotype and are wealthy, well-educated and enter the country quite legally. Mexico is seeing a huge brain drain as more middle- and upper-class citizens move abroad, many who hold higher degrees and work in professional fields like medicine and law. The biggest cause for this is unemployment, with hundreds of thousands of skilled workers unable to find work, though security issues also play a big role. The higher the level of education, the less likely workers are to stay in Mexico, with about 70% of Mexicans with a PhD coming to work in America. The brain drain is worst in the sciences, where 79% of students who come to study in America never return home.
   
8. Jamaica: In a trend common for Caribbean nations, Jamaica faces one of the biggest brain drains in the region. Over 80% of Jamaica’s citizens who’ve obtained higher education live abroad. Most of this migration is due to lack of jobs, as there simply aren’t enough to go around for young graduates from university programs. What makes this loss so striking isn’t just the high percentage, but that Jamaican citizens who choose to work abroad must pay a remittance to the Jamaican government. Even with these additional fees, students aren’t enticed into staying to work in Jamaica. While much attention has been paid to the issue in recent years, little has changed and Jamaica. Along with Haiti, Suriname, Guyana and Grenada are losing between 70-90% of their college-educated force each year.
   
9. Malaysia: The brain drain in Malaysia has been steadily worsening, with the World Bank projecting it to intensify over the next few years. Currently, two out of every ten Malaysians with higher education seeks employment elsewhere, accounting for about 305,000 immigrants in 2009. There are a number of factors that contribute to this mass emigration, including job opportunities, political corruption and lack of religious freedom. Malaysia made big economic strides in the 90s, but growth has been halved in the past decade, slowing from 7.2% to just 4.6%. Experts believe this is largely due to brain drain, and caution that the nation could see serious economic issues if it doesn’t do something more to encourage professionals to work in their home country.
   
10. England: While it isn’t seeing staggering losses like many countries on this list, it is valuable to see how brain drain is a problem even in developed and relatively wealthy nations like Britain. Over the past few years, England has seen a large number of its skilled professionals leaving for work abroad, with over 1.1 million university graduates living and working outside of the country. This accounts for almost 1 in 10 skilled citizens choosing to emigrate. This mass emigration of skilled professionals may have serious ramifications for the British economy, as professionals add to the workforce of nations like Australia, Canada, America, France and Spain rather than at home. When compared to other developed nations, these numbers are especially high, with only Germany coming close in terms of losses (with 860,000 workers lost), making it clear that even top nations with good schools, public health and lots of resources can be subject to brain drain.

WIKILEAKS: Malaysia's New Economic Model

He noted barriers to non-bumiputras in the job market, starting and growing businesses, purchasing housing, and educational opportunities began a move of many well educated non-bumiputra Malaysians to emigrate. The fact that 800,000 young Malaysians are now working abroad, 300,000 having emigrated in the past 18 months, including increasing numbers of ethnic Malays was recently noted in Parliament. Malaysia's "brain drain" has begun to get the attention of policy makers, according to Husni.
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Raja Petra Kamarudin

C O N F I D E N T I A L SECTION 01 OF 05 KUALA LUMPUR 000103

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E.O. 12958: DECL: 01/19/2020
TAGS: ECON, EFIN, ENIV, EXIM, MY, PGOV
SUBJECT: MALAYSIA’S NEW ECONOMIC MODEL: ECONOMIC REFORM EFFORTS MAY MEET OPPOSITION

REF: A. 09 KUALA LUMPUR 303
        B. 09 KUALA LUMPUR 318
        C. 09 KUALA LUMPUR 887

1.  (C) Summary:  Prime Minister Najib Razak (Najib) introduced a first wave of limited economic reforms (refs A and B) shortly after taking office in April 2009 and has promised more substantial economic reforms designed to improve Malaysia's competitiveness (ref C). 
To accomplish this, Najib formed the National Economic Advisory Committee (NEAC) to develop a New Economic Model (NEM), an economic policy roadmap which he hopes will lead Malaysia from middle income to high income country status. 
Little has been revealed about the contents of the NEM, but government officials say it is intended to address Malaysia's "stagnating" economy, by improving education, reducing corruption, strengthening weak public institutions, reconfiguring emigration, cutting back on government over-involvement in the private sector, and increasing low domestic investment rates. 
Leading Malaysian economists believe that Najib is sincere in his desire to address these problems.  However, they question his ability to make major changes in the government's long-standing discriminatory Bumiputera preference policies which have discouraged domestic investment and new business formation and are driving the "brain drain" of young professional Malaysians frustrated with limited opportunities under this  system.
Economists here expect Najib's effort to establish a policy framework that will foster a more gradual move away from ethnic preferences to a merit-based economy, but believe that may be insufficient.  If PM Najib is unable to deliver on NEM reforms, they expect the opposition will seize the reform agenda as an issue for possible 2012 elections.  
Executing a robust NEM, however, will be even more difficult as the PM will undoubtedly face steady opposition from within his own political party (UMNO), particularly from members who fear their parliamentary seats may be lost if the current patronage system is dismantled.  End Summary.
The New Economic Model: Reigniting High Growth
2.  (C) Since Prime Minister Najib Tun Razak (Najib) took office in April 2009, he has called for Malaysia to move from a low value-added, manufacturing-for-export oriented middle income economy to a knowledge-based service oriented high income economy.  He has used the rubric of former Prime Minister Mahathir's Vision 2020 goal of reaching "high-income country" status by the year 2020 as his call to action to justify developing a "New Economic Model" (NEM) to promote economic transformation. 
PM Najib quickly announced an investment liberalization agenda and by April 2009 implemented a first tranche of reforms aimed at reducing bumiputra (ethnic Malays and other non-Chinese or Indian ethnicities) ownership requirements in 27 different non-influential service sectors (e.g. veterinary services and ship salvage and refloatation services) and allow foreign controlling ownership interests in some types of financial institutions (Ref A). 
PM Najib announced a second tranche of reforms late in April including reducing bumiputra ownership requirements on all listed companies from 30% to 12.5% and repealing Foreign Investment Commission guidelines on new mergers and acquisitions by foreign firms (Ref B). 
In July, PM Najib formed the National Economic Advisory Committee (NEAC) and charged the new body - made up of high profile Malaysian and non-Malaysian economic figures - with developing the NEM.  In his October 23 budget speech (Ref C), PM Najib promised additional economic reforms.
Financial Crisis and Capital Flight Push GOM to Reform
3. (C) Najib has been forced to consider a broader reform program because the Global financial crisis (GFC) has put tremendous pressure on the underpinnings of Malaysia's economic growth.  FDI has slowed to a trickle, $15 billion of portfolio investment departed in 2009 and has just begun to return, and there remain large domestic reverse investment outflows as Malaysian conglomerates focus on overseas rather than domestic investment. 
According to a January 8 UBS Securities report, Malaysia experienced net capital out flows in excess of $27 billion from mid-2008 to mid-2009.  More telling, the UBS report states Malaysia has not experienced net capital inflows in any one calendar year since 1997.  UBS cites domestic investors investing outside Malaysia as the primary source of the outflows. 
PriceWaterhouse Coopers Consulting Malaysia (PWC) General Manager Pearlene Cheong described Western multi-national corporate interest in investing in Malaysia as "dormant" and that ethnic Chinese Malaysians had been taking their money out of Malaysia ever since the Asian financial crisis.  She said that PWC's investor advisory business has seen primarily North Asian investors working in the extractive industries focused in East Malaysia and added, "This is not the knowledge-based type of employment that the government is looking for to stimulate wage growth."
Bold Statements Calling for Change
4. (C) The Najib administration has identified several areas of the economy needing reform and has announced its intentions to carry out reforms through the NEM.  In a December 1 speech to the Malaysian Institute of Economic Research, Finance Minister II Husni said Malaysia's economy was "stagnating" and highlighted Malaysia's most pressing economic issues needing to be addressed by the NEM as education, corruption, GOM economic over-management, weak public institutions, emigration, and low domestic investment rates.
Education: Husni said, "Our universities are a disappointment." He cited Malaysia as having its highest unemployment rate for recent college graduates while adding that there is a severe shortage of skilled workers, implying that large numbers of Malaysian recent college graduates are unskilled.  Malaysian sovereign wealth fund Khazanah reported that skilled labor shortages and the poor quality of Malaysian graduates costs Malaysian competitiveness 15% of GDP annually.
Corruption and Cronyism: He cited the recently released Transparency International 2009 Corruption Perception Index, in which Malaysia fell to number 56 of 180 countries, its lowest rating in over 20 years, and continuing a fall from number 26 in 2004. 
Husni promised wholesale reform in government procurement practices, controlled by the Ministry of Finance, and an end to sole source contracts, except for the military.
GOM Over-involvement in the Economy: Husni called for the transparent divestiture of GOM interests in government-linked corporations (GLCs) and the restoration of the private sector's role as the primary engine for growth.  He also cited that the GOM needs to discontinue open-ended protection of domestic industries, allow market driven resource allocation including greater precision in subsidy allocation, and foster better competition policies to spur innovation.
Weak Public Institutions: Husni criticized the lack of diversity in the civil service and proposed strengthening public institutions through greater ethnic participation.
Brain Drain: He noted barriers to non-bumiputras in the job market, starting and growing businesses, purchasing housing, and educational opportunities began a move of many well educated non-bumiputra Malaysians to emigrate.  The fact that 800,000 young Malaysians are now working abroad, 300,000 having emigrated in the past 18 months, including increasing numbers of ethnic Malays was recently noted in Parliament. Malaysia's "brain drain" has begun to get the attention of policy makers, according to Husni.
Low Domestic Investment: Since 1997, domestic investment rates halved from 20-25% of GDP annually to roughly 10% and have remained at reduced levels for the past decade.  Husni said that the 1Malaysia concept is intended to introduce competition and move Malaysia to a more performance-based culture like Japan, Korean, and Singapore, promoting an attractive investment and working environment for all Malaysians.
NEM to be Broad and Wide-Ranging
5.  (C) The government and our contacts have released few details of the upcoming NEM.  However, PM Najib announced December 22 at the Finance Ministry's "Media Night" that he had approved the NEM direction, and that the final model will be presented to the Cabinet and made public by the end of February 2010.  The NEM will "set the direction of the economy and make the economy more resilient", according to Najib. 
NEAC Acting Director of Research Tong Yee Siong, said the NEAC met the week of February 1-5 to finalize its recommendations to the Cabinet for approval and public release by the end of February.  Tong told Econoffs that the NEAC will produce goal papers and an economic model framework.  Tong expected the recommendations to be very broad, and would propose a policy framework to address the most significant economic issues facing Malaysia and improve its economic competitiveness. 
Nicholas Zefferies, the president of AmCham, and the only "foreign" member of the NEAC, told Econ Counselor January 13 that NEAC reform recommendations to PM Najib would be wide-ranging.  Zefferies said that Najib was planning to give NEAC powers similar to the Prime Minister's Special Task Force to Facilitate Business (Pemudah), to enforce the planned economic reform program on government Ministries.
Economic Reform Versus Ethnic Preferences
6.  (C) Tong told us that the NEAC is focused on removing disincentives to domestic investment established in the New Economic Policy (NEP) as a key to reinvigorating domestic and foreign investment.  He added that any basis for serious economic and investment reform efforts in Malaysia involves dismantling old entrenched Bumiputra ethnic preferences established since the Mahathir regime in the NEP. 
Finance Minister II Husni's speech was important for connecting Najib's 1Malaysia slogan to real economic reform, according to Malaysian Institute for Economic Research Managing Director and long-time UMNO economic advisor Mohamed Ariff.
However, as Husni criticized Malaysia's longstanding ethnic preference policies, he qualified his statements by asserting that "the government is not abandoning bumiputras" and that the government will pursue reform in "a prudent and cautious method" in an effort to allay bumiputra fears of economic displacement. 
Ariff told us that the Husni speech angered some senior UMNO members who complained that Najib was opening the economy too much and moving too fast toward reform.  Opposition parliament members praised the speech, according to Ariff.
PM Najib Seeks Incremental Reform
7.  (C) Our economic contacts close to PM Najib said they were convinced he is sincere about wanting economic reform. Economic Planning Unit Deputy Director General K. Govindan, who briefs PM Najib and the cabinet weekly on Malaysian economic performance and economic policy, told us he believes PM Najib understands in general terms the reforms needed to improve human capital and productivity, increase trade and investment, and reduce corruption. 
Nevertheless, Govindan said he does not make specific economic policy recommendations at those meetings for fear of offending other Ministers in the meeting who oppose the reform agenda. 
Ariff also believes PM Najib legitimately seeks economic reform. Ariff told us PM Najib's words to him were "change or be changed" when referring to economic reform.  But Ariff also said he expected PM Najib to slowly pick away at the NEP without causing too much economic and political disruption. This will require regularly announcing small reforms rather than the sweeping reforms required to transform the economy.
Ariff offered the February NEM release and the June 2010 release of the 10th 5-year Malaysia Plan as two upcoming opportunities for Najib to roll out more economic reforms.
Safe Won't Work
8.  (C) In the view of our economist contacts, PM Najib's "politically friendly" incremental strategy to economic reform may end up being too little too late.  Tong projected that for reform to work, the PM will need to make a bold announcement on major reforms and then rally public support for change.  Tong said that NEAC members are advocating that PM Najib announce significant structural changes to Malaysia's economy as a part of the NEM. 
Govindan agreed that major structural changes are needed for sustained economic growth.  He added that a series of small reform programs will eventually limit Malaysia to an unacceptably low 3-4% annual growth rate that will keep the country trapped in middle income status until "politics are removed from education and the economy." 
The critical point, Ariff said, was that while Malaysia continued taking baby steps on economic reform, its competitors for investment such as Indonesia, Thailand, and Vietnam would be overtaking Malaysia as the first choice for foreign direct investment.
Ruling Party May Block Aggressive Reform
9.  (C) Each of our contacts agreed that political will is the key to reform, but none are convinced all of the coming announcements of plans to reform Malaysia's economy will be backed by substantially broad concrete measures. 
Ariff told us that after early enthusiasm for economic reform, some UMNO insiders do not want reform that would take away the economic rents and patronage system they have relied on to maintain the party's power base for over a generation. 
Ariff predicted that UMNO would not survive in power by moving to an open and transparent system and that UMNO insiders would challenge Najib if he moved too strongly on government reform. 
Govindan sees Malaysia's huge and largely ethnic Malay civil service, completely loyal to UMNO, but increasingly incompetent, as PM Najib's largest obstacle.  He commented that the civil service has a very narrow worldview and will oppose, even refuse to implement, reforms perceived as damaging ethnic Malay interests, even if convinced of the long-run gains for Malaysia. 
Tong told us that achieving any of the goals developed by the NEAC will require significant political buy-in to operationalize the policy changes necessary to reinvigorate investment and spur additional growth.  However, Tong commented that NEAC members are frustrated with a lack of high-level political commitment outside of PM Najib as well as the slow responses from Ministries which impeded progress on the NEM. 
He added that some NEAC members are concerned that the NEM maybe merely a public relations exercise that will have no real long-term policy impact.  Zeffries told us that he was not confident that PM Najib has a sufficiently strong political position to pursue the NEAC's upcoming proposals.  Liew described the opposition closely watching economic reform, offering that an inability of the ruling coalition to implement promised economic reforms will provide powerful political ammunition for use in upcoming federal elections in 2012.
Ethnic Minorities Support Reform
10.  (C) Cheong sees her Malaysian private sector business clients as highly supportive of the type of economic opening she believes PM Najib will announce in the NEM and commented that ethnic Chinese, Indian, and urban Malays not directly benefitting from UMNO patronage will strongly support economic reform efforts, but that rural Malays, a strong UMNO constituent base, will fear changes labeled as detrimental to Bumiputra interests. 
However, Cheong observed that Non-Bumiputras have successfully competed in the open economy at a disadvantage to Bumiputra and government linked businesses for over 30 years and that Malaysians would patiently wait for change.  She added that the lack of investment is so obvious that the government is practically being forced to take action.
KEITH