Oil & Gas Windfall: Malaysia's Boon or Bane? (I)

I actually wrote this article a few months back for the purposes of submission to the New Straits Times (NST). Unfortunately, and bruising my personal ego in the process, it was rejected. ;) The article sort of sat around idle for a while until I submitted it to Aliran Monthly. Well, it's just been published, and I thought I'd put out my article here in 2 parts.

(A little plug for Aliran - It's a Reform Movement dedicated to Justice, Freedom & Solidarity and listed on the roster of the Economic and Social Council of the United Nations. Founded in 1977, Aliran welcomes all Malaysian above 21 to be members. Visit their website for more information or subscribe for a copy of Aliran Monthly today ;).)

Malaysia is a country blessed with abundant natural resources. In particular, we are thankful that the country is rich in oil and gas, which created Malaysia's sole representative in the Fortune 500, Petroliam Nasional Berhad (Petronas). In the most recent financial year ending March 2007, Petronas achieved record profits before tax of RM76.3 billion thanks to record high crude oil prices which increased from under US$25 per barrel to above US$70 all within 4 years.

Of greatest importance, was the fact that Petronas contributed RM53.7 billion to our national coffers in taxes, royalties, dividends and export duties last year. Contribution from Petronas and other oil and gas companies operating in Malaysia was budgeted to make up some 46.8% of the government revenue for 2007. This represents a steep increase from approximately 30% in 2006 and 25% in 2004. These statistics marks Malaysia's heavy reliance on oil and gas industry today.

Malaysia's abundance of oil & gas resources is akin striking lottery. It is a once-off affair, and at some point of time, our reserves will run dry. According to Oil & Gas Journal, Malaysia held proven oil reserves of 3.0 billion barrels as of January 2007, down from a peak of 4.6 billion barrels in 1996. These reserves will last us for only another 20 years or so.

What's worse, Malaysia is expected to become a net oil importer by 2010 assuming a conservative growth of 4% in petroleum products consumption. Our trade current account surplus has also been boosted significantly by oil and gas related products which constitutes more than 11% of our exports. The frightful acceleration of dependence on our limited oil and gas resources places the country's economy at great risks.

Malaysia must not fall into the trap of what economists call the “resource curse”, that is countries devoid of natural resources fare better than countries better endowed. Countries such as Hong Kong, Singapore and Switzerland contrasted against the oil-rich but poorly developed Middle East countries immediately comes to mind.

This appears to be closely related to the phenomenon known as the Dutch disease. The Netherlands in the 1960s, after its discovery and depletion of oil and gas in the North Sea, was plagued with unemployment and a unproductive manufacturing sector due to the negative side effects of such a discovery.

What is perhaps most worrying for Malaysia, with the reliance on natural resource overshadowing the other productive sectors of the economy, is the resulting “rent-seeking economy” where influential parties within and without the government focus their efforts in securing a a larger share of the economic pie, instead of creating a bigger pie.

Oil and gas for example, is of wealth, which does not in itself create employment. The right to manage this wealth however, lies in the hands of the government of the day. This concentration of distributive control over wealth leads to vastly disproportionate amount of resources spent on lobbying and rent-seeking activities which will in turn reduce efforts in raising our other productive sectors as well as human capital. Associate Professors, Ricky Lam and Leonard Wantchekon of Northwestern and New York University respectively labelled this phenomenon the political Dutch disease.

In Malaysia, we are certainly seeing the impact of the political Dutch disease. With rampant rent-seeking activities as well as political patronage, large amounts of economic and financial leakages are beginning to surface. Earlier this year, the Second Finance Minister, Tan Sri Nor Mohamed Yakcop has disclosed in Parliament that the recent bailout of 7 privatised projects has cost the Government RM11.0 billion, including the Putra and STAR LRT transport systems and Malaysia Airlines System costing RM7.7 billion and RM2.8 billion respectively. This amount works out to approximately 69.5% of the original cost of these projects.

Not included in the above lists are projects such as the MATRADE building and the Middle-Ring Road II which had repair bills of RM120 million and RM70 million over their original cost of RM167 million and RM120 million respectively.

More recently, we have seen how just completed government projects such as the Immigration office in Putrajaya, the mega-court complex in Jalan Duta as well as the renovated Parliament house require desperate resuscitation efforts.

Whilst the bail out packages and the repair bills have worked out to huge sums of money, its impact on the economy appears to be minimal at first glance. The country's gross domestic product (GDP) continues to grow at a healthy rate of around 5% per annum for the past few years. However, the GDP growth rate masks the fact that we have been increasingly reliant on our God-given natural resources for revenue, which has in turn cushioned the impact of dissipation of wealth caused by the impact of non-value-adding rent-seeking activities.

More coming up in Part II. ;)