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IMPLEMENTATION COMPLETION REPORT ASEM TRUST FUND 021697 Malaysia: Enhancing Industrial and Export Competitiveness (Bank-Executed)

Prepared by: Hong Tan Date: January 25, 2002

SUMMARY This project belonged to the first round of activities proposed and approved under the ASEM Trust Fund. It addressed policy concerns about relying on export growth led by the electronics industry with its attendant vulnerability during the Asian crisis, about diversifying exports through strengthening the industrial and export competitiveness of Malaysia's own resource-based industries, and about the need for timely information to monitor and respond to industrial and exporting trends. This project, which is Bank-executed, was intended to fund technical assistance to the Industry Section of the Economic Planning Unit (EPU) of the Prime Minister's Department, and to related government agencies with policy interests in industrial and export competitiveness. The project would provide assistance in developing an industrial competitiveness information system (ICIS) to monitor industrial performance and exports over time and to develop timely policy-relevant information to respond to emerging trends. A companion Recipient-executed project (ASEM TF-21763) would fund technical studies on enhancing the industrial and export competitiveness of resource-based industries and, in particular, the small and medium size enterprises (SMEs) that make up many of these industries. At closing in May 2001 after two extensions, all activities proposed to be undertaken by the Bank team were successfully completed. BACKGROUND AND OBJECTIVES In response to the Asian financial crisis, the Government of Malaysia implemented several measures to prevent further economic slo wdown, and to restore economic growth. The latter strategy relied, among other things, on increasing industrial and export competitiveness of the manufacturing sector which, in 1997, accounted for 36 percent of GDP and 81 percent of export earnings. Even before the crisis, issues of industrial and export competitiveness had been central to the Government's long-term development strategy as articulated in Vision 2020. It had begun to address structural issues associated with achieving this vision--industries bifurcated between dynamic, export-oriented MNCs and mostly domestic-oriented local firms, with few linkages between them; an export structure dominated by the electrical and electronics sector which accounted for one-third of value-added in manufacturing and two-thirds of its exports; and a large number of SMEs using labor- intensive methods and urgently requiring equipment

modernization and productivity upgrading. The crisis, and the collapse in exports that accompanied it--down 10 percent in US dollar terms in the first seven months of 1998 alone--highlighted the need for improved policies to enhance industrial competitiveness and both promote and diversify exports. The Government requested technical assistance in reviewing policies it had initiated prior to the crisis and, on the basis of international best practice, recommending new policies to promote and diversity exports and to enhance industrial competitiveness. Two kinds of technical assistance were requested. (1) First, it would finance three technical studies on export promotion and export diversification; research and development incentives and technology upgrading; and business development services for SMEs. The principal beneficiaries of this technical assistance would be the Industry Section of the Economic Planning Unit (EPU), Prime Minister's Department, Bank Negara Malaysia (BNM) the central bank, Ministry of International Trade and Industry (MITI), and related agencies MIDA, MATRADE and SMIDEC with responsibilities for industrial promotion and investment incentives, export promotion, and small and medium size industries, respectively. This technical assistance would be funded under ASEM TF-21763, and be Recipient-executed. (2) Second, to support policymaking in these areas, the Government also requested assistance in developing an information system to systematically monitor developments and trends in industrial performance and exports. That request, the focus of this Bank-executed project, would be addressed under ASEM TF-21697.

ACHIEVEMENT OF TRUST FUND OBJECTIVES (1) Recipient-executed Technical Studies The three original thematic technical studies were combined into one large study on industrial and export competitiveness in three resource-based industries--rubber products, oil palm products, and timber and wood products. ECONSULT, in association with Sagric International (Australia) and LMC International (U.K. & U.S.), was tasked with (1) identifying a set of down-stream products that had potential in export markets, taking into account domestic manufacturing capabilities and overseas demand; (2) reviewing existing fiscal incentives, industry structure and constraints, level of technological capabilities, infrastructure and investment needs, and marketing arrangements in the domestic industry; and (3) assessing the potential for exports of these products through detailed marketing studies. ECONSULT completed a draft report for rubber, oil palm, and wood which was delivered to EPU in August 2000. The findings and policy recommendations were presented to, and discussed at, a public-private sector workshop in November 200. The final report, "Developing Export Competitiveness in Resource-based Industries" in 4 volumes, was delivered to EPU in December 2000. (2) Bank-executed Industrial Competitiveness Information System (ICIS) The objectives of the Bank-executed project were to: (1) develop an industry database and information system (ICIS) for monitoring industrial and export performance, (2)

provide the Government of Malaysia with policy insights from empirical analysis of the data, and (3) provide training to staff from the Economic Planning Unit and other Government agencies training on using the ICIS. 2-1. Development of Industry Database (ICIS). This new database was an extension of an earlier effort by the TM to create firm- level panel data from annual surveys of manufacturing fielded between 1985-1995 by the Department of Statistics (DOS), linked to special-purpose firm surveys in 1988, 1994 and 1997. It updated the panel data to 1997 (the industrial survey was not fielded in 1998), and included previously unavailable information on firm- level exports. The resulting linked panel firm- level data formed the platform for a PC-based information system (ICIS), made accessible for a variety of monitoring and analytic purposes through an easy-to-use PC interface developed by the project team. These databases were turned over to EPU at the conclusion of the project. Developing the ICIS involved several activities. First, the Bank team and EPU negotiated with DOS for access to firm- level export data that had been fielded as part of its annual industrial survey, but hitherto unused. These export data were successfully linked to the existing firm- level panel data. Second, the team demonstrated that the export data were reliable and consistently reported, which convinced DOS not to drop enumeration of detailed export information in the 2000 survey and beyond, as was originally planned because this information was rarely used. Finally, the team advised DOS on a sampling framework that would allow the Government of Malaysia to track a panel of firms over time and to better monitor industrial and export trends. Together, these project- financed activities ensured that future industrial surveys enumerated by DOS would continue to provide the Government with a consistent source of panel data for export monitoring and policy analysis of competitiveness trends. 2-2. Studies of Export and Industrial Competitiveness. This part of the project was intended to provide EPU with analysis and policy insights on industrial and export competitiveness. The analysis built on an earlier UNDP-EPU funded study "Technology Development, Inter-Firm Linkages and Productivity" (May 2000) that used similar data, covering a shorter panel (until 1995) and without the benefit of export information. The updating of the panel to include data from the 1996 and 1997 industrial surveys, as well as export data, permitted a new dimension--export dynamics and competitiveness--to be studied, and a short technical paper to be prepared. In November 2000, the project team presented a draft paper "Exporting, Productivity Growth and Competitiveness" to the project Steering Committee. First, the study reported trends in the export sector, using the firm panel data to describe patterns of firm transitions in and out of exporting. Next, it used regression analysis to characterize exporters and the determinants of entry into exporting, to complement the descriptive trends. Finally, it estimated panel production functions to examine the relationship between exporting and productivity growth, controlling for a variety of other factors that also affected productivity. Of particular interest to policymakers and to researchers was the issue of whether there were dynamic learning effects (productivity growth) from the exporting experience of Malaysian firms.

2-3 Training for Government Staff. The third component provided training for selected government staff in the use of ICIS for monitoring and studies of industrial and export competitiveness. As training required a minimum level of competence with the statistical software STATA, the head of computing at EPU (a former trainee) provided staff from recipient agencies with a pre-training review of the basics of STATA. In Nove mber 2000, the project team conducted a 3-day hands-on training course for 25 government staff from both ASEM Labor and ASEM Export projects on using the PC-based LMIS (Labor Market Information System) and the ICIS (industrial competitiveness information system). The curriculum included (1) use of the PC- interface, the training manuals, the principal data sources, and key elements of the underlying statistical package; (2) use of the LMIS for labor market analysis; and (3) use of the ICIS for industry analysis and for estimation of TPF and productivity growth, using materials prepared as part of the Export and Industrial Competitiveness report.

EXECUTION EXPERIENCE AND RESULTS Execution of the project was generally successful. This was due in no small measure to the creation of a Steering Committee, chaired by the Economic Planning Unit (Industry Section) and comprising representative from interested government agencies, to guide both the recipient-executed and Bank-executed projects. This organizational structure made possible extensive consultations between the Steering Committee and the private sector beneficiaries of the project, and facilitated completion of the Recipient-executed project under ASEM TF21763. The Steering Committee also provided overall guidance for the Bank-executed project, and elicited the full cooperation of DOS, the national statistical agency, in working with the project team. The project team also benefited from the advise and efforts of a national consultant, a former director of industrial statistics at DOS. She worked with the project team and DOS to assemble the industrial and export panel database, and helped refine the statistical sampling frame to facilitate future enumeration of consistent panel data for monitoring and analysis. Results of the Technical Study A technical paper "Exporting, Productivity Growth and Competitiveness" was completed as part of the Bank-executed project. Some highlights of the study and its findings: · There was a rising trend in export orientation over the 1980s up to the mid-1990s; export orientation was high throughout for electronics, chemicals and textiles, but some industries--furniture, primary metals and general machinery--showed marked increases in export orientation over time from low initial levels. Most firms--about 57 percent--never exported throughout the period; 10 percent exported every year; another 26 percent moved in and out of the export market. Exporting may involve sunk costs, so that once firms begin exporting, they are unlikely to exit the export market permanently.

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Firms that export tend to be larger, have foreign equity or joint- venture partners, and are more likely to have invested in the past in new technology, and in formal training for its employees. Firms entering into exporting have higher productivity levels, and investments in new technology and worker skills are a pre-requisite for exporting success. Production function estimates indicate that exporting is positively correlated with productivity growth. While forays into the export market are initially disruptive for productivity, substantial productivity gains are made as export experience increases--up to 84 percent over starting year productivity levels by the 8th year. The export-productivity relationship persists even controlling for the effects of other productivity correlates--such as investments in new technology and in worker training. While there is a causal link from exports to productivity growth, there is also evidence of pre-export improvements in productivity, possibly related to investments in capital equipment and new technology, that requires further study.

ACTIVITY SUSTAINABILITY It is expected that many of the initial gains from the trust fund will be sustained. The Bank-executed project has sensitized the Government of Malaysia, and the Economic Planning Unit in particular, to the potential policy uses of longitudinal establishment data collected by DOS, the national statistical office. The ICIS has already had an early impact in shaping the way national statistics are collected: (1) it is using, for the first time, information on exports at the establishment level that DOS has routinely collected for decades but never exploited; (2) it has headed off DOS's plans to stop collecting this vital information; and (3) because monitoring industrial performance relies critically on tracking the same firms over time, it has advised DOS on the desirability of changing its sampling design to facilitate tracking of individual establishments over time. The Bank-executed project also provided technical assistance to develop the monitoring and analytic capabilities of staff from the recipient agencies. It has provided EPU with the industrial and competitiveness data base--ICIS--as well as the software tools and the training to use it. There now exists a small group of government staff in EPU and several government agencies with some working familiarity with the database and the software. Whether or not this initial momentum is sustained will depend critically upon the ICIS being updated every year, and on continued management commitment to maintaining analytic skills of its staff through policy studies using the ICIS data.

OVERALL ASSESSMENT Given the foregoing, and despite two extensions, the project is judged to have achieved all its goals satisfactorily.

Data Sheet Trust Fund No.: TF021697 Recipient Country: Malaysia Task Team Leader: Hong Tan Grant Approval Date: December 11, 1998 Project ID No.: Project Executed by: Sector: Financial/Industrial Bank Managing Unit: WBIHD Grant Amount: (in US$) Grant Agreement Date: Closing Date: US$161,000 March 31, 1999 May 31, 2001

FY Amount FY Amount

Project Title: ASEM TF Enhancing Industrial and Export Competitiveness

1. Disbursements (actuals in US$)

(as of Reporting date)

1999

10,108

2000

61,901

2001 Nationality:

76,435

Contract awarded, or consultant hired:

Professor P. Sellappan, Computer Science and IT Department, University of Malaya Ms. Dorothy Robert, Consultant (formerly Director of Industrial Statistics, DOS)

Amount: (in US$)

US$ 7,500

Malaysia Malaysia

US$ 10,000

2. Compliance with the visibility provision

Within the stated objectives of the project, every effort was made to identify and use consultants and expertise from countries participating in the ASEM process, in this case, Malaysian nationals and firms, as well as EU experts. Because of the sensitive nature of firm-level industrial surveys conducted under the National Statistics Act, only Malaysian nationals acceptable to the Economic Planning Unit and the Department of Statistics were used. National consultants hired under this Bank-executed project had the appropriate skill mix (computer scientist and software specialist, survey statistician and former director of industrial statistics, DOS) needed to develop a PC-based Industrial and Competitiveness Information System (ICIS), and to assemble firm-level surveys from DOS and advise on the statistical sampling frame.

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