The economy of Sabah, a Malaysian state in the northern part of Borneo Island, has fallen into a slumber during the Covid-19 pandemic, with the lowest growth among the country's states.
Undocumented workers are a critical issue that needs to be addressed for the overall economy to move forward in Sabah, says Richard Marshall, senior economist with the United Nations in Malaysia, Singapore and Brunei. Salman Saeed
Sabah's economy has mainly been driven by commodity-related sectors, especially agriculture, mining, oil and gas, and tourism -- making the state and its people dependent on the global markets and vulnerable to global economic shocks.
This vulnerability has been exposed during the pandemic in the form of a high unemployment rate, which increased from 5.8% in 2019 to 9% in the third quarter of 2021 compared to 4.7% nationwide, according to Department of Statistics Malaysia. Many of these job losses have involved low-skilled workers in the primary sector.
The poverty rate has also increased from 19.5% to 32.4% in the same period, according to data released by Malaysia's Liberal Democratic Party. The national average in 2020 was 8.4%. In 2020, Sabah's economy shrank by 9.5%, even worse than the national gross domestic product (GDP) contraction of 5.6%.
Even before the pandemic, Sabah's economic performance trailed the national average, especially when prices of commodities such as crude oil and palm oil went down, affecting local revenues.
The severe shock during the pandemic, plus the past year's sluggish growth, has been a wake-up call for economists, business experts, and the state and national governments to rethink Sabah's economic development approach.
"This is a very important lesson that we have learned, so we should not rely for everything on particular sources of income," said Wong Khen Thau, Sabah chairman of the Malaysian International Chamber of Commerce and Industry.
Speaking at the Sabah International Business and Economic Summit (SIBES) 2022 held last month, he suggested that the state would need to find competitive advantages instead of relying on attracting foreign investment with cheap labour. This will require the state government to improve infrastructure and education to bring out the potential of local people, especially young people.
Other speakers at the summit agreed that changes will be required in many areas. They highlighted sector diversification, more investor-friendly policy and increased human capital investment to move toward innovative, sustainable and inclusive growth. Resetting the relationship with Malaysia's federal states is another critical area.
In other words, Sabah -- known as the "Land Below the Wind" because typhoons rarely strike it -- will need to find the wind of change.
FEDERAL RELATIONS RESET
"For Sabah, we have only one type of problem, and that is economics," said John Lo, a member of the Sabah Economic Advisory Council, during the recent summit.
"We are possibly the richest state in terms of resources. We used to be number two [in wealth creation among states] in Malaysia. Now, we are the worst in poverty with the highest unemployment."
The reason behind Sabah's lagging economic development can be traced back to political tension with the federal government that has persisted through six decades of the post-colonial era.
In 1963, the Malaysia Agreement known as MA63 was enacted and signed by the United Kingdom, the Federation of Malaya, North Borneo (or Sabah), Sarawak and Singapore. It combined these entities into a new nation called Malaysia. Singapore left the federation in 1965 and became an independent country.
The agreement grants Sabah and Sarawak a high degree of autonomy, including in areas of finance, religion and population policy. Both states have the potential to enjoy their existing pluralistic society, in contrast to the dominance of the Muslim majority on the peninsular mainland.
But the process of granting autonomy has been painfully slow, and past federal governments did not recognise both states as equal partners with peninsular Malaysia.
Many Sabah and Sarawak leaders and residents feel that the federal state hasn't sincerely worked at granting autonomy. Instead, it imposes bureaucratic regulations and a migration policy that has brought more Muslim populations into the states.
On the other hand, the tension between the federal government and the two states is reflected in neglected economic development. Even recently, many residents of Sabah and Sarawak still could not access electricity and tap water.
In Sabah, poor infrastructure and low-quality education are still critical problems as allocations from the federal budget have been small because of the state's low population -- just 3.5 million in a country of 32 million. Local businesses have also complained that investment opportunities in Sabah are not adequately promoted by the federal state, resulting in economic activity being concentrated on the mainland.
However, Mr Lo says he sees the wind of change starting to stir.
In December last year, the Malaysian parliament unanimously passed a number of constitutional amendments that recognise Sabah and Sarawak as equal partners to Peninsular Malaysia. Their status will be elevated to "Borneo States", as two of the three entities that make up Malaysia: West (Peninsular) Malaysia, East (Borneo States) Malaysia and the three Federal Territories of Kuala Lumpur, Putrajaya and the offshore financial centre Labuan. Previously, Sabah and Sarawak were defined only as two of 13 states.
This is supposed to lead to increasing economic opportunities in the two states, including larger annual budget allocations to fund development.
"This [resetting federal-state relations] is a work in progress, and it requires a lot of hard work. We are fighting for an equitable share of revenue," said Mr Lo.
Sabah leaders have called for allocations of 40% of the net revenue collected from the state as agreed during the formation of Malaysia in 1963. Instead, past federal governments provided meagre budgets that hindered poverty eradication and slowed economic development.
Sabah "will be avoiding the steepest part of the learning curve" by adopting already proven green technologies, says Vincent Pung Yee Kiong, CEO of Sabah Development Bank. SUPPLIED
FIVE-YEAR PLAN
The constitutional amendments are not the only positive sign of change.
In March last year, the Sabah state government led by Gabungan Rakyat Sabah (or Sabah's People Coalition) launched a five-year development plan (2021-25) known as Hala Tuju Sabah Maju Jaya (SMJ) -- a roadmap to establish long-term growth in three key sectors: agriculture, industry and tourism.
Increasing human capital and infrastructure networks and initiating green development are also priorities in the plan.
Hajiji Noor, chief minister of Sabah and state minister of finance, said that the SMJ would chart the new strategic direction for Sabah's economic development.
In the agriculture sector, accounting for 16% of Sabah's GDP in 2019, the state government will heavily emphasise building the value chain -- specifically production, harvesting, processing and marketing -- while making optimum use of technology, innovation and sustainability practices.
Increasing investment in enhancing infrastructure, innovation, and technology adoption will be highlighted in the industrial sector, accounting for 8% of GDP.
Mr Hajiji said that one of the highlighted innovations is the Industrial Tree Plantation (ITP), an initiative focusing on public-private partnership in reducing and relieving pressure on tropical timber and the forest.
Under the initiative, timber industry players will plant 80 million trees in the next decade, which will give 7 billion ringgit (US$1.7 billion) per year in return from the export of timber products.
It will be an economic game-changer to revive Sabah's timber industry to its former peak production of 12 million cubic metres in the 1980s, establishing 400,000 hectares of forest plantation and creating 40,000 jobs. It will also help Sabah achieve carbon-neutral status by as early as 2050.
"There are many opportunities to leverage multiple sectors across the state. Sabah has secured 4.4 billion ringgit worth of foreign investments as of June 2021, the third biggest in the country. And we are confident Sabah is and will be an attractive destination for investment," said Mr Hajiji.
"I have stressed from the onset that we want to be investor-friendly, and we will ease all hurdles to facilitate all investments."
Sabah's tourism sector, which normally contributes 10% of GDP, has been severely affected by the Covid pandemic. Tourist arrivals plummeted more than 70% in 2020, reducing the number of visitors from more than four million to less than a million. China and South Korea contributed about 68% to the international arrivals total before the pandemic.
"This pandemic has made it clear that a tourism rebound will certainly require a different approach whereby business as usual is no longer an option," said Noredah Othman, chief executive officer of the Sabah Tourism Board.
She stressed the need to expand the tourism market to attract more resilient target groups, including high-quality tourists and digital natives looking to combine work opportunities with travel. This requires more investment in digital infrastructure and well-connected air connectivity, she said.
"We should not rely for everything on particular sources of income," says Wong Khen Thau, Sabah chairman of the Malaysian International Chamber of Commerce and Industry. SUPPLIED
INVESTING IN PEOPLE
Investment in Sabah has made a significant push recently. The value of approved projects last year surpassed 5 billion ringgit, the highest in history, despite the pandemic.
The state government also signed a memorandum of understanding with the Linaco Group, a coconut manufacturer in Malaysia, which has committed to invest 200 million ringgit in and develop large-scale, high-yield hybrid coconut plantations, which will create 4,250 job opportunities.
In early January, the state government and Petronas, the national oil and gas company, co-launched the Sabah Gas Master Plan that identified strategies and potential natural gas development in Sabah, including at the Sipitang Oil and Gas Industrial Park.
Last but not least, the 12th Malaysia Plan 2021-25 launched last year has addressed development allocations and plans for Sabah and other less developed states, showing a positive sign of the federal government's commitment to distribute resources and development.
Despite the promising outlook, experts agree that more work needs to be done, especially in green and inclusive development.
"We are still backward in our supporting infrastructure such as expertise, logistics, power stability and the interconnectivity of our internet. But being late to me is also a huge blessing," said Vincent Pung Yee Kiong, managing director and chief executive officer of Sabah Development Bank.
He raised the example of China's leapfrogging experience, which has allowed the country to adapt, reinvent and rewrite best practices and use technology to improve on old development paradigms that damaged the environment.
"For example, power generation by coal is already a dirty word, and it's getting extremely difficult to finance," said Mr Pung. "In recent years there's been a shift in expectations toward green and sustainable development among the global community. Sabah, in this respect, is in a better position to adapt and capitalise on proven green sustainable technology to unlock its potential. Thus, we will be avoiding the steepest part of the learning curve."
Richard Marshall, senior economist with the United Nations in Malaysia, Singapore and Brunei, raised concerns over a large population of undocumented labourers locked in subsistence activities, informal employment and poverty because of their inability to obtain proper registration.
Undocumented workers are a critical issue that needs to be addressed from the perspectives of welfare, productivity and the overall economy to move Sabah toward a high-value economy, in his view.
"This is a drag on Sabah's overall productivity. It's bad for them in a welfare sense but also bad for the economy," said Mr Marshall.
"There's a need to build back better in the crisis, address productivity challenges and promote inclusion. We notice the allocations in the 12th Malaysia Plan.
"But it should not only be about infrastructure and those types of hard investment," he continued. "It also needs to lead private sector flows, crucially, on the human side -- investing in people, investing in education and training, and finally, tackling the issue of undocumented workers and the drive and productivity that they bring to the Sabah economy."
