Source Center For Market Research

KUALA LUMPUR, Malaysia:Voters in the states of Selangor, Negeri Sembilan, Penang, Kedah, Kelantan, and Terengganu will head to the polls on Aug 12. According to the Center for Market Education (CME), state elections are a good opportunity to propose economic reforms that may be beneficial for the country as a whole. 

"After the post-GE15 enthusiasm, the content and the spark of the debate on economic reforms have dropped – said Dr. Carmelo Ferlito, CME CEO – and state elections should become an occasion to relaunch that debate so that the discussion would not be limited just to seat allocations".

We have already seen how the implementation of policies inspired by populistic reasons, such as the GST removal, have been detrimental for the country. CME hopes that state elections will be the chance for PM Anwar and the unity government to promote a brave reformist agenda and that the elections outcome will place them in the conditions to pursue that agenda: with four more years to rule ahead – and the emergence of the long-term pro-investment platform described with Ekonomi Madani – Anwar can lead a series of beneficial, although unpopular, measures. This would include, among others, tax reforms, liberalizations and harm reduction strategies on different crucial fronts.

One important topic of discussion that must be raised before voters head to the polls is fiscal devolution, defined as legislation that will increase the power of local governments to collect fiscal revenues and spend these revenues for local development programs.

Often, fiscal devolution is criticized as an enabler of inequality, with different local councils getting less than different parts of the country. However, this critique seems misplaced. As reported by the think-tank New Local, a study from the University of Sheffield demonstrated that the UK, despite the low level of fiscal devolution, has a higher level of regional inequality than any other large wealthy country. Furthermore, research by the OECD has shown that fiscal decentralization is positively correlated with a range of outcomes, including an increase in GDP per capita.

How could this be applied to the Malaysian case? According to CME, a good starting point would be the re-introduction of the goods and service tax (GST), which, in contrast to the previous system, should be collected at state level. Revenues collected by the state could remain within the state. As an example, 80 percent of the total could remain within the state, while the remaining 20 percent could contribute to the federal government’s budget.

Such a decentralized system could benefit two priorities for local governments; increased investment in development projects and greater resources to fight against poverty. With regard to poverty, local governments are obviously better placed to know what the real needs on the ground are. Therefore, they could better decide what to do and how, responding more directly to bottom-up signals.

A strong argument in favour of fiscal devolution is also the possibility for the states to implement, thanks to available resources, development projects which would be based on their local economic, geographic, and vocational conditions. Availability to collect and spend resources would create virtuous competition among states, pushing them “to fight” to attract investment opportunities thanks to an increased power of action. This would produce positive effects for Malaysia as a whole in terms of FDI attraction.

A very practical example: if GST is locally collected, a state could deploy a competitive strategy whereby key investments would benefit from preferential fiscal treatment. This system could become a strong driver for innovation and create employment opportunities for the most competitive territories.

Think about the agreement between Tesla and the federal government, whereby some beneficial treatment for the electric vehicle (EV) producer (no approval permits or APs required) is granted. Tesla is positioning Malaysia to be part of the development of the regional EV industry, adding that one of the main reasons the company has opted for investing in the country is the current government’s “support in forward looking policies” for the sector.

With the right fiscal tools available, local governments can further boost this strategy – which belongs to the whole harm reduction toolbox – by favouring investments, research, and development in multiple industries, thanks to (but not only to) preferential fiscal treatments. Clear, positive, effects can be produced by this strategy in Malaysia, creating a virtuous cycle of investment and development in the country.

Fiscal devolution and forward-looking policies could become extremely important drivers for economic development at state level, whereby a mix of new revenue collection and spending powers could lead the way for pro-investment initiatives. These policies could nurture investments, for example, not only in the crucial EV industry, but also in the field of sugar alternatives or nicotine consumption.

Tobacco and sugar harm reduction policies could be best supported at federal level with the decentralized pro-investment action made this possible at state level by the fiscal reform we suggest. In this way, while the states could focus on the building of a pro-investment and pro-innovation environment at local level, the federal government could focus on the implementation of forward looking policies inspired by scientific evidence, like done in the United Kingdom, New Zealand and the Philippines: these countries, embracing harm reduction, are achieving public health objectives and spurring innovation via FDIs which in turn are strengthening the economic value chain for several industries.

In conclusion, state elections can become an occasion to further promote the debate around the importance of innovation and how it can sprout out of local entrepreneurship within the right institutional framework. Discussing fiscal devolution would raise awareness on how state governments can be protagonists in the development process if they would have direct access to revenue collection and subsequent expenditure decisions.