The Sabah economic model: A general overview


By: Dr. Rafiq Idris

SINCE the formation of Malaysia in 1963, Sabah has accomplished many things in terms of economic development. Infrastructure has improved. Per capita income has increased by many folds. Poverty rate has also been reduced significantly. In addition, Sabah has become one of the biggest producers of petroleum, rubber and cocoa in Malaysia and palm oil in the world. 

The trade performance is no exception. Sabah’s trade was recorded to be US$154.4 million in 1962 (R. Idris, 2015) while in 2011 the trade value was reported to worth approximately US$27.3 billion (R. Idris, 2015). 

Sabah’s trade sector has also become more dynamic with more diversified export products are reported in the last four decades. 

Service sector is the main contributor to Sabah’s economy. In the early years of independence, the first sector economy such as natural resources and agricultural products were the most important contributors. 

Gradually, there was structural transformation when the economy shifted to service sector, as the main contributor to the economy. Sabah has a large reserve of hydrocarbons and minerals. In fact, Sabah’s rainforest is one of the oldest in the world and is highly diverse in flora and fauna. 

Apart from commercial harvesting of timber resources, the rainforests of Sabah also provide opportunities for eco-tourism, extraction of non-timber forest products and medicinal plants for the pharmaceutical industry. Despite all these, some argue that Sabah should and could have done better. Some even claim that Sabah is still backward compared to many other states in Malaysia. 

In this regard, some view that Sabah's economic performance is “underperforming” due to inadequate allocation from the federal government, lack of autonomy in decision-making and infrastructure, among other things. 

Obviously, there are still many issues that require serious attention such as non-favorable food self-sufficiency level or deficit food trade balance position (R. Idris, 2016), regulation and institution transformation issues in areas such as labour and business licensing and even unstable water supply in certain areas. 

Moreover, it might also be that Sabah is in the present economic circumstances due to non-conducive policies.  The question now, what is the best comprehensive economic or econometric model that can explain the variables that influence Sabah’s economy?  To what extent drafted economic plans so far were based on a comprehensive economic model? Have all policies been introduced considered the various inter-related variables in the economy? 

This article highlights my personal view as well as the view of many stakeholders that were obtained from my ongoing study on Sabah’s economy. Inputs are obtained from various stakeholders in some main districts in Sabah. 

An ongoing study of Sabah’s economy headed by myself and a group of researchers from Universiti Malaysia Sabah (Research grant: SDK0094-2019) look into this subject. This idea proposed in this article are merely suggestions that might have been the thought of many Sabahans including policy makers. Some might also be in the plan or pipeline for implementation.

Proposed model and recommendations

Equation 1 in figure 1 shows the typical component of a country’s Gross Domestic Product (GDP). It consists of four key elements of an economy; consumption, investment, government expenditure and net export. 

GDP is the monetary value of all final goods and services produced within the geographical boundary of a country over certain period of time. In other words, it is the total income or production of goods and services in a country. 

Equation 2 in figure 2 shows the highly aggregated sectors which contribute to Sabah’s economy. They include agriculture sector, mining sector, service sector, manufacturing sector and construction sector. In 2019, service sector contributes 46.1pc to Sabah’s GDP. Mining, agriculture, manufacturing and construction sector represent 26.4pc, 16.1pc, 7.6pc and 3.6pc of Sabah’s economy respectively. 

Equation 3 of figure 3 depicts the component of a proposed Sabah’s Econometric Model where it presents some of the key determinants of Sabah’s economic performance. Those variables in equation 3 (in figure 3) directly or indirectly have influenced on the variables in equation 2 (in figure 2) and equation 1 (in figure 1). 

In other words, it implies that budget allocation, capital stock and technology, infrastructure, policy and autonomy in decision making, institutions, business cost, labour supply and skills, external economy and shocks have influenced on all the aggregated sectors mentioned in equation 2 (figure 2) which are namely agriculture, manufacturing, mining, service and construction sectors.

It also indicates that budget allocation, capital stock and technology, infrastructure, policy and autonomy in decision making, institutions, business cost, labour supply and skills, external economy and shocks influence all the GDP components mentioned in equation 1 (figure 1) which are namely private consumption in the economy, investment in the economy, government expenditure and net export. 

Figure 3 shows the importance of infrastructure or enablers such as port facilities and airports in determining Sabah’s economic performance. Without proper infrastructure, the economic performance will be affected. 

In addition, stable water and electricity supply play a key role in supporting economic activities. Production activities will be disrupted by unstable supply. Stable supply may attract more investment. Besides that, some viewed insufficient allocation for the state by federal government has also slowed down development process.

The fact is, Sabah is a huge state. Certain administrative districts such as Beluran alone is bigger than a few states combined in West Malaysia. As such, sufficient allocation on infrastructure is important.

Besides, as depicted in many economics text book, capital stock, labour supply and skills as well as productivity (which is related to level of technology) play important role in determining economic growth.

It explains why certain countries grow faster compared to others. Availability of right labour force and businesses in the economy determine the performance. 

Supply of labours, labour type and capital do influence economic outcome.

Furthermore, non-conducive or less business friendly policies also have a major influence on Sabah’s economy.  For example, maritime policy, labour market related policy, investment policy and policy related to industrial parks have been identified as among the policies that need significant improvement. 

Apart from that, centralisation of decision making and lack of autonomy may have influenced the performance of Sabah’s economy. The insufficient space to solely decide on maritime policy, investment agenda, export promotion and infrastructure development would affect the performance of Sabah’s economy in the long run. 

Moreover, the cost of doing business also requires state intervention. Expensive land or property price and higher logistic cost, among others, make business cost to be higher, hence reducing competitiveness. These certainly have effects on the economy. In addition, institutions and administration also play a part in affecting the economic performance of any countries. 

Less efficient services though gradually improve have effect on the economy. There is a need to further transform institutions so that effort to implement and achieve good economic plan can be done. 

“Shocks” also influence economic performance. Shock here refers to any situations or events that affect economy beyond normal circumstances. Shocks include economic crisis, natural disaster such as earthquake, sudden disease spread and sudden change in regulations due certain circumstances such as Covid-19 where it restricts movement of people. 

Lastly, the effect of external economic situation on the performance of domestic economy must also be considered. Recessions and changes in trade policy of major economies have effects on domestic economy. Export to these economies will be affected.

Table 1 depicts the summary or checklist of things that are within government and domestic firms’ control which are necessary to boost Sabah’s economic performance and to influence at least certain variables stated in equation 3 (figure 3), equation 2 (figure 2) and equation 1 (figure 1) based on the inputs obtained from several stakeholders as well as the author’s view. There are still many factors that can influence the economy and not limited to those in Table 1 (right).

All in all, the preliminary findings of the study revolve around the issues, challenges and variables which influence Sabah’s economy highlighted by some stakeholders who took part in various interviews or focused group discussions in major districts in Sabah. 

In order to improve Sabah’s economic performance, the actions, policies or regulations or incentives should be targeted at related variables mentioned above and other factors not mentioned in this article. 

Recommendations mentioned in table 1 can be considered and there are still many rooms available for improvement. Economic Model proposed in this study is a simplification of how different variables affect 

Sabah’s economy. It explains the factors that influence Sabah’s economic performance as a whole. Some of them are not new idea, but may have not been implemented. 

The things discussed might not be easy to implement and are subject to many constraints. 

Having said that, I believe that the state government has better plan for the development of Sabah. It is hoped that Sabah is focusing on the target of achieving developed and high-income status.

Dr. Rafiq Idris is an Economist and Senior Lecturer from the Financial Economics Programme, in the Faculty of Business, Economics and Accountancy, at Universiti Malaysia Sabah (UMS).



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