Critical Shifts Needed in Malaysia’s Economic Thinking

LABOUR IS FINITE, especially in the context of Malaysia which has not had a demographic dividend since two decades ago. Malaysian employers and policy makers need a paradigm shift to invest in productivity and to be willing to pay for skills.

Employers in Malaysia often lament the shortage of talents but there will be no solution to the challenge until and unless it is framed as a pay question.

Malaysia, especially Penang, suffered massive unemployment from around the late 1960s as a result of the advent of baby boomers onto the job market. The export-oriented industrialisation first launched in Penang by Tun Dr. Lim Chong Eu’s state government in the early 1970s solved unemployment among the relatively small group of urban youths, and facilitated the massive migration of rural youths into urban jobs.

Their wages were low by international comparison, but the men and women (the latter forming the majority) in the electrical and electronics sector in the 1970s and 1980s were comparatively very well paid domestically. Compared to what? For a Chinese youth living in George Town’s inner city, compared to unemployment and absence of income now that Penang Port had fallen into decline with the withdrawal of the state’s free port status in 1967, a job in the nascent Bayan Lepas Industrial Park was extremely uplifting. For young Malay women from rural Selangor and Negeri Sembilan, a factory job in the free trade zones in Shah Alam or Sungai Way was socially transformative. There were plenty of social gains and upward mobility to be had.

Over time, however, and by the time the economy took off from 1988 to 1997, it was already evident that a low wage, low skill, low productivity model was not really sustainable.

Reviewing the Labour Market

A new and proactive perspective regarding our labour market is very much needed today. Malaysia’s and Singapore’s labour markets are, in reality, almost one single entity. If Malaysian workers are paid too low, they would most likely move someplace geographically convenient and culturally similar, with a higher wage. Where else, if not Singapore?

There is little point complaining that too many Malaysian engineers leave for Singapore after two or three years working in Penang. It is not as if Malaysia does not have a sufficient supply of young engineers. It is the inability or unwillingness on the part of corporations to pay these people adequately to make it worth their while to stay.

The corporations often retort that the dire situation is the result of currency differentiation. This is far from the whole story. It is practically certain that if Malaysian employers are prepared to pay just two-thirds of what Singapore pays to attract Malaysian workers, they would be able to turn things around and retain most of their employees.

We also know that many qualified technicians avoid formal employment and an industrial salary and prefer, instead, to enter into the gig economy as an e-hailing driver or food delivery rider. Again, it’s a pay question.

Accepting the fact that pay in Malaysia is psychologically benchmarked to Singapore’s is a good start for a paradigm shift. To pay more in order to retain good engineers and to stop good technicians from becoming food-delivery riders, Malaysia must work towards building a high wage, high productivity, highly skilled and technologically advanced economy.

Planning the Future of Industrialisation

The next question concerns the sort of investments and industries we wish to attract into the Malaysian economy. High approved investment figures do not guarantee anything if they do not lead to decent paying jobs for Malaysians.

The New Investment Policy (NIP), which was launched three days before Parliament was dissolved last year in October, outlines what our goal is in the procurement of investments for Malaysia.

According to the National Investment Aspirations (NIA), on which the NIP is based, the goal is to first increase the complexity of the economy to avoid the country becoming dependent only on one or two sectors. To achieve this, local R&D capabilities and greater innovation will be enhanced. Additionally, support is to be given for industries higher up the value chain to transition into more differentiated and higher value products.

Secondly, high-value jobs need to be created. Policy makers must understand that low pay and the country’s heavy dependence on unskilled foreign labour are slowing productivity gains and innovation as there is little need for businesses to automate or do things differently from what they have been doing.

Thirdly, the domestic industrial ecosystem needs to expand and deepen. Moving forward, Malaysia seeks to expand and further integrate local supply chains into global value chains, further enhancing knowledge diffusion and ensuring a greater degree of economic spillover for the nation. The country cannot continue relying on foreign direct investments to steer its economic upgrade.

Three Key Imperatives

Key imperatives moving forward is for the country to: (1) Ensure stronger linkages and knowledge transfer between companies; (2) Drive more facilitative policies for local companies to expand and internationalise; and (3) Strengthen the capabilities of local companies to develop higher value products and services.

Fourthly, clusters will continue to be a key catalyst in driving Malaysia’s industrialisation. As such, the country’s investment policies will take an increasingly facilitative approach in new cluster development, focused on new high-potential industries while continuing the development of existing clusters.

And finally, we need to improve national inclusivity. This involves taking strong and accountable public action to dismantle geographical and other barriers, and to expand opportunities for the wider population – particularly in ensuring job opportunities, access to education and affordable healthcare. Building strong foundations through human capital investments will be essential in achieving the economic productivity needed to accelerate Malaysia’s transition to a high-income nation.

Developing long-lasting, high-skilled jobs will bring significant productivity gains. This calls for a greater emphasis on R&D, innovation, capacity building, and high-quality FDIs, as well as the adoption of IR4.0 technology, automation and process improvements.

In order for the Malaysian economy to advance over the next few years, we must work to build a middle class community that is larger than the bottom class.

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