Malaysia on track to achieve high-income nation status

• May 25, 2021

THE World Bank recently reckoned that Malaysia will likely transition from an upper-middle-income to a high-income nation between 2024 and 2028.

While Malaysia has long been a middle-income country, achieving a high-income nation status will essentially require collaborative, strategic efforts from all parties involved.

As of 2020, the threshold to be classified as a high-income nation stands at gross national income (GNI) per capita of US$12,535 (RM51,907.43).

Malaysia’s GNI per capita currently stands at US$11,200 (RM44,800), only US$1,335 (RM5,340) short of the current threshold level that defines a high-income economy.

While moving through the various stages of development, Malaysia found itself as a middle-income country with slower productivity growth since the mid 1990s. Before the Covid-19 pandemic, data showed that productivity growth per hour was 1.4% in fourth-quarter 2019; this is significantly lower than previous quarters (third-quarter 2019: +2.6%, second-quarter 2019: 2.3%, first-quarter 2019: +2.5%).

A similar pattern seen in productivity growth by employment also registered 1.4% in fourth-quarter 2019, falling from an average of 2.4% between first-quarter 2019 and third-quarter 2019. This is further dampened by the pandemic, which pushed labour productivity to contract 5.5% in 2020.

Malaysia recorded a productivity of US$68,473 (RM283,546.69) in 2019, ahead of selected Asian countries such as Thailand, Indonesia, China and Vietnam. While the productivity level is better than some of the emerging countries, there is still ample room for Malaysia to close the gap with more developed nations, the closest of which are South Korea (US$80,566 or RM333,623.81) and Japan (US$82,382 or RM341,143.86).

From a competitive standpoint, slower productivity growth is the main challenge for Malaysia to become a high-income nation. Notably, this is primarily attributed to issues surrounding the reallocation of economic resources, limited technology creation, skills gap, low female labour force participation rate (LFPR) as well as structural issues in the labour market.

Reallocation of resources to high-end sectors at an early stage

Malaysia has now reallocated much of its economic resources towards the services sector (about 56% of total GDP). On the other hand, the manufacturing sector’s contribution to the country’s GDP has declined from an average of 32% during the 1990s to an average of 22.5% in the past five years.

It is important to note that the decline in the relative weight of the manufacturing sector due to its comparative dynamism vis-a-vis the services sector is no indication of its global competitiveness. As such, the importance of the Malaysian manufacturing sector should be reassessed as it is still key for new productive knowledge in modern economic activities, especially during this era of Industrial Revolution 4.0 (IR4.0).

While moving through the stages of development, the value added of the manufacturing sector has started to decline. With that, most of the economic resources have shifted towards other high-end economic activities such as the services sector. It is common to observe similar phenomena among high-income economies, where they abruptly move towards a higher productivity economic sector by adopting technology. However, Malaysia is experiencing it at a stage of lower productivity than most aspirational economies.

The Malaysian government has recently emphasised transforming the local manufacturing sector to focus on high value-added and knowledge-intensive industries. The main focus is to shift from input-driven to productivity-driven growth to garner a higher contribution from total factor productivity. Achieving this will require developing an economy that relies heavily on skills, innovation and knowledge.

New technology creation to provide further impetus

To achieve Malaysia’s aspiration of becoming a high-income nation, acceleration in new technology creation should be given priority. Technology creation in Malaysia is mainly dependent on multinational corporations (MNCs) transferring their knowledge to local workers. However, this is not always the case. In fact, it is widely known that MNCs that operate in Malaysia prefer their own suppliers and have brought in expertise or labour from their home countries.

These MNCs only outsource simple processes without any value-add to local firms. They have less incentive to train and may only provide sub-optimal training for local employees. This, in turn, creates limited productivity gains in the labour market.

According to the 2021 Innovation Index Report, Malaysia ranks 33rd as an innovative nation and the second-most innovative middle-income country. Notably, Malaysia is among the top high-tech net export countries globally. However, participation in research and development activities remains moderate, as indicated by its 29th rank globally, which is down two positions from 2019.

This is also evident by the number of patent applications, which has remained low at 2,122 in 2019 – significantly lesser than other regional countries such as China (1,327,847), South Korea (248,427) and Singapore (7,354).

Other factors that drive limited technology creation and diffusion is the lack of strong intellectual property (IP) environment. According to the International IP Index, Malaysia’s overall score increased to 51.61% in 2020 from 51.24% in 2019. Nevertheless, over the past nine years, Malaysia has improved its national IP environment, particularly for copyright protection.

In the same period, Malaysia’s high-technology manufacturing and exports had grown substantially. We believe there is still room for improvement, especially in terms of commercialisation and technological transfer.

The US Chamber of Commerce’s Global Innovation Policy Centre found that economic growth strongly correlates with a country’s IP index for innovation-based economies such as Singapore. This is why Malaysia should strengthen its IP regime. This can be done by creating an appropriate environment for technologies to flourish while pushing the pace of innovation in domestic firms through incentives.

Based on the components that make up the IP index, priority should be given to patentability, licensing terms, IP rights enforcement, and SMEs’ creation and utilisation of IP assets.

The World Bank recently estimated that up to two-thirds of all jobs in developing countries are susceptible to automation amid the unprecedented disruption caused by IR4.0. The World Economic Forum projected that nearly two-thirds of today’s primary school students will be employed in jobs and industries that do not currently exist.

Therefore, it is essential to amend the existing economic trajectory and industrial relations through innovation and technology and rapid digital adoption.

The pandemic has significantly boosted digital adoption among Malaysian businesses due to the various movement restrictions. Nevertheless, there is still room to improve digital adoption, especially for micro and SMEs (MSMEs). One of the biggest challenge for SMEs to adopt digitalisation are financing, employee skillset and inadequate technology knowledge/exposure.

To encourage SMEs to embrace digital adoption, government incentives and awareness campaigns are essential. This includes encouraging SMEs to adopt digitisation for their back-end processes such as administration, data processing and accounting, on top of focusing more on front-end business processes such as e-commerce. Companies should invest in efficient managerial practices and work procedures, advanced machinery and technology and skilled labour.

Structural challenges in the labour market

For Malaysia to achieve a high-income status, it is also crucial to have a labour market with high productivity and a skilled workforce. However, there are still common challenges across all sectors that impede productivity breakthroughs such as income gap, skills gap and industry structure.

For example, issues such as skills gap among local graduates are not new. They are due to the mismatch between industry demand and supply from higher learning and technical and vocational education and training institutions.

Along with that, the low creation of high-skilled jobs has lagged behind the supply of graduates. Bank Negara estimated that between 2010 and 2019, the share of high-skilled job creation in Malaysia declined to an average of 27% from about 51% in the previous decade. This corresponds to 86,200 employment gains per year. Meanwhile, the number of graduates in Malaysia has increased by an average of 151,000 persons over the same period.

In Malaysia, high-skilled jobs make up only around 24% compared to more than half in the United States. Structurally, most industries in our economy remain at the lower end of the production value chain. Despite various incentives in place, the creation of skilled jobs remains limited. The overdependence on low-cost labour has further perpetuated a labour-intensive economy, suppressing wages and being a disincentive to automation.

We need to implement the right initiatives to generate skilled jobs with higher productivity and wages to attract better quality investments into Malaysia. As such, the foreign direct investment (FDI) strategy assessment should be prioritised and focused on high-end sectors that could contribute to stronger growth and employment prospects in the long term. This must also take into account the quality of innovation, automation, creation of new technology and commercialisation of intellectual property.

Despite women outperforming men academically, Malaysia faces a low female labour force participation rate (LFPR) compared to their male counterpart. The Statistics Department reported that female LFPR stood at 55.4% while males’ at 80.6% in 2020. Many women have cited housework as the main reason for not being part of the labour force. It is essential to introduce more economic and societal support for women, complemented by improved economic opportunities and fair competition for women through legal reforms.

Huge number of foreign workers

Malaysia’s reliance on foreign labour is another challenge that impedes productivity growth. The percentage of foreign labour has been increasing steadily since the 1990s due to the large demand for cheap labour wages.

According to the Immigration Department, in 2019, excluding illegal foreign workers, 2.3 million foreign workers accounted for 13.2% of Malaysia’s total labour force. This is a significant factor suppressing local wages and deterring the country’s progress towards a high-productivity nation.

In terms of income, the Statistics Department reported that the mean monthly salaries and wages increased 4.4% to RM3,224 in 2019 from RM3,087 in 2018. However, the absolute gap in the income share between the bottom 40% (B40) and top 20% (T20) household groups remains significant, as T20 household earns almost 50% of total income in Malaysia.

We must raise the income and purchasing power of the B40 household to reduce overall income inequality. As such, the implementation of various social assistance programmes such as cash assistance to B40 households should remain in place with further enhancements to close the income gap. It is important to note that successful high-income nations raise the average incomes and basic standard of living that every household can expect to achieve.

All in all, moving to a high-income status from a middle-income country is not an easy task. This could be attributed to factors that include resource limitations, appropriate policies and implementation issues. The Covid-19 pandemic further poses new challenges for Malaysia that could impede the nation’s aspirations of achieving high-income status.

In a post-pandemic world, Malaysia will need to emphasise on reskilling and upskilling the local labour force to build a more resilient economy that can withstand future shocks. The country should also escalate digital adoption among local firms and accelerate reformation in the labour market to achieve a breakthrough in its middle-income trap.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd.

Source: https://www.thestar.com.my/business/business-news/2021/05/22/malaysia-on-track-to-achieve-high-income-nation-status