The economists at the ADB has given a cogent analysis of the structural economic challenge now being faced by Malaysia. This has been bothering me for the longest possible time. Perhaps the part of the analysis set out below that annoys me the most is the view that the present structural deformities could have been avoided if Malaysia's economic planning had been more objective and less dogmatic. This may be one of the matters haunting the likes of Dr M and, if it isn't, it should. Not the least reason being the fact that he had a good 22 years of dominance to get it right. Structural economic deformities are not things that happened overnight. It is a slow and debilitating accretive process that could have been treated.
Malaysia’s manufacturing sector is reversing to a state reminiscent
of its post-colonial stage of development. Regrettably this situation
was avoidable.
When the Federation of Malaya gained independence
from Britain in 1957, economic conditions were ripe for rapid and
sustained growth. Its primary export sector was showing immense
potential for expansion. Primary
commodities — particularly tin ore and natural rubber — accounted for a
third of Malaysia’s GDP and over 75 per cent of exports by 1970, a
legacy of its colonial past.
But manufactured exports accounted for less than 10 per cent, raising
concerns that heavy reliance on a few commodities left Malaysia
vulnerable to terms-of-trade shocks from swings in commodity prices.
There was little economic diversification up to the 1980s, with already
undersized manufacturing focused on little more than processing
agricultural and mining output.
Several terms-of-trade shocks in
the early 1980s — followed by global recession a few years later — did
ultimately balloon fiscal and current account deficits, setting the
stage for radical reform. A new National Development Policy was
introduced in 1990, easing the affirmative action strictures of the
pro-ethnic Malay New Economic Policy (NEP)
and placing wealth creation ahead of wealth redistribution. The
Promotion of Investment Act of 1986 extended generous incentives for
private investors and relaxed regulations on foreign direct investment
(FDI), allowing for full foreign ownership of export-oriented companies.
Massive FDI inflows ensued.
These reforms opened Malaysia’s gates
to the global production network and it succeeded in developing a
vibrant and competitive electronics sector. Manufacturing grew sharply
from about 12 per cent of GDP in 1970 to over 30 per cent by the
mid-1990s. The share of electronics in manufactured exports soared from
below 50 per cent in 1980 to peak at more than 70 per cent in 2000. But
its share has fallen to below 50 per cent again in 2015.
While
Malaysia had an early start in electronics, it could not build on this
technological advantage. As wages started to rise, skills remained weak.
After the Asian financial crisis (AFC) struck in 1997, FDI in Malaysia
never recovered and domestic investment slumped as well. Since 2006,
Malaysia has been a net exporter of capital, a process many suspect is
driven more by capital flight than outward FDI.
Although a net
labour importer, Malaysia remains a net skills exporter, with growing
numbers of professionals migrating to Singapore and other welcoming
industrialised countries. With these developments, Malaysia’s good
fortunes have reversed in recent years, both in manufacturing and across
the economy.
Like its early post-colonial phase, Malaysia is
moving back to processing its agricultural and mineral resources. The
only difference now is that the commodities themselves have changed.
Rubber and tin have shifted to palm oil and petroleum. Petroleum
refining and palm oil processing accounted for almost 19 and 12 per cent
of manufacturing output in 2012, respectively — with both of these
industries now bigger than electronics.
While developing countries
are often encouraged to process agricultural or mineral outputs before
exporting to increase their value, Malaysia appears a rare example of an
upper-middle-income country — aspiring to high-income status — that is
stunting or even reversing its previous successes in manufacturing.
This
manufacturing retrenchment has been demonstrated by the overall
contraction of this sector’s share of GDP, which fell gradually to 24
per cent in 2008 to remain roughly at that level ever since.
Why
should we care about Malaysia’s manufacturing contraction? The main
concern about petroleum refining and palm oil processing is that they
are capital-intensive and generate few jobs. Despite their importance in
overall output, just 14,400 workers are employed in petroleum refining,
compared to the nearly 200,000 workers employed in electronics.
Furthermore, agro- and petrol-processing industries generate relatively
low-productive, low-skilled jobs and so wages are also low. The largest
share of manufacturing workers are plant and machine operators who have
an average annual salary of around US$4000 when per capita incomes
average US$11,000.
Malaysia may be experiencing ‘premature deindustrialisation’,
having transitioned to a service led economy before it has fully reaped
the benefits of industrialisation. But unlike many other countries with
similar experience, Malaysia’s case appears to be driven more by policy
than technological disruption, trade or globalisation. There is growing
recognition that many of the country’s problems — including the slump
in private investment — are rooted in the distortions resulting from the
design and implementation of the NEP and its subsequent incarnations. The government-linked corporations spawned to serve racial economic redistribution now crowd-out private investment in most sectors of the economy, including manufacturing.
If
Malaysia is to realise its aspirations and enjoy living standards
associated with high-income countries, it must arrest this structural
regression and revive private investment in manufacturing. But
regenerating manufacturing is unlikely without an overhaul of current
policies. And while Malaysia may still reach the technical threshold of
high-income status in a few years — assuming an economic crisis can be
averted till then — this will still mean little to the welfare of
workers in manufacturing if it continues its journey backwards.
