Malaysia ranks as the third richest country in Southeast Asia, with income per capita of US$11,415 Purchasing Power Parity (PPP) in 2019, and has remained stuck in the middle-income trap. The journey towards reaching a high-income status will be regressed by the unprecedented COVID-19 global pandemic.
The pandemic has caused collateral damage to the country’s potential output growth in terms of either reduced capacity or destroyed capacity for some sectors; lower labour participation rate due to some jobs having been lost permanently and displaced by technology; dampened productivity growth as well as sharply falling capital stock formation.
While much of the Malaysian economy will gradually return to its pre-pandemic structure, some parts will be changed forever, a consequence of an imminent restructuring of the post-COVID-19 global economic order. Hence, the road back will require sweeping efforts from the policy makers, public and private sectors alike, to reflect on how to face the challenges of competitiveness, provide the appropriate framework for private initiatives and businesses to thrive as well as prepare our workforce for the new economic reality.
Structural challenges and weaknesses
Can the country rise to these challenges and rebuild its economy? The Malaysian economy has been plagued with structural challenges and weaknesses over the years, resulting in the country lagging behind its counterparts in many aspects while the newly emerging countries like Vietnam and Indonesia are fast catching up as Malaysia seems to be somewhat stagnating and the pace of change and advancement is moving slowly.
These challenges and issues include the complexity of business regulations and investment climate; slowing private investment; slower productivity and capital efficiency; low level of technology adoption, lack of innovation and technological advancement; shortage of skilled manpower; high dependency on low-skilled foreign workers; income inequality and regional growth disparity.
While Malaysia has seen steady improvement in the ease of doing business, it is far from satisfactory and can do much better to enhance its business and investment climate. Effective and targeted regulatory reforms are needed to reduce the burden of starting, licensing, and business taxation processes, business entry regulations and related factors, including land regulation, taxation, and labour regulations.
Malaysia is the ninth most complex country in the world for multinationals to do business in and the third most complex in Asia, according to the Global Business Complexity Index (GBCI) 2020 report.
Reducing red tape
This calls for the need of regulatory reforms to reduce red tape and burdensome at the Federal Government level, states and local authorities to streamline as well as ease unnecessary regulations and compliances on businesses.
(a) Starting a business: Local entrepreneurs continue to face cumbersome procedures to start and operate a business. Malaysia ranks 126th on this indicator, taking 8.5 procedures and 17.5 days;
(b) Paying taxes: Malaysia ranks 80th on this indicator as domestic companies spend an average of 174 hours annually to comply with fiscal obligations, slightly more than the OECD high-income average of 159 hours; and
(c) Legal rights and enforcing contracts.
There have been no reforms in these areas over the last five years and, hence, it is crucial to enhance regulations that protect the rights of lenders and borrowers, and improve the efficiency of the judicial system. For instance, the time needed to enforce a contract in Malaysia has taken 425 days compared to Thailand (reduced from 440 to 420 days), and in Indonesia (from 471 days to 403 days). According to the World Bank, businesses in Malaysia, for example, need 17 days to deal with procedures related to starting a business compared to 1.5 days in Singapore and Hong Kong and eight days in South Korea.
Malaysia’s productivity growth has remained weak (2.2 per cent pa in 2018-19) and the productivity level has been lagging behind Singapore, the US, Japan and South Korea. The advancement in productivity improvements were impeded by the shortage of skilled and talented manpower, low adoption of technologies, industry structure and firms’ commitment towards productivity enhancement as well as the mindset of both employees and employers.
The skill gap is the key hurdle to uplifting workers’ productivity. Currently, Malaysia’s industries are excessively dependent on semi- and low-skilled workers and foreign low-skilled labour, with the ratio of skilled workers to total employment, which is still low at 27.2 per cent as compared to the target of 35 per cent by 2020 set by the government. On average, labour quality contributed only about 8 per cent to real GDP growth over 2001-18, much lower than the OECD average.
Need for certainty
Businesses and investors need certainty on the supply of foreign workers. Industries would support the national policy of reducing over-dependency on foreign workers and be implemented in phases and in an orderly manner. We need a clear and consistent policy on foreign workers management (recruitment, placement, monitoring, enforcement and repatriation of migrant workers to their homeland). The Human Resource Ministry should be the sole body formulating policies for the recruitment of foreign workers while the Home Ministry should confine itself to security concerns and enforcement through the Immigration Department.
Skilled workers are crucial to facilitate innovation and technology adoption as well as to promote upgrading of industries to unlock potential economic growth and sustain competitiveness. The education system, the technical and vocational education and training institutions need to undergo major revamp and transformation to produce better skill set specialisation and high-quality pool of manpower to support the industries. The brain drain problem must be curbed.
The COVID-19 pandemic underscores the vital role of information and communication and technology (ICT) in business resiliency. Capital investment in ICT equipment as well as other machinery and equipment had decreased from 26.0 per cent in 2010 to 21.8 per cent in 2018. Although the manufacturing and services sectors contributed almost 79 per cent of GDP, the adoption of technology remains low at 37 per cent and 20 per cent respectively in 2018. The low adoption of advanced technologies and automation have limited improvements in production processes and productivity gains.
Robust digital infrastructure
As the digital economy and business world would require information and communications technology skills in the next 10 years, Malaysia’s standards in technical subjects such as science and mathematics still lagged behind most advanced economies.
A robust digital infrastructure is imperative to creating a time-tested ecosystem to speed up digitalised technology adoption, spur innovation and creativity, lower the cost of technology adoption and reduce the barrier of digitalisation for businesses and companies, especially SMEs in the adoption of progressive digital tools and applications in the journey towards IR 4.0, and empower our workforce and talent with digital and future skills to cope with the highly technical and continuously evolving technologies.
Levelling up human capital through reskilling and upskilling is imperative in a digitalised world. While robot automation will create more jobs than they displace, our people must continue to have creative skills and maintain an innovative mindset.
Lee Heng Guie is Executive Director of the Socio-Economic Research Centre (SERC).