Middle income-trap – Malaysia has shot itself in the foot!

Malaysia’s Development Strategy Revisited (2)
by Dr. Mohamed Ariff*

Input-Driven Growth unsustainable

It goes without saying that Malaysia must grow at a faster pace if it is serious about joining the club of developed countries by 2020 – hence the need to reinvent itself through reforms that can help restore the lost growth potential. Malaysia has learned the hard way that input-driven growth is unsustainable. It is instructive to note that the economy was growing at a rate of over 8.0 per cent in the early 1990s despite declining total factor productivity. To stay competitive, the growth strategy then was to keep wages low with the aid of a large migrant workforce. Obviously there was a dismal failure to understand that there were limits to economic expansion through input increases.

Migrant Workers depress wages

It was a major policy blunder to let migrant workers depress wages in the country, thereby throttling productivity improvements. Malaysia locked itself into low value-added manufacturing by allowing foreign workers to work in the sector for low wages, thus removing the incentive for manufacturers to automate. The size of the problem is huge: the country reportedly has 1.9 million registered migrant workers and another 600,000 unregistered ones (probably an underestimate), accounting for nearly one-fifth of the working population. These workers are not confined to the so-called 3D jobs – the difficult, dirty and dangerous jobs that the locals shun – but compete with Malaysians in the wider labour market.

This is a race that Malaysian workers are bound to lose, as migrant workers are willing to accept lower wages and work longer hours, with no laws – let alone enforcement of laws – in place to protect their rights. Unless and until there is equal pay for equal work, the employers’ penchant for migrant workers will continue unabated.

This is not to deny that Malaysia needs the services of foreign workers, both skilled and unskilled. But care must be taken to ensure that they are treated with dignity and fairness, and not exploited by agents, employers and the authorities. Condoning the injustices inflicted on foreign workers only serves to increase the demand for foreign workers, to the detriment of locals in the labour market.

Productivity Gains Needed

Malaysia has inadvertently fallen into a middle-income trap by adopting an ill-conceived policy of preserving its fading competitiveness through suppressed wages. High wages need not mean high labour costs if the increased wages are backed by productivity gains. By the same token, low wages may not translate into low labour costs if productivity suffers. In the Malaysian context, the social cost of employing migrant labour far exceeds the private cost to employers. If the negative externalities associated with the excessive presence of migrant workers are taken into account, the short-sighted dependence on the migrant workforce turns out to be a costly affair. Obviously Malaysia has shot itself in the foot!

(to be contd)

  1. #1 by HJ Angus on Friday, 22 October 2010 - 11:56 am

    I agree that migrant workers may have unintended effects on the economy.
    The other factor that is hampering growth is the 30% surplus civil servants who are draining money from the amount that should be available for development. Someone else checked that 62% of every tax ringgit goes towards civil service salaries.
    If the government pays more attention to just these 2 items the domestic economy will improve.


  2. #2 by yhsiew on Friday, 22 October 2010 - 12:17 pm

    I believe it is not that the government is unaware of the fact that migrant labors depress wages in the country, throttling productivity improvements and confine Malaysia to low value-added manufacturing, but rather, the government is faced with little choice as there is a severe shortage of Malaysian scientists and engineers to help out in automating and computerizing plants and processes which are required by the manufacturing industry.

    The government should have emulated Singapore by taking in only qualified engineers, technical personnel and professionals. The initial cost involved could be heavy but the country would reap the benefits in the long run once the plants and processes are set up by these experienced people. The government should also consider implementing some technology-transfer programs or give incentives to private companies which practice technology-transfer or human resource development, so that Malaysian engineers and technical personnel, after being trained by migrant/foreign experts, are able to continue the job even if the latter leave the country.

  3. #3 by PoliticoKat on Tuesday, 26 October 2010 - 10:20 pm

    yhsiew :
    the government is faced with little choice as there is a severe shortage of Malaysian scientists and engineers to help out in automating and computerizing plants and processes which are required by the manufacturing industry.

    Sorry that is false. There are Malaysian scientist in abundance, spread all over the world. Just look in any university from UK to Germany to Japan or any multinational company from Google to Rolls-Royce. Malaysia has the scientist and engineers, it just doesn’t want to employ them. And given the work conditions in Malaysia, we don’t want to work in such an environment.

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