thestar: Malaysia must act now to retain competitiveness

Wednesday March 31, 2010

MALAYSIA’S gross national income (GNP) is about US$7,600 annually or RM2,200 a month and currently, almost 4% of all Malaysians and over 7% of rural Malaysians live below the poverty line.

The NEM report said that half a century after independence, these figures provided a sobering reminder of how far Malaysia still had to go before it could become an advanced, high income economy.

From independence in 1957 until the Asian financial crisis, Malaysia’s economic development was impressive by any measure. In the mid-1990s, in the run-up to the 1997 Asian financial crisis, Malaysia’s gross domestic product (GDP) grew at an average rate greater than 9% annually.



Since 1997, however, the GDP growth rate had been practically halved (not even taking into account the 2008 global financial crisis).

It said the Asian financial crisis was a watershed in Malaysia’s growth. Since the crisis, the country’s position as an economic leader in the region had steadily eroded.

The crisis also caused significant outflow of foreign portfolio investment and foreign direct investment as well as a fall in overall investment, which had not recovered.

Since the Asian financial crisis, Malaysia had seen a major change in aggregate investment trends. While countries such as Indonesia had seen notable recovery in investment levels since the crisis, Malaysia had seen no recovery, with aggregate investments levels as a percentage of GDP continuing to decline.

Although Malaysia ranked 23rd out of 183 countries overall, doing business in Malaysia was more difficult than in competing countries, especially in aspects related to entry and exit of firms.

Malaysia’s place on the Global Competitiveness Index had dropped to 24th in 2010 from 21st previously, indicating that the country was becoming less attractive as an investment destination. Institutional structures, processes and policies also contributed to the difficulty of doing business in Malaysia.

Export is, and had been for some time, a key focus of Malaysia. Exports had focused mainly on electrical and electronics (E&E) products which accounted for more than 40% of the country’s total exports.

GDP growth in Malaysia was sensitive to the fortunes of the E&E sector, where recent decline in global growth was quickly reflected in a fall in such exports, exposing the country to volatility in global markets.

Skilled jobs were most often synonymous with higher wages and in Malaysia, not enough high-wage jobs had been created.

This reflected the dominance in Malaysia of low value-added good which required low-skilled labour. As a result, only 25% of Malaysia’s labour force comprised highly skilled workers, compared with significantly higher proportions in Singapore, Taiwan and South Korea.

The human capital situation in Malaysia was not improving. Instead, the country was losing the skilled talent needed to drive future growth.

The exodus of talented Malaysians was further compounded by the fact that the education system, despite high fiscal outlays through several reform efforts, was not effectively delivering the skills needed.

Against the backdrop of strong economic growth and the New Economic Policy, Malaysia had made impressive headway with regard to overall poverty reduction.

Inequality, however, remained a real challenge for Malaysia. Although absolute poverty had been reduced, 40% of households continued to have very low income levels, particularly those in rural areas.

Starting as a low-income country in 1957, Malaysia briskly climbed the ladder to attain upper middle-income status by 1992.

But since becoming an upper middle-income country, Malaysia had largely stayed where it was. Although its income trajectory continued to exhibit a gradual uptrend, the country remained far below the “high income” boundary.

As global investors were increasingly turning to large-scale markets to lower costs, small economies like Malaysia must remove all costly barriers to give investors compelling reasons to put their money and create high wage jobs here.

Malaysia must act now before its position deteriorated any further.