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Malaysia must rethink its labour market to be truly high-income

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A worker works at a production line in Top Glove factory in Shah Alam, Malaysia, 26 August, 2020 (Photo: Reuters/Lim Huey Teng).

In Brief

Recently released World Bank projections forecast Malaysia achieving high-income status by 2025. But the same prediction made in December 2017 had Malaysia reaching the mark this year. While the COVID-19 pandemic is partly to blame, the downgrading of expectations predates the crisis.

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Malaysia’s upper-middle income period has lasted much longer than other economies that have successfully transitioned in the past 30 years, prompting sceptics to question Malaysia’s capacity to escape the middle-income trap. Political turbulence and reform stagnation have not helped.

As the World Bank stresses, high-income status is just an administrative classification based on average per capita income. It is not a true reflection of superior living standards. Indeed, the measure is especially misleading given Malaysia’s above average inequality levels and large undocumented population, both of which suggest averages overestimate the welfare of ordinary Malaysians.

Even on this crude measure, Malaysia is still no closer to being a prosperous and developed society than it was in 2013, when aspirations for a more inclusive country regressed with the Bumiputera Economic Empowerment Plan (BEEP).

A chief proponent of the ethnic Malay-favouring BEEP was then deputy prime minister Muhyiddin Yassin, who now holds the top job. He and his party have been central to the political merry-go-round of recent years, having twice exited governing coalitions and now confronted with another split. Facing dual pandemic and political crises, his first year in government has focused on public health, temporary economic relief and an inclusiveness vision that lacks specifics. There have been six economic stimulus packages totalling US$82.5 billion that demonstrate policy adaptability but limited foresight. While his prime ministership is tenuously sustained by state of emergency powers, Muhyiddin must demonstrate the reformist credentials necessary to inspire the transition to high-income status if he hopes for re-election.

Labour markets and associated policies must be central to Malaysia’s reform ambitions. Headline statistics showing consistently low unemployment and reasonable overall participation rates disguise more nuanced concerns regarding effective functioning.

Low unemployment is a by-product of having a very limited safety net. Malaysia’s social expenditure footprint is extremely low for a country of its development, and with spending spread thin due to poor targeting, the neediest recipients receive comparatively little. Only about half of employees are covered by employment-based social protection schemes, leaving the remainder particularly vulnerable to job loss. The absence of a comprehensive unemployment insurance scheme disempowers workers, discouraging mobility and reducing leverage to negotiate wages and conditions.

Headline statistics also mask underlying concerns for several individual demographics. Female labour force participation remains 10–15 per cent lower than peer-group averages despite improvements in recent years, with a lack of access to affordable childcare and stubborn beliefs around male breadwinners being the primary reasons. Parental leave provisions could also be more generous and gender neutral, and more could be done to address unequal pay for equal work. The government has been promoting flexible work, including providing tax incentives for employers as a pandemic relief measure, but stubborn practices are proving hard to shift.

Participation among older workers is another missed opportunity, with an official retirement age of 60 and a minimum pension withdrawal age of 55 — both too early given Malaysian life expectancy is around 76 years. This has a significant influence on workforce behaviour, incentivising both voluntary and involuntary early retirement.

Youth unemployment is also a major concern, with unemployment in the 15–24 age group almost seven times that of middle-aged workers. Alongside this, over a third of all tertiary educated employees are in jobs below their skill level. Concerns that Malaysia is prematurely deindustrialising have worsened persistent difficulties in creating skilled jobs and capable graduates.

Malaysia’s past success was built on basic education and international openness. But generating advanced industries requires greater leaps in higher education, soft skills development, digitisation, innovation capacity, services sector liberalisation and institutional quality. It also requires greater investment from the business sector, given less than 19 per cent of firms provide employee training — about half the average for comparable countries.

Disincentives for employees to invest in their own development come from persistent inflexible management practices including valuing seniority over meritocracy. Disincentives for employers to invest in employee development stem from a dependence on short-stay foreign workers. Visa policies providing more red tape than rights create a revolving door of legal migrants and a large irregular workforce, neither of which has an employment status conducive to skills development.

Businesses persist with lower skilled processes — generating jobs unsuited to local graduates — and the best and brightest migrants lack legal pathways to contribute to Malaysia’s long-term development. Moving away from a perpetual ‘temporary’ foreign worker system to one better aligned with long-term stakeholder incentives and labour market needs is critical.

Meanwhile, ethnic discrimination policies limiting education and employment opportunities often compel minority groups to take their talents elsewhere. Malaysia’s nearly 2 million strong diaspora is disproportionately skilled, ethnic Chinese and particularly benefiting neighbouring Singapore. Tax incentives to encourage their return are wasteful when their departure could have been avoided by removing barriers to inclusiveness.

Should Malaysia ultimately achieve high-income status, it will be of little substance if inequality of opportunities and outcomes continue to divide society. Malaysia’s political leaders must not waste the pandemic impetus. Targeted safety nets, retraining programmes and job matching services that have emerged as temporary relief must be systematised. It must also undertake substantive reforms to address barriers to female workforce participation, young and old employability, equal opportunity across ethnic groups and investment in workforce skills development.

Without this, Malaysia’s aspiration of high-income living standards will remain a distant oasis and it will remain in a middle-income a trap of its own making.

Stewart Nixon is a Research Scholar at the Crawford School of Public Policy, The Australian National University.

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