Competition begins at home

Much is being done to make sure M'sia can compete with the best on the world

BY now, most people would have heard of the term middle-income trap.

This describes a situation where a nation makes rapid progress in terms of economic growth and in increasing incomes from a low base, but is unable to make that final leap to becoming a high-income nation.

Why this happens is often not clear but economists theorise that once the economic factors of production such as land, labour and capital have been sufficiently harnessed, it needs real gains in productivity to further increase income.

Put in another way, there is only so much land, labour and capital. Once you have made optimum use of these, the next stage is simply to ensure that you use these much more efficiently, and that there is a further increase in productivity.

Are we stuck in a middle-income trap?

It’s too early to answer the question. If we don’t reach high-income status by our target date of 2020, then perhaps we are.

But let me tell you we are doing everything possible to get to high income.

In a nutshell, competitiveness is crucial for high income. We simply must do things better than before and more efficiently.

High income goal: ‘In a nutshell, competitiveness is crucial for high income. We simply must do things better than before and more efficiently.’

 

We need a technological and knowledge leap, and to foster an environment which breeds and encourages competitiveness.

To become a high-income country, we have to be globally competitive, and focus on areas where we can bring our competitiveness to bear with the highest impact in terms of economic contributions and earnings.

Often, we hear the New Economic Model or NEM which is aimed at moving us into a high income country, is dead and is replaced by the Government and Economic Transformation Programmes. Nothing can be further from the truth and I am keen to dispel this transformation blues.

The moves we are taking to transform arise from the NEM - we are NOT replacing it.

We are implementing the NEM as best as we can through measures aimed at making major changes to our operating environment.

The Strategic Reform Initiatives have been put in place as an enabling process.

The National Economic Advisory Council (NEAC) recommended in the NEM, 51 broad and cross cutting policy measures to enable us to realise our goal of transforming our nation into a high income, sustainable and inclusive economy. We are implementing, albeit at different stages, all the 51 strategic reform initiatives.

There are six areas in which we are making major changes:

·Competition, standards and liberalisation
·Improving public finance
·Better public service delivery
·Defining and reducing the Government’s role in business
·Human capital development
· Narrowing disparities

Like charity, competition begins at home.

We introduced the Competition Act, which is being enforced this year so that all anti-competitive behaviour among Malaysian industries can be removed and there will be free and fair competition.

This is a major milestone and our adoption of this, despite powerful vested interests, demonstrates our commitment towards a competitive economy.

We have made amendments to the Standards of Malaysia Act 1996, approved in Dec 2011, to accelerate the development of standards.

This includes reducing the period of adoption of international standards from a year previously to nine months.

These are key requirements for an industry to be internationally competitive.

In the last Budget, 17 sub-sectors were announced for liberalisation, with up to 100% foreign equity participation.

Nine sectors have been fully liberalised while the remaining will be liberalised in stages by end-2012.

For changes to take place we need a healthy fiscal position.

We have made progressive improvements in tax collection, and collected additional RM25bil through improved efficiencies in 2011.

We have other measures in the pipeline to be disclosed in due course.

In terms of public service delivery we are re-engineering business processes. 395 licences will be eliminated by year end, which is estimated to reduce RM729mil in business licence compliance costs.

We are exploring open recruitment between the private sector and the civil service, and introducing real time performance monitoring.

We have introduced a minimum wage to force industry to become more competitive and various other initiatives to improve skills and upgrade the workforce.

Concurrently, we are modernising labour laws, providing a labour safety net, recognising talented women, strengthening human resource management and providing labour market analysis.

In making Malaysians more employable in the ICT industry and addressing the industry’s talent supply issue, the MyProCert programme does its part in upskilling Malaysians with international certification standards on programmes such as iOS Mobile Development and Oracle Certified Professional Programmes.

We are limiting the Government’s role in business to four areas – national infrastructure such as public transport; businesses that need to be owned locally such as defence; specialised industries which require large growth, catalytic or new technology; and situations where the private sector needs co-investors. There is a programme to pare down Government investments.

Last year, 80 companies participated in TERAS – a programme that aims to develop high performing bumiputra SMEs by enabling them to scale up and accelerate their growth, thus making them more competitive in the open market.

In line with the NEM, we are using the principles of being market friendly, merit-based, need-based and transparent in implementing these measures.

So far 50 more companies have qualified under this programme this year.

We are committed to encouraging competition and entrepreneurship.

The Government’s role is to set the conditions for competitiveness, enabling the private sector to take the lead and rise to the challenge. We know if we don’t successfully transform here, we will lose the battle to become a high-income nation.

But we are already taking the measures by putting in place enablers to make the economy more competitive and taking specific measures in a cross-section of areas to achieve the income we need to make us a developed country.

We will get there.

Datuk Seri Idris Jala is CEO of the Performance Management and Delivery Unit and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my

World Bank warning of another global recession; Mier: Worse to come!

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(Shanghai Daily)
 

THE World Bank is warning developing countries to prepare for the "real" risk that an escalation in the eurozone debt crisis could tip the world into a slump on a par with the global downturn in 2008/09.

In a report sharply cutting its world economic growth expectations, the World Bank said Europe was probably already in recession. If the debt crisis deepened, global economic forecasts would be significantly lower.

"The sovereign debt crisis in the eurozone appears to be contained," Justin Lin, chief economist for the World Bank, said in Beijing yesterday. "However, the risk of a global freezing-up of the markets as well as a global crisis similar to what happened in September 2008 is real."

The World Bank predicted world economic growth of 2.5 percent in 2012 and 3.1 percent in 2013, well below the 3.6 percent growth for each year projected in June.



"We think it is now important to think through not only slower growth but sharp deteriorations, as a prudent measure," said Hans Timmer, the bank's director of development prospects.

The report said if the eurozone debt crisis escalates, global growth would be about 4 percentage points lower. It forecast that high-income economies would expand just 1.4 percent in 2012 as the eurozone shrinks 0.3 percent, sharp revisions from growth forecasts last June of 2.7 percent and 1.8 percent respectively.

It cut its forecast for growth in developing economies to 5.4 percent for 2012 from its previous forecast of 6.2 percent.

It saw a slight pick up in growth in developing economies in 2013 to 6 percent. But the report said threats to growth were rising.

It cited failure so far to resolve high debts and deficits in Japan and the United States and slow growth in other high-income countries.

On top of that, political tensions in the Middle East and North Africa could disrupt oil supplies and add another blow to global prospects.

China's growth - forecast in the report at 8.4 percent - could help bolster imports and gives it "big fiscal space" to respond to changing conditions, Lin said.

But the World Bank report added: "No country and no region will escape the consequences of a serious downturn." 

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Mier: Worse to come

By LEONG HUNG YEE  hungyee@thestar.com.my

Eurozone crisis, slower China growth likely to hurt economy

KUALA LUMPUR: The Malaysian Institute of Economic Research (MIER) expects gross domestic product (GDP) for 2011 to be 4.9% but to decelerate to 3.7% in 2012.

MIER executive director Dr Za-kariah Abdul Rashid said this year would not be as bad as 2008 or 2009 but might not be as good as 2011, pulled down by the eurozone crisis as well as slower growth in China's economy.

He said if the eurozone crisis turned worse, the country's economy might be affected and the GDP could reach the 2008/2009 level.

“There's some avenue if the Government wants to spur the economy by spending on development. It will depend on the private sector whether our economy turns out to be strong this year,” Zakariah said at a briefing to present Malaysia's economic outlook.

Zakariah: ‘The private sector has done a lot for the economy.’

“However, the private sector has done a lot for the economy. We can't expect much more from the private sector.”

He said MIER had previously forecast 2011 GDP growth to be 4.6% but revised it upwards after looking at the latest numbers and the crisis in the eurozone.

“Growth in the last quarter of 2011 is expected to be much lower on account of external developments. The latest monthly economic indicators are already suggesting that,” MIER said in a report.

It added that economic growth would likely get “bumpier” in the months ahead.

Meanwhile, Zakariah said that there was “room for 25 to 50 basis-point downward revision” in the overnight policy rate (OPR). However, he said the revision would depend on the situation and had to be done vigilantly.

Based on MIER's Business Conditions Index (BCI), the business sentiment had worsened from the second quarter of last year. The BCI fell to 96.6 in the fourth quarter of 2011, the first time it had dipped below the 100 threshold since the fourth quarter of 2010.

“It usually shows a contraction mode when the index sinks below 100. The BCI had been dropping since the second quarter of 2011,” Zakariah said.

Sales, local and foreign orders, as well as capacity utilisation were significantly lower in the fourth quarter of 2011, with companies expecting to scale back production over the next three months as inventory builds up.

Concurrently, consumer sentiment also fell to a two-year low of 106.3 on the Consumer Sentiments Index as household incomes lost momentum, and finances and job became a growing concern.

Zakariah said the index pointed out that consumers were also holding on to purchasing big tickets items as spending plans took a backseat.

Separately, Zakariah said it would be better for the Government to call for general elections early as uncertainty over the nation's political future would hurt the economy.

He said private investors were currently holding back investments on concerns that government policies could change due to the political climate here.

“If you ask me as an economist, I would rather see the problem solved once and for all. The earlier they settle the political matters, the better, we can focus on the economy.

“Right now everything is still hanging. People are postponing because of the elections. So if they settle it once and for all and immediately, it would be better,” Zakariah said.  

How can Malaysia stem the tide of talent migration?

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Migration of talent – how can Malaysia stem the tide? 
By THEAN LEE CHENG and FINTAN NG starbiz@thestar.com.my

Brain drain stands in the way of a high-income Malaysia, a World Bank report says. But the solutions are not easy.

FOR over 25 years, Malaysia was one of the few Asian countries blessed with an annual growth of 7% and up. The country's growth spurt occurred between 1967 and 1997, which paved the way for the shift from low-income to middle-income. Among developing countries, Malaysia made tremendous progress in poverty reduction. In the 1970s and 1980s, income inequality was reduced dramatically while a Malay middle-class emerged.

World Bank’s Philip Schellekens ... ‘Whatever we present here we can stand by.’

These are laudable achievements no doubt. Nevertheless, in today's fiercely competitive global landscape and Malaysia's eye-popping data of escalating brain drain, the challenges for the country to move forward are far, far more complex.

Last year, Malaysia had recorded a strong recovery but the momentum appeared to have tapered off with jittery growth in the last two quarters. While business sentiment has improved in the first quarter of this year, consumer confidence has weakened on concerns of rising inflation.

Growth is expected at 5.3% this year and 5.5% in 2012. The three key risks in the near term are:

• A weaker-than expected global recovery, which will dampen growth momentum,
• A further strengthening of inflationary pressures, which may undermine consumer spending, and
• Weak fiscal consolidation.

Over the medium term, various government initiatives are being put in place to boost economic growth. But over and above the Economic Transformation Programmes and New Economic Models, the heart of Malaysia's transformation hinges on two fundamentals productivity, which requires a revamp of the education system, and policies of inclusiveness. Discontent with Malaysia's inclusiveness policies is a key factor, particularly among the non-bumiputras who make up the bulk of the diaspora.

Human capital is, after all, the bedrock of a high-income economy or for any economy for that matter. Sustained and skill-intensive growth needs talent going forward. Malaysia needs to develop, attract and retain talent.

Brain drain does not square with this objective. Malaysia needs talent, but talent seems to be leaving.

Brain drain the migration of talent across borders has long been a subject of debate and controversy. Of late, it has been openly discussed in the media, which is to be viewed positively. At least there is that openness today which was not there 10 years ago. The creation of Talent Corp Malaysia Bhd to bring back our own, and to attract new talent, is also a tacit acknowlegement by the Government that we need to manage our human capital carefully and diligently.

Brain drain is by no means something unique to Malaysia. It is something faced by many others. Taiwan saw many of its talented leave for Silicon Valley; the former Irish president Mary Robinson, during her presidency, did much to engage the Irish diaspora.

Within Asia, the brain drain is most pronounced in South-East Asia, according to the Malaysia Economic Monitor: Brain Drain released on Thursday (www.worldbank.org/my). The report says emigration rates are the highest in middle-income countries, which have both the incentive and the means to migrate. The incentive would be less strong for high-income countries. For low-income countries, financial and human capital constraints may make emigration less likely. Malaysia falls into the middle-income category.

The World Bank's Bangkok-based senior economist Philip Schellekens, who produced the report after an online survey among 200 respondents from the 1 million Malaysian diaspora around the world acknowledges that this number is small.

Click on image for actual size.
 

“But the World Bank, in the first place, does not wish to present this as a definite conclusion. Instead, it wishes to convey a qualitative feel of what is going on. The study can be seen as the first step towards understanding what has been driving brain drain in Malaysia and how policymakers can address it.”

The report measures the size of the Malaysian diaspora and brain drain, its key characteristics and its evolution over the past 30 years. It gives an updated picture on the basis of the most recent information available, including Singapore's census results which were released early this year.

“We've avoided at all costs to use anecdotal sources for such a sensitive topic. So, whatever we present here we can stand by. We also document our sources of information so that other people, as part of this process, can continue the work, refer to our study, look at the numbers and update or improve them.”

It is an extension of previous reports on Malaysia, Growth through Innovation and Inclusive Growth. 

Why do people leave?

Brain drain is a symptom, not a problem in itself. It is the outcome of underlying factors as all of us respond to push and pull factors. While not every person leaving Malaysia constitute a brain drain, about a third of them do. Seen from the long lens of emigration and its effect years from today, Malaysia is not only losing talent today, it is also losing talent tomorrow, because children who leave with their parents, and who spend their formative years abroad, are less likely to return.

The report removes the veil of doubt and uncertainty over some numbers. Some of the key highlights are:

● The Malaysian diaspora is large and expanding, with a conservative estimate of about 1 million worldwide last year. The diaspora has quadrupled over the last 30 years, and is geographically concentrated and ethnically skewed.

● Singapore alone absorbs 57% of the entire diaspora, with the rest residing in Australia, Brunei, Britain and the United States. - Malaysia's brain drain is intense relative to its narrow skill base. - The brain drain is aggravated by a lack of compensating inflow. While many Singaporeans leave the city-state for greener pastures, many highly skilled expatriates also enter the republic.

The situation is different in Malaysia. While Malaysia receives many, most who come have low skills. Coupled with this dire situation, Malaysia's high-skilled expatriate base has shrunk by a quarter since 2004.

● The number of skilled Malaysians leaving for Singapore has increased from 10% in 1990, 23% in 2000 to 35% last year. This is defined by those who have tertiary education. About 47% of all skilled foreign-born residents in Singapore were born in Malaysia.

Malaysia is not on the brink of a crisis, but it can do better as it has a lot of potential. Brain drain, says Schellekens, should not be viewed as potentially negative. It has its positive potential, as when it aspires a young person to pursue tertiary education, as when it allows those who remain to leverage on those who have succeeded abroad.

“There is an increased openness in Malaysia to discuss these issues and this is a welcome development,” he says.

The report goes beyond stating numbers and facts. It also identifies two areas the government needs to seriously look into the need to improve productivity and to strengthen Malaysia's policies of inclusiveness.

Talent Corp CEO Johan Mahmood Merican says the report is not something new. “It lends credence to what the Government already knows and we have taken action even before the World Bank report was released. There is a lot of work-in-progress which supports the direction that we have initiated.

“What is important is there is an urgency for us to change the business model if we are to advance. It is not a case of whether we stand still or we advance. If we stand still, we are effectively regressing. Vietnam and Indonesia are getting their act together and recording high growth. In that sense, it is consistent.”

Johan says the usefulness of such a report is that while it highlights the potentially negative effects of brain drain, it also highlights the flip side, its positive effects.

“Malaysia has been spared from the detrimental part of it in the sense that our industries have not come to a halt, as in some other countries. At the same time, it has not been as beneficial to us as a country, as it has to some other countries. So at this point in time, it is neutral. The question is, how do we make it net positive? This is where Talent Corp comes in. We are beginning to engage with Malaysians abroad and with the private sector,” Johan says.



Courting talent back

Four months after its establishment, Talent Corp is primarily focused on facilitating initiatives to attract, nurture, engage and retain talent to support human capital needs of the Economic Transformation Programme (ETP). This has resulted in the Residence Pass that enables top foreign talent, especially those in the ETP, to continue working in Malaysia for a longer tenure and fewer restrictions. There has also been revisions to the Returning Expert Programme to encourage more Malayisan professionals working overseas to come home and help drive the nation's economic transformation, especially in the ETP. Because of Malaysia's base in manufacturing, parcticularly in electrical & electronics, an industry-led initiative to address the sector's talent requirements, with an emphasis on nurturing local talent was launched last week. Similar groups in other key economic sectors are currently in the pipeline.

“This is clearly a long-term project. We are looking at small starting steps this year to ease the mobility of talent and to establish a baseline for future work,” says Johan. Other initiatives in the works will be announced later this year in due course.

Johan also brings up the success story of Pua Khien Seng, the Malaysian who invented the pen drive, and who has been residing in Taiwan for 16 years. Pua is now president and co-founder of Phison Electronics Corp, a listed technology company in Taiwan with a market capitalisation of almost NT$40bil (RM4.3bil).

“His business will always be in Taiwan. So how do we leverage on that? How can we facilitate that engagement with Pua, and other Malaysians, who are residing abroad?”

The larger question is: Can targeted measures such as talent management and diaspora engagement substitute more comprehensive reforms?

Schellekens thinks not. “Our observation is that the targeted measures developed by Talent Corp are helpful. These are first steps in the right direction but if the underlying deterrents are not addressed comprehensively, then these measures will only have a marginal impact.”

The fundamental issues, or underlying factors why people leave relate to economic incentives, which can be captured under the umbrella of low productivity, and social disincentives which reflect discontentment among the non-bumiputras with Malaysia's inclusiveness policies.

“If you want to tackle the brain drain in a comprehensive fashion, it is not through reversing it or trying artificially to stop it. Tackle the fundamentals and things will happen automatically; people will feel incentivised not to leave the country, or to return if they have left,” Schellekens, the lead author of the report says.

The report highlights the progress made by South Korea. It was a third poorer than Malaysia in the 1970s in terms of average income but nowadays it's three times richer. One remarkable aspect of South Korea's development path has been its attention to investment in quality education. As with Singapore, Hong Kong, China and Japan, the bedrock of any country's progress is its human capital.

A statement from RAM Ratings Services Bhd says: “While we may be comforted by the report's finding that the brain drain has not reduced significantly the country's stock of educated workforce, it highlights the disconcerting fact that the country has a narrow skills base and that its skilled human capital base continues to slide, exacerbated by the brain drain. We need to actionalise inclusiveness under the clarion call of 1Malaysia and sharpen the focus on competitiveness, meritocracy, good governance and productivity in both the government and private sector. Only by unleashing private sector dynamism, entrepreneurialship and innovativeness can we sustain the virtuous circle of high investment-growth-productivity increases.”

Its chief economist Dr Yeah Kim Leng adds: “It would be difficult to achieve the high income target by 2020. Productivity growth would slow as the labour market would be more confined to lower-skilled sets. The country's industrial and technological upgrading and its shift up the value chain would be hampered by skills shortages, higher cost of foreign skilled manpower and deficiencies in innovation and entrepreneurship.”

While our challenge is to tap into our potential and we are blessed with an abundance in myriad areas and sectors this has become more difficult than a decade or two ago because competition in the region for trade, talent, and foreign direct investment has intensified. While we bicker among ourselves, other countries are forging ahead very quickly.

As Malaysia climbs up the income ladder, new challenges in form of innovation will come our way.
Says Schellekens: “Malaysia aspires to base its future growth on innovation. This means that growth will become more skills-intensive, creating a demand for skilled people as well as leading to rising wage levels for the skilled. This may accentuate the income disparity between the skilled and the unskilled, leading also to social challenges between the city and countryside.

Another challenge is the need for more internal competition. Iron sharpens iron.

“There is a sense of urgency for Malaysia to implement the structural reform agenda more quickly as well as comprehensively, else the underlying momentum of growth will deteriorate through an erosion of competitiveness. We are concerned that some of these trends may be happening already, as with the parts and components trade within the electrical and electronics of Malaysia,” he adds.

Malaysia Economic Monitor, April 2011

Click on a thumbnail to access the higher resolution version (you may want to enlarge the resulting browser window to get the largest view possible). To save a copy, right-click on the hi-res image and choose "save as" or "save image as".  The Brain Drain Challenge in Pictures
The Malaysian diaspora in 2010 is estimated at 1 million, a third representing brain drain	The diaspora is geographically concentrated	The pace is brain drain is elevated
Relative to narrow skill base, brain drain is intense	Brain drain is a symptom driven by productivity and inclusiveness concerns	Boosting productivity will require up-skilling through education and innovation policies
Reducing the ethnic skew in the diaspora will require updating inclusiveness policies	Targeted policies to tap into global talent and engage with the diaspora would complement

Related Stories:

Reversing the brain drain, innovate to compete!

 The big picture on skilled labour market
Can Malaysia reform fast enough to meet challenges?
Talent Corp CEO: Need to change business model
The vicious cycle' of brain drain

Malaysia's Migrant Economy!

Striking a balance in foreign labour

By CECILIA KOK cecilia_kok@thestar.com.my

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Harbouring the hope of providing a better future for her family, Sutimah left her village in Surabaya, Indonesia 23 years ago and travelled almost 2,000 km by boat to Peninsular Malaysia in search of a better-paying job.

She started work as a housemaid, earning less than RM400 a month. But for Sutimah, that was a sufficient amount that could alleviate the poor living conditions of her family.

“I tried to send as much money home as possible each month so that my family could live more comfortably, and my children could have access to better education,” says the 45-year-old mother of four.

Nor Zahidi Alias says rapid economic development is the primary reason for many countries’ increasing dependence on foreign labour

Sutimah, who has just been granted permanent resident status in Malaysia, is now working as a cleaner with an agency that pays her a monthly salary of RM1,000. She still sends back a big portion of the money that she earns each month, as the financial burden of her family keeps growing, particularly since her husband became paralysed a few years ago and could no longer work as an odd-job labourer.

“I have never thought of going back to Indonesia to work. I couldn't, it's just too difficult to make ends meet and to provide for my family,” she says.

Sutimah's experience, though not representative of all, speaks of a typical factor that drives people to leave their homelands and work in another country. Invariably the migrants will cite poor living conditions and a lack of opportunity for upward social and economic mobility as the main reason in their quest for greener pastures.

Promised land?  For south and southeast Asian economies, especially those that are lagging behind Malaysia, many migrant workers perceive the latter as a land flowing with milk and honey.

Official data show that Malaysia attracts a huge number of migrant workers into the country. According to official record, the number quadrupled from less than 500,000 in 1999 to more than two million, representing about 17% of the country's workforce in 2008.

It is believed that the number has since reduced to less than two million over the last two years as many migrant workers were sent home at the height of the global financial crisis in 2009. As at the end of February 2010, total registered foreign workers stood at 1.8 million, down from 1.9 million at the end of December 2009.

What's more intriguing is the fact that the actual number of migrant workers living in Malaysia could be more than double of what the official data suggest. It is believed many of these migrant workers have entered, or re-entered the country illegally.

While Malaysia cannot claim that it offers the lucrative benefits that many first-world nations have, its relatively better economic prospects and political stability have been the major pull factors.

So, is that a boon or a bane to the Malaysians economy? According to experts, it can be both ways.



“It goes without saying that foreign workers have indeed contributed to the growth of our economy, especially in sectors where we have an acute shortage of workers such as construction,” says the Malaysian Trade Union Congress deputy president Mohd Jafar Abdul Majid.

“But our economy is swamped with foreign workers who are unskilled or have low skill sets that could not contribute meaningfully to Malaysia's aspiration of becoming a high-income economy; and I think we have been too dependent on this group of foreign workers for far too long,” he adds. This is based on the significant increase in the number of unskilled or low-skill migrant workers in the country over the past two decades.

Filling the gap

In the Economic Report 2010/2011 compiled by the Finance Ministry, it was stated that of the 1.8 million registered migrant workers in Malaysia, 38.2% were employed in the manufacturing sector, 16% in the construction and 14.2% in the plantation sectors.

Indonesia accounted for the highest number of registered foreign workers in Malaysia at 50.9% . This was attributable to their country's proximity to Malaysia and its cultural and language similarities with Malaysia.
Bangladesh was second highest, accounting for 17% of the total foreign workers in Malaysia, followed by Nepal at 9.7%, Myanmar, 7.8%, India, 6.3% and Vietnam, 4.2%.

“The high dependency on foreign labour is not a characteristic unique to Malaysia,” says Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias.

He says countries that have been experiencing high growth rates such as Singapore and the Gulf states, including the United Arab Emirates and Saudi Arabia, are also experiencing the same phenomenon of having to rely on foreign labour in many sectors in their economies.

“Rapid economic development is the primary reason for the countries' increasing dependence on foreign labour,” Zahidi explains.

In general, the rising standard of living and educational levels that usually come in tandem with economic development will to lead to an aversion to the 3D (dirty, demeaning and dangerous) sectors by the local population. The void in these sectors has to be filled by unskilled migrant workers and Malaysia is not spared.

Robust economic growth in the past two decades has led to higher standard of living and improved the literacy rate among the people.

In addition, the sustained boom in economic activities has also led to substantial job creation as employment expanded faster than the labour force.

A tight labour supply situation further fuelled the growing demand for foreign labour, especially in the manufacturing and construction sectors.

Flawed strategy?

Since the 1980s, Malaysia's economy has been driven largely by the export-oriented manufacturing sectors, especially the electrical and electronic segments. The Government, perceiving migrant workers as a cheap source of labour that could enhance the country's export competitiveness had been encouraging the deployment of foreign labour in the 1990s.

As a result, local manufacturers had been able to enjoy a steady supply of cheap labour for the past two decades, and Malaysia has been able to maintain its competitiveness.

Migrant workers have been used as the foundation of the country's rapid-growth strategy. The presence of migrant workers in the country has been more than just filling the gap in the 3D sectors.

But economists are questioning if the huge influx of foreign labour is indeed the right move.
Some economists say it has been a flawed strategy.

Professor Datuk Dr Mohamed Ariff of the Malaysian Institute of Economic Research says the opening of the floodgates for cheap foreign labour in the past is a major mistake that has put Malaysia in the middle-income trap.

“It was a short-sighted growth strategy that attempted to maintain the country's competitiveness based on a low-wage system,” he explains, adding that he firmly believes that if Malaysia had not allowed the massive influx, local manufacturers would have been forced to innovate, automate to boost productivity to maintain their competitiveness so that they could move up the value chain.

Economists concede that the continuous dependence on cheap foreign labour would be a drag to the country's economy, as it would not encourage local corporations to mechanise - the initiatives of which are necessary to push the economy into a high-income level as defined by World Bank.

In addition, the huge number of unskilled or low-skilled foreign workers in the country has also raised concerns of security and incidences of highly contagious diseases in the country.

They are also seen to be putting additional strain on the Government's fiscal position as foreign workers could also have access to subsidised facilities including fuel and medical care.

“Over-reliance on foreign workers can have detrimental consequences, and that is why the Government is looking at ways to reduce dependence on them. The nation's prevailing dependence on low-skilled foreign workers cannot be done away with overnight, as a sudden repatriation of them can have serious repercussions on the economy, especially in sectors like manufacturing, construction and plantation,” he explains.

“Production activities will stall as quick replacements are not readily available. This will inevitably lead to a loss of competitiveness, closures or stagnations of businesses,” Zahidi says, adding that the distinctive roles of foreign labours in the 3D sectors cannot be underestimated.

To lift Malaysia to a higher developmental plane, economists say more incentives should be introduced to spur businesses to become less labour-intensive.

“For certain, it is only when businesses become accustomed to capital-intensive modes of production can their reliance on low-skilled foreign labour be reduced,” Zahidi says.

Skilled foreign labour

Not all foreign workers in Malaysia are unskilled or have low skill sets. A small number of them are highly skilled professionals who play an invaluable role in enhancing the country's productivity and competitiveness.

Generally termed as expatriates, these professionals are considered to be an asset to the country, as they bring with them the knowledge and skills that could enrich the local labour force.

“Inflows of skilled foreign labour should not be discouraged. As demonstrated by other countries such as Singapore and some of the Gulf states where highly skilled foreign labour are critical in the spurring a country's development. There is certainly a positive role that certain classes of foreign workers can play in any economy,” Zahidi says.

According to Economic Report 2010/2011, as at the end of July last year, the number of expatriates in Malaysia stood at 31,371, accounting for less than 2% of the migrant workers in the country.

They were mostly employed in the services (64.8%) and the manufacturing (22.2%) sectors, and they came mostly from India (17.8%), China (10.2%) and Japan (7%).

Under the 10th Malaysia Plan, the Government planned to attract highly-skilled expatriates to promote a knowledge and innovation-based economy, especially in the technical and professional services. Part of this effort is reflected in Talent Corporation Malaysia Bhd, which aims to attract, motivate and retain high-skilled human capital in the country.

Finding the right balance

The Government's effort in reducing the country's dependency on low-skilled foreign workers has been ongoing, as evidenced in the gradual reduction in the number of registered foreign workers over the last two years. Its target is to reduce the number of foreign workers to 1.5 million by 2015.

But this would be a challenging task. “Economic transition has not been easy; neither has the country's policy to reduce its heavy reliance on low-skilled imported labour because the technology base of Malaysia is still relatively low,” says independent consultant Dr Vijayakumari Kanapathy (formerly a senior analyst with the Institute of Strategic and International Studies).

“So, given the structure of Malaysia's economy, the reliance on imported labour in the immediate future is likely to continue,” she adds.

Mohd Jafar concurs, saying: “To be fair, all stakeholders play a role in reducing the country's reliance on migrant workers. Employers need to move away from their dependence on cheap foreign labour and go up the value chain, while policymakers need to implement better regulation and improve on the enforcement part, especially in preventing the illegal immigrants from entering the country.”

Malaysia needs to shift its focus from importing cheap labour to managing labour flow that can maximise growth and facilitate its structural adjustment towards a higher income economy.

This will also minimise the negative social impact brought about by these foreign nationals. But striking a balance between short and long-term needs of the economy will prove to be a complex challenge.

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