Declining productivity: Worrisome economics beyond politics

Perhaps, this blogger had not explained the rationale of our current political/partisan position. There are likely to be readers and political comrades (in which many gone different ways) are surprised. Some speculated or even conjure up unfounded allegations for this observed change to tolerate Anwar Ibrahim as Prime Minister.  

Do perish such thought, we plead you'll. At this stage of our life, the priority for rationale and sensible thinking, and the priority of rakyat, national and ummah interests far outweigh partisanship and ideologies. More so, we are faced with a chaotic and topsy turvy situation of the day.   

After BN lost the general election in 2018, Malaysia had three Prime Ministers under Pakatan Harapan and later two Perikatan Nasional governments. The so-called Selamatkan Malaysia campaign worsened the economic situation. 

Mahathir's half-bake and conveniently selective reforms over 22 months was followed by PN's politics-at-all-cost during the Covid pandemic crisis and put the national debt at RM1.5 trillion. It is a major indication of the economic mess and became a fiscal constraint that straitjacketed the country from getting out of the present rut. 

Anwar is not the best and ideal option, but the other options are not tenable, morally and ethically. Time to forget the past and attempt at moving forward. To those who have yet to realise, Malaysia is in a political and social mess with the state of the economy in a frightening decline. The reason politics should take a backseat! 

Productivity crisis

Sounding alarmist to some and the politicians may chose to deny, but we are in a crisis. 

The best we could do to tone down would be to say we are at a crossroad. It was at the crossroad that  music legend say bluesman Robert Johnson sold his soul to the devil to get the mojo to be a great guitarist. 

A country at a crossroad means taken a wrong assessment, decision, and action, it will only lead to downhill from there on. We could see the ruling elite compromise itself and sacrifice the life of citizens to survive. 

It actually was happening for decades in the rice industry. However, it was all to see during the pandemic where human life was sacrificed due to negligence and incompetency. Yet there were those political opportunist taking advantage without conscience from the crisis.    

To those who wish to appreciate the problem and able to understand the implication, the issue of declining productivity raised in the recent Keluar Sekejap interview with World Bank Chief Economist for Malaysia, Aporva Sanghi incapsulate the crossroad situation we are in.         

Aporva mentioned of the long term decline in productivity. Decline in investment at below 20% of GDP and the investment coming Malaysia's way lack quality.

One area in investment decline is education or in other words, human resource investment. He described and quantified Malaysia as facing learning poverty at 40%. There is lack of nutrition in school children,  in which we recalled the late Ungku Aziz (Al Fatihah) talking about kerangka minda decades ago. 

The economy needs to be more competitive and do away with excessive APs, monopoly, and excessive reliance on imports. The NIMP is good but its still horizontal i.e. lacking depth. As any IMF/World Bank mantra, need liberalisation and the need on services mentioned to increase competition and raise competency. 

He highlighted the semi-conductor industry to illustrates the weakness of Malaysia in taking advantage of its position and realised its potential to be a major global player.

Policy stability was lacking in Malaysia. The country need talent .. talent ... talent ..., but policymaker could only think of revenue sacrificing tax incentive to go about it, instead of taking the more painstaking and effective solution.

Too many plans and policies, but not enough on the doing. Too many programs, departments and special purpose agencies, which only increase overheads, to end up fragmentised and lacked deliverables. Madani and even Keluarga Malaysia had good intention and narratives, but still needed to do is the economy wide reform or transformation.

The problem with over reliance on foreign workers was mentioned. Repeated PMs expressed need to reduce dependence, but at the end, all succumb to industries' pleadings and end up not doing anything. The overdependence problem came at the expense of locals and it was glaring post-Covid in the effort to revive the economy.

Malaysia has problem of too low wages, but it still goes back to low wage against productivity as yardstick. Increasing minimum wage did not come with higher productivity and without it, could possible lead to business failure. 

Landing to end the podcast on a diplomatic tone, Aporva said Malaysia is never as bad as it seem, but it is never as good as it should be. 

Too many legacy issues of the structural kind. It needs to find ways to raise revenue. More spending needed to prepare for the aging population, defense, healthcare among others. It need to unlock the state-held growth. 

Another way of saying, the civil servants are major hinderance and obstacle to change, new initiatives and ultimately progress. 

A way forward

Last week's Edge Weekly published below:  

The imperative of nurturing productivity in unlocking Malaysia’s growth potential

ECON-templation by Woon Khai Jhek / The Edge Malaysia

22 Nov 2023, 01:30 pm

This article first appeared in Forum, The Edge Malaysia Weekly on November 20, 2023 - November 26, 2023

The International Monetary Fund’s (IMF) latest World Economic Outlook report paints a grim picture, with the global economy showing signs of stagnation and dwindling trend growth. Based on estimates released in October 2023, medium-term global economic growth from 2024 to 2028 is projected to be slower at approximately 3.1%. This compares against the pre-pandemic era estimate of 3.5% released in January 2020 and falls short of the forecast made in April 2008 of 4.9%.

The culprits? A lack of capacity building and a sluggish pace of productivity improvements, both of which have been further exacerbated by the Covid-19 pandemic.

While high-income economies enjoy a greater likelihood of recovery due to their established infrastructure and resources, the same cannot be said for emerging and developing economies like Malaysia. Moreover, Malaysia’s productivity challenges are intricately linked to structural issues, which call for a comprehensive solution.

The productivity issue in Malaysia predates the pandemic and has significantly hampered the country’s economic growth potential in recent years. Between 2014 and 2019, Malaysia’s annual labour productivity growth averaged 3%, which was lower than the 4% achieved between 2002 and 2008. In contrast, Asean-6 nations were able to achieve 4% and 5% over the same periods. The Economic Complexity Index data also tells a similar story, highlighting stagnation in the last decade.

This productivity malaise is no secret as the over-reliance on low-skilled migrant labour, inadequate investment in research and development (R&D), and the absence of a comprehensive long-term strategy have all contributed to this predicament. The widespread availability and reliance on low-cost foreign labour not only disincentivises investments in productivity-boosting technology but also stifles the development of a skilled local workforce. Limited investments in R&D and the absence of a robust innovation ecosystem also undermine Malaysia’s competitiveness in an increasingly knowledge-driven global economy. A telling sign is Malaysia’s relatively low proportion of machinery and equipment capital stock, at just 12% in 2019, compared with regional peers such as Thailand (20%) and Vietnam (14%).

To break free from the downward spiral of dwindling productivity growth, the most evident path is to ramp up technological adoption and propel the economy up the value chain. Fortunately, policymakers are aware of the urgency, as demonstrated by the policy priorities outlined in the Madani Economy framework and the New Industrial Master Plan (NIMP) 2030. Prioritising high-tech and high-value-added industries constitutes a pivotal structural reform aimed at elevating productivity. The missions to advance economic complexity and tech capabilities offer Malaysia the potential to catch up in the swiftly evolving global landscape.

However, is that the entire solution? Not quite!

While machinery and digital transformation are crucial, their full potential can only be unlocked with a skilled workforce. The former represents the tools and physical capital that can amplify efficiency, while the latter signifies the human capital capable of leveraging those tools.

In this context, one potential avenue is the progressive wage policy currently in the government’s pipeline. While raising wages may seem counterintuitive from the perspective of stimulating economic growth, it holds the potential to drive productivity gains. By tying compensation to skills, performance, and productivity, it not only encourages workers to upskill and enhance their efficiency but also motivates companies to invest in productivity-boosting technologies and facilities. Simultaneously, it bolsters businesses’ competitiveness, both on the domestic and global fronts.

Opponents of interventions that force higher wages often raise concerns about their impact on consumer inflation. However, a crucial distinction between a progressive wage policy and a minimum wage policy is that the former involves a structured approach that aims to upgrade skills and enhance productivity. Consequently, this policy should theoretically have a neutral effect on prices, as the higher wage costs would be offset by increased output. Higher wages and enhanced purchasing power would subsequently have a positive impact on the overall economy through heightened consumption demand.

Nonetheless, a prerequisite to enable such a development of human capital is an education system that prepares the workforce for future demands. This might necessitate a comprehensive overhaul of the education system, one that prioritises STEM (Science, Technology, Engineering, and Mathematics) education and critical thinking. This step is essential to equip the future workforce with the adaptability required in an ever-evolving technological landscape.

In a world grappling with unprecedented challenges, fostering productivity growth remains imperative and is intricately entwined with the synergy between technology and human capital. Persistent structural issues have hindered productivity growth, constraining Malaysia’s economic potential. A comprehensive approach is needed, one that considers the specific needs of different industries and acknowledges the impact on small businesses. This is a defining juncture, and the decisions we make today will mould Malaysia’s economic trajectory for years to come. The time to act is now.

Woon Khai Jhek, CFA is a senior economist and head of the economics research at RAM Rating Services Bhd

Listen attentively to the podcast interview. Several times if possible to appreciate how worrisome and far reaching is the declining productivity to the future economic and country's general wellbeing.