Building Malaysia’s long term economic strength (Part I) – Fiscal Strength and Labour Reform

3 June 2024

By Tan E Hun

In its latest annual report, Bank Negara projected Malaysia’s growth to be 4% to 5% in 2024. Earlier this month, its latest Quarterly Bulletin reported that the nation recorded a GDP of 4.2% in Q1 2024, driven by several positive developments in private expenditure and export demands. At first glance this may seem counterintuitive when contrasted with other earlier developments, for one the depreciation of the Ringgit earlier this year spooked many. But there is a strong case to be made that the performance of the ringgit is driven by transient factors at the moment, such as interest rate differentials with our ASEAN neighbours. By extension, those who extrapolate our foreign exchange rates to Malaysia’s economic potential as a whole lack perspective.

In fact, key economic indicators such as headline inflation and unemployment rate are evolving favourably. As opposed to financial investors chasing the highest rates of return across the globe, industrial investors, who by definition operate on a longer time horizon, have expressed their confidence in Malaysia, by collectively investing 57.2% of the record 329.5 billion MYR received by Malaysia in 2023. The prospects of Malaysia’s economic growth are improving as exports rebounded while stronger growth is seen in areas such as the manufacturing sector and services sector. Malaysia recently emerged as an “unexpected winner” of the global race to dominate the chips and semiconductor ecosystem. And as electric vehicles become the next front in the US-China technology war,  Chinese EV makers are also piling into Malaysia, as seen in Chinese automaker Geely’s announcement in late 2023 to invest USD10 billion in Proton’s new Automative Hi-Tech valley manufacturing base in Tanjung Malim, Perak. According to UOB 2024 Business Outlook Survey, Malaysia has emerged as a prime destination for businesses seeking to expand within ASEAN. 

Commendably, the government is making great attempts to seize the opportunity and build on these developments. The Prime Minister’s announcement to establish the largest integrated circuit design hub in South East Asia in Selangor is evidence of a strategic direction to further anchor key industries in the country. But to take full advantage of these global trends, our economic situation calls for structural reforms. We must enhance productivity and increase our capabilities to compete regionally and internationally. Domestic structural weaknesses must be addressed to ensure that our economic environment is equipped with a strong fiscal capacity, a competent workforce, well connected infrastructure and a conducive business environment. 

Part I of this article examines how Malaysia can build its long-term economic strength by strengthening its fiscal position and implementing labour reforms to enhance our domestic workforce.

Fiscal reform

Fiscal reform must be a top priority for strengthening our state’s capabilities. There is a genuine requirement for greater public spending if we want to achieve growth. Although Malaysia is—rightly—going through the fuel subsidy rationalisation process, that and other expenditure reductions will not be sufficient to create fiscal capacity. The need for tax reform is clear. As it stands we suffer from a narrow tax base, low tax revenue relative to GDP, unbalanced tax treatment between labour and capital, and, arguably, generous and often outdated tax exemptions.

Proposals such as the introduction of a luxury tax or sales tax on low-value goods could bring in more income, but taxes that cover a wider base such as the newly implemented capital gains tax can be fine-tuned to reduce tax arbitrage and narrow the gap of contribution between capital owners and workers. Tax exemptions should only be provided to sectors that generate catalytic impact for the overall economy – high value manufacturing, building AI capacities, decarbonisation efforts etc. Instead of remaining permanently stuck in a political quagmire on GST, alternatives to GST such as a “harmonised” sales and service tax that could simplify administrative processes yet broadly function similarly to the GST system should be deliberated further. But by far the biggest reform we need to address and the one that will create a multiplier effect on the overall economy is increasing our tax base, in other words increasing the number of people eligible to pay tax. For that, we need to address our structural problem of low wages.

Labour reform

Our labour market requires significant reform. To take advantage of the international interest in investing in Malaysia, and to enhance the competitiveness of our domestic companies, we need a skilled workforce. To achieve this, we require a bold wage reform, but carried out incrementally, helping employers adapt to a new wage structure and guide workers to increase their productivity. It’s essential to move past the inertia that keeps us in a low-wage model and by extension stunts our economic potential.

We need to pay people more if we want to retain and develop talent in Malaysia. But to pay people more, workers’ abilities and the relevancy of their skill sets must meet the demands of higher skilled jobs.

The expansion of vocational training and our STEM pipeline of graduates is crucial. There is genuine demand for technicians, software engineers, design engineers, system integrators, R&D and PhD researchers, data scientists and many more technical roles. A multiple-stakeholder approach involving government, industry, academia and civil society showcases a true “whole-of-society” endeavour. More cross-sector collaboration between academia and industry should be encouraged to enhance STEM curricula and competence alignment with the jobs of the coming decades. Industries have started to incorporate mentorship and role model programmes earlier on with universities. Government incentives must be provided to educational institutions to update training and laboratories infrastructure so students can access, experiment and familiarise themselves with prototypes/design tools before entering the job market. Industry associations and non-governmental bodies such as the Penang Science Cluster provide crucial links between industry and education,through its various STEM programmes. Ultimately, raising the level of education, increasing our workforce capabilities and  paying well is the main pathway to address systemic challenges such as the chronic talent shortage and brain drain.

By now we are largely in agreement that our reliance on low-skilled foreign workers needs to change. It is time to implement policy interventions to shift this pattern. The much discussed multi-tier levy system, if phased and introduced correctly, could help businesses seek alternative solutions and replace foreign workforce through automation endeavours and upskilling of local workers.

Singapore’s progressive wage model aims to increase salary incrementally through upgrading of skills and productivity of the workers. The spirit of this principle can be emulated in our own context, by incorporating skills programmes and initiatives as requirements before workers can move up a pay scale, incentivising workers to upskill along the way, thereby increasing their productivity and providing opportunities for career advancements. The upcoming Minimum Wage review, due this year, is a crucial tool to increase the floor of stagnant wages, but that in itself is insufficient to move our overall national wage level. Fresh graduates across many sectors are being paid almost the same rate compared to 30 years ago, this needs to change.

Lastly, the current workforce will notably increase if our female labour participation rate increases. Barriers for women to enter and subsequently stay in the workforce still need to be addressed. First and foremost, safe and affordable childcare and elderly care have to be made more widely available, to reduce the burden of care placed on women. Employers should also be incentivised to introduce gender-sensitive workplace policies such as flexible working hours for all employees, so not just women are expected to take leave and perform unpaid care work. Promote targeted incentives to support women-led businesses to operate and grow. Sectors that traditionally employ a high proportion of women, like the care or service industry, can benefit from gender-responsive budget measures that provide incentives for employees to stay in the workforce, such as training or a stronger support network.

Reforming the labour market to move to a high-productivity and high-wage model is a fundamental step to secure our nation’s economic future. It should be seen as a long term project through organic growth using tested ideas such as improving quality of investments, increasing productivity etc but also with clever and experiential interventions such as exploring progressive wage models to elevate the quality and income of our workforce. But for these reforms to be effective, they need to be part of a multi-pronged systematic approach, with synergistic policies sequenced and introduced appropriately. The second part of this series will explore other reforms in this approach, for example building the right infrastructure, improving social well-being and enhancing public service delivery.

Published in Forum, The Edge Malaysia Weekly on 5 June 2024

Your Cart