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Can Malaysia graduate into the
league of high-income countries?
If Malaysia doesn’t
fix glaring flaws
in education and
labour quality, it
can kiss goodbye to
meaningful economic
transformation.
Saravanan Ramasamy
C
ases of rapidly growing economies stagnating at middleincome levels and failing to
graduate into the league of
high-income nations are not
uncommon. This phenomenon, often
described as the‘middle-income trap’, is
best demonstrated by Latin American
countries such as Mexico, Brazil and
Peru where a period of growth was suddenly followed by noticeable slowdowns,
resulting in rapid deviations from the
upward growth trajectory.
An IMF Working Paper entitled
‘Growth Slowdowns and the MiddleIncome Trap’ published in March 2013
compares several successful East Asian
economies and some unsuccessful Latin
American economies. Although Latin
American countries such as Mexico,
Brazil and Peru reached the middleincome level before any of the other
countries, they did not progress further
as compared to two of the Asian “Tigers”,
Korea and Taiwan. Despite their relatively
late start, Korea and Taiwan managed to
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progress rapidly, increasing their per capita income from US$3,000 (MYR9,949.50)
to surpass US$23,000 (MYR76,280.18) in
a relatively short time.
The IMF research went further, looking at drivers of growth and deceleration
amongst these Latin American countries.
It decomposed growth rates into physical
capital, human capital and an expansion of
the working age population and the residual is called Total Factor Productivity
Growth (TFPG).
TFPG, in its most fundamental definition, is the residual that measures ‘everything and anything’ that is not accounted
for by input growth.
Source : IMF
Note
: t = 0 defines as the year when GDP per capita for a particular country reached US$3,000 in PPP terms
accountants today | JANUARY / FEBRUARY 2014
Can Malaysia graduate into the
league of high-income countries?
Source : IMF
Source: Note •
•
IMF 1/12 refers to a low income threshold of US$1,000 and a high income threshold
of US$12,000 in PPP terms
Frequencies are calculated as the ratio of slowdown episodes to the total number of observations per income class
Source : United Nations’ Statistics Division
Adopted from: The Star Business 11 January 2014
It can also refer to the additional output
generated through enhancement in efficiency arising from advancements in workers’ education, skills and expertise, acquisition of efficient management techniques
and know-how, organisational improvements and gains from specialisation.
The IMF paper claimed that steep falls
in TFPG appear to have played an important role in past growth slowdowns of the
Latin American countries in the 1980s.
What’s also interesting to note is that
the paper proved empirically that countries that have attained middle-income
status are more likely to experience slowdowns than low-income and high-income
countries.
The Malaysian scenario
Based on the World Bank’s 2012 definition which categorises a high-income
nation as a country with a Gross National
Income (GNI) per capita of more than
US$12,615 (MYR41,838), Malaysia, with
a GNI per capita of US$9,820 in 2012
(MYR32,568), is already ranked in the
upper-middle income league. While Asia continues to set the pace
as the world’s fastest growing region,
some Asian middle-income countries are
showing signs of economic slowdown
and face stiff competition from lower-cost
economies. Malaysia is not an exception. While the headline numbers continue to paint a somewhat rosy picture for
Malaysia’s economy amid a weak global
economic environment, these obscure
the risks that may hinder the country’s
continued progress. Indeed, one would
question whether Malaysia can indeed
graduate into the league of high-income
countries.
According to the IMF working paper,
Malaysia, as compared to other Asian
countries, faces a larger risk of slowdown
stemming from institutions and macroeconomic factors (see table on page
38). The paper considered 42 growth factors, grouped into five categories, namely; (1) Institutions, (2) Infrastructure,
(3) Macroeconomic Environment and
Policies, (4) Trade Structure and (5)
Others.
JANUARY / FEBRUARY 2014 | accountants today
37
Can Malaysia graduate into the
league of high-income countries?
1. Institutions include small government
involvement in the economy, strong
rule of law and light regulation.
2. Infrastructure includes telephone
lines and road networks.
3. Macroeconomic factors include low
gross capital inflows, the change over
2008-2012 in capital inflows and trade
openness and the (negative of the)
change in the investment-to-GDP
ratio.
4. Trade structure includes strong
regional integration.
The findings of the IMF paper were also
echoed in a report by The Asia Foundation
(TAF), an international non-profit organisation headquartered in the United States.
Source : IMF
Note – A higher risk of slowdown arising from institutions in Malaysia than in Vietnam does
not mean that the latter has “better” institutions than the former but rather that its institutions have improved more rapidly over the last period of the sample
2000-2007
2008-2012
2000-2012
Average Change (%)
GDP
5.57
4.24
5.06
Labour
1.46
1.49
1.47
Labour Quality
0.19
0.18
0.19
Labour Quantity
1.27
1.31
1.29
Capital
1.99
2.00
1.99
Non-ICT Capital
1.09
1.04
1.07
ICT Capital
0.90
0.95
0.92
TFPG
2.12
0.76
1.6
GDP
100
100
100
Contribution to GDP (%)
Labour
26.27
35.08
29.11
Labour Quality
3.46
4.19
3.69
Labour Quantity
22.82
30.89
25.42
Capital
35.65
47.09
39.34
Non-ICT Capital
19.50
24.63
21.16
ICT Capital
16.14
22.46
18.18
TFPG
38.08
17.83
31.55
Source : Department of Statistics, Malaysia
Adopted from: The 20th Productivity Report, Malaysia Productivity Corporation
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accountants today | JANUARY / FEBRUARY 2014
While institutions are important, indeed
crucial, for growth, there has been much
more attention paid recently to the role of
institutions in Malaysia.
According to the TAF report, there
is a compelling need for Malaysia to shift
from a race-based to a needs-based policy
in order to address imbalances in society
and improve the democratic process to
ensure good governance and that the
rule of law prevails. Poor institutions
could deter innovation, hamper the efficiency of resource allocation and reduce
the returns to entrepreneurship.
The TAF report goes on to reason
that despite the numerous bold policy
measures and long-term plans introduced by the Government over the years,
Malaysia’s economic progress continues
to be plagued by a lack of innovation and
skills, a low level of investments in technology, declining standards in education,
relatively high labour cost and sluggish
productivity growth.
Productivity improvement
badly needed
Based on the 20th Productivity Report
issued recently by the Malaysia
Productivity Corporation, while Malaysia
enjoyed an average GDP growth rate of
5.06% for the period 2002-2012, the economy grew at a slower pace during the
period 2008-2012 at an average growth
rate of 4.24%, as compared to 5.57% during the period 2000-2007. Decomposing
the growth rates into Labour, Capital
and TFPG contribution reveals that while
TFPG contributed significantly at 38%
during the period 2000-2007, the contribution decreased more than half to 18%
during the period 2008-2012 (please see
table on the left).
The concern over the drop in TFPG
was raised in the 20th Productivity
Report. In order to ensure that the
Malaysian economy remains on a sustainable growth path, the focus will have
to be on labour quality, said the report.
Countries like Hong Kong and South
Korea reaped the benefits of a significantly high contribution of labour quality during the period 2008-2012. It was not so in
Can Malaysia graduate into the
league of high-income countries?
Source: Labour Force Survey, Department
of Statistics, Malaysia
Cited in: The 20th Productivity Report,
Malaysia Productivity Corporation
the case of Malaysia, where labour quantity contributed much more than labour
quality in improving TFPG’s contribution
to economic growth. The growth of TFPG
is expected to raise per capita income and
living standards for the long-term.
The report stressed that the driver of
TFPG will have to be R&D, investment in
human capital as well as investments in
capital equipment that can fundamentally
change the focus of the economy. This is
where the level of ‘knowledge’ plays a critical role in raising TFPG. Increasing the level
of knowledge will drive the level of ‘critical
thinking’ and in turn improve the contribution and quality of labour productivity.
Education reform is inevitable
Education reform is the key to raising
productivity and quality. A comparison of
Malaysia’s labour composition over the
period 2000-2012 showed total employment with secondary education remained
high at 55%. Total employment with tertiary education increased by 12% from 14%
to 26% which was substituted by the drop
in primary education from 31% to 19% (see
graph above). While tertiary education’s
contribution has increased, nevertheless,
total employment with secondary and primary education still remained the major
employment group, constituting 74% of
the total employment in 2012. This trend
has to change.
To put things into perspective, in a
recently published report by Hong Kong’s
Economic Analysis Division, it was report-
ed that the proportion of the local workforce with tertiary education increased
steadily from 31% in 2007 to 34% in 2012.
If we want to compete and not just pay lip
service to transformation, Malaysia must
produce a high-quality workforce through
improving the quality of education.
But the journey will be arduous. A
World Bank report entitled ‘Malaysia
Economic Monitor: High Performing
Education’, noted that the cognitive skills
of Malaysian students, as measured by
standardised international tests, is not
on par with the country’s aspirations to
become a high-income economy.
While Malaysia spends billions on
education, the end result is schooling, and not learning. The World Bank
report stated that Malaysia has extensive coverage with its schools and
achieved near-universal access that has
9 in 10 Malaysian adults undergoing at
least lower secondary education. The
Malaysian government spent the equivalent of 3.8% (approximately US$12 billion
or MYR39.8 billion) of its GDP on basic
education, or more than twice the average
of 1.8% within ASEAN nations. This is also
higher than the 2.2% average of the Asian
tiger economies of South Korea, Hong
Kong, Japan and Singapore. However,
this larger spend does not commensurate
with an increase in quality.
As we all know, Malaysia underperformed shamefully in the Programme for
International Student Assessment (PISA)
survey results released in December
2013, ranking 52nd overall out of the
65 countries. Malaysia did not only trail
high-performing education systems in
East Asia, but also poorer nations such as
Vietnam, which outperformed the country by a significant margin.
Aside from the abysmal PISA performance, Malaysia continued to decline
against the Trends in International
Mathematics and Science Study (TIMSS)
benchmark in which Malaysia once performed well. Although Malaysia attained
the international average between 1999
and 2003, we dropped sharply in 2007 and
further in 2011.
What lies ahead?
With the Malaysian economy aspiring
to reach high-income heights by 2020,
the focus of growth must increasingly
lean towards an innovation-driven growth
strategy. This strategy emphasises the
creation of high value-added activities,
of which a key ingredient is the quality
of labour. Thus far, Malaysia’s education
system has failed in producing the skills
and talent required to take the country’s
economy to the next level.
Apart from labour quality, it is important to focus on government involvement
in promoting a fair and open economy.
Insufficient checks and balances continue to dog the country’s economy, thus
leading to opaque governance practices.
Reforms are critically needed to promote
economic inclusion among all ethnic
groups by doing away with rent-seeking
behaviour and patronage politics.
Reaching the target as set by the
World Bank does not really make one
a high-income nation as countries can
always fall back to previous levels. What
is important is for Malaysia to address
the underlying dynamics that are deterring meaningful structural reforms – specifically those relating to labour quality
and education. n
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