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ASEAN labor flows hit a wall with growing migrant crackdown

Malaysia and Thailand left short-handed as foreigners leave en masse

A worker collects palm oil fruit at a palm oil factory in Sepang, outside Kuala Lumpur.   © Reuters

TOKYO/SINGAPORE/BANGKOK -- Tighter restrictions on foreign labor in Malaysia and Thailand have pushed out millions of Southeast Asian migrant workers, driving up wages and potentially threatening a growth model reliant on freedom of movement and cheap labor.

Malaysia's Top Glove, the world's largest manufacturer of rubber gloves, faces a very challenging increase in labor costs, according to Executive Chairman Lim Wee Chai. Foreign workers account for more than half the company's workforce of 13,000.

The rise in costs owes largely to a shortage of foreign manpower in the country. Companies like Top Glove in labor-intensive industries are paying higher wages to foreign workers to keep them from leaving, or employing more locals to fill the gap. Top Glove intends to build two more plants this year, but a lack of workers could cause these plans to fall through.

Malaysian palm plantation operator Felda Global Ventures Holdings had to scramble to fill a shortfall of 8,000 workers. Indonesians used to account for 70% of the company's 35,000 or so foreign employees. But fewer Indonesian migrants sought work in Malaysia last year, forcing Felda to shrink its harvesting operation and weighing on sales in the plantation segment.

Thailand's Samut Sakhon Province, a major fishing hub, is 5,000 workers short following tighter government regulations that prompted many migrants to leave. Fewer than 500 people responded to a call for more workers.

The Association of Southeast Asian Nations had 6.9 million migrants coming from within the region in 2015, according to the United Nations. Nearly 80% -- 5.3 million -- were in Thailand and Malaysia, two of the region's most developed economies. Both countries have also long turned a blind eye to foreign workers without proper documentation, who are often tasked with difficult or dangerous jobs.

U.N. data and estimates from local industry bodies suggest that a total of roughly 4 million, or 2 million people each, used to work illegally in Thailand and Malaysia, putting the total number of migrant workers at roughly 10 million -- equivalent to more than 10% of the countries' working-age population.

Many come from fellow Association of Southeast Asian Nations members Myanmar, Laos, Cambodia and Indonesia, as well as such other emerging economies as Bangladesh and Nepal. Remittances from those workers are vital to economic growth in these poorer countries, yet many are returning home.

The biggest reason is a crackdown on illegal migration by Malaysia and Thailand. The U.S. and Europe have criticized the employment of millions of foreign workers without legal protections as an abuse of human rights.

Regulations implemented last June in Thailand impose fines on employers with unregistered foreign workers. Malaysia has arrested many migrants as well as people employing them illegally, and the government introduced a tax this year on companies with any foreign workers.

Both countries have implemented systems letting migrant workers register for legal status and receive temporary approvals to stay in the country. But fewer than 200,000 such approvals were issued in Malaysia through November as many migrants, fearing arrest, opted to return home. As many as 1 million workers in Malaysia, and a similar number in Thailand, are believed to have become unemployable under the new regulations, leaving a massive hole in the labor force.

The industries hit hardest are those that relied the most on foreign workers, including agriculture, construction and labor-intensive manufacturing. Businesses have no choice but to raise wages to attract legal workers, including locals, to fill the gap.

In Malaysia -- where unemployment sits below 4% -- year-on-year private-sector wage growth accelerated from the 4% range to 7.3% for two straight quarters after the registration push began around April. Thailand, where unemployment is hovering around 1%, will raise the minimum wage nationwide this year after hiking it in some areas for the first time in four years in 2017. Bangkok's wage floor will rise nearly 5% after a 3% increase last year.

Foreign workers without visas began pouring into Malaysia and Thailand from neighboring countries around 1990, after the Cold War. Brisk cross-border movement and cheap labor have driven ASEAN's rapid growth.

The bloc's migrant population more than tripled between 1990 and 2015 to roughly 10 million, with about 70% hailing from within ASEAN. 

Foreign workers account for nearly 30% of the population in Singapore, with high-skilled workers helping the country achieve its hub status in financial services while low-skilled ones build the necessary infrastructure that supports economic activities.

Japanese companies in ASEAN are raising concerns about direct and indirect effects from the crackdown on illegal labor, such as higher costs and slower work. Though they do not directly employ migrants without legal status, they may do business with subcontractors or other companies that do.

A Japanese general contractor in the region complained that its competitiveness will suffer if it has to raise prices to reflect increased costs.

"If we lose foreign workers, who are diligent and can work long hours, plants will stop operating," an executive at a Malaysian office of a Japanese company warned.

Japanese businesses have been drawn to Southeast Asia by its large pool of cheap labor. "Many countries in the region are becoming less suited for a low-cost production hub as their economies develop," said Kaori Iwasaki of the Japan Research Institute. "These countries now face the need to offer incentives other than cheap labor to retain foreign companies," Iwasaki added. With aging populations sure to be a long-term factor as well, companies may shift more operations to neighboring countries.

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