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Nikkei Markets

Malaysia needs structural reforms to shrink income gap

Government eyes raising skills and boosting foreign investments in key sectors

Malaysian Prime Minister Mahathir Mohamad has raised the minimum wage to 1,100 ringgit per month since coming to power in 2018.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia, raring to break into the club of high-income nations, needs to unleash few structural reforms to lift local wages and shrink income inequality in an economy that has enjoyed near-full employment for years, policymakers and economists said.

For nearly two decades, Malaysia's unemployment rate has hovered around 3%, a reading economists consider as full employment. Compensation to employees, however, has stagnated at around 35% of gross domestic product, lagging that of regional rivals such as Singapore.

Economists said a tight labor market, however, could also indicate a shortage of skilled personnel as well as a mismatch between demand and supply in skills, which could weigh on future economic growth prospects.

"Malaysia is on the threshold of joining the ranks of the world's high-income, advanced economies by 2025," said Chief Asia-Pacific Economist Rajiv Biswas at IHS Markit. "This requires a transition of the Malaysian economy towards higher value-added output, particularly since the domestic labor market is tight."

Demands for structural reforms are rising at a time when Malaysia's economic growth, despite recent signs of slackening, remains broadly resilient amid mounting external risks. The pace of economic growth in the first quarter decelerated to 4.5% year-on-year from 4.7% in the previous quarter as consumers trimmed property purchases, while businesses pared investments. Still, the growth rate is sharply higher than Thailand's 2.8% expansion pace in the first quarter and Singapore's 0.1% growth rate in the second quarter.

For decades, Malaysia has been relying on cheap foreign labor to toil in its factories producing electronics parts, on palm oil plantations, and at construction sites as it transformed from a largely agrarian nation into one of the most industrial economies in the region.

Official data show there are more than 2 million migrant workers in the third-largest Southeast Asian economy -- and at least as many undocumented workers in a nation of 30 million people, according to various estimates.

However, an abundance of such cheap labor is now thwarting prospects of wage growth, automation and the adoption of other technological advances that are crucial to boost productivity.

In Malaysia, a worker would only be paid $340 for output worth $1,000, according to research findings by Bank Negara Malaysia. That compares with $510.8 received by workers for producing the same output in benchmark economies including its richer southern neighbor Singapore.

"Growth has been unfairly divided between capitalists and workers," said Zakiah Jaafar, deputy director general at the ministry of economic affairs. Further, "we're less productive," she noted.

By year-end, the government hopes to release a guideline on remuneration to narrow the gap between the lowest-paid and highest-paid employees at its sprawling government-linked companies that range from oil and gas firm Petroliam Nasional to homebuilder Sime Darby Property.

"We're encouraging firms to pay better wages" with state-owned enterprises as the starting point, said Muhammed Abdul Khalid, economic adviser to Prime Minister Mahathir Mohamad.

Since coming into power in 2018, Mahathir has raised the minimum wage to 1,100 ringgit per month, but economists said the increase was insufficient and the country's employment market requires wholesale reforms that include shifting away from industries that rely on low-cost labor to raise the share of high-value economic output.

Other priority reforms that have been identified by the government involve improving technical and vocational training programs with relevant skills, said Muhammed.

Malaysian businesses are facing a shortage of professionals for key roles that is potentially holding back growth, said recruitment firm Hays. "Skills shortages are not a new problem, but our clients are informing us that the situation is worsening rather than getting better," said Hays Managing Director Tom Osborne.

Beyond the immediate term, Muhammed said the government plans to focus on foreign investments in key sectors that include electronics, aerospace, chemical, and medical devices to shift the economy away from its reliance on low-cost labor.

"All the incentives will be focused towards these sectors," he said. "We want only to encourage value-added, high-wage industries."

In addition, a key public policy priority will be to improve education and training for Malaysians in order to meet the skill requirements for the country's future higher value-added economic structure, said Biswas of IHS.

"This will be important to prevent the nation from becoming too dependent on foreign workers for skilled occupations, as has occurred in some Middle Eastern nations, notably in the Gulf states," he noted.

--Jason Ng

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