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Malaysia must look beyond election with employment reforms

Half measures will do little to keep nation out of middle-income trap

| Malaysia

Malaysian Prime Minister Najib Razak has put labor market improvements at the center of his government's efforts to achieve high and sustainable economic growth. But reforms announced by his government ahead of the nation's impending general election smack of populist appeal and will be too timid to achieve real change.

A program of systematic restructuring is needed to raise productivity, boost wages and help Malaysia avoid the so-called middle-income trap, a phenomenon of developing economies seeing their growth plateau before they have joined the ranks of high-income economies.

The government seeks to improve wages and working conditions while reducing the country's heavy reliance on low-skilled migrant workers, many of whom are undocumented and employed through contractors under hazy arrangements that make training difficult.

The government's target is to leave the list of middle-income states and qualify for high-income status under the World Bank's definitions by 2020. This would require an increase in annual gross national income per head to $12,236 from the $9,860 in 2016.

The Eleventh Malaysia Plan, the government's current five-year development strategy, identifies the creation of high-skilled jobs and efficient and effective labor markets as top policy priorities. Yet attempts to improve working conditions have been sporadic and the impact patchy.

Some of the recently proposed employment law changes would be positively harmful to the government's productivity objectives. For example, defining full-time employment as 48 hours a week would contribute to a harmful culture of long hours and unskilled labor. Such working conditions would not be acceptable to many Malaysian citizens, leaving more openings clear for migrant workers, the most difficult group to retrain.

A minimum wage for full-time workers was introduced four years ago, with the aim of spurring productivity growth and encouraging technological upgrades. The minimum was raised in 2016 and is scheduled for another revision this year. However, the current rate of 4.80 ringgit per hour ($1.24) for most sectors is too low to propel a shift to skill-intensive, technologically advanced operations. It compares with the minimum of $1.28 in Thailand's more developed regions, even though Malaysia's gross domestic product per capita is 60% higher than Thailand's.

There is also confusion about migrants' share of Malaysia's workforce, which puts into question the government's target of stabilizing the proportion of foreigners at 15% by 2020.

Official data show that there were about 1.7 million documented foreign workers in mid-2017, down from 2.1 million in late 2014. The apparent reduction is credible, since it would reflect the number of visas issued by the government, which has imposed recruitment freezes in recent years.

However, the official labor force survey reported growth in the proportion of non-citizens from 13% in 2014 to 15% in 2016. The real total may be much higher because the official surveys largely exclude undocumented workers. Independent estimates that include them put the overall proportion of foreigners in the workforce at 25% to 40%.

The government should clear up this needless statistical mystery as soon as possible.

But ministers seem more concerned with enforcement of unsatisfactory laws. A case in point is a recently introduced requirement that employers must make a declaration of compliance with labor regulations when hiring foreign workers, including committing not to deduct the government's special levy on foreign labor from the workers' pay. Employers must also pledge not to hold onto migrants' passports.

Adding this compulsory layer of regulation will remind employers of the law and may concentrate minds on the potential penalties for infringement. But companies will not really comply without sustained government efforts to monitor employers and protect workers.

Malaysia has achieved average annual economic growth of 5.7% a year since 2010. If this relatively good performance is to be sustained, manufacturing must generate an increasing proportion of skilled jobs for the country's urbanizing population.

But official surveys suggest that foreign workers account for a third of employment in manufacturing and two-thirds in agriculture. The relatively high share of foreign workers in manufacturing suppresses wages and impedes both productivity growth and technological investment.

The government has made matters worse through its knee-jerk reactions to specific problems. For example, ministers recently announced plans to insert anti-discrimination components into the Employment Act, following reports that some hotel operators had discriminated against workers wearing Islamic headscarves.

Action may have been required, but rather than rushing to resolve the hotel headscarf issue, the government should have taken the opportunity to introduce comprehensive anti-discrimination legislation to ensure fair employment in all sectors, along with a universal right to equal opportunities.

Malaysia's economic aspirations call for more wide-ranging and coordinated change than the government has put forward. More fundamental shifts are needed -- much higher hourly wages, higher productivity, fewer working hours and more balanced lifestyles.

Such a program would be contentious and perhaps politically inconvenient. But if the government persists in resorting to quick and partial fixes, it is hard to escape the impression that the pursuit of political popularity is driving policy priorities.

Hwok-Aun Lee is a senior fellow at the Institute of Southeast Asian Studies in Singapore.

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