Read the mainstream press and it is hard to miss that the Economic Planning Unit and the Ministry of Finance are trying to market a new economic model to replace old ones. I fear that this new model is misguided and will lead Malaysia down the wrong path.
Read the mainstream press and one will find that it is popular these days to state that Malaysia needs to go up the economic value chain. Almost always accompanying that is rhetoric calling for Malaysia to graduate from its addiction to low-wage, low-skilled workers which, by and large, refers to dependency on cheap foreign labor.
Policy-wise, this has been translated into restriction on recruitment of cheap foreign labor. As proof, an astronomical levy on recruitment of foreign workers was imposed as part of the second stimulus package.
In time of economic slowdown, that particular action does not make sense and luckily, the Najib administration understands this and has decided to postpone it indefinitely. But even without a slowdown, that is no way to move forward due to uncertainty of any country’s development path.
Nonetheless, it is true that Malaysia needs to move up the value chain. We have been benefiting massively from early adoption of a liberal economy but other recently liberalized economies like India and China are finally catching up with Malaysia, and at an amazing pace.
Rapid reduction of poverty and continuous registration of high economic growth are testaments of how fast these countries are catching up after abandoning flawed economic models that ignore the importance of private property as a basis of a society.
Not only are they catching up rapidly thanks to liberalization, with their overwhelmingly larger and cheaper supply of labor, they are crowding out Malaysia and its peers like Thailand and the Philippines from the low-wage, low-skilled and labor-intensive niche. Penang, for instance, is already seeing multinational corporations migrating out from the state to Vietnam and China. This trend occurs because, among other reasons, of the availability of cheaper and larger supply of labor.
From this perspective, Malaysia is indeed losing its competitiveness; Malaysia is unable to compete in a low-wage model. If Malaysia fails to react, challenges from these low-cost countries have the potential to wreak havoc on the Malaysian economy. Fearing being pushed to the margin in the global market, Malaysia seems to be left with nowhere to go but up in the value chain.
Going up does not automatically mean actively restricting recruitment of cheap foreign labor, though. Cheap foreign labor still has roles in the Malaysian economy, even as its importance continue to diminish and even as other countries are able to excel at low-wage, low-skilled industry better than Malaysia.
This point is all the more tenable since in the long run, price equalization will happen to bring some kind of equilibrium between Malaysia and other competing countries.
The new equilibrium for low-wage, low skilled industry — perhaps especially for manufacturing — for Malaysia may be below its current level but the requirement for such industry will still exist since it provides goods or services which are hard if not impossible to trade. Somebody will have to do it.
Restriction on recruitment of cheap foreign labor is doubly unhelpful if the locals themselves refuse to take up low-wage low-skilled jobs. The restriction will create upward pressure on prices which include wages, pushing up the cost of living unnecessarily high when access to a large source of cheap labor to stabilize prices is available in the region.
In an open economy, that pressure will attract cheap supply of labor to act as a counterbalance. If that source is unavailable locally at the right prices, it will come from abroad.
That is already happening in Malaysia and the same trend is observable in the United Kingdom, where Eastern Europeans are taking up low paying jobs which the locals are reluctant to do as cheaply as the immigrants are willing. The same is true in the United States but instead of Eastern Europeans, they are from Mexico or other parts of Latin America.
A restriction on foreign labor will prevent that from happening, forcing prices and wages to go up. I feel this point must be stressed and hence, I repeat, that will inevitably cause the cost of doing business to increase.
The upward pressure on wages has been suggested as a tool to attract talents into Malaysia as an effort to take Malaysia forward beyond low-wage low-skilled economy into the realm of new economy.
This, however, confuses an increase in nominal wealth with an increase in real wealth. What is the point of being paid higher wages when the cost of living goes up accordingly, or higher?
In other words, the restriction which drives nominal wages up really makes no difference in real terms.
It must be noted that any increase in real wealth is largely due to productivity. This is not a mere opinion. Rather, it is an economic fact.
If one is less willing to believe mainstream economic theory due to the unfavorable popular reputation that economists currently suffer, then do refer to any econometric model on the matter; the correlation is strong and the causal relationship is enticing. Any effort at moving up the value chain must take this into account.
By moving up the value chain, it inevitably means greater application of science and innovation to increase productivity. A highly educated workforce will be required if the economy is to enjoy higher productivity.
In light of this, the question is not whether our addiction to cheap labor is a barrier to take the economy to a higher plane.
Instead, the questions that demand answers are: does Malaysia have a highly educated workforce; does Malaysia have the talents to fulfill the prerequisite of a high-value economy?
With a minority of its population holding a graduate degree and with an education system that seeks to brainwash its students rather than encourage critical thinking, it is a stretch to answer the questions in the positive.
That, by no means, is a reason to throw in the towel but it can help to refocus our energy from wrongfully vilifying low-skilled foreign labor to educating Malaysians better.
What is needed is an education system that demands the biggest effort from all. Schools, colleges and universities need to be liberalized to encourage development of competitive, thinking and open minded workforce, not yet more groups to be goaded for political purposes.
While these workforce is being developed, foreign talents should be welcomed and even offered citizenship.
Furthermore, just as the argument that low-cost giants are crowding Malaysia out from the low-wage, low-skilled niche, what actually guarantees that Malaysia can break into the high-value, high-skilled niche already filled with countries that with highly educated workforce?
Somehow, the rhetoric and the central planning action by the government which lead to curbs on foreign labor seems to suggest there is heavy competition in low-skilled industry but not in high-skilled industry.
”It’s crowded here, let’s move over there. Simple.” Well, it is not. While the pay off from a high-value economy is huge, it is naïve to think that there will be no competition.
Just imagine how much resources will be required to reverse the serious brain drain Malaysia has been experiencing for so long. Malaysia is way behind the curve in competition for talents. Compounding the issue is unfair practices by the government that make certain groups of Malaysia unappreciated.
If restriction of employment of cheap foreign labor is used as a stick to force Malaysia up the value chain, the danger is that Malaysia might fail to break into the high-skill niche and then finding itself with a largely dismantled low-skill industry.
With a serious lack of talent in the local economy, Malaysia might not only find itself entrenched in the middle-income trap, it might fall behind in comparison with its peers.
Unnecessary hostile position against cheap foreign labor might cause Malaysia to not have a fallback position if there is an error of judgment.
It is therefore, in my humble opinion, imperative that we ensure the ledge on the other side of the gully is properly secured before we make the jump across rather than chipping off the ledge we are still on. If we find ourselves in mid air only to realize that the ledge on the other side cannot support us, the next place we will be is at the bottom of the gully.
First published in The Malaysian Insider on May 4 2009.