Competition begins at home

Much is being done to make sure M'sia can compete with the best on the world

BY now, most people would have heard of the term middle-income trap.

This describes a situation where a nation makes rapid progress in terms of economic growth and in increasing incomes from a low base, but is unable to make that final leap to becoming a high-income nation.

Why this happens is often not clear but economists theorise that once the economic factors of production such as land, labour and capital have been sufficiently harnessed, it needs real gains in productivity to further increase income.

Put in another way, there is only so much land, labour and capital. Once you have made optimum use of these, the next stage is simply to ensure that you use these much more efficiently, and that there is a further increase in productivity.

Are we stuck in a middle-income trap?

It’s too early to answer the question. If we don’t reach high-income status by our target date of 2020, then perhaps we are.

But let me tell you we are doing everything possible to get to high income.

In a nutshell, competitiveness is crucial for high income. We simply must do things better than before and more efficiently.

High income goal: ‘In a nutshell, competitiveness is crucial for high income. We simply must do things better than before and more efficiently.’

 

We need a technological and knowledge leap, and to foster an environment which breeds and encourages competitiveness.

To become a high-income country, we have to be globally competitive, and focus on areas where we can bring our competitiveness to bear with the highest impact in terms of economic contributions and earnings.

Often, we hear the New Economic Model or NEM which is aimed at moving us into a high income country, is dead and is replaced by the Government and Economic Transformation Programmes. Nothing can be further from the truth and I am keen to dispel this transformation blues.

The moves we are taking to transform arise from the NEM - we are NOT replacing it.

We are implementing the NEM as best as we can through measures aimed at making major changes to our operating environment.

The Strategic Reform Initiatives have been put in place as an enabling process.

The National Economic Advisory Council (NEAC) recommended in the NEM, 51 broad and cross cutting policy measures to enable us to realise our goal of transforming our nation into a high income, sustainable and inclusive economy. We are implementing, albeit at different stages, all the 51 strategic reform initiatives.

There are six areas in which we are making major changes:

·Competition, standards and liberalisation
·Improving public finance
·Better public service delivery
·Defining and reducing the Government’s role in business
·Human capital development
· Narrowing disparities

Like charity, competition begins at home.

We introduced the Competition Act, which is being enforced this year so that all anti-competitive behaviour among Malaysian industries can be removed and there will be free and fair competition.

This is a major milestone and our adoption of this, despite powerful vested interests, demonstrates our commitment towards a competitive economy.

We have made amendments to the Standards of Malaysia Act 1996, approved in Dec 2011, to accelerate the development of standards.

This includes reducing the period of adoption of international standards from a year previously to nine months.

These are key requirements for an industry to be internationally competitive.

In the last Budget, 17 sub-sectors were announced for liberalisation, with up to 100% foreign equity participation.

Nine sectors have been fully liberalised while the remaining will be liberalised in stages by end-2012.

For changes to take place we need a healthy fiscal position.

We have made progressive improvements in tax collection, and collected additional RM25bil through improved efficiencies in 2011.

We have other measures in the pipeline to be disclosed in due course.

In terms of public service delivery we are re-engineering business processes. 395 licences will be eliminated by year end, which is estimated to reduce RM729mil in business licence compliance costs.

We are exploring open recruitment between the private sector and the civil service, and introducing real time performance monitoring.

We have introduced a minimum wage to force industry to become more competitive and various other initiatives to improve skills and upgrade the workforce.

Concurrently, we are modernising labour laws, providing a labour safety net, recognising talented women, strengthening human resource management and providing labour market analysis.

In making Malaysians more employable in the ICT industry and addressing the industry’s talent supply issue, the MyProCert programme does its part in upskilling Malaysians with international certification standards on programmes such as iOS Mobile Development and Oracle Certified Professional Programmes.

We are limiting the Government’s role in business to four areas – national infrastructure such as public transport; businesses that need to be owned locally such as defence; specialised industries which require large growth, catalytic or new technology; and situations where the private sector needs co-investors. There is a programme to pare down Government investments.

Last year, 80 companies participated in TERAS – a programme that aims to develop high performing bumiputra SMEs by enabling them to scale up and accelerate their growth, thus making them more competitive in the open market.

In line with the NEM, we are using the principles of being market friendly, merit-based, need-based and transparent in implementing these measures.

So far 50 more companies have qualified under this programme this year.

We are committed to encouraging competition and entrepreneurship.

The Government’s role is to set the conditions for competitiveness, enabling the private sector to take the lead and rise to the challenge. We know if we don’t successfully transform here, we will lose the battle to become a high-income nation.

But we are already taking the measures by putting in place enablers to make the economy more competitive and taking specific measures in a cross-section of areas to achieve the income we need to make us a developed country.

We will get there.

Datuk Seri Idris Jala is CEO of the Performance Management and Delivery Unit and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my

Malaysia's minimum wage, and its implications

Dramatic rise in wages poses upside risk to inflation
  
NOMURA RESEARCH

RECENT news suggests that Prime Minister Najib is likely to announce setting a minimum wage on Labour Day (May 1). This is authorised under the National Wages Consultative Council Act of 2011 passed by parliament in July last year.

Because of the looming general elections, the announcement is likely to be construed as politically motivated, but there are also important economic consequences of a legislated minimum wage requirement.

The minimum wage is likely to be set anywhere between RM800 to RM1,000 per month. If we assume RM1,000, this would imply a significant 17% rise in the wages of unskilled workers, which according to Malaysia's Employers Federation 2010 Salary Survey, are earning an average RM852 a month.

To put this in perspective, it compares with the average increase of wages in the manufacturing sector of only 6% per year.

This poses an upside risk to inflation, in our view. First, overall labour productivity growth, which has been slowing in the last few years to an average of 2.7% (versus 5.3% pre-1998), is likely to substantially lag the potential increase in minimum wages, resulting in a rise in unit labour costs.

Second, while one could argue that the legislation only affects a certain segment of the employed sector, in 2010 the share of private wage earners earning RM1,000 or below comprise nearly 50% of total employment, according to the Malaysian Institute of Economic Research.

Given the significant share, this is also likely to affect wage negotiations among higher skilled workers, and could stoke higher wage expectations.

As is common in other countries (e.g. Indonesia), minimum wages can be perceived as a wage-setting mechanism (which sets a floor to actual wages) rather than just a safety net for low-wage workers.

Finally, given the current strength in domestic demand (indeed Bank Negara's annual report suggests that domestic demand “will continue to be the anchor for growth,”) firms are likely to pass on rising input costs, fueling CPI inflation.

There are also longer-term concerns:

● Minimum wages could introduce rigidities into the labour market that may ultimately structurally raise unemployment rates. We think part of the reason Malaysian unemployment rates recovered quickly during the 2008/09 global financial crisis is that wage flexibility allowed downward adjustment in wages rather than employment losses during the downturn. Indeed, wages fell more sharply in 2008/09 than in the previous recession, and the unemployment rate recovered to pre-crisis levels more quickly and stayed there until now. The legislated minimum wages could reduce some of that flexibility.

● This could also hurt external competitiveness, which, as we have argued before, is facing some pressures that are not due to an appreciating real exchange rate. If a minimum wage of RM1,000 is set, Malaysia's labour costs will be nearly twice the regional average and will be the highest in South-East Asia except Singapore.

We understand that the Government is fully aware of these concerns and has pledged to address them by a broader set of structural reforms under Prime Minister Datuk Seri Najib Tun Razak 's New Economic Model and the 10th Malaysia Plan unveiled in 2010.

The problem, however, is implementation has been slow so far and without more meaningful progress, these concerns will likely persist. One key argument of the proponents of the minimum wage is that this is supposed to complement these reforms by imposing a hard constraint on firms to improve productivity and reduce their reliance on low-skilled, low-wage foreign workers.

The risk is the reforms lag the minimum wage implementation, and hence the argument fails to hold, while external competitiveness could suffer.

The extent of the impact will still depend on the level of the minimum wage set, and the enforcement among firms.

While the latter remains to be seen, for the former, we can draw on some findings from academic literature to gauge the optimal level of the minimum wage, i.e. whether it is high enough to improve living standards of wage workers but low enough to keep competitive pressures under control.

A study by the World Bank suggests that a useful rule of thumb for developing economies is that the minimum wage at the national level should be no more than 40% of average wages.

By this benchmark, a minimum wage set at RM1,000 for Malaysia seems appropriate on average, though there is considerable variation across sectors. For instance, it is around 41% of the current average in the manufacturing sector, but about 75% of the rubber sector.

In terms of the near-term monetary policy implications, although headline inflation eased for the fourth consecutive month in February to 2.2% year-on-year from 2.7% in January, we see risks to our current policy rate forecast of a total 50 basis points cut in the second half of 2012.

We think the risk of Bank Negara remaining on hold for the rest of 2012 has already increased given that in its recently released annual report, the central bank continued to assess that “at the current level (3%) of the overnight policy rate, monetary conditions remain supportive of economic activity.”

Minimum wages implemented in May could provide additional upside risks to inflation, when fiscal policy is highly expansionary and commodity prices are elevated.

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Malaysia's Minimum wage's benefits and effects