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Sunday, April 5, 2015

Too much faith in services won’t help, say economists

Malaysia has yet to come out of the crucial phase of industrialisation, say economists, and as such jumping into the services sector is seen as premature. – The Malaysian Insider pic, April 5, 2015.Malaysia has yet to come out of the crucial phase of industrialisation, say economists, and as such jumping into the services sector is seen as premature. – The Malaysian Insider pic, April 5, 2015.
As Malaysians mark the first week of the goods and services tax (GST), experts have cautioned Putrajaya against putting too much faith in the services sector and private consumption to drive the economy.
This thrust, said Institut Rakyat head Yin Shao Loong, would not help raise the incomes of working-class Malaysians as wages in the services sector tended to be based on those in manufacturing.
The plan to make services the next engine of growth was premature, said the experts, as the Malaysian economy had still not grown out of a crucial phase of its industrialisation process.
Skipping this phase and going too soon into services was unsustainable, said economist Tan Sri Prof Kamal Salih (pic, left), because the consumption needed to fuel those services is coming from debt.
“This is why our private, corporate and public debt levels are so high and this makes us vulnerable to external shocks,” said Kamal, who is adjunct professor of economics and development studies at Universiti Malaya.
Trait of advanced economy
The Najib administration’s greater push into services is contained in the Economic Transformation Plan handbook.
“The government’s high-income objective is not just a quantitative target,” the handbook states in its first chapter “New Economic Model of Malaysia”.
“It is also about Malaysia becoming an advanced, developed nation with an economy possessing the characteristics that are common to developed nations.”
One of the key components of that objective is to develop “a large and thriving services sector, to supplement the nation’s historical strengths in oil and gas, agriculture and manufacturing”.
In his 2014 budget speech, Prime Minister Datuk Seri Najib Razak said the services sector was the main contributor to economic growth and had huge potential to be developed.
“In 2013, services contributed 55% (to the economy) compared with 49.3% in 2000.”
On March 16, Najib said the services sector provided about eight million or 62% of all total jobs in the country.
He said this when launching the Services Sector Blueprint and the Logistics and Trade Facilitation Master Plan.
The blueprint had four main policies, most of them to develop high value local services such as in healthcare, finance, information and communications technology (ICT) which can then be exported.
The Budget 2015 had also provided more than RM5.3 billion under various schemes to develop these services.
Harder to export lawyers than rubber gloves
Experts, however, said this focus was premature as high value services could not grow without a highly skilled and innovative workforce, which in turn came when the country had high-tech, high value industries.
Malaysia’s industries, said Kamal, were trapped in their low-value model which relied on foreign capital and cheap labour.
“So instead of spending on research and development and becoming more high tech, our industries will spend more money to bring in lowly paid foreign workers to keep up production rates and be cost competitive.”
Because cheap foreign labour was so readily available, money and resources were not put into developing a highly-skilled local workforce, he said.
High-value industries nurture skilled workers who are better paid and who will then be able to sustainably drive domestic demand and consumption without relying on too much debt.
“But because we could not develop our industries we are skipping this phase and going straight into services and trying to maintain growth via consumption.
“Because of wage stagnation, all that consumption is sustained by debt,” he said referring to the fact that Malaysia’s household debt is 86.6% of the total value of the entire economy in 2013.
Kamal said most advanced economies, such as South Korea, Germany and Taiwan usually moved more into services after their industries became high tech and high value.
Another problem with Putrajaya’s thrust, said Yin, was that services were harder to export compared with high quality manufactured goods.
“Services are harder to export than goods because it is far harder to multiply the service capacity of an individual with technology than it is to multiply the production capacity of manufacturing with technology.”
The amount and quality of services depends on the quality of workers, which depends on the education system, which has been shown to be rife with problems, said Yin.
“(The government) failed to realise that it was the export of manufactured goods that really drove South Korea’s wealth and standard of living,” said Yin.
Focusing on services at this stage of Malaysia’s development, he said, would not lead to higher wages that Malaysians were hoping for because it would be tough to create value-added services.
Like Kamal, Yin said Malaysia had to turn around and reinvest in a new industrial policy based on forcing local firms to go high-tech and high value.
“Focusing on exports benefits the economy because export firms invest more in research and development of technology, pursue productivity, and can generate higher wages,” said Yin.
“Exporting manufactured goods ends up stimulating the growth of services to complement manufacturing.
“In fact, selling competitive goods abroad allows services to piggyback on those strengths and tap into export markets,” he said.
- TMI

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