Time for bold, structural reforms: BNM governor

Malaysia should seize the opportunities resulting from a strong economy and favourable global environment to set itself on a more productive, sophisticated and sustainable economic growth path through bold structural reforms of the labour market, investments and new growth areas.

Bank Negara Malaysia (BNM) Governor Muhammad Ibrahim (above) said such an uncharted path would not be new to Malaysia as it was the very reason that positioned the country’s economy to be highly open, diversified and served by multiple sources of growth.

“(Hence), it is time to embark on long-term policies that will further enhance our competitiveness and ensure that our economy is well-balanced to deliver sustainable growth,” he said during a briefing with senior editors yesterday ahead of the release of BNM’s Annual Report 2017 and the Financial Stability and Payment Systems Report today.

Muhammad said the current positive economic environment would provide policymakers with ample policy space to continue with necessary reforms, adding that the labour market, among others, was in need of urgent attention.

“To avoid being trapped in low-cost, low-productivity and low-income spiral, Malaysia needs to reform the labour market by creating high-quality jobs, especially for the new generation of job seekers.

“If we remain as we are now, our children won’t have a job that is good enough and I don’t think our children will be better off than us. Even now, I am not sure if our children are living better than us,” he said.

The BNM governor said the other key factor would be to attract quality investments that contributed meaningfully to the nation’s development and to embrace new growth areas and new activities such as sharing economy, digital economy and more sophisticated manufacturing processes.

He also pointed out that foreign workers were cheap to hire but the macroeconomic cost was huge, especially now that the share of low-skilled jobs creation has doubled to 16 percent in recent years.

The BNM annual report stated that Malaysia’s transition into a high-income and developed nation was at risk as long as firms were still engaged on a “race to the bottom” in relation to labour costs, and were unwilling to pay more despite commensurable productivity gains from higher-skilled workers.

“Employment of cheaper foreign workers vis-à-vis locals allows employers to keep wages low and in doing so, obviates the pressure to change the status quo. This distorts the natural wage clearing mechanisms that would have otherwise driven wages upwards,” it said.

Five key points

Studies have pointed to some forms of depression on overall wages, and particularly on the wages of low-skilled locals.

The median wages of foreign workers were generally lower than those of locals, especially in mid-skilled occupations where 60.8 percent of locals were employed.

“It is entirely plausible that the very high presence of foreign workers in the private sector could widen wage differentials and deter job creation for locals,” the report said.

The BNM annual report noted in an article entitled “Low-Skilled Foreign Workers’ Distortions to the Economy” that this was most evident in the Gulf Cooperation Council economies where 88 percent of private-sector jobs created from 2000-2010 were taken by foreign workers of which 85 percent of them were low-skilled.

“While the hiring of more low-skilled foreign workers does create demand for local workers in mid-skilled and supervisory jobs, it is arguable as to whether this is the most desired route in achieving that outcome.

“Automation and the adoption of more sophisticated technologies will create their own demand for higher-skilled workers. These positions usually come with better wages and can be filled by retrained unemployed graduates,” said the report, adding that moving forward, more can be done on the progress made.

The end objective would be to ensure that the future foreign worker management system in Malaysia is clearly articulated, firmly implemented, and more aligned towards Malaysia’s economic objectives.

The report outlined five key points that were worth pursuing, namely clear stance on the role of foreign workers, gradual implementation and clear communication of policies, market-driven demand management instruments, fair treatment of foreign workers, and effective monitoring and enforcement.

As for investments, the BNM report said there appeared to be a mismatch between the investments the country was receiving and the new growth areas in which the nation should be cultivating.

“For example, there is emerging evidence of increasing foreign direct investment (FDI) in less productive sectors such as real estate and property development, particularly in segments where policymakers have identified imbalances.

“FDI in the real estate and construction sector has risen in terms of share, from an average of 6.3 percent of annual FDI flows in 2010-2015, to 19.1 percent in 2016 and 2017,” it said.

Industrial engagements suggested that these investments were mainly channelled mainly into the higher-end property segments.

“Other leakages include low domestic spillovers due to the high rate of income repatriation by foreign companies and high remittances from foreign workers, both of which are structural factors which weigh on Malaysia’s current account balance,” the annual report added. - Bernama