Malaysia’s 34th place ranking in the 2024 IMD Competitiveness Index is a stark reminder of the urgent need for strategic economic and policy reforms. The ranking is the country’s worst position since 2020, having dropped from 27th in 2023. The significant decline underscores the pressing need to restore and enhance Malaysia’s global competitiveness.
Decoding the drop
A detailed analysis reveals declines in three out of four key factors: economic performance, government efficiency, and business efficiency.
The domestic economy, in particular, experienced a sharp fall, dropping by 19 places, while international trade slipped by three places. The depreciation of the ringgit, from a US$/ringgit rate of 4.4 to 4.7 over the past year, is a key factor in Malaysia’s drop in ranking.
This depreciation not only undermines purchasing power but also affects investor confidence, leading to a significant decline in Malaysia’s global competitiveness.
Exploring challenges and opportunities
The exchange rate volatility and trade imbalance are crucial indicators of underlying economic challenges. However, they also present opportunities for improvement.
The weaker ringgit makes imports more expensive, contributing to inflationary pressures, while the higher import-to-export ratio indicates structural inefficiencies in the economy. Addressing these issues requires a multifaceted approach, including stabilising the currency, enhancing export competitiveness, and implementing policy measures to attract and retain foreign investment.
Furthermore, improving government efficiency and business practices will be essential to reversing the downward trend in Malaysia’s competitiveness ranking and fostering sustainable economic growth.
Despite these challenges, the index indicates that Malaysia remains strong in international investment, with an increasing influx of FDIs. This trend is a positive signal, reflecting confidence in Malaysia’s economic potential and strategic position in the global market.
Looking ahead, several factors are poised to significantly improve our competitive environment, offering a promising path to restore and enhance Malaysia’s global competitiveness.
First, the continued rise in FDI will boost our exports and strengthen our domestic economy. Increased foreign investment brings not only capital but also technology transfer, innovation, and best practices, which can enhance productivity and competitiveness.
These investments create jobs, stimulate local industries, and integrate Malaysia more deeply into global supply chains.
Second, the new industrial master plan and national semiconductor strategy are set to catalyse further growth. These initiatives are designed to modernise our industrial base, foster innovation, and position Malaysia as a leader in key high-tech sectors.
The significant investments from global conglomerates like Google and Tesla underscore the attractiveness of Malaysia’s strategic initiatives and its potential as a hub for advanced manufacturing and technology development.
Third, the downturn in the semiconductor market is showing signs of bottoming out. Malaysia’s strong position in the industry, which is crucial for numerous high-tech and consumer goods, will enhance our competitiveness as the sector rebounds.
The semiconductor industry is vital to many other sectors, and recovery here will have a multiplier effect on the broader economy. As demand for semiconductors picks up, Malaysia stands to benefit from increased production, exports, and innovation within this high-value industry.
Government and business practices
The index registered declines in terms of government efficiency, public finance, business legislation, and institutional framework. The drop in ranking for public finance is likely to be due to our ballooning deficit, national debt, and pension funding issues.
These financial challenges strain the government’s ability to invest in essential services and infrastructure, undermining overall economic stability. Additionally, protectionist policies such as the Bumiputera shareholding quota and continued opacity in the government’s procurement process negatively impact business legislation and the institutional framework.
These policies create an unpredictable business environment.
The most significant drop in ranking occurred in business efficiency. Our productivity and efficiency fell by a staggering 17 places, and management practices dropped by 11 places.
A major contributing factor is our stagnant wages, which lag behind those of other countries offering higher-wage employment. This persistent issue of underpaying workers and undervaluing reskilling, upskilling, and lifelong learning continues to hinder our competitiveness. Employees are less motivated, and businesses struggle to attract and retain top talent, leading to a less dynamic and innovative economy.
Strategic reforms
Addressing these issues requires a comprehensive approach. Improving public finance through fiscal discipline and transparent management of national debt and pension funds is crucial.
Reforms in business legislation to create a more transparent and investor-friendly environment will also be essential. Enhancing wage structures and prioritising workforce development through reskilling and upskilling programmes can help improve productivity and efficiency.
Furthermore, adopting modern management practices and flexible working arrangements, as seen in other advanced economies, can drive higher business efficiency and economic growth.
The National Human Resource Framework, announced in May last year, coupled with the National TVET Policy 2030 and an additional RM200 million allocation for TVET training this year, are pivotal for sustaining Malaysia’s competitiveness.
These initiatives aim to enhance the skills and adaptability of our workforce, aligning them with evolving industry needs and technological advancements. Effective implementation will bolster productivity and innovation across various sectors, crucial for economic growth in a rapidly changing global landscape.
Moreover, management practices in Malaysia require urgent modernisation. Many firms still adhere to outdated norms, insisting on physical office presence even when remote or hybrid work arrangements could enhance efficiency and employee satisfaction, as evidenced by global trends accelerated by the Covid-19 pandemic.
Countries like Singapore have mandated flexibility processes for workplace arrangements, highlighting the need for Malaysian firms to adapt to contemporary workforce expectations.
However, it’s crucial to acknowledge that assessments of management practices through surveys may sometimes reflect employee dissatisfaction rather than true operational deficiencies. Addressing these perceptions and fostering a culture of continuous improvement will be vital in driving organisational effectiveness and long-term success.
Despite the setback, the government’s ongoing fiscal consolidation efforts, strategic industrial policies, commitment to investment-friendly initiatives, and strengthened multilateral trade engagements are expected to enhance our competitiveness in the foreseeable future.
Waking up from complacency
As Malaysia’s ranking has experienced a decline this year, it serves as a critical lesson that overly optimistic headlines and policies must be turned into tangible policy outcomes which bolster business confidence to yield lasting benefits.
This decline underscores the need for the government to refrain from complacency and instead view it as a clarion call to implement strategic reforms across various sectors.
It is paramount for policymakers to understand that competitiveness is not merely about numbers on a global index but a reflection of how effectively policies are implemented and how they resonate with businesses and investors.
Therefore, the focus must shift towards ensuring that initiatives aimed at economic growth and development are not just ambitious on paper but are actively realised on the ground. - FMT
The views expressed are those of the writer and do not necessarily reflect those of MMKtT.
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