Investing more in the people

Malaysia has done well in gross enrolment ratio and university enrolments have shot up but there

Emphasis on human capital development crucialfor the country to boost productivity

WEAK crude oil prices have given Malaysia the opportunity to do away with the fuel subsidies late last year. But it is also now giving the country’s policymakers the opportunity to implement the changes that can make the economy more competitive and in the process raise incomes and living standards.

At the core of making the country’s economy more competitive lies human capital development. This is important given that Malaysia’s exports competitiveness lies in the manufacturing sector and not in the extraction of natural resources.

Gross manufacturing exports (including those derived from chemical, petroleum and rubber products) comprised nearly 77% of last year’s exports, of which 48.5% came from the electrical and electronic (E&E) subsectors.

Therefore, the country needs to move up the manufacturing value chain faster if its economy is to remain competitive. To do so, a skilled workforce is needed to adopt technology and knowledge for innovation that can then be translated to higher productivity.

While this message is not new, Malaysia’s human capital development continues to bedevil policymakers. Tellingly, while policymakers will say that these challenges are being met head-on and there have been progress made in several of these areas, it does not neccesarily mean that the transformation of the economy’s labour needs is keeping pace with global economic trends.

Current global conditions make it all the more urgent to ensure that the country stays the course in making the necessary transformation to stay ahead. In an interview with CNBC recently, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz admitted that the country could do better to escape the middle-income trap, saying that reforms in the areas of education and health were being pursued and that Malaysia “still had time to achieve its goal if the reforms were successfully implemented”.

The World Bank’s chief economist Kaushik Basu says the Malaysian economy will have to adjust to the new realities of lower commodity prices and to make the necessary policy adjustments, including more emphasis on human capital development in order to boost future income.

Chuah says quality engineers are needed for the E&E subsectors.

“During this period, to diversify is important and the biggest investment is to spend more on human capital, which we spend too little on,” he says at a media briefing during a stopover in Kuala Lumpur recently. Basu says the returns from human capital will be bigger in the long-run than natural resources extraction.

“Studies have shown that even having good teachers in school can make a huge difference to the earnings capacity of students in future. This is a lesson that all emerging economies must take and that is to invest in education and human capacity building much more than what have done in the past,” he says.

Future skilled workforce

At the heart of the transformation of the Malaysian economy is the quality of the workforce. It has stood up fairly well over the decades when the economy transformed to one increasingly based on low-end manufacturing, especially in the exports-reliant E&E subsectors from one largely reliant on tin and rubber exports.

However, the pace of transformation is vital because the low-cost model of making lower valued goods is not feasible as Malaysia aspires to a high-income nation by 2020. But employers perennially complain that there is a shortage of skilled workers, the mainstay of innovation and productivity.

Pentamaster Corp Bhd executive chairman Chuah Choon Bin tells StarBizWeek that quality engineers are needed for the E&E subsectors to be competitive. The Bayan Lepas, Penang-based company exports automated semiconductor equipment to China, the United States and Europe.

While Pentamaster today exports the goods to countries from which firms in the industry used to import from, Chuah cautions that local players and multinational firms cannot always rely on the low-cost based model to stay competitive. “Cheap doesn’t mean we can compete indefinitely, we need to instil the quality mindset and the Malaysian education system is lacking in this respect,” he says, pointing to Germany and Japan as good examples of how the education system has supported the creation of a skilled workforce.

An education system that can reliably supply a skilled workforce is important but as the most recent Programme for International Student Assessment (in 2012) administered by the Organisation for Economic Cooperation and Development (OECD) shows, even at the basic level, Malaysia is not faring well.

The assessment saw Malaysian 15-year olds ranking in the bottom third for mathematics, science and reading as well as for problem-solving skills. The OECD’s education and skills director Andreas Scheleicher had noted then that today’s “15-year-olds with poor problem-solving skills will become tomorrow’s adults struggling to find or keep a good job”.

He goes on to say that “policymakers and educators should re-shape their school systems and curricula to help students develop their problem-solving skills which are increasingly needed in today’s economies.”

Although access to education is not an issue, quality is. “Malaysia has done well in gross enrolment ratio and university enrolments have shot up, overtaking many countries including India but there’s still a lot more investments needed,” Basu observes.

The reluctance to participate in the Times Higher Education (THE) rankings and be scrutinised by the global academic community has not done much good, as the latest THE rankings again showed local universities’ lack of participation.

Indeed, several key issues were brought up in the World Bank’s December 2013 Malaysia Economic Monitor, among them being that the quality of education has not kept pace with its regional peers and the questionable quality of teachers.

The report says the disproportionate share of post-secondary graduates among the unemployed further suggests that the education system is not producing the skills sought by the labour market.

“Malaysia’s performance in standardised international student assessments is below what would be expected of a country with its income per capita or level of educational expenditures, and well below the performance of the high-income economies that Malaysia aspires to compete against for innovation and knowledge-based investments. Moreover, performance appears to have deteriorated over the past decade. The level of English proficiency is widely perceived to have declined over time, a hypothesis that is supported by data on English teacher proficiency,” the report’s author Frederico Gil Sander noted.

Never mind the future, for employers such as Chuah, the lack of cooperation between small medium industries (SMIs) and tertiary education institutes does not bode well for the immediate cohorts of graduates nor for the upskilling of the current workforce, so vital for technology-based firms.

“There is no concerted effort like in Germany where world-class technology firms work closely with universities and vocational institutes to ensure that the economy gets the workforce it needs. The problem with Malaysia is that SMIs are not in the picture unless they are of a certain size, therefore its hard to grow in terms of human capital,” he argues.

The perception that the Government prefers foreign direct investment over local private-sector investments, which Bank Negara has debunked in its latest annual report, says a lot about the dilemma that policymakers may be in. On the one hand, they want to encourage the faster adoption of new technologies but the lack of skilled workers or even knowledgable engineers and scientists mean that there is a need to work with foreign firms to get them to transfer their knowledge and technology to the local economy.

“We cannot compete in the market because of quality, and we lose good people who go abroad to study and don’t return as they can find better opportunities and better pay,” Chuah adds.

Basu believes Malaysian policymakers are committed to a holistic transformation of the economy but cannot say how far reforms have been successful or implemented.

“Whether Malaysia is doing enough or not I’m not in a position to answer but from two years ago and even now, when I discuss with policymakers, all of them have stressed the importance of diversifying and they’re taking this seriously,” he says.