Economists say extra incentives needed to push economy up the value chain
IS the reason for Malaysia’s private investment growth slowing down since 2013 really due to escalating costs, or is it because businesses are less competitive? After all, Malaysian businesses and consumers have had to live with rising costs for some years now, as subsidies are either being abolished or lowered.
The gradual cessation of such assistance, as it was, has revealed how uncompetitive a large swathe of the Malaysian economy is. Yes, there are pockets of competition such as the glovemakers and chipmakers, while the country is the second-largest exporter of palm oil and palm-derived products in the world.
But the reliance on the low-cost model has cost the Malaysian economy dearly. Businesses have no incentive to move up the value chain and produce goods and services that make higher margins. What makes life more difficult now is that they have to contend with other costs – minimum wage, higher inputs, the goods and services tax (GST) and the latest – the Employment Insurance System (EIS). The additional costs eat into whatever margins they make.
On the surface, some will say that businesses have invested less because costs have risen. The truth is, when comparisons are made, the cost of doing business is actually not as high as what local businesses believe it to be. A number of countries in this region have higher costs but see higher private investments, perhaps due to a low-base effect since their economies may be less developed. The other more compelling reason, given how developed the Malaysian economy is, is competition.
However, it does not detract from the fact that, mere coincidence or not, the growth rate of private-sector investments in the country has been falling as the cost of doing business keeps rising.
Since hitting a peak of 21.4% in 2012, private-sector investments have been on a decline. At the same time, the cost of doing business has gone up.
Since 2010, in line with the Government removing subsidies, the cost of doing business has been estimated to have gone up significantly as the economy moves up the value chain.
The reasons range from a higher minimum wage to the increase in energy prices.
The soon-to-be-implemented EIS has further raised worries among the business community that it would lead to another round of cost increases.
The environment for doing business has certainly become tougher in recent years.
The Federation of Malaysian Manufacturers (FMM) cited some of the elements that have contributed to the increase in costs such as the GST, the introduction of a minimum retirement age law and the expansion of the Social Security Organisation insurance to cover all employees, including top management, effective since June 2016.
The Malaysian Employers Federation had objected to the proposed EIS.
“It will be an additional burden to the already high cost of doing business and will make Malaysian employers less competitive, especially given the challenging economic outlook,” the FMM said in a statement, adding that employers cannot afford to absorb any further increases.
Anecdotal evidence, according to economists, points to the possibility of the increased costs being among factors that may have affected private investment growth.
The trend of private investment growth around the region in countries such as Indonesia and Thailand has also slowed. There are many factors that account for that slowdown, but generally, the pace of investment growth in Asean has slowed down compared with the decade before the 1997/1998 Asian financial crisis. The costs, on the other hand, of doing business have also risen against a backdrop of moderating private investment growth.
The Socio-Economic Research Centre’s executive director Lee Heng Guie says that should this trend continues, it can jeopardise potential output growth and productivity.
“I think companies will remain cautious amid continued uncertainty in the economic environment,” he tells StarBizWeek.
He notes that private investment growth in terms of gross domestic product has improved since the financial crisis, but notes that if the absolute growth rate remains low, potential output to the economy will be impacted.
“Economic growth depends a lot on two components, private investment and consumption. I stress on this private investment. If we argue that we have seen the peak and are stuck at this declining trend, it would potentially dampen the future growth path.
“As a country, we need to investigate why private investment growth is slowing and address the factors causing it. Are we looking at a scenario where domestic investors continue to be cautious about putting money in the country?” Lee says.
More efforts are needed to push the economy up the value chain, where the emphasis will be on high technology and knowledge. Lee emphasises that the Government will have to facilitate them.
“We need to create jobs, move up the economic value chain and raise productivity. The country cannot keep on relying on the public sector to drive this and we need the private sector to regain its momentum.
“For this to happen, we need to think high-quality investments that help improve efficiency and productivity,” he adds.
He also notes that several of the Asean economies have shown soft private investment growth, likely due to the global environment which has affected private investments.
“Note that we have seen a slower pace of growth since 2013, and following Bank Negara’s projections of 4.1% for 2017, it would mean a fifth consecutive year of slow private investment growth.
“We need to ask the question why private domestic investors are not seeing opportunities in the country, or is there something more sinister that’s happening? Is it due to crimping profit margins, the increased competition or the higher cost of doing business?”
He notes that the factors can dampen investments.
“While it is good to invest overseas, why is our home country not good enough to invest in?”
Commenting on policy environment, he says the Government should be an effective facilitator and initiatives such as the Economic Transformation Programme have in part helped to create the right ecosystem to strengthen the private sector.
He notes that other factors such as taxes must be conducive to encourage investments.
Australia has announced new corporate tax rates that would see businesses with a turnover of AU$10mil (RM33.4mil) or less having their rates reduced from 30% to 27.5% this financial year, with further cuts phased in over the next decade. By 2026-2027, all companies will pay a rate of 25%.
“We have to work on this front to continue the reduction in direct taxes to balance the equation, as indirect taxation through the GST has been implemented,” Lee says.
Alliance Research’s chief economist Manokaran Mottain says private investment growth is shrinking globally because competition for money is very high.
“Economies that score well in the ease of doing business will capture the most money. This statistic that is published by the World Bank is very important for investors,” Manokaran says.
Malaysia was ranked 23rd out of 190 world economies with a distance to frontier score of 78.11 in the Doing Business Report 2017 from 22nd in the previous year.
“Although we have a one-stop agency for foreign investors, there may be some challenges, as some investors are complaining that they cannot get things done,” he adds.
He says that the slowing private investment growth also comes on the back of domestic investors looking to invest in high-growth and lower-cost economies.
“Our economy used to grow at between 5% and 6%, but is slower due to a maturing economy. We are also an upper-middle-income economy today,” he says.