INDUSTRIALISATION is the process of transformation from a primarily agrarian economy to one based on the manufacturing of goods. This process fosters development in aspects beyond economic fundamentals such as social, demography, and politics.
Besides that, it enables urban-rural migration and social mobility, improves purchasing power and spending habits, and creates political movements that challenge the traditional agrarian elites.
However, industrialisation is passé for most advanced economies as they have long progressed past that into the post-industrial phase of development, which was brought about through new technological discoveries.
The concept of replacing an old economic practice with a new one was coined as “creative destruction” in the early 1900s by Joseph Schumpeter, a political economist. Over time, creative destruction spurred advanced economies to deindustrialise and shift their focus to services.
In order for a developing economy like Malaysia to achieve its high-income nation aspiration, we should first look back in time and take cues from the industrialisation and deindustrialisation process of one of the earliest industrialisers i.e. the United States (US).
Historically, the US was the very first country to experience deindustrialisation back in the mid-1950s, when the economy saw declining employment within the manufacturing sector.
During the period of deindustrialisation, the share of employment in the manufacturing sector has been declining while manufacturing value-added remained constant to the total share of Gross Domestic Product (GDP) – evidence of increasing labour productivity growth within the sector.
Over the years of development, contribution of manufacturing sector towards GDP growth will likely plateau as manufacturing productivity peaks. Therefore, more efforts would be directed towards the services sector to achieve higher growth.
As a matter of fact, a proper deindustrialisation process requires consistent heavy investments into education and infrastructure, as the economy divests into more growth sectors. Then, only would the transition from a manufacturing-oriented economy into service-oriented economy be smooth.
Hence, share of employment within the services sector will increase, as automation gradually takes over employment within the manufacturing sector.
> Manufacturing spearheaded Malaysia’s growth
Before the 1997 Asian Financial Crisis (AFC), a strong emphasis was placed on the manufacturing sector to drive the Malaysian economy. Manufacturing output grew sharply from 14% in the early-1970s to nearly 30% in the late-1990s.
Privatisation, which was officially announced in 1983, picked up pace as the government sought to reduce its financial and administrative burden. By mid-1990s, there were 200 privatisation projects in the pipeline.
Nevertheless, this economic liberalisation nurtured industrialisation and gave Malaysia an early start in the manufacturing sector, especially in the electronics and electrical (E&E) segment.
However, manufacturing expansion slowed down and became less significant to the country’s economic growth after the AFC, which resulted in a slump in private investment.
Consequently, Malaysia underwent a structural change to a services-led economy. According to statistics, services output rose from 43% in 2000 to 53% in 2016.
Similarly, manufacturing output also gained momentum post-AFC and increased by 31% in the late-1990s. However, such growth was not sustainable as it dwindled to below 25% and has been flat for the past decade.
As at 2016, contribution from the manufacturing sector stood at a meagre 20% of GDP.
The 24th Productivity Report 2016/2017 by the Malaysian Productivity Corporation stated productivity growth of 1.4% within the manufacturing sector – below the 11th Malaysia Plan (11MP) target of 2.6%.
Ultimately, Malaysia seems to exhibit signs of premature deindustrialisation as the country looks towards becoming a service-oriented economy without having had a proper experience of industrialisation. Here, we explore the possible causes of Malaysia’s premature deindustrialisation.
> Globalisation and the rise of the dragon
As the country opened up to trade, the manufacturing sector began to “import” deindustrialisation from the advanced economies. Due to its market size in world markets, Malaysia was essentially a price taker.
Therefore, the decline in the price of manufacturing in advanced economies put a squeeze on manufacturing in Malaysia, right when technological progress was about to pick up steam.
Furthermore, China’s accession to the World Trade Organisation (WTO) in 2001 marked the time China began to engage more fully with the global economy. As a result, developing countries were indirectly impacted negatively by China’s export expansion.
According to a study by Gordon H. Hanson and Raymond Robertson on China and the Manufacturing Exports of Other Developing Countries, had China’s export supply capacity remain constant over the 1995 to 2005 period, export demand would have been 0.6% to 1.8% higher in developing countries.
> Change in consumption preference
The declining share of manufacturing to GDP is not unique to Malaysia. From 1997 to 2015, the global services sector recorded relatively faster growth as it rose from 63% to 69%.
At the same time, manufacturing grew slower from 20% to 15%, indicating higher income growth around the world and a shift in consumption preferences away from goods and towards services.
In the case of Malaysia, spending on goods (food and non-alcoholic beverages, clothing and footwear, furnishing and household equipment) made up 33% of monthly household expenditure in 1994. However in 2016, it fell to 26% of total household spending.
Meanwhile, spending on services (health, recreation and culture, education, restaurants and hotels) increased from 20% of household expenditure in 1994 to 22% last year.
Besides the shift in preference towards services, the proliferation of e-commerce has also altered consumer behaviour. The intersection of globalisation and technology means greater connectivity and speed between buyers and sellers when conducting sales transactions.
Since e-commerce requires a manufacturing firm with flexible and agile production capacity, the traditional manufacturing model of mass production is slowly losing its significance.
In order to survive the age of disruption, manufacturers are required to adopt a business strategy that can quickly respond to customer needs and market changes in a cost-effective manner.
> The necessity to address the elephant in the room
At present, the fast pace of technological advancement has begun paving way for the imminent disruptive wave of Industry 4.0.
Through the gradual incorporation of robotics and artificial intelligence, usage of big data and cognitive computing, and implementation of cashless transactions in all sectors of the economy, corporates attempt to maximise productivity and profitability while being cost-effective.
Not surprisingly, Malaysia has already felt the effects of disruptive technology, from ride-hailing taxi apps such as Grab, to shopping within the comfort of your own home without even physically being at the mall using online shopping apps such as Lazada and 11street.
Thus, it is crucial to address the probable issue of premature deindustrialisation in our economy.
Within the manufacturing sector, jobs in the assembly line would be most affected. The onset of automation will likely replace lower skilled labours with robots, causing jobs displacement in the short run.
With the E&E segment having the largest added value contribution and highest employment share of 421,018 workers, the 24th Productivity Report 2016/2017 stated that around 2.3% of total E&E employments were lost largely due to automation replacing unskilled workers – translating into almost 10,000 job losses.
Therefore, unskilled workers disrupted by this, especially ones without a college degree, should be given adequate reskilling training in order for them to adapt to a higher skilled job, increasing their productivity and allowing them to value add in their future employment.
> Preparing Malaysians for the change
Currently, measures have already been taken by the government pertaining to this issue as the country strives towards the new Transformasi Nasional 2050 (TN50) plan.
Just recently, Malaysia was listed among 25 “Leading Countries” well-positioned to gain from Industry 4.0 in the Readiness for the Future of Production Report 2018 published during the recent World Economic Forum 2018.
As part of an initiative to cultivate globally competitive young Malaysian students, the government allocated RM2.2bil worth of scholarships for young Malaysians to pursue their higher education, with an additional of RM90mil under the MyBrain scheme specifically for postgraduate studies in the latest Budget 2018.
Through the Malaysia Education Blueprint initiated in 2011, the Science, Technology, Engineering and Mathematics (STEM) approach was integrated into our learning system to provide students with much more relevant skills gathering and analysing problems based on up-to-date real world situations.
Additionally, our Prime Minister announced that computational thinking skills will be integrated alongside STEM into the education system’s syllabus, from as young as Year One students.
Meanwhile, the Technical and Vocational Education and Training programme is currently being developed to prepare the future workforce in facing the disruptive force of Industry 4.0.
However, with all the policies and initiatives introduced by the government to prepare our nation in embracing the Fourth Industrial Revolution, policy execution remains the key to success.
Manokaran Mottain is the Chief Economist at Alliance Bank Malaysia Bhd.