Deindustralisation could work to Malaysia’s disadvantage, warns Khazanah Research


  • Economy
  • Monday, 15 Oct 2018

KUALA LUMPUR: Malaysia’s push towards sustained economic growth must be underpinned by more emphasis on more hi-tech manufacturing and more capital invested in technology, says Khazanah Research Institute (KRI)

If Malaysia’s potential for sustained economic growth in the future lies in its ability to harness innovation and improve productivity growth, “this structural change that is accompanying our deindustrialisation could work to our disadvantage”, it cautioned.


In its “State of the Household” report issued on Monday, it said sub-sectors with the higher increase in labour income share are associated with decreased investment in technology and higher increase in the proportion of low-skilled foreign workers hired.


KRI also pointed out the deindustrialisation of the Malaysian economy was reflected in the gradual decline in the share of manufacturing sector after peaking in the early 2000s, replaced by the services sector.

Overall, KRI’s report said from the increase in labour income share and the improving income inequality, it appears that over the last decade, the growth of the economy has become more inclusive in nature—benefiting many Malaysians.


“Structurally, however, this has been accompanied by a transition away from a more capital-intensive to a more labour-intensive model—a structure that is skewed towards lower skilled workers rather than investment in technology, and more traditional services sub-sectors rather than high-tech manufacturing.


Our findings highlight that the transition towards an economy that is simultaneously inclusive and productivity-driven could be wrought with trade-offs that would need to be carefully managed,” it said.

Overall, the increase in the labour income share in Malaysia has been broad-based, with all economic sectors experiencing increases to varying degrees, together with a higher share of self-employment in the workforce.

The report found that the sub-sectors with the higher increase in labour income share are associated with decreased investment in technology and higher increase in the proportion of low-skilled foreign workers hired.


However, KRI said in contrast to the global trend, Malaysia’s labour income share has instead been increasing since the official statistics were made available in 2005, together with declining household income inequality.

Between 2005 and 2016, including income share going to self-employment, labour income share has increased by 7.5 percentage points.

Based on its research, this increase in labour income share in Malaysia can be explained by three factors:


More self-employment


More than a fifth of the increase in labour income share since 2005 can be accounted for by the increasing share of the Malaysian workforce who are in self-employment.


The increase has been apparent in urban areas and amongst women joining the labour force.


Structural shifts to economic sectors with higher labour income share


The share of the services sector in the Malaysian economy has been growing, particularly in the more traditional services sub-sector such as wholesale and retail trade.


At the same time, the share of the manufacturing sector in the overall economy has been gradually declining, especially in high-tech manufacturing.


Since the services sector has higher labour income share relative to the manufacturing sector, this has led to an overall increase in the economy-wide labour income share. From 2005 to 2016, close to 30% of the increase in labour income share can be attributed to this shift.


Greater reliance on labour-intensive production

Almost half of the overall increase in labour income share since 2005 can be attributed to the individual increases in labour income share within all major economic sectors.

This is turn can be explained by the greater reliance on labour-intensive production in most economic sub-sectors.

The report found sub-sectors with the higher increase in labour income share are associated with decreased investment in technology and higher increase in the proportion of low-skilled foreign workers hired.





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