Khazanah Research urges more emphasis on technology

Launch of State of Households 2018: Allen Ng lead author of the KRI report.

PETALING JAYA: 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, it said sub-sectors with the higher increase in the 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 that the deindustrialisation of the Malaysian economy was reflected in the gradual decline in the share of the manufacturing sector after peaking in the early 2000s, replaced by the services sector.

“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 investments 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 a 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 the income share going to self-employment, the labour income share has increased by 7.5 percentage points.

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

more than a fifth of the increase in the 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.

There is a structural shift to economic sectors with a 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 the 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 a 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 the labour income share can be attributed to this shift.

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

This, in 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 a higher increase in the proportion of low-skilled foreign workers hired.