Wage growth challenges

THE World Bank’s latest Malaysia Economic Monitor puts into perspective how overall economic competitiveness have lagged in recent years and shown up in the lack of diversification into high value exports that can bring higher wages.

It is not a study that is new as there have been public discussions on it before but it does show how growth potential that is properly harnessed can bring more benefit to ordinary wage earners.

This competitiveness is measured through the economic complexity index (ECI), which tracks a country’s export competitiveness and sophistication and, according to some studies can also be a useful metric to evaluate income levels and inequality. Despite having strong growth potential, a vibrant manufacturing base and being an important hub for semiconductor as well as electrical and electronics production, Malaysia’s ECI ranking has more or less stagnated.

There are missed opportunities. Malaysian firms find it difficult to attract top talent because of the lack of high-quality opportunities, that is, high paying jobs, hence the brain drain that has affected the country for decades and how this has benefitted others, among which is the number of Malaysian-invented patents owned by foreign firms, which is up sharply.

The World Bank’s latest report on Malaysia highlighted an ECI ranking that has fallen to the 32nd placing in 2024 from the peak of 23rd in 2021, the same placing as 2016, which it says reflects limited diversification of export products over the period. The report compares Malaysia with Vietnam, which has advanced 20 spots over the same period despite coming from a lower base.

Vietnam’s advance has been through actively entering new and more complex product markets. This in turn has been reflected in economic growth as measured by gross domestic product (GDP) averaging 6.2% annually from 2014 to 2024, the period in which the World Bank ECI comparisons were made.

Malaysia’s GDP growth in the same period averaged 4.2%.

Wage growth presents even more of a reason as to why economies should move up the value chain and diversify goods produced for exports as well as broaden export markets.

While Vietnam, coming from a lower base, has more scope to do this, Malaysia, with supporting infrastructure across the manufacturing base and decent supply chain and logistics links, have not been as nimble.

The wage growth comparison is telling. Despite having a reputation as a low-cost labour market, a niche that Malaysia increasingly finds hard to compete in, Vietnam’s cities and industrial zones has seen strong annual wage growth, and a KPMG report published in 2024 noted that growth is strongest across the technology fields while in Malaysia, the latest World Bank report noted that wage growth averaged 3% from 2010 to 2024.

Producing less complex and sophisticated goods for exports does not pay, and as the World Bank pointed out, wage growth has not kept up with what Malaysians expect from a growing economy that has not created enough high value jobs to go around.

This has resulted in a skilled workforce that is either underemployed or unemployed. The adoption of automation and artificial intelligence will worsen the situation with fewer opportunities for fresh graduates.

It is totally meaningless to be considered an upper-middle-income country, or according to the Harvard Atlas of Economic Complexity, the 57th richest out of the 145 studied under the ECI, if the economy does not produce enough well-paying jobs and where businesses still rely on low-wage migrants doing low-value work.

Again, the comparison with Vietnam, where the shift is evident when comparing export structures in 2024 with 2014. Malaysia’s remained largely the same.

The goal is to have higher margins for the goods produced, so that workers get paid higher wages and also higher wage jobs are created.

But somehow, politics always get in the way of the financial wellbeing of the Malaysian wage earner. The politics surrounding the RM1.1bil Arm Holdings deal comes to mind.