This article first appeared in The Edge Financial Daily on June 5, 2017

KUALA LUMPUR: While Malaysia’s labour productivity growth of 3.5% for 2016 was an improvement compared with 3.4% in the previous year, the performance was considered unsatisfactory as the country is still lagging behind the productivity levels of countries, such as Singapore and South Korea.

Last Wednesday, Malaysia Productivity Corp announced the labour productivity figures for 2016, reporting growth of 3.5% to RM78,218 for the year from RM75,548 in 2015.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said the growth was not satisfactory, considering the government’s aim to register an average annual growth of 3.7% as outlined in the 11th Malaysia Plan.

“Though Malaysia’s labour productivity growth inched to 3.5% in 2016 from 3.4% 2015, it was far from satisfactory as this marked two successive years of slowing growth from 3.7% achieved in 2013,” he told The Edge Financial Daily.

Lee said it will be challenging to meet the 3.7% annual growth target, noting Malaysia’s average productivity growth of 2% over the past decade amid rising external pressures following the 2008-2009 financial crisis and competitive domestic economy environment.

He said it is disheartening to see Malaysia’s productivity level still dismal and lagging behind most developed countries including Singapore, South Korea and Japan. The growth pace in advanced economies tends to be slower compared with emerging economies, however, their productivity levels are substantially higher.

“In 2015, Singapore’s labour productivity was almost two times higher than that of Malaysia’s; South Korea was 1.8 times and Japan 1.7 times higher. In Asean, countries such as Indonesia and and the Philippines reported growth of 4.6% and 4.4% respectively, despite a slowdown in global exports,” he said.

However, he said Malaysia has no choice but to push harder to raise productivity, in order to realise its ambition to become a high-income economy.

The government had on May 8 introduced the Malaysia Productivity Blueprint (MPB), which had identified several areas to be improved upon in order to elevate productivity levels.

Five strategic thrusts were identified under the blueprint, namely to build the workforce of the future, to drive digitalisation and innovation, to make industry accountable for productivity, to forge a robust ecosystem and to secure a strong implementation mechanism.

While comprehensive action plans can be made, Lee said proper implementation of the blueprint is important in order to have impactful outcomes.

“The plan must look at all aspects of productivity, such as the application of leading-edge technologies to extract higher efficiency from the inputs of labour and capital,” he said.

Lee noted that there has been lots of fiscal incentives and financing support schemes rolled out by the government for companies to boost productivity and innovation, but he questioned the effectiveness of these schemes.

“Private firms still suffer innovation inefficiencies. In this regard, the MPB should set clear goals and develop appropriate key performance indicators to track the progress of innovation and research and development (R&D) achieved by the private sector,” he said.

Sunway University Business School professor of economics Dr Yeah Kim Leng concurs that closing the productivity gap between Malaysia and more advanced economies will be a challenge, as Malaysia is performing below its potential.

“I think we are generally on track to become a high-income nation ... it’s just that we are still underperforming our potential given the resources, the growing population and the relatively high savings rate that we have.

“We have invested more than other countries in terms of developing our human capital, but that has not translated into much higher productivity levels. It’s not in line with what we have invested,” said Yeah.

The underlying cause of this, he said, is the predominantly low- and semi-skilled workers in the Malaysian labour force, which is also reflected in the relatively lower proportion of tertiary-educated employees in the workforce.

Another issue is the current level of technological capabilities and skills of industries operating at the frontier, as technological progress ties in closely with labour productivity.

“The labour force has to have greater adoption and employment of technology to raise their productivity and also greater investment in R&D to enable us to produce higher value goods and services.

“We need to embrace the fourth industrial revolution, or industry 4.0, which will determine the extent to which we can close the technological gap and in turn the income gap,” he said.