This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.

IN February last year, the government held back a surprise (and sizeable) hike in the foreign worker levy following protests from employer groups. The levy was subsequently adjusted lower after getting industry feedback, particularly from the labour-intensive plantation and agricultural sectors, which have limited room for automation in the medium term.

Last Wednesday, the government deferred to next year its requirement for employers to pay the foreign worker levy (instead of deducting it from their employees’ wages) under the Employer Mandatory Commitment (EMC) from Jan 1 — after yet more protests from employer groups, many of which had valid concerns.

The government’s decision on the EMC is not all wrong. However, the reversal and hue and cry could have been averted had the employer groups been engaged and given proper guidance on cost planning in the first place. This reflects poorly on the policymakers and implementers, especially when the same employer groups (who are essentially the people who decide how much to invest and whether to continue investing in Malaysia) had been hit by a levy hike at a time earnings growth was increasingly hard to secure, market watchers say.

Malaysia’s reputation had already taken a beating in November last year when The Guardian published an exposé on Nepalese workers supplied by third-party agency (Human Connection) to work at four McDonald’s franchised restaurants in Kuala Lumpur. They claimed that they had been cheated out of months of salary and charged additional fees that resulted in a 25% salary deduction, leaving them without enough money for food or to send back to their families. That reportedly forced them to run away without their passports, which had been wrongfully kept from them, and enter the illegal market to earn money to survive and find their own way back to Nepal. It is understood that the high agency fees borne by the foreign worker to be documented also nudges them to become an illegal, sometimes by overstaying.

The report trailed another investigative piece by the same UK-based publication, accusing major electronics manufacturers of using exploited and abused migrant workers. “The discovery last year on the Thai-Malaysian border of mass graves of suspected trafficking victims — who are believed to have been trafficked with the help of corrupt officials — pointed to a worrying level of collusion at the highest level,” the Nov 21, 2016, article said.

Two to five million undocumented?

Malaysia had said it wants to reduce its dependency on foreign workers and move up the global value chain. Last year’s levy hike was intended to prompt greater automation, raise productivity and efficiencies, and reduce wage suppression among the locals, experts say. But does the government have a holistic plan to achieve these goals — one that would minimise shocks to businesses and the economy while ensuring that our foreign helpers are fairly treated?

While levy hikes can happen overnight, labour-intensive industries need a longer transition period — unless the country and its economy are prepared to accept them closing down or take their business elsewhere.

Without a proper ecosystem, any levy hike would only hurt employers who hire documented foreign workers the most while creating a greater push towards the black market, industry players say, claiming that most people would choose documented workers if the process was not so painful.

Like it or not, the reality is that at 2.14 million, the number of documented foreign workers (from at least 13 countries) in 2015 exceeded the 1.99 million Indian Malaysians — the country’s third largest ethnic group after the Malays and Chinese Malaysians. Indonesians make up 835,965 or 39.2% of the 2.14 million documented workers, followed by 502,596 Nepalese (23.5%) and 282,437 Bangladeshis (13.2%).

There might already be more than seven million foreign workers in Malaysia, including five million without work permits, if indeed 70% of foreign workers in Malaysia are undocumented (illegal) workers, as claimed by the Malaysian Trades Union Congress (MTUC). Even conservative estimates put the number of illegals at two million.

The seven million figure, if true, dwarfs Singapore’s 5.6 million population and matches Hong Kong’s 7.3 million. It also potentially exceeds the 6.65 million Chinese Malaysians in the country as at last year.

Seven million is “potentially close to half the [official] total labour force”, says Julia Goh, an economist at UOB Malaysia. Malaysia’s total labour force stood at 14.77 million in October 2016, of which 14.25 million were employed, which puts the unemployment rate at 3.5%, according to official statistics.

The 2.14 million legal foreign workers alone make up 14.5% of the total labour force, just below Malaysia’s intended 15% ceiling, a goal which some experts say “does not reflect economic needs and may be counterproductive to growth”.

As the undocumented workers would not be included in official labour force figures, a seven million-strong pool of foreign workers could represent 35.7% of Malaysia’s estimated 19.63 million total work force (14.77 million plus seven million less 2.14 million documented).

“That’s a big number by any standards. Indeed, at sector level, it has been reported that foreign labour accounts for at least 50% to 70% of total workforce in the plantation, construction, low-end manufacturing and some service industries,” says RHB Research Institute executive chairman and chief economist Lim Chee Sing.

Even a conservative two million-strong illegal pool would put foreign workers at 24.7% of the enlarged total workforce (16.77 million, including two million illegals).

Among the 2.14 million documented foreign workers, the 450,364 in the construction sector accounted for about 34% of the total 1.31 million employed by the industry in 2015. The 745,131 in manufacturing, meanwhile, was 32% of the 2.3 million employed by the sector. The 497,480 registered for the plantation and agricultural sector was 28% of the 1.75 million hired by the agricultural, forestry and fishing industries, Ministry of Home Affairs statistics show.

The number of documented foreign workers had increased 6.7% annually over 15 years from 807,096 in 2000 to 2.14 million in 2015 — the 15-year compound annual growth would be 15.5% a year if seven million was the 2015 official figure and the number of illegals was minimal in 2000.

“The country’s dependency on foreign labour has become entrenched in the economy and can’t be resolved easily without collaborating with industry players and adopting a more holistic approach to deal with it over the medium term. Many industries will suffer badly if the consequential shortage of workers [due to a significant reduction] caused production and output to drop drastically. This will translate into a sharp slowdown in the country’s economic growth. Hence, there is no short cut to deal with the issue and it needs to be addressed carefully [as the impact on the industry can be significant],” Lim says.

At the same time, he adds, the country cannot ignore the threat from the over-dependence situation and it needs to adopt a more holistic approach to deal with it in consultation with industry players.

“Over-dependence on foreign labour to grow the economy obviously has serious implications for the economy. Apart from being stuck in labour-intensive and low value-added industries, the middle-income trap, outflow of capital due to remittances by foreign workers and associated social issues, there are also issues of reliability or sustainability in the sense that these foreign workers will leave the country after acquiring some skills and go back home or elsewhere to look for better opportunities from time to time. Malaysia will then be stuck in a dilemma of having to train them, lose them and having to keep training new people from time to time, among others,” Lim says.

Goh reckons that continued reliance on foreign labour will “ultimately hurt the locals in the longer run as the wages of blue collar workers would be suppressed and the opportunities would be limited if companies remain stuck in the past and do not change their mindsets”.

That said, she concurs that “there needs to be a well-thought-out approach to deal with this issue” and admits that it is “not an easy task to move up the value chain and income bracket, which explains the middle-income trap”.

“A review of the foreign worker levy and applying selective restrictions would be one way to manage the foreign worker dilemma but it should be discussed and consulted with the relevant stakeholders, and industries given a definitive schedule of when the policies and levies are to be adjusted. Ultimately, if not properly implemented, the consumers usually bear the brunt of it as some quantum will be passed on to them,” Goh says, adding that the levies collected should be channelled into assisting reskilling and retraining to boost productivity.

In 2014, the RM2.6 billion levy on foreign workers was 1.2% of federal expenses and 0.24% of gross domestic product. Rationally, Malaysia should have every motivation to document all migrant workers as they are a small fiscal boost whereas undocumented ones are a fiscal cost — ranging from expenses associated with follow-up health measures due to the re-emergence of eradicated infectious diseases, such as tuberculosis, to incarceration and deportation. Detention, food and deportation of undocumented people cost RM26 million or 0.01% of federal expenses in 2015, the World Bank said in its December 2015 Malaysia Economic Monitor, citing the Ministry of Home Affairs.

According to the report, Malaysia cannot continue to have a fragmented economic immigration management system — where more than 10 different ministries and departments within the ministries are directly engaged in the approval of foreign labour — as that makes it difficult to monitor non-compliance with immigration and labour laws.

Malaysia also needs to simplify the process of sourcing foreign workers so that the approval process for immigrant labour is transparent, reflects labour market demands and shortages and not be so burdensome to both potential employers and migrants that both would rather turn to the illegal market.

“While costs set in bilateral agreements between governments are generally much lower, the real costs are much higher, primarily due to third-party intermediaries who play a central role in the sourcing and placement process, and who charge the immigrant substantial fees. Much of the evidence finds that high fixed costs for immigrants incentivise perverse behaviours, such as overstaying, in the case of documented workers, or entering the country illegally to avoid paying fees altogether,” the report read, noting how migrants may each have to bear RM9,000 to RM14,000 in costs while there is lack of data on enforcement against employers who take on illegals.

A big pool of illegals will only hamper Malaysia’s journey towards high-income developed country status. At the end of the day, there are undesirable jobs that are heavily reliant on low and unskilled foreign labour and will remain that way. There are also jobs that can be substituted by technology rather than low-skilled migrant workers. The right balance needs to be struck so that businesses want to invest and stay invested here.

Master Builders Association Malaysia (MBAM) president Foo Chek Lee’s remarks post-EMC deferment, asking that the government engage stakeholders on policies that could affect them “before any implementation to avoid uncertainties, financial losses and diminishing confidence”, is a fair request.

If policymakers are serious about harnessing the most of Malaysia’s labour force and encouraging investments, they need get buy-in from businesses and workers to stay above board. To do this, there needs to be a carrot-and-stick approach, where those who abide by the law are rewarded and recognised and those who circumvent it are held accountable.

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