KUALA LUMPUR: As wage earners brace for higher spending under the goods and services tax (GST) that takes effect tomorrow, they will feel the brunt of decades of Malaysia’s economic policies which have kept wages low and local industries uncompetitive.

Low wages have not helped the government improve its revenue, as only 1.7 million Malaysians pay income tax out of a workforce of 12 million, and Putrajaya is seeking to increase earnings from the broad-based consumption tax.

But low wages are the legacy of Malaysia’s industrialisation policy, which has long focused on making the country a low-cost, low-value manufacturing hub.

Although this helped transform the economy in the early 1990s, experts are now warning that a new industrialisation policy is needed, as there are worrying signs that the government’s push for developed status in five years is not raising the incomes of the majority of people.

The call to reform the manufacturing sector is the key to solving the problem of low wages, said Yin Shao Loong, executive director of the think tank Institut Rakyat.

The sector sets a benchmark which, with the exception of oil, gas and utilities, the services sector also followed, he said.

“Manufacturing enjoys a high ratio of sales per worker, whereas service industries such as retail, food and administration tend to earn lower amounts.

“But if manufacturing wages are low due to lower sales value, then service wages will follow,” Yin said.

The problem, said economist Tan Sri Kamal Salih, was that the manufacturing sector was mostly involved in low-value assembly, which required little skill and, therefore, paid low wages.

“We produce components which get shipped to China, for instance, which, in turn, uses those components to produce the finished product that then gets exported to the United States.”

And because it relies on foreign workers from poorer countries who will settle for low wages in order to keep costs low, the industry is not motivated to offer higher pay to attract Malaysians.

The Employees Provident Fund recently revealed that 75% of its 14 million contributors still earn less than RM2,000 a month and about 15% of them earn between RM2,000 and RM5,000 a month. Those earning more than RM5,000 are in the top 10%.

The call to move Malaysian industries up the value chain is not new. It’s something that the administration of Prime Minister Datuk Seri Najib Razak has said needs to be done.

But experts interviewed by The Malaysian Insider said realisation was not being matched by policies that were aggressive enough to steer industries away from the low-value model to being high-value producers.

Also, the government’s push to hinge the economy on the services sector, as stated in the Economic Transformation Plan, takes the attention away from reforming the manufacturing sector.

At the same time, government agencies, said Kamal, were still pursuing policies which encouraged more low-skill industries to come to Malaysia to set up shop.

“You see agencies opening up more industrial parks to bring in more foreign companies. There is little push in domestic industries to reinvest in upskilling, ‘teching up’ and research.

“Instead, when a company makes profits, it buys property overseas,” said Kamal, who is adjunct professor of Economics and Development Studies in Universiti Malaya.

This is the opposite of what new industrial powers such as South Korea, Japan and Germany have done to grow their manufacturing base, said Yin.

“They nurtured home-grown and owned industries. Sometimes they partnered with foreign firms which had strategic technology.

“However, over-reliance on foreign firms would not give local firms the space to develop. This is part of Malaysia’s problem.”

 The incentives, Yin said, remained the same and targeted towards attracting investment rather than making companies perform and upgrade themselves.

Kamal uses the RM42 billion mass rapid transit project as an example of a lost opportunity to nurture local firms.

“We have firms that can manufacture the cars and the engines for them, and the rails also. But instead we decided to import the engines and cars.”

A new industrialisation policy, Kamal said, must reverse this process. — The Malaysian Insider

This article first appeared in The Edge Financial Daily, on March 31, 2015.