This article first appeared in Forum, The Edge Malaysia Weekly on September 7, 2020 - September 13, 2020

In the second quarter of 2020, Malaysia’s GDP contracted 17.1% — the worst regionally. The Philippines recorded a contraction of 16.5%, Singapore 12.6%, Thailand 12.2% and Indonesia 5.3%. Vietnam, however, recorded economic growth of 0.4%.

Looking further, Japan saw a second quarter contraction of 9.9%, South Korea 2.9%, Spain 22.1%, France 19.3% and the US 9.6%. China’s GDP took a hit in the first quarter but recovered to a growth of 3.2% in the second quarter.

Several factors contributed to these numbers. The first is overall control of Covid-19. The poorer a given country’s control over the disease, the worse its economic performance will be. The second is the strictness of a country’s lockdown. This is generally correlated to the first factor — countries that have a higher Covid-19 transmission rate, the R0, are more likely to introduce stricter lockdowns.

The third factor is the response from the respective governments. Globally, central banks have unleashed tidal waves of liquidity while governments have undertaken strong fiscal expansion to help soften the blow of the pandemic on businesses and individuals. In principle, the size of government support should correlate with the severity of the lockdown.

In Malaysia’s case, the direct fiscal injection by the federal government to the economy amounted to RM45 billion or about 3% of GDP. This needs to be increased. In the second quarter, government expenditure increased by a mere 2.3%. This is not enough.

By comparison, Singapore’s direct fiscal injection was S$100 billion (RM303.7 billion), about 20% of nominal GDP. Thailand’s direct fiscal injection came up to around 10% of GDP.

Countries are increasing their fiscal deficits to an average of 14%, according to the International Monetary Fund. Part of Malaysia’s problem was legislative — changes to the country’s fiscal principles require parliamentary approval. Now that some of this has been achieved, Budget 2021 will need to be more expansive.

While these three factors are more short term in nature, there are also structural issues that explain these Covid-19 disparities in economic outcomes. Malaysia’s economic structure and its implications on the types of jobs in the country is, in all likelihood, a significant contributor to its poor economic performance in the second quarter and, more generally, in a pandemic such as this.

To see this, consider Malaysia’s 17.1% contraction from the perspective of economic sectors. The largest contraction was in the construction sector, which recorded a growth rate of -44.5%. This was followed by manufacturing at -18.3% and services at -16.2%.

The construction number looks massive and is certainly worrying but ultimately, the sector makes up just 3.1% of the country’s GDP. On the other hand, despite falling by 16.2%, the services sector makes up 57.8% of GDP and employs about 61% of the labour force.

There is nothing problematic, certainly, with the services sector having an outsized role in the economy and employment. For many high-income nations, the services sector is indeed the largest component of the economy. Where the challenge lies for Malaysia, however, is in the composition of services.

A 2017 Khazanah Research Institute report by Allen Ng, Tan Zhai Gen and Mohan Mahadeva shows that the bulk of employment in Malaysia’s services sector is in wholesale, retail, food and beverage and accommodation — more than double the second largest sub-sector, business services and finance. Moreover, the largest increase in total employment in services comes from sales and service workers, with semi-skilled manual workers and office clerks declining.

In a related paper, two of the authors, along with co-author Tan Theng Theng, argued that Malaysia has structurally shifted towards a more labour-intensive model that is “skewed towards medium- and low-skilled workers with lower labour productivity, more traditional service sub-sectors rather than high-tech manufacturing, and smaller firms rather than larger enterprises”.

In non-pandemic times, this poses a long-term structural issue that Malaysia needs to overcome if it is going to be successful at shifting its economic structure towards higher value-added, higher productivity work and economic activity. This is no surprise. What Covid-19 has highlighted, however, is precisely how vulnerable this makes Malaysia’s workforce and firms to a pandemic. More broadly, this also makes the country vulnerable to not only shocks such as pandemics but also any shock that may halt production — think of climate change effects such as floods or, in a more extreme scenario, wars.

The underlying reason behind Malaysia’s vulnerability to a halt in production — via measures such as the Movement Control Order — is because large chunks of its jobs do not lend themselves to the possibility of working from home. It is common to see discussions on shifts in the “nature of work” towards more mobile, more flexible working conditions. But how many of our jobs in Malaysia are adaptable in such ways?

Daniel Garotte Sanchez and a group of economists at the World Bank have attempted to answer this question globally. Their July 2020 study finds that, “In high-income countries, one of every three jobs is amenable to home-based work, while in low-income countries only one of every 26 jobs can be done at home … Telecommutable jobs are highly unequally distributed across space, not only across but also within countries. They are less prevalent in lagging regions.”

This is complemented by an August 2020 study by Charles Gottlieb at the University of St Gallen and others that demonstrates declines in employment from lockdowns are hardest on middle-income nations. According to the authors, “While workers in rich countries have a substantially higher ability to work from home, which mitigates declines in employment and GDP, poor countries concentrate employment and value-added in essential sectors [primarily agriculture] that are not shut down. Middle-income countries see the largest declines as they feature relatively large employment shares in non-essential sectors and relatively low work from home ability.”

As such, consider Malaysia’s large services sector with jobs in wholesale, retail, F&B and accommodation as well as a high reliance on tourism jobs, particularly outside of economic centres like the Klang Valley and Penang, and what we have is an employment recipe that features what the study points out — relatively large employment shares in non-essential sectors and relatively low work from home ability. This may also explain, in addition to differences in fiscal injections, why Singapore’s GDP growth declined by less despite its smaller domestic economy — about 25% of its services sector is business services.

The imperative to double down on structural transformation in the economy is clear. For one, it provides new avenues of future economic growth for the nation as well as moves jobs towards more high-paying ones. But it also makes us more resilient to halts in production from pandemics and climate change effects as it means more jobs can be done from home.

Furthermore, as the World Bank study points out, “Across all countries, jobs that can be performed from home tend to be much better paid.” This then reduces the fiscal burden of support from the government.

There will be more pandemic-like scenarios in the future. Improving Malaysia’s economic and employment structure will develop our resilience.

Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy division

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.