Reforms Can Optimize the Role of Immigration in Malaysia’s Development, World Bank Says

December 18, 2015

KUALA LUMPUR, December 18, 2015 – Malaysia’s growth is projected to remain at 4.7 percent in 2015, easing to 4.5 percent in 2016. This outlook reflects some slowdown in domestic demand in the course of 2015 from tighter fiscal conditions, which are expected to continue in 2016-17, a new World Bank report states. Overall, domestic demand is projected to grow, remaining the main driver of growth in a context of soft global demand.

The World Bank’s Malaysia Economic Monitor, launched today, focuses on the critical role that immigrant labor plays in filling important gaps in low- and mid-skilled jobs, helping both to raise the country’s GDP and to create jobs for Malaysians.

," says Ulrich Zachau, World Bank Country Director for Malaysia and Southeast Asia. "Strengthened immigration policies and management will be important to achieve this goal - a system that effectively links immigration to the labor demand of businesses in Malaysia, supports immigrant workers in making the most productive contribution to the economy possible, and protects both low-skilled Malaysian and vulnerable immigrant workers. International experience shows that achieving such balance is difficult, but possible. ” 

Malaysia’s relatively open immigration policy has reinforced Malaysia’s conducive business environment, making it a very attractive investment destination.  The report finds that low-skilled immigrants can create additional jobs by filling workforce gaps not filled by Malaysian workers, reduce production costs, help expand output and exports, and raise the demand for both unskilled employment and higher-skilled Malaysians.  Economic modelling suggests that a 10 percent net increase in low-skilled foreign workers may increase real GDP by up to 1.1 percent.  Also, for every 10 new immigrant workers in a given state and sector, up to five new jobs may be created for Malaysians in that state and sector, two of them female.  

Effective human capital management is a key priority in Malaysia's achievement of high income economy status by 2020,” says Dato’ Sri Abdul Wahid Omar, Minister in the Prime Minister’s Department. “As addressed in the 11th Malaysia Plan, an accurate assessment of talent supply and demand as well as the economic costs and benefits associated with the employment of immigrant labor is crucial to understanding how Malaysia can leverage immigration policy to achieve this goal.  Productivity is a key to delivering the 11th Plan growth targets, where labor productivity is targeted to expand by 3.7% annually on average. To boost multi-factor productivity as a significant source of growth, industries will be encouraged to automate and innovate, and industry-led technical and vocational education and training (TVET) will be strengthened. In addition, reducing our dependence on low-cost and low-skilled immigrant labor will go a long way to generate a productivity-driven production base. With greater productivity and high-income jobs, this would ensure our goal to raise the compensation of employees to GDP to 40% by 2020 from 34.9% in 2015 is achieved.

While immigrant labor generates employment and slightly increases the wages of most Malaysians, it also is estimated to reduce salaries of immigrant workers already in the country by close to four percent, and wages of the least educated Malaysians (around 14 percent of the total labor force) by around three quarters of one percent.  The report finds no significant impact of immigrant labor on total labor force participation or unemployment.

How can Malaysia strengthen its immigration system?  The report considers six possible directions for reform:

  1. Aligning the institutional and legislative framework with the human resource development strategy; 
  2. Establishing an evidence-based system for identifying labor market shortages that immigrant labor can fill; 
  3. Adopting a live-levy system that responds to labor market needs identified in the evidence-based system; 
  4. Using a broader set of criteria to categorize immigrants (i.e. skills, experience) and defining approaches for their recruitment, employment, and repatriation; 
  5. Strengthening monitoring and enforcement of immigration and labor regulations; and 
  6. Investing in upskilling the unskilled workforce, and promoting productivity-enhancing technology.

The Government has generally responded to on-going external challenges with a reasonable mix of macro policies” says Rafael Munoz Moreno, Senior Country Economist for Malaysia. “With uncertain global growth and constrained policy options, Malaysia can now consider structural reforms to raise output potential and to boost investor sentiment.

The World Bank report notes that, with slower growth and falling oil revenues, a focus on the quality of public expenditure will be an important priority for Malaysia.  The report also highlights the recent conclusion of the Trans Pacific Partnership (TPP) agreement as an important commitment on structural reforms that may further increase output potential in the medium term.

The Malaysia Economic Monitor series provides an analytical perspective on the policy challenges facing Malaysia as it grows into a high-income economy. The series also represents an effort to reach out to a broad audience, including policymakers, private sector leaders, market participants, civil society, and academia.​

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