Raising Productivity Growth Essential for Malaysia’s Progress towards High-Income Economy Status, World Bank Says

December 19, 2016

KUALA LUMPUR, December 19, 2016—Malaysia's economy remains resilient to external headwinds, with GDP growth projected around 4.2 percent in 2016 and 4.3 percent in 2017, according to new economic analysis from the World Bank.  This outlook reflects a gradual slowdown in the growth of consumer spending and investment, as the global economic growth and commodity prices remain subdued, and as households adjust to moderating job prospects and fiscal consolidation.

The World Bank’s Malaysia Economic Monitor, launched today, notes that the Malaysian economy faces risks stemming mostly from external developments. Such external risks include uncertainties around a rebalancing of the Chinese economy, further declines in the world prices of oil and other commodities that Malaysia exports, and evolving US economic policies and their impact on global trade, energy prices, financial flows and exchange rates. Uncertainty in global financial markets could affect investor and business sentiment.

The latest Malaysia Economic Monitor includes a special focus on increasing productivity. According to the report, rising productivity will become the main engine of economic and income growth in Malaysia in the future, as traditional drivers of growth are expected to moderate, with capital accumulation facing headwinds and labor force growth gradually slowing down as the Malaysian population ages.

In addition with rising total factor productivity, the report envisages rising female labor force participation and increasing human capital through skills upgrading as the key drivers of future growth, to enable Malaysia to reach the income levels of high-income economies by 2050.

The government has outlined several productivity targets under the 11th Malaysia Plan.

For the past 25 years from 1990 to 2014, Malaysia has enjoyed a period of solid growth mainly led by factor accumulation,” says Datuk Abdul Rahman Dahlan, Economic Minister in the Prime Minister's Department. “The economy has benefitted greatly from high investment rates associated with infrastructure and private sector development, as well a growing working age population and an expanding female participation in the labor force. Throughout this period, total factor productivity growth has been relatively stable, indicating the economy's flexibility and opening to new sectors of investment. Having said that, there is room to improve based on the recommendations given by the World Bank. Going forward, Malaysia will undertake further improvement measures in order to raise the level of human capital and productivity.”

Productivity growth has been steady in Malaysia for the past 25 years, but has trailed that in several high-income and regional economies.  The World Bank's new Enterprise Survey for Malaysia issued in 2016 indicates that labor productivity has declined in the country between 2012 and 2014, reflecting both a moderation in sales and continued employment creation.

Based on selected key productivity drivers, Malaysia has fared relatively well in some areas. The data from the Enterprise Survey provides an insight into the relationship between some of the main potential drivers of productivity such as infrastructure, education, innovation and efficiency, and how it has affected productivity.

“Raising productivity will be the key to future economic growth and prosperity in Malaysia," says Ulrich Zachau, World Bank Country Director for Southeast Asia. “Malaysia has an opportunity to reach high income country status and catch up with the advanced economies with a combination of policies and investments that focus on productivity – including policies to upgrade skills, promote innovation, further strengthen competition and trade to increase firm level efficiency, and support women in the workforce.”

The World Bank report notes that Malaysia has an opportunity to strengthen existing institutions in delivering on new areas of research around productivity. Gathering more detailed information and adding capacity to analyze productivity can help inform the development of targeted policies to raise productivity. Open policy dialogue and close consultations among both private and public sector stakeholders can help validate results and implement policy options to raise productivity growth.

Malaysia’s existing institutional architecture has sustained consistent productivity growth for more than two decades, though challenges need to be addressed in order to refocus attention on productivity growth.  These challenges include overcoming skills gaps, maintaining high quality of infrastructure, strengthening the research and development ecosystem, and addressing distortions in output markets.

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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