OECD urges Malaysia to improve its labour productivity

Author: Poorna Rodrigo | Date: 21 Dec 2016

Report cites declining share of skilled workers and insufficient technology as part of country’s problem

The Organisation for Economic Co-operation and Development (OECD) has urged Malaysia to reverse a trend of 15 years of poor labour productivity by improving education and labour skills – helping the country meet its governmental goal of becoming a ‘developed nation’ by 2020.
The OECD’s recommendations come in a new economic assessment of Malaysia. “Enhancing the regulatory frameworks for competition and small and medium-sized enterprises, facilitating economic integration with the other countries of the region, raising public sector productivity and improving labour market functioning would also boost productivity,” the Paris-based intergovernmental think tank said in its report.
Between 2006 and 2010, Malaysia’s annual labour productivity improvements (measured against GDP) hovered slightly above two per cent while regional competitors South Korea, Indonesia and China fared better, the report said. However, between 2001 and 2005, Malaysia performed better – with annual labour productivity improvements averaging nearly three per cent. Even then, regional peers like China, Indonesia, Thailand, Korea, Singapore and Turkey all outperformed Malaysia , according to OECD data.
The report blamed low labour productivity on “slower ‘capital deepening’, declining share of skilled workers and insufficient technology diffusion and innovation.” As a result, local firms are facing new competition from east Asian peers, it noted.
Malaysian Institute of Human Resource Management (MIHRM) deputy president Dr Henry Yeoh was less pessimistic, however. He said: “My personal take is that the competition from east Asia is not impacting organisations in Malaysia alone, as I observed other regional countries in the ASEAN [Association of Southeast Asian Nations] region are somewhat impacted too.
“It’s likely that Malaysia is feeling the impact more than others because it does not rely on low costs – the country’s economic growth is contingent on the attractiveness of our locally-produced goods and services vis-à-vis pricing, quality, innovation and fulfilling the end consumers’ tastes and preferences in a highly competitive market.”
For these reasons, Yeoh argued, “when our goods and services are not so in demand in the marketplace, it will only be a logical and prudent thing to scale back operations, to the extent of having to downsize accordingly [which maybe] directly or indirectly affects productivity growth.”
And this can cause a vicious cycle, with workers and organisations’ ability to be “agile and flexible to adapt to the VUCA [volatility, uncertainty, complexity and ambiguity] state of economic flux” being weakened by slowdowns in productivity growth linked to downsizings, Yeoh added.
The Malaysian government has already announced plans to boost the country’s labour productivity in its “people-focused, enhancing productivity-themed” 11th Malaysia Plan (2016-2020) published in June 2015 – the final blueprint before its hoped-for 2020 graduation to developed country status.
Accelerating annual labour productivity growth to 3.7 per cent until 2020 is key to achieving this goal, and this means nearly doubling the average two per cent rate over the past decade. Malaysia’s Productivity Corporation’s (MPC) 23rd productivity report called it a “challenging goal”, but an important one to improve the quality of life for all Malaysians.
Accordingly, the government will introduce productivity-linked incentives and performance targets for major industrial players and individual enterprises, while expediting regulatory reforms, it said. Incentivisation will help businesses “allocate a greater portion of their investments towards innovation and modernisation,” the MPC report noted.