Levy for foreign workers in Malaysia: Who will blink first?

By: Vanitha Nadaraj

Malaysia never did resolve its foreign worker dependency issue and the newly revised annual foreign worker levy proves just that. What started decades ago as a convenient solution has turned the Malaysian economy into an addict for foreign labour.  The growing sectors decades ago for manufacturing, construction, service and plantation sectors grew on the backs of foreign labourers . These sectors would now collapse if not for foreign workers. About 80 percent of the oil palm industry workforce is made up of foreign workers.

A lot could have been done much earlier. Malaysia could have weaned itself off labour-intensive manufacturing and start controlling the value chain. Malaysia could have created a new kind of workforce that is able to embrace higher levels of technology.

Labour shortage a major challenge

Were you a businessman, you would want immediate solution. Waiting  for the government to implement its grand plan of creating a highly skilled workforce would have been intolerable. The temptation to take the easy way out and hire cheap, hard working foreign labour so available, was overwhelming.

Malaysia had always offered some of the best business and investment incentives in this region for both locals and foreigners. Which is why major electronics and electrical companies were located here and remained here even though labour was a major challenge.

That is fast changing. Last year, it seemed as though the entire electronics industry in Malaysia up and left. Major international companies closed and relocated to other parts of Southeast Asia. The reasons ranged from high cost of operations due to the Goods and Services Tax (GST) in Malaysia and high cost of imports due to a depreciating ringgit against the dollar.

Local and foreign worker dilemma

Another reason is the difficulty in getting workers. Apparently, Malaysia needs at least six million more workers for various sectors and foreign labour is the preferred option. Local workers are said to be unreliable. There are numerous accounts from employers of local workers abruptly walking out, faking sick leave, insisting on numerous breaks and allowances. Foreign workers, on the other hand, are willing to work long and hard and endure tougher working conditions.

Then again, local workers complain that the employers are unreasonable because they demand long working hours for low salaries and limited medical benefits. The same complaints can be heard from foreign workers and almost every one has a woeful tale of mistreatment under the hands of an employer in Malaysia. Over the years very little has been done to ensure the rights and working conditions of both locals and foreigners are looked into, and at the same time ensure employers get their required workforce.

Textile industry Runs Short

At a recent dialogue on the Trans-Pacific Partnership, Malaysian Textile Manufacturers Association president Dato’ Sri Tan Thian Poh told reporters that many of his members would be able to increase their production volume by 50 percent if they had enough workers. It was shortage of workers that was holding them back.

At that same event, Hon Geok Hoon told Asean Today that worker shortage in the textile industry is still very much labour-based. “A lot of the sewing and stitching work needs people to do them. We may need to relocate to another country,” says the Vice President for human resources administration for Ghim Li Fashion (M) Sdn Bhd. It is a Singapore-owned company with a plant in Johor that produces garments primarily for the US market and the clients include Macy’s, Sears, Walmart and Target.

Levy Shock for Foreign Workers

From February 1, the government restructured the annual levy rates for foreign workers. For the manufacturing, construction and service sectors, each foreign worker would be charged RM2,500 a year instead of RM1,250 (US$591 and US$296). The rate for those in the plantation and agriculture sectors is RM1,500, up from RM590 (US$355 and US$140). Domestic maids are exempt.

The government says the levy is one way of weaning industries off their reliance on foreign workers. Apparently, the move is to nudge employers to offer more jobs to local workers especially now when businesses are have started to retrench local workers.  More waves of retrenchment are expected given the slow global growth conditions.

CIMB Equities Research says the levy is likely to reduce earnings by 1-8 percent in the plantation sector. The additional cost per year for the plantation sector as a whole is likely to be RM338 million (US$80 million). For both agriculture and plantation, it comes up to a staggering RM569 million (US$135 million).

As for the manufacturing, construction and services sectors, labour cost for each worker will go up by 11-25 percent as a result of the increase in levy. The research house deems this cost increase as “manageable”.

Strong opposition to Foreign Worker Levy

Employers definitely do not see this “manageable”. Fifty-five local chambers of industry and trade organisations have bandied together to oppose the move to increase the levy for foreign workers. One of the groups, the Associated Chinese Chambers of Commerce and Industry of Malaysia, say that a better option would be to legalise illegal foreign workers at the earlier levy of RM1,250.

The government records show that there are more than two million registered foreign workers. It is estimated that there are between three to six million illegal foreign workers in Malaysia. This suggestion by the chambers could earn the government RM5 billion (US$1.2 billion), which is twice what the government would now get.

The government hopes to earn RM2.5 billion (US$591 million) from this exercise. The increase in levy can to an extent compensate for the huge loss in oil revenue, the main revenue earner for the country.

So who will blink first: the government or the employers? The government may not push through a move that has met with so much opposition in such a short span of time.

While the issue of levy increase is likely to be resolved soon, the issue of over-dependency on foreign workers in Malaysia is still unresolved. Increasing the levy on foreign workers in Malaysia hardly seem like a viable solution to a problem that has been festering for decades.