It is time for Malaysia to review its labour policies

Malaysia needs to relook at its labour policies to match its economic reality better. The weakening of ringgit is just one of the many challenges.

By James Lim

Malaysian oil companies are facing the squeeze. More foreign workers have decided to stay at home. This is due to a drop in ringgit-denominated earnings and better prospects at home. “This year, output will be impacted by (the shortage of) workers,” said Datuk Zakaria Arshad, chief executive of Felda Global Ventures Bhd, the world’s third-largest palm oil estate operator.

There are 1.9 million foreign workers in the country documented by Malaysia’s Home Ministry. This is about 14 to 15% of the local workforce. This number does not include illegal foreign workers. The nation’s policies are not helping to bring it closer to its economic aims or vision 2020. Instead, the policies add on to Malaysia’s troubles. There are spin-off factors that render Malaysia less attractive as a working destination.

Stricter government policies make it harder for employers to hire foreign labour

Starting from August 2016, there were new rules effective. It states that the calculation of minimum salary must include allowances. Also, some workers from certain industries must undergo medical examination. These new rules affect the ease of hiring foreign labour. For labour-intensive industries, there may be detrimental impacts.

These rules have coincided with the revenue losses documented last year. Datuk Shamsuddin Bardan, Malaysian Employers Federation (MEF) Director, said a similar freeze on foreign workers in 2016 cost companies about US$5.9 billion. He also warned that the bill could be higher now. The labour-intensive industries, such as construction, plantation and agriculture suffer the most.

The move to decrease the economy’s dependence on foreign labour is part of the plan. The policy had good intentions. But, it lacks accompanying incentives that would ensure the achievement of desired impacts. Employers need encouragement to balance their use of capital and skilled labour better. There needs to be a transition period for these changes to take place. The Malaysian government should be aware of the short-term consequences of their actions. Only then, they can come up with policies to mitigate any adverse impacts.

Restrictive foreign labour policies fail to consider the positive contributions by foreign workers. Productivity growth can arise from the use of low skilled foreign workers. These effects are particularly obvious in export-oriented modern industries. Malaysia’s main source of economic growth is international trade. To capture the best out of its labour pool, it needs to think differently. The nation simply should adopt an industry-specific approach when enforcing foreign labour policies.

Difficulty in shifting to higher value-added industries

The knowledge industries share the same struggles as the labour-intensive sectors. ACCA’s 2017 research noted that only 25% of Malaysia’s labour force is composed of highly skilled workers. This is lower than Singapore, which has 54% of highly skilled labour. Employers continued to grapple with an increasingly severe issue of brain drain. 2017 Hays Asia Salary Guide noted that 79% of respondents in Malaysia are willing to relocate. They will move countries to secure the right job. 69% of employers in Malaysia also feel that they lack the right talent. This prevents them from achieving business objectives.

TalentCorp, a government department tasked with bringing high-skilled Malaysians, has failed its target. Its 2016’s target was to get 800 professionals back. But, only 398 high-skilled Malaysians returned, which was 55.8% lower than the 900 in 2013. IMD World Talent Ranking 2017 also highlights Malaysia’s lack of attractiveness. Malaysia registered decreases in all three key indicators. How will the nation improve when its skilled jobs do not attract talents?

Source: IMD

Additionally, Malaysia deals with large volumes of low-value exports. Even with the necessary talents, Malaysia will struggle to make short-term adjustments. The painful shift will help its economy to focus on higher value-added goods. Malaysia is China’s largest trading partner in Southeast Asia. Malaysia’s bilateral trade with China was US$3.2 billion in June 2017. Bilateral trade between both nations is likely to increase to US$160 billion (RM671.7 billion) by 2020.

Electrical and electronics (E&E) products are valued at US$6 billion, up 22.4% from February 2016. These products are one of the many growth drivers in the export sector. The Malaysian government needs to tweak its economic incentives. This will then encourage private sector companies to shift towards higher value products.

Looking ahead at Malaysia’s promising future

The Malaysian economy has been on an upward growth trend. Its strong export drivers are projected to boost growth in 2018. It also made progress in labour productivity, evident from a 3.5% increment in 2016 figures. But, it cannot afford to be complacent. It still needs to shift to the digital economy and higher value-added industries.

Source: Bank Negara Malaysia

The government policies cannot be ‘one size fits all’. It needs to be reflective of labour shortages issues in certain industries. It is time for a review of rigid quotas and levies. Market stakeholders will benefit from policies that complement dynamic market conditions. There are signs that the Malaysian government is moving in the right direction. For instance, new government regulations have approved the hiring of only foreign workers. This applies mainly to export-oriented sectors.

The Malaysia government needs to manage their foreign labour and retrain existing workers. At the same time, it requires the necessary investments in infrastructure. Introduction of incentives may accelerate the positioning the economy for a new age. With much to do, the time to act is now.