MALAYSIA has known for some time that its manufacturing sector needs to move up the global value chain towards higher-value and more complex products to remain a relevant and competitive player. Not only does low-end, low-wage manufacturing make it harder for locals to command better pay, it is also not a conducive environment for technology transfers, let alone innovation.
To be sure, Malaysia has made notable progress in diversifying its export composition and markets. But while the manufacturing sector remains the largest export contributor and makes up the second largest portion of GDP, Malaysia’s share of the world’s manufacturing exports is declining.
More importantly, the local manufacturing sector “has not evolved enough to respond to changing global demands, producing products that are also manufactured by many other countries”. This observation is supported by the declining number of exports that have a so-called Revealed Comparative Advantage score that’s greater than one (RCA>1), according to a paper appended to the 11th Malaysia Plan (2016-2020). The latter essentially means the country has a smaller number of export products with high comparative advantage when measured against the proportion of world exports.
“Issues affecting the manufacturing sector are low productivity, pervasiveness of low value-add labour-intensive industries, lack of innovation and competitiveness and weak enablers,” the paper states.
These issues are being tackled but the effectiveness of the methods has come into question because of the slow pace in moving up the value chain. As stated in the New Economic Model, many of the policies and strategies used to achieve the current state of development are insufficient to take the country to the next stage.
An often quoted example is South Korea, which joined the middle-income group of countries the same year as Malaysia, but took only 26 years to reach high-income status in 1995. Malaysia, on the other hand, has spent 47 years in the middle-income group, 20 of which were in the upper tier (South Korea only stayed seven years).
According to a recently published review of Malaysia’s innovation policy by the Organisation for Economic Co-operation and Development (OECD), the government had devised a number of ambitious strategies and plans to support research and innovation.
“However, the many commendable initiatives undertaken during this period to support the emerging knowledge economy have been confronted with weaknesses in governance and difficulties in implementing reforms of an increasingly complex system of innovation,” the OECD report read.
“More coordination appears to be needed among actors and policies, and funding requires some prioritisation,” it added.
Among other things, the OECD noted that the Malaysian science, technology and innovation (STI) policy system “has been shown to be complex and characterised by a significant degree of functional overlap among actors and their respective schemes and programmes”.
Some 14 agencies under eight ministries provide grants to support research and development (R&D) activities, the OECD observed, citing a 2014 study. If one were to take a broader view, there are 44 agencies and 10 ministries engaged in initiatives to support STI activities, be it research, development, commercialisation or innovation.
“The multiplicity of actors with similar roles, albeit with different scopes and emphases, increases the risk of redundancies … if in excess, [overlaps] tend to diminish the propensity of public and private actors [players] to engage in R&D activities, inflict additional deadweight and lead to inconsistencies between the different support schemes that undermine their effectiveness,” the OECD said.
And while there are resources and support for R&D and commercialisation, fragmentation also implied that funds awarded are spread thinly, “which stands in the way of achieving critical mass and reaping the advantages of managing larger portfolios”, it said. The Ministry of Health, for example, operates very small research grant schemes, it added.
Tellingly, the National Innovation Survey found that 42% of relevant companies did not access government support and R&D grants because they were not aware of the availability, the report said.
On top of that, frequent changes in the system further add to its complexity and reduce transparency. “The instability tends to reduce the system’s effectiveness as, more than most other policy areas, it requires time to build the necessary relationships of trust, develop a shared understanding and send clear signals to all the actors in the STI system,” noted the OECD report.
An example the OECD gave was this: Between 2005 and 2010, MIGHT (Malaysian Industry-Government Group for High Technology) was put under the purview of the Ministry of Science, Technology and Innovation (Mosti), then transferred back to the Prime Minister’s Department under the Science Advisor to the Prime Minister. In 2014, it was put under a minister in the Prime Minister’s Department. The Science Advisor, whose position was established in 1984 under the Prime Minister’s Department to spur economic growth through science and technology, became part of the Ministry of Science, Technology and Innovation in 2005, prior to being reinstated and placed under the auspices of the Prime Minister’s Department again in 2010.
In the meantime, some ministries were restructured with the Ministry of Energy, Green Technology and Water being established in 2009, following the Cabinet reshuffle, from the Ministry of Energy, Water and Communications, with the communications part transferred to the Ministry of Communications and Multimedia. A new Ministry of Education came back into being in 2013 after being separated into two ministries in 2004 — the Ministry of Education and the Ministry of Higher Education. In 2015, the Ministry of Education was separated again.
If you thought the changes above are hard to follow, imagine the confusion among the players themselves and those seeking aid. Alas, “conflicting guidance is also a major problem” identified by Malaysian STI players, the OECD said, pointing to the coexistence of several STI advisories with partially overlapping remits. While their existence gives weight to certain sectoral issues, the advantages are outweighed by problems arising from lack of coordination and adequate expert mix, overlaps and infrequent meetings.
And this problem has been going on for decades: “The evolution of agenda-setting councils in Malaysia illustrates quite well the difficulty to ensure this function in view of the competition between organisations already in place. Debates around the creation of such coordinating institutions date back to the early days of Malaysia’s independence,” it added, citing the Pan Malaysian Scientific Advisory Council created in 1953 and eliminated in 1957, plus subsequent incarnations. It remains to be seen if the newly formed National Science Council will beat its predecessors.
So while Malaysia has successfully identified its main challenges and come up with ambitious strategic plans in response, “its capacity to implement and deliver them appears limited”. The weakness in implementation is attributed to inadequate governance, lack of policy sustainability and predictability, ill-conceived measures and insufficient capabilities of middle-management administrators at some ministries and agencies.
Not only does Malaysia need to improve the government’s delivery ability, it also needs to establish a “systematic evaluation system at the core of policymaking”. Malaysia can no longer let “poor monitoring and evaluation” get in the way if it wants to make real progress. It is high time that these long-time issues be ironed out.
The advent of the fourth industrial revolution — where intelligent machines and ubiquitous mobile supercomputing are set to disrupt and change the way we live, work and relate to one another — means there is a real danger of Malaysia being left behind if it does not act fast. Even so, there are opportunities in every crisis and the country still has a chance if it makes the necessary moves to future-proof the economy.
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