KUALA LUMPUR (May 30): Malaysia’s reliance on foreign cheap labour has become the biggest policy issue in the country's aspirations to move up the value chain, attract foreign direct investment (FDI) and exit the middle-income trap, according to a prominent economist.
Tan Sri Andrew Sheng warned that Malaysia “has no time to be complacent” as it faces fierce competition for FDI from neighbouring countries amid a “tectonic shift” in the world order.
“The real problem with the middle-income trap is this: Can you continue to develop your country based on foreign cheap labour? The foreign cheap labour is the biggest policy issue in Malaysia, in my view,” he told the audience here at the Affin Conference Series 2023.
“Why? Because if they are cheap, our young people cannot get their wages up. This is why the middle-income trap is broken by every country that stop their reliance on cheap labour. South Korea and Singapore are the classic example, they pay higher wages and force their companies to move up the value chain,” he said.
Sheng, formerly chairman of the Hong Kong Securities and Futures Commission, also said for Malaysia to attract quality FDI, the country should channel domestic investments into strategic sectors to uplift national competitiveness in research and development, and to develop its own market niche.
'The idea of copying is gone'
“The idea of copying [other countries] is gone,” Sheng said, emphasising the importance for Malaysia to develop its own competitive advantage that delivers sufficient return on equity (ROE) to attract higher FDI into the country.
Sheng highlighted green energy and technology as among the sectors that Malaysia could focus on in developing its own strengths.
“All investments that are coming in, they want green energy. Go for green energy transformation, and have very good policies to encourage the retraining of our young people,” he said.
“Every company now should have their own innovation or reskilling lab, working with the universities; because today, most of the innovation comes internally from staff — on how to do things better. This is one of the ways Malaysian businesses can transform themselves.
“Internally, companies need to organise their training and reskilling programme as part of their business strategy. This is true also for the civil service, because the game is changing very rapidly,” he added.
Slower economic growth translates into lower ROE for FDI
Sheng is of the view that this would help address Malaysia’s structural weakness of relying on debt-driven domestic consumption to fuel economic growth.
“Basically, Malaysia’s growth strategy of the last 25 years since the Asian Financial Crisis was a debt-driven domestic consumption story. That is the structural issue that Malaysia now faces. The FDI flow into Asean+3 remains robust, but would it continue? It depends on ROE,” he said.
Sheng cautioned that Malaysia’s relatively slower economic growth than its neighbouring peers like Indonesia, Vietnam and Thailand would translate into lower ROE for FDI, and hence weaken attractiveness to investors.
“The big problem is how to translate high level principles into practical projects and programmes that you and I could understand? The point is, we really need to have a much better strategic game and implementation game at the same time,” he added.