Sunday, May 6, 2012

Malaysia’s Low-Productivity Trap

Oct 20, 2011
Raymond Woo

Today, I would like to talk about a subject close to the hearts of many working people - labour productivity. In this article, I argue that Malaysians’ low-maintenance culture and general apathy (or what call the tidak apa attitude in Malay) towards technology and many other things in life is a major hindrance in achieving higher productivity and therefore, high income-nation status.

First, let us look at what constitutes national productivity, which is measured in terms of Total Factor Productivity (TFP). According to the growth accounting method, three elements, namely labour, capital and technology contribute to the production of goods and services. The former two elements are what we call “factors of production”, tangible factors which can added in more quantity to increase productivity growth. The last element, technology is an intangible factor which enhances production, namely to produce more goods and services with the same amount of labour and capital. That being said, we also know about the law of diminishing returns, where increased input necessarily leads to lower marginal growth and thus lower returns on investments, if there is no increased development of enhancers like technology and labour productivity.

Sten Malmquist, a Swedish economist had created the Malmquist Index which compares the production technology of two economies at any time. The index decomposes TFP into two elements: technological change and technical efficiency change.

Unfortunately, according to Idris Jajri (2007), empirical results suggest that Malaysia’s economic growth has stagnated in recent years due to negative returns from negative efficiency. Our growth has obviously zig-zagged through the years: our annual GDP growth averaged 6% in the 1960’s, 7.3% in the 1970-1975 period, 8.6% in the 1975-1980 period, then to a slower growth rate of 5.1% in the 1981-1985 period, improving to 6.7% in the 1985-1990 period, and later accelerating to 8.7% in the 1990-1995 period. Then, the East Asian Financial Crisis struck, reducing our growth rate to 4.6% in the 1996-2000 period, and our anaemic growth rate has not improved much until now.

Technological change and technical efficiency involve mainly human capital development. You need a lot of capital investment in research and development (R&D), a good technical education, and a meritocratic environment for the best scientific and technical minds to thrive, among others. The point is to encourage synergy between good scientific minds to improve technological productivity, which can only happen when a country retains a mass of scientists to its shores, which can only happen when you have an excellent and conducive system for scientific talent to develop in the first place.

I take the KTM Komuter train everyday to PwC, and I would always be reminded how haphazard and lackadaisical our national human capital development policy has been. KTM Komuter trains are often badly maintained, and the drivers and technicians have low technical competency, leading to frequent train breakdowns and delays. When waiting for yet another delayed train, I often ponder upon many interrelated factors leading to the current state of KTM Komuter: poor technical education, lack of drive in the workplace, lack of technical expertise to maintain the trains and the tracks, lack of budget to buy and maintain new trains regularly, KTM’s lack of growth strategy, economic inefficiency due to its status as a privatised monopoly, and so on.

As is everything in economics, one thing necessarily leads to another thing, or to many other things. KTM’s technological and technical failure leads to public transport bottlenecks and subsequent induced traffic congestion, as potential and current KTM users get fed up and drive to work instead. Traffic congestion leads to loss work hours and increased stress on mental health, which lowers productivity and efficiency at work. Lower productivity leads to lower growth, both in terms of GDP and also in terms of real income and purchasing power. This pure armchair logic will tell us that it is of no surprise that Malaysia is still stuck in low growth and the middle-income trap for more than a decade now, and the KTM example is just one of the many technological and technical failures our country faces everyday!

Our government has done some good things in the past few years to promote productivity and economic growth. Like technology, administrative and legal reforms are intangible enhancers to production. Thus, the establishment of the government performance improvement unit PEMANDU (where some PwC Advisory people have been seconded to) and its myriad  transform processes and targets has achieved some results, like Malaysia’s increase in the World Bank Doing Business Index ranking (an index that measures the ease of doing business by quantifying how many regulatory steps one must take to establish a legal business in a country) from 21 to 18, and World Economic Forum’s Global Competitiveness Index ranking from 26 to 21.

We have no choice but to keep initiatives like that going. It would be pointless for our government to keep on pouring money and assets into the economy (such as happened in the latest budget) without fundamentally changing the way we function in life, an important part being technology. As government-related activity already comprises more half of our GDP, we have no choice but to look inward, at how we live our lives and perform at work and life, in order for our country to develop further.

Paul Krugman once said that, “productivity isn’t everything, but in the long term it is almost everything.” Let me add another pithy saying: if we only keep on waiting for durian runtuh (fallen durians in Malay, meaning a windfall) from the government and other institutions without learning about and improving on the method of picking durians, we will only get to enjoy durians when they runtuh on our heads. 

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