We always heard South Korea achieved high income country status and our Malaysia has not. But to what extant that we have fallen behind? This chart perfectly tell you what’s wrong and why you shouldn’t listen to charlatan who otherwise offered bad advise for national development plan.
Blue line is South Korea. Red line is Malaysia and Green line is Indonesia. This line measure Total Productivity Factor, in short measuring how much input vs how much output. Input is capital and labour, and output is total economic volume. When you divide input with output, you get how productive each countries were.
Everyone started at 1985 as 100, and the index goes on. After almost 35 years, South Korea managed to score 167, Malaysia 115 and Indonesia 106. South Korea beat us handily while we beat out Indonesia narrowly. Despite all the ups and downs, South Korea never looked back and continued its march. While Malaysia and Indonesia have lots of serious setbacks.
From 1985 till 1995, South Korea grew fast while both Malaysia and Indonesia stagnant. This doesn’t indicate the economic output is lower, it just meant that there are higher emphasis on capital input rather than any real meaningful grow. Remember that higher total number of capital input will also resulted in higher total number output despite labour not growing, but when divided with total number of output only it did show efficiency. True to the trend, 1997/98 crisis struck us and sucks us all the capital that resulted in steep economic decline.
South Korea did share the same fate. For a time, their economic output decline too. But they restructure their economy and restart the growth. During 1999 till 2009, their TFP grew much faster than any period of time. We knew in history that South Korea successfully pursue high tech/high knowledge export during that same time period while Malaysia and Indonesia stuck at exporting more Palm Oil and primary sector. What a twist of fate. South Korea create global brand such as Kia, Samsung, LG and export it all over the world while we and Indonesia create none. 10 years later, South Korea is a high income economy.
But during that period, Malaysia too did enhance the TFP. Most would probably forgotten or would brand Tun Abdullah as a sleepy figurehead. But during that 6 years, TFP did grew at a slower pace, but surely. Had this trend been continued, although our TFP would still not exceed South Korea, we would still comfortably postulated a TFP index of 130-140, still translate into an income level of $20,000 – $25,000. What happened during those Tun Abdullah years? This is where things got interesting. Many might not knew that after 1997/98 crisis, our corporate are saddled with huge debt, lots of inefficiency and crippling under-investment. During that time, Tun Abdullah appointed a slew of experts or technocrat to reform these state-owned corporate. Some of them grew into international juggernaut that are able to explore greener pasture and brought opportunities that opened up international market. However, the good story ended in 2009 when crisis struck and we changed course again. To his credit, Tun Abdullah’s underrated achievement are not built upon and we didn’t seize the foundation leftover. All the while, Indonesia is still recovering from the devastating 1997/98 crisis that brought political changes and economic upheaval. Their TFP sunk to a low of 82 compared to 100 from 1985.
For the next 10 years until 2020, we start to implement developmental state policies. We looked inward and we decided to implement mega infrastructure project. After all, we can also squeeze out efficiency from our domestic labour too. We looked inward and we thought it was the best way. For 10 years, most of our economic growth came from construction sector which almost contributed 30% of all our economic activities while our much touted Penang E&E have a smaller slice of pie despite having the highest value adding in the middle of the global supply chain. As a result, our TFP changed from a low of 105 to 115 during that 10 years timeframe. In the meantime, Indonesia recovered and start to catch up with us. Its TFP stood at 92 in 2009 and grew to 106, a difference of 14 points. South Korea also grew from 154 to 167 during that same time period. Obviously something is not right for Malaysians. We are lagging behind, and not only we are lagging behind, we are being in risk of being surpassed by Indonesians.
WHAT DOES THAT MEANS FOR THE FUTURE (AND YOUR CHILDREN)
South Korea achieved a high base of TFP. Their economy has greater output productivity given the same resource (capital and labour). They managed to further enhanced this and cemented their leadership in high value adding sector (technology, knowledge sector). We will see better and better product and services from Samsung, LG, Hyundai, Kia, etc.
Our neighbour Indonesia, will however see a transformation in their economy. They will no longer be focusing on primary sector. They ascended to secondary sector and are now developing their service sector. In fact, they already started competing with Malaysia on manufacturing sector. Their better proximity to natural resources, larger pool of labourers, bigger market meant that their TFP will benefit greatly. Malaysia will no longer enjoy cheap labour supply from them and have look elsewhere for labour supply (Bangladesh, Cambodia, Myanmar), and in fact we had to compete with them to produce cheaper (not better product/service, caused we are not ascending on the value adding ladder). How can we produce cheaper than them? Our competitive advantage via-a-vis to Indonesia will further shrunk. It is already shrinking.
This left a hallowing and widening loss of middle layered industries that our previous generation build up so hard. Through thriftyness and hardwork, they are able to compete in international market with cheaper price. Had our policies been encouraging to structurally transform these firms to open up more international market, our industries will able to ascend quickly and to learn the rope of global business.
Unfortunately, in the next 10 years, our TFP will remain stagnant and we are forced to compete with our neighbour. Much middle layer industries will be forced to relocate or close down completely. This meant lost of income, economic output and more importantly the opportunity to ascend into higher ladder of value adding.
Imagining our future generation having stuck into non productive economy. Spending 12 years of resources, time and training into education that has not prepared them for the increasingly competitive environment. 1/3 of graduate are tertiary level and Malaysia spent billions to subsidies and/or undertake training for this group of people, only to find out their skills is no longer relevant due to inability to create suitable jobs for them.
That left a saddled and burdened group of labourer with financial commitments that were used to upskills themselves but left with no real job opportunity. And an inequality society with less-than-growing economic pie; when the economic pie grows albeit unequally, it is an unequally blessing to all as everyone can move along the economic ladder. Now the ladder is no more.
It is a negative reinforcing spiral. No ascending industries > no high value adding> no high productivity > no high income > No High Income Nation.
It can also be read reversely: No incentives to invest > no capital investment > no productivity growth > no high income > no consumption > no incentives to invest.
Our neighbour Indonesians are now creating fertile ground for investment and are jump starting their TFP. They knew perfectly well that their TFP foundation been laid and it is time to grow. This did happen to us during Tun Abdullah premiership but sadly we didn’t build upon that foundation to further enhance our productivity like South Korea did. Would Indonesia surpassed us? It is likely.
Start our TFP growth again. Not only direct incentives are required, but also indirect one. The states can direct investment into better field of opportunity through combining the use of structural tax reform (that encourage private consumption and export), heavy subsidies and business reform (easier access to credits) that encourage risk taking climate. Direct intervention include matching investments, export credits/grants, high ROE bar to state-owned firms (encouraging merger and global champion), technocrat panel with quasi-policy setting power (power sharing).
Had our trend continued into 2030, don’t be surprised that our TFP will lag behind Indonesia. We will work as cheap labour for Indonesia then, exporting our children to Indonesia to work. We are already exporting our best and brightest out currently. We will surely be exporting more of our people if we fallen behind and behind.