Low wages, lower growth: Malaysia’s productivity problem laid bare

The country is now facing a proposed 10% US duty (subject to review), partly triggered by allegations that it has failed to curb the import of goods allegedly made with forced labour.

This comes as Malaysia is also under a separate US investigation over claims of excess production capacity in its electronics, machinery and steel industries.

From a politico-economic perspective, this is a familiar story: capital exploiting labour and extracting its surplus value. The suppression of domestic wages has been discussed before. The exploitation of forced migrant workers, if true, is an even more serious concern.

At the heart of the problem is the continued extraction of surplus value from the labouring class. Through global labour arbitrage – where the removal of barriers to international trade causes jobs and industries to migrate to nations with low wages and cheap operational costs – a rentier capitalist class has grown fat on the accumulation of capital by multinational companies.

The historical development of any country, from a politico-economic standpoint, flows from social practice, the struggle for production, the class struggle and scientific work.

Labour productivity

Total-factor productivity (TFP), also known as multifactor productivity (MFP), is typically measured as the ratio of aggregate output, such as gross domestic product (GDP), to aggregate inputs. It is a measure of productive efficiency: how much output can be produced from a given set of inputs.

It also accounts for part of the differences in per-capita income between countries.

Malaysia’s labour productivity continues to lag, well below the levels seen in advanced economies. According to the Malaysia Productivity Corporation’s Productivity Report 2018/2019, MFP growth, a measure of technological innovation, was negative over the preceding decade.

More recent reports suggest that MFP growth has remained sluggish, with only marginal improvement. The country’s productivity level rose to RM96,692 per employee in 2023, up marginally from RM95,858 in 2022. Despite the modest rise, progress remains slow and insufficient given the broader economic challenges the country faces.

The deeper problem for Global South economies is a structural contradiction within capitalism itself. As long as the law of value remains dominant, there will be a tension between raising productivity and sustaining profitability: efforts to raise the former tend to depress the latter, and thus eventually constrain growth.

Low labour productivity

Several factors explain Malaysia’s persistent low labour productivity and negative MFP growth, despite minor improvements in output per employee.

Dependence on low-skilled labour: Malaysia’s economy relies heavily on cheap, low-skilled foreign labour, particularly in construction, agriculture and manufacturing. This reduces the incentive to invest in technological innovation or workforce development.

Productivity growth requires improvements in technology (producing more with the same or fewer inputs), innovation (through new methods such as the Internet of Things, robotics and artificial intelligence), skills (education, experience, expertise) and better organisational structures (efficient leadership and streamlined processes such as kanban, just-in-time, agile management and lean manufacturing).

Weak technological innovation: Negative MFP growth signals a lack of technological advancement or inadequate integration of technology into production. Capitalist firms often prioritise cost-cutting over long-term innovation, especially in resource-extractive or labour-intensive industries.

Malaysia’s gross domestic expenditure on research and development (GERD) stands at about 1% of GDP. This is well behind Singapore (2.0%), China (2.7%), Japan (3.4%), Taiwan (4.0%) and South Korea (4.9%).

The country needs to raise R&D spending above 3.5% of GDP by 2030 if it is to remain competitive in a globalised economy.

Inefficiency in resource allocation: A focus on profit maximisation leads to the misallocation of resources. This tends to favour speculative finance or real estate (such as the proliferation of real estate investment trusts or REITs) over productivity-enhancing industries such as advanced manufacturing or high-technology R&D.

The few companies in Malaysia that have adopted new ways of working tend to show better TFP. In production, lean principles have been embraced across transnational and domestic industries – in electronics, the automotive sector, healthcare, the aerospace industry, and oil and gas.

Fragmented economic structure: Ethnocapitalism and class divisions hinder equitable access to capital and resources. Bumiputra policies, while aimed at equity, may inadvertently sustain inefficiencies in rent-seeking or politically connected industries.

The country needs to adopt total factor productivity as its main driver of economic development through the application of science and technology, rather than remaining entangled in ethnopolitics and its divisive identity politics.

Economic growth achieved this way can deliver progress alongside a more equitable distribution of wealth.

Overemphasis on extractive and rentier activities: Malaysia’s economic reliance on resource-based industries, from rare earth elements to depleting oil and gas fields, and on financialisation diverts investment away from high-value sectors.

It is these high-value sectors. such as advanced manufacturing and AI-based services, that drive productivity growth,

Initiatives such as the national semiconductor strategy, the national artificial intelligence office, “Industry 4.0” and electric vehicle projects were launched with much fanfare.

Yet each has its own inherent weaknesses, because proper inputs-outputs-outcomes-impacts assessments were not carried out, as Emir Research has repeatedly pointed out.

Underdeveloped human capital: Educational systems, including technical and vocational education and training, may not align with industry needs. Underinvestment in lifelong learning leaves the workforce underprepared for new technologies and automation.

Much of this socioeconomic underperformance can be traced to economic policies that have been influenced by the neoliberal agendas promoted by institutions such as the International Monetary Fund and the World Bank.

The country may have to endure this longer without meaningful economic reforms.

The World Economic Forum, meanwhile, is already cultivating the next generation of capitalists to exploit workers further.

The way forward to escape the trap of economic dependency as a semi-peripheral nation lies in a more progressive development path. A liberating socialist approach is one direction worth exploring.

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