Stop competing on cheap labour, Malaysian groups tell Asean leaders

Open letter to the leaders of Asean:

Your excellencies, the heads of states in Asean

The socialist party PSM wishes you a warm welcome to Malaysia as you arrive for the Asean summit meeting that commences on Monday, 26 May.

We are happy that Asean leaders will be meeting to discuss strategies to improve the wellbeing of the people of Asean.

Asean countries have witnessed significant economic growth in the past 50 years. In Malaysia, for example, gross domestic product (GDP) increased 25 times in real terms in the last five decades. But the majority of people in the bottom 80% of the population in all Asean countries are burdened with debt and mired in economic problems.

This paradox of economic hardships persisting despite impressive rates of expansion of our respective GDPs, arises from our “export-led growth” pattern of development where we rely on low costs of production (ie low wages of between a fifth to a fifteenth of the wages in advanced countries) to produce for the markets of Western countries and Japan.

In addition, the ongoing competition between Asean countries for foreign investment has led to a progressive reduction of corporate tax rates. In Malaysia, corporate tax has decreased from 40% of corporate profits in 1988 to its current 24% of profits.

This in turn has caused a contraction in the ratio of government income to GDP. For Malaysia this ratio has decreased from 30% in the 1980s to only 15% last year.

This reduction in government revenue has severely restricted the government’s ability to strengthen the social safety net for our people.

Hence, it is necessary for Asean countries to rethink our economic strategy.

PSM hopes that you will use this summit meeting as an opportunity to evaluate the following proposals:

1. Develop the internal market of the Asean region

For the past five decades, countries in Asean have followed the advice of the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO) to rely on foreign investment to drive the construction of manufacturing industries and rely on the markets of rich countries in Europe and North America for goods created by factories in Asean.

This development model cannot continue forever because:

• The West only represents 12% of the world’s population. It is impossible for them to generate enough gross demand for all countries in the world.
• The rate of GDP growth in Western countries is now low because of the relocation of many factories to Asian countries, where manufacturing costs are much lower. A process of ‘de-industrialisation’ has taken place in Western countries in the past 40 years, and this has led to the loss of high-paying factory jobs. These have been replaced by precarious jobs in the service sector with low and unstable incomes.

If the internal market in the Asean region (which has a combined population of 690 million) can be developed, it will bring several benefits to our economy, including:

• An increased demand for goods and services. Businesses in Asean, including our small traders, will benefit from the expansion of aggregate demand in Asean.
• Opportunities for new investments.
• The generation of new jobs.
• An increase in tax collection.
• A reduction in dependence on the European and US markets.

2. Increase the wages of ordinary workers in Asean countries

At present, the wages of ordinary workers in Asean countries are about a sixth (Malaysia) to a fifteenth (Cambodia) of the wages of ordinary workers in European countries and the US. One reason is the competition between Asean countries to attract foreign investors by offering ourselves as countries where manufacturing costs are low.

However, the low-wage policy makes it difficult for ordinary workers in our countries to make ends meet, and prevents a fairer distribution of national income to the working class.

In addition, household demand is the largest contributor to gross demand of any country. But, when the majority of consumers are low-wage workers, how can the gross demand of households grow in a robust manner?

Currently, countries in Asean are afraid to increase the minimum wage because the risk of creating a “comparative disadvantage” in the competition for foreign investment.

That risk can be overcome if several Asean countries – Malaysia, Thailand, Vietnam, Indonesia and the Philippines in particular – can agree to increase their minimum wages (which currently vary) by 10% every year (calculated taking their current wage level as the base) for the next five years. How this can be enforced needs to be discussed in depth.

Our recommendation is to include this approach in the Asean Free Trade Agreement so that import taxes can be imposed as a ‘fine’ against countries that fail to comply with the minimum wage increase schedule that has been agreed to.

3. Stop the race to the bottom in corporate tax

Government spending is another major contributor to a country’s gross demand.

In all countries in Asean, the ratio of government expenditure to GDP has decreased in the last 50 years. In Malaysia for example, government spending has decreased from 35% of GDP in the 1980s to 20% of GDP now.

The main reason is the reduction of corporate tax from 40% on company profits in 1988 to 24% on corporate profits this year. Malaysia had to reduce the corporate tax rate because it is competing with Thailand, Vietnam and Indonesia for foreign investment. Currently, corporate tax in Thailand is 20% and in Singapore, 17%.

The continued reduction of corporate tax rates in Asean countries not only hinders the development of the region’s internal market, it also restricts fiscal flexibility for the government to implement programmes to help ordinary people and to protect the environment. It has also caused an increase in national debt in most Asean countries.

This matter should be taken seriously by Asean and specific steps taken to increase corporate tax gradually and simultaneously to reach a higher level – we recommend 30% of the company’s gross profit – within a period of 10 years.

This means that Malaysia would be required to increase corporate tax by 0.6% every year for the next 10 years, while Thailand has to increase by 1% every year so that both countries can achieve the goal of 30% within a period of 10 years.

Again, effective measures to implement this, perhaps by tweaking the Asean Free Trade Agreement, have to be discussed.

4. Implement an effective carbon tax

The ‘cap and tax’ system is a good way to reduce greenhouse gas emissions.

Under this system, the largest emitters of CO2 will be given limits (the ‘cap’) for carbon dioxide production, based on the type of industry and the scale of production. A tax will be imposed on CO2 emissions that exceeds the set limit.

Vietnam has imposed a carbon tax at a rate of $0.50 per ton of CO2, and Indonesia is planning to launch it at a rate of $5 per ton.

But these rates are far less than the carbon tax imposed in Europe. France is charging US$52 per ton and Sweden is currently charging $137 per ton of CO2.

As is well known, too low a carbon tax rate will not incentivise the corporate sector to switch to renewable energy sources.

The fact is, Asean countries are anxious that the carbon tax will increase the cost of energy, transport and goods such as cement and iron, thus harming the country’s competitiveness in the race to attract foreign investment.

This concern can only be addressed if the carbon tax is implemented at about the same rate in all Asean countries. Negotiations on how this can be done should begin.

5. Resolve youth unemployment and underemployment

Young people between the ages of 20 and 35 are facing serious problems in making a living. Job opportunities are reduced, and new graduates are unable to find jobs commensurate with their education or training.

The work that can be found often is lowly paid and most of it is short-term contract work without guarantees or social protection. The problem of lack of work can be overcome:

• If more government positions are created in the health sector, welfare sector and environmental sector – to restore rivers, forests and to create a ‘circular’ economy. But the fiscal space is narrow for most Asean countries. Government revenue is currently insufficient to launch initiatives like this.
• If the private sector in Asean decides to produce more goods or services. But this path is constrained by the slow growth rate of domestic aggregate demand, because in general the wages received by workers in this region are a sixth to a fifteenth of the wages received for the same work in Western countries.
• If the number of hours of work per week is reduced gradually such that available work is shared out among all those who need to work.

The problem of youth unemployment should be recognised by Asean governments as a serious and worsening problem. Studies and discussion sessions should be organised to find effective measures to overcome this problem which, if failed to be handled effectively, will lead to frustration and radicalisation of our youth.

6. Set up joint ventures to pioneer new green industries

It is very important for Asean countries to work together to make electric buses of various sizes, solar panels, machinery to recycle organic waste to generate electricity and so on. These industries are central to transition to a green economy and reduce greenhouse gas emissions.

These new industries, if they can be ‘on-shored’ in Asean, will also generate jobs for our people and develop domestic gross demand in the Asean region.

Apart from the six proposals above pertaining to economic issues, we hope this Asean summit will also look into the following two issues:

1. Better treatment of refugees

Asean countries need to improve our treatment of refugees. We should, at the very least:

• Grant refugees the right to work legally: Currently they are forced to work illegally and this exposes them to exploitation by irresponsible employers. Currently we have about two million legal migrant workers in Malaysia, and some 160,000 refugees recognised by the UN refugee agency (UNHCR). Malaysia can easily reduce its intake of migrant workers a bit so that jobs can be given to refugees. The same situation also exists in Thailand and other Asean countries.
• Use part of the fees collected for work permits for refugees to pay for the cost of medical treatment of refugees and their families in government hospitals.

The implementation of these two steps will protect some of the basic rights of refugees in our countries.

2. Creation of a mechanism of checks and balances for the Asean Extradition Agreement

Currently Asean countries have agreed that if a citizen from country A escapes to another Asean country B, country B must arrest and send back that person if requested by country A.

We have no objection if this agreement is only used to arrest criminals. But considering that some countries in Asean have not yet attained a reasonable level of human rights, we feel it is necessary to create a mechanism to filter ‘extradition’ requests to ensure that people who flee because of human rights or political issues are not sent back to their home countries.

We should establish a process of checks and balance where if the person can show evidence he or she is not a criminal but a human rights activist or political refugee, he or she should be granted asylum for a longer period.

We hope that you will be able to discuss the issues that have been highlighted in this letter. We apologise if parts of our presentation are somewhat blunt. We speak out of a desire to create a more equitable and wholesome Asean region, and are prepared to meet with any committee that is tasked with looking further into these proposals.

Wishing you a most productive summit meeting. We hope you have a pleasant stay in Malaysia.

Sincerely,

Jeyakumar Devaraj

These proposals have been endorsed by 55 Malaysian NGOs.

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

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