Malaysia Economic Monitor The Quest for Productivity Growth 1
Contents RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK External environment Domestic economic developments Outlook THE QUEST FOR PRODUCTIVITY GROWTH Productivity Macroeconomic overview Productivity Country Benchmarking Productivity of Manufacturing Firms 2
Sluggish global economic growth Annual growth rate, % 6.0 5.0 Previous estimate (Jan. 2016) 4.0 3.0 2.0 1.0 0.0 2015 2016f 2017f 2018f 2015 2016f 2017f 2018f 2015 2016f 2017f 2018f Global Advanced EM and Developing Source: World Bank staff calculations 3
commodity prices bottoming up Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Commodity Price Indices 140 120 100 80 60 40 Energy Non-energy 20 Source: World Bank Commodity Price Data (Pink Sheet). 4
and the commodity balance stabilizes 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 Balances, % of GDP (last four quarters) 15 Commodity Balance 13 11 Non-Commodity CA Balance 9 7 5 3 1-1 -3-5 Source: CEIC, DOSM, World Bank staff calculations 5
The current account balance has increased Balances, % of GDP (last four quarters) Current Transfers Primary and Secondary Income 20.0 Services Balance Goods Balance 15.0 Current Account 10.0 5.0 0.0 0.6 1.9-5.0-10.0-15.0 Source: World Bank staff calculations 6
Fiscal consolidation continues despite lower oil-related revenues 0 Balances of the Federal Government, percent of GDP -1-2 -3-4 -5-6 -5.3-4.7-4.3-3.8-3.4-3.2-3.1-3.0-7 -8-6.7 2009 2010 2011 2012 2013 2014 2015 2016 2017f Source: MOF, World Bank staff calculations 7
GDP Growth remains resilient supported by private consumption Contribution to GDP, Y/Y 12.0 Private consumption Fixed investment Change in inventories 10.0 Government Net exports Real GDP 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Source: CEIC, DOSM, World Bank staff calculations 8
Households credit growth remained on a downward trend Loans outstanding (banking system); y/y change of 12-mth moving averages,% 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Passenger cars Personal use Total, Households Residential property Credit cards Source: BNM, World Bank staff calculations 9
Portfolio outflows were registered in Q3 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Portfolio flows, RM billion 25 20 Residents Non-residents Net portfolio flows 15 10 5 0-5 -10-15 -20-25 -30 Source: CEIC, DOSM, World Bank staff calculations 10
Among broad depreciation of currencies 108 106 104 102 100 98 96 US$/ currency, Rebase Jan 2016= 100 94 92 90 Thai Baht Philippines Peso Indonesia Rupiah Singapore Dollar Malaysia Ringgit Source: CEIC, BNM, World Bank staff calculations Note: December data as at 16 December 2016 11
Weak but growing: Global economic growth Commodity prices Global trade But higher uncertainty: Expect volatility 12
GDP growth expected to slowly recover in 2016 Change from last year, percent 7.0 6.0 5.0 4.0 5.5 4.7 6 5 4.2 4.3 4.5 3.0 2.0 1.0 0.0 2012 2013 2014 2015 2016f 2017f 2018f Source: CEIC, DOSM, World Bank staff projections 13
Transforming urban transport The Quest for Productivity Growth 14
Global TFP growth has been slowing down post the global financial crisis 4.0 Sources of world economic growth, annual growth rate, % 3.5 3.0 2.5 1.1 0.8 Capital Stock Labor TFP 2.0 0.5 1.5 1.0 0.5 0.0-0.5 0.0-0.3 1990-1995 1996-2000 2001-2005 2006-2010 2011-2014 Source: World Development Indicators (WDI), World Bank staff calculations 15
1996-2000 2001-2005 2006-2010 2011-2014 1996-2000 2001-2005 2006-2010 2011-2014 1996-2000 2001-2005 2006-2010 2011-2014 and the deceleration has been broadbased across all level of incomes 7 6 5 Sources of world economic growth, annual growth rate, % Capital Stock Labour TFP 4 3 2 1 0-1 High income Middle income Lower middle income Source: WDI, World Bank staff calculations 16
Malaysian factor accumulation key for growth Contribution to annual growth rate, % 10.0 Capital Stock Labour TFP 8.0 3.5 6.0 4.0 2.0 0.0 2.2 3.8 2.1 1.7-0.3 2.7 1.0 2.1 1.9 1.1 1.3 2.0 1.5 1.8-2.0 Source: WDI, World staff calculations 17
Malaysia s TFP growth below high income regional economies 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Contribution to annual growth rate, % (1990-2014) Capital Stock Labour TFP 1.8 2.2 2.2 2.3 2.1 2.0 0.9 1.9 1.1 1.4 2.0 2.0 1.9 1.9 1.8 4.4 1.1 3.0 Source: WDI, World Bank staff calculations 18
Labour productivity in Malaysia is lower than many regional countries Value added growth per worker, annual growth rate, % (1990-2014) 5.00 4.00 Change in Share of Working Age Population Change in Participation Rate Change in Employment rate Change in Productivity 3.00 2.00 1.00 3.95 3.39 3.08 2.78 2.65 0.00-1.00 Singapore Korea Thailand Turkey Malaysia Source: WDI, World staff calculations 19
but above other peer countries Value added growth per worker, annual growth rate, % (1990-2014) 2.58 2.07 1.11 0.67 0.24 Indonesia Chile Brazil Peru Mexico Source: WDI, World staff calculations 20
Productivity Prior to the 1998 AFC, sectors with higher labour productivity created more employment Value added growth per worker by sector, % (1990-1998) 2.00 *Other activities - Finance, business services, real estate and government services Mining 1.50 1.00 Other activities* Agriculture Wholesale & retail 0.50 Manufacturing 0.00-1.20-1.00-0.80-0.60-0.40-0.20 0.00 0.20 0.40 0.60-0.50 Employment -1.00 Source: WDI, World Bank staff calculations 21
Productivity After 1998, labour productivity reduced and destroyed employment in manufacturing Value added growth per worker by sector, % (1999-2014) 2.00 *Other activities - Finance, business services, real estate and government services 1.50 Manufacturing 1.00 Other activities* 0.50 Agriculture Wholesale & 0.00 retail -1.50-1.00-0.50 0.00 0.50 1.00-0.50 Mining Employment -1.00 Source: WDI, World Bank staff calculations 22
Higher productivity, key for raising income markedly in the long-run GDP per capita, Malaysia/ Average high-income economies, % 100 90 80 70 60 Baseline: TFP growth = 1.8% Scenario 1 (S1): TFP growth = 2.3% Scenario 2 (S2): S1 + labour force Scenario 3 (S3): S2 + human capital + investment 50 40 90.8 30 20 10 22.2 28.6 39.7 48.4 0 Source: WDI, World staff calculations 23
2010 2011 2012 2013 2014 11MP 2010 2011 2012 2013 2014 Historical Raising productivity should be complemented by improvement in other areas Female labour force participation, % Investment as share of GDP, % 60 30 55 50 45 40 35 30 28 26 24 22 20 Source: DOSM, WDI, World Bank staff calculations 24
Sustained employment, in difficult sales environment Real employment growth; Real annual sales growth; Labour productivity growth, %, 2012-2014 10 8 6 4 2 0-2 -4-6 -8 5.2 2.8 3.6 3.0 0.2 2.7 Malaysia -0.7 Employment Real annual sales Labour productivity High-income & OECD -2.9 ASEAN -5.3 9.1 5.4 China -3.4 Source: World Bank Enterprise Surveys 25
Large firms lead recent productivity decline Annual labour productivity growth, %, 2012-2014 2.0 0.0 1.0-2.0-3.2-4.0-6.0-11.6-8.0-10.0-12.0-14.0 Small (<20) Medium (20-99) Large (>100) Source: World Bank Enterprise Surveys 26
mainly among exporting firms particularly in Malaysia 5.0 Annual labour productivity growth, %, 2012-2014 0.0-5.0-10.0 Exporter Non-exporter -15.0 Malaysia High-income & OECD ASEAN China Source: World Bank Enterprise Surveys 27
Services performed better than manufacturing Annual labour productivity growth, %, (2012-2014) Manufacturing Services 8.0 4.0 4.0 0.0-4.0-8.0-12.0-16.0 2.0 0.0-2.0-4.0-6.0-8.0 Source: World Bank Enterprise Surveys 28
Manufacturing firms in Malaysia have higher variability of TFP 4.5 Manufacturing firms TFP (2012-2014) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Malaysia 25th percentile Median 75th percentile High-income & OECD ASEAN China Source: World Bank Enterprise Surveys 29
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China with much of the variability of TFP explained by large and small firms Manufacturing firms TFP (2012-2014) 6 5 4 3 2 1 0 25th percentile Median 75th percentile Small (<20) Medium (20-99) Large (>100) Source: World staff Enterprise Surveys 30
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China lower productivity mainly explained by non-exporters 6 5 4 3 2 1 0 Manufacturing firms TFP (2012-2014) 25th percentile Median 75th percentile Non-exporters Exporters Source: World Bank Enterprise Surveys 31
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Services productivity in Malaysia seem less productive than comparator countries Ratio of median labour productivity (Services/ Manufacturing) 2.5 2.0 1.5 1.0 0.5 0.0 Small Medium Large Source: World Bank Enterprise Surveys 32
Benchmarking Some Potential Drivers of Productivity Skills Infrastructure Innovation Efficiency 33
Skills Infrastructure Innovation Efficiency 34
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysia manufacturing firms have a higher share of secondary educated workers Share of secondary educated workers, % of total workers 100 80 60 40 20 0 Manufacturing Services Source: World Bank Enterprise Surveys 35
Malaysian firms have lower vacancy rates but report more difficulties in finding skills Vacancy rate, % Firms that find difficult to find skills, % 45 40 Malaysia ASEAN 100 Malaysia ASEAN 35 30 80 25 60 20 15 40 10 5 20 0 Total Small (<20) Medium (20-99) Large (>100) 0 Source: World Bank Enterprise Surveys 36
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Small (<20) Medium (20-99) Large (>100) Small (<20) Medium (20-99) Large (>100) Malaysian firms less likely to provide training and train fewer workers, mainly small firms 100 80 60 40 20 0 Firms that offer training, % Workers trained, % 60 50 40 30 20 10 0 Firms offering formal training Workers offered formal training Firms offering formal training Workers offered formal training Source: World Bank Enterprise Surveys 37
Malaysian SMEs that provide training have higher labour productivity and TFP Median sales per worker, USD Median TFP, % 60,000 5.0 No training No training 50,000 Training Training 4.0 40,000 3.0 30,000 20,000 2.0 10,000 1.0 0 Small (<20) Medium (20-99) Large (>100) 0.0 Small (<20) Medium (20-99) Large (>100) Source: World Bank Enterprise Surveys 38
Skills Infrastructure Innovation Efficiency 39
Productivity is positively associated with innovation Median sales per worker, USD 35,000 No innovation Any innovation 30,000 25,000 20,000 15,000 10,000 5,000 0 Small (<20) Medium (20-99) Large (>100) Source: World Bank Enterprise Surveys 40
Malaysian firms mainly focus on non-technical innovation 50 Percentage of firms that innovate, % 40 Malaysia ASEAN 30 20 10 0 Firms with technical innovation Firms with non-technical innovation Firms who spent on formal R&D Source: World Bank Enterprise Surveys 41
Skills Infrastructure Innovation Efficiency 42
Malaysia s infrastructure compares well although other MICs are catching up 7 Score (1-7), 2016-2017 and 2006-2007 6 5 2006-2007 2016-2017 4 3 2 1 0 Source: World Economic Forum Global Competitiveness Index 43
Malaysia s logistics performance compares well with other MICs 5 Score (1-5), 2016 and 2007 4 2007 2016 3 2 1 0 Source: World Bank Logistics Performance Index 44
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysian firms more likely to have water shortages and less power outages 40 30 20 10 Manufacturing firms experiencing shortages/ outages, % 0 At least 1 water shortage in a month At least 1 power outage in a month Source: World Bank Enterprise Surveys 45
Skills Infrastructure Innovation Efficiency 46
Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysia High-income & OECD ASEAN China Malaysian firms face less regulatory burden 50 40 30 20 10 Days, number of visits, time dealing with regulations 0 Time spent dealing with regulations (%) Avg. visits or meetings required with tax officials Days to obtain import license Days to obtain operating license Source: World Bank Enterprise Surveys 47
Small Medium Large Small Medium Large Small Medium Large Small Medium Large although regulatory burden increases with firm size Average senior management time spent dealing with regulations, % 14 12 10 8 6 4 2 0 Malaysia High-income & OECD ASEAN China Source: World Bank Enterprise Surveys 48
Practices Informal Sector Licenses & Permits Tax Rates Tax Administration Political instability Corruption Labor regulations Access to Land Customs & Trade Reg Electricity Transportation Access to Finance Courts Crime, Theft & Disorder Inadequately educated workforce Malaysian firms mention regulatory burdens as main constraints in the business environment Ranking of business environment obstacles, percent of firms 30 Malaysia 25 High-income & OECD 20 15 10 5 0 Source: World Bank Enterprise Surveys 49
The proportion of Malaysian firms that are credit constrained is similar to comparators Firms financially constrained (fully or partially), % of firms 60 50 40 30 20 10 0 Malaysia High-income & OECD ASEAN China Source: World Bank Enterprise Surveys 50
Gap between most and less productive manufacturing firms declined slightly Labour productivity growth, %, 2005-2014 12 10 8 6 Above median 9.4 Below median 4 2 Productivity gap: 11.3 ppt 2.8 0-2 -4-1.9 Productivity gap: 8.9 ppt -6-8 -6.1 2005-2010 2010-2014 Source: DOSM, World Bank staff calculations 51
Domestic-oriented manufacturing firms saw smaller decline in labour productivity growth 6 5 4 3 2 1 0-1 -2-3 Labour productivity growth, %, 2005-2014 5.4 3.8-1.5-2.6 2005-2010 2010-2014 2005-2010 2010-2014 Domestic-oriented Export-oriented Source: DOSM, World Bank staff calculations 52
Distortions in output markets seem to undermine productivity growth Productivity and factors distortions Productivity and output market distortions -2 0 2 4 6 8 Output wedge, log(tau_y_wedge) -4-2 0 2 4-4 -2 0 2 Physical productivity, log(tfpq) l_tau_k_wedge lpoly smooth: l_tau_k_wedge -4-2 0 2 Physical productivity, log(tfpq) l_tau_y_wedge lpoly smooth: l_tau_y_wedge Source: DOSM, World Bank staff calculations 53
Removing distortions to the 1997 US level could increase productivity by 23 percent TFP gains by misallocation,% 140 120 100 80 70 60 50 40 TFP gains with US efficiency 60 127.5 30 59.2 40 20 42.9 75.7 78 86.6 20 10 22.8 24.5 30.5 0 0 Malaysia 2014 Turkey 2014 China 2005 India 1994 Source: DOSM, World Bank staff calculations 54
Conclusions Productivity growth in Malaysia has declined since 2008, in part because slowdown in external demand. Malaysia shows relatively higher divergence in productivity of firms In the same manufacturing industry, which can be explained by misallocation of resources across firms. Between large and small firms, which can be explained by underperforming small firms => need to raise productivity of domestic laggard SMEs Misallocation in output markets undermine productivity Productivity benchmarking Good average education but skills hard to find => training Innovation but in non-technical areas => technology absorption Infrastructure compares well => keep the edge on logistics performance Efficiency limited by misallocation and perceived regulations => competition Closing the gap with high income economies will require to accelerate productivity growth, while also keeping factor and human capital accumulation 55
Terima kasih! RAFAEL MUNOZ MORENO rmunozmoreno@worldbank.org 56