Malaysia Economic Monitor The Quest for Productivity...

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Malaysia Economic MonitorThe Quest for Productivity Growth

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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

3

Sluggish global economic growth…

Source: World Bank staff calculations

Annual growth rate, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2015 2016f 2017f 2018f 2015 2016f 2017f 2018f 2015 2016f 2017f 2018f

Global Advanced EM and Developing

Previous estimate (Jan. 2016)

4

… commodity prices bottoming up…

Source: World Bank Commodity Price Data (Pink Sheet).

Commodity Price Indices

20

40

60

80

100

120

140

Jan

-13

Mar-

13

May-1

3

Jul-13

Sep-1

3

Nov-1

3

Jan

-14

Mar-

14

May-1

4

Jul-14

Sep-1

4

Nov-1

4

Jan

-15

Mar-

15

May-1

5

Jul-15

Sep-1

5

Nov-1

5

Jan

-16

Mar-

16

May-1

6

Jul-16

Sep-1

6

Nov-1

6

Energy Non-energy

5

…and the commodity balance stabilizes

Source: CEIC, DOSM, World Bank staff calculations

Balances, % of GDP (last four quarters)

-5

-3

-1

1

3

5

7

9

11

13

15

200

9Q

1

200

9Q

3

201

0Q

1

201

0Q

3

201

1Q

1

201

1Q

3

20

12

Q1

201

2Q

3

201

3Q

1

201

3Q

3

201

4Q

1

201

4Q

3

201

5Q

1

201

5Q

3

201

6Q

1

201

6Q

3

Commodity Balance

Non-Commodity CA Balance

6

The current account balance has increased

Source: World Bank staff calculations

Balances, % of GDP (last four quarters)

0.6 1.9

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0Current Transfers Primary and Secondary Income

Services Balance Goods Balance

Current Account

7

Fiscal consolidation continues despite lower oil-related revenues

Source: MOF, World Bank staff calculations

Balances of the Federal Government, percent of GDP

-6.7

-5.3

-4.7-4.3

-3.8-3.4 -3.2 -3.1 -3.0

-8

-7

-6

-5

-4

-3

-2

-1

0

2009 2010 2011 2012 2013 2014 2015 2016 2017f

8

GDP Growth remains resilient supported by private consumption


Contribution to GDP, Y/Y

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Private consumption Fixed investment Change in inventories

Government Net exports Real GDP

9

Households’ credit growth remained on a downward trend

Source: BNM, World Bank staff calculations

Loans outstanding (banking system); y/y change of 12-mth moving averages,%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0Passenger cars Residential property

Personal use Credit cards

Total, Households

10

Portfolio outflows were registered in Q3


Portfolio flows, RM billion

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25Q

1 2

013

Q2

20

13

Q3 2

013

Q4 2

013

Q1 2

014

Q2 2

014

Q3 2

014

Q4 2

014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q1 2

016

Q2 2

016

Q3

20

16

Residents Non-residents Net portfolio flows

11

Among broad depreciation of currencies

Source: CEIC, BNM, World Bank staff calculationsNote: December data as at 16 December 2016

US$/ currency, Rebase Jan 2016= 100

90

92

94

96

98

100

102

104

106

108

Thai Baht Philippines Peso Indonesia Rupiah

Singapore Dollar Malaysia Ringgit

12

Weak but growing:

• Global economic growth

• Commodity prices

• Global trade

But higher uncertainty:

• Expect volatility

13

GDP growth expected to slowly recover in 2016

Source: CEIC, DOSM, World Bank staff projections

Change from last year, percent

5.5

4.7

6

5

4.2 4.34.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2012 2013 2014 2015 2016f 2017f 2018f

14

Transforming urban transport

The Quest for Productivity Growth

15

Global TFP growth has been slowing down post the global financial crisis…

0.0

1.10.8

-0.3

0.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1990-1995 1996-2000 2001-2005 2006-2010 2011-2014

Capital StockLaborTFP

Source: World Development Indicators (WDI), World Bank staff calculations

Sources of world economic growth, annual growth rate, %

16

and the deceleration has been broad-based across all level of incomes

-1

0

1

2

3

4

5

6

7

199

6-2

00

0

200

1-2

00

5

20

06

-20

10

201

1-2

01

4

199

6-2

00

0

200

1-2

00

5

200

6-2

01

0

201

1-2

01

4

199

6-2

00

0

200

1-2

00

5

200

6-2

01

0

201

1-2

01

4

High income Middle income Lower middle income

Capital StockLabourTFP

Source: WDI, World Bank staff calculations

Sources of world economic growth, annual growth rate, %

17

Malaysian factor accumulation key for growth

Source: WDI, World staff calculations

3.8

1.71.1 1.3 1.8

2.2

2.12.1 1.9

1.5

3.5

-0.3

2.7

1.02.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0Capital Stock Labour TFP

Contribution to annual growth rate, %

18

Malaysia’s TFP growth below high income regional economies


2.0 2.0 1.9 1.9 1.83.0

2.00.9

1.91.1 1.4

1.1

1.8

2.2

2.2

2.3 2.1

4.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Capital Stock Labour TFP

Contribution to annual growth rate, % (1990-2014)

19

Labour productivity in Malaysia is lower than many regional countries…


3.953.39 3.08 2.78 2.65

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

Singapore Korea Thailand Turkey Malaysia

Change in Share of Working Age Population

Change in Participation Rate

Change in Employment rate

Change in Productivity

Value added growth per worker, annual growth rate, % (1990-2014)

20

…but above other peer countries


2.582.07

1.110.67

0.24

Indonesia Chile Brazil Peru Mexico

Value added growth per worker, annual growth rate, % (1990-2014)

21

Prior to the 1998 AFC, sectors with higher labour productivity created more employment


-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

-1.20 -1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60

Pro

ductivity

Employment

Manufacturing

Other activities*

Wholesale & retail

Mining

Agriculture

*Other activities - Finance,

business services, real estate and

government services

Value added growth per worker by sector, % (1990-1998)

22

After 1998, labour productivity reduced and destroyed employment in manufacturing


-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

-1.50 -1.00 -0.50 0.00 0.50 1.00

Pro

ductivity

Employment

ManufacturingOther activities*

Wholesale &

retail

Mining

Agriculture

*Other activities - Finance, business

services, real estate and government

services

Value added growth per worker by sector, % (1999-2014)

23

Higher productivity, key for raising income markedly in the long-run


GDP per capita, Malaysia/ Average high-income economies, %

22.228.6

39.748.4

90.8

0

10

20

30

40

50

60

70

80

90

100

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

24

Raising productivity should be complemented by improvement in other areas…

Source: DOSM, WDI, World Bank staff calculations

Female labour force participation, % Investment as share of GDP, %

30

35

40

45

50

55

60

201

0

201

1

201

2

201

3

201

4

11M

P

20

22

24

26

28

30

20

10

20

11

20

12

20

13

20

14

His

torical

25

Sustained employment, in difficult sales environment

Source: World Bank Enterprise Surveys

Real employment growth; Real annual sales growth; Labourproductivity growth, %, 2012-2014

2.8 3.6 3.0

9.1

0.2

5.2

-2.9

5.4

-0.7

2.7

-5.3-3.4

-8

-6

-4

-2

0

2

4

6

8

10

Malaysia High-income &OECD

ASEAN China

Employment

Real annual sales

Labour productivity

26

Large firms lead recent productivity decline…


Annual labour productivity growth, %, 2012- 2014

1.0

-3.2

-11.6

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

Small (<20) Medium (20-99) Large (>100)

27

…mainly among exporting firms particularly in Malaysia


Annual labour productivity growth, %, 2012- 2014

-15.0

-10.0

-5.0

0.0

5.0


ASEAN China

Exporter Non-exporter

28

Services performed better than manufacturing


Annual labour productivity growth, %, (2012-2014)

-16.0

-12.0

-8.0

-4.0

0.0

4.0

8.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0Manufacturing Services

29

Manufacturing firms in Malaysia have higher variability of TFP…


Manufacturing firms TFP (2012-2014)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5


ASEAN China

25th percentile Median 75th percentile

30

…with much of the variability of TFP explained by large and small firms

Source: World staff Enterprise Surveys


0

1

2

3

4

5

6

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a


25th percentile Median 75th percentile

31

lower productivity mainly explained by non-exporters



0

1

2

3

4

5

6

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Non-exporters Exporters

25th percentile Median

75th percentile

32

Services productivity in Malaysia seem less productive than comparator countries


Ratio of median labour productivity (Services/ Manufacturing)

0.0

0.5

1.0

1.5

2.0

2.5

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Small Medium Large

33

Benchmarking Some Potential Drivers of Productivity

Skills Infrastructure

Innovation Efficiency

34



35

Malaysia manufacturing firms have a higher share of secondary educated workers…


Share of secondary educated workers, % of total workers

0

20

40

60

80

100M

ala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-i

nco

me

& O

EC

D

AS

EA

N

Chin

a

Manufacturing Services

36

Malaysian firms have lower vacancy rates but report more difficulties in finding skills


Firms that find difficult to find skills, %

0

5

10

15

20

25

30

35

40

45

Total Small(<20)

Medium(20-99)

Large(>100)

Malaysia ASEAN

0

20

40

60

80

100 Malaysia ASEAN

Vacancy rate, %

37

Malaysian firms less likely to provide training and train fewer workers, mainly small firms


0

20

40

60

80

100

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Firms offeringformal training

Workers offeredformal training

0

10

20

30

40

50

60

Sm

all

(<20

)

Mediu

m (

20-9

9)

Larg

e (

>1

00)

Sm

all

(<20

)

Mediu

m (

20-9

9)

La

rge

(>

10

0)

Firms offering formaltraining

Workers offeredformal training

Firms that offer training, % Workers trained, %

38

Malaysian SMEs that provide training have higher labour productivity and TFP


Median sales per worker, USD Median TFP, %

0

10,000

20,000

30,000

40,000

50,000

60,000

Small (<20) Medium(20-99)

Large(>100)

No training

Training

0.0

1.0

2.0

3.0

4.0

5.0

Small (<20) Medium (20-99)

Large(>100)

No training

Training

39



40

Productivity is positively associated with innovation


Median sales per worker, USD

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


No innovation Any innovation

41

Malaysian firms mainly focus on non-technical innovation


Percentage of firms that innovate, %

0

10

20

30

40

50

Firms with technicalinnovation

Firms with non-technicalinnovation

Firms who spent onformal R&D

Malaysia ASEAN

42



43

Malaysia’s infrastructure compares well although other MICs are catching up

Source: World Economic Forum Global Competitiveness Index

Score (1-7), 2016-2017 and 2006-2007

0

1

2

3

4

5

6

7

2006-2007

2016-2017

44

Malaysia’s logistics performance compares well with other MICs

Source: World Bank Logistics Performance Index

Score (1-5), 2016 and 2007

0

1

2

3

4

5

2007 2016

45

Malaysian firms more likely to have water shortages and less power outages


Manufacturing firms experiencing shortages/ outages, %

0

10

20

30

40

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Ch

ina

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

At least 1 water shortage in a month At least 1 power outage in a month

46



47

Malaysian firms face less regulatory burden…


Days, number of visits, time dealing with regulations

0

10

20

30

40

50M

ala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-i

nco

me

& O

EC

D

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Mala

ysia

Hig

h-incom

e &

OE

CD

AS

EA

N

Chin

a

Time spent dealingwith regulations (%)

Avg. visits ormeetings requiredwith tax officials

Days to obtainimport license

Days to obtainoperating license

48

…although regulatory burden increases with firm size


Average senior management time spent dealing with regulations, %

0

2

4

6

8

10

12

14

Sm

all

Mediu

m

Larg

e

Sm

all

Mediu

m

Larg

e

Sm

all

Mediu

m

Larg

e

Sm

all

Mediu

m

Larg

e


ASEAN China

49

Malaysian firms mention regulatory burdens as main constraints in the business environment


Ranking of business environment obstacles, percent of firms

0

5

10

15

20

25

30

Pra

ctices

Info

rma

lS

ecto

r

Lic

en

se

s &

Perm

its

Ta

x R

ate

s

Ta

xA

dm

inis

tratio

n

Polit

ical

insta

bili

ty

Corr

up

tion

Lab

or

reg

ula

tio

ns

Access t

oL

an

d

Custo

ms &

Tra

de R

eg

Ele

ctr

icity

Tra

nspo

rta

tion

Access t

oF

ina

nce

Court

s

Cri

me

, T

he

ft &

Dis

ord

er

Ina

deq

uate

lye

du

ca

ted

work

forc

e

Malaysia

High-income & OECD

50

The proportion of Malaysian firms that are credit constrained is similar to comparators


Firms financially constrained (fully or partially), % of firms

0

10

20

30

40

50

60


ASEAN China

51

Gap between most and less productive manufacturing firms declined slightly

Source: DOSM, World Bank staff calculations

Labour productivity growth, %, 2005-2014

9.4

2.8

-1.9

-6.1

-8

-6

-4

-2

0

2

4

6

8

10

12

2005-2010 2010-2014

Above median Below median

Productivity gap:

11.3 ppt

Productivity gap: 8.9 ppt

52

Domestic-oriented manufacturing firms saw smaller decline in labour productivity growth


Labour productivity growth, %, 2005-2014

5.4

-1.5

3.8

-2.6

-3

-2

-1

0

1

2

3

4

5

6

2005-2010 2010-2014 2005-2010 2010-2014

Domestic-oriented Export-oriented

53

Distortions in output markets seem to undermine productivity growth


Productivity and factors distortions Productivity and output market distortions

-2

02

46

8

Cap

ital w

ed

ge

, lo

g(ta

u_k_

we

dg

e)

-4 -2 0 2Physical productivity, log(TFPQ)

l_tau_k_wedge lpoly smooth: l_tau_k_wedge

-4

-2

02

4

Outp

ut w

edg

e , lo

g(ta

u_y_

we

dg

e)

-4 -2 0 2Physical productivity, log(TFPQ)

l_tau_y_wedge lpoly smooth: l_tau_y_wedge

54

Removing distortions to the 1997 US level could increase productivity by 23 percent


TFP gains by misallocation,% TFP gains with US efficiency

42.9

75.7 7886.6

127.5

0

20

40

60

80

100

120

140

22.8 24.530.5

59.2

0

10

20

30

40

50

60

70

Malaysia2014

Turkey2014

China2005

India1994

55

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

56

Terima kasih!

RAFAEL MUNOZ [email protected]

Malaysia Economic Monitor The Quest for Productivity...

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