Ask any Malaysian whether things are becoming less affordable and we suspect most will answer with an emphatic “yes”. It is a common lament, that wages are just not keeping up with inflation and rising cost of living. The data appears, however, to suggest otherwise. According to statistics compiled by the International Labour Organization’s Global Wage Database, Malaysia has one of the highest rates of wage increase among our neighbours, on average, second only to Vietnam. Note that this is real wage growth, adjusted for purchasing power and inflation (see Table 1). So, what gives? Are the feelings and perceptions of the majority of Malaysians not a reflection of the underlying truth?
While the feelings and data appear contradictory, we think both are true. Wages are growing relatively fast but the standard of living for the average Malaysian is not improving. The crux of the problem is in the quality of jobs being created, besides a depreciating ringgit.
Bank Negara Malaysia’s report titled “Low-Skilled Foreign Workers’ Distortions to the Economy”, published in 2018, showed a rising share of job creation in the mid- and low-skilled categories, with the bulk of these new jobs going to foreign migrants — as high as 64.4% in 2015 and 81.5% by 2016. The share of low-skilled jobs rose from 8% between 2002 and 2010 and double to 16% of total jobs created between 2011 and 2017. On the other hand, the percentage of new high-skilled jobs fell from 45% to 37% over the same period (see Chart 1).
In total, mid- and low-skilled jobs accounted for 63% of total jobs created between 2011 and 2017, up from 55% between 2002 and 2010. Note that the definition of mid-skilled jobs includes clerical support, service and sales and skilled agriculture workers, plant-machine operators and assemblers, all of which are in fact relatively low-paid jobs. Based on our calculations, the percentage of high-skilled jobs created fell further, to just 28% between 2018 and 2019 (pre-pandemic). Surely, we must be moving in the wrong direction, as an economy that continues to develop with the target of becoming a high-income nation. We should be creating more highskilled — and high-pay — jobs, not less!
Put another way, Malaysian workers may be getting a higher percentage of wage increments — but many are starting from a very low base. Since the absolute wage is low, on average, there is little leftover — after the necessary expenses on staples such as housing, food and transportation — for discretionary spending. In addition, the official inflation rate is an issue in that the basket does not reflect urban living, where housing accounts for a very large share of the cost of living, and this cost has risen way above the Consumer Price Index numbers. The results are a falling national savings rate and rising household debt as Malaysians attempt to improve their standard of living.
It also means that companies have a tough time upselling more and better-quality goods and services at higher prices — and thus, earn better profits — to the average Malaysian. Case in point: The price of a McDonald’s Big Mac is far lower (in US dollar terms) in Malaysia than in the Philippines, Thailand, Singapore and South Korea and only slightly pricier than in Indonesia. We think McDonald’s cannot raise prices without hurting demand. This is a fundamental reason behind the persistent downtrend in sales, net profits and return on capital for companies listed on the Bursa Malaysia. As we highlighted last week, even though the share prices have underperformed, stock valuations are not cheap — because earnings are falling (see Chart 2). Needless to say, weak purchasing power, for the majority of the population, is not conducive to fresh investments.
See also: Education was, is and always will be the great equaliser
We wrote in May 2019 that “labour is lowly paid but not underpaid in Malaysia”. What did we mean? The salary one is paid typically commensurates with experience, skill set, education and training — and is roughly equivalent to the value of output or revenue one generates for the company. And the reality is that too many workers in the country are in the mid-low skills categories, with low productivity.
In fact, companies are raising pay for workers at a faster rate than the additional output growth these workers are able to generate in return — part of the reason that profits and return on capital have been on a downtrend. This is perhaps best reflected in the country’s lagging productivity growth, that is, the increase in value of output per hour worked — compared against both regional peers as well as against the pace of wage increases (see Chart 3).
In short, workers may be struggling, but so are companies! The obvious conclusion is that Malaysia is simply not moving up the value chain fast enough to command higher salaries. It also means that income for the nation as a whole is growing too slowly. We did fail to reach high-income nation status by 2020, as targeted.
To summarise, despite real wages rising at one of the fastest clips in the region, Malaysians continue to struggle to keep up with the cost of living — because for many, many years, the majority of new jobs have been starting at very low pay levels. The push for domestic consumption as the driver of economic growth was premature and, ultimately, unsustainable, resulting in rising household debt. The corresponding secular decline in national savings rate hurts the ability of the country to fund investments.
Weak purchasing power also disincentivises investments — businesses are unable to upsell, to raise prices for better-quality goods and services. Meanwhile, costs (including wages) continue to rise — outpacing productivity gains — leading to falling profits and return on capital. That means less and less money available for investments, including for research and development, innovation and future job creation — all contributing to perpetuate the negative feedback loop.
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In fact, this problem has persisted for a long time, all the way back to since the Asian financial crisis (AFC). Malaysia was among the first in the region to develop and industrialise, transforming from mining to diversified agriculture to a manufacturing-based economy, and was hugely successful in attracting investments into and developing the electrical and electronic sector for exports. From 1990 to 1997, Malaysia’s GDP per capita was the fastest growing in the region, second only to South Korea, underpinned by strong investments. The AFC severely affected and disrupted growth in the region. Still, with Malaysia’s big head start and not insignificant advantages at that point — for instance, in terms of infrastructure, education and language barrier — a resumption of this growth and move up the value chain would have been the most logical and path of least resistance. And yet, there is no doubt, we dropped the ball.
Post-AFC, GDP per capita growth (from 1997 to 2019) was the slowest in the region, not only lower than South Korea but also worse than Indonesia, Thailand, Singapore, the Philippines and Vietnam (see Table 2). Why? Clearly, the AFC was a critical turning point, the events and our own responses greatly influencing the country’s development and progress to this day. As we wrote in the first part of this series (“Part 1: Why is Bursa a chronic underperformer? Capital controls imposed”, The Edge, Issue 1407, Feb 7, 2022), we continue to suffer deep and cascading negative effects of Malaysia’s unconventional response — capital controls. We will elaborate more on this issue in the next, perhaps final, part of this soul-searching exercise.
The Global Portfolio lost 7.9% for the week ended Feb 23. All shares in the portfolio ended in the red, mirroring the broader market selloff. The biggest losers were Airbnb (-19.6%) and Grab Holdings (-12.3%). Shares in Home Depot (-11.9%) also fell sharply, despite reporting stronger-than-expected earnings results. It is apparent, from the current reporting season, that investors were setting a much higher bar in terms of expectations, which are inevitably unrealistic as growth normalises from pandemic recovery-driven highs in 2021. In addition to worries of imminent interest rate hikes by the US Federal Reserve, intensified geopolitical tensions after Russia began its invasion into Ukraine weighed heavily on global stock markets. Last week’s losses pared total returns since inception to 48.6%. This portfolio is marginally outperforming the benchmark MSCI World Net Return Index, which is up 48.4% over the same period.
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Cover photo: Bloomberg
