Malaysia OVERVIEW

OECD Economic Surveys
Malaysia
July 2019
OVERVIEW
This Overview is extracted from the 2019 Economic Survey of Malaysia. The Survey was discussed at a meeting of the Economic and Development Review Committee on 24 April 2019 and is published on the responsibility of the Secretary-General of the OECD.
This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
OECD Economic Surveys: Malaysia© OECD 2019
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Table of contents
Executive summary............................................................................................................................... 7
Key Policy Insights.............................................................................................................................. 13
Malaysia’s economic performance has been very successful, but social and governance
challenges remain .............................................................................................................................. 13
Renewed priorities of structural reform ......................................................................................... 14
Malaysia’s current state of well-being ........................................................................................... 18
Ensuring resilience to maintain growth momentum .......................................................................... 21
Monetary and financial market policies underpin resilience.......................................................... 24
Low-income households are relatively vulnerable to rising cost of living .................................... 27
Ensuring fiscal sustainability is prioritised........................................................................................ 29
Building a larger and consistent revenue base to foster inclusiveness........................................... 31
Consolidating expenditure for strengthening social protection...................................................... 34
Improving public procurement as a basis for maximising expenditure efficiency......................... 37
Improving budget process transparency......................................................................................... 38
Risk management of contingent liabilities needs to be strengthened............................................. 38
Policy framework of public-private partnership needs to be more transparent.............................. 40
Strengthening public debt management as key to fiscal sustainability .......................................... 42
Ensuring integrity is key to efficient fiscal system ........................................................................ 44
Fostering growth and productivity..................................................................................................... 46
Accelerating liberalisation facilitates productivity gains ............................................................... 48
Promoting services liberalisation contributes to overall productivity............................................ 48
Strengthening the policy framework for environmental sustainability and green growth................. 51
References.......................................................................................................................................... 55
Annex 1.A. Key recommendations in the first OECD Economic Assessment of Malaysia
(November 2016)............................................................................................................................... 58
Tables
Table 1. Selected target indicators......................................................................................................... 16
Table 2. Macroeconomic indicators and projections............................................................................. 22
Table 3. Possible shocks to the Malaysian economy............................................................................. 24
Table 4. Past OECD recommendations on fiscal policy ....................................................................... 31
Table 5. Past OECD recommendations on promoting inclusive growth............................................... 37
Table 6. More could be done to improve budgetary transparency ........................................................ 38
Table 7. Estimated fiscal impact of selected key recommendations ..................................................... 45
Table 8. Past OECD recommendations on boosting productivity......................................................... 51
Table 9. Past OECD recommendation on green growth ....................................................................... 53
Figures
Figure 1. Per capita GDP has converged but its pace needs to be accelerated...................................... 13
Figure 2. Life is good in Malaysia, though improvement is still needed in several areas..................... 19
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 4  TABLE OF CONTENTS
Figure 3. Well-being improvements have weakened ............................................................................ 20
Figure 4. Recent macroeconomic developments................................................................................... 23
Figure 5. Malaysia’s growth is highly reliant on trade.......................................................................... 24
Figure 6. Monetary and financial developments have been stable overall............................................ 26
Figure 7. Inflation has a different impact according to income groups................................................. 27
Figure 8. Decreasing contribution of paid employment and self-employment to household income... 28
Figure 9. Malaysia’s inequality has declined but its tax-and-transfer system has little effect on
income distribution........................................................................................................................ 28
Figure 10. The fiscal deficit has increased ............................................................................................ 30
Figure 11. Malaysia’s tax revenue collection is low ............................................................................. 31
Figure 12. The share of non-tax revenue is projected to widen, and the ratio of total revenue to
GDP has been falling..................................................................................................................... 33
Figure 13. Malaysia’s tax mix relies on direct taxes............................................................................. 34
Figure 14. Public social spending has much room to increase.............................................................. 35
Figure 15. Malaysians can expect a lengthy retirement ........................................................................ 35
Figure 16. Healthcare expenditure is rising fast.................................................................................... 36
Figure 17. Government’s debt guarantee has risen ............................................................................... 39
Figure 18. Malaysia’s capital stock of PPP projects is high.................................................................. 41
Figure 19. Malaysia can improve the preparation, procurement and management of PPPs ................. 42
Figure 20. Federal government debt remains below the ceiling............................................................ 43
Figure 21. Federal government debt scenarios...................................................................................... 43
Figure 22. Malaysia needs to fully implement anti-corruption plans.................................................... 44
Figure 23. Contribution of labour quality to economic growth is low.................................................. 46
Figure 24. Labour productivity level still lags behind advanced countries........................................... 47
Figure 25. There is room to further liberalise services regulations in Malaysia ................................... 49
Figure 26. Restrictions to movement of people in STRI, by professional services............................... 50
Figure 27. Economic development path needs to be less carbon-intensive .......................................... 54
Boxes
Box 1. Malaysia’s socio-economic development.................................................................................. 14
Box 2. The government’s structural reform priorities........................................................................... 15
Box 3. Malaysia’s drive to promote greater governance, integrity and anti-corruption........................ 17
Box 4. Quantifying the fiscal impact of the selected key recommendations in the Survey .................. 45
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 │5
The 2019 OECD Economic Survey of Malaysia was prepared by Hidekatsu Asada, Tan
Kay Kiang, Ricardo Espinoza and Marieke Vandeweyer under the supervision of Patrick
Lenain.
It benefitted from contributions at various stages by Adam Bogiatzis, Andrew Bell, Bert
Brys, Matthieu Cahen, Janos Ferencz, Alessandro Goglio, Robert Grundke, Andrés
Fuentes Hutfilter, Katsuya Iino, Chris James, Korin Kane, Eija Kiiskinen, Britta Labuhn,
Tadashi Matsumoto, Michael Mullan, Laura Reznikova, Mohamed Rizwan Habeeb
Rahuman, Inese Rozensteine and Abu Zeid Mohd Arif. Isabelle Luong provided statistical assistance and Stephanie Henry provided editorial support.
The draft report was discussed at a meeting of the Economic and Development Review
Committee on 24 April 2019, with participation of representatives of the Malaysian authorities. The cut-off date for data and information used in the Economic Survey is 25
June 2019. The previous Economic Assessment of Malaysia was issued in November
2016.
The Economic Survey is published under the responsibility of the Secretary-General of the OECD.
Support from the governments of Japan and Malaysia is gratefully acknowledged.
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OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 6  BASIC STATISTICS
BASIC STATISTICS OF MALAYSIA, 2018*
(Numbers in parentheses refer to the OECD average)**
LAND, PEOPLE AND ELECTORAL CYCLE
Population (million, OECD: 2017) 32.4 98.0 (37.7)
Under 15 (%, 2017) 23.8 75.3 (80.3) (17.9)
Over 65 (%, 2017) 6.5 73.2 (77.7) (16.8)
International migration stock (%, 2015) 8.3 77.7 (83.0) (10.0)
Latest 5-year average growth (%) 1.4 (0.6) May 2018
Population density per km² (OECD: 2017)
Life expectancy (years, 2016)
Men (2016)
Women (2016)
Latest general election
ECONOMY
Gross domestic product (GDP)
In current prices (billion USD) 358.7 7.8 (2.5)
Value added shares (%, OECD: 2017)
Primary sector
In current prices (billion MYR) 1447 36.8 (27.1)
Latest 5-year average real growth (%) 5.2 55.3 (70.4) Services (2.3)
Per capita (000 USD PPP, OECD: 2017) 31.4 (44.7)
Industry including construction
GENERAL GOVERNMENT
Per cent of GDP
Expenditure (OECD: 2017) 19.8 (41.0) 51.2 (112.4)
Revenue (OECD: 2017) 16.1 (38.8)
Gross financial debt (OECD: 2017)
EXTERNAL ACCOUNTS
4.03 Main exports (% of total merchandise exports)
Exchange rate (MYR per USD)
PPP exchange rate (USA = 1) 1.42 44.0
In per cent of GDP 15.6
Machinery and transport equipment
Mineral fuels, lubricants and related materials
(56.1) 69.7 Miscellaneous manufactured articles 11.2
(52.0) 62.6 Main imports (% of total merchandise imports)
(0.3) 2.3 Machinery and transport equipment 43.3
-5.4 Mineral fuels, lubricants and related materials 14.4
Manufactured goods 11.7
Exports of goods and services
Imports of goods and services
Current account balance
Net international investment position
LABOUR MARKET, SKILLS AND INNOVATION
Employment rate (aged 15 and over, %, OECD: 2017) 65.4 (68.4) 3.3 (5.8)
Men (OECD: 2017) 77.0 (76.0) 10.9 (11.9)
Women (OECD: 2017) 52.9 (60.9) (1.7)
Participation rate for 15-64 year-olds (%, OECD: 2017) 68.3 (72.1) (36.9) 18.8
Unemployment rate, Labour Force Survey (aged 15 and over, %)
Youth (aged 15-24, %)
Long-term unemployed (1 year and over, %, 2016, OECD: 2017) 0.2
Tertiary educational attainment (aged 25-64, %, 2016, OECD: 2017)***
45.0 (38.0) Gross domestic expenditure on R D (% of GDP, 2015, OECD: 2016) (2.5) 1.3
Average hours worked per week (OECD: 2017)
ENVIRONMENT
Total primary energy supply per capita (toe, 2016,
OECD: 2017) 2.9 (4.1) 6.9 (9.0)
CO2 emissions from fuel combustion per capita (tonnes, 2016)
Exposure to air pollution (more than 10 μg/m³ of PM 2.5, % of Renewables (%, 2016, OECD: 2017) 4.2 (10.2) population, 2017) 90.7 (58.7)
SOCIETY
Income inequality (Gini coefficient, 2015) 0.410 (0.313)
Public and private spending (% of GDP) Reading 398 (496)
Health care (2016) Mathematics 421 (494) 3.8 (12.6)
Education outcomes (PISA score, 2012)
Education (public, 2017) (4.5) 4.6 Science 420 (501)
Share of women in parliament (%) 13.9 (29.7)
* The year is indicated in parenthesis if it deviates from the year in the main title of this table.
** Where the OECD aggregate is not provided in the source database, a simple OECD average of latest available data is calculated where data exist for at least 80% of member countries.
*** Data refers to those aged 25 and over for
Malaysia.
Source: Calculations based on data extracted from databases of the following organisations: OECD, International Energy Agency, International Labour Organisation,
International Monetary Fund, World Bank.
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 EXECUTIVE SUMMARY │7
Executive summary
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019
8 │ EXECUTIVE SUMMARY items. While the government has introduced many initiatives and programmes to address the issues of rising cost of living, such as direct cash transfers and price controls, progress could also be made by providing a more targeted support, boosting entrepreneurship, improving productivity and employability among the low-income households.
Improving the quality of growth
Malaysia’s economy is doing well, but social and governance challenges must be addressed.
The government prioritises inclusive growth and improving trust in public institutions. Further progress toward the planned target of high-income country status by 2024 will also require focusing on productivity growth with structural reforms to move up the value chain and improve skills. As well, ensuring environmental protection will improve the quality of growth. These issues are in line with the government’s priorities.
Fiscal policy needs reform
Fiscal sustainability needs to be ensured.
Revenue collection is low. The revenue mix relies strongly on direct taxes, and revenues are volatile due to oil-related receipts. This is further reinforced by the recent abolishment of Goods and Services Tax. Nonetheless, expenditure will rise substantially, driven in particular by pension, healthcare and education outlays in light of the government’s promotion of inclusive growth, in particular strengthening targeted support to lowTo strengthen anti-corruption measures, the government launched the National Anti-
Corruption Plan 2019-2023 in January 2019 that encompasses measures promoting transparency and accountability at all levels, strengthening effectiveness of public service delivery, and integrity in business. income households.
Figure B. The fiscal deficit has increased
Growth is projected to be resilient, though with downside risks. Private consumption will remain the main driver of growth, thanks to stable employment conditions and government measures to help low-income families. Risks to the projection are largely on the downside. Rising trade tensions, geopolitical uncertainties, and weaker growth in advanced economies are significant risks for highly open economies like
Malaysia.
% of GDP
25
Revenue
Expenditure
23
21
19
17
15
2014 2015 2016 2017 2018 2019
Figure A. Growth is projected to be resilient, though with downside risks
Note: Data for 2019 are government's projections.
Source: Ministry of Finance (2018), Fiscal Outlook and Federal Revenue Estimates 2019.
2017 2018 2019 2020
5.7 4.7 4.7 4.8
Private consumption 6.9 8.0 6.3 6.5
Real GDP
StatLink2
Exports of goods and services
Imports of goods and services
Consumer price index
Federal government fiscal balance
Current account balance
The government is rightly prioritising building up fiscal space and medium-term sustainability, highlighting risks associated with the large stock of government debt and contingent liabilities. This will require increasing the low level of tax revenue, preferably by removing some of the many tax exemptions.
8.7 2.2 0.8 1.6
10.2 1.3 1.6 1.9
3.7 1.0 1.7 2.1
-2.9 -3.7 -3.4 -3.0
2.9 2.3 2.2 1.9
Source: OECD calculations.
Improving budget process transparency and strengthening public debt management are key to fiscal accountability. Alignment of public procurement and governance of state-owned enterprises with international best practices is a basis for maximising expenditure efficiency and The rising cost of living has been a key source of concern for large segments of the population.
Although headline inflation has been benign in recent years, food prices have increased fast. This has increased the burden of families, especially the low-income groups that consume more on food
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 EXECUTIVE SUMMARY │9 transparency, and reducing the perceived high productivity and make it more difficult to climb level of corruption. up the value chain. Investment in education and training, but also recognition of prior learning, would help under-qualified workers. Policies to stimulate the demand for high-level skills would help those who are over-qualified.
Improving green growth policy framework
More public participation in environmental protection and promoting vertical coordination across municipalities would make growth greener.
Energy subsidies need to be eliminated and replaced with targeted support to low-income groups.
Figure D. Qualification mismatch
Percentage of mismatched workers, 2017 or latest available year
50
Under-qualification
45
Human capital development is key
Over-qualification
40
The contribution of labour quality to economic growth remains much lower compared to the OECD average.
35
30
25
20
15
10
5
Figure C. Low contribution of labour quality to economic growth
Annual average, per cent, 2001-18
0
16
14
12
10
8
EU CHL USA CAN MYS MEX TUR
Source: OECD, Skills for Jobs database.
StatLink2
6
Despite significant improvements, a number of educational challenges remain. Malaysia’s children enter primary school at age six and only the first six years of primary education are compulsory. Compulsory education should be expanded at both ends. The performance gap in international assessments between Malaysia’s education system and other countries has widened, reflecting the fact that a number of neighbouring countries have improved the quality of their education system more rapidly.
4
2
0
Source: The Conference Board (2019), Total Economy
Database, April.
StatLink2
Malaysia faces substantial labour market imbalances. Changes in the sectoral composition of employment in the period 2010-
2016 were larger in Malaysia than in most OECD countries, implying that the type of skills needed in the labour market might have changed considerably. Further changes can be expected in the future, under the impulse of automation and population ageing.
As in some other countries, student performance is driven by the family’s socio-economic status. A significant portion of the gap between top performing and low-achieving students can be explained by parental education and family income. Regional disparities are still high, reflecting the difficulty to attract qualified teachers to disadvantaged schools. A better use of the teacher workforce could be achieved by reducing teacher administrative workload. Some skills imbalances can be further reduced by improving the responsiveness of the education system and by strengthening the connection between education institutions and businesses.
Shortages are found across the skills spectrum, with several medium and high-skilled occupations experiencing labour shortages, but also many low-skilled occupations. At the same time, one-third of workers are employed in occupations that do not match their qualification level. These labour market imbalances hinder
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 10 │ EXECUTIVE SUMMARY
Figure E. Educational attainment is on the rise implementation of longer maternity leave entitlements, which should be co-financed by the government, and the adoption of flexible work arrangements by employers.
Gross enrolment rates
Per cent
110
1990 2017
100
90
80
70
60
50
40
30
20
10
0
Figure F. Gender gaps in labour market participation increase with age
2018 data by age
Per cent
Men Women
100
90
80
70
60
50
40
30
20
10
0
Preprimary Primary Secondary Tertiary
Source: World Bank, World Development Indicators database.
StatLink2
Adults need better access to upskilling and reskilling opportunities to ensure that their skills remain relevant for the labour market. These opportunities are limited in Malaysia, especially for certain groups, such as low-skilled adults, older adults, inactive women and workers in small and medium-sized enterprises. Promoting the benefits of adult learning, providing high-quality information and individualised advice and guidance services are some of the ways policy can
Total 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Source: Department of Statistics Malaysia.
StatLink2
Helping both parents in paid work also requires investing more in affordable and good-quality early childhood care and education. This would not only be beneficial for parents, but also has positive effects on children’s cognitive and social development. encourage higher and more inclusive participation. In addition, existing training programmes or financial incentives for training are often not aligned with the needs of the labour market. To better align skills demand and supply, information from skill needs assessment exercises can be used to design training programmes and incentives. This information can also be used to identify individuals with skills that do not correspond to the ones in demand in the labour market, and policies can be developed to specifically focus efforts on these vulnerable individuals.
More efforts are needed in creating the conditions that promote the development of a more innovative and dynamic economy that demands higher levels of skills. Technological adoption is critical to boost productivity and transition to a high-income economy. Hence, efforts should continue to attract foreign direct investment and promote entrepreneurship. In addition, the share of manual jobs has increased steadily in Malaysia, whereas the share of highskilled jobs remained relatively stable in recent years. The demand for low-skilled workers is largely filled by immigrant labour. The economy’s reliance on low-skilled immigrants can lower the rate of adoption of new technologies and compromise Malaysia’s aspiration to become a technology-driven economy and move up the value-added chain.
Malaysian women have high levels of educational attainment, but their labour market participation remains low. To activate this pool of unused skills, barriers to labour market participation for women must be reduced. To ensure that both fathers and mothers can earn an income, the reconciliation between work and family life could be made easier by legal
OECD ECONOMIC SURVEYS: MALAYSIA 2019 © OECD 2019 EXECUTIVE SUMMARY │11
MAIN FINDINGS KEY RECOMMENDATIONS
Macroeconomic policy, fiscal sustainability and inclusive growth
Growth is projected to be resilient, though with downside risks on the external front, mainly due to slowing global trade. Inflation is low.
Prepare for unexpected shocks by building fiscal space. The fiscal medium-term trajectory should aim at cutting the budget deficit further than the target of 2% of GDP to create a buffer in case of unexpected shocks.
Monetary policy should remain vigilant to downside risks.
Low tax revenue collection hinders the promotion of inclusive growth.
The benefits of strong growth have been unevenly distributed.
Raise tax revenue ratio to GDP by further improving efficiency of tax administration, broadening tax bases, and increasing indirect tax revenue, in particular consumption-related taxes to reduce reliance on oil-related revenues.
Strengthen targeted cash transfers to low-income people and access to public services.
Lack of transparency and weak competition in public procurements generate inefficiency.
Ensure full compliance with the proposed Government Procurement Act.
Governance of state-owned enterprises needs more transparency and Align the framework of state-owned enterprise governance with the OECD accountability. guidelines.
The regulatory framework of public-private partnership needs more The regulatory framework needs to be aligned with international best transparency. practices throughout the project cycle.