Thursday, 24 February 2011

Minimum wage policy can hurt manufacturers’ competitiveness

The Edge Online | Minimum wage policy can hurt manufacturers’ competitiveness               
Written by OK Lee   
Monday, 07 February 2011 11:28

The government has embarked on a number of transformation programmes such as the Government Transformation Programme (GTP), the Economic Transformation Programme and the New Economic Model (NEM). Under the NEM, the aim is to transform the Malaysian economy into a high-income one with US$15,000 to US$20,000 income per capita by 2020 from the current level of US$8,000.

After over 50 years, Malaysia has only managed to attain a gross national product (GNP) per capital of US$8,000. To double the GNP per capita in nine years is certainly a very ambitious and formidable target. Many doubt this is achievable. However, there should be total commitment and unwavering leadership, strong political will, a national consensus, unity and a focused effort to pursue these programmes to their fruition for the sake of Malaysia and Malaysians.

Malaysia has been and is still stuck in a middle income trap. In the early 1970s, Penang and Malaysia attracted foreign investment because of the lower cost of doing business. The learning curve of the workers was short and they could soon meet the demand to produce low  value-added goods of good quality at competitive cost. During this stage, the multinational  companies and the local supporting SMIs continued to earn comfortable profits without the need to invest in higher tech, higher value-add products.

Regional competition did lead to some minor transformation over the years. The manufacturing sector grew rapidly, resulting in higher wages for and a shortage of Malaysian workers. Foreign labour then came in handy to fill the gap. So the companies could continue to enjoy low wages and production costs and comfortable profit margins.

In the last two decades, globalisation, outsourcing, offshoring and business process outsourcing gave rise to mobility of resources, investment, companies and skilled workers. Skilled workers flow to locations where they are paid higher and companies move to locations that are more competitive. Many skilled Malaysian workers have been leaving the country, lured by higher pay.

Globalisation also made it imperative for the companies to set up similar plants in other emerging, lower cost nations. The Malaysian operations had to compete, some even with their related companies in these bigger and lower cost countries, in terms of product cost and quality, failing which these operations would be moved to the more competitive locations. There were many such instances of this happening in Penang in the past.

With global competition and the influx of imported workers, it is not easy to justify paying higher wages to Malaysian workers who are doing similar work producing goods of similar value, otherwise the companies’ operations would no longer be competitive and profitable. These companies’ operations would then move out from Penang to another location that can sustain their business. Malaysian workers should be able to contribute higher value-add inputs to produce higher value-added goods to enable the companies to remain competitive and profitable. Their skill levels have to be enhanced while at the same time, more companies with higher value-added operations should be attracted to Penang to offer the skilled workers jobs and pay commensurate with their higher skills. The timing has to be right, otherwise either the well trained workers would leave for better pay or the investors would not invest here due to a shortage of skilled workforce.

There has been much discussion and hue and cry over the plan to impose a minimum wage. Such a plan has pros and cons and serious implications and has to be thoroughly studied and extensive consultation made before a final decision is made. Public consultation on this policy that would have great impact on the Malaysian economy and investment is seen as not vigorous enough when compared to that for the goods and services tax policy that would have an impact on poorer Malaysians and the government coffers.

While it is hoped that this minimum wage policy will force private companies to pay higher wages to their workers, it can also lead to loss of competitiveness for existing factories. Some marginal ones, especially the SMIs, may close or relocate leaving a trail of unemployment. Potential investors will also take into consideration the minimum wage in comparison with other investment centres in making their investment decision. The foreign workers’ pay would be increased too, giving them more money to repatriate to their homelands.

The plan to impose higher wage for security guards has already given rise to conflict and an outcry from many affected parties. This could also be seen as a prelude to introducing a minimum wage for other sectors.

It is hoped that extensive consultations will lead us to a national consensus that can help reduce conflict and work towards achieving the objectives of the ETP and NEM.

Datuk OK Lee is the northern branch chairman of the Federation of Malaysian Manufacturers.

This article appeared in The Edge Financial Daily, February 7, 2011.


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