MALAYSIA ECONOMIC MONITOR JUNE 2019 Re-energizing the Public Service CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY MALAYSIA ECONOMIC MONITOR © 2019 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org MALAYSIA ECONOMIC MONITOR JUNE 2019 Re-energizing the Public Service Acknowledgements This edition of the Malaysia Economic Monitor was prepared by Richard Record (Task Team Leader), Yew Keat Chong, Shakira Teh Sharifuddin, Rajni Bajpai (Task Team Leader for Part 2) and Jeeva Govindasamy. Kenneth Simler, Achim Schmillen, Wei San Loh, Deryck Brown, Bernard Myers, Samuel Fraiberger, Maryla Maliszewska, Carmen Loo, Cristina Constantinescu, Taufiq Zin, Anton Prokopyev, Amanina Abdur Rahman, Siddhartha Raja, Jorge Guzman, Steven Pennings, Norman Loayza, Young Kim, Sharmila Devadas, Willy McCourt, Sergio Schmukler, Abdullah Maamor Ibrahim, Facundo Abraham and Shahrul Natasha Halid provided additional contributions. Mara Warwick, Firas Raad, Ndiame Diop, George Larbi and Souleymane Coulibaly provided overall guidance. The team is grateful to Andrew Mason, Ekaterine Vashakmadze, Ergys Islamaj and Francesca de Nicola for their constructive input. This report benefited from productive discussions with staff from the Ministry of Economic Affairs, the Ministry of Finance, the Prime Minister’s Department, Bank Negara Malaysia, the National Centre for Governance, Integrity and Anti-Corruption Anti-corruption, Public Service Department, Malaysian Administrative Modernization and Management Planning Unit and many other government ministries and agencies, relevant organizations and individuals, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the Strategic Planning and International Cooperation Division of the Ministry of Economic Affairs and the Economics Department of Bank Negara Malaysia for close ongoing collaboration with the World Bank and for the crucial support to the launch of this report. The team would like to express its gratitude to analysts at several private financial firms and rating institutions, whose participation in a constructive dialogue also informed the analysis. Joshua Foong and Min Hui Lee led external communications and the production and design of the report. Irfan Kortschak provided editing assistance, while Aziaton Ahmad provided administrative support. Kane Chong designed the report and its cover. Photography: Samuel Goh The report is based on information current as of June 21, 2019. Please contact Richard Record (rrecord@worldbank.org), Yew Keat Chong (ychong@worldbank.org) or Shakira Teh Sharifuddin (stehsharifuddin@worldbank.org) if you have any questions or comments regarding the Malaysia Economic Monitor. 4 MALAYSIA ECONOMIC MONITOR | JUNE 2019 Abbreviations 1MDB 1 Malaysia Development Berhad KRI Khazanah Research Institute ASEAN Association of Southeast Asian Nations LTGM Long Term Growth Model ASR Adult Survival Rate M40 Middle 40 percent (of the population) ATI Access to Information Malaysian Administrative Modernization and MAMPU Management Planning Unit ATM Automated Teller Machine MASCO Malaysia Standard Classification of Occupations B40 Bottom 40 percent (of the population) Malaysian Communications and Multimedia BNM Bank Negara Malaysia MCMC Commission BSH Cost of Living Aid (Bantuan Sara Hidup Rakyat) MEM Malaysia Economic Monitor CPI Consumer Price Index MGS Malaysian Government Securities Digital Government Competency and Capability MIER Malaysian Institute of Economic Research DGCCR Readiness MODUG Malaysian Open Data Users Group DMO Debt Management Office MOF Ministry of Finance Malaysia DOSM Department of Statistics Malaysia MSAP Mandatory Standard on Access Pricing E&E Electrical and Electronics MTR Mid-term Review EAP East Asia and Pacific NACP National Anti-Corruption Plan ECRL East Coast Rail Link OBI Open Budget Index EG Electronic Government ODB Open Data Barometer EM Emerging Market ODRA Open Data Readiness Assessment EMDE Emerging Market and Developing Economies Organization for Economic Cooperation and FBM KLCI FTSE Bursa Malaysia Index OECD Development FDI Foreign Direct Investment OGI Open Government Index FM Frontier Market OPR Overnight Policy Rate G2G Government to Government OSA Official Secrets Act GDP Gross Domestic Product PER Public Expenditure Review GFCF Gross Fixed Capital Formation PSC Public Service Commission National Centre for Governance, Integrity and Anti- PSD Public Service Department GIACC Corruption PTD Administrative and Diplomatic Service GLC Government-linked Company Q/Q Quarter-on-Quarter GLIC Government-linked Investment Company QoG Quality of Government GNI Gross National Income RMKe-11 Eleventh Malaysia Plan GST Goods and Services Tax RMKe-12 Twelfth Malaysia Plan HCI Human Capital Index SAAR Seasonally Adjusted Annual Rate HIES Household Income and Expenditure Survey SDGs Sustainable Development Goals HRM Human Resource Management SST Sales and Services Tax ICT Information Communications Technology T20 Top 20 percent (of the population) IMF International Monetary Fund TFP Total Factor Productivity IPI Industrial Production Index TM Telekom Malaysia IR4.0 Industrial Revolution 4.0 WGBI World Government Bond Index ISP Internet Service Provider Y/Y Year-on-Year JKKMAR Cabinet Special Committee on Anti-Corruption MALAYSIA ECONOMIC MONITOR | JUNE 2019 5 6 MALAYSIA ECONOMIC MONITOR | JUNE 2019 Table of Contents Acknowledgements 4 Abbreviations 5 Summary 8 Recent economic developments 9 Economic outlook 10 Re-energizing the public service 12 PART ONE 17 Recent economic developments 18 Regional growth has moderated amid increased headwinds 18 Malaysia’s economy has continued to grow at a more modest pace 19 Export growth has eased in recent months 22 Inflation turned temporarily negative due to several policy-related factors 23 Conditions in the financial system have remained broadly stable 26 Federal government debt as a share of GDP has increased slightly 30 Economic outlook 31 Growth in East Asia is projected to slow over the near term 31 Malaysia’s economy is expected to expand at a relatively modest pace 32 Risks to Malaysia’s growth outlook continue to tilt towards the downside 37 Near-term policies should focus on boosting resilience and protecting the vulnerable 37 PART TWO 45 Re-energizing the public service 46 The public service plays a vital role in Malaysia’s transition to a high-income and developed economy 46 Malaysia’s public service performs at par or ahead of the region, but shows a stagnant or declining trend and falls short of high-income comparators 47 The public service faces challenges in fulfilling the emerging expectations of the people 50 Malaysia’s public sector size and wage bill has been an issue of concern 52 So, how can Malaysia re-energize the public service to achieve shared prosperity? 57 Merit-based recruitment, decentralization, and the use of competency frameworks to induct the best talent 57 Ensuring fair and neutral employment in the public service 60 Supporting a more open and transparent environment in the public service 63 Embracing new technologies and skills to digitalize and automate for improved public service delivery 66 References 70 MALAYSIA ECONOMIC MONITOR | JUNE 2019 7 Summary Summary Malaysia’s economy has continued to grow at a more modest pace Growth moderated in Q1 2019, owing to weaker The Malaysia Economic Monitor (MEM) consists of investment growth and inventory drawdowns. two parts. Part 1 presents a review of recent economic Domestically, an easing of export growth, together developments and a macroeconomic outlook. Part with a decline in investment, has resulted in Malaysia’s 2 focuses on a selected special topic that is key to economic growth becoming more dependent on Malaysia’s medium-term development prospects and consumption. the achievement of shared prosperity. In this edition, the focus of the special topic is on re-energizing the In 2019, Malaysia’s economy is expected to expand public service to better enable it to facilitate Malaysia’s at a relatively moderate rate, with risks tilted future development. towards the downside. The GDP growth rate is projected to reach 4.6 percent in 2019, 0.1 percentage While Malaysia’s public service performs well or points lower than in the previous forecast, reflecting at par with regional standards, its performance weaker-than-expected investment and export activity has been largely stagnant and falls short relative observed in Q1 2019. Potential risks to growth include to high-income aspirational comparators. Malaysia those related to escalating trade tensions, a sharper- is one of the top performers in the region according than-expected slowdown in major economies, as to the World Bank’s Doing Business index, but it’s well as volatility in financial and commodity markets. performance on the Government Effectiveness Relatively high levels of private and public debt also indicator has remained stagnant or fallen in recent pose risks to growth. years. It also lags behind both high-income and other upper middle-income countries in terms of openness In the short term, policies should focus on boosting and transparency. Malaysia’s index for voice and resilience and protecting the vulnerable. In an accountability is well below what would be expected, environment of growing uncertainty, it is particularly given its level of per-capita income, and some important to rebuild fiscal policy buffers, to facilitate indicators like political stability and the rule of law have private investment, and to ensure adequate social worsened over time, with a widening gap with OECD protection for low-income and vulnerable households. comparators. In the medium term, bold reforms will be needed to Building capacity in the public service is vital for boost human capital and to raise productivity. As Malaysia’s successful transition to a high-income Malaysia proceeds on its transition to a high-income and and developed nation. To enable the public service developed economy, incremental growth in incomes to fully realize its potential, Malaysia will need to invest will be increasingly dependent on improvements in in the management of human resources in the public human capital and productivity. In turn, this will require service; to encourage and develop a more open, a multi-year reform agenda to improve the quality transparent environment; and to manage the impact of workforce skills and learning outcomes from the of new and emerging trends, including those related education system. to rapidly-evolving technological innovations and digitalization. 8 MALAYSIA ECONOMIC MONITOR | JUNE 2019 Summary Recent economic competitive strength of the Malaysian economy. However, weakening external demand and a maturing developments global technology cycle have weighed on Malaysia’s aggregate export performance. The current account surplus widened appreciably to 4.5 percent of GDP in Q1 2019, reflecting a Malaysia’s economy has continued to expand, but larger trade balance and a narrower primary at a more modest pace of 4.5 percent in Q1 2019. income deficit. The increase in the goods surplus, to The expansion has been largely supported by sustained 9.4 percent of GDP in Q1, was mainly due to declining consumption spending in both the private and public imports more than offsetting the slower pace of export sectors. Overall economic activity, however, has been growth. weighed down by weaker-than-expected investment growth and continued inventory drawdowns. Private consumption growth has remained strong, at the rate of 7.6 percent in Q1 2019. This strong Malaysia’s GDP growth rate expansion has been supported by continued growth is forecast to moderate to in real incomes, with stable employment and wage growth as well as lower consumer price inflation. Public 4.6 percent in 2019, with consumption also accelerated, at the rate of 6.3 percent increased headwinds in Q1, mainly due to increased expenditure on supplies and services. By contrast, investment registered its first quarterly decline in nearly four years, with the Headline inflation briefly turned negative in early growth rate at -3.5 percent in Q1 2019. Capital 2019, with the rate standing at -0.3 percent in expenditure in the private sector slowed materially to Q1 2019 due to several policy-related factors. The 0.4 percent in Q1, with increased uncertainty appearing continued effects of lower fuel prices and the goods to have weighed on business confidence. With a and services tax (GST) to the sales and services tax review of major infrastructure projects and with the (SST) transition were the main drivers of the temporary near completion of several multi-year projects, public deflation. Consumer price inflation has returned to investment contracted by -13.2 percent in Q1. positive territory since March. Core inflation, which measures underlying inflation, has remained positive On the supply side, growth has moderated in most and stable. economic sectors except agriculture. Growth in the services sector moderated to 6.4 percent in Q1 2019, Labor markets have remained stable and mainly due to the normalization in the retail sector supportive of economic growth. The labor force following the largely tax policy-induced expansion in participation rate remained stable at 68.5 percent 2018. Growth in the manufacturing sector also slowed, in Q1 2019. The overall unemployment rate was in line with weaker export demand, to 4.2 percent in Q1. unchanged at 3.3 percent, albeit with substantially With weaker investment, growth in construction activity higher rates for younger cohorts, with the rate for the decelerated to 0.3 percent in Q1. Unplanned closures of 15-24 years age group at 10.4 percent. Wage growth key oil and gas facilities also affected the mining sector, in the manufacturing sector continues to significantly which contracted by -2.1 percent in Q1. Meanwhile, the outstrip growth in services. agriculture sector experienced a significant turnaround, expanding at the rate of 5.6 percent in Q1, largely due In line with concerns regarding decelerating global to a recovery in palm oil production. growth, Malaysia’s monetary policy committee reduced the overnight policy rate to 3.0 percent Export growth slowed to 0.1 percent in Q1 2019, in May 2019. Bank Negara Malaysia, in announcing with softening external demand for manufactured the rate cut of 25 basis points, also highlighted the exports. There is evidence to indicate that Malaysia has considerable downside risks to the global economic increased its market share for exports to both the US environment. While domestic monetary and financial and to China following the imposition of tariffs between conditions remain supportive of growth, there are some the two countries. This points to the underlying signs of tightening of financial conditions. MALAYSIA ECONOMIC MONITOR | JUNE 2019 9 Summary Household debt has continued to decline, standing at 83.0 percent of GDP at the end of 2018, in a context of tighter mortgage lending conditions. Economic outlook Although household debt levels remain comparatively high, the bulk of household debt is secured by Malaysia’s GDP growth rate is forecast to residential property and securities. The overall quality moderate to 4.6 percent in 2019, with increased of lending by both banks and non-banks has remained headwinds. This is 0.1 percentage points lower than sound, with the aggregate impairment ratio improving in the previous forecast, reflecting weaker-than- to 1.2 percent. expected investment and export activity. While private consumption is expected to continue to support Domestic financial markets have been affected by heightened risk aversion, related to both domestic and external factors. Concerns regarding US-China trade tensions, slowing global growth and a more moderate economic activity domestically, have seen portfolio outflows by non-resident investors in an environment of heightened risk aversion. This trend may continue if Malaysia’s weighting in the World Global Bond Index is reduced. Similarly, the Ringgit has been on a broad depreciating trend against the US dollar since April 2019, mainly reflecting outflows from the domestic bond market. Federal government debt increased to 51.2 percent of GDP at the end of 2018. The fiscal deficit increased to 3.7 percent of GDP in 2018 to accommodate new policy directions and short-term adjustments. The vast majority of federal government debt remains denominated in the domestic currency, with most issuances having a remaining maturity period of more than three years, limiting both currency and rollover risks. The review of the government’s outstanding public private partnership commitments has seen a reduction in the aggregate stock of the government’s liabilities. However, the share of committed government guarantees has increased to 9.2 percent of GDP. A number of new revenue and expenditure measures have been introduced. Taxes on sugar-sweetened domestic demand, its growth is projected to decelerate beverages and a tourism departure levy are expected to 6.6 percent this year. This follows a robust expansion to come into effect during 2019. The extension of in 2018, especially during the zero-rated GST period. the SST to cover imported digital services from non- In the public sector, the continued rationalization of resident suppliers will commence on January 1, 2020. government expenditure will continue to weigh on its Efforts are also underway to reduce tax leakages. On contribution, with the growth rate projected to stand the expenditure side, the new fuel subsidy framework at 1.8 percent for the year. Sentiment-based forecasts is also expected to be rolled out by mid-2019. A of GDP growth continue to track below consensus more targeted framework and the gradual removal of estimates, suggesting that confidence remains weak. untargeted subsidies could contribute to decreased subsidy spending, potentially freeing up space for Investment is projected to remain subdued over more efficient targeted cash payments. In 2019, the the near term, with both the public and private government is committed to achieving a fiscal deficit sectors continuing to adopt a cautious stance. target of 3.4 percent of GDP. Softening external demand, together with weaker business sentiment, are likely to result in continued slow growth in private investment, with the rate projected 10 MALAYSIA ECONOMIC MONITOR | JUNE 2019 Summary to stand at 2.9 percent in 2019. Public investment downside risks, there is a clear need to increase policy is projected to continue to contract in 2019, to -7.0 space and maneuverability. More could be done to percent, with major projects nearing completion and diversify sources of revenue, including through a the government maintaining a cautious approach realignment of tax incentives, an expansion of personal towards new infrastructure investment, given concerns incomes taxes, and a broadening of the sales and regarding public debt levels and available fiscal space. services tax. Over the medium term, investment may start to pick up as selected large-scale capital projects resume. A widening of the government’s revenue base should also be accompanied by efforts to expand The weakness in the external sector is likely to and improve the social protection system persist in the near term, with softening global to achieve greater overall progressivity. The demand constraining export growth. Malaysia’s government’s planned move to a more targeted fuel exports are projected to grow at the more moderate subsidy framework could lead to potential savings pace of 0.7 percent in 2019. Continued global for reinvestment in core social welfare programs. In uncertainty and prolonged domestic supply constraints addition, evidence from across the world has shown will affect Malaysia’s manufactured and commodity that progressive taxes and social transfers can be very exports. The former will be exacerbated by the dip in effective at reducing income inequality. Compared to the global technology cycle. other countries in the region, the depth of Malaysia’s social safety net system remains underdeveloped. Headline inflation is expected to increase modestly in 2019, with the effects of transitory policy-related Further, as Malaysia continues on its path towards factors dissipating. The consumer price inflation rate becoming a high-income and developed economy, is projected to average at about 1 percent for 2019, it will need to implement reforms to boost human mainly due to the diminishing effects of the changes capital and to accelerate productivity growth. To to consumption tax policy towards H2 2019. Underlying ensure greater shared prosperity and inclusive growth, inflation is expected to be broadly contained over the it will be necessary to increase labor productivity, near team in the absence of immediate domestic cost which in turn depends on improved human capital pressures. development. While Malaysia performs well in this regard compared to other middle-income countries, Looking further ahead, Malaysia remains on track its performance falls well short of that of aspirational to achieve high-income economy status by 2024. comparators. To improve human capital outcomes, Malaysia’s GNI per capita stood at US$10,460 in 2018, priority should be given to measures to enhance US$1,915 below the threshold level of US$12,375 that learning outcomes; to reduce child stunting and the World Bank currently sets to define high-income malnutrition; and to strengthen social protection country status. systems to enable households to invest in and to protect human capital. To boost income per capita over Risks to Malaysia’s growth outlook continue to the long term, Malaysia should also intensify its efforts tilt towards the downside. A further escalation of to close the gaps between economic opportunities for trade tensions between the US and China, as well as men and women. sharper-than-expected slowdowns in major economies and the technology cycle could weigh on Malaysia’s To accelerate productivity growth, it is also growth in the near term. A continued cycle of slowing necessary to increase efforts to boost investor global growth, weak business sentiment, and subdued confidence; to increase competition; and to address investment is another key risk factor for Malaysia’s open market distortions. This is particularly important in economy. Further, the country’s comparatively high areas where government linked companies continue to levels of public debt will continue to exert constraints play a disproportionate role, stifling competition and on fiscal space available in the event of macroeconomic resulting in many potentially productive private sector shocks. firms operating below their optimal levels. In the short term, the focus of government policies should be on rebuilding fiscal buffers, supporting private investment, and ensuring adequate social protection for low-income households. In an environment of growing uncertainty, with heightened MALAYSIA ECONOMIC MONITOR | JUNE 2019 11 Summary Re-energizing the public service in facilitating the country’s socio- economic development since independence is widely public service acknowledged. Thus, people’s expectations regarding the public service and delivery of public services remain high, with the current Prime Minister often articulating his desire to restore the public service to its “glory days” There is a well-established connection between the in his speeches. Various efforts have been made to quality of state institutions and economic growth. improve the quality of public service delivery, monitor With increased affluence, societal expectations its performance, and implement corrective measures. regarding the range and quality of services delivered However, over recent years and despite these efforts, by the state also tend to grow. Therefore, enhancing there is a perception that the quality of the public the effectiveness of state institutions is an integral part service has remained stagnant, with a failure to keep of a successful transition to a higher level of economic pace with the country’s transformation. and social development. To achieve this, it is necessary to improve the capacity of government agencies and Looking to the future, how can Malaysia re-energize institutions both to set objectives and priorities and the public service to achieve higher levels of shared to attain them. The 11th Malaysia Plan is intended to prosperity? This report takes a closer look at the most facilitate the achievement of the aspirations outlined in important elements of public sector governance, these Vision 2020, particularly the one of transitioning to an being: (i) the management of the public service itself; industrialized and developed country. In the Mid-term (ii) the government’s role in encouraging an open and Review (MTR) of the Plan, the government identified transparent environment in the public sector through a number of constraints to improving public services. the establishment of an appropriate institutional To address these constraints, the MTR outlined and legal framework; and (iii) the impact of new and reforms that would help rebuild the public service by emerging trends, including technological innovations strengthening its human resources and institutions, and digitalization on employment in the public service. to enable it to implement the measures necessary to facilitate the achievement of the national vision, in accordance with the principles of good governance. With increased affluence, While Malaysia’s public service performs relatively well or is at par on a number of governance societal expectations indicators compared to other countries in the regarding the range and region, it lags behind high-income aspirational comparators. Malaysia is one of the top performers quality of services delivered in the region in terms of the Doing Business rankings, by the state tend to grow but it’s performance on the Government Efficiency indicators has been largely stagnant. It lags behind the OECD average, a gap that is large and widening, and behind other high-income countries. It also lags behind There is ample evidence to support the proposition both high-income and other upper-middle income that bureaucracies characterized by meritocratic countries in terms of openness and transparency, recruitment and predictable, rewarding career not just in public service employment, but in overall paths are associated with higher economic growth governance. Malaysia fares poorly in terms of citizen rates. However, Malaysia’s public service continues perceptions related to equal treatment in public sector to be characterized by a rigid, over-centralized HRM employment and ranks below regional and OECD system, with a lengthy recruitment process and other comparators in terms of the impartiality of its public suboptimal practices. The over-centralization of the administration. However, it has done well on measures system limits the strategic role that central agencies related to gender equality, with women constituting should play to detect, strategize and respond to nearly 50 percent of employees in the public service. emerging issues and challenges that may affect the capabilities of the public service. Recruitment Like other East Asian countries with a growing is based on “schemes of service” that are very well middle class, Malaysia faces rising expectations established, but that are predominantly career-based and increased demands from citizens for better- rather than position-based. By contrast, advanced quality public service delivery and a more responsive countries increasingly utilize competency frameworks public service. The instrumental role of Malaysia’s to recruit candidates with the appropriate level of skills, 12 MALAYSIA ECONOMIC MONITOR | JUNE 2019 Summary knowledge and capabilities into the public service range of agencies and departments to coordinate their and to ensure adherence to high moral and ethical activities more effectively. When government agencies standards for their appointment and promotion. and departments work in silos, they are unable to engage in the kind of collaboration that is critical to Malaysia needs to intensify its efforts to ensure deliver on the government’s commitments. To facilitate equal treatment in the area of public sector increased transparency and improved coordination, employment and to improve public perceptions Malaysia will need to not just invest in improving its regarding the impartiality of public administration. behavioral, technical or financial resources, but also Fair and neutral employment practices result in a more to strengthen the institutional and legal framework diverse, resilient and innovative workforce that is more to support greater openness in the public service, responsive to market demands and the needs of the particularly with respect to access and sharing of data. country. In its election manifesto, the government committed to measures to ensure fair and neutral Megatrends related to digitalization and employment, including through the establishment automation pose challenges for the management of the Equal Opportunity Commission to address of the public service, with significant changes to discriminatory work practices in both the public and the nature of jobs. Unlike the routine manual skills that private sector. are currently required of a large proportion of public servants, the public sector workforce of the future Malaysia should facilitate the emergence of an open will require advanced cognitive, socio-behavioral and environment in the public service. To achieve this, it is interpersonal skills. It will also require adaptability to necessary to build an institutional and legal framework perform non-routine cognitive and analytical tasks that encourages pro-active sharing of information in an ever-evolving context. A large share of jobs in and data in a user-friendly and impactful manner. In Malaysia, including in the public sector, are susceptible Malaysia, there are still significant constraints on access to automation. From the perspective of managing the to data, creating challenges for the potential users future public sector workforce, the main challenge of such data and hampering effective coordination. relates to maximizing the potential gains from The achievement of Malaysia’s policy goals of a more technological change while at the same time mitigating transparent and citizen-centric government requires a the negative impact of these changes. MALAYSIA ECONOMIC MONITOR | JUNE 2019 13 Recent economic developments and outlook Malaysia’s economy continues to grow at a ...but has been weighed down by weaker- moderate pace... than-expected investment GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6 6.1 5.6 5.7 5.5 4 5 5.3 4.8 4.7 4.5 4.5 4.4 4.5 2 4 4.3 4.2 0 3 -2 2 -4 1 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 0 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Export growth has slowed amid softening ...and domestic nancial markets have been global demand... affected by heightened risk aversion Contribution to Export Growth, y/y, Percentage Non-resident Portfolio Flows, RM Billion 15 25 20 10 15 5 10 0 5 -5 0 -10 -5 -15 -10 -20 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 E&E - Semiconductors E&E - Others Exports, y/y Equity Corporate Bonds Government Bonds Non-E&E Commodities and Sukuk and BNM Bills Malaysia’s economy is forecast to grow at ...while sentiment-based forecasts highlight 4.6 percent in 2019... downside risks to the growth outlook GDP, y/y, Percentage GDP, 2019f, y/y, Percentage 7 6.0 6 5.5 5.7 5 5.1 5.0 4.7 4.6 4.6 4.6 4 4.4 4.4% 4.5 3 4.2% 2 4.0 1 3.5 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 07/2018 08/2018 09/2018 10/2018 11/2018 12/2018 01/2019 02/2019 03/2019 04/2019 05/2019 0 2015 2016 2017 2018 2019f 2020f 2021 Consensus Mean Consensus Sentiment-adjusted Forecast Range Forecast Forecast 14 MALAYSIA ECONOMIC MONITOR | JUNE 2019 Re-energizing the public service Malaysia scores comparatively well in terms ...and compares poorly in measures of open of overall government effectiveness, but has government, especially compared to high- been on a declining trend... income economies Government Effectiveness Ranking, 2018 Open Government Index, 2018 0.9 2 0.8 0.7 1.5 0.6 0.5 1 0.4 0.3 0.5 0.2 0.1 0 0 -0.5 Norway New Zealand Sweden Canada Australia OECD Chile Malaysia (1991-2014) Malaysia Structural Peers Argentina Upper middle income Commodity Exporters New Zealand Sweden Norway Canada Australia OECD Chile Argentina EAP Region Upper middle income Malaysia Malaysia’s government wage bill has been ...but has risen as a share of public tracking below the average of comparators... expenditure over recent years Central Government Wage Bill as a Percentage of GDP Plotted Against Log Central Government Wage Bill as a Percentage of Public Expenditure of GDP per Capita, Malaysia: 2000-18 and Comparator Countries for Most Plotted Against Log of GDP per Capita, Malaysia: 2000-18 and Comparator Recent Year Available Countries for Most Recent Year Available 25 70 Malaysia Malaysia High income High income Low income Low income Lower middle income 60 Lower middle income Upper middle income Upper middle income 20 Linear (Wage bill as a percentage of GDP) Linear (Wage bill as a percentage of Public Expenditure) 50 15 40 Malaysia, 2018 30 10 20 5 Malaysia, 2018 10 Malaysia, 2000 Malaysia, 2000 0 0 6 7 8 9 10 11 12 6 7 8 9 10 11 12 Re-energizing the public service will require ...and the adoption of digital technologies competency-based and transparent in the management of the public service recruitment... Citizen Perceptions on Equal Treatment with Regard to Access to Public Percentage of Jobs that are Susceptible to Automation Employment, 2016 5 100 4 80 3 60 2 40 1 20 0 0 Cambodia Mongolia Malaysia Thailand China New Zealand Sweden Australia Norway OECD Argentina Canada EAP Region Upper middle income Chile Malaysia Adjusted (technological feasibility + adoption time lags) Unadjusted (technological feasibility) MALAYSIA ECONOMIC MONITOR | JUNE 2019 15 16 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | JUNE 2019 17 PART ONE - Recent Economic Developments and Outlook Recent economic developments Regional growth has moderated amid increased headwinds Global economic activity has continued to in global growth may be receding, but momentum soften, with decelerating international trade remains weak. and investment activity. The global growth rate is estimated to have eased to 2.6 percent1 in Q1 2019 Growth in the developing East Asia and Pacific (Q4 2018: 2.7 percent) (see Figure 1). Activity in major (EAP) region has eased in the context of less advanced economies, especially in the Euro Area, and favorable external conditions (see Figure 2). The in several major emerging market and developing regional economy grew at a marginally slower pace economies (EMDEs) has been weaker than previously of 6.1 percent in Q4 2018 and Q1 2019 on account of anticipated. Global industrial production and trade weaker trade and manufacturing activity, as well as the expansion have lost considerable momentum since ongoing moderation of China’s economy. Growth in mid-2018, with weakening global investment activity the rest of the region is also slowing, but less sharply, and persistent policy uncertainty. In response to these albeit with notable heterogeneity. Regional trade has developments, major central banks have adopted softened notably amid weakening global investment more accommodative monetary policy stances for and elevated trade policy uncertainty related to the near term, contributing to the relatively stable the ongoing US-China trade tensions. The recent global financing conditions since early 2019. Recent moderation notwithstanding, the EAP region remains high-frequency indicators suggest that the weakness the main driver of global economic activity, contributing to about one-third of global growth. FIGURE 1 FIGURE 2 Global growth has continued to moderate Growth among regional economies has also amid softening trade and investment activity eased slightly in a context of a less favorable global environment GDP, y/y, Percentage GDP, y/y, Percentage 5 8 7 4 6 3 5 2 4 1 3 0 2 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 World Advanced Emerging and Developing EAP Thailand China Economies Developing Economies Indonesia Vietnam Philippines Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects 1 Growth rates are measured on a year-on-year basis, unless otherwise stated. 18 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy has continued to grow at a more modest pace In Malaysia, quarterly GDP grew at a moderate by continued growth in real incomes amid stable rate of 4.5 percent in Q1 2019 (Q4 2018: 4.7 employment and wage growth, and by a moderation percent) (see Figure 3). Malaysia’s economic in consumer price inflation. Meanwhile, public expansion in Q1 was largely supported by sustained consumption accelerated to 6.3 percent (Q4 2018: consumption expenditure in both the private and public 4.0 percent), mainly due to increased expenditure on sectors, with total consumption expenditure expanding supplies and services. at 7.4 percent during the quarter (Q4 2018: 7.4 percent) and contributing to 5.0 percentage points of output Gross fixed capital formation (GFCF) registered growth (see Figure 4). Net trade added a further 0.9 its first quarterly decline since Q2 2015, reflecting percentage points to growth despite weakening export subdued business investment growth and a further expansion, with the subdued export growth being contraction in public investment. Private investment more than offset by the decline in import demand growth slowed materially to 0.4 percent in Q1 2019 over the period. Overall economic activity, however, (Q4 2019: 5.8 percent), with increased uncertainty was constrained by weaker-than-expected investment appearing to have weighed on business confidence. growth and continued inventory drawdowns, which The recent weakness in investment spending was subtracted 0.9 and 0.5 percentage points respectively further dampened by the continued decline in public from growth. investment following the near completion of several multi-year infrastructure projects, and by the ongoing Household consumption, the main driver of reviews of major public infrastructure projects. In terms domestic demand growth, has remained solid. of investment type, the quarterly slowdown in capital Private consumption continued to expand strongly spending was evident across structure (-1.3 percent; at 7.6 percent in Q1 2019 (Q4 2018: 8.4 percent), Q4 2018: 1.3 percent), machinery and equipment (-7.4 accounting for 4.3 percentage points of the aggregate percent; 4Q 2018: -1.3 percent) as well as other asset output growth during the period. Over the past two clusters (-2.2 percent; 4Q 2018: 4.5 percent).  quarters, household spending has been underpinned FIGURE 3 FIGURE 4 Malaysia’s economic growth continued to ...weighed down by weaker-than-expected moderate in Q1 2019... investment growth and continued inventory drawdowns GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6 6.1 5.6 5.7 5.5 4 5 5.3 4.8 4.7 4.5 4.5 4.4 4.5 2 4 4.3 4.2 0 3 -2 2 -4 1 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 0 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Source: DOSM Source: World Bank staff calculations based on DOSM data MALAYSIA ECONOMIC MONITOR | JUNE 2019 19 PART ONE - Recent Economic Developments and Outlook On the supply side, growth moderated across in part to the recovery of oil palm production, which most economic sectors except for agriculture. The was affected by adverse weather conditions in previous growth rate for the services sector moderated to 6.4 quarters.  percent during the quarter (4Q 2018: 6.9 percent), largely due to the normalization of the wholesale and Recent indicators suggest that Malaysia’s economic retail subsector following the largely tax policy-induced expansion will continue at a relatively modest pace expansion in 2018. Manufacturing activity has also in the near term. The Industrial Production Index (IPI), moderated in recent quarters, with growth standing which tends to be volatile, increased at a faster pace at 4.2 percent in Q1 2019 (4Q 2018: 4.7 percent). in April at 4.0 percent (March 2019: 3.1 percent). This This mainly reflects the softening global demand for largely reflects a slight pickup of output growth in the electrical and electronics (E&E) exports, including manufacturing sector and a recent turnaround in mining semiconductors. In the construction sector, growth activity. Meanwhile, growth of wholesale and retail sales further decelerated to 0.3 percent during the quarter moderated further to 5.3 percent during the month (4Q 2018: 2.6 percent), constrained by the slowdown (March 2019: 5.4 percent), due largely to slower growth in new large infrastructure projects and the persistent in retail trade. The Malaysia composite leading index, excess of newly built properties. The contraction of a measure of the overall economic performance in the the mining sector deepened, with the rate standing months ahead, indicates that the economy will continue at -2.1 percent in Q1 2019 (4Q 2018: -0.7 percent), to grow at a relatively modest momentum in the Q3 mainly due to several unplanned closures of oil and gas 2019. The Malaysian Institute of Economic Research’s facilities across Malaysia. Meanwhile, the agriculture Business Conditions and Consumer Sentiment Index in sector rebounded, with the growth rate standing at 5.6 Q1 2019 similarly point towards a more moderate pace percent during the quarter (4Q 2018: -0.1 percent), due of economic expansion in the near term. TABLE 1 GDP growth decomposition GDP, y/y, Percentage Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1   2016 2017 2018 2017 2017 2017 2017 2018 2018 2018 2018 2019 GDP 4.4 5.5 5.6 6.1 5.7 5.7 5.3 4.5 4.4 4.7 4.7 4.5 Consumption Private Sector 5.9 6.5 6.9 7.1 6.9 6.9 6.6 7.9 8.9 8.4 8.0 7.6 Public Sector 1.1 7.6 3.4 4.0 6.9 5.5 0.4 3.1 5.2 4.0 3.3 6.3 Gross Fixed Capital Formation 2.6 9.5 3.9 6.6 4.4 6.1 0.4 1.6 2.8 0.6 1.4 -3.5 Exports of Goods & Services 1.3 9.9 9.3 10.6 5.1 8.7 2.4 2.6 0.7 3.1 2.2 0.1 Imports of Goods & Services 1.4 13.0 9.6 12.2 6.2 10.2 -2.3 3.6 2.0 1.8 1.3 -1.4 Sectoral Agriculture -3.7 6.5 4.5 3.1 9.3 5.8 3.1 -1.7 -0.8 -0.1 0.1 5.6 Mining 2.2 1.0 -0.5 2.3 -0.9 0.4 -0.6 -3.4 -5.7 -0.7 -2.6 -2.1 Manufacturing 4.4 5.9 6.0 7.0 5.3 6.0 5.3 4.9 5.0 4.7 5.0 4.2 Construction 7.5 6.8 8.3 6.2 5.9 6.7 4.9 4.8 4.7 2.6 4.2 0.3 Services 5.7 5.7 6.3 6.5 6.2 6.2 6.5 6.5 7.3 6.9 6.8 6.4 Source: World Bank staff calculations based on DOSM data 20 MALAYSIA ECONOMIC MONITOR | JUNE 2019 MALAYSIA ECONOMIC MONITOR | JUNE 2019 21 PART ONE - Recent Economic Developments and Outlook Export growth has eased in recent months Export growth has slowed amid softening external Q4 2018: 1.1 percent) following the softening demand demand for manufactured exports. With intensifying for manufactured exports. Imports of consumption US-China trade tensions, Malaysia has been able to gain goods also expanded at a slower pace of 1.1 percent market share for a number of tariff-affected products (Q4 2018: 4.7 percent), with much of this growth in both the US and China (see Box 1). However, in driven by imports of durable items. Meanwhile, capital aggregate terms, weakening global demand is imports contracted further by -9.8 percent (Q4 2018: dominating Malaysia’s overall export performance. -9.4 percent) during the quarter, consistent with the In Q1 2019, gross exports declined for the first time recent slowdown in investment activity. since Q3 2016, with a growth rate of -0.7 percent (Q4 2018: 8.1 percent). The moderation was broad- The current account surplus widened appreciably based, with declines across most major manufactured to 4.5 percent of GDP in Q1 2019, (Q4 2018: and commodity exports (see Figure 5). While E&E 2.9 percent), primarily reflecting a larger trade exports have continued to drive much of the recent balance and a narrower deficit on primary income growth momentum, the pace of expansion has eased (see Figure 6). During the quarter, the goods surplus considerably, in line with the slowdown in the global increased further to RM33.8 billion (Q4 2018: RM32.7 technology cycle. Non-E&E manufactured exports also billion), equivalent to 9.4 percent of GDP, with a decline declined appreciably over the quarter, largely due to in merchandise export growth being more than offset weakening foreign demand for chemical and metal by a decline in imports. There was a smaller deficit products. in the services account at -RM1.8 billion in Q1 2018 (Q4 2018: -3.8 billion), with the decline partly due to Gross imports contracted due to lower demand for increased net tourism receipts and reduced payments intermediate and capital imports. Malaysia’s gross for foreign transportation services. Largely due to imports fell by 2.5 percent in Q1 2019 (Q4 2018: 5.7 lower net payments related to portfolio investment, percent). Much of this decline was attributable to the the deficit on primary income also narrowed in Q1 2019 subdued growth of intermediate goods (0.0 percent; to -RM10.1 billion (Q4 2018: -12.9 billion). Meanwhile, FIGURE 5 FIGURE 6 Export growth has slowed amid softening The current account surplus widened appreciably external demand for manufactured exports due to a larger trade balance and a narrower income deficit Contribution to Export Growth, y/y, Percentage Current Account Balance, Percentage of GDP 25 10 20 15 5 10 5 0 0 -5 -5 -10 -10 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 E&E - Semiconductors E&E - Others Exports, y/y Goods Primary & Secondary Income Account Non-E&E Commodities Services Current Account Source: World Bank staff calculations based on BNM and DOSM data Source: World Bank staff calculations based on DOSM data 22 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook the secondary income account deficit sustained at 2018: 12.9 billion), channeled mainly into the healthcare -RM5.5 billion (Q4 2018: -RM5.2 billion) with continued services and manufacturing sector. In 2018, approved sizable outward remittances from foreign workers.  In FDI increased 48 percent to RM80.5 billion (2017: the financial account, foreign direct investment (FDI) RM54.4 billion). inflows were higher in Q1 2019 at RM21.7 billion (Q4 TABLE 2 Selected external sector indicators Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2017 2017 2017 2017 2018 2018 2018 2018 2019 Balance of Goods & Services (% of GDP) 5.9 6.8 7.7 7.1 8.3 5.8 6.4 7.6 8.8 Current Account Balance (% of GDP) 1.5 3.0 3.5 3.0 3.9 0.8 0.9 2.9 4.5 Total Exports (% of GDP) 70.5 70.2 70.7 68.9 68.5 68.5 69.0 69.0 66.3 Total Imports (% of GDP) 64.6 63.4 63.0 61.8 60.2 62.8 62.6 61.4 57.4 Net Portfolio Investment (RM billion) -32.4 17.5 -9.9 9.4 -1.5 -37.9 0.8 -5.8 2.1 Gross Official Reserves (RM billion) 422.2 424.8 427.7 414.7 416.4 423.4 427.0 419.6 420.2 Gross Official Reserves (US$ billion) 95.4 98.9 101.2 102.4 107.8 104.7 103.0 101.4 103.0 Source: World Bank staff calculations based on BNM and DOSM data Inflation turned temporarily negative due to several policy-related factors Headline inflation turned negative in Q1 2019, price reductions. The CPI returned to positive territory reaching an average rate of -0.3 percent (Q4 in March and April 2019. 2018: 0.3 percent), with the decline largely due to lower domestic fuel costs (see Figure 8). The Underlying inflation has remained positive and lower fuel prices were due to the reintroduction of stable. The core inflation rate, which excludes the the managed float fuel pricing mechanism amid lower impact of volatile items such as fresh food and price- global oil prices during the quarter (see Figure 9). As administered items, remained stable at 0.3 percent in such, the RON95 petrol prices were lower in January Q1 2019 (Q4 2018: 0.4 percent). While overall inflation and February 2019 than in the same period last year, has remained stable and low, concerns regarding the contributing to the negative CPI in these two months. cumulative increase in the cost of living pressures have The negative inflation also reflects the base effect of continued to linger, particularly among lower-income the removal of the goods and services tax (GST) from households which tend to spend a greater proportion last year. The decline in prices was not broad-based, of their incomes on essential items such as food and with only 20 percent of consumer items registering housing. MALAYSIA ECONOMIC MONITOR | JUNE 2019 23 PART ONE - Recent Economic Developments and Outlook BOX 1 Malaysia appears to be benefitting from trade diversion in some export products as a result of the US-China trade tensions With bilateral trade between the US and China FIGURE 7 declining since the implementation of tariffs, Malaysia has seen modest gains in exports to Malaysia’s exports to the US and China of products both the US and China targeted by tariffs have increased. This suggests Year-on-year change in US and Chinese imports from Malaysia of tariff-affected products after tariff implementation, US$ billion that Malaysia is deriving some short-term benefits from 1.2 the US-China tensions as a result of trade diversion. It also points to the underlying competitive strength of 1.0 China list 3: the Malaysian economy. Lique ed 0.8 natural gas Malaysia’s exports of tariff-affected products to the U.S. and China have increased in value by more 0.6 China list 2: than US$1 billion since the tariffs were imposed. An U.S. list 2: Memories Copper alloy, 0.4 waste and analysis of trade data shows gains in the US market of U.S. list 2: scrap Processors US$0.36 billion, equivalent to 1.7 percent of Malaysia’s and controllers 0.2 goods exports to the US for the same period, and gains China list 1 and list 2: U.S. list 1 and list 2: (other) in the Chinese market of US$0.91 billion, equivalent to 0.0 (other) China list 3: about 6 percent of Malaysia’s goods exports to China. U.S. list 3 (other) These statistics are derived from an examination of -0.2 Change in U.S. imports Change in China imports US and Chinese imports from Malaysia of products from Malaysia from Malaysia on the six US and Chinese lists of goods affected by tariffs, which the two countries have imposed on each Source: World Bank staff calculations based on US Census and China Customs statistics other over this period. Specifically, the imports from Note: U.S. (China) list 1 refers to tariffs imposed in July 2018 and covering Malaysia for such products in the period following the US$34 billion in imports to the U.S. from China. US (China) list 2 refers to tariff implementation is compared to imports in the tariffs imposed in August 2018 and covering US$16 billion in imports to the U.S. from China. US (China) list 3 refers to tariffs imposed in September 2018 corresponding period a year ago.2 and covering US$200 billion in imports to the U.S. from China. Most of the increase in Malaysia’s tariff-affected exports to the U.S. and China has been driven by a much lesser extent. The exports of products on US List the increased exports of four products (see Figure 3 have declined. By contrast, the gains in the Chinese 7). In particular, the increase in Malaysia’s exports of market are primarily driven by exports of copper electronic integrated circuits, including processors waste and scrap (China List 2) and of liquefied natural and controllers, and memories (on which tariffs were gas (China List 3). There has also been an increase in imposed in August 2018) appears to account for the exports of products on China List 1 and other products majority of its increased exports to the US market. (apart from copper waste and scrap) on China List 2. Malaysia’s exports to the US of other products on US There has been a decline in exports of other products List 1 and US List 2 products have also increased, but to (apart from liquefied natural gas) on China List 3. 2 The analysis compares the effect of tariffs implemented in July, August and September 2018. The authors compare August 2018-March 2019 with August 2017-March 2018, for products on US and China lists 1 implemented in July; September 2018-March 2019 with September 2017-March 2018 for products on US and China lists 2 implemented in August; and January-March 2019 with January-March 2018, for products on US and China lists 3. For list 3, the last quarter of 2018 is excluded due to continued year on year growth of US imports of from China, in anticipation of a tariff hike from 10 percent to 25 percent. 24 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook FIGURE 8 FIGURE 9 Headline inflation turned negative in January and ...due largely to lower transportation costs February... In ation, y/y, Percentage Contribution to In ation, y/y, Percentage 6 6 5 4 4 3 2 2 1 0 0 -2 -1 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 Headline In ation Core In ation Others Transport Headline In ation Housing, Water, Electricity, Food and Non-alcoholic Gas & Other Fuels Beverages Source: DOSM Source: World Bank staff calculations based on DOSM data Conditions in the labor markets remained stable rate stood at 3 percent or lower. Meanwhile, the female and supportive of economic growth. In Q1 2019, labor force participation rate increased marginally, the labor force participation rate remained stable from 55.6 percent in Q4 2018 to 55.7 percent in Q1 at 68.5 percent (Q4 2018: 68.5 percent), while the 2019. Over this quarter, wages in the manufacturing unemployment rate was unchanged at 3.3 percent (see sector increased by 7.0 percent (Q4 2018: 9.8 percent), Figure 10). However, the unemployment rate for those considerably higher than wage growth in the services aged between 15 to 24 years continues to be high, at sector, which increased by 3.8 percent (Q4 2018: 4.1 10.4 percent in Q1 2019 (Q4 2018: 10.5 percent) (see percent). Figure 11). By contrast, for every other age group, the FIGURE 10 FIGURE 11 Labor market conditions have remained broadly ...however the unemployment rate among those stable... aged 15-24 years remains high Unemployment Rate, Labor Force Participation Rate, Unemployment Rate, Percentage Percentage Percentage 3.6 70 14.0 12.0 3.4 69 10.0 3.2 68 8.0 6.0 3.0 67 4.0 2.8 66 2.0 2.6 65 0.0 01/2015 05/2015 09/2015 01/2016 05/2016 09/2016 01/2017 05/2017 07/2017 01/2018 05/2018 09/2018 01/2019 03/2016 06/2016 09/2016 12/2016 03/2017 06/2017 09/2017 12/2017 03/2018 06/2018 09/2018 12/2018 03/2019 Labor Force Participation Rate Unemployment Rate Overall 15-24 25-34 35-44 45-54 Source: DOSM Source: DOSM MALAYSIA ECONOMIC MONITOR | JUNE 2019 25 PART ONE - Recent Economic Developments and Outlook Conditions in the financial system have remained broadly stable At the May 2019 monetary policy committee supported by stable funding sources such as deposits meeting, the Central Bank of Malaysia took the and long-term borrowings, remained supportive of decision to lower the overnight policy rate (OPR) financial intermediation, with banks’ liquidity buffers by 25 basis points to 3.0 percent. BNM continued able to withstand potential exigent needs. As of Q1 to expect Malaysia’s economy to expand at a rate 2019, financial institutions recorded an excess of within the range of 4.3 to 4.8 percent in 2019, and capital buffers of RM154 billion, indicating that financial reiterated the considerable downside risks to the institutions are able to withstand severe economic global economic environment. Meanwhile, underlying and financial shocks. In addition, the impairment and inflation is expected to remain stable in the absence delinquencies level remained low and stable, reflecting of strong demand pressures. While domestic monetary the banking system’s sound asset quality. and financial conditions remain supportive of economic growth, there are some signs of tightening of financial Growth in net financing moderated slightly to 5.1 conditions. Hence, the adjustment to the OPR is percent in Q1 2019 (Q4 2018: 5.8 percent) (see intended to preserve the current degree of monetary Figure 12). This moderation was driven by the lower accommodativeness. growth of both outstanding loans and issuances of corporate bonds, which expanded by 4.5 percent and Financial soundness indicators continued to 7.1 percent respectively (Q4 2018: 5.1 percent and 8.0 indicate that the banking system’s capitalization percent). Issuances of corporate bonds were mainly remained strong. As of the end of 2018, financial channeled towards financing capital expenditure institutions recorded sound levels of profitability, with and operating expenses. In the banking system, the banking sector registering an average return on the deceleration of growth in outstanding loans for equity rate of 12.6 percent (June 2018: 13.3 percent). businesses was due to lower loan growth in the real Sufficient liquidity in the banking system, largely estate and construction sectors, following a slowdown FIGURE 12 FIGURE 13 Net financing moderated on lower banking loans Household debt declined further to 83 percent of and issuances in the capital market GDP Contribution to Net Financing Growth, y/y, Percentage Household Debt to GDP, Percentage Household Debt, y/y, Percentage 10 90 14 88 12 8 86 10 6 84 8 4 82 6 2 80 4 0 78 2 01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 76 0 2012 2013 2014 2015 2016 2017 2018 Corporate Banking System Total Net Household Debt-to-GDP Annual Change, Household Debt Bonds and DFI Loans Financing Source: BNM Source: BNM 26 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook in the property segment and the near-completion of tensions between US and China. In the domestic bond a number of large-scale projects. In the household market, Malaysian Government Securities (MGS) yields segment, outstanding loan growth during the period experienced temporary spikes in the second half of April was relatively stable at 5.0 percent (Q4 2018: 5.2 following speculation that Malaysia would be excluded percent). from the FTSE World Government Bond Index (WGBI), which contributed to a sizable unwinding of non- In 2018, household debt declined further to 83 resident holdings of MGS amounting to RM8.3 billion in percent of GDP (2017: 83.8 percent) (see Figure April (see Figure 14). While domestic institutions would 13). Growth in household debt also moderated, from likely provide sustained support to the government 4.9 percent in 2017 to 4.7 percent in 2018, mainly due borrowing, the possible exclusion raises questions to the slower growth of residential property and motor regarding the longer-term participation of passive vehicle loans. Although household debt remained foreign investors in Malaysia’s MGS market (see Box elevated, about two-thirds of household loans are 2). Interbank rates were broadly unchanged, indicating secured by property or securities, thus reducing the net that the overall conditions in the financial markets exposure of financial institutions. Debt service ratios remained stable. (the ratio of households’ total monthly debt obligations to monthly disposable income) of newly-approved The ringgit broadly weakened against the US dollar loans have remained below 60 percent for the bulk of and most regional currencies, mainly reflecting household loans. The overall quality of lending by both outflows from the domestic bond market (see banks and non-banks to households remained sound, Figure 15). In the period between April 1 to June 20, the with the aggregate impairment ratio improving to 1.2 ringgit depreciated by 1.8 percent against the US dollar percent (2017: 1.4 percent). to stand at RM4.16. Over this period, the ringgit also weakened relative to the euro (-2.2 percent), Japanese Domestic financial markets have been affected by yen (-4.6 percent) and most regional currencies. As of heightened risk aversion, driven by both domestic June 14, the value of international reserves stood at and external factors. The FBM KLCI declined by 3.3 US$ 102.6 billion, sufficient for 7.2 months of retained percent between March and May before recovering imports cover and is at the ratio of 1.1 to short-term in recent weeks, mainly reflecting concerns regarding external debt. softening global growth and an escalation in the trade FIGURE 14 FIGURE 15 Domestic financial markets have been affected by ...contributing to the continued depreciation of heightened risk aversion... the ringgit against the US dollar Non-resident Portfolio Flows, RM Billion MYR/Currency, Rebased to January 2017=100 (Upward Trend Indicates MYR Depreciation) 15 110 10 105 5 100 0 95 -5 90 -10 85 -15 -20 80 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 03/01/2017 27/02/2017 18/04/2017 13/06/2017 04/08/2017 29/09/2017 21/11/2017 15/01/2018 09/03/2018 30/04/2018 27/06/2018 16/08/2018 12/10/2018 05/12/2018 29/01/2019 25/03/2019 15/05/2019 Equity Corporate Bonds Government Bonds USD EUR GBP IDR and Sukuk and BNM Bills THB VND PHP Source: BNM and Bursa Malaysia Source: World Bank staff calculations based on BNM data MALAYSIA ECONOMIC MONITOR | JUNE 2019 27 PART ONE - Recent Economic Developments and Outlook BOX 2 The effects of benchmarks on international capital flows On April 15, 2019, FTSE Russell announced that US$2 billion. Because of this effect, large emerging Malaysia had been placed under review for possible countries, such as the Republic of Korea and Taiwan, exclusion from the World Government Bond Index China, have on occasion actually lobbied to not be (WGBI). The selection of Malaysia for review was not upgraded to developed market status (Bloomberg, unique but was rather part of a more general pattern of 2014). inclusion in and exclusion from international benchmark indexes, with this process having implications for the The benchmark reclassifications may have allocation of capital across borders. implications for countries and asset classes other than those specifically targeted. The removal of a As an increasing number of international mutual large country from a benchmark can have consequences funds and other institutional investors have become in terms of capital flows to the rest of the countries in the more passive, the assets that follow benchmark same index, even if the fundamentals of these countries indexes have increased. Passive funds tend to allocate do not change. For instance, Qatar and the United Arab inflows (capital injections) proportionally to the weight Emirates together accounted for around 40 percent of of each country in indexes such as the MSCI Emerging the MSCI Frontier Markets (FM) Index. Thus, in May Market (EM) Index or the MSCI World Index. Therefore, 2014, when these countries were upgraded to the MSCI changes in these indexes (due to changes in country EM Index, funds tracking the MSCI FM Index had to weights or countries being added or removed) can significantly increase their loading in the other frontier trigger a similar rebalancing by the funds that track countries. This resulted in significant inflows and stock them, resulting in sizeable movements to international market price increases in countries such as Nigeria, capital flows. Kuwait, and Pakistan (see Figure 16). Similarly, MSCI announced in February 2019 that it would increase Reallocations due to changes in benchmark indexes the weight of China’s A shares in the MSCI EM Index can produce unexpected effects in international (MSCI, 2019). If China’s overall weight increases, other capital flows that are not necessarily explained countries in the index will lose weight. For example, the by economic fundamentals. For instance, emerging weights of Korea and Taiwan will fall from 15.0 to 12.7 countries tend to have larger weights in emerging percent and from 11.1 to 10.4 percent, respectively. As market indexes than in developed market ones. Thus, a result, there is speculation that China would increase they might face capital outflows when upgraded and its capital inflows at the expense of the rest of the inflows when downgraded. A case of this occurred countries in the index, which would experience capital in 2009, when MCSI announced that Israel would be outflows (Bloomberg, 2019). upgraded from emerging to developed market status and moved from the MSCI EM Index to the World The benchmark effect can affect the overall Index. As a result, Israel’s weights went from 3.17 to 0 economy through its impact on exchange rates in the MSCI EM Index and from 0 to 0.37 in the MSCI and debt markets. By leading to capital movements, World Index. As the value of assets allocated to the two reclassifications can cause exchange rate appreciation indexes was similar, shifting Israel to the World Index or depreciation, depending on whether the benchmark implied a much lower total capital allocation to that changes produce capital inflows or outflows, country, resulting in equity outflows to a value of about respectively. This effect occurred in Colombia, when Source: Raddatz, Schmukler and Williams (2017) 28 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook FIGURE 16 positive (or negative) domestic shocks will tend to see Reclassification in frontier markets can have their weight increase (or decrease) in the benchmark dramatic effects on capital flows indexes. Consequently, these countries would receive a relatively higher (or lower) share of subsequent Cumulative Flows, US$ Millions, for Selected EMDEs injections of capital to investment funds. In other 150 words, the use of benchmarks creates a positive- 100 feedback that amplifies domestic shocks in a country. Announcement Date On the other hand, a country can be affected by shocks 50 Second Effective in other countries, even if its performance is stable. Date Positive shocks in other countries (and thus relatively 0 higher returns abroad) would reduce the weight of -50 Third Effective Date the first country, resulting in capital outflows. In turn, contagion could be benign when negative shocks in -100 other countries result in inflows to the first country. First Effective Date -150 Benchmark indexes can have important Mar 01, 2014 May 01, 2014 Jul 01, 2014 implications for the movement of capital across borders. In particular, changes in benchmarks can explain counterintuitive and unexpected movements Frontier Countries Qatar+UAE in cross-country investments and assets prices. Most of Source: World Bank staff calculations using data from Raddatz et al (2017) the benchmark effect is observed at the time when the change is effectively implemented, rather than when it is first announced. The extent of the impact depends on the size of benchmark investors and the relative five local currency bonds were included in J.P. Morgan’s importance of countries in these benchmarks. At the flagship local currency bond index in March 2014. As same time, by altering the relative country weights, the a result, Colombia experienced large sovereign debt change in benchmark can affect the extent to which capital inflows. These inflows led to an appreciation countries are exposed to international markets and, of the Colombian peso. At the same time, this event thus, to future reclassifications. After the immediate affected Colombian debt markets, leading to a higher reclassification effects, countries will be more or less share of foreigners holding local currency Colombian exposed to international markets, depending on how bonds and a 5 percent increase in the Colombian important they are in benchmark indexes. As more local currency bond index. Furthermore, as foreigners international investors start to follow indexes more started buying sovereign bonds, some local banks sold passively, the benchmark effect is expected to become part of their allocation in these bonds and used the more relevant. As a result, it will become increasingly proceeds to increase credit to firms (Williams, 2018). important to understand the general equilibrium effects of the benchmark effect. Benchmarks can lead to the amplification and contagion of shocks. Countries that experience MALAYSIA ECONOMIC MONITOR | JUNE 2019 29 PART ONE - Recent Economic Developments and Outlook Federal government debt as a share of GDP has increased slightly Federal government debt as a percentage of GDP that it is in the final stage of finalizing its proposal to increased to 51.2 percent in 2018 (2017: 50.1 enhance tax revenue. The committee has been tasked percent), with risks remaining manageable. The with looking into measures to reduce tax leakages, higher level of debt was due to the upward adjustment to access the underground economy, to enhance tax in the fiscal deficit to 3.7 percent of GDP in 2018, to administration, and to consider new sources of revenue. accommodate new policy directions and in response The government has also stated that it does not plan to to short-term adjustments. 97.1 percent of the federal introduce any new taxes in 2019, other than those that government borrowing was denominated in ringgit, have already been announced. limiting the exposure to valuation changes resulting from currency movements. Potential rollover risks are also limited, with more than 75 percent of outstanding issuances having a remaining maturity period of more The absence of adequate than three years as at end-2018. measures to boost revenue Total committed government guarantees that will constrain the amount are serviced by the government to finance the ongoing infrastructure projects also increased in of fiscal policy space 2018, to 9.2 percent of GDP (2017: 7.4 percent). Other liabilities, including the net debt of 1Malaysia Development Berhad (1MDB), dropped to 15 percent of GDP (2017: 21.8 percent), with this decline driven largely On the expenditure side, the new fuel subsidy by cost rationalization exercises on the government’s framework is expected to be rolled out in July outstanding public-private partnership commitments. 2019. A more targeted framework and the gradual The overall value of the federal government debt and removal of untargeted subsidies could contribute to liabilities is estimated to stand at RM1.1 trillion, or 75.4 reduced expenditure on subsidies. At the same time, percent to GDP (2017: 79.3 percent). The government moving from blanket subsidies at the pump to targeted has indicated that its debt consolidation plan will resume cash payments to beneficiaries of the Bantuan Sara in 2019, with a target debt-to-GDP ratio of around 47 Hidup (BSH) would improve allocative efficiency. The percent by 2025. The government also announced government is committed to achieving its fiscal deficit the formation of the Debt Management Office (DMO), target of 3.4 percent of GDP in 2019, in line with the which will supervise the issuance and structure of debt current fiscal consolidation plan. and formulate strategies to reduce the government’s debt and liability burden. The government announced several new revenue measures in the first half of 2019. First, it announced the sugar tax on sweetened beverages, to be levied on the manufacturers, and is expected to take effect in July. Second, it announced the tourism departure levy, which is expected to come into effect in the second half of 2019. In addition, the government is in the midst of rationalizing tax incentives for investments. The government also announced the imposition of a digital services tax, implemented through an extension of the 6 percent SST to cover imported services provided by foreign digital service providers. However, this will only come into effect in January 2020. The government’s Tax Reform Committee has indicated 30 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook Economic outlook Growth in East Asia is projected to slow over the near term In 2019, global conditions are expected to be less Growth in the developing EAP countries is projected supportive of regional growth, reflecting weaker- to moderate over the near term, with increased than-expected international trade and investment external headwinds. Regional growth is expected activity at the start of the year. Over the year, to ease to 5.9 percent in 2019-20 (2018e: 6.3 percent), the global growth rate is expected to decline to 2.6 mainly reflecting the continuing slowdown in China percent (2018e: 3.0 percent), 0.3 percentage points amid domestic and external headwinds (see Figure below previous projections (see Figure 17). Growth in 18). Regional growth excluding China is projected to advanced economies is projected to decelerate over slow to 5.1 percent in 2019 (2018e: 5.2 percent) before the near-term future, partly reflecting the waning fiscal edging up to 5.2 percent in 2020-21 as global trade stimulus in the United States. In the medium term, stabilizes. Domestic demand will remain the primary these economies are expected to converge gradually driver of growth in most economies in the region on the to their relatively modest potential growth rates, which back of stable private consumption, which is expected remain constrained by aging populations and subdued to partially offset the negative effects of the less productivity growth. Growth in EMDEs is projected supportive external environment. to ease further to a four-year low of 4.0 percent this year (2018e: 4.3 percent) , before gradually recovering in 2020-21, as the financial market stress and other adverse factors currently affecting a number of the large economies dissipate. FIGURE 17 FIGURE 18 Global economic growth is projected to moderate Growth in developing EAP is expected to slow, over the near term with increased external headwinds GDP, y/y, Percentage GDP, y/y, Percentage 6 Latest Estimates (June 2019) 8 Latest Estimates (June 2019) Previous Estimates (January 2019) Previous Estimates (January 2019) 7 5 6 4 5 3 4 3 2 2 1 1 0 0 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f 2019f 2020f 2021f World Advanced Emerging & Developing Developing EAP Developing Economies Developing EAP excl. China ASEAN Economies Source: World Bank staff projections Source: World Bank staff projections MALAYSIA ECONOMIC MONITOR | JUNE 2019 31 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy is expected to expand at a relatively modest pace With the increased headwinds, Malaysia’s GDP observed in Q1 2019, with faltering external demand growth is forecast to moderate in 2019. Malaysia’s and softening business sentiment. Meanwhile, public GDP growth rate is expected to decelerate to 4.6 sector investment is expected to contract further, by percent in 2019 (2018: 4.7 percent), 0.1 percentage point -7.0 percent, over the year (2018: -5.0 percent), with lower than in the previous forecast. This decline largely several multi-year public infrastructure projects nearing reflects the weaker-than-expected investment and completion and with the government adopting a export activity in Q1 2019. While private consumption more cautious approach towards new infrastructure is sustained by stable labor market conditions and investment. While the government has announced the continues to support domestic demand, its growth revival of two key infrastructure projects, the ECRL and is projected to moderate to 6.6 percent this year Bandar Malaysia, both of which could help boost public (2018: 8.0 percent), following the robust expansion in investment, the full details and overall plans have not household expenditure in 2018 especially during the yet been disclosed. As such, the positive spillovers to zero-rated GST period. In the public sector, the planned economic activity may be limited in the near term. rationalization of government operating expenditure will weigh on the contribution from government The weakness in the external sector is likely to consumption, with growth projected to decelerate to persist into the near team, with softening global 1.8 percent during the year (2018: 3.3 percent).  demand weighing on export growth. Malaysia’s export growth is currently projected to moderate to Gross fixed capital formation is projected to 0.7 percent in 2019 (2018: 2.2 percent) in the context remain subdued into the near-term future, weighed of softening global growth and faltering trade down by slower public and private capital spending momentum, aggravated by prolonged domestic growth. The near-term outlook for private investment supply constraints in the commodity sectors. Export activity is expected to be slightly weaker than previously expansion is projected to remain modest over coming envisaged, expanding at the rate of 2.9 percent in years, in the context of the less supportive global 2019 (2018: 4.3 percent). This revision mainly reflects environment. Similarly, import growth is projected to the softer-than-expected business investment data decelerate to the estimated rate of 0.4 percent over the TABLE 3 GDP growth and contribution to growth GDP Growth, y/y, Percentage Contribution to GDP Growth, Percentage Point 2018 2019f 2020f 2021f 2018 2019f 2020f 2021f GDP 4.7 4.6 4.6 4.6 Domestic Demand Domestic Demand 4.3 4.6 4.8 4.9 4.0 4.3 4.5 4.5 (including stocks) (including stocks) Final Consumption 7.1 5.7 5.5 5.4 Final Consumption 4.8 4.0 3.8 3.8 Private Sector 8.0 6.6 6.3 6.2 Private Sector 4.4 3.7 3.6 3.6 Public Sector 3.3 1.8 1.7 1.7 Public Sector 0.4 0.2 0.2 0.2 Gross Fixed Capital Gross Fixed Capital 1.4 0.0 1.1 1.9 0.3 0.0 0.2 0.4 Formation Formation Change in Stocks -1.2 0.3 0.4 0.3 External Demand External Demand Exports of Goods & Exports of Goods & 2.2 0.7 0.6 0.6 1.5 0.5 0.4 0.4 Services Services Imports of Goods & 1.3 0.4 0.5 0.5 Imports of Goods & 0.8 0.2 0.3 0.3 Services Services Source: World Bank staff calculations and projections 32 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook year (2018: 1.3 percent). This largely reflects the lower tax policy towards the second half of the year. The growth of intermediate and capital exports, consistent projected modest increase in inflation in H2 2019 is with lower-levels of export demand and a slowdown in also predicated on the assumption that the float pricing overall investment activity. mechanism for RON95 and diesel will be reintroduced in mid-2019. This will result in fuel subsides becoming News-based measures of economic sentiment more targeted, leading to an upward adjustment in point towards a lower forecast of GDP growth domestic retail fuel costs in line with the recent trends compared to those of professional forecasters. in global oil prices. Underlying inflation is expected to Complementary news-based measures of economic be broadly contained over the near term in the absence sentiment3 indicate a softer perception of the economic of immediate domestic cost pressures. conditions in Malaysia during H1 2019, with the sentiment-adjusted growth forecast in 2019 tracking Looking further ahead, Malaysia remains on track below the consensus forecast throughout the period to achieve high-income economy status by 2024. (see Figure 19). Below-trend optimism was especially Malaysia’s gross national income (GNI) per capita stood notable across the economic, corporate and industrial, at US$10,460 in 2018, US$1,915 below the threshold and trade categories through March, coinciding with level of US$12,375 that the World Bank currently sets to the deterioration of sentiment around global growth define high-income country status, based on estimates prospects. The overall sentiment has improved slightly using the Atlas method. The latest World Bank staff since then, supported in part by BNM’s decision to projections indicate that Malaysia could exceed the lower the OPR in May (see Figure 20). defined threshold at some point between 2021 and 2024. As Malaysia’s economy converges with the high- Headline inflation is expected to increase modestly income economies, it is important to be attentive to in 2019, with the effects of transitory policy- the broader aspects of development and societal well- related factors dissipating. Consumer price inflation being, such as health, education and the distribution of is projected to average at about 1 percent for 2019 wealth, that are not adequately captured by advances as a whole (2018: 1.0 percent), mainly due to the in per capita income terms (see Box 3). diminishing effects of the changes to consumption FIGURE 19 FIGURE 20 The sentiment-based forecast of GDP growth has ...reflecting largely below-trend optimism in the been tracking below the consensus forecast... economic and corporate clusters GDP, 2019f, y/y, Percentage News Sentiment, Z-score 1.0 6.0 0.5 0.0 5.5 -0.5 -1.0 5.0 -1.5 -2.0 4.4% 4.5 -2.5 4.2% -3.0 4.0 -3.5 -4.0 12/2018 01/2019 02/2019 03/2019 04/2019 05/2019 3.5 01/2018 02/2018 03/2018 04/2018 05/2018 06/2018 07/2018 08/2018 09/2018 10/2018 11/2018 12/2018 01/2019 02/2019 03/2019 04/2019 05/2019 Commodity/ Financial Market Corporate/ Industrial Economic/ Monetary Policy Government Finance Consensus Mean Consensus Sentiment-adjusted Forecast Range Forecast Forecast Political/ General Trade/External Payments Source: World Bank staff projections Source: World Bank staff calculations 3 The news-based sentiment index is derived by the staff of the World Bank through an analysis of the proportion of positive words (“gain”, “improve”, “agreement”, etc.) relative to the proportion of negative words (“concern”, “fear”, “decline”, etc.) present in a vast collection of news articles on Malaysia’s economy. Information derived from media reports has two main advantages compared to official statistics. First, measurements of economic conditions can be calculated in real-time, at a daily frequency. Second, this information enables the measurement of economic forces that might not be easily captured by traditional data sources, providing complementary insight into factors such as the collective sentiment regarding economic prospects. A recent study based on historical data in 25 countries between 1991 and 2017 suggests that including news-based measures of sentiment reduces the forecast errors of GDP growth by 12 percent on average relative to the consensus forecast. MALAYSIA ECONOMIC MONITOR | JUNE 2019 33 PART ONE - Recent Economic Developments and Outlook BOX 3 Malaysia’s growth dividend from increasing education quality and health indicators to the levels of high-income countries Recent analysis has shown that accelerating is based on the celebrated Solow-Swan growth model, human capital development will be critical for adapted to developing/emerging economies. An enabling Malaysia’s successful transition to a high- extension, based on the World Bank Human Capital income and developed nation. According to the World Index, allows for an analysis of the long-run growth Bank’s Human Capital Index, Malaysia currently ranks effects of improved learning quality and health 55th out of 157 countries. While Malaysia performs outcomes. Education quality here is measured using well in terms of some components of the index, it does normalized test scores and is embodied in each child less well in others. A particular area where Malaysia when they are in school. The health of the population will need to improve its performance is with regard to is approximated in two ways. First, the Adult Survival learning outcomes (World Bank 2018a). Rate (ASR) is the fraction of current 15-year olds who would survive to age 60, assuming that the current age- The World Bank’s Long-Term Growth Model (LTGM) specific mortality rates apply throughout their lifetime. can be used to simulate a boost to long-term growth Second, the stunting rate is measured as the fraction in Malaysia by increasing the quality of education of 5-year-old children who have a height that is more and health in response to this challenge. The LTGM than two standard deviations below the median. The FIGURE 21 FIGURE 22 Simulations for Malaysia’s rate of human capital Simulations for Malaysia’s long-term rate of GDP growth growth Human Capital, y/y, Selected Simulations GDP, y/y, Selected Simulations Quality of Education + ASR + Stunting Quality of Education + ASR + Stunting 0.8% Quality of Education + ASR 5.0% Quality of Education + ASR Quality of Education Quality of Education Baseline Baseline 4.5% 0.6% 4.0% 0.4% 3.5% 3.0% 0.2% 2.5% 0.0% 2.0% 2020 2025 2030 2035 2040 2045 2050 2020 2025 2030 2035 2040 2045 2050 Source: World Bank staff calculations using the LTGM human capital extension Source: World Bank staff calculations using the LTGM human capital extension 34 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook simulations assume that other growth drivers, besides Increasing education quality and the two health human capital (e.g. investment, productivity), continue indicators to the 50th percentile of high-income at their historical trend rates. countries boosts growth by 0.25 percentage points in the period from 2035 to 2050 (see Figure 22). In the business-as-usual baseline, the headline The results are mostly driven by education quality. annual GDP growth rate is initially at around 4.6 Malaysia’s current education quality (75 percent) is percent, but slows over the next 30 years to a trend good compared with other upper middle-income rate of 2.4 percent (see Figure 22). In this baseline, countries. However, it is below the 25th percentile education quality is assumed to be constant (at 75 of high-income countries, and well below regional percent, its 2018 value). However, human capital growth aspirational peers such as South Korea (90 percent) slows over time from an initial rate of 0.6 percent to and Singapore (93 percent). Boosting schooling quality around 0.2 percent by 2035 and 0.06 percent by 2050, today to the high-income 50th percentile (83 percent) as the gains from previous expansions to schooling increases human capital growth by 0.25 percentage start to fade (see Figure 21, health measures are also points (see Figure 21), and GDP growth by around 0.2 constant in the baseline). Slowing long-term headline percentage points (see Figure 22)—but only after 2035, growth also reflects slower population growth (falling when today’s children start to join the workforce (the from 1.3 percent today to 0.4 percent by 2050); an smaller effects over 2025-35 are because today’s older aging population; and a declining return on private children only receive partial treatment). Combined, investment (given relatively high investment rates). the two health indicators add almost 0.1 percentage Slowing growth is common as countries make the points to human capital growth over 2035-50 and 0.06 transition to high income status but can also motivate percentage points to GDP growth. By 2050, the level of new pro-growth reforms. GDP is almost 5 percent higher. Notes: Common assumptions: (i) the investment share of GDP is assumed to stay at its 2018 value of 24.5 percent of GDP (6.5ppts public and 18ppts private); (ii) Total Factor Productivity (TFP) growth is assumed to remain at 0.9 percent (close to the 15-year average using Penn World Tables 9 data); (iii) the labor share is 0.5 (similar to PWT9 data); and (iv) capital-to-output ratio is at its steady state value of 2.25. The assumed return to an extra year of schooling is 12 percent. The depreciation rate is 5.8 percent (from PWT9). Source: Devadas and Pennings (2019) and Loayza and Pennings (2018). MALAYSIA ECONOMIC MONITOR | JUNE 2019 35 36 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook Risks to Malaysia’s growth outlook continue to tilt towards the downside The possibility of escalating trade tensions, addition, there are signs of firms slowing down on sharper-than-expected slowdowns in major hiring, capacity building and expansion activities, which economies and a maturing global technology cycle could subsequently affect the momentum of economic could weigh on Malaysia’s growth in the near term. growth. Given Malaysia’s high degree of trade openness and global value chain integration, the growing protectionist The relatively high level of public debt will continue tendencies and unresolved trade tensions pose a to exert constraints on fiscal policy space. The significant risk to domestic growth in the near term. government has undertaken a number of initiatives Prolonged unresolved trade tensions could translate to increase revenue collections and to diversify the to heightened uncertainty, leading to a decline in revenue base, including the establishment of the Tax global business sentiment, subsequently offsetting Reform Committee and the introduction of a number any potential short-term gains for Malaysia resulting of new taxes. The overall impact of these measures, from trade and investment diversion from China. A however, is expected to be small in the near term. maturing global technology cycle could also contribute The higher level of public debt, with the absence of to the growing uncertainty and further dampen growth. adequate revenue measures, will continue to constrain Early indications of the slowdown have already been the flexibility of fiscal adjustment against future observed in the moderation of E&E manufacturing due macroeconomic shocks. In addition, there are relatively to weaker global demand in Q1 2019, which contributed sizable committed government guarantees and other to lower manufacturing exports. commitments, such as those arising from public- private partnerships, which would place additional Growing uncertainty regarding the external pressure on the fiscal policy space over the longer environment could also lead to more subdued term. In the private sector, the relatively high level of business sentiment and to a moderation in overall household debt in the context of persistent property investment. Several indicators of business sentiment4 market excesses remains a source of risk to macro- suggest that businesses are notably less optimistic financial stability, as well as acting as a constraint on about the near-term outlook in the context of slowing household spending. global growth and prolonged policy uncertainty. In Near-term policies should focus on boosting resilience and protecting the vulnerable In the immediate term, the government should aim to Given the current constraints on fiscal policy build fiscal buffers, to facilitate private investment, space, it is crucial for the government to undertake and to ensure adequate social protection for lower- bold reforms and measures to increase revenues. income households. With growing uncertainty and Malaysia’s near-term fiscal consolidation has been with risks to the economy tilting to the downside, it is primarily driven by vigorous expenditure rationalization. important to ensure adequate room for policy space Going forward, reforms should also focus on mobilizing and maneuverability. More targeted social protection revenues to expand fiscal space. Beyond timely existing systems could help to alleviate cost pressures and to initiatives (including the establishment of the Tax Reform provide financial support to lower-income households. Committee and the realignment of tax incentives), 4 The Malaysian Institute of Economic Research (MIER) business conditions survey, RAM Business Confidence Index. MALAYSIA ECONOMIC MONITOR | JUNE 2019 37 PART ONE - Recent Economic Developments and Outlook more could be done to diversify sources of fiscal Malaysia has a range of social safety net programs that revenue. For instance, the personal income tax revenue are administered by various ministries, including core could be broadened through the implementation of a welfare programs implemented by the Department of more progressive tax structure. At present, Malaysia’s Social Welfare and the BSH program. personal income tax revenue is estimated at 2 percent of GDP (see Figure 23), lower than many upper-middle income and high-income countries. Malaysia’s top marginal income tax rate currently stands at 25-28 The depth of Malaysia’s percent. This is relatively low compared to many regional countries and most high-income countries. Second, the social safety net system current coverage of the SST could be expanded. Similar remains relatively to personal income tax, Malaysia’s tax revenue on goods and services in proportion to GDP is lower than underdeveloped that of most upper-middle and high-income countries (see Figure 24). Consideration could also be given to broadening the scope of capital gains taxes, and to strengthening the effectiveness of tax administration Malaysia performs relatively well in terms of through the increased adoption of digital technology breadth of coverage based on the number of to more effectively enforce compliance. potential beneficiaries of the various social safety net programs. However, compared to other countries The widening of the government’s revenue base in the region, the depth of Malaysia’s social safety net could also be accompanied by measures to expand system remains underdeveloped, as measured by the and improve the existing social protection system average expenditures per beneficiary relative to GDP to achieve overall progressivity. The government’s per capita. Core welfare programs are particularly planned move to a more targeted fuel subsidy underfunded. In addition, stylized simulations of the framework could lead to potential savings that could impact of the BSH program suggest that the amount subsequently contribute to the expansion of core social of benefits per beneficiary household is fairly small welfare programs, with evidence from a number of relative to household incomes, resulting in only a countries showing that progressive taxes and social modest impact on overall inequality. Improvements to transfers, such as targeted cash transfers, can be very the existing social protection system could be achieved effective in reducing income inequality. Currently, by increasing the total outlay for benefits; better FIGURE 23 FIGURE 24 Malaysia trails many upper-middle- and high- ...and revenue from taxes on goods and services income countries in the collections of personal income tax revenue... Personal Income Tax Revenue, Percentage of GDP, Average 2012-2017 Tax Revenue on Goods and Services, Percentage of GDP, Average 2012-2017 30 14 12 25 10 20 8 15 6 10 4 5 2 0 0 THA MYS SIN PHP BRA CRO CZE LIT URU POL KOR HUN SVN JPN EST FRA GER AUS FIN ISL SWE DEN US PHP MYS SIN IDR THA AUS KOR AZE ITA PER GER POL FRA CZE LIT SVN NOR CHL EST HUN BRA MEX MEX SVK UK SVK UK Source: World Bank staff calculations based on IMF data Source: World Bank staff calculations based on IMF data 38 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook targeting that more directly factors in household size Concurrently, ongoing efforts by the government when determining eligibility and benefit amounts; and to reform governance to enhance transparency linking program eligibility to measures that promote and to improve the efficiency of the public service human capital formation, such as school enrolment and should continue. Under the MTR of the 11th Malaysia attendance (see Box 4). Plan, governance reforms cover a number of areas, including elevating integrity and accountability, Over the medium term, as Malaysia transitions enforcing prudent public finance, and enhancing public into a high-income economy, policy should focus on service delivery. Given that spending on public service measures to boost human capital and to accelerate salaries and pension would continue to constitute productivity growth. The achievement of shared the largest share of overall public expenditure, the prosperity and inclusive growth depends on increasing emphasis should shift towards enhancing public labor productivity, which in turn depends on stronger sector efficiency and reinventing public services. This human capital development. Malaysia’s score on the would require fundamental reforms to public service Human Capital Index (HCI) is 0.62, which is roughly employment and the associated remuneration and comparable to other upper-middle income countries reward system, including reviewing hiring policies and but considerably lower than that of its aspirational strengthening the link between compensation and comparators. Improving human capital outcomes would employee performance. include enhancing learning outcomes, reducing child undernutrition, and strengthening social protection More broadly, ensuring that Malaysia has an systems to enable households to both invest in and effective and efficient public service will be protect human capital. Closing the gaps between men’s necessary for the achievement of shared prosperity. and women’s economic opportunities could also boost Building capacity and capability in the public service long-term growth. Accelerating productivity growth is core to the achievement of Malaysia’s successful would also entail a commitment to boost investor transition to a high-income and developed nation and confidence and to address market distortions resulting to the fulfilment of society’s increasing demands for from unhealthy competition. The dominant role of GLCs better quality services. The types of public service that has at times stifled competition, leading to higher costs Malaysia needs for this transition, and the way that it and resulting in many productive firms operating below is recruited, managed and incentivized are explored in their optimal levels (see Box 5). more detail in Part 2 of this edition of the MEM. MALAYSIA ECONOMIC MONITOR | JUNE 2019 39 PART ONE - Recent Economic Developments and Outlook BOX 4 Is income inequality in Malaysia rising or falling? Or both? Inequality is one of the more contentious topics in use a relative concept of inequality. That is, income is economic policy and in social and political discourse. measured as a proportion of the average income or It is also one of the most easily misunderstood. To begin, aggregate household income, respectively. According there are fundamental disagreements between those to these relative measures, it may be seen in Figure 25 who argue that inequality is unfair and undemocratic that the relative Gini index declined from 0.51 in 1970 to and those who believe that some inequality is desirable 0.44 in 1989, where it remained until 2009, before again if it is the result of rewarding entrepreneurs and declining to 0.40 in 2014, where it remained in 2016. innovators who take risks and successfully contribute Over the same period, the total share of household to the country’s advancement. In addition, there are income accruing to the bottom 40 (B40) increased many domains of inequality to consider, with many from 11.5 to 16.4 percent, with a marginal decline in the distinctions between them, most notably the distinction period from 2014 to 2016.5 between inequality of opportunities versus inequality of outcomes, such as income, wealth, health, and While relative income inequality has been declining, happiness. Within these domains, there are numerous absolute income inequality has been increasing. ways of measuring inequality, with different measures Recent publications by KRI (2018), World Bank sometimes pointing in different directions within a single (2018a) and Ravallion (2019) have highlighted growing given context. Here we focus on two perspectives— absolute gaps in income levels. The absolute Gini relative and absolute—of income inequality. index, computed in the same manner as the relative Gini index but without normalizing by mean income, Income inequality in Malaysia has either been increases by a factor of more than four between 1970 falling rapidly or rising rapidly, depending on how and 2016 (see Figure 26).6 Thus, at the same time that it is measured. The most commonly used inequality lower income groups were gaining a larger proportion measures (such as the Gini index or income shares) of total household income, the absolute gap in ringgit FIGURE 25 FIGURE 26 Malaysia has seen an increasing income share of ...but while the relative Gini index has declined, the B40, corresponding with a declining relative the absolute Gini index has increased Gini index... Relative Gini Index B40’s Income Share Relative Gini Index Absolute Gini Index 0.60 18 0.60 450 17 400 0.55 0.55 16 350 15 0.50 0.50 300 14 250 0.45 0.45 13 200 12 0.40 0.40 11 150 0.35 10 0.35 100 1970 1980 1990 2000 2010 2020 1970 1980 1990 2000 2010 2020 Relative Gini (published) B40 Income Share Relative Gini (published) Absolute Gini Source: World Bank staff calculations using DOSM data Source: World Bank staff calculations using DOSM data Note: Absolute Gini index calculated in monthly income per household in constant 2010 Malaysian ringgit 5 The most recent Household Income and Expenditure Survey (HIES) data is from 2016. The 2019 HIES is currently in the field, with results expected in mid-2020. 6 Unlike the standard relative Gini index, the absolute Gini index is not bounded by zero and one. Its scale depends on units in which income is denominated, which is why it is essential to adjust for inflation. 40 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook FIGURE 27 FIGURE 28 Relative inequality is weakly correlated with ...whereas absolute income inequality and income household income growth... growth are highly correlated Annual Growth Rate of Relative Gini Against Annual Growth Rate of Annual Growth Rate of Absolute Gini Against Annual Growth Rate of Mean Income, All Countries, Malaysia Highlighted in Blue Mean Income, All Countries, Malaysia Highlighted in Blue 30 30 Annual Growth Rate in Absolute Gini (%) Annual Growth Rate in Relative Gini (%) 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -30 -20 -10 0 10 20 30 -30 -20 -10 0 10 20 30 Annual Growth Rate in Mean Income (%) Annual Growth Rate in Mean Income (%) Source: World Bank staff calculations using PovcalNet data Source: World Bank staff calculations using PovcalNet data terms was increasing because average incomes were which compiles data from more than 1,600 harmonized increasing for all income classes and in larger absolute household surveys from more than 160 countries.7 increments for higher-income households. For example, The left panel shows no discernible relationship over this period, in inflation-adjusted terms, the average between income growth and relative inequality (slope monthly income of a B40 household increased from RM 0.08, adj-R2 0.025), meaning that relative inequality 325 to RM 2,473, while the national average increased has increased or decreased at about the same rate, from RM 1,130 to RM 6,043. Thus, while B40 incomes regardless of the rate of income growth (Malaysia improved from 29 to 41 percent relative to the national observations in red dots). In contrast, in the right panel, mean, the absolute difference between the B40’s the absolute Gini increases almost in direct proportion average income and the national average increased with income growth (slope 1.09, adj-R2 0.80), tending from RM 805 to RM 3570. to decline only when the economy is contracting. This matches Malaysia’s experience, with Figure 26 showing What can and should be done to reduce absolute that the only two periods in which the absolute Gini income inequality? Many economists, but certainly declined coincided with the mid-1980s commodities not all, tend to emphasize relative inequality measures, price shock and the Asian financial crisis. especially in the context of a growing economy. If poorer people are gaining a larger share of a growing Should reducing absolute income inequality be economic pie, what’s not to like? A common rejoinder a policy objective, and if so, what are the trade- (see KRI 2018) is that most people don’t observe their offs? The absolute income Gini is the product of the income shares, they observe themselves getting a relative Gini and average household income, implying salary increment of RM 100 while their richer neighbor that reducing absolute income in a growing economy receives an increment of RM 400, thus concluding that requires a reduction in relative inequality that is large inequality is getting worse. Indeed, this likely shapes in comparison to the growth in mean income. The the perceptions of many Malaysians who feel that they lower-right quadrant of Figure 28 shows that this a fairly are not benefiting from economic growth and are falling rare occurrence. To achieve such a win-win outcome behind, despite what relative inequality measures say. Malaysia would need proportionately faster income It also reveals the potential pitfalls of over-reliance growth among lower-income households to resume on a single statistic. Some reflection on the patterns the decline in relative income inequality that appears to of relative and absolute income inequality relative to have stalled in the period from 2014 to 2016. Malaysia’s income growth may help illuminate the debate. relative income inequality is high compared to countries at a similar income level. Resuming the downward trend Empirically, absolute income inequality changes in relative income inequality is a worthy objective in its almost in step with income growth, whereas own right, and will also contribute to reducing absolute relative inequality is only weakly correlated with income inequality, or at least slowing its increase. This growth. Figure 27 and Figure 28 summarize changes will depend on growth and social policies to ensure that in inequality for 1,400 growth spells calculated from the all Malaysians share in the country’s prosperity. World Bank’s publicly-available PovcalNet database, 7 The growth spells in this analysis include only the intervals from one survey to the next survey, as opposed to all possible growth spells. MALAYSIA ECONOMIC MONITOR | JUNE 2019 41 PART ONE - Recent Economic Developments and Outlook BOX 5 Malaysia’s need for speed: How regulatory action is unleashing ultrafast internet Over the past decade, Malaysia’s internet market fixed broadband market in the Asia-Pacific region for has been characterized by relatively slow growth any country with a population larger than one million compared to most of its regional peers. This lag has people. Limited competition combined with difficulties been especially noticeable in terms of the adoption in network deployment constrained alternative internet of fiber internet services, which are a sine qua non for service providers (ISPs) from rolling out their networks the sustained development of any digital economy. or offering services on competitive terms (World Bank Malaysia has not only lagged in comparison with more 2018b). advanced economies, but also relative to middle- income comparators (see Figure 29). However, regulatory reforms undertaken in Malaysia’s telecommunications sector in 2018 Recent World Bank analytical work to identify have had a significant positive impact. Most visibly, policies to promote Malaysia’s digital economy a series of regulatory actions have caused the prices found that this lag was at least partly due to limited of fixed broadband services to drop and triggered a competitive pressure in the market, marked by the shift in consumer demand towards faster internet dominance of incumbent Telekom Malaysia (TM). As of connections. In 2018, the Government introduced an December 2017, TM held a 90 percent market share. important measure known as the Mandatory Standard For context, this made Malaysia the most concentrated on Access Pricing (MSAP), which was implemented by FIGURE 29 FIGURE 30 Until recently Malaysia has lagged in the uptake ...but broadband prices have fallen dramatically of fiber internet subscriptions... over the past year... Fiber Internet Subscriptions, by Percentage of Households Average Prices of Fixed Broadband Plans 100% 2015 January 2018 RM 2018 December 2018 399 80% 60% RM RM 247 RM 215 224 40% RM RM 176 157 RM RM 137 20% 107 0% 30Mbps 100Mbps 300Mbps 1Gbps South Korea China Japan Vietnam Thailand Malaysia Nepal Indonesia Philippines to to to and above 40Mbps 200Mbps 500Mbps Source: World Bank staff calculations using data from Tele-geography Source: World Bank staff calculations using data from MCMC 42 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART ONE - Recent Economic Developments and Outlook TABLE 4 ...and speeds increased during 2018, especially for fixed connections Tested speeds in Mbps Tested speeds in Mbps Fixed internet Mobile internet Dec-17 Mar-19 Dec-17 Mar-19 Fastest five (average) 135.9 155.2 54.8 62.8 Malaysia 22.2 67.2 (3x) 16.0 20.5 (1.3x) Global comparison (F5/MY) 6.1 2.3 3.4 3.1 Source: World Bank staff calculations using data from Ookla Speed Test the telecommunications regulator. MSAP regulates regulator MCMC shows that the number of fixed the prices and terms for alternative ISPs to access broadband subscriptions with download speeds of wholesale broadband capacity provided by TM. Similar more than 100 Mbps grew by a factor of eight to 1.2 measures have had positive impacts on broadband million subscribers in 2018. These increased speeds are markets in Europe, for example. Likewise, this was reflected in the online tests conducted by subscribers. expected to allow Malaysia’s alternative ISPs to offer lower priced, higher quality services to their subscribers Malaysia is now starting to close the gap with using the widespread and high-quality facilities of the leading countries with respect to internet speed. In TM network. December 2017, the average speed of fixed broadband services in the five countries in the world with the fastest connections was more than six times faster Malaysia’s average fixed than the average speed in Malaysia. By March 2019, broadband speeds have this had narrowed to just over two times. Put another way, Malaysia’s average fixed broadband speeds have accelerated by three times accelerated by more than 300 percent in just over a year in the space of a year (see Table). The already-competitive mobile broadband market has seen a smaller improvement, reflecting the fact that it was already performing relatively well. The quality of fixed broadband connections, However, it is now facing increased pressure to grow, including cable and fiber internet services, rapidly with consumers demanding faster connections to feed responded to these regulatory changes. Within their digital ambitions. three months, multiple service providers, including TM, announced new broadband subscription plans that Recent events show the impact of policy reform on included faster speeds at lower prices. The impact was market outcomes. The implementation of regulations especially evident for what is globally becoming the that boost competition have been shown to have norm for basic broadband services (30 Mbps services), positive effects on subscription and affordability with average prices for those plans falling by 30 percent in many contexts. Malaysia’s experience shows the over 2018. Notably, the average price of plans for potential gain, demonstrating the demand for high- speeds in excess of 1 Gbps (the emerging speed target quality, affordable internet services and indicating that for advanced economies) fell by over 40 percent. Price the digital transformation is yet to be fully realized. It drops were seen across all plan types (see Figure 30). also indicates that this is a first, even if critical, step in a longer journey to provide all Malaysians with access As faster speed broadband plans have become more to ultrafast, affordable broadband services, that will affordable, Malaysian subscribers have switched position them and their businesses and the economy to these plans. Data from the telecommunications for growth in an increasingly digital world. MALAYSIA ECONOMIC MONITOR | JUNE 2019 43 Image Source: Malaysia Administrative Modernization and Management Planning Unit (MAMPU) PART TWO Re-energizing the Public Service MALAYSIA ECONOMIC MONITOR | JUNE 2019 45 PART TWO - Re-energizing the Public Service Re-energizing the public service The public service plays a vital role in Malaysia’s transition to a high-income and developed economy There is a well-established connection between country by 2020. Undeniably, Malaysia has made institutional quality and economic growth. Strong good economic progress and has introduced several public institutions underpin successful economic reforms to realize this goal over these past decades. growth and development, with recent research However, the pace of reforms and development has demonstrating the relationship between the existence not been consistent as the country struggles to meet of a strong, merit-based public service and higher rates its goals within the 2020 timeframe. The explanations of growth. While the developing EAP countries have for this are many and varied but can at least be partly benefited from relatively good economic governance, attributable to gaps that undermine the ability of the the challenges to enhancing state effectiveness are government to implement key policies needed to meet more significant now than they were at earlier stages its development priorities. One such gap is the capacity of development. of the public service, which is key to furthering the country’s development agenda. This has come under Enhancing state effectiveness can be defined in criticism in the recent years and there are questions terms of improving the capacity of government around whether the public service has the right people, to clearly define objectives and priorities, and skills and tools to perform its role effectively. Reforming to attain them. The argument is as follows: the the public service, including overall public sector developing EAP countries seek to transition to higher- governance, cannot be done independently from income status, they will face both pre-existing and broader economic and social reforms.8 With the Vision new governance challenges, with increasingly rigorous 2020 approaching its end date, the government has demands on state institutions. Additionally, as policy decided to extend the timeframe for the achievement makers try to facilitate the emergence of increasingly of the stated aspiration by a few more years. Given the affluent, middle-class societies, they will face increased importance of strong institutions for enhancing growth societal expectations regarding the range and quality and ensuring shared prosperity, it is perhaps timely for of services delivered by the state. Therefore, enhancing this edition of the MEM to focus on the capacity of the state effectiveness is an integral part of making a public service in Malaysia. successful transition to a higher state of economic development. Achieving this will require a renewed This special topic looks at the state of focus on not merely having the right form of institutions, Malaysia’s overall public sector governance but on ensuring the effectiveness of the functions of and, more specifically, the role and significance these institutions and how they are implemented. of the public service in that context, including Malaysia’s Public Service is at the heart of the through benchmarking with regional and global institutional architecture that is necessary to facilitate comparators. While it is well understood that the country’s transition to a developed economy. governance encompasses a broad range of issues, including institutions, anti-corruption,9 transparency, Thirty years ago, Malaysia’s Vision 2020 (Wawasan accountability, civic participation, the rule of law, 2020) expressed the aspiration of achieving the amongst others, this MEM focuses on the people who transition to an industrialized and developed are at the heart of public sector governance. Thus, it 8 A flagship report on Malaysia’s high-income transition is under preparation by the World Bank Global Knowledge and Research Hub in Malaysia. 9 A report on Anti-Corruption that examines successful cases of tackling corruption around the world is under preparation by the World Bank Global Knowledge and Research Hub in Malaysia. 46 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service focuses on public servants and the system by which enhancing environment of transparency and openness they are managed. Along with the importance of could be developed within the public sector. It further effective human resources management (HRM) in the sheds light on the impact of digital technologies on public service, the MEM stresses the importance of human resources and the need for recalibrating skills fostering transparency. The special topic examines not in the public sector and to ensure that public servants just recruitment, promotions and other HRM practices, are able to effectively support Malaysia’s transition to a it also explores the means by which an enabling, trust- high-income and developed country. Malaysia’s public service performs at par or ahead of the region, but shows a stagnant or declining trend and falls short of high-income comparators Malaysia’s transition from a low to upper middle- Business Index (see Figure 31), where it is one of the income country can be partly attributed to the top performers in the region, it’s performance on other strength of many of its institutions and their key indicators like the Government Efficiency indicator ability to effectively design and implement (see Figure 32) has remained largely stagnant or even national development strategies. This includes the declined. implementation of key policies focused on eradicating poverty and boosting growth through economic Malaysia’s performance is far less impressive diversification and industrial expansion. Developing when compared with that of OECD and other countries within and outside the region have been keen high-income countries (see Box 6). Although it to learn from Malaysia’s experience, particularly from seems natural to compare Malaysia’s public service the role that its public institutions played in facilitating with that of other countries in the region, these may the transformation of its economy from a largely natural not be the most appropriate comparators in a period resource-based, lower-income country to a modern and when Malaysia is transitioning to high-income and industrialized upper middle-income country. However, developed nation status. For example, while Malaysia barring a few indicators like the World Bank’s Doing is ahead of its regional peers on the government FIGURE 31 FIGURE 32 Malaysia performs well with low regulatory costs ...but performance has been largely stagnant on of doing business... scores of government effectiveness Doing Business Ranking, Selected Countries in EAP Government Effectiveness Ranking, 2018 180 2 154 150 1.5 133 138 124 120 1 90 69 73 0.5 60 46 0 30 27 13 15 2 4 5 0 -0.5 Norway New Zealand Sweden Canada Australia OECD Chile Malaysia (1991-2014) Malaysia Structural Peers Argentina Upper middle income Commodity Exporters Singapore Hong Kong, China Korea, Rep. Taiwan, China Malaysia Thailand China Vietnam Indonesia Philippines Palau Cambodia Lao PDR Source: World Bank Doing Business Index Source: World Bank Find My Friends using Worldwide Governance Indica- tors and Global Competitiveness Index MALAYSIA ECONOMIC MONITOR | JUNE 2019 47 PART TWO - Re-energizing the Public Service effectiveness indicator,10 its progress has stagnated While efforts to modernize the public sector began in recent years and lags behind the OECD average in the 1990s it is unclear if the benefits have and other high-income countries on this measure. The been fully maximized. During this period, Malaysia index for voice and accountability is well below what rolled out its Multimedia Super Corridor initiative to would be expected given Malaysia’s level of per capita facilitate the country’s transformation into a modern income and some indicators like political stability and state by 2020. It was among the first few countries in government effectiveness have worsened over time. the region to make a big push for the adoption of ICT This suggests that Malaysia has not been making to improve operational and service delivery efficiency progress in key areas of governance and public sector in government through its Electronic Government performance which leads to the question whether (EG) initiative. The EG initiative helped accelerate the the public service has the right people, capacities, adoption of ICT in the public service, facilitating the resources, values and motivation to meet the country’s provision of electronic services and the development emerging needs. of human resource management information and online payment systems. However, a number of issues Malaysia also lags behind both high-income and pertaining to the interoperability of systems and other upper-middle income countries in terms of streamlining back-end processes remain unaddressed. openness, not just in the area of public service Thus, Malaysia lags behind aspirational comparators, employment, but also on overall governance. including Singapore and South Korea, in indices related Malaysia’s relatively weak performance on the to the implementation of e-government (see Figure Open Government Index (OGI)11 is consistent with 34). The government acknowledges that while the observations around the challenges faced by the number of government online services has grown, its research community in accessing government data ability to provide end-to-end online services (such as (see Figure 33). While information on government transactions with cashless payments) remains below and public sector plans, initiatives and programs is target. The challenge is compounded by the rapid pace generally available and accessible online, there is as yet of urbanization, which results in higher expectations, no right-to-information law or formal requirement to and greater demands from citizens for better urban publish many of these documents. While there is some services (World Bank 2015a). To make the quantum leap degree of civic participation, it is not always clear how from one of the better-performing public services in feedback is collected and integrated into the policy Southeast Asia to being on par with the public services design process. Transparency regarding this process of OECD countries, Malaysia will have to adopt a holistic is important to foster an environment of openness and approach to assimilate technology in the public service inclusiveness across the public sector. and make optimal use of digitalization. FIGURE 33 FIGURE 34 Malaysia performs poorly in measures of open ... but relatively better in the adoption of government... e-government Open Government Index, 2018 E-Government Index, 2018 0.9 1.0 0.8 0.7 0.8 0.6 0.6 0.5 0.4 0.4 0.3 0.2 0.2 0.1 0 0.0 New Zealand Sweden Norway Canada Australia OECD Chile Argentina EAP Region Upper middle income Malaysia Lao PDR Cambodia Indonesia Vietnam EAP Region Philippines Thailand China Malaysia Singapore Korea, Rep. Source: Open Government Index Source: Open Government Index 10 The index captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. 11 The OGI covers four dimensions of government openness: publicized laws and government data, right to information, civic participation, and complaint mechanisms. 48 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service BOX 6 Dimensions of Malaysia’s governance in comparative perspective The Worldwide Governance Indicators provide a In general, while Malaysia is at par or better basis to compare selective aspects of public sector than its regional comparators, its performance is effectiveness across countries. These indicators stagnating and the gap between its performance enable cross-country comparisons across a range of and that of aspirational peers remains large and is dimensions, including voice and accountability; political widening. Most of Malaysia’s regional comparators fall stability and the absence of violence; government into the middle-income category. As Malaysia aspires effectiveness; regulatory quality; the rule of law; and to transition to a high-income and developed nation, the control of corruption. Performance in terms of these where the degree of shared prosperity is a measure indicators is scored from -2.5 (weak) to +2.5 (strong). of developed success, it is appropriate that it should aspire to achieve levels of public sector effectiveness comparable to those of the OECD economies. FIGURE 35 Malaysia’s public service is at par with the region, but shows a stagnant or declining trend; and a huge and widening gap with high-income comparators Worldwide Governance Indicators, Selected Dimensions, Comparative Performance for Malaysia, Developing EAP Region and OECD Countries, 2013-2017 Voice and Accountability Political Stability and Absence of Violence Government Effectiveness 1.5 OECD Avg., 1.18 1.0 2.0 OECD Avg., 0.73 1.0 0.8 1.5 OECD Avg., 1.32 0.6 0.5 Reg. Avg., 0.29 Malaysia, 0.84 0.4 1.0 0.0 Reg. Avg., 0.22 0.2 -0.5 0.5 Malaysia, -0.40 0.0 Reg. Avg., 0.53 -1.0 Malaysia, 0.16 -0.2 0.0 2003 2005 2007 2009 2011 2013 2015 2017 2003 2005 2007 2009 2011 2013 2015 2017 2003 2005 2007 2009 2011 2013 2015 2017 Regulatory Quality Rule of Law Control of Corruption 1.5 OECD Avg., 1.37 1.5 OECD Avg., 1.34 1.5 OECD Avg., 1.28 1.0 1.0 1.0 Malaysia, 0.68 0.5 Malaysia, 0.03 Malaysia, 0.41 0.5 Reg. Avg., 0.39 0.5 0.0 Reg. Avg., 0.04 Reg. Avg., 0.28 0.0 0.0 -0.5 2003 2005 2007 2009 2011 2013 2015 2017 2003 2005 2007 2009 2011 2013 2015 2017 2003 2005 2007 2009 2011 2013 2015 2017 Source: Worldwide Governance Indicators MALAYSIA ECONOMIC MONITOR | JUNE 2019 49 PART TWO - Re-energizing the Public Service The public service faces challenges in fulfilling the emerging expectations of the people Like other East Asian countries with a growing However, the actual challenge, based on experience middle-class, Malaysia faces rising expectations from other countries, lies in maintaining the courage and increased demands from citizens for better- to implement and sustain these reforms in the face quality public service delivery and a more of resistance. While experience shows that this has responsive public service. The instrumental role of often been difficult, it is not impossible with strong Malaysia’s public service in facilitating the country’s leadership, commitment and determination. socio-economic development since independence is widely acknowledged. People’s expectations regarding the public service and delivery of public services remain high, with the current the Prime Minister often A culture of greater articulating his desire to restore the public service to its openness involves risk, “glory days” in his speeches. Various efforts have been made to improve the quality of public service delivery, but would go a long way monitor its performance, and implement corrective towards building trust measures. However, despite these efforts, there is a perception that the public service has not been able in government to fully internalize these reforms and there are gaps in implementation affecting service delivery outcomes. The public service is again under the spotlight, due Past assessments by the World Bank have to the government’s current emphasis on good indicated the existence of gaps in Malaysia’s public governance, transparency and integrity. In particular, service, and particularly its HRM, that impede the the capacity of the public service to meet the emerging delivery of high-quality services. Governments can expectations and challenges as Malaysia transitions to only be effective if their public servants are motivated a high-income country is being questioned. and able to effectively implement policies, programs and deliver services (Bureaucracy Lab, World Bank). To In the recent MTR of the 11th Malaysia Plan, the achieve this, the role of HRM should not be limited only issue of governance was elevated to the forefront. to personnel management, but it should effectively The 11th Malaysia Plan (RMKe-11), the most recent of support public institutions to achieve their objectives. Malaysia’s national development plans, is intended to The assessments have revealed a disconnect between facilitate the achievement of the aspirations outlined HRM systems and stakeholder expectations regarding in Vision 2020. While plans and strategies with the type of public service and administrative capacities defined targets have been well-articulated, it is the needed to support Malaysia’s transition. Malaysia’s effective implementation of the same that has fallen overly-centralized HRM system, with a career public short of expectations. In the MTR, the government service system that does not fully leverage the skills acknowledged key constraints to improving public and professional talents of the public servants, complex services and outlined a wider set of reforms aimed remuneration practices, and a lack of market alignment at rebuilding the public service, its people and between pay and recruitment are some of the areas of institutions. A step in this direction was the increased concern. focus on anti-corruption measures to restore integrity and accountability in the government (see Box 7). The National Anti-Corruption plan and the creation of an overarching agency to monitor progress towards its implementation are a good start to tackle corruption. 50 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service BOX 7 Re-centering governance, integrity and anti-corruption in Malaysia Malaysia’s May 2018 general elections ushered strengthening governance and integrity and eradicating a new coalition government into federal office corruption are in progress, many of which require a for the first time since peninsular Malaya’s two thirds majority of the Parliament to amend the independence from Great Britain in 1957. One- Federal Constitution, including initiatives to limit prime third of the incoming Pakatan Harapan government’s ministers’ terms to a maximum of two and to ensure the election manifesto was centered around issues related separation of powers and responsibilities between the to governance, with a strong emphasis on enhancing executive, the legislature and the judiciary. integrity across public institutions; curbing corruption; reforming the Parliament and the judiciary; and Key reform initiatives that are in the final draft improving the electoral system. The new government stages include: has established a framework for reform; introduced changes to the process of formulating policies; and • Reviewing the entire electoral process, including developed a system to monitor progress with an aim the area of political financing, by the Election to institutionalize good governance and integrity at all Commission. levels of government. • Establishing an Independent Police Complaints and Misconduct Commission. The government has established the National • Limiting the involvement of administrative Centre for Governance, Integrity and Anti- members (politicians) in the appointment of Corruption (GIACC), which reports directly to the secretary generals and director generals, to Prime Minister. It has also established the Cabinet empower the public service. Special Committee on Anti-Corruption (JKKMAR), chaired by the Prime Minister himself. GIACC has • Enacting the Malaysian Ombudsman Act to replace been given the mandate to coordinate and monitor all the Public Complaints Bureau. initiatives related to governance, integrity, and anti- • Forbidding political appointees to government corruption. The National Anti-Corruption Plan (NACP) linked companies (GLCs). (2019-2023), launched in January 2019, envisions • Formulating Procurement Act (under preparation) Malaysia as a corruption-free country, to be achieved to ensure transparency and best value for tax through improving the accountability and credibility payers’ money. of the judiciary and prosecution and law enforcement • Improving the transparency and integrity of agencies; increasing efficiency and responsiveness budgets by: i) conducting a mid-year budget in public service delivery; and ensuring integrity in review; ii) formulating tighter criteria and imposing business. greater scrutiny for off-budget allocation; and iii) ensuring the recording and monitoring of public Since the formation of GIACC on June 1, 2018, expenses in accordance with the established it has implemented close to 80 initiatives. Key financial procedures. measures include the establishment of parliamentary select committees, comprising of parliamentarians from both sides of the house; a policy on the declaration of Another 115 initiatives, as outlined under the NACP assets by administrative and parliamentary members; (2019-2023), are currently in progress. and a directive banning political appointments to head of mission posts. Several other initiatives related to Source: GIACC 2019 MALAYSIA ECONOMIC MONITOR | JUNE 2019 51 PART TWO - Re-energizing the Public Service Malaysia’s public sector size and wage bill has been an issue of concern With Malaysia’s population of approximately 32 These can be used to assess the affordability and million, its public service employs about 1.7 million sustainability of the wage bill and to determine whether people, accounting for 11.4 per cent of total wage it is consistent with the operation of a motivated employment. This means that there are approximately and professional public service. The relative size of 5.3 public servants to every 100 Malaysian citizens. government employment and the public sector wage There are seven branches of public services, with these bill can be broadly assessed through some of the being the General Federal Public Service (consisting following indicators: of schemes such as the administrative and diplomatic service or PTD); the public services at the State level; • Public sector wage bill as a percentage of the Joint Services (common to the Federation and one GDP: Developing countries tend to have smaller or more of the state governments);12 the education governments relative to GDP and consequently a service; the judicial and legal service; the armed forces; lower ratio. and the police force. In Malaysia, the term ‘civil service’ is • Number of government employees as a generally used to refer to the civilian or non-disciplined percentage of the total population: Governments components of the wider public service, thus excluding acting as an employer of last resort have often the armed forces and the police force. Close to one- taken on large numbers of public servants in the third of the total number of civil servants are employed lowest grades on meager wages. in the education service alone, while another 14 per • Number of government employees as a cent are employed in the health sector. The General percentage of total employment: This metric Federal Public Service employs 39 per cent of the total is similar to the preceding one, but it corrects for number of public servants. developing countries that have a relatively high proportion of children in the population, leading to Comparing the size of the public service across a relatively low public servant to population ratio. countries in terms of numbers and wage bill can be challenging due to non-standardized definitions • Public sector wage bill as a percentage of total and categorizations of government employment public sector spending: In order to deliver quality around the world. In addition to issues related to the public services, governments will need to spend availability of reliable government employment statistics money on goods and services as well as on wages in many countries, the difficulty is compounded by the and salaries. fact that public employees can be categorized in various • Recruitment growth rate: When government ways according to their occupation, employment recruitment grows faster than GDP, revenue or status and who pays their salaries. For example, local population growth, it is clear that either financial government employees paid from the central budget stability (growing deficits) or future performance might be categorized as local government staff in some (through reduced wages or reduced non-wage countries, while in others they may be categorized as expenditure) may be jeopardized. central government staff. Similarly, various monetary and non-monetary benefits may be accorded to public Cross country comparisons show that while servants at different levels, adding to the complexity Malaysia’s public sector wage bill is tracking below of comparing public sector wage bills across countries. regional averages, it has increased in proportion Other than wage bill and employment, the overlaps to total public spending during recent years (see and duplication, budget optimization, implementation Figure 36 and Figure 37). Malaysia’s wage bill as a efficiencies and effectiveness can also contribute to share of GDP has tracked just below comparative complicating the size issue in the public sector. averages, at 5.6 percent of GDP in 2018. However, as a share of total public expenditure, spending on personal Despite these challenges, a number of indices emoluments has increased steadily over the last twenty and measures may provide useful insights into years, from a low of 17.6 percent in 2002, to a peak of employment levels and wage bill sustainability. 29.3 percent in 2017, driven primarily by expenditure 12 See Article 133 of the Constitution. 52 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service FIGURE 36 FIGURE 37 Malaysia’s government wage bill has been ...but has risen as a share of public expenditure tracking below the average of comparators... over recent years Central Government Wage Bill as a Percentage of GDP Plotted Against Log Central Government Wage Bill as a Percentage of Public Expenditure of GDP per Capita, Malaysia: 2000-18 and Comparator Countries for Most Plotted Against Log of GDP per Capita, Malaysia: 2000-18 and Comparator Recent Year Available Countries for Most Recent Year Available 25 70 Malaysia Malaysia High income High income Low income Low income Lower middle income 60 Lower middle income Upper middle income Upper middle income 20 Linear (Wage bill as a percentage of GDP) Linear (Wage bill as a percentage of Public Expenditure) 50 15 40 Malaysia, 2018 30 10 20 5 Malaysia, 2018 10 Malaysia, 2000 Malaysia, 2000 0 0 6 7 8 9 10 11 12 6 7 8 9 10 11 12 Source: World Bank staff calculations based on Worldwide Bureaucracy Source: World Bank staff calculations based on Worldwide Bureaucracy Indicators and MOF Malaysia data Indicators and MOF Malaysia data consolidation across non-wage categories. The World 2010. The growth in establishment positions over this Bank’s 2011 Public Expenditure Review (PER) found period could be attributed to an increase in posts at all that Malaysia was already at the upper end of wage bill government levels, but particularly in federal agencies, affordability compared to some of the higher-income where the number of posts increased by around 27 countries it aspires to emulate. The emolument-to- percent compared to 11 percent for state and local- revenue ratio indicated that Malaysia was spending a level posts. Other reasons for the increase in the wage larger share of its revenues (about 27 percent in 2009) bill include the increased conversion of contract and on its wage bill than a number of countries, including casual staff to full-time federal employees in the period Canada (13.7 percent); Norway (12.5 percent); Australia from 2013 to 2017. The wage bill further increased as a (10.6 percent); and South Korea (9.6 percent). This result of increments in salary in 2012, 2013 and 2016, percentage has steadily increased to 34.3 percent for coupled with enhancement of allowances over the past Malaysia in 2018. few years. The significant increase in the wage bill since The World Bank’s analysis of public sector wages 2010 can be attributed to a large increase in across 130 countries revealed a huge variation in the number of public servants; an increase in the public sector wage premium compared to private number of posts; the conversion of contract staff sector salaried employees depending on level of into regular employees; and increases to salaries employment and choice of comparator. The size and allowances. Over this period, there was a rapid of the premium across countries varied significantly increase in the number of public servants, from about by worker characteristics (e.g. education, occupation, 1.2 million in 2010 to about 1.7 million in 2019. The skills and gender) and was sensitive to the choice World Bank PER analysis shows that the number of of the private sector comparator.13 In more than half public service posts increased by 25 percent in the the countries and occupations in the sample, public period from 2006 to 2010. The largest annual increase and private formal sector earnings did not differ occurred in 2008 (in excess of 8 percent), with the significantly, except in occupations where there was a growth rate slowing considerably to 1.7 percent by large amount of heterogeneity. Overall, and consistent 13 The analysis draws on data from the World Bank’s Worldwide Bureaucracy Indicators, a country-level data set containing public sector labor market indicators produced by the World Bank. MALAYSIA ECONOMIC MONITOR | JUNE 2019 53 PART TWO - Re-energizing the Public Service with the previous literature, the public sector premium employment and the public sector wage bill provides was found to be larger in developing countries than in information regarding the resources allocated to high-income countries. The public sector is more likely maintain the bureaucracy, these statistics do not shed to pay premiums for clerks and workers in elementary light on the administrative capacity or the quality of occupations, but less for senior officials, professionals, service delivery. Nor do they indicate whether the size of and technicians. While recent data for Malaysia is not the public service is appropriate, as public employment available, analysis carried out for the World Bank’s is a matter of national policy preference. Nevertheless, PER presented a consistent set of findings to show as a country moves towards achieving high-income that the public sector wage system was compressed, status, it is likely to require increasingly specialized and suggesting that jobs at the higher echelon provide more sophisticated skills that entails the organization less income growth than equivalent jobs in the private of workflows and structures that support the transition sector for the same skills. However, the compression (see Box 8). This needs to be complimented by a ratio can change significantly when allowances and country’s ability and efforts to enhance revenues that other benefits offered in the public sector are included would ensure the sustainability of the wage bill in the in the comparison. long run. While wage and employment statistics are While public sector management covers a wide indicators that can serve as a useful starting range of issues and areas, all of which require point for a deeper and more nuanced analysis, attention, this report focuses on the government’s policy recommendations cannot be based on these efforts to improve the public service. It takes a statistics alone. Evidence from international studies closer look at the most important elements of public shows that decisions related to public sector pay and sector governance, these being: (i) the management employment reforms and their timing can be situational of the public service itself; (ii) the government’s role and highly country context specific. A comprehensive in encouraging an open, and transparent environment employment and wage reform agenda would involve a in the public sector through the establishment of the detailed process, including wide-ranging consultations appropriate institutional, policies and legal framework; with stakeholders. Measures that artificially reduce the and (iii) the impact of new and emerging trends, scope of the public service (for instance, excluding including technological innovations and digitalization the armed forces) do not change anything except on employment in the public service. the definition of the public service. While the size of 54 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service BOX 8 An example of how the public service can experience both staff shortages and excesses at the same time Malaysia’s statistical system can be used as an employees. If one assumes a fixed budget, increasing example of the reforms and restructuring required the number of highly skilled staff typically entails the to meet emerging challenges. In 2016, the Economic elimination of many more lower-skilled positions simply Planning Unit commissioned the World Bank to carry because higher skill levels come at a higher price. out a strategic review of Malaysia’s statistical system. This is enabled by the labor-saving aspects of digital This involved a forward-looking analysis of the legal, technologies. In the case of Statistics Netherlands, after institutional, organizational, and technical reforms its modernization exercise, it employed 40 percent needed for the system to support the information needs fewer people with a 50 percent increase in output, a of a modern, developed and high-income country. The lower total budget, a more diverse array of products review provides several insights that are applicable and services, and a substantial decrease in firms’ data more generally to modernizing the public sector. reporting burden. As the public sector is generally slower to shed workers than the private sector, this To benefit from technological change, the process may take time. However, it can be accelerated composition of government personnel will need to by retraining, redeployment, and incentives for early change. Leveraging digital technologies requires a separation from the public service. highly-skilled work force that is capable of designing, managing and interpreting the flows from advanced Modernizing the government service typically information systems. At present more than 85 percent entails the adoption of new organizational of positions at the Department of Statistics Malaysia structures. The optimal means to organize the (DOSM) are relatively low-skilled clerical and support work flow for a smaller, more skilled work force using positions, with less than 15 percent consisting of advanced technologies will differ considerably from professional and managerial positions. DOSM aims the means to optimize a larger, less skilled work to gradually reverse those proportions, in a manner force. In the case of national statistical offices, in similar to Statistics Netherlands when it transformed many advanced countries, this has meant shifting its operating model. Statistics Netherlands reduced from “vertical stovepipe” systems organized around its number of managers in the process, as the particular statistical products (such as surveys and more technologically skilled workers require less national accounts) to “horizontal” models that are management oversight. organized around statistical processes that cut across different products (such as data collection, analysis Budget realities imply that a more sophisticated and dissemination). Public sector entities have diverse public service tends to be relatively smaller, with a missions and operational processes, making it difficult greater proportion of positions requiring high-level to generalize how these organizational changes should skills. Few governments can afford to significantly be planned and implemented. However, it is a virtual expand their number of highly skilled employees without certainty that changes to the size, skills, and tools of the making cuts elsewhere, including in the total number of agency will require new ways of organizing work. MALAYSIA ECONOMIC MONITOR | JUNE 2019 55 56 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service So, how can Malaysia re-energize the public service to achieve shared prosperity? Building the capacity of the public service talent while having to deal with disruptions affecting workforce is key to the successful implementation public employment, including those related to the of public policies and to the achievement of national ever-evolving state of ICT innovation. At the same time, priorities. Given the strong relationship between HRM elements of Malaysia’s public service already perform to and organizational performance, it is important to a high standard and present useful lessons for broader have an effective HRM strategy that is able to attract, reform.14 Further discussion of these challenges and an manage and retain the best talent. Such a strategy examination of the means by which Malaysia can foster should include a transparent performance management an open, transparent, fair and neutral public service system to determine rewards and promotions. and of the measures it could implement to catch up Managing this is becoming increasingly challenging, with the high-income countries it aspires to emulate is with the public sector continuing to compete for top covered below. Merit-based recruitment, decentralization, and the use of competency frameworks to induct the best talent There is ample evidence to support the proposition promoted based on clearly-formulated, transparent that bureaucracies characterized by meritocratic and well-established practices. recruitment15 and predictable, rewarding career paths are associated with higher economic growth Malaysia’s public service is perceived to have rates. Put simply, governments that recruit and promote an over-centralized system, characterized by a based on merit have better growth performance than lengthy recruitment process and other suboptimal those that do not. This is relevant to Malaysia’s aspiration practices. A recent study of public sector HRM in nine to achieve high-income and developed nation status, as Southeast Asian countries suggests that Malaysia’s its public service plays a key role in facilitating national public service is the most centralized in the region. development. Good human resource policies are the In Malaysia, most recruitment is handled centrally most powerful tools to attract and retain the best by the Public Service Commission (PSC), with inputs talent required to ensure that the public service has from the Public Service Department (PSD). The over- the capacities and capabilities it needs to fulfil this role centralization of the system limits the strategic role effectively. In developed Commonwealth countries, that central agencies should play to detect, strategize such as Australia, Canada, New Zealand, Singapore and respond to emerging issues and challenges and the United Kingdom, there is a long-established that may affect the capabilities of the public service. tradition of merit-based recruitment and selection Over-centralization also limits the discretion and the methods, with public servants at all levels recruited and flexibility of line ministries and agencies to make timely 14 BNM is one of the public institutions in Malaysia whose HRM processes is independent from the government. The central bank’s human capital management framework strives to attract, retain and develop high quality talent. This encompasses several comprehensive initiatives including the awarding of scholarships to outstanding students and to current staff to pursue post-graduate studies at selected top universities around the world, as well as putting in a robust and clear succession plan. BNM also continuously improves its performance evaluation framework, with performance-based pay and evaluation frameworks, and plans to implement a 360-degree feedback system in 2019 which will allow for a more holistic approach to performance. The institution also invests significantly in staff training and development, with a total training budget at about 4-6 percent of gross salaries. Diversity is also at the forefront with women making up 43 percent of senior management, 55 percent of managers and 57 percent of first level executives. About 60 percent of the workforce are from Gen Y and Z (below the age of 40). BNM has been featured in various employment surveys as one of best places to work in Malaysia. 15 The key feature of a meritocratic civil service is that it restricts politicians’ power over their administrative agents. Meritocracy is understood as broadly comprising a number of forms. In the narrow, Weberian sense, it refers to a career-based public service, with entry through competitive exams, and government by principles of political neutrality. MALAYSIA ECONOMIC MONITOR | JUNE 2019 57 PART TWO - Re-energizing the Public Service decisions related to their own human resource needs. Zealand and the UK instead base their HRM practices Although the PSC has transitioned to using online on a competency-based framework. With the current methods in recent years, it can still take well over a year system, there are growing concerns that the best- for an applicant to complete the recruitment process. qualified Malaysians do not generally apply for entry Delays in recruitment have the potential to affect into the public service due to better, more rewarding implementation, with vacancies not being filled on time. opportunities elsewhere. The government has faced challenges related to the requirement that recipients of The rigidity of Malaysia’s recruitment system government scholarships serve in the public service, as makes it challenging to recruit the best and is mandated by the terms of their scholarships. This is brightest applicants. Recruitment is based on due not only to the poor enforcement of contracts, but “schemes of service” that are very well established, to the lack of appeal that careers in the public service but that are predominantly career-based rather than holds and to the unattractive jobs and roles that are position-based. Once a person is recruited into a scheme offered to the recipients. of service, he or she is recruited into a career, but not necessarily a position. While over the years Malaysia has Increasingly, advanced countries utilize massively reduced the number of schemes of service, it competency frameworks to recruit candidates is time to take a fresh look at the classification of the with the appropriate level of skills, knowledge and main categories of post. Schemes of service are found capabilities into the public service and to ensure mainly in other middle and low-income Commonwealth adherence to high moral and ethical standards for countries, including Kenya, Mauritius and Nigeria. their appointment and promotion. These countries High-income countries such as Australia, Canada, New have been developing these frameworks over at least TABLE 5 Examples of ‘leading and communicating’ competencies from the UK civil service Competency framework for Level 6 (Director General and Director) Effective Behavior Ineffective Behavior People who are effective are likely to... People who are less effective are likely to... Actively develop and protect the reputation of the Overlook opportunities to champion achievements, Department and the Civil Service – create a sense of difference and external experience in the pride and passion for public service Department and the Civil Service Shape, promote and exemplify desired Departmental Act in ways which are at odds with desired culture and the Civil Service values and culture and values – damages the Civil Service leadership reputation internally and externally Be highly visible and credible at the most senior Lack confidence or impact at high levels, struggle levels across and outside the Civil Service, with media spotlight, miss opportunities to communicating purpose and direction with clarity communicate messages or give a confused or and enthusiasm uninspiring narrative about what’s important Engage positively in debate, surface tensions and Operate independently, rarely asking for input from resolve ambiguities across the Civil Service senior colleagues and communicating infrequently Demonstrate insight into the link between the moral Disregard the link between the moral and business and business case for equality and diversity and case for diverse and sustainable outcomes achieving organizational priorities Negotiate with and influence external partners, Lack insight into the different motivations and stakeholders and customers successfully at the agendas of the variety of stakeholders highest levels Source: UK Civil Service Competency Framework 58 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service two decades, with increasing sophistication, and (equivalent to PSC) after being advertised widely, the frameworks that they utilize for different levels of including outside the country. Shortlisted candidates employment are in the public domain. An example are required to present themselves at an assessment of a competency framework for effective behaviors center for evaluation as an integral part of the selection expected from a senior public servant in the UK civil process, and not merely for confirmation of their service in relation to the ‘leading and communicating’ appointments, as in Malaysia. The interview panel competency is presented below (see Table 5). members include the Commissioner, the Deputy State Services Commissioner, a panelist proposed Unlike Malaysia, in a number of high-income by the responsible minister, and other people the countries, both entry-level and senior promotion Commissioner selects for their expertise relating to appointments are subject to open competition. the business of the department and sector concerned. In Malaysia, like in many other low- and middle- Such a process instils a sense of ownership within the income countries, open competition applies only hiring department, with full and due consideration for entry-level appointments in the public service. given to the specific requirements of the position. Entry-level processes and promotion appointment The UK civil service appointment panels similarly processes are handled separately by the PSC and recruit on the principle of open competition (see Box the PSD respectively. In Singapore, it is the PSC that 9). The principle was given the force of law with the is responsible for making appointments and granting promulgation of the UK’s Constitutional Reform and promotions to senior management ranks. In New Governance Act 2010. Zealand, even CEO (equivalent to Secretary-General) positions are filled by the State Services Commission BOX 9 Basic rules for recruitment and promotion in the UK civil service “The need to avoid nepotism and favoritism means that • All applicants must be considered equally on merit you need to take great care when appointing someone at each stage of the selection process. from outside the civil service, or when promoting • Selection must be based on relevant criteria someone from within it. The basic rules for these applied consistently to all the candidates. appointments are as follows. • Selection techniques must be reliable and guard • All such appointments must be made on the basis against bias. of fair and open competition. You cannot therefore appoint someone to a job without • All prospective applicants must be given equal an advertisement and competition, even if you believe and reasonable access to adequate information them to be ideally or uniquely suitable.” about the job and its requirements, and about the selection process. Source: https://www.civilservant.org.uk/ethics-recruitment_and_promotion.html MALAYSIA ECONOMIC MONITOR | JUNE 2019 59 PART TWO - Re-energizing the Public Service Ensuring fair and neutral employment in the public service Malaysia fares poorly on citizens’ perceptions regarding equal treatment in public sector Fair and neutral employment, ranking below the regional and OECD employment facilitates average in terms of the impartiality of public administration. Fair and neutral employment terms the emergence of a more facilitate the emergence of a more diverse, resilient, diverse, resilient and and innovative workforce that is responsive to market demands and the needs of the country. In its election innovative workforce manifesto, the current government promised to establish an Equal Opportunity Commission to address discriminatory work practices in both the public and administration (see Figure 39). However, Malaysia has private sector. This is timely, with Malaysia ranking in made progress in terms of inducting women into the the lowest place out of a group of selected comparators public sector, with women filling close to 50 percent of in the Institutional Profiles Database’s perception the positions in Malaysia’s public sector overall, with a survey regarding equality of access to public sector higher share at the federal level (see Figure 40 and Figure employment (see Figure 38). It also ranks way below the 41). At the same time, there are ongoing challenges OECD average in the Quality of Government’s (QoG) regarding the achievement of equal representation of perception survey regarding the impartiality of public men and women in leadership positions. 60 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service FIGURE 38 FIGURE 39 Citizen perceptions as to equal treatment in ...with the share of citizens viewing the public public sector employment are low... sector as being impartial is also low Citizen Perceptions on Equal Treatment with Regard to Access to Public Citizen Perceptions on the Impartiality of Public Administration, 2016 Employment, 2016 5 7 6.3 6.2 6.2 6.1 6 5.8 4.0 4.0 4.0 4.0 5.6 4 5.3 3.4 5 3.0 3.0 3 3.9 3.8 4 3.6 3.4 2.3 2.2 2.0 3 2 2 1.0 1 1 0 0 New Zealand Sweden Australia Norway OECD Argentina Canada EAP Region Upper middle income Chile Malaysia Sweden New Zealand Norway Canada Australia Chile OECD EAP Region Malaysia Upper middle income Argentina Source: Institutional profiles database Source: Quality of Government (QoG) Expert Survey FIGURE 40 FIGURE 41 Women fill half of the positions in Malaysia’s ...and in overall terms, Malaysia compares well public sector overall, but the share is much lower with benchmark countries outside the federal public service... Gender Participation in the Malaysian Public Service, 2016 Share of Female Employment in the Public Sector, 2016 Male 80 75.7 Female 80 70.2 71.5 69.3 66.5 63.5 58.9 61.0 59.7 60 54.4 60 54.9 53.5 52.4 50.8 45.6 46.5 47.4 44.1 41.1 40 40 33.5 29.8 24.3 20 20 0 0 Federal Public Service Public Service Federal Statutory Bodies State Statutory Bodies Local Government Overall Sweden Norway Canada Australia OECD Chile Argentina Malaysia Upper middle income EAP Region State Source: World Bank staff calculations based on PSD data Source: World Bank staff calculations based on ILO data MALAYSIA ECONOMIC MONITOR | JUNE 2019 61 PART TWO - Re-energizing the Public Service Research from around the world indicates that relating to gender and race, but often with the addition there is a relationship between equal opportunity of protections against discrimination on the basis of age and resilience, innovation and responsiveness to and disability over the years. For example, New Zealand market demands. In turn, that relationship bears on law recognizes that to address discrimination, positive Malaysia’s overall goal of achieving high-income status. actions may be needed to enable particular groups to Advocates of light business regulation have long achieve equal outcomes with other groups. argued that anti-discrimination laws act as a brake on growth, with the argument being that such regulations Given the strong relationship between HRM and constrain companies’ employment decisions. However, organizational performance, it is important recent research in the United States has found a positive that the system is not just aligned with national correlation between the presence of equal employment priorities, but also meets the expectations of a legislation and rates of corporate innovation. This range of stakeholder groups. The system should be research presents evidence to suggest that such based on strong principles to build and sustain the legislation spurs innovation by triggering a rebalancing confidence of the Rakyat that the public service is clean, of the workforce and matching pro-equality employees efficient, trustworthy and representative. To achieve (who are likely to be more creative) with innovative this, the key principles outlined in Figure 42 can serve firms. A large number of countries have implemented as useful guidance. specific anti-discrimination legislation, usually initially FIGURE 42 Four guiding principles for public service recruitment in Malaysia Guiding Principles for Improving Fair and Neutral Employment in the Public Service Are entrants inducted into the service with Is the public service the right values? attracting Malaysia's brightest and best and Are those values the right people for reinforced throughout the right job? public servants’ Integrity and careers? Capability Neutrality Representativeness Transparency Is the public service representative of the Is there a transparent whole population of procedure for Malaysia in all its recruitment, performance ethnic, religious, management and gender and regional promotion of public diversity? servants’? Source: World Bank staff elaboration 62 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service HRM reforms need to be carefully designed, and reform package) will need a change management plan. if emulated from another country, they should For example, it was necessary for the UK civil service be adapted to the local context.16 Reform efforts, to delay the delegation of budget responsibility to including those involving HRM, can have unanticipated government departments in the mid-1980s because consequences, which may require attention upfront. it had failed to anticipate the need for the relevant In particular, reforms should be formulated and departments to have more sophisticated financial implemented on the basis of a deep understanding management skills and systems. Table 6 below lists of the local context and/or of the dynamics of the some basic change management questions related to institutions involved in the reform efforts, amongst human resource management delegation. other matters. Each of the reforms (or the overall TABLE 6 Change management questions on human resource management delegation Theoretical framework Change management question Example of implication for delegation What is the road map for change? A road map for delegation should be developed. What is the strategy for winning over stakeholders, and Concerns of central staff whose positions may be adjusting where necessary based on their feedback? affected, retraining and redeployment making best use of skills. What consequences, including negative ones, can be An un-costed pension liability may be created. anticipated at the outset? Which reforms should be piloted or phased? Perhaps those ministries that show ownership and already have the capacity to handle the reform should be a starting point. What new learning needs will the reforms create, and how A detailed training program may be needed at different can they be addressed? levels. Source: World Bank staff elaboration Supporting a more open and transparent environment in the public service The creation of a merit-based, transparent, through greater transparency. To achieve greater inclusive and citizen-centric public service needs to transparency, an environment that encourages pro- be supported by a broader institutional framework active information and data sharing in a user-friendly that encourages the emergence of an open and and impactful manner is vital. This requires not just inclusive environment in the public sector. Such a behavioral, technical and/or financial resources, but framework promotes openness not just in terms of the also measures to strengthen the institutional and legal relationship between the public service and citizens, framework to better support openness in the public but also within the public service, particularly between service, particularly with respect to data sharing. entities and across functions. Malaysia’s Five-Year Within this context, the Malaysian Administrative Development Plan 2016-2020 (the RMKe-11) articulates Modernization and Planning Unit (MAMPU) partnered the country’s intention to improve service delivery by with the World Bank in 2016-17 to assess Malaysia’s increasing responsiveness to citizens, leveraging data readiness to successfully advance its Open Data to enhance outcomes, and increasing accountability program (see Box 10). 16 This tailoring process has been called ‘localization’, ‘refraction’ or ‘crossvergence’ by different authors. MALAYSIA ECONOMIC MONITOR | JUNE 2019 63 PART TWO - Re-energizing the Public Service BOX 10 Reforms to improve open data would facilitate Malaysia’s efforts to make government more transparent and citizen-centric Many of the policy challenges of the 21st century data management challenges, and the still-limited are difficult for ministries and public servants to public engagement around data. While the current address if they continue to work in silos. The World legal framework does not specifically mandate open Bank’s report entitled “Improving Public Sector through data, neither does it actively hinder it or make it Innovation and Inter-agency Coordination” examines impossible. Malaysia has not yet enacted an Access to the manner in which governments around the world are Information (ATI) law at the national level. However, two responding to the challenges associated with increased such laws exist at the state level. In addition, there has coordination. The report notes that the achievement of been some proactive release of data, as mandated by the SDGs requires a complex array of inter-relationships modern regulations, across the country. In general, the between ministries and departments. However, it Official Secrets Act (OSA) is not used to actively prevent found that the establishment of additional inter-agency the release of information. The OSA explicitly prohibits committees, coordination bodies, and high-level task the publication of only a few items of information, mostly forces is rarely a solution. Rather, it found evidence to devolving decision-making related to confidentiality to suggest that these efforts require a more joined-up agencies, thus allowing for differences in interpretation approach, with contributions across units. and application. Thus, agencies have strongly devolved powers and responsibilities in terms of decisions Governments are increasingly aware that effective related to the release or sharing of data. Even though policy actions cannot rely only on internal actors. this situation presents an opportunity for more open Rather, they must involve strategies to engage data and a bigger impact, in practice data-holders citizens and the private sector to provide input. have opted to follow a case-by-case decision-making When government agencies and departments work process that creates silos and uncertainties for both in silos, hiding the data they hold or disclosing it only government and non-government requesters regarding in unusable and/or cumbersome formats, it inhibits the availability and provision of data. the kind of collaboration that is critical to deliver on government commitments. In Malaysia, access to data is challenging and remains an area of concern for potential and An Open Data Readiness Assessment (ODRA) actual data-users and other stakeholders. Data shows that Malaysia is well-placed to realize management policies and procedures to support public significant socio-economic gains from open data, policy design and implementation exist in the country, but that significant further effort is needed to but the level of interconnectedness and integration achieve this potential. According to this assessment, of government data is still low. While agencies are Malaysia scored “green” or “trending to green” in terms generally aware of the data they hold, with much of this of six of the eight assessed dimensions (see Figure 43). data in digital format, comprehensive inventories within and/or across agencies are not generally available. The ODRA found that several substantial There is strong demand for more internal data sharing, constraints on the achievement of openness although requests are usually dealt with on a case-by- remain, including a fragmented policy environment, case basis, with data fees applying even to requests 64 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service FIGURE 43 An effective open data eco-system requires effort across a range of dimensions Dimensions Under the Open Data Readiness Assessment Methodology Senior Leadership National Policy and Technology Legal and Skill Framework Infrastructure 1 8 2 Funding Institutional and Open Data 7 3 Structures in Open Data Initiative Government Program 6 4 5 Civic Government Engagement Data and Management Capabilities Policies and Procedures Demand for Open Data Source: World Bank (2017) for government-to-government (G2G) data exchange.17 with the number of datasets on data.gov.my increasing The external demand for open data is strong, and there dramatically from a modest 115 in 2014 to 12,910 by is continued interest from different actors to access the end of 2018. In addition, the establishment of the and use more data and to interact with data holding Malaysian Open Data Users Group (MODUG) in 2018 agencies. However, this external demand has not yet has opened up a participatory venue for effective been met, despite the existence of the Open Data two-way communication with the public. Moreover, program, which could help to improve data quality and for the agency to truly fulfill its mandate, increased usefulness. coordination and support from the highest levels of government is needed. While a culture of openness in Advancing Malaysia’s policy goals of facilitating the public sector may create a number of risks for public the emergence of a more transparent and citizen- servants (data may reveal that some programs are not centric government requires a number of agencies as effective or efficient; data is not reliable), it would go and departments to come together. MAMPU’s a long way towards building accountability and overall efforts have resulted in some positive achievements, trust in the government. 17 International rankings such as the Open Data Barometer (ODB) and the Open Budget Index (OBI) place Malaysia among the group of countries that must invest in opening up key datasets that people want and that affect the daily life of citizens. Malaysia scored 46 out of 100 in the latest edition of the OBI placing the country still among the group that release limited budget information. Similarly, in the ODB ranking -- which assesses that extent to which datasets on budget, spending, contracting/procurement (among others) are made available through government portals in open formats Malaysia scores 15 out 100 for the categories of “detailed government budget” and “public contracts.” MALAYSIA ECONOMIC MONITOR | JUNE 2019 65 PART TWO - Re-energizing the Public Service Embracing new technologies and skills to digitalize and automate for improved public service delivery Megatrends involving digitalization and Quantitative estimates of the share of jobs automation are disrupting Malaysia’s labor that is susceptible to automation vary widely. market and creating challenges for HRM policies. The World Development Report 2016 estimates These challenges are not unique to Malaysia, but rather that from a purely technical level, 68 percent of are affecting countries at all levels of development. the current jobs in Malaysia could potentially Technological transformation creates opportunities be automated. According to the same reference, for tremendous gains in productivity, performance from a purely technological standpoint, between 60 and welfare both in the public sector and the wider percent and 80 percent of all jobs in several East Asian economy, but it also leads to labor market disruptions. countries could potentially be automated. However, Of course, some jobs are here to stay, regardless the full automation of jobs takes time, especially in of digitalization. But there will inevitably be many developing and emerging economies. Not all disruptive changes, partly because technological transformation technologies are adopted quickly, implemented fully, alters the task content of jobs. In the process, it or yield immediate benefits. Barriers to the adoption augments certain skills and creates new jobs, while at of technology, lower wages, and a higher prevalence the same time other skills become obsolete. To take of jobs based on manual dexterity in developing and best advantage of the opportunities afforded by new emerging countries also mean that the process of technologies, it will be important that public servants automation is likely to be slower and less widespread in have – or can be trained in – the sorts of skills needed those countries. Adjusted for such time lags, the World to navigate digital technologies effectively. The public Development Report estimates that 49 percent of jobs sector workforce of the future will require advanced in Malaysia are susceptible to automation—a smaller cognitive, socio-behavioral and interpersonal skills, share than in Thailand and China but a larger share than as well as adaptability to perform changing, non- in Cambodia and Mongolia (see Figure 44). routine cognitive and analytical tasks. This is in stark contrast to the routine manual skills that are commonly required today. FIGURE 44 A high proportion of jobs in Malaysia are susceptible to automation Percentage of Jobs that are Susceptible to Automation, Selected Countries 100 80 60 40 20 0 Cambodia Mongolia Malaysia Thailand China Adjusted (technological feasibility + adoption time lags) Unadjusted (technological feasibility) Source: World Bank (2015b) partly based on methodology of Frey and Osborne (2017) 66 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service Malaysia’s Critical Skills Committee has recently are not frequently found in the public sector but are computed the likelihood that various occupations rather routine manufacturing or services jobs (like will be automated. The Committee assigns a score “packing, bottling and labelling machine operator” to each of 478 different 4-digit occupations in the and “contact center salespersons”). However, other Malaysia Standard Classification of Occupations occupations with a high likelihood of automation are (MASCO), based on an influential paper by Frey and widespread in today’s public sector workforce, most Osborne (2017) that estimates the automatability of particularly “data entry clerks,” the occupation with the occupations in the United States. The authors argue highest probability of automation among all the 478 that automation is possible for most tasks, except where occupations covered in the Critical Skills Committee’s “engineering bottlenecks to computerization” arise.18 analysis. The public sector also relies heavily on However, there are potential constraints to automation some of the occupations with the lowest likelihood of beyond these bottlenecks. These constraints include automation, where competition for sought-after talent whether firms other than globally connected top-tier is likely to increase. firms adopt automation technologies; costs associated with adopting automation technologies; and legal, Occupations usually involve bundles of tasks, so regulatory, and normative barriers to adopting certain jobs may evolve as the process of automation automation technologies. Additionally, a number of proceeds, with increased emphasis on some tasks occupations may evolve as the process of automation and decreased emphasis on others, rather than proceeds, rather than disappearing entirely. disappearing entirely. Some jobs frequently found in the public sector may very well almost exclusively Some of the ten occupations for which there involve routine tasks that can be automated relatively is the highest probability of automation in easily. However, most public sector jobs involve a range Malaysia are widespread in today’s public sector of different tasks, some of which will be more easily workforce. Tables 7 and 8 show the ten occupations automatable then others. Therefore, the methodology with the highest and lowest probability of automation to determine the automatability of jobs by Frey and according to the Critical Skills Committee’s analysis. Osborne (2017) generally leads to significantly higher Some of the occupations with the highest probability estimates of displacements than alternative estimates TABLE 7 TABLE 8 Some occupations in Malaysia are likely to be ...while others while likely remain relatively less automated in the future... affected Top ten occupations with the highest probability of automation Top ten occupations with the lowest probability of automation Rank Title Rank Title 1 Data Entry Clerks 1 Dieticians and Nutritionists 2 Contact Centre Salespersons 2 Hotel Professionals 3 Photographic Products Machine Operators 3 Hotel Managers 4 Clearing and Forwarding Agents 4 Education Methods Specialists 5 Fashion and Other Models 5 Specialist Medical Practitioners 6 Legal Secretaries 6 Audiologists and Speech Therapists 7 Packing, Bottling and Labelling Machine Operators 7 Social Welfare Managers 8 Accounting Associate Professionals 8 Psychologists Product Graders and Testers (Excluding Foods and 9 Education Managers 9 Beverages) 10 Health Services Managers 10 Woodworking-Machine Tool Setters and Operators Source: Critical Skills Committee (2019) based on methodology of Frey and Source: Critical Skills Committee (2019) based on methodology of Frey and Osborne (2017) Osborne (2017) 18 See Critical Skills Committee (2019) for a detailed description of the methodology adopted. MALAYSIA ECONOMIC MONITOR | JUNE 2019 67 PART TWO - Re-energizing the Public Service – like the one by Arnts et el. (2016) – that determine the automatability of tasks. For instance, even an The public sector occupation such as legal secretaries, with the sixth workforce of the future highest probability of automation in Malaysia, might not disappear completely. Instead, aspects of the will require advanced occupation that can be relatively easily performed cognitive, socio-behavioral by computers (such as standardized legal research) are likely to be automated, while other aspects that and interpersonal skills require non-routine cognitive skills (like interaction with citizens) will become more prominent. The introduction of automatic teller machines (ATMs) provides an experience of a number of countries that have made illustrative example. ATMs can handle many tasks that some headway in training their public servants to adopt have historically been performed by bank tellers, such new technology and to acquire the requisite skills as such as facilitating cash withdrawals. As noted by to remain relevant in the context of evolving global Bessen (2015), following the widespread introduction megatrends. Malaysia could learn from the experience of ATMs in the US, the number of tellers there did not of these countries regarding the necessary design, dwindle. Instead, their function changed: dispensing implementation and evaluation implications, while at cash and taking deposits became less important, and the same time remaining aware of the local context. tasks involving human interaction became more so. For example, in the UK, the government has set up the Government Digital Services Academy to train public Technological change calls for public sector sector professionals in the requisite digital skills through HRM policies that are more responsive and courses on such subjects as artificial intelligence and agile; that emphasize skills complementarities digital services using agile principles. The main policy between machines and humans; and that enhance question from the perspective of managing the future continuous learning. Malaysia could learn from the public sector workforce is how to maximize the potential 68 MALAYSIA ECONOMIC MONITOR | JUNE 2019 PART TWO - Re-energizing the Public Service gains from technological change while mitigating 3. Enhanced opportunities for continuous ensuing challenges: learning among the public sector workforce will be necessary to encourage workers to 1. HRM policies need to adapt to fast-paced stay engaged and to continue to participate in technological changes leading to the changing labor markets. While the public sector automation of a large number of tasks, potentially workforce of the future will most likely have many resulting in redundancies. At the same time, they fewer data entry clerks than the public sector must induct new occupations that demand new workforce of today, reskilling, upskilling and cross- skills. skilling can ensure that workers currently engaged in this occupation will have long, productive 2. Public sector recruitment and workforce and fulfilling careers. The government plans to planning and development policies will need to develop a Digital Government Competency and systematically emphasize skills to complement Capability Readiness (DGCCR) framework to new technologies (including advanced cognitive, provide specific upskilling in developing related socio-behavioral and interpersonal skills) and digital capabilities. A sketch of future skills in the to ensure that the public sector remains able to civil service developed by the OECD emphasizes attract and retain the appropriate talent in the professionalism, strategic and innovative aspects face of increasing competition for workers with in the civil services to a far greater degree than in sought-after skills. the past (see Table 9). TABLE 9 Future skills of the civil service as Malaysia’s looks towards developed country status Typology of skills for a professional strategic and innovative civil service An effective state... Professional Strategic Innovative ...needs civil servants who • Qualified • Outcomes driven • Iterative are... • Independent • Evidence based • Data literate • Values driven • Future oriented • Citizen centered • Ethical • Proactive • Curious • Networked • Storytellers • Insurgent ...in a civil service which • Merit based • Agile • Open and collaborative is... cultures, leadership and • Capable of integrating • Attractive to skilled job management soft skills, ethics, talent seekers management (future • Engaged potential vs. past • Planned and managed performance) to ensure the right skills • Autonomous (e.g. work and competencies are design) • Able to structure the right effectively allocated balance of generalize and to areas of current and • Mobile specialist professions and emerging need • Diverse career paths • Future oriented and • Learning oriented responsive ...led by senior civil • Trusted policy • Transformational leaders • Collaborative leaders and servants who are... advisors and effective and change managers adaptive managers transactional managers Source: Adapted from OECD (2017) MALAYSIA ECONOMIC MONITOR | JUNE 2019 69 References References AMRO (2019) Malaysia: Annual Consultation Report, Country Report No. ACR/19-01, Singapore: ASEAN+3 Macroeconomic Research Office. 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World Bank (2019b) East Asia and Pacific Economic Update, October 2018: Managing Headwinds, Washington, DC: The World Bank. World Bank (2019c) Global Economic Prospects, June 2019: Subdued Investment, Washington, DC: The World Bank. World Bank (forthcoming) ‘Promoting Economic Opportunities for Women in Malaysia’, working paper, Kuala Lumpur: The World Bank. http://blogs.worldbank.org/governance/getting-basics-right-how-manage-civil-servants-developing-countries http://www.nst.com.my/news/government-public-policy/2019/04/484308/171-million-civil-servants-govt-payroll- march-2019 MALAYSIA ECONOMIC MONITOR | JUNE 2019 71 CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY