In just six decades, Malaysia has transformed from a resource-based economy dependent on rubber and tin to a diversified economy with an established oil and gas industry and a competitive manufacturing export sector, especially in electrical and electronics (E&E). This economic transformation has resulted in a rapid improvement in living standards, with Malaysia attaining the status of an upper middle-income economy. Despite the country’s impressive growth, it has yet to catch up with advanced economies in Asia, such as Singapore, Korea, and Taiwan, Province of China.

From premature deindustrialization to structural stagnation

Malaysia began to deindustrialize in the late 1990s in the aftermath of the Asian financial crisis, which led to a significant reduction in the investment rate. It also coincided with the rapid industrialization of China, which resulted in the loss of competitiveness in Malaysia’s labor-intensive manufacturing industries. Consequently, the manufacturing sector’s share of GDP declined from 31 percent in 1999 to 23 percent in 2010, while its share of employment fell from 23 percent to 17 percent over the same period.

Malaysia’s deindustrialization seems to be premature as it has occurred at a per capital income level that is considerably lower than that experienced in other advanced economies. This could reflect Malaysia’s slow progress in industrial upgrading in high value-added segments of the manufacturing value chain due to inadequate quality investment, limited spending on research and development (R&D), and high dependence on low-skilled labor. However, the pace of decline in the output and employment shares of manufacturing has slowed considerably since the early 2010s and has stabilized in recent years. The current episode is more aptly characterized as a structural stagnation.

New Industrial Master Plan 2030

Although Malaysia’s economy has become relatively more diverse over the past 20 years, its competitiveness raises some concerns. Malaysia’s share of global manufacturing exports peaked at 1.7 percent in 2000 and fell to 1.2 percent in the mid-2010s, although it has increased slightly in recent years. While Malaysia has a respectable 7 percent global market share in the semiconductor sector, most of the activities have centered at the lower end of the value chain such as assembly and testing.

Cognizant of concerns over the competitiveness of Malaysia’s manufacturing sector, the government has sought to reinvigorate the sector repeatedly through various industrial policies over the last two decades.

The latest instalment is the New Industrial Master Plan (NIMP) 2030 launched in October this year. The NIMP 2030 aims to revitalize the manufacturing sector and transform the nation into an industrialized high-income country. In the semiconductor sector, the focus is on improving complexity by shifting from the labor-intensive, low-value back-end work, such as assembly and testing, to integrated circuit design, wafer fabrication, and advanced packaging solutions. Other priority sectors include specialty chemicals, advanced materials, medical devices, aerospace, electric vehicles, and carbon capture, utilization, and storage (CCUS).

Unlike previous plans that are sector-driven, the NIMP 2030 adopts a mission-based approach with defined projects and action plans as well as financing mechanisms by the public and private sectors. One of the projects is to attract a global leader to establish wafer fabrication in Malaysia to facilitate the moving up in the semiconductor value chain and at the same time improve supply chain resilience.

Within seven years, the NIMP 2030 aims to address some of the structural challenges by creating 700,000 high-skilled manufacturing jobs, raising median monthly wages from under RM2,000 to over RM4,500, increasing R&D expenditure from 1 percent to 3.5 percent of GDP, and doubling Malaysia’s global market share in high-tech manufacturing exports to 4 percent. Focused implementation, accountability, and monitoring will be critical to achieving these ambitious targets within the set time frame. In this regard, we are encouraged that the NIMP 2030 devotes an entire chapter to implementation. The governance structure has the highest level of government oversight, with private sector representation and a dedicated delivery management unit.

Technology and skills upgrading

Innovation and technological capabilities are key drivers of long-term growth. The role of technological innovation becomes increasingly important for middle-income countries to transition to high-income status. Malaysia’s total factor productivity growth—a measure of technical progress—has fared better than many developing countries over the past few decades, but still falls behind Korea and Taiwan.

The government has rightly identified the need to advance economic complexity and encourage firms to adopt automation and technology to spur the next phase of industrial transformation. However, weakness in the innovation ecosystem and the lack of skilled labor could hamper the development of high value-add industries. While challenges such as low expenditure on R&D and the lack of coordination between commercialization and innovation initiatives can be partly addressed by fiscal resources and more collaboration, tackling the talent shortage will require a major policy shift.

Although Malaysia has made great strides in expanding access to education, more could be done to enhance educational standards and foster talent development and retention. The country’s performance in internationally comparable test scores , such as the Programme for International Student Assessment (PISA), indicate poor outcomes relative to Malaysia’s level of development and education expenditure. While the diligent and English-speaking workforce with relatively low wages was an advantage during the early industrialization phase, innovating at the frontier requires substantially specialized skill sets that can command a wage premium.

As part of the NIMP 2030, the government aims to expand Technical and Vocational Education and Training (TVET) programs for high-skilled jobs in critical sectors to help reduce the mismatch between skills and industry needs. At the same time, the labor compensation structure and the government’s inclusive policies may need to be revisited as Malaysia is currently facing an exodus of talents. According to the Ministry of Human Resources, Malaysia’s brain drain rate is at 5.5 percent of the population, which is higher than the global average of 3.3 percent.

Re-focusing on structural reforms

Strong political leadership and sound narratives are important to shape public policies. Following an eventful five years with five prime ministers, the unity government led by Prime Minister Anwar Ibrahim appears to have restored political stability and regained credibility from the public, businesses, and investors. The Madani Economic Framework provides clarity on the administration’s policy directions, including raising national competitiveness and championing social justice, while the NIMP 2030 lays out concrete action plans to revitalize the economy.

Having navigated the economy out of a pandemic-induced recession through a mix of policy measures, the government should refocus its efforts on addressing structural challenges to pave the way for a strong and sustained economic recovery. With effective implementation, we are hopeful that the NIMP 2030 can revitalize the manufacturing sector and help Malaysia attain an economic status at par with its more advanced regional peers.