The “MADANI Economy: Empowering the People” Framework
“The success of economic structural reforms should be assessed in terms of how far it can create more jobs with meaningful wages for all Malaysians”, Prime Minister Dato’ Seri Anwar Ibrahim announced when he launched the MADANI Economy: Rakyat Empowerment framework on 27 July 2023. He acknowledged that wages are low and that:-
- The Government will implement policies that support increasing wages relative to GDP to reach the level of 45% in line with more advanced countries.
- The minimum wage level will be reviewed and laws will be introduced that guarantee a safe and comfortable working environment
- The Ministry of Economy and the Ministry of Human Resources will also explore a progressive wage model that directly co-relates to an increase in income with an increase in productivity
- The dependence on low-skilled foreign labour will be reduced by implementing tiered foreign worker levies, where part of the levy increase will be allocated to automation and training programs for local workers
The Government is focused on wage structure in this economic framework towards rebuilding and positioning Malaysia among the world’s 30 largest economies in less than 10 years.
Wage Structure in Malaysia Vs Other Countries
Malaysia’s economy and average wage has stagnated since the 1970s, while the economy and average wage of the countries – (like Singapore, South Korea as well as East European nations like the Czech Republic, Estonia and Poland) – who were on par with Malaysia, has grown much more rapidly. We will now delve into the possible reasons for this outcome.
Household consumption expenditure, according to the European Central Bank, is a key driver of economic growth and, wages in turn, are a key driver for the growth of household income and household consumption expenditure. The slower growth in Malaysia’s wages has resulted in the slowing of household consumption expenditure as well as its economic growth. The GDP is therefore a function of wages and domestic consumption. As the wages increase, domestic consumption increases, followed by domestic profits and the GDP. But when wages stagnate, domestic consumption and GDP per Capita is adversely affected.
Singapore and South Korea understood this concept and began implementing solutions early in the 1970s by increasing minimum wage structure progressively over the last couple of decades. The data from other countries denote that raising the minimum wage faster could have had net positive effects to Malaysia’s economy. Workers then earn enough for the cost of living in the country, and their higher wage earnings will help push up domestic consumption, which in turn grows the profits of domestic businesses and Malaysia’s economy.
In the charts above, it can be seen that prior to the late-1970s, Malaysia’s GDP per capita (in US$ terms) was actually higher than South Korea (Malaysia is denoted with a red line and is higher than South Korea which is denoted by a light blue line). Today, South Korea’s economy has grown four to five times more than that of Malaysia. Even the 1997 crisis did not deter South Korea from pursuing its path of growing its wages rapidly using the crisis as opportunities to expand wages and increase domestic consumption. Worker skills and sophistication of South Korean industries rose alongside the raise in wages and its economy. But Malaysia used the crisis to shrink its wages, which in turn would shrink its domestic consumption and, therefore, its economy.
By the early-1990s, Malaysia’s GDP per capita was also on par, if not better than the economies of the East European countries like Poland, Czech Republic and Estonia; but these countries have since expanded rapidly while Malaysia’s GDP per capita stagnated in contrast. Additionally, the GDP per capita of South Korea, the Czech Republic and Estonia have grown to over US$20,000 to become advanced countries today, with Poland expected to follow suit next year.
Depressing wages to incentivise and attract investments with lower costs is certainly not the solution to increase affluence. Increasing minimum wage progressively has been seen to be the key to increase household consumption and grow the economy and the countries that progressively increased their minimum wage over the years, irrespective of downturns and pandemic, have proven that it is true.
The Foreign Workforce in Malaysia
Another silent, seamless factor that has inadvertently help maintain the low wage structure these past decades can be attributed to the “phantom workforce” of undocumented migrants in the country. According to Rani Rasiah, the person in charge of migrants affairs at Parti Sosialis Malaysia, the migrant workforce in Malaysia is said to be close to 4 million undocumented migrants, which is more than two times in excess of the requirement set by our Malaysia Plans.
Labour migration remains unregulated, she states, contributing to the estimated 3.5 million undocumented migrant workers. They are not part of the formal workforce but they are gainfully employed by the total Small and Medium Enterprises (SMEs). This ‘phantom workforce’ doesn’t feature in official statistics, but their labour output is included in the GDP through (SME) contribution. SMEs readily absorb them as they are cheaper and more pliable. But this situation sets a low benchmark for all. Therefore, local, Malaysian workers are compared unfavourably to migrant workers for having higher expectations.
She laments that there are no labour inspections by labour agencies, no union to represent this migrant workforce and enforcement is grossly underfunded and remains ineffective or absent. The minimum wage of RM1500 has thus turned out to be an elusive dream for many of these workers, both in urban and rural areas, and they continue to be in a vulnerable position.
This is the environment, she says, that has over time shaped employers and workers. “Bosses enjoy a good level of impunity and frequently get away with labour law violations. Malaysian workers meanwhile have become a disempowered and demoralised lot. There is no incentive to work harder, as even with working 12 hours a day they are unable to earn enough to raise living standards for their families, and are perennially in debt. Employers frequently gripe about the work ethics of Malaysian workers. Can they really expect greater enthusiasm?”
A Review of the Minimum Wage vs the Progressive Wage Model
In Malaysia, the minimum wage system introduced in 2013 of 1,200 Ringgit (US$273) was increased by 25% to 1,500 Ringgit (US$341) on May 1st, 2022, almost a decade later.
According to Minister of Economy, Rafizi Ramli, the new Progressive Wage System Policy (PWM) has been approved at the Cabinet level and will be included in Budget 2024 in October this year, with its expected implementation in April/May 2024.
What exactly is this Progressive Wage Model? It is to be differentiated, in Malaysia, to apply to the semi-skilled and skilled workforce and will progressively raise these workers’ wages or salaries to go hand-in-hand with the growth of the world economy. Meanwhile, the Minimum Wage will still apply for the non-skilled or foreign workforce. The raise in remuneration of the PWM, at this stage, is left to the discretion of the employers and is meant to compensate and reward productivity and skill training on the job. The government has further packaged the salary scheme with tax incentives for enterprises and business owners who adopt this wage structure.
However, Human Resources Minister, V. Sivakumar announced that The Minimum Wage of RM1,500 is still maintained under the policy framework of the Progressive Wage system to be introduced by the government next year. How that will be incorporated will probably be finalised by the many think tanks and forums currently on the policy implementation discussions. He added that his ministry would look into the proposed drafting of the “Salary Advertisement Act” which would require employers to post a salary scale for jobs offered in the advertisements and thus make it more transparent.
It is felt that the introduction of the Progressive Wage system would benefit workers by charting a career path for their wages to rise along with training and higher productivity and standards. At the same time, higher productivity would improve business profits for employers while the customers enjoy better service standards and quality.
The Singaporean Model of the Progressive Wage System
Singapore is said to have successfully done an adaptation of the model since 2012. Singapore strategically moved away from labour-intensive industries into producing higher-value goods in the 1970s. Albert Winsemius, Singapore’s chief economic advisor, had cautioned that if Singapore’s wages remained low, it would be “caught in a low wage trap”. He is credited with creating the National Wage Council (NWC) which links government, industries and employers together to discuss wages and socio-economic progress. Singapore’s wages rose 20% in 1979,19% in 1980 and 19% in 1981 and continues to grow, enabling increased domestic consumption, profits and economic growth.
In the charts above, we can see how Singapore’s per capita household consumption expenditure, profits and economy have been growing rapidly due in large part to the high growth in wages, and how South Korea and Estonia are also growing rapidly alongside it, while Malaysia remains stagnated.
Conclusion
It is therefore crucial now for the Malaysian prime minister, Anwar Ibrahim, to propose and implement this Progressive Wage Model and action it to produce results over the next 10 years. Anwar stated that Malaysia is “caught in a vicious cycle of low wages, low profits and a lack of competitiveness”, and as such the Progressive Wage Model could serve as an effective means for supporting the nation in achieving its economic targets, raising the standard of living in Malaysia and propelling it towards greater competitiveness within the ASEAN region as well as at an international level.
References
- Government Introduces Unique Progressive Wage Policy Rooted in MADANI Economy, New Straits Times, Nor Ain Mohamed Radhi, Accessed 8/9/2023
- In Focus: The Wage Debate – How to Lift the Salaries of Those Earning the Least ?, ChannelNewsAsia, Accessed 10/9/2023
- Malaysia Does Not Need the Progressive Wage Model, It Needs to Raise Minimum Wage Faster, The News Lens, Roy Ngerng, Accessed 5/92023
- Minimum Wage Remains Under Progressive Wage System, New Straits Times, Bernama, Accessed 5/9/2023
- Will the New Wage Model Work for Workers?, The Malay Mail, Rani Rasiah, Accessed 10/9/2023
