After Years of Middling, It’s Time to Get Malaysia’s Business Sector Back to Driving GDP Growth Again.

Malaysia’s gross domestic product (GDP) growth has been growing in stable fashion over the past 6 years (ref. Fig. 1), but you hardly hear the same level of excitement exuded by chief executives and business owners across the business sector on a consistent basis. An analysis report highlighted  this intriguing phenomena in Malaysia’s retail sector recently (ref. The Edge Markets, 14 December 2017). But in fact, over the past 6 years, more than 60% of Malaysia’s business sector have been caught in a status-quo limbo; and among the remainder, 19% have improved (on average) whereas 18% have worsened (on average), resulting in a marginal net improvement of just 1% (ref. Fig. 2). The vibrancy of the business sector, when looked at as a whole, did not grow much between 2010 and 2016, despite the GDP growth.

Given this context, why did Malaysia’s business sector remain lethargic despite the country’s economic growth; and, perhaps more importantly, why does this matter?

Malaysia’s GDP showed remarkable growth and resiliency from 2010 to 2016, with an average GDP growth rate of 5.1%. Consider this against the world GDP, which only grew at an average of 2.7% from 2010 to 2016 (World Bank).
Fig. 1: Yearly GDP and GDP Growth (constant 2010 prices), 2010 to 2016.
Malaysia Business Expectation 2010 to Q3 2017.png
Fig. 2: Yearly Business Situation (Whether Business has Gone Up, Maintained, or Gone Down), 2010 to 2016.

Malaysia’s GDP Growth was Mainly Driven by Higher Growths in Population Consumption and Infrastructure Spending from 2010 to 2016.

To shed some light onto this phenomena, it is important to realize that the GDP is an aggregated measurement of several economic areas in a country, and that the performance of the business sector is just one economic area taken into the GDP. The other economic areas can still drive GDP growth, as long as they outperform the business sector by a wide enough margin.

How is a country’s GDP measured?
There are three established methodologies (or approaches) used to measure the GDP of a country:  (i) production approach, (ii) income approach, and (iii) expenditure approach. In theory, all three methods should yield the same results; however, statistical errors during the data collection process will usually result in variances between the methods used. Although the three approaches yield satisfactory measurements of the GDP in their own right, different insights on the performance of the economy are obtained depending on the approach used.

Firstly, breaking down Malaysia’s GDP growth via the expenditure approach: it is observed that the nation’s GDP growth was primarily driven by constituting growths in gross fixed capital formation (e.g. infrastructure spending), private consumption expenditure (i.e. household expenditure), and public consumption expenditure (i.e. government expenditure), with the former two growing slightly faster than the latter in 2016; growth of trade balance, i.e. exports minus imports, declined significantly from 2010 levels (ref. Fig. 3).

From 2010 to 2016, Malaysia’s GDP growth has been primarily driven by fixed capital investments and infrastructure spending, household consumption expenditure, and government consumption expenditure. Growth of export consumption has declined significantly compared to 2010.
Fig. 3: Indexes of GDP Growth (Expenditure Approach), 2010 to 2016, (2010=100).

Secondly, breaking down Malaysia’s GDP growth via the income approach: it is observed that income growths in employee remuneration as well as net taxes on production and imports (i.e. taxes less subsidies on production and imports) were driving GDP growth; gross operating surplus of the business sector grew the slowest compared to 2010 levels (ref. Fig. 4). (Gross operating surplus can be thought of as operating profits of the business sector, although they are not exactly equal in the traditional accounting sense.)

GDP Income Approach 2010 to 2016.png
Fig. 4: Indexes of GDP Growth (Income Approach), 2010 to 2016, (2010=100).

When the analyses of both expenditure and income approaches are combined, the sluggish sentiments within the business sector becomes more concrete: declining export growth coupled with slower operating profit growth over the past 6 years are leaving the business sector with little to shout about.

High Growths in Population Consumption and Infrastructure Spending are Not Necessarily Sustainable in the Long Term.

It comes at no surprise that Malaysia’s GDP growth is driven by growths in household consumption and infrastructure spending: Malaysia is, after all, a developing country that boasts a moderately young population base that is still growing (marginally). However, adopting a forward-looking stance 2—3 decades into the future, achieving a consumption-driven economic growth based largely on the population base will become increasingly challenging. Consider the following:

  • By 2020, Malaysia will join the ranks of other ageing countries such as Japan and Singapore. By then, at least 7% of Malaysians will be aged 65+ for the first time in the country’s history. (Ref. The Edge Markets, 11 October 2017.)
  • Furthermore, Malaysia’s economic advantage due to the relative youth, size, and labour of its population, or what is known as the first demographic dividend, is nearing its end. The first demographic dividend will likely end by 2029. By then, the number of economic dependents aged 65+ will be growing faster that economic producers (i.e. working population aged 15 to 64), and the relative size of the working age population will be smaller than what it is today. (Ref. The Edge Markets, 11 October 2017.)

The combined population trends has a knock-on impact on the country’s GDP and GDP growth. As populations age, consumption levels typically slow down, and as consumption levels slow down, taxes on production and imports are subsequently affected; unless, the drop in consumption per capita due to the effects of ageing in the population base can be compensated by higher per capita value being consumed. This is why improving the performance of Malaysia’s business sector matters, and is key to driving the growth of the Malaysian economy in the coming decades.

The Key Takeaway: Elevate the Business Sector into a Greater Driver of GDP Growth by Advancing It Up the Technology Value Chain.

Notwithstanding the effects of global macroeconomics on business performance (which are beyond control), the question of improving the performance of Malaysia’s business sector is still very valid, particularly in the context of raising productivity. Unfortunately, there is still a lot of work to be done: when looked at as a whole, business sector performance has declined rather consistently from 2010 and 2016 (ref. Fig. 5); and when comparing productivity levels, Malaysia still lag well behind those of developed nations (ref. Fig. 6).

Malaysia Business Sector Profitability 2010 to 2016.png
Fig. 5: Yearly Gross Operating Surplus per Establishment, 2010 to 2016.
Malaysia Productivity 2016 Comparison with OECD.png
Fig. 6: Productivity of Malaysia Compared to Developed Countries (OECD), 2016.

A highly performing, highly productive business sector spurs expansion, technological advancement, and development of intellectual property that is necessary to compete with the “big boys” at the global arena. And, as alluded to in the previous issue, a highly productive business sector is also key to solving the living standards conundrum experienced by Malaysians.

To increase productivity, the entire business sector has to move up the technology value chain by improving R&D and innovation, product development, packaging, as well as marketing and distribution. This is true not just for export manufacturers, but also for SMEs in the supply and distribution chains that support them. Effective initiatives should be expanded, supportive policies should be mainstreamed, and best practices should be shared with a sense of renewed purpose, in order to truly transform the business sector into a vibrant, highly automated, and IP-based economy.

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