PHOTO: Walkerssk, CC0, via Wikimedia Commons

MALAYSIA has long aspired to join the ranks of developed countries. Admission to the OECD, often referred to as the “rich countries’ club,” would be formal recognition that Malaysia has done just that. How close is Malaysia to the OECD level of development? Judging from its economic development, the answer is “close.” In 2019, Malaysia’s per-capita GDP was estimated at about $12,200, not far behind the $13,530 average of the six least wealthy OECD members, according to World Bank data.

Per-capita GDP is a very narrow gauge of development, though. Another good measure is the human development index, or HDI, which takes into account life expectancy, health, quality of life and education. In 2019, Malaysia’s HDI put it 61st of 189 countries. Within Asia, only three countries rank higher: Singapore at 9th, Japan at 19th and Korea at 22nd. So Malaysia has made good progress. The coronavirus outbreak may also hit HDI and economic growth—a black swan event that could have a hard-to-anticipate impact.

However, the service sector provides a more comprehensive assessment. The service sector, as opposed to agriculture or manufacturing, tends to be the largest and most important in any developed economy. Here you find the best-paid, most highly skilled jobs. Services reflect the quality of a country’s workers. And since the lion’s share of the service sector caters to consumers, it also measures consumer-sector development. An innovative, sophisticated service sector with a strong supply of skilled labor and robust demand from its customers is a meaningful measure of a country’s development.

So how does Malaysia’s services sector stack up? Its service sector is currently estimated at roughly 55% of GDP, much lower than the OECD average of about 70%. Malaysia’s GDP still relies heavily on agriculture, mining and manufacturing. To get ready for prime time, Malaysia will need a bigger and higher value-added service sector to do the heavy lifting.

On the supply side, Malaysia boasts one of the best-educated populations in emerging Asia. The percentage of adults with a secondary education increased to 87% in 2017 from 63% in 1990, and in tertiary education to 41% from 8%, according to World Bank data. However, educational quality is more nuanced and uneven. According to the OECD’s latest Program for International Student Assessment, Malaysian students of equivalent education levels perform only about 85% as well as their OECD peers in reading, 88% in math and 84% in science. They score even lower relative to students from urban China and Singapore, which rank first and second, respectively.

OECD research found that Malaysia also suffers a shortage of university graduates with the technical training required to fill medium- and high-skilled occupations. And while countries everywhere face a shortage of highly skilled workers, Malaysia’s is especially severe: the OECD estimates that about a third of the country’s jobs are filled by workers without the requisite skills. This situation seriously hinders productivity growth, making it tougher for Malaysia to climb the value chain.

Private consumption now accounts for more than half of Malaysian GDP, according to central bank data, and has done for the past decade.

It’s better on the demand side, where private consumption has withstood slowing global trade and rising economic uncertainty. In the first half of 2019, private consumption grew by 7.7% year on year—not far off 2018’s 8% growth—despite falling investment and slowing export growth. Consumption’s resilience is testimony to how Malaysia’s efforts to industrialize and develop exports have produced a robust middle class: private consumption now accounts for more than half of Malaysian GDP, according to central bank data, and has done for the past decade.

Going forward, however, growing middle class and household incomes will depend on the service sector. Malaysia needs to make labor productivity and growth in consumption mutually reinforcing. To boost labor productivity, it needs to improve both the quality of workers and their market mobility. A more productive labor force will translate into higher household incomes, which will further stimulate private consumption. More consumption will encourage greater investment in services. And stronger investment, especially in entrepreneurial startups, will make services a more powerful engine of employment growth.

Unfortunately, Malaysia’s investment is missing in action. Investment as a percentage of GDP has drifted lower in recent years, to an estimated 23% in 2019 from around 26% in 2017, according to the central bank—the opposite of what Malaysia needs. In late February, the abrupt resignation of Prime Minister Mahathir increased political uncertainty, which will further dampen investor confidence. If this trend continues, it could jeopardize Malaysia’s becoming a more developed economy.

Reviving investment in services would come with a bonus: accelerating the evolution of Malaysia’s digital economy. Malaysia already has the conditions for its digital economy to take off. More than 80% of Malaysians, for example, already regularly use the internet. But Malaysian companies, according to the Digital Adoption Index, lag their regional peers in adopting digital technology to drive their own development. Malaysia’s score in the Digital Adoption Index is 0.55, below Korea’s 0.62, Japan’s 0.68 and Singapore’s 0.81. This is the new frontier for Malaysia’s service sector. Getting there will ready Malaysia for the prime time.

Read more: https://www.forbes.com/sites/yuwahedrickwong/2020/03/04/how-close-is-malaysia-from-its-goal-of-joining-the-oecd/?sh=1946eb5b75fa
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