ETP: Part 6 — The ETP will make the rich even richer

(Also published on The Malaysian Insider)

The ETP will be bad for wage-earners. Workers’ share of national income under the ETP will be just 21 per cent compared to 28 per cent currently. Wage-earners’ losses will be corporate gains. The corporate share of ETP income will be 74 per cent, up from 67 per cent today. We fully support a vibrant corporate sector, but a healthy middle class is also crucial for sustainable high-income status. In developed economies, wages take about 50 per cent of national income.

Income disparity will continue. The top 20 per cent of households currently gobble up 49 per cent of all household income. Under the ETP, the top 15 per cent of wage-earners will take 40 per cent of all wages. The bottom 36 per cent will have to make do with just 12 per cent of total wages. It appears that KR1M thrift stores and Menu1Malaysia austerity meals will still be required in 2020 as the promised “high incomes” benefit only a small minority.

The ETP will double our dependence on cheap foreign labour. If the ETP succeeds, there will be 16.2 million jobs and just 14 million workers to fill them. Who will fill the 2.2 million shortfall? The lower 1.2 million jobs the ETP creates will pay just RM1,100 in today’s terms. We would hope that Malaysians take the higher-paying jobs, which means that low-paid, poorly-skilled foreign workers will be required.

“E” for socio-economic impact. The newly generated wealth that the ETP promises to create will not produce a balanced economy where the fruits of its transformation are fairly shared by corporations, wage-earners and the government. Instead, it will do the reverse. The ETP may, in fact, exacerbate the already wide gap between the few rich Malaysians and the very many poor ones.

● The ETP will further reduce wage-earners’ share of national income — to 21 per cent under the ETP from 28 per cent today.

● The smaller wage-earners’ share will continue to be shared by a few elite employees. The top 15 per cent of wage-earners will take 40 per cent of all wages.

● Corporates’ share of national income will rise to 74 per cent under the ETP from 67 per cent today.

● Corporate and wage-earners’ shares must be balanced for sustainable high-income status. The ETP fails to address this.

The ETP is elitist 

The ETP claims that its projects and initiatives will transform Malaysia into a high-income economy. In 2020, GNI (gross national income) per capita will be RM48,000, and 3.3 million new medium to high-income jobs created. RM48,000 per year, or RM4,000 per month is far higher than the average RM2,500 income for the lower 80 per cent of Malaysian households. It seems most of us will be rich!

Sadly, the reverse is true. If PEMANDU achieves its ETP investment and income targets, only a small group of people and businesses will reap a disproportionate share of the new wealth, leaving the vast majority of Malaysians to pick up the crumbs, as it were.

We now focus on Socio-economic impact — the “S” and the final criterion of the DEEDS framework with which we are evaluating the ETP. We are disheartened to find that the ETP will not transform real wages and the standard of living of the vast majority of Malaysians. Of the RM800 billion additional GNI  that the ETP targets:

● 74 per cent will go to corporate profits. This is much larger than the already high 67 per cent today. Put another way, the corporate share of gross national income is three-quarters under the ETP compared to two-thirds today;

● Only 21 per cent of the incremental income will go into the pockets of wage-earners. This is even lower than the 28 per cent today. The ETP will in fact take us further away from the norm in high-income countries, where wage-earners’ share of national income tends to be closer to 50 per cent;

● The small share to wage-earners will be very unevenly distributed. The top 15 per cent of wage-earners will take 40 per cent of all wages. Put another way, the average real wage for the vast majority 85 per cent of wage earners will be just RM2,300 per month in today’s terms;

● The ETP will double our dependence on cheap foreign workers — at least an additional two million foreign workers will be required if the ETP is achieved.

It’s the bosses who will be the very big winners

Gross national income (GNI) is the value of the products and services produced by all Malaysians and Malaysian companies. As such, GNI comprises the profits generated by Malaysian companies and the incomes earned by the rakyat, and the portion of these profits and incomes that are taken by the government in the form of taxes.

The big winners of the ETP are entrepreneurs and capitalists:

● RM594 billion of the incremental RM800 billion GNI that the ETP creates will go to corporate profits;

● Just RM166 billion will go to wages for employees; and

● RM40 billion will go to the government in net taxes.

The 28 per cent proportion of national output that is currently given to wages in Malaysia is relatively low. In contrast, approximately 40 per cent and 46 per cent of national outcome is given to wages in the newly developed countries of Singapore and Korea respectively. In the older developed countries of Canada, Japan, the United Kingdom and the United States, this figure exceeds 50 per cent.

The ETP, if it goes as planned, will take us even further from developed status as just 21 per cent of the incremental income it anticipates to generate will go to wages. In fact, our calculation errs in PEMANDU’s favour. The 21 per cent share is based on gross wages. It should rightfully be wages net of tax. We do not strip out taxes as the information is not available, but if we did, it would very likely take wages share to below 20 per cent of the incremental income that the ETP targets to generate.

Sustainable high-income is about balance

We are not against enterprises and corporations making profits. We believe a healthy and vibrant private sector guided by a light government hand is the basis for sustainable economic growth.

However, sustainable economic growth is also dependent on a healthy and vibrant middle class. If Malaysia is to reach the status of a high-income nation, the share of national income that goes to wages should increase and should eventually approximate that of developed economies. It should be closer to 50 per cent of GNI rather than the 21 per cent or less level that the ETP targets.

In addition, the ETP does little to address the income chasm in Malaysia. The top 20 per cent of households in Malaysia currently gobble up 49 per cent ,or nearly half, of household income. The bottom 40 per cent of households make do with just 15 per cent of all household income. The World Bank says income inequality in Malaysia is one of the highest in Asia and not far from Latin American levels.

The 3.3 million “medium to high-income” jobs that PEMANDU aims to create under the ETP will do little to redress the situation:

● The top 15 per cent of wage-earners will take 40 per cent of all wages;

● The bottom 36 per cent of wage-earners will take just 12 per cent of the already small wage pie.

From another perspective, 85 per cent of the 3.3 million “medium to high-income” jobs that PEMANDU promises by 2020 will pay an average of less than RM3,000 per month. That may sound high, but remember that just like RM100 today is worth a lot less than RM100 nine years ago, RM3,000 in 2020 will be worth a lot less than RM3,000 today.

Based on PEMANDU’s own inflation estimates, RM3,000 in 2020 is equivalent to only about RM2,300 today. That is an improvement over current levels, but is nowhere near high-income status. It is equivalent to just S$975. Put another way, 85 per cent of the jobs created by the ETP will, on average, pay less than half the S$2,400 that a fresh graduate in Singapore can expect to earn.

Is the ETP creating more low-paid jobs for foreigners?

The number of available jobs in Malaysia will rise to 16.2 million by 2020. The 3 per cent per year job growth rate is three times the 1 per cent per year population growth that PEMANDU anticipates. As population growth is slower than job growth, the gap has to be filled by:

● Raising the labour force participation rate, that is the percentage of Malaysians choosing to work;

● Net migration — which could be in the form of tempting our vast, highly-qualified diaspora back; and/or

● Bringing in foreign labour.

The labour force participation rate in Malaysia was 63 per cent in 2010. Assuming this rises to the 65 per cent average in developed economies such as Australia and the United States, there would be approximately 14.0 million workers in 2020. Assuming all these local workers are employed, there will still be another 2.2 million jobs to fill from the 16.2 million total jobs anticipated in 2020.

Who will fill this gap? The ETP Roadmap does anticipate “150,000 high-skilled Malaysian Diaspora to return”. That covers the high-paying jobs, but scarcely makes a difference to the 2.2 million gap. It appears that more foreign labour will be required.

What type of foreign labour? 1.2 million or 36 per cent of the new jobs that the ETP aims to create in 2020 will pay an average RM1,400 per month in wages in the year 2020 . This is about RM1,122 in today’s terms, which is not particularly high. We would assume and hope that most Malaysians will be in the jobs that pay better. So the bulk of the remaining jobs will be low-paid, and likely filled by unskilled foreigners.

At a time when we are trying to reduce our dependence on foreign workers, it does not make sense to have an economic transformation programme that requires a minimum addition of two million foreign workers on top of the existing two million legal foreign workers in the country. The continued over-reliance on cheap foreign labour lessens the incentive for productivity improvements and capital investment necessary to increase average wages and the share of national output given to wages.

Conclusion: E for socio-economic impact

We give the ETP “E” for socio-economic impact. The newly generated wealth it promised to create will not be broadly spread across all Malaysians. It will not create a balanced economy where the fruits of Malaysia’s success are fairly shared by corporations, individuals and the government.

The reverse is true. Most Malaysians will not be much better off. The ETP will not help, and in fact may, exacerbate the already wide gap between the few rich Malaysians, and the very many poor ones:

● Corporations will take an even bigger slice of national income — three-quarters under the ETP compared to two-thirds currently;

● The share of national income going to wage-earners, under the ETP, will shrink to about 20 per cent, much less than the 28 per cent today and take us further away from the developed countries norm of about 50 per cent;

● The small share to wage-earners will, in turn, be largely devoured by a few Malaysians. The top 15 per cent of wage-earners will take 40 per cent of all wages; and

● The ETP will double our dependence on cheap foreign labour — it requires at least another two million foreign workers, on top of the two million legal foreign workers who are already in Malaysia.

If not the ETP, what then?

Following the many weaknesses which we have identified, we have been asked a recurring question. What would we do?

There are two parts to our response. The first part comprises recommendations we have made in this series, such as improving data integrity and transparency, applying a high bar when naming projects related to politically influential entities as EPPs and making sure that the red tape cut for EPPs does not come back to stifle other entrepreneurs with ideas but not EPP status. Our hope is that this series results in constructive dialogue that will improve the ETP for the benefit of Malaysians, and sets some foundations for more effective policies by future governments.

The second part involves proposing a transformative strategy or framework or programme of our own if we had the opportunity to start over or if PEMANDU, for whatever reason, is dissolved. We will cover this in a series of subsequent Focus Papers.

A sneak peak: We consider productivity crucial. One of the main reasons a larger share of income in developed countries is given to wages is because of the higher productivity of workers in these countries. This could be due to higher skill levels, higher levels of capital per worker (in the form of machinery, for example) and involvement in higher value-added economic activities (such as research and development and design rather than low end manufacturing, for example). We think the ETP focuses too much on pushing through EPPs which may create many jobs but fail to significantly increase the productivity of the average worker. We believe measures to improve the productivity of the existing and future labour force need to be put in place. This involves not only improving the skill levels of the workforce but also making politically difficult decisions to reduce our dependence on unskilled foreign labour.

The story so far

Part 1, Let’s evaluate PEMANDU on its DEEDS, introduced this series. We assess PEMANDU and the ETP on the goals, plans and targets stated in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the framework which PEMANDU has chosen to work within. In that vein, and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, GNI surrounding the entire GTP, we evaluate PEMANDU and the ETP on its DEEDS:

Data transparency was covered in Part 2, We won’t really be twice as rich in 2020. We declared, “It does not compute!” PEMANDU’s target is to double nominal income per capita to RM48,000 by 2020. But using its forecasts for income and population growth, and inflation, the target should be RM54,145, not RM48,000. Can this “roadmap to transformation” be trusted when even the basic maths is wrong?

Execution took three Focus Papers:

Part 3(i), PEMANDU strengthens the “know-who” cancer, focuses on PEMANDU’s practice of taking credit for pre-existing projects and its role in cutting red tape. PEMANDU is institutionalising the role of middleman if it cuts red tape only for EPPs. Malaysian innovation, creativity and productivity will continue to lag if long-term policy changes are not made. It does not matter how good your product or idea is, or how efficiently you can make it, it depends on who you know to get it through the system.

Part 3 (ii), The hothouse labs probably killed innovation posits that large companies would naturally dominate the vaunted ‘labs’ that chose the EPPs. Also, the tight 8-week time frame to research best practices, distil them and support them with detailed analysis would have incentivised participants to select EPPs for which research was already ready, rather than pursue genuinely transformative alternatives.

Part 3 (iii), Doubtful EPPs; doubtful achievements and due diligence says the selection of projects with very little hope of success as EPPs raises serious doubts about the due diligence process at PEMANDU. The RM10 billion Karambunai Integrated Resort needs 2.8 million visitors per year to break even – more than all the travellers arriving at Kota Kinabalu airport! The multi-billion ringgit plan to transform Tanjong Agas from a fishing village to a petrochemical hub has REFSA aghast. It creates redundant infrastructure, and goes against the government’s own master plan identifying the already established Kertih and Gebeng as the focus areas for such activities in the Eastern Corridor Economic Region (ECER).

Enterprise is severely lacking so far. Part 4, Private enterprises are rejecting the ETP highlights that the private sector makes up only 35 per cent of the total investments in EPPs, far below the 60 per cent that PEMANDU says is required to take Malaysia to high-income status by 2020. It is understandable that priority is given to government-led, big-ticket infrastructure project in the early days of the ETP. However, PEMANDU’s attempt to paint a rosier picture by citing figures excluding large public sector projects like the MRT draws suspicion that something is amiss. REFSA debunks PEMANDU’s selective figures with a simple cake analogy and some telling numbers.

Diversity, or the lack thereof, was the focus of Part 5, The ETP so far is just a handful of mega-projects. 131 EPPs across 12 NKEAs are supposed to take us to high-income status. But two mega-projects — the MRT and Petronas RAPID project — account for more than half the apparently impressive RM176 billion of investments achieved in the first year of the ETP.  The Oil, Gas & Energy NKEA dominates. There has been zero progress in Financial Services, which is crucial to high-income and the Palm Oil, Agriculture and Business Services NKEAs also languish. Broad-based transformation is not happening. Not yet.

Note on PEMANDU’s response

Upon hearing that we were writing an evaluation of the ETP, the communications team at PEMANDU kindly arranged interviews with a director from the minister’s office who is also the director of the Oil, Gas and Energy & Financial Services NKEAs, the director of the Wholesale and Retail (W&R) NKEA and the assistant director of the Tourism NKEA. We are grateful for these interviews and will include clarification points from these interviews in our evaluation. These interviews were recorded by the ETP communications team and we hope that they would be made available online for public access. — REFSA (Research for Social Advancement)

* Dr Ong Kian Ming and Teh Chi-Chang wrote this analysis for REFSA.

Read Dr. Ong’s critiques of the ETP in full here