Monday, April 20, 2009

The Hollowing Out Of Malaysian Industry?

Quah Boon Huat of MIER wrote a piece in today's STAR that's worth thinking about:

"If deindustrialisation is indeed in the cards for Malaysia, it cannot be positive deindustrialisation...Malaysia’s manufacturing sector is being affected by, among other things, rising production costs arising from a tightening labour market, and cheap exports (from, for example, China and Vietnam). The sector has also failed to make the transition to higher value added activities...The problems the manufacturing sector currently faces can be traced back to a lack of industrial deepening because of misguided institutional change during the 1990s."

This is spot on - there's no doubt that Malaysian manufacturing is declining, and the problems will only become more acute. This has been my view since 2006, when manufactured exports started falling off.

I'm not so certain on the other hand, if the situation is quite as bad as he is making out. Quah mentions that increasing incomes in the services sector is indicative of "postive" deindustrialisation, which at first blush is happening concurrently.

Here's the share of manufacturing in real GDP since 2000:

and here's the composite of the services sector:

(Ignore the last values in both charts - neither are "normal", due to the sharp falloff in global trade on the one hand, and a relative rise in government spending, as all the other sectors fell).

It does seem in terms of the Quah's narrative, that we're seeing the impact of both aspects of deindustrialisation, not just the "negative" kind. What else can we find from a drill down of the national accounts? Here are the losers:

...and the winners:

These seem to give more support for viewing what's occuring as "positive" deindustrialisation, rather than "negative".

Obviously there's a lot happening under these aggregate ratios, such as the role of foreign workers and changing patterns of consumption, but a more nuanced viewpoint seems called for rather than the sharp distinction made in the article.

I can't help but think that given it's providence, perhaps the role of the article was more to focus attention on the need for structural change in the economy, rather than a straightforward commentary on the current state of affairs. In that case, I'd say this was a job well done.


  1. hishamh

    That was certainly my inference from the MIER piece. It was directed at providing further impetus for structural economic reform.

    The fact that the piece helped introduce some economic concepts was icing on an already tasty cake :D

  2. Hi HishamH,

    These questions always bug me, hope you can shed some lights:
    1. How does govt/economist classify sectors of industry ?
    For e.g,
    plant grape -> make wine -> securitization of wine
    (agriculture) -> (mfg ?) -> (finance)

    farm -> home stay
    (agriculture) -> (tourism)

    In practice, how are they being segregated ? what if they are under the same owner/company ?

  3. To be honest, it's not something I've really investigated. It's certainly not something that's taught in classes, unless you're specialising in national accounting statistics.

    However, the main basis of segregation is by products and services - ownership/company doesn't really come into it. A second consideration is that at the aggregate level, it's the net production that is counted.

    For instance, in your example, grape production would be taken net of labour and seed costs; wine production would be net of grape production, and the additional labour and other costs associated. When it comes to selling wine, the production would be taken net of whatever has gone before i.e. profits.

    Securitization on the other hand produces nothing, since it is just a transfer of a claim on a future income stream (payment on debt of wine producers) from one party to another - except in terms of the fees generated for the banker involved. Thus the general condemnation of the US financial sector in this crisis, since their contribution to GDP growth over the last few years can with some justice be described as illusory.

    The basis of GDP estimates (really just guesstimates) are input-output tables, which describes the interaction between all the different economic agents.

  4. Thx for your insights.. will try to digest the info, especially on the input-output table.

  5. Hisham,

    I would appreciate if we could touch base ?

    Currently putting together a BRIC & Emerging Markets platform & feel that your articles could add some real value to the commentary.

    Please have a look at my blog you will get a b good understanding there. My contact details are under the About tab



  6. Paul, that link doesn't go where it's supposed ;) I had to find your blog through the main WordPress site.

    Thanks, and I'll be in touch.