Wednesday, June 5, 2013

Solving The Problem Of Imported Low Cost Labour

While I don’t always fully agree with some of Mr Menon’s views, I think this article is spot on (excerpt; emphasis added):

Can the new members of ASEAN catch-up without domestic polarisation?
Jayant Menon

ASEAN is divided. So how many ASEANs are there? Most separate the newer, less developed members (such as Cambodia, Laos, Myanmar and Vietnam; known as CLMV) from the older ones (Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore; known as ASEAN6). As high-income countries, some would even put Singapore and Brunei in a separate, third category…

…In addition to market-oriented reforms, the fact that convergence is taking place should not be surprising. One reason to expect catch-up is the difference in the marginal efficiency of capital between poor and richer countries. With little access to capital, workers in poor countries have relatively low levels of productivity that can be raised substantially by increasing the amount of capital available to them by even small amounts…

A gaping hole in the policy landscape in ASEAN is the failure to address labour migration adequately. Furthermore, ongoing demographic transitions will require greater capital inflow or labour outflow if massive unemployment is to be avoided. Capital inflows will only increase if there are substantial improvements in the investment climate. These changes will take time and since absorptive capacity is currently nearing its limit, it is an issue for the long run. Greater labour mobility will occur in the interim, but will require effective policy frameworks to be developed in both sending and receiving countries, if it is to be regulated. It would also help if a regional agreement that also deals with low-skilled labour could be struck. The current policy void on labour migration not only limits the benefits from trade and investment liberalisation, but increases the cost of structural adjustment. For Cambodia, Laos, Myanmar and Vietnam, the absence of a functioning exchange-rate mechanism due to varying degrees of dollarisation increases the importance of labour mobility in adjusting to economic shocks.

While rapid growth in Cambodia, Laos and Vietnam has reduced per-capita income differentials with the other ASEAN members, the distribution of these gains have been uneven and income inequality within these countries has remained unchanged or worsened (Table 1). It would appear that inter-country differences in economic conditions are being narrowed at the same time that intra-country differences are being increased. All kinds of within-country inequities have remained stubbornly high or have increased, including rural-urban, along ethnic lines and across gender. What is alarming is the increase in polarisation, both economic and social, in these converging countries. These factors can threaten cohesion, and pose major risks to social stability. High and/or rising income inequality can also threaten growth itself, as well as the poverty elasticity of growth. How can these consequences of rapid growth be avoided, or at least minimised?

There’s a lot more to the article (the paragraph on inequality above is just a sampling), but I think the one point I really want to stress here is that the presence of a large migrant labour force in Malaysia is mainly economic – partly from our own need for labour, but also partly the relative lack of economic opportunity in our poorer neighbours. Some have blamed low domestic wage growth on this phenomenon, though I think in this instance other important factors are in play as well.

But the point here is that, the real long term answer to the problem of low-wage migrants is to help develop Myanmar, Bangladesh, Cambodia, Laos and Vietnam (not to mention Indonesia and the Philippines). Increasing the level and growth of prosperity in ASEAN as a whole will do more in the end than any barriers to labour mobility. Trying to restrict immigration alone is like Canute the Great telling the tide not to wet his feet.

This would also have the happy effect of creating bigger regional markets for Malaysian goods and services. Promoting free trade and allowing investment outflows are not zero-sum games where they win and we lose; it’s almost always win-win, though the benefits might not be obvious at first glance.

Technical Notes:

Jayant Menon, "Can the new members of ASEAN catch-up without domestic polarisation?", VoxEU article, June 2013 (accessed 4 June 2013)


  1. Hi, can economic data be falsified? Can we trust it? For me, all is theory, not practical even CPI data. For GST, you mention it is one off, not related to inflation. But, why after oil price down to its previous level, bus fee and othe things still the same and some more up. More practically, GST will deduce some good price, let say 5%, so does this mean I buy the things will be less 5%? And how government can control the price, say this good must be deducted, if the retailer refuse to do so? Sorry, I am not from economic or financial field. I just want to know. Thank you.

    1. @anon

      The government shouldn't be controlling prices...period. Competitive forces are a better manager of resources and ensuring that companies don't profiteer.

      As to inflation, prices tend to be "sticky" because of wages. Most companies don't mind varying their prices as long as their profit margins are maintained, but the wage component of costs tends to go only up. For some reason, people object to having their salaries cut.

  2. Dear Hisham,

    IT would need a tremendous political will from all countries, since the effect wont be obvious in short term, thus not really benefiting current presidents or PMs. How many years do you reckon the above proposed scenario can happen? 10 years?

    1. @zakzak,

      Altruism in politics? It does happen occasionally.

      I think in this case, we're looking at the very long term, though 10 years is a pretty reasonable estimate for beginning to see the effects.