Malaysia should export more value, not just goods

18 March 2014| last updated at 11:37PM

Malaysia should export more value, not just goods

By Firdaos Rosli
THE media release of Malaysia’s Trade Performance 2013 highlighted many important achievements but only one that caught my eye — where it says: “despite imports outpacing exports, Malaysia still enjoyed a positive trade balance”.

A quick check of official statistics reveals that such position is not exclusive to 2013 alone but is already trending so since at least five years ago. As imports accelerate faster than exports, trade balance inevitably narrows despite an overall increase in total trade.

Is the occurrence structural or cyclical? Are there any side effects? What are the challenges in increasing exports? Here are some facts:

Fact one: Malaysia’s industrial policies have been effective in increasing production volume but its value-added component, the key to profitability and higher export value, did not appear to keep pace with production. Official data shows that manufacturing output initially grew in parallel to value-added component before they started to move away from each other since in the late 1980s.

As a result, the percentage of value-added component versus GDP is also showing a downward trend. These events have eventually caused the contribution of manufacturing sector to the GDP to reach a plateau since year 2000.

Fact two: The global economy is significantly different today than during the years when Malaysia successfully adopted market-friendly policies to shift from agricultural to manufacturing-based economy. Adopting “traditional” generic import-substitution and export-orientation (EO) policies to boost exports are outdated as tariffs and non-tariff barriers are already at the minimum.

Interventionist measures would probably contravene existing international commitments. Besides, some economists would argue that the adverse reaction to excessive government intervention is far worse than neutrality as poor targeting of resources will amplify inefficient economic activities. Complementary industries will also suffer as a result of flawed intervention.

Furthermore, even correct intervention policies have costs. Subsidies and tax incentives to artificially stimulate specific industries are lost revenues for the government. It is also worth noting that most developing economies are already adopting EO policies which make it even harder for Malaysia to chart its competitive advantage.

Fact three: According to UNCTAD, Malaysia’s domestic value added (DVA) as a percentage of exports in 2010 is at 58 per cent, that is, 42 per cent of its total exports is derived from foreign value-added (FVA). The country’s FVA-DVA mix is almost similar to the UK (58 per cent) and South Korea (56 per cent). As such, Malaysia needs a targeted export approach that focuses on increasing value-added components of export either by upgrading FVA or DVA.

Herein lies the issue of attracting “quality” FDI with a much higher degree of automation and technology which is vital to increase DVA components.

This is not entirely successful due to, among others: one, the demand side whereby manufacturers are still refusing automation and adopting higher technology due to low-cost production, and two, the supply side whereby there is still a large pool of foreign labour that accounts for almost 21 per cent of the Malaysian workforce. As a result, wage level determines the type of labour and production value chain in the country.

In the past, Malaysia’s low-cost advantage was the ultimate reason for FDI but such reasoning is already obsolete. Investors today are no longer responsive to the country’s low-cost “advantage” and flatter bureaucracy level as they demand higher returns to compensate higher investment risks, especially when the global economy is still edgy.

Investors want higher investor protection — either in terms of monetary or creations of the mind– as they believe that these guarantees reflect the next benchmark of market-based policies. No doubt that such investor protection can be onerous and often seen as protecting trade rather than freeing trade.

Fact four: As the country’s global value chain (GVC) participation rate (the indicator of a country’s export integratedness in the international production networks) is high at 68 per cent, it is pragmatic to devise a complementary strategy that would make Malaysia a springboard to third countries including to the original exporting country. Malaysia’s re-exportation activity is already climbing steadily from RM21.8 billion in 2008 to RM65.8 billion in 2012.

Evidently, Malaysia could also upgrade its FVA in order to boost the value of exports. FVA upgrade requires participation of two or more countries and this is why securing trade deals with strategic partners is equally important than behind-the-border reforms alone.

This strategy, however, does not directly contribute to GDP growth and its success will depend on trade diversion, which can only occur when a country joins an FTA with a common external tariff structure.

One thing is certain: there is no time-proof, one-size-fits-all economic policy as it can never be static. When it is time to change, it is time to change.