Malaysia's Economic Divide

To what extent can economic developments form the basis for political contradictions in Malaysia? Economic developments, notably around the cost of living have played an important role in political changes in the last few years. Yet to what extent does this tendency describe a more long-term political contradiction in the country, or to what extent does it just reflect short-term economic circumstances?

I would argue that economic developments have formed the basis for a growing political contradiction between two sectors of the economy, the modern corporate capitalist sector centred around manufacturing, modern services and corporatised agro-business, and on the other hand a mixed sector, non-corporate in character and made up of smaller non-capitalist enterprises, subsistence businesses, centred around medium-sized enterprises and micro-enterprises, with lower levels of productivity and remuneration.

This process is part of a longer trend in Malaysia's political economy which in the years after the Asian Financial Crisis saw a weaker trend of modernising economic growth – which in the decades preceding the crisis had uplifted large sections of the population. The table below shows the way in which occupations grew from 1957 onwards, moving the country from an agricultural one, towards significant growth in manufacturing and services.

Development of occupation categories over time 1957-2000

In this process the country experienced high levels of modernisation with more workers moving into the modern corporate sector and a new and sizeable middle-class formed out of these processes, emerging as an important political force.

After the 2000s the country experienced slower levels of FDI, lower rates of growth, lower levels of wage growth, and a decline in the manufacturing sector, towards a growth in services which was however concentrated in traditional rather than modern services.

In this period the World Bank would divide Malaysian households into four categories, middle and high income, aspirational, vulnerable and poor. The largest and fastest growing group it would note were aspirational households who were around the median income but were struggling to enter into the middle-class, defined in terms of income security and lifestyle. Meanwhile the vulnerable group defined those who had been lifted out of poverty but who risked falling back into poverty. In 2004 it assessed 32.2% of households as aspirational and 26.5% as vulnerable, by 2009 this was 38.7% and 24.4% respectively, and by 2014 the aspirational group formed 51.2% of the population, with the vulnerable 14.8%.

Distribution of income groups 2004-2014

This reality was being driven by broader macroeconomic trends. The onset of deindustrialisation was moving labour towards the service sector, and particularly towards the traditional service sector in areas such as retail and wholesale and food and beverage, stagnating growth in modern manufacturing and modern services and growing sectors which were less technologically advanced, more dependent on low-skilled labour and offer lower wage remuneration.

Percentages of high-and-medium tech manufacturing and modern services in the economy

Linked to this was the fact that whilst the the country experienced in this period a higher labour share of income, this was driven by growth in low-technology, low-productivity and low-remuneration work in sectors such as wholesale and retail trade, food, beverage and accommodation and construction. As Bank Negara would note:

Specifically, between 2010 and 2017, the share of income accounted for by low- and mid-skilled workers has increased due to stronger expansion and employment growth in the wholesale and retail trade, food, beverage and accommodation as well as construction industries. While faster growth in these labour-intensive industries has contributed towards improvements in the headline labour income share, these industries continue to provide lower wages negating ongoing efforts to achieve the “high-income nation” status.

Important to this was the divergence between GDP growth and wage growth in these sectors, with big divergences in the construction and wholesale retail and food and accommodation sectors, suggesting high levels of labour exploitation in these sectors, with wage growth diverging from economic demand for these services.[1]

Sectoral GDP growth and median wage levels (2011-2017)

This is evidenced by the fact that even when accounting for lower levels of productivity between Malaysian workers and workers in other advanced economies, as a portion of productivity Malaysian workers were still paid less than workers in other advanced economies. This is found in all economic sectors, but was again particularly prevalent in low-skill, low-technology sectors such as wholesale and retail trade, food and beverage and accommodation industries, industries which form 19% of economic activity and 27% of total employment. Bank Negara would argue that this explained by the presence of high levels of foreign workers in these sectors, a lack of bargaining power but also because these sectors are labour intensive and low-skilled.

This fact would be further explained by the way in which these low-technology, low-productivity sectors are particularly dominated by small enterprises and micro-enterprises, particularly found in traditional services, which have a low capacity for technological innovation, which are highly labour intensive and are often subsistence oriented. Again sectors like food and beverage and hospitality are highly dominated by small and micro enterprises and during this period SMEs and micro-enterprises were playing an increasingly important role in the economy. As has been argued, this importance of micro-enterprises in the economy could also impact better quality economic growth:

The other issue with the prevalence of Malaysian SMEs and micro-enterprises in low-productivity economic activities is that both the business owners and employees of these firms may find it difficult to increase their earning power. This then leads to slower growth in domestic demand, which has an impact not only on the short-term indicators of the Malaysian economy, such as private consumption but also on the structure of the economy.

This fact was also reflected in the trajectory of the skill make-up of the economy over the period. Thus in the period between 2001 to 2017, low-skilled jobs increased from 10.6-13.6% of total jobs, whilst semi-skilled jobs declined from 65.0% to 59.2% in the same period. This has suggested a hollowing of semi-skilled jobs and the onset of labour market polarisation between high and low skilled jobs, a fact attributable both to automisation, but also the structure of the economy itself, polarising between corporate and non-corporate capitalist sectors.

Distribution of occupations by skill 2001-2017

This divide in terms of skill was also important in terms of those who lived above or below Bank Negara's calculation of the living wage (defined in terms not only of neccesities [food and shelter] but also in terms of  being able to “meaningfully participate in society, the opportunity for personal and family development, and freedom from severe financial stress”). Bank Negara found that in a city such as Kuala Lumpur, 27% of families were living below the standard of a living wage. Of this group, low-skilled and semi-skilled workers made up the vast majority and as was noted, this division has strong overlaps with levels of education.

Living wage by skill group

This process suggests in the long terms the development of two forms of polarisation in the economy:

• Firstly a polarisation between the advanced corporate capitalist and non-corporate capitalist sectors which has seemingly been developing since the early 2000s. Thus whilst Malaysia's economic growth in the 1980s and 1990s was emphasising modern manufacturing and modern services and was reducing the importance of the non-corporate capitalist sector, the restructuring of growth since 2000 seems to have reversed this trend, and sugggests that the non-corporate capitalist sector has come to play a much more important role in the economy, with lower-productivity, labour intensive, low-technological work in manufacturing and traditional services, particularly within small and micro-enterprises playing a much more signficant role, or picking up the slack that the advanced corporate sector hasn't been filling.
• Secondly a polarisation between low-skilled workers in the non-corporate capitalist sector who live below a realistic understanding of the poverty line as the living wage, and those in the corporate capitalist sector and high-skilled workers who have greater opportunity for social mobility. If these dynamics are correct then we could talk of a growing class division which doesn't just take into account typical class identifiers but which will take into account education, skill level, sectors worked in, work in corporations or small or micro enterprises etc.

Politically in Malaysia this division could be represented in these terms:

This process has played out in the politics of the B40. We know the B40 are particularly centred in lower-skilled, lower-productivity sectors of the economy, in SMEs and traditional services and small-holder agriculture etc. The B40 increasingly became an increasingly important group both because of higher levels of electoral competition but also because the possibility of economic growth continuing to uplift such groups became problematic. Increasingly the state had to step in to contribute to B40 incomes through transfers such as BR1M which from 2009 onwards increasingly formed the most significant contributor to income growth amongst the B40, with wages and self-employment continuously declining as shares of income.

Slow wage growth linked then to the longer term structural changes in the economy mixed together with rising prices to produce levels of political disaffection which influenced a turn of many B40 voters against the BN governmnt. The extent to which a rising cost of living was brought about by this polarisation of the economy would also be interesting to look into. The cost of living effects different income levels in different ways because of different consumption habits across income groups, but it could also be interesting to understand the rising cost of living in terms of divergences between corporate and non-corporate capital in Malaysia. This would be complex to go into but particular goods could be looked at to see the ways in which rising prices in the corporate capitalist sector have effected rising prices for those in the non-corporate sector. See for example the story of Sekinchan fishermen, fish being a good seeing high price increases, who noted the rising costs of diesel, and costs of boat repair and nets were pushing up fish prices. To what extent was this brought about by rising prices in the corporate sector or through the corporatisation of the supply chain thus increasing prices? The same would likely be true of food goods, most of which is controlled by corporate capital, or whose inputs come from that sphere. At the same time we know that prices were increased by GST, yet to what extent can the implementation of GST be understood as part of this divide? In terms, for example, of the way in which limited ability to further tax corporate incomes and the need by the state to maintain expenditure for welfare and development purposes required the state to increase taxes on the non-corporate sector also, which furthered economic imbalances.

Such an approach might help to make more evident the way in which developing economic contradictions began to turn into political contradictions in the country, with economic polarisation creating the basis for a stronger conflict of interests between the corporate capitalist and non-corporate capitalist sectors, and thus politicising elements of the B40 against the establishment forces. This didn't produce a political conflict with firm frontiers or ideas of class or group identities centred around such economic contradictions, but could form the basis for such identities in years to come.  

[1] As Jan Lust has argued in the case of Peru, this divergence could be understood in terms of super-exploitation in low-income, low-productivity sectors yet is only really meaningful if the relationships between these sectors and the modern corporate capitalist sector is understood. The super-exploitation doesn't only occur within these sectors, but because the corporate capitalist sector is unable to provide jobs for workers in these sectors, producing a reserve army of labour, lowering wages and reducing incentives for innovation in low-skill sectors, and producing a dependency between the corporate capitalist sector, and cheap services in the non-corporate capitalist sector.