By Ameen Kamal,
The GDP performance for the first quarter of 2021 has shown how the electrical and electronics (E&E) and manufacturing sectors have contributed significantly to the economic resiliency in Malaysia, during the pandemic-driven global economic downturn. Compared to the 3.4% contraction year-on-year (y/y) in 4Q20, the 1Q21 GDP contraction of 0.5% (y/y) is a notable improvement, showing a significantly much smaller contraction than what others may have expected.
Economists have mentioned how a spike in demand in the demand of microchips due to global shortage as well as a peak in the global semiconductor cycle has benefitted Malaysia’s E&E industry, which includes semiconductors as a significant sub-sector alongside other technologies such as solar and light-emitting diodes (LEDs). As the country’s biggest export contributor, it is a no-brainer that the Industrial Production Index (IPI) was reported to have soared to 9.3% in March 2021, which is the highest growth since July 2013.
According to Ministry of Finance, this achievement is reflected in the growth of the manufacturing and E&E index, whereby each index grew 12.7% and 10.3% respectively. The sales value of the manufacturing sector for March 2021 also rose to 15.3% (RM126.9 billion), the highest within the last 44 months.
Though this has been to be attributed to the Strategic Programme to Empower the People and Economy (PEMERKASA), the focus on manufacturing and E&E can be traced back to historical policies, which have been given a continuous focus since the last five decades.
According to Malaysian Investment Development Authority (MIDA), Malaysia’s E&E sector started in the 1970s with just eight foreign companies in component production, known as the “eight samurais”. Over time, the sector has grown with more innovative and advanced technologies, fuelled by technology transfers. The industry has diversified into various E&E manufacturing clusters throughout the country, and Malaysia has been ranked 7th in the global E&E exporters, putting the country as a major global market player.
That said, success of more recent policies has ensured Malaysia is able to reinforce its strengths, contributing to the economic resiliency driven mainly by the robust and well-established manufacturing and E&E sector. Of course, this was supplemented with favourable commodity market as well as stimulus measures targeting the domestic economy.
The programme PEMERKASA for example, which is an initiative worth RM20 billion, has contributed greatly in ensuring a business environment that is favourable for companies and investors. PEMERKASA initiatives such as the Enhancement of the National Authorised Economic Operator (AEO) facility for the strengthening of Malaysia’s business environment, provides a “green lane” for global trading businesses and makes it easier and faster to apply for investments.
However, the GDP performance also clearly reminds us that Malaysia can’t rely on the E&E sector alone. Just like how the manufacturing and E&E sectors embarked on a move to go up the value chain since the start of the last decade, other industries in Malaysia need to follow suit in the full adoption of digital transformation and 4IR technologies. Initiatives such as Industry4WRD has been in place to push 4IR technologies in the manufacturing and E&E sectors, and MIDA, with its various initiatives has been pushing this to other sectors as well.
It is also noted by economists that a stronger GDP growth have been limited by reduced private consumption and investments, which has been exacerbated by Covid-19 waves leading to tighter MCOs that could lead to more business closures. This is why MCO 3.0 has allowed most economic activities to operate, but with stronger monitoring and enforcement of SOPs. Time will tell if these measured would prove sufficient.
In any case, the situation is a reminder as to why the next paradigm shift has to be moving beyond heavy reliance on FDIs and foreign manufacturing in Malaysia. It is true that trade will always be important for the country, but the domestic situation calls for increased net high-tech output, especially through the support of micro and small medium enterprises (MSMEs). Local economic security is crucial for socio-economic resiliency, which in turn, is critical for maintaining peace and order in times of crisis.
In other words, domestic output driven by homegrown innovations and local production has to be the key focus now, and in the future in order to move from a technology adopter to a technology producer. This puts a special focus on supporting a healthy pipeline of start-ups and smaller businesses in the form MSMEs, which employ most of the B40 and lower end of M40 segments. Sowing and nurturing the seeds of a robust domestic economy is crucial for the protection of vulnerable groups in an economic turmoil.
On this front, financial support and funding have always been a focus. For example, the Extension of Wage Subsidy Programme (WSP) 3.0 under PEMERKASA was introduced to relieve the financial burdens of eligible employers, and the Government has embarked on Strategic Collaboration Efforts through the Finance Ministry, Bank Simpanan Nasional, SME Bank and Malaysia Digital Economy Corporation (MDEC) in managing a SME digitalisation grant. For example, MDEC has allocated RM14 million to 70 SMEs and start-ups to boost the digital ecosystem, aligning it to the recently launched Malaysia Digital Economy Blueprint (MyDIGITAL).
In support of both domestic economy and trade, MyDIGITAL has a clear thrust with a particular focus on the MSMEs to widely integrate elements of the digital economy, supporting trade and investment and easing operating barriers in order to enhance productivity and competitiveness in the regional and global arena.
Ameen Kamal is the Head of Science & Technology at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.