Malaysia, institutions and the middle-income trap : challenges in human capital development and income inequality in the manufacturing sector
Creators: name: Lopez, Gregore Pio
Publisher: name: The Australian National University
Year: 2012
Subjects: subject: Human capital Malaysia
subject: Wages Manufacturing industries Malaysia
subject: Malaysia Economic conditions

description: Malaysia's growth performance in recent years has been lacklustre. This research attempts to identify what institutional issues may have contributed to this performance. The research examines the impact of institutional quality on economic performance generally. The study proceeds at two levels: at the cross-country level and at the sectoral level. The research uses econometric and case study analysis to explain the effects of institutions on economic performance and identify the fundamental causes of less satisfactory economic outcomes. Recommendations for institutional reform then follow. At the cross-country level, a stochastic frontier model was used to analyse the relationship between institutions and economic efficiency, to rank the economic efficiency of Malaysia in relation to other countries over time, and to explain what the reasons are for changes in economic performance. Economic efficiency is defined here by measuring numerically a best practice frontier and evaluating the performance of countries included in the study (or other economic units) relative to that best practice frontier. The results suggest that overall, and at the middle income level, institutions related to 'Government Effectiveness' have the strongest impact on economic efficiency. Institutions related to 'Control of Corruption' and 'Rule of Law' are important to economic efficiency at the middle income level while institutions related to the 'Rule of Law' matter the most to economic efficiency at the high income level. Using a case study approach, the thesis investigates the links between human capital development and manufacturing sector output and the determinants of wage inequality in the manufacturing sector. A stochastic frontier model is again used, here to investigate the contribution of the different skills level to manufacturing sector output. The results demonstrate that unskilled labour contributes most significantly manufacturing sector output. Using the 'supply-demand-institutions' framework and implementing it within a modified industry wage equation framework, the determinants of the wage gap at the industry level in the manufacturing sector were identified. Difference in skill levels are found to have the biggest impact on increasing the wage gap in Malaysia's manufacturing sector. The analysis suggests three key reasons for the weak human capital development in Malaysia's manufacturing sector. First, Malaysia's education and training institutions have failed to produce skilled labour in sufficient numbers and quality. Second, skills development through training, retraining and up-skilling in the manufacturing sector has not produced the required human capital with the appropriate skills. Private sector linkages as well as the public-private sector partnerships that are necessary for effective training and development are at much lower and unsatisfactory levels in Malaysia's manufacturing sector compared to the successful East Asian economies. Third, labour policies in the manufacturing sector provide incentives for firms to rely on unskilled or semi-skilled labour rather than use high skilled labour. The unlimited supply of unskilled labour and weak human capital formation in the manufacturing sector (that Malaysian policy and institutional settings allow) in turn leads to increasing wage inequality. The government's response to human capital development and income inequality is primarily race-based, and has failed to resolve these issues. This approach is unlikely to be successful in addressing the middle-income trap. A move away from race-based institutions will be necessary to break through the middle income trap.