Emulate High Income Singapore and Switzerland, says Cambridge Don

by Shannon Teoh@www.themalaysianinsider.com

A leading economist said today Malaysia’s drive towards a high-income economy must be led by the manufacturing sector, which offers better productivity growth than services.

Professor Ha-Joon Chang (left) from Cambridge University’s faculty of economics and politics said it is a myth that only services-based countries are high-income, knowledge economies. He cited as examples Singapore and Switzerland, which he said continued to add value to their economies through manufacturing.

“It is wrong to separate the manufacturing sector from the knowledge sector. Historically, manufacturing has been the learning center, the main source of new productive knowledge,” said the winner of the prestigious 2003 Mydal prize for outstanding work in political economy.

The Korean economist said services such as finance, design and engineering can only be “developed after you first acquire the ability to manufacture the relevant products.”

“These services are mainly sold to manufacturing firms, so their prosperity depends on manufacturing success,” he told a public lecture here organised by the United Nations Development Programme UNDP) and the Institute of Strategic and International Studies (ISIS).

Datuk Seri Najib Razak has repeatedly stressed that Malaysia must escape its “middle-income trap” by improving its service sector, and implemented two liberalisation exercises freeing 44 service sub-sectors from Bumiputera quotas.

The Prime Minister also launched the New Economic Model (NEM), which aims to develop services as the main engine of growth. Services made up about 55 per cent of the GDP in 2008 and the government plans to increase its contribution to 60 per cent by 2020 as it strives to more than double per capita income from US$7,000 (RM22,000) per year to US$15,000.

But Chang again cited Switzerland and Singapore as “deeply entrenched myths” of “post-industrial knowledge economies”.He pointed out that the two countries ranked second and third in the world in terms of manufacturing value added per capita, behind industrial giant Japan.

Chang pointed out that, in 2005, Switzerland added US$6,874 manufacturing value per capita and Singapore, US$6,708. Comparatively, Malaysia added just US$1,430.

“I’m not saying manufacturing should account for 90 per cent of the GDP, maybe still around 25 to 30 per cent. But it has to deepen and create more per worker.

“Malaysia needs at least twice or three times the value, and if you want to reach Singapore’s level, then five times,” he said.

Chang, who has taught in Cambridge for over two decades, said the trend of de-industrialisation in rich countries does not mean that manufacturing is less important but that it has become more productive and efficient.

“There was a time when rich countries like Britain and Belgium had close to half the workforce in factories but now it is under 20 per cent. But it is not because we are now producing or consuming less manufactured goods.

“We are consuming more than ever in physical terms but the value share has shrunk because productivity has risen and relative prices fall,” he said, citing lower prices of electronic and computing goods as an example.

He said, in contrast, productivity rises slowest in services making it appear that consumption of services is higher.He warned that if developing countries focused on services, its lower trad-ability “will be problematic because there is a need of a stable supply of foreign currency if they are to import advanced technology.”