A country’s economic competitiveness hinges on a solid foundation of quality human capital. The MADANI “Empowering the People” economic framework anchors the government’s commitment to human capital development with measurable goals, including positioning Malaysia in the top 12 of the Global Competitiveness Index (2023: 27th) and top 25 of the Human Development Index (HDI) (2021: 62nd) within the next decade.
Enhancing productivity is essential for structural economic reform which is required to position Malaysia as a preferred investment destination and to create skilled jobs with higher earnings. To deploy capital efficiently and drive technological progress and organisational innovation, the country will need to leverage a skilled workforce and assimilate knowledge and technologies, which would spur productivity growth. However, Malaysia’s labour productivity growth has only risen marginally at 1.3% on average per annum over the last five years, while wages have grown faster by 2.4% per annum over the same period. As such, the labour productivity growth rate has yet to reach the momentum to achieve the 11th and 12th Malaysia Plan (11MP; 12MP) target of 3.6%-3.7% per annum. A major reason for the modest growth is that only 29.6% of Malaysia’s current workforce is engaged in high-skilled jobs, below the 12MP target of 35%. Furthermore, the average skills-related underemployment as a percentage of the population increased to 5.6% in 2022 from 4.3% in 2018. Apart from wage issues, the country’s modest labour productivity growth rate could also be related to insufficient employment opportunities and labour market mismatches. If unaddressed, this would stifle economic and industry development, thereby suppressing wealth and wages, risking further brain drain and curbing brain gain.
A skilled workforce will grow when workers compete for higher wages, and companies prioritise higher-level skills and productivity to improve profitability. While wage policies are in place to increase earnings by promoting upskilling, the productivity measurement needs to evolve beyond basic indicators such as the number of certifications and years of education, focusing instead on application, industry requirements and commercialisation. Furthermore, it is necessary to avoid overlaps between the existing Productivity-Linked Wage System and the impending Progressive Wage Model.
Skills-related underemployment is partly explained by graduates not meeting industry standards, making educational benchmarking and outcomes a priority. Despite high spending on public education at 20.4% of total government expenditure over the last five years compared to the global average of 13.4%, learning outcomes have remained subpar as Malaysia has consistently underperformed in benchmarking tests such as the Programme for International Student Assessment (PISA), a worldwide study to evaluate the educational system by measuring 15-year-olds’ scholastic performance. While disrupted learning during the pandemic led to a drop in PISA scores worldwide, Malaysia’s decline of 27 points across all literacy measures surpasses the average decline of 10 points observed in other countries. This is significant as a 20-point decline is equivalent to one full year of learning.
International comparisons, despite their limitations, offer insights into the state of Malaysia’s education system and highlight areas for improvement. The Human Capital Index 2020 report revealed that Malaysian students lagged by almost three years in learning outcomes against the expected 12.5 years of schooling. Disruptions to schooling during the pandemic had also widened the learning gap, especially among financially disadvantaged students. Furthermore, traditional assessments have been experiencing grade inflation, undermining critical thinking and broader learning outcomes, which, in turn, has impacted students’ performance in internationally benchmarked assessments.
With its ongoing efforts to improve education outcomes, Malaysia will benefit from the international benchmarking of education and workforce quality, which would help in fulfilling the human capital goals outlined in the MADANI economy framework. A commitment towards raising education and productivity outcomes is important to signal policy consistency, sustainably improve Malaysia’s gross domestic product (GDP) per capita and showcase its ability to materialise development blueprints. We will continue to monitor development indicators, such as Malaysia’s HDI, alongside education and skills-related underemployment metrics, as among the components in our analysis of Malaysia’s sovereign rating.
