Strengthen service sector to greater height

强打服务业创高薪

Is it an ultimate dream? Yes. Is it an economic pride? Yes. Is it a source of prosperity? Yes. Then, it must be the “service sector”, right?

Less developed nations has been associated with backward agriculture economy while developing nations aggressively push their manufacture sector. Service sector has been seen an important engine of growth to developed nations. Therefore, service sector is regarded as a dream for every nation, a pride for every economy and a sector that can generate lots of income.

One of the benchmark targets in Malaysia’s Economic Transformation Program (ETP) is increasing the contribution of service sector to 65% of GDP by 2020. The journey towards service sector has started – but are we ready? In answering this question, let analyze the trend and the gap.

The Trend: Service versus Others

Best possible data available through Malaysia Statistical Department are ranged from 1987 to 2013. Taking first and last three year averages, percentage of output contribution to Gross Domestic Products (GDP) is shown in Figure 1. There are some classification changes between these two periods of time. Hence, minor adjustment is made to match the earlier years (1987 to 1989; will be referred as “Period 1”) to the latest years (2011 to 2013; will be referred as “Period 2”) classification for better comparison.

Figure 1: Output Contribution to GDP (%)

(Data source: Statistical Department of Malaysia)

Service sector has already the biggest contributor to GDP since Period 1. Its contribution has increase 10.26 percentage points to 55.37% over the two periods of study. At the same time, manufacturing sector’s contribution also increases to 3.82 percentage points to 25.13%. Primary sector of “agriculture, livestock, forestry and fishing” and “mining and quarrying” collectively suffered decline of 14.34 percentage points to 15.97%. Construction sector has minor increase of 0.26 percentage points in its contribution to GDP.

Figure 2 shows share of labor employed as percentage of total employment. Similar trend to output contribution, service sector has largest share followed by manufacturing sector. Over the two period of study, labor share of service sector increase significantly from 47.18% to 60.38% or 13.2 percentage points. Indeed, all sectors labor share increase except “agriculture, livestock, forestry and fishing” sector which suffer a drop of 17.77 percentage points.

Figure 2: Share of Labour Force(%)

(Data source: Statistical Department of Malaysia)

Based on the trend analysis of output contribution and labor share, it seems that Malaysia is ready to go from manufacturing to service sector. Indeed, Malaysia has already completed transforming from agriculture-based economy to manufacturing-cum-service sector. From the comparison between two periods of study, Malaysia also has started its transformation from manufacturing to service sector.

Therefore, the question should now be extended: Are we ready to transform from manufacturing to service sector “in the best possible ways” to “achieve ETP target”? In addition, policy makers should also ask what benefit of developing service sectors to various citizen groups, especially the youth, golden generation, women and business group, which ranged from small and medium (SME) entrepreneurs to big conglomerate.

In the Best Possible Ways

To get the best possible ways, productivity should be increased, not just increasing the percentage share of output or percentage share of labor. Productivity can be measured in term of GDP per labor employed – amount of output each labor produced – as calculated and shown in Table 1.

Based on Table 1, mining and quarrying sector shows extraordinary high level of GDP per labor employed despite having lowest output contribution per GDP and percentage of labor share per total labor employed (see Figure 1 & 2). This could be due to activities in this sector (include oil exploration) is both highly capital intensive and very high selling price, thus did not really reflect labor work productivity. Ignoring mining and quarrying sector, manufacturing sector turns out to be the most productive followed by service sector. Over these two periods of study, manufacturing sector achieved highest productivity improvement. Perhaps thanks to modernization of agriculture sector in Malaysia, its GDP per labor also increase a lot. Yet, each sector productivity increase about two to three times over a period of about 24 years, which is small.

Table 1: GDP per labor employed

	Agriculture, Forestry, Livestock and Fishing	Mining and Quarrying	Manufacturing	Construction	Service sector
Avg 87 - 89	9.03	325.40	18.66	8.39	13.91
Avg 11 - 13	35.18	778.32	83.75	22.18	53.31
Productivity changes	+ 26.15 (2.9  times)	+ 452.92 (1.4 times)	+ 65.09 (3.5 times)	+ 13.79 (1.6 times)	+ 39.39 (2.8 times)

(Calculated from data obtained from Statistical Department of Malaysia)

World Bank data (in our previous article in this column but not stated here) reveals Malaysia’s overall GDP per labor employed for 2012 is about 18 years, 25 years and 32 years behind South Korea, Singapore and Japan respectively. Malaysia’s GDP per labor employed is also ways behind developed countries like Germany, France, Australia, United Kingdom, United States, Spain and Netherlands. These countries GDP per labor employed is 1.7 times to 2.7 times higher than Malaysia. Current growth in productivities for service sector (2.8 times over 24 years) may only see Malaysia reaching developed nations’ current level only in more than 15 years time.

ETP Target vs. Gap

ETP targeted service sector to contribute at least 65% of GDP. Based on data from Malaysia statistical department, service sector contribution to GDP fluctuated between 44.64% (lowest, recorded in 1988) and 55.91% (highest, 2013). Mathematically, service sector’s contribution need to increase 9.09 percentage points from 2014 to reach target in 2020. This is translated into an average 1.30 percentage point per year over seven years. Based on historical trend from 1988 to 2010 - see Figure 3, service sector recorded only an average yearly changes rate of 0.41 percentages point per year. For the past 26 years (1988 to 2013), service sector only twice recorded consecutives three years of incensement in share of GDP, which is from 1991 to 1993 and 2011 to 2013. Therefore, despite Malaysia’s service sector is the biggest economic sector in term of output and labor usage, it remain a doubt whether this sector can achieve its 65% contribution to GDP target by year 2020.

Figure 3: Service Sector Share to GDP (%) and Yearly Changes (percentage point)

(Data source: Statistical Department of Malaysia)

Benefits to Citizen Groups

National effort to develop a particular sector (in this case, service sector) can only be justified if it can bring significant benefits to various citizen groups. Therefore, what can the service sector bring to four important groups, namely (i) youth, (ii) senior citizen, (iii) women and (iv) entrepreneurs?

Youth – Job creation matching population growth

On aggregate, Malaysia did not have and most likely may not going to have unemployment problem in near future. Based on Table 2, service sector alone has created enough job opportunities to match population growth rate.

Table 2: Service Sector Job Creation

Description	2011	2012	2013	Average
Population growth (annual, %)	1.69	1.66	1.62	1.66
Service sector: Labor changes (% of total employed)	3.31	1.62	2.52	2.48

(Data source: World Bank and Statistical Department of Malaysia)

However, two qualitative matters cannot be revealed with available statistics. Firstly, the wages and other employment benefits to youth labor enough to match current and expected inflation? Manufacturing sector, especially those in export-oriented industries may suppress wages to maximize competitiveness in cost. In wake of China “super cheap” products, the only way of survival for non-branded Malaysian exports is selling at even lower price. Furthermore, higher emphasis on mechanization (or automation) may lead to jobless growth – have growth but reduce new job opportunity as labor is to be replaced by machine.

In service sector, the focus is mainly local market where global price competition more easily avoided. Hence, there is less pressure to minimize wage and higher emphasis to improve service quality through human capital development. As service is localized business, more local youth are needed as compare to hiring cheap unskilled foreign labors to operate machine through simple and standardized procedures.

Senior citizen – To work is win-win situation

Imagine a country having aging problem, especially significant numbers of old age citizens (called “senior citizen” or “golden generation”) who did not have tertiary education level for formal employment beyond retirement age. Instead of giving social benefits or shedding pity tears, why not offer them paid-job that suit their ability? This policy enable senior citizen to proudly earn their living. There are scientific findings claimed senior citizens who actively in work may improve health (like reduce risk of dementia).

This policy of employing golden generation has been practiced very successfully in China and Singapore. At Singapore, one will notice senior citizen working at various job level (pushing pedestrian traffic light, waiter, security guard, shop manager, chef to name a few) in various service industry. Those with higher education may have opted to extend their retirement as consultant, free-lance and various other jobs.

Women – Flexi working make big different

On average from 1990 to 2011 (World Bank statistics), female labor participation rate in Malaysia is 43.5%, lower than neighboring countries like Thailand (66.2%), Singapore (52.8%), Indonesia (50.2%) and Philippines (49.4%). Iceland female labor participation reached 70.2% while United States is 58%, Australia (55.1%) and United Kingdom (53.9%). One of the main reasons for low female labor participation is inflexible working hours that causes women (especially those married with children) to stop working. Service sector may be the best opportunity to offer flexible working hour and part-time that suit female group.

Entrepreneurs – New opportunities

According to the SME census 2011, SMEs have 98.2% of total establishments, 32.5% share of GDP and 71.1% share of total employment. More than 87.6% of the SMEs are come from services sector. Therefore SMEs is an important lifeline of our economy. Developing services sector may give new business opportunity to current and potential entrepreneurs especially priority services sectors encourage by ETP.  Example are wholesale and retail trade, finance and insurance, transport and storage.

Conclusion

Services sector has higher potential than other sector and provides benefit to various groups. So Malaysia moving towards services sector is correct direction but within services sector must choose a suitable sub-sector to focus.

[Chinese version published at Nanyang Press, 12th January 2015. Available online at http://www.nanyang.com/node/674801. This English version may be slightly different from the Chinese online/printed newspaper version]

Four economic triangles Part 2: “Capital” and “system” are inadequate

四个经济三角（下）资本系统比上不足

Just like car needs fuel to move, human and science-technology (ST) need funds (capital) to develop. All these three factors are integrated through various systems and national policies. Economic progress needs all the four foundations to be strong.

(3) Capital

In economic, “fund” usually refers to money invested and called “capital”. Capital formation can be generated internally through saving, raise from stock market or through foreign direct investment (FDI) but depleted by debt servicing. In a two-ways relationship, quality of human factor and science and technology factor determine effectiveness of capital utilization and generation. Table 3 compares strength of capital factors for selected countries.

Table 3: Capital Factor Comparison

Country	FDI inflow (2013)	FDI outflow* (2012)	Market capitalization (2012)	Gross saving (2012)	Gross capital formation (2013)	External Debt (2013)
Selected Asian countries
Malaysia	3.71	5.53	156.16	31.87	26.15	35.52
Thailand	3.27	3.45	104.65	30.23	29.24	38.20
Indonesia	2.12	0.61	45.26	30.69	33.64	29.90
Philippines	1.42	0.74	105.58	42.29	19.67	24.62
Vietnam	5.19	0.77	21.14	31.61	26.59	44.08
Singapore	21.40	8.04	144.34	48.08	29.05	N.A.
Japan	0.08	2.07	61.99	21.75	20.79	N.A.
South Korea	0.94	1.93	96.54	34.60	28.99	N.A.
BRICS countries
Brazil	3.60	0.36	54.69	14.64	17.89	19.86
Russia	3.37	2.42	43.35	28.12	22.59	N.A.
India	1.50	0.46	67.97	30.32	30.02	20.78
China	3.76	1.42	44.93	51.01	49.29	9.19
South Africa	2.32	0.76	160.15	12.62	19.36	36.59
Selected developed countries
Germany	0.90	2.56	43.38	24.19	17.00	N.A.
France	0.24	1.52	69.83	17.52	19.57	N.A.
Australia	3.17	0.41	83.95	25.33	28.57	N.A.
United Kingdom	1.92	2.89	122.65	10.86	14.60	N.A.
United States	1.40	2.62	114.92	16.54	19.05	N.A.
Spain	3.31	0.36	75.24	18.93	18.25	N.A.
Netherlands	4.01	(0.14)	84.54	24.78	16.21	N.A.

Note: All data are in percentage of GDP. “*” negative value (Netherland) implies “disinvestment” that caused by unfavorable changes in assets versus liability. Gross capital formation data for both Japan and United States are dated 2012. For external debt, “N.A” implies no external or data not available.

Source: All data from World Bank.

Since year 2007, Malaysia’s FDI outflow is higher than inflow. This trend is expected for already developed countries like Japan and South Korea but not developing countries like Malaysia. Malaysia need extra capital to push growth, thus higher FDI outflow is not helping capital formation. Table 3 shows that Malaysia seems rely on stock market and domestic saving as their source of investment capital. For 2012, Malaysia’s stock market capitalization is second highest among selected countries. Is saving rate of about 32% of GDP is also among the highest. Overall analysis indicates sustainability concern for Malaysia, Thailand, Philippines and Singapore as they have very high market capitalization and saving rate. Thus, room for further boost in capital formation is restricted to increasing FDI inflow.

On one hand, Singapore is remarkable that it has achieved double digit FDI inflow per GDP since 1994 except two years in between. If Malaysia can achieve such record, its economic growth could be much higher. On the other hand, any global economy crisis will give severe impact to Singapore.

Malaysia gross capita formation for 2013 is 26.15%, which is much lower than Indonesia (33.64%) and China (49.29%); slightly lower than Thailand and India (all developing countries); and also lower than Singapore, South Korea and Australia (developed countries). Capital formation is expected to be much higher in developing nations as compare to developed nations. Thus, statistics in Table 3 imply that Malaysia is moderately strong in capital factor.

The only obvious drawback is high debt. Malaysian central government debt has moved past 50% of GDP since 2009. World Bank data (not shown in Table 3) revealed this debt stands at 53.3% as at 2012, which almost touching legalized debt ceiling of 55%. Reaching the limit may cause government shutdown like the United States. In addition, Malaysia’s external debt at 35.52% of GDP (or 37% to Gross National Income, GNI) is also a concern and may likely give negative effect to future capital formation.

(3) System

“System” in economic has been over-directly link with resources flow and production. Thus, in this framework, “system” is better viewed as catalyst from scientific (chemistry) perspective. As catalyst, systems speed up inter and intra reactions between and within “human”, “science-technology” and “capital”. Figure 1 is reproduced below to facilitate further explanation.

Border “ab” represents financial system. It has been commonly known as platform to allocate internal saving and foreign funds (money) between saver (contributor) and borrower (user of funds). These monies are used in either pure consumption or investment into science and technology. Border “ac” is management system that help human governs capital and utilize science-technology (ST). Border “bc” is education system that provides knowledge on how human and capital input can maximize utilization of ST. Ethic or morality (point “a”) is needed to government relationship between human and capital. Combination of capital and ST will determine production capability (point “b”). Human and ST create knowledge-based economy (point “c”). Besides financial, management and education systems, public service and juridical system are of equal important. Thus, the strength of “system triangle” is measured from these five systems of financial, management, education, public service and juridical.

Figure 1: The Four Economic Triangles

“ab” = financial system “ac” = management system “bc” = education system Within “abc” = public service system = juridical system

Financial system

Based on Table 4, Malaysia’s financial sector reach to its population is better than Indonesia, Philippines, Vietnam, India and China. Malaysia has higher Automated teller machines (ATMs) and more bank branches (both per 100,000 adults). Yet, it is very obvious that all selected developed countries (except Netherland) have higher financial reach than Malaysia.

Malaysia financial sector has relatively lower risk, measured in term of higher Capital-to-Asset ratio (CAR) and lower non-performing loan (NPL), as compared to countries like Japan, Brazil, India, South Africa, Germany, France, Australia, UK, Spain and Netherland. Surprisingly, Spain NPL has been increasing rapidly from just 0.7% in 2006 to 8.2% in 2013. High NPL but low CAR in all the selected developed European countries as well as Australia and three BRICS countries indicate alarming sign of a new global financial crisis. Thus, developing countries like Malaysia needs to prepare well ahead and continue strengthen its financial sector.

Education system

Based on Table 4, Malaysia’s literacy rate is few percentage points less than most selected countries. Nonetheless, it is still proudly high at 93.1%. Malaysia’s total public spending (PS) in term of percentage of GDP is also comparable standard with developed nations. Indeed, Malaysia’s PS is much higher than Singapore, Japan, Indonesia, Philippines and India. Malaysia’s “secondary pupil-teacher ratio (P/T)” is either comparable or better (lower ratio) than majority of selected countries.

Table 4: System Factor Comparison

Country	Financial Strength*					Education Strength			Public service
	ATM (2012)	Branch (2012)	C.A.R (2013)		NPL (2013)	Literacy (Average 2008 - 2012)	PS  (Average 2008 - 2012)	P/T (Average 2009 - 2013)	Real GDP / Compensation (Average 2008 - 2012)
Selected Asian countries
Malaysia	52.9	19.9	9.6		1.8	93.1	5.2	13.7	14.2
Thailand	84.2	11.8	10.9		2.3	96.4	5.0	19.9	6.2
Indonesia	36.5	9.6	12.5		1.7	99.2	3.2	16.8	19.4
Philippines	19.3	8.1	10.8		3.0	95.4	2.7	34.8	12.3
Vietnam	21.2	3.2	9.9		N.A	93.5	5.6	N.A	N.A.
Singapore	58.1	9.8	8.2		0.9	96.1	3.1	14.9	26.6
Japan	127.8	33.9	5.5		2.3	N.A.	3.7	11.8	84.6
South Korea	282.5	18.4	8.1		0.7	N.A.	5.0	16.9	52.5
BRICS countries
Brazil	118.6	47.3	9.3	2.9		90.7	5.6	16.5	10.2
Russia	182.0	38.2	11.5	6.0		99.7	4.1	8.6	5.6
India	11.2	11.4	6.9	3.8		N.A.	3.3	25.5	46.6
China	37.5	7.7	6.3	1.0		95.1	N.A	15.2	N.A.
South Africa	59.9	10.4	7.7	3.6		93.2	5.9	25.0	15.2
Selected developed countries
Germany	118.8	13.9	5.5	2.9		N.A.	4.9	12.9	56.7
France	109.0	38.8	5.4	4.3		N.A.	5.8	12.7	9.4
Australia	165.9	31.8	5.6	1.4		N.A.	5.1	N.A.	39.5
United Kingdom (UK)	124.3	24.2	5.0	3.7		N.A.	5.7	N.A.	14.4
United States (US)	173.4	35.3	11.8	3.2		N.A.	5.3	14.2	36.0
Spain	138.1	85.1	6.3	8.2		97.7	4.9	10.9	35.7
Netherlands	55.1	19.6	4.8	3.2		N.A.	5.8	13.6	28.4

Note: “*” Year is as stated except for Korea (for ATM is 2011), Germany (both ATM & Branches 2011, NPL 2013), UK (ATM 2011, C.A.R. 2012, NPL 2012), US (ATM 2009), Vietnam (C.A.R 2012), China (C.A.R. 2012). For “P/T”, year for Philippines, Singapore, Russia & South Africa is 2009. Gross capital formation data for both Japan and United States are dated 2012. “N.A” implies data not available.

Source: All data from World Bank.

Thus, why Malaysia’s education standard is ranked so miserably in international assessments? In Programme for International Student Assessment’s (PISA) test in 2012, Malaysia was ranked 39^th out of 44 countries on “creative problem-solving”. Singapore ranked top. The test also showed only one out of 100 Malaysian students, aged 15 is able to solve the most complex problems, compared with one in five in Singapore, Korea and Japan. Malaysia scored 421 in Mathematics (lower as compared to global average score of 494), 398 in Reading (496) and 420 in Science (501) respectively.

Universiti Malaya is ranked 151^th in QS World University Ranking 2014 as compared to other Asian universities like National University of Singapore (NUS) (globally ranked 22^nd), University of Tokyo (joint 31^st), Seoul National University (joint 31^st) and Kyoto University (36^th). In Times Higher Education (THE) World University Ranking 2014, no Malaysian university makes into Asian Top 100 that dominated by universities from Japan, Singapore, South Korea, Hong Kong and China. India, Thailand, Iran, Israel, Lebanon, Saudi Arabia and Turkey all have their university among Asian Top 100 list.

Recently, former finance minister and politician veteran, Tengku Razaleigh Hamza has voice his disappointment. He lamented the big government spending on educating sector that failed to improved education quality.

Public service

Ratio of real GDP per compensation to public sector employees is presented in the last column in Table 4. Ratio for Malaysia is 14.2, implying every domestic currency (Ringgit) spent yield 14.2 Ringgit worth of real GDP. Thus, the higher this ratio means the more productive (effective) the employees’ in public sector. From Table 4, Malaysia’s public sector is much more productive than countries like Thailand, Brazil, Russia and France. However, Japan is almost 6 times higher than Malaysia. Malaysia public sector’s efficiency is also very far behind South Korea, India and Germany. Even Indonesia has higher ratio than Malaysia while Singapore is almost double Malaysia’s ratio.

Conclusion

One of the most important teachings of Sun Tzu in his Art of War is “know ourselves – both strength and weaknesses”. Thus, it is important to know Malaysia’s strength and weaknesses. A “four economic foundations” framework comprising aspects of “human”, “capital”, “science & technology” and “system” is proposed.

Malaysia is better than mostly all developing countries in term of “human factor” and “science and technology factor” but still far behind selected developed countries. Malaysia has moderate strength in “capital” foundation. Malaysia seems rely on stock market and domestic saving as their source of investment capital. Yet, most critical concern is high level of debt. In term of “system”, Malaysia’s foundation in “financial system” and “education system” is good. Yet, in various international standard comparisons, we failed badly in education quality while the competitiveness of domestic financial institutions still remains a doubt. Perhaps, there are other qualitative factors that cannot be captured by merely quantitative data. Among the most important qualitative factors may be corruption and ineffective over-protectionism.

To progress into developed nation as in Vision 2020 and Economic Transformation Program (ETP), we need to immediately strengthen all the four economic fundamentals without fear and prejudice.

[Chinese version published at Nanyang Press, 1st December 2014. Available online at http://www.nanyang.com/node/667497. This English version may be slightly different from the Chinese online/printed newspaper version]