FIRST OECD ECONOMIC

ASSESSMENT OF MALAYSIA 2016

Fostering inclusive productivity

Putrajaya, 11 November 2016

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@OECDeconomy

http://www.oecd.org/eco/surveys/economic-survey-malaysia.htm

2

Growth has been resilient

Source: OECD Economic Outlook database and national statistical offices.

Note: ASEAN-5 is the weighted average growth rate of Indonesia, Malaysia, Philippines, Thailand and Singapore.

GDP growth

Incomes are rising

3

Note: GDP per capita is computed in real USD PPP terms; ASEAN excludes Myanmar; 1970-2011 data are from the Penn World Tables, 2012-14 data from the World Development Indicator database.

Source: World Bank, World Development Indicators; Penn World Tables 8.1 database and Economic Planning Unit, Malaysia.

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

1970 1975 1980 1985 1990 1995 2000 2005 2010

%%GDP per capita (percent of OECD average)

Malaysia Korea Thailand Philippines ASEAN

4

Income inequality has declined

Source: Department of Statistics, Malaysia.

5

Well-being can still be raised

Source: OECD calculations based on data provided by OECD, Better Life Index, national sources and UNESCO, UIS.stat (database).

1. Indicators are normalised to range between 10 (best) and 0 (worst) .

2. OECD higher/lower income countries are countries belonging to the top/bottom 30% of the OECD member countries.

0

1

2

3

4

5

6

7

8

9Income

Jobs

Community

Education

EnvironmentHealth

Life satisfaction

Safety

Work-life balance

Better-life index, main dimensions

Malaysia Higher-income OECD Lower-income OECD

6

Boosting productivity growth is key

Source: OECD calculations based on data provided by national statistical offices and OECD, Productivity Statistics.

Annual labour productivity growth

0

2

4

6

8

10

12

0

2

4

6

8

10

12

China Indonesia Thailand Korea Malaysia Singapore Turkey OECD

%%

2001-2005 2006-2010 2011-2015

7

The bond market is relatively developed

Source: Bank Negara Malaysia; Asian Bond online database.

0

50

100

150

200

250

0

50

100

150

200

250

Indonesia Philippines China Thailand Singapore Malaysia Korea Japan

% of GDP% of GDP Size of domestic bond markets (as of December 31, 2015)

Corporate Government

8

Household debt is relatively high

Note: Data reflects gross debt as a share of GDP at June 2015, except for Malaysia (2015 average) and China (as at December 2015).

Household debt

Source: Bank Negara Malaysia Annual Report 2015; Standard Chartered Bank (2016), Asia Leverage: After the Boom.

9

Tax revenues are low and declining

Source: OECD (2015), Revenue Statistics in Asian Countries 2015: Trends in Indonesia, Malaysia and the Philippines (for the years 1990-2013); MOF (2015), Economic Report 2015 -2016 (for the years 2014-16).

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% of GDP% of GDP

OECD average Malaysia

Boosting productivity

10

Student performance can be improved

11

Follow through with the revised school curricula based on internationalbenchmarking and improvements to teacher evaluation, training and upskilling.

Monitor the impact of basic education reform implementation on student accessand equality.

Percentage of low performers in mathematics by socio-economic quartile

Source: OECD (2016), Low-Performing Students: Why They Fall Behind and How to Help Them Succeed.

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Korea Singapore Viet Nam Indonesia OECD average Thailand Turkey Malaysia

%%

Bottom quarter

Top quarter

New business entry is low

12

Source: World Bank, World Development Indicators.

Streamline firm registration and introduce zero licensing procedures in services and industry.

Number of new limited liability corporations per 1,000 people aged 15-64

0

1

2

3

4

5

6

7

8

9

10

11

0

1

2

3

4

5

6

7

8

9

10

11

2006 2007 2008 2009 2010 2011 2012 2013 2014

Malaysia OECD Indonesia Korea Thailand Singapore

13

Amend insolvency laws to facilitate the rescue of viable firms.

The insolvency regime is inadequate

Note: The gap to frontier is the difference between Malaysia’s score and the score of the best performing country (=100).

Source: World Bank, Doing Business.

Gaps to the frontier

0

20

40

60

80

100Starting a business

Dealing with constructionpermits

Getting electricity

Registering property

Getting credit

Protecting minority investors

Paying taxes

Trading across borders

Enforcing contracts

Resolving insolvency

Services trade is still overly restricted

14

Note: The STRI indices take values between 0 and 1

Source: OECD, Services Trade Restrictiveness Index.

The OECD Services Trade Restrictiveness Index (STRI) for Malaysia

Pursue further trade and investment liberalisationto boost services sector growth and competition.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Malaysia Average of countries covered by the STRI

Public-sector employment is high

15

Commission an independent review of public sector productivity.

Regularly evaluate strategic plans and programmes through independentaudits and regulatory impact assessments.

Expand performance benchmarks to a larger number of officials, with clearlinks to rewards, penalties and career progression.

Source: ILO (2016), ILOSTAT database.

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

Korea Philippines Japan Thailand Viet Nam Mexico Turkey Chile Malaysia OECD

%% Share of employment in the public sector (2014)

Fostering inclusive growth

16

17

Labour participation rates are relatively low

Source: ILO, ILOStat Database; OECD, Labour Force Statistics.

Promote flexible work arrangements and invest more in early childhood care,lifelong learning and reskilling.

Align tertiary and vocational education and training to labour market needs tocontinue to reduce skills mismatches.

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Thailand China Singapore OECD Indonesia Malaysia Philippines Korea

%%Labour force participation as a percent of people at 15-64

18

Spending for social protection is low

Source: OECD, Social Spending Indicator; ADB, Statistical Database System.

Develop a comprehensive social protection system, including by implementingan employment insurance scheme.

Improve social policy consistency, programme targeting and the overallimpact on reducing disadvantage.

Social protection spending as a share of GDP

0

5

10

15

20

25

0

5

10

15

20

25

1997 2002 2007 2012

%%

OECD social expenditure Malaysia social expenditure

19

The consumption tax rate is low

Source: OECD Tax Database; KPMG (2015), 2015 Asia Pacific Indirect Tax Guide.

Undertake an independent review of expenditure and revenue needs.

Over the medium term, consider gradually reducing exemptions and thenraising the rate of the goods and services tax, and increasing theprogressivity of income tax.

VAT/GST tax rate

20

Pension replacement rates are low

Note: The data are for 2012 for Malaysia and for 2014 for OECD countries. The source publications assume investment returns of 3.5% per annum for Malaysia, whereas a 3% per annum return was assumed for OECD countries.

Source: OECD (2013), Pensions at a Glance Asia-Pacific 2013; OECD (2015), Pensions at a Glance 2015.

Increase pension access ages in line with improvements in healthy lifeexpectancy and reduce exemptions for early withdrawal.

Enrol future public employees in the defined contribution scheme coveringprivate sector employees.

0

20

40

60

80

100

120

0

20

40

60

80

100

120

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%% Net replacement rate

21

Regional inequality is still high

Source: Department of Statistics, Malaysia.

Improve social services, transport, and broadband connectivity in remote areas.

22

Key recommendations

23

Resilient growth

Continue fiscal consolidation to provide a buffer should conditionsdeteriorate

Undertake an independent review of expenditure and revenue needs

Over the medium term, consider:i) Gradually reducing exemptions and then raising GSTii) Increasing the progressivity of income tax

Increase the use of market mechanisms and stricter environmental standards to strengthen green growth strategies

24

Boosting productivity

Follow through with the revised school curricula based oninternational benchmarking and improvements to teacher evaluation,training and upskilling

Increase the collaboration of tertiary institutions with industry todeliver job-ready graduates, with focus on vocational education andtraining

Commission an independent review of public sector productivity

Streamline innovation system governance through clear mandates for the National Science Council and Research Management Agency

Enhance independence, staffing and financial resources of thecompetition regulator

Amend insolvency laws to facilitate the rescue of viable firms andintroduce out-of-court insolvency procedures

Expand merger control powers

Pursue further investment liberalisation to boost the services sector

25

Fostering inclusive growth

Develop a comprehensive social protection system, including byimplementing an employment insurance scheme

Promote flexible work arrangements and invest more in earlychildhood care, lifelong learning and reskilling

Increase pension access ages in line with improvements in lifeexpectancy and reduce exemptions for early withdrawal

Improve social services, transport and broadband connectivity inremote rural areas

Enrol future public employees in the defined contribution schemecovering private sector employees

http://www.oecd.org/eco/surveys/economic-survey-malaysia.htm

For more information

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Appendix

Disclaimers:

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without

prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers

and boundaries and to the name of any territory, city or area.

OECD projections for 2016-17

28

2015 2016 2017

Real GDP growth 5.0 4.2 4.2

CPI 2.1 2.3 2.5

Headline budget

balance (% of GDP)-3.2 -3.1 -3.0

Memorandum items

Oil price

(Brent, USD per barrel)52.4 43.5 45.0

World trade growth

(Volume change) 2.5 2.1 3.2

Source: Ministry of Finance, Malaysia and OECD Economic Outlook database.