Presentation of the OECD 2016 Economic Survey of Malaysia

FIRST OECD ECONOMIC ASSESSMENT OF MALAYSIA 2016 Fostering inclusive productivity Putrajaya, 11 November 2016

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

@OECDeconomy @OECD

Growth has been resilient GDP growth

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

Source: OECD Economic Outlook database and national statistical offices.

2

Incomes are rising GDP per capita (percent of OECD average)

% 100

Malaysia

90

Korea

Thailand

Philippines

ASEAN

% 100 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

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.

3

Income inequality has declined

Source: Department of Statistics, Malaysia.

4

Well-being can still be raised Better-life index, main dimensions Malaysia

Higher-income OECD Income 9 8 7 6 5 4 3 2 1 0

Work-life balance

Safety

Lower-income OECD

Jobs

Community

Life satisfaction

Education

Health

Environment

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.

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

5

Boosting productivity growth is key Annual labour productivity growth % 12

% 12 2011-2015

2006-2010

2001-2005 10

10

8

8

6

6

4

4

2

2

0

China

Indonesia

Thailand

Korea

Malaysia

Singapore

Turkey

OECD

0

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

6

The bond market is relatively developed Size of domestic bond markets (as of December 31, 2015)

% of GDP 250

Corporate

% of GDP 250

Government

200

200

150

150

100

100

50

50

0

0

Indonesia

Philippines

China

Thailand

Source: Bank Negara Malaysia; Asian Bond online database.

Singapore

Malaysia

Korea

Japan

7

Household debt is relatively high Household debt

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

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

8

Tax revenues are low and declining % of GDP

% of GDP 40

40 OECD average

Malaysia

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

0

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).

9

Boosting productivity

10

Student performance can be improved Percentage of low performers in mathematics by socio-economic quartile % 90 80 70

% 90 Bottom quarter

80

Top quarter

70

60

60

50

50

40

40

30

30

20

20

10

10

0

Korea

Singapore

Viet Nam

Indonesia

OECD average

Thailand

Turkey

Malaysia

0

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

➢ Follow through with the revised school curricula based on international benchmarking and improvements to teacher evaluation, training and upskilling. ➢ Monitor the impact of basic education reform implementation on student access and equality.

11

New business entry is low Number of new limited liability corporations per 1,000 people aged 15-64 11

11 Malaysia

10

OECD

Indonesia

Korea

Thailand

Singapore

10

9

9

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

Source: World Bank, World Development Indicators.

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

12

The insolvency regime is inadequate Gaps to the frontier Starting a business 100

Resolving insolvency

80

Dealing with construction permits

60 40

Enforcing contracts

Getting electricity

20 0

Trading across borders

Registering property

Paying taxes

Getting credit

Protecting minority investors 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.

➢ Amend insolvency laws to facilitate the rescue of viable firms.

13

Services trade is still overly restricted The OECD Services Trade Restrictiveness Index (STRI) for Malaysia 0.7

0.7

Malaysia

Average of countries covered by the STRI

0.6

0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0

0

Note: The STRI indices take values between 0 and 1

Source: OECD, Services Trade Restrictiveness Index.

➢ Pursue further trade and investment liberalisation to boost services sector growth and competition.

14

Public-sector employment is high Share of employment in the public sector (2014)

% 18

% 18

16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

Korea

Philippines

Japan

Thailand

Viet Nam

Mexico

Turkey

Chile

Malaysia

OECD

0

Source: ILO (2016), ILOSTAT database.

➢ Commission an independent review of public sector productivity. ➢ Regularly evaluate strategic plans and programmes through independent audits and regulatory impact assessments. ➢ Expand performance benchmarks to a larger number of officials, with clear links to rewards, penalties and career progression.

15

Fostering inclusive growth

16

Labour participation rates are relatively low Labour force participation as a percent of people at 15-64

% 90

% 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

Thailand

China

Singapore

OECD

Indonesia

Malaysia

Philippines

Korea

0

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 to continue to reduce skills mismatches.

17

Spending for social protection is low Social protection spending as a share of GDP

% 25

OECD social expenditure

%

Malaysia social expenditure

25

20

20

15

15

10

10

5

5

0

1997

2002

2007

2012

0

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

➢ Develop a comprehensive social protection system, including by implementing an employment insurance scheme. ➢ Improve social policy consistency, programme targeting and the overall impact on reducing disadvantage.

18

The consumption tax rate is low VAT/GST tax rate

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 then raising the rate of the goods and services tax, and increasing the progressivity of income tax.

19

Pension replacement rates are low % 120

Net replacement rate

% 120 100

80

80

60

60

40

40

20

20

0

0

South Africa Indonesia Mexico United Kingdom Chile Japan Malaysia Ireland New Zealand United States Korea Switzerland Canada Germany Poland Sweden Slovenia Australia Estonia Norway Belgium OECD Finland Czech Republic Saudi Arabia Denmark France Israel EU28 Greece Brazil Iceland Italy China Slovakia Russia Argentina Luxembourg Portugal Spain Hungary Austria Netherlands Turkey India

100

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 life expectancy and reduce exemptions for early withdrawal. ➢ Enrol future public employees in the defined contribution scheme covering private sector employees.

20

Regional inequality is still high

Source: Department of Statistics, Malaysia.

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

21

Key recommendations

22

Resilient growth

➢ Continue fiscal consolidation to provide a buffer should conditions deteriorate

➢ Undertake an independent review of expenditure and revenue needs

➢ Over the medium term, consider: i) Gradually reducing exemptions and then raising GST ii) Increasing the progressivity of income tax ➢ Increase the use of market mechanisms and stricter environmental standards to strengthen green growth strategies

23

Boosting productivity ➢ Follow through with the revised school curricula based on international benchmarking and improvements to teacher evaluation, training and upskilling ➢ Increase the collaboration of tertiary institutions with industry to deliver job-ready graduates, with focus on vocational education and training ➢ 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 the competition regulator ➢ Expand merger control powers ➢ Amend insolvency laws to facilitate the rescue of viable firms and introduce out-of-court insolvency procedures

➢ Pursue further investment liberalisation to boost the services sector

24

Fostering inclusive growth ➢ Develop a comprehensive social protection system, including by implementing an employment insurance scheme ➢ Promote flexible work arrangements and invest more in early childhood care, lifelong learning and reskilling

➢ Increase pension access ages in line with improvements in life expectancy and reduce exemptions for early withdrawal ➢ Enrol future public employees in the defined contribution scheme covering private sector employees

➢ Improve social services, transport and broadband connectivity in remote rural areas 25

For more information

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

@OECD

26

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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.

Appendix

27

OECD projections for 2016-17 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

52.4

43.5

45.0

2.5

2.1

3.2

Memorandum items Oil price (Brent, USD per barrel) World trade growth (Volume change)

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

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