This past decade, the Malaysian economy has experienced turbulence from regional and global developments, and none have been more vulnerable to the impact than workers in the manufacturing sector.

Reality is sinking in around the world Malaysia being no exception as plants are closed to consolidate operations and new locations are sought to optimise investment capital.

The 1997/98 economic crisis claimed 83,865 jobs in 1998, while the slowdown in the US economy and events of Sept 11 last year have generally dampened consumer demand and confidence.

Job losses are an inevitable result, alongside predictable effects on the macro-economy. The unemployment rate in Malaysia crept up steadily from 2.8 percent in 1995 to almost 4 percent in 2001, before dropping marginally to 3.7 percent in the first quarter of this year.

The 18,000 jobs created by the Multimedia Super Corridor since its inception in 1996 cannot quite offset the fact that 56,061 Malaysians lost their jobs just last year alone.

Of the job losses, 41,662 or 74.3 percent were recorded in the manufacturing sector, which has long lured investors with low-cost labour. This, in turn, has produced an export trade that has fueled much of Malaysia's economic prosperity over the past 30 years.

Today, the country must enter a more innovative and competitive trajectory if it is to continue keeping Malaysian workers in the manner to which they have become accustomed.

Not competitive enough

Foreign investors no longer place Malaysia at the top of their list of investment destinations. Indeed, applications to set up manufacturing ventures to date this year are only one-fifth of the RM2.1 billion recorded last year.

However, Malaysian Industrial Development Authority (Mida) director of foreign investment Yeow Teck Chai attributes this to the global economic scenario, which has seen a 30 percent worldwide drop in foreign direct investment (FDI).

Malaysia's global competitiveness has also dropped. Ranked 18th in the world competitiveness scoreboard just seven years ago, Malaysia has dropped more than 10 places to 29 this year. ( see Table )

Meanwhile, poor economic conditions worldwide, especially in key markets like the US, hold dire repercussions for returns from external trade.

Ministry of International Trade and Industry (Miti) figures show that exports to the US shrank 11.6 percent, from RM76.5 billion in 2000 to RM67 billion last year.

Total exports also experienced a contraction of 10.4 percent, from RM373 billion in 2000 to RM334 billion last year.

New niches needed

Labour Department data show 'reduction in demand of product' as the reason cited most often by companies that closed this year.

Multi-national corporations with a large presence in Malaysia, like American disk-drive manufacturer Seagate Technologies, have been cutting costs across the board.

Seagate, while retaining a plant in Penang, closed its other factory in Penang and stopped operating in Ipoh last year, affecting some 10,000 workers. It attributed the closures to "international consolidation".

The manufacturing hub of Penang, where giants like Motorola and Intel are based, has been hit by new standards of competitiveness.

Between January and October last year, there were 11,895 job cuts through retrenchment or voluntary separation schemes. Of these, 89 percent were from the manufacturing sector, according to figures from the Socio-Economic and Environmental Research Institute (Seri).

In light of this, Penang State Executive Councillor for Economic Planning, Education and Human Resources, Dr Toh Kin Woon, warned that "we are in trouble" if new niches are not found to offset the manufacturing sector's steadily declining competitiveness

Yeow of Mida, though, is optimistic about the future of the sector, noting that the phenomenon of companies moving out "has always been there".

He also points out that it is part of a "natural industrial progression that happens in many other countries as well".

New locomotive

As manufacturers struggle to adjust to such factors, it is crucial that other sectors pick up the slack.

"The manufacturing sector has reached a plateau. It can't be an engine for growth in the long-term, even though the composition of the sector will change. The locomotive of the future is the services industry," says Malaysian Institute of Economic Research (Mier) executive director Dr Mohamed Ariff.

Indeed, because certain service-sector jobs do not require complex technical skill sets, it could also serve as an effective medium-term measure by absorbing retrenched workers quickly.

A strong services sector would also turn a negative into a positive. Industries like packaging, marketing and banking could feed off opportunities generated by China's massive manufacturing sector, to complement China's strengths instead of competing with it.

China has replaced Southeast Asia as the prime destination for investment dollars, taking up 46 percent of FDI last year, according to UN Conference on Trade and Development. And China's economy continues to grow at an average rate of seven to nine percent annually.

Job mobility

Federation of Malaysian Manufacturers vice-president, Paul Low, believes it is key for workers to be flexible enough to enter the service sector if they lose their job in manufacturing.

Manpower Department figures reveal that 80.5 percent of retrenched workers who registered to seek alternative employment were successfully placed in other jobs last year.

This remains a central concern. But limited data compounds the problem as policy-makers are in the dark over the fate of retrenched workers once they leave their companies.

Human Resource Ministry figures reveal 200, 626 job losses through retrenchment since 1998. This year alone, 73 per cent of the 17, 536 job cuts have been in the manufacturing sector. ( see Table )

"Workers are the most vulnerable. They have no safety net and there is a potential for zero income and poverty," warns Toh.

He admits that information on these workers is "sorely lacking" and that the Penang government faces a "gargantuan task" in trying to address the problem, because many workers return to their home states once they are laid off.

Re-skilling under scrutiny

Human Resources Development Bhd, set up under the Human Resources Ministry, reported that the RM11 million allocated for the Workers Information Technology Scheme to encourage computer literacy among workers, has been fully utilised. More than 17, 000 places have been filled to date.

However, the effectiveness of the scheme has now come under question.

A study conducted in April by Seri, a think-tank that advises the Penang government, notes that the courses offered have failed to improve the marketability of workers because they are not taught specific skill sets.

It also finds that courses are poorly administered, with long delays in the processing of applications. This is of particular concern to unemployed workers, who may not have the financial resources to wait for applications to be approved.

The study also highlights the fact that many retrenched workers do not have faith in the Labour Department's ability to find them a job.

Ironically, the Seri recommendation to the National Economic Action Council is for allocation of more staff to the department, because many of its own problems arise from under-staffing.

To ease the burden on workers, Mohamed hopes that the government will "close the door" on foreign workers employed in factories.

Avoiding a collision

Mier, which advises the government on economic matters, further takes the view that a paradigm shift must occur to deal with the constraints faced by the manufacturing sector..

Mohamed says workers must be retrained to engage in more value-added work that would enable industries to move up the chain.

This would negate the threat from competitors like China, which has steadily eroded Malaysia's competitive advantage in labour-intensive industries with its immense pool of cheap labour.

"It is inevitable that the manufacturing sector will have to change. It is obvious that Malaysia will lose some industries, but the idea here is to avoid a collision course (with China)," says Mohamed.

"The manufacturing sector will have to undergo major structural changes in order to move into high value-added activities."

The k-economy

The government is responding, although the transition will undoubtedly take time. In 2000, it demonstrated awareness of the shifting ground by introducing the 'k-economy' concept to guide the change from a production-based to a knowledge-based economy.

The outcome is this month's release of the Knowledge-Based Economy Master Plan, which identifies current shortcomings that must be addressed.

Among these are Malaysia's falling global competitiveness due to a low science and technology base, poor research and development capacity, and the low levels of innovative skills and venture capital.

The master plan, prepared by the Institute of Strategic and International Studies under a government committee chaired by the Finance Ministry, outlines seven strategic thrusts to propel Malaysia into a k-economy.

These stress the urgent need to establish the institutions that would develop human capital, the most important asset in a k-economy.

New game plan

Recent Mida policy changes also reflect a growing awareness that the country must adapt to a market place where the reliance is no longer on labour-intensive industries.

Mida's new pre-package scheme is tailored to attract high-end investors, primarily in high-tech sectors like wireless technology, the aerospace industry and research and development.

Beneficiaries will enjoy start-up and training grants from the government in addition to existing incentives like partial tax exemptions for five years under the 'pioneer' status awarded to companies breaking into emerging fields.

The game plan for the manufacturing sector is to shed increasingly uncompetitive labour-intensive industries in favour of higher value-added and capital-intensive ones.

This will build on current advantages like good physical infrastructure, a well-educated workforce and familiarity with industrial practices, areas in which China lags behind.

According to Yeow, Mida's efforts have managed to secure projects from companies like 3M, Intel and Dell that could otherwise have gone to competitors like Singapore.

Addressing related problems

Mohamed, however, says the strategy of simply offering monetary incentives and tax cuts will backfire, drawing on the analogy of icing a cake.

Instead of adding more icing to sweeten the deal, the government should look at the composition of cake itself to examine deeper flaws and disincentives that are keeping investors away, he explains.

He identifies alleged corruption among low-level officials as a main obstacle. While China, too, allegedly has its share of corrupt officials, investors seem willing to overlook this in order to exploit the extremely low cost of labour there.

"The writing is on the wall, but without a thorough study, we cannot see precisely where the problem lies," he says of the corruption perception.

Planning for the future

A long term solution lies with the possibility of an Asean-China Free Trade Area (FTA) being created for mutual economic benefit.

At the Asean-China Summit last year, leaders agreed to establish a FTA by 2011 that would see the reduction of tariff and non-tariff barriers, mutual investment, and greater co-operation in all spheres of the economy.

A Trade Negotiating Committee has been set up to discuss the terms of a framework agreement that will be finalised at the Asean-China Summit to be held in Cambodia in November.

Meanwhile, Budget 2003 unveiled on Sept 20 proposes to allocate RM620 million to the Human Resources Ministry. It plans to set up 29 training centres to produce skilled and semi-skilled workers to serve the needs of value-added electronics and manufacturing industries.

Even as manufacturers and policy-makers draw up macro schemes that will be crucial to Malaysia's economic future, it is worth noting Toh's words that those on the front lines of the battle the workers "have families to support and mortgages to pay".

And their priorities will not wait.

WONG JOON IAN is a philosophy and journalism student at New York University. He is an intern with malaysiakini .