Immigrant labor: Can it help Malaysia’s economic development?

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Malaysia has been able to reach remarkable achievements over the past decades, including extreme poverty eradication and promotion of inclusive growth. It aims to reach a high-income nation status by 2020, which goes beyond merely reaching a per capita GDP threshold. As the 11th Malaysia Plan points out, the goal is to achieve a growth path that is sustainable over time, reflects greater productivity, and is inclusive. High-income status can be achieved if we ensure that future generations have access to all the resources, such as education and productive opportunities, necessary to realize their ambitions and if Malaysia’s economy is globally competitive and resource-sustainable.

Over the years, immigrants have played a crucial role in the economic development of Malaysia, with around 2.1 million immigrants registered and over 1 million undocumented as of 2013. Education levels among the Malaysian population have increased remarkably over the last two decades, and immigrant workers have become one of the primary sources of labor for low-skilled occupations, most commonly in labor-intensive sectors such as construction, agriculture and manufacturing. Economic studies show that a 10% net increase in low-skilled foreign workers could raise Malaysia’s GDP by 1.1% and create employment and increase wages for most Malaysians.

Immigration into Malaysia is the result of structural factors such as differences in income per capita and demographic patterns as well as relative porous borders between Malaysia and its neighboring countries. For instance, Malaysia’s gross national income per capita is $10,570 compared to $3,440 in Indonesia, and well above other countries such as Bangladesh and Nepal. Countries that send the largest numbers of immigrants to Malaysia tend to have a younger population, which fills gaps in the tight Malaysian labor market. These disparities are likely to still be present in the future and to keep motivating migration.

Understanding its significant economic impact, the 11th Malaysia Plan stresses the importance of effective migration management to achieve high-income country status by 2020.  To fully take advantage of its potential benefits, the 11th Malaysia Plan states that migration management system should be aligned to the human resource development strategy of the country. International experience from Australia and the UK shows that well-functioning migration systems are informed by an evidence-based approach. In particular, these countries have developed systems that monitor shortages in different occupations based on labor market data. Such systems are critical in ensuring that foreign workers can fill labor gaps rather than substitute for local workers.  

Currently, Malaysia uses a mix of quantity and price restrictions (quotas by sector and levies) to control the influx of foreign workers in the country. Quotas are generally static and do not respond quickly to labor market needs, while levies are a more flexible instrument. However, for the levy system to be effective, it is extremely important to adjust the levels based on labor market signals. A dynamic levy system that enables the government to appropriately price labor market needs is a desirable instrument to align immigration to the objectives of the country. Such instrument is also necessary to ensure that firms are not limited from filling their labor shortages with immigrant labor when there is a real need.

As discussed in the December 2015 issue of the World Bank Malaysia Economic Monitor, legal immigration can certainly help Malaysia meet its 2020 vision of becoming a high income economy. Countries such as the UK and Australia are examples of economies that have established tools and systems that align immigration to their labor market needs. In light of this, what can Malaysia learn from the more and less successful experience of other countries? Which reforms would optimize immigration management and better link it to Malaysia’s development? Share your thoughts in the comments below.


Rafael Munoz Moreno

World Bank’s Mexico Lead Country Economist for Equitable Growth, Finance, and Institutions

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