Structural issues within the Malaysian economy Vital issues for the 13th Malaysian Plan

Murray Hunter


Structural issues within the Malaysian economy
Vital issues for the 13th Malaysian Plan


Jul 05, 2025





Economists often talk about the Malaysian economy as if it is a homogenous entity. The failure to understand the complexities of the economy can lead to ineffective policy decisions and economic mis-management. This partly explains why so many budgetary and agency approaches to the economy often fail very badly. In order to make better fiscal, monetary, and structural decisions, one must understand the particular differences of the Malaysian economy to ‘textbook’ models.

Physical separation

The first issue relating to the structure of the economy are the long physical distance separations between the country’s parts. Malaya is a peninsula, connected by land to Singapore and Thailand. Malaya is separated from Sabah and Sarawak by the South China Sea. Sabah and Sarawak are basically separated from each other by Brunei, where it’s easier to connect by either land or air. The Pan Borneo Highway is not yet completed.

Effectively, the three separate land masses can be seen as Malaya with two nodes. The interactions of government and business is actually minimal. Malaysia’s GDP was RM 1.8 trillion in 2023, Sarawak’s GDP was RM 142.35 billion, and Sabah’s GDP was RM 111.9 billion.

Government owned corporate economic

A major part of Malaysia’s formal economy is controlled by the government through government linked companies or GLCs. These GLCs control around 55 percent of the market economy in the country.

GLCs are primarily rent-seeking and profit orientated organizations. They have not been established along public welfare objectives. GLC operations are aided by regulated monopolies, oligopolies, or restricted markets based upon legislated barriers of entry to other competitors. The primary objective of GLCs is to provide the maximum dividends as possible to the government to assist in financing the annual budget.

The banking system is primarily owned by the government, but not used as an arm of policy. They are primarily profit-making entities like other GLCs. The heavy regulation of the economy skews competitiveness, as those firms with connections to the government of the day benefit through contracts, which might make up 30-40 percent of the budget. Market restriction is governed through licensing, import approvals, permits, and concessions. Malaysia unlike most other ASEAN markets is very restrictive, which prevents growth.

Private sector

Although a major part of the private sector is over-run by GLCs, banking, finance, and communications, much of the private sector is based upon long established firms that have grown up over the last 70 years. Most of these firms are in service industries, although there is some manufacturing and agriculture enterprises. Many firms that participate in construction and utilities are politically connected. Foreign investment is primarily focused upon labour-intensive industries, although Penang has successfully developed a chip manufacturing cluster. On the whole, very few firms are innovative due to the heavy race-based restrictions on equity. Very few multi-national firms have chosen Malaysia as a central manufacturing centre, due to the relatively small domestic market size of 33 million people.

Due to equity restriction issues, there is not much confidence in future rules, as happened in the freight forward industry a few years ago. Rules can change overnight. Local freight forwarding firms had to sell out 50 percent of its equity to Bumiputera interests. This has led to little modernizing of agriculture and firms staying in low-cost labour sectors rather than investing in new technologies. Modernization of the economy has been left to GLCs which aren’t by their nature innovators. The government has tried to launch innovation companies in sectors like biotech, but failed dismally.

The result of the above is that Malaysia have lost relative productivity as a manufacturing nation. Labour wage rates have remained static, but productivity per worker is very low.

The informal sector

Economists insufficiently pay attention to Malaysia’s informal sector, which comprises 55 percent of GDP. The vast majority of the workforce are either self-employed sole proprietorships or work in MSMEs employing between 2-5 people in agriculture, small manufacturing, or retail activities. These ventures are poorly capitalized, run on ‘hand to mouth’ finance and as a consequence have little or no capital for investment.

These firms are based upon low (no) technology, low levels of innovation, are poorly productive and think only in the short term. Many operate only spasmodically, or seasonally. The markets these enterprises operate with the single strategy of coping their competitors, in sectors where business opportunities are very easy to exploit.

Malaysian five-year plans, annual budgets, and government policies do little to assist this sector. Less attention is paid to the informal sector than the corporate sector, which deals in contracts rather than enhancing capabilities. Even the smallest of contractors, although meet the requirements of Bumiputera equity, are blocked out of business by other firms with political patronage and institutional connections.

Three-tier labour market

Malaysia’s formal workforce is made up of approximately 15 million people. According to statistics in 2019, 15.5 percent or 1.7 million worked in government. GLCs employed around 1.3 million people. Wage improvements are pegged to government announcements for the public sector, rather than competitive pressures.

As a result of the clearly divided economic sectors in Malaysia, there is a three-tier labour market. Dirty and dangerous low paying jobs are undertaken by foreign guest workers, which Malaysians will not work in. Foreign guest workers have different rules of work by and have few civil rights.

The second sector of the labour market is where Malaysians primarily occupy. This runs from semi-skilled right up to corporate managerial positions.

Thus, there are two-sub sectors. Those people who work in jobs with no prospect for career advancement, such as being on shop floors, retail, and other service industries, and those in management positions in either government and the corporate sector. This group has been experiencing wage growth through government announcements, where major corporations follow government leads.

The second professional tier is now coming under threat from computerisation, automations, and now artificial intelligence (AI), which is rapidly taking away jobs. This can be seen within the banking sector, and even fast-food outlets where ordering and e-payment systems allows for the reduction of staff at outlet level.

The third sector is within the informal sector, where there are no minimum wages and conditions. Those under-employed or not working are not counted in official figures.

Onto the 13th Malaysian Plan

With the 13th Malaysian Plan ready to be released in the next month, there are a number of issues that should be considered.

Malaysian academics and researchers have some of the highest research paper citations in the world, but nothing to show for it. At the same time, Malaysia has a low level of domestic and international collaborative research, which is a major reason innovation is low in Malaysia. Most research awards and funding go to researchers who have strong personal connections with the decision makers in the bodies granting research funds. This destroys meritocracy in the interests of patronage.

Education in general is hindered by the focus upon religious studies. Religious studies are incorporated into school curriculums, where recent surveys have shown that students spend up to 67 percent of their school time on religious studies. Students in Malaysia are falling behind other countries in the region which focus firmly on STEM subjects.

As discussed above, Malaysians find it difficult to find employment as the low-unskilled end of the labour market. This is partially because wages are unattractive, and employers prefer foreign guest workers to undertake the dangerous and dirty jobs. This will continue to dampen productivity improvement. Graduates are disappointed with the low salaries offered in the market and often opt out to doing some form of business within the informal economy. This leads to the growth of low capital, non-skilled, no innovation, copy-cat businesses in the informal economy.

Bank lending practices prevent many MSMEs from obtaining loans to commence or expand their businesses. Lack of collateral banks require is a major issue.

Sourcing raw materials for many types of manufacturing, especially where firms develop their own unique products (innovation) is often very difficult where it is required to import large quantities of materials firms can’t finance. This is a major hinderance to the ability of firms to innovate, due to lack of resources.

Logistic infrastructure is still poor in many parts of the country and not growing fast enough. There is a difficulty for firms shipping goods from small towns in small to medium quantities across the country. This inhibits market opportunities for rural based enterprises.

Malaysia’s Cabotage Policy restricts foreign vessels participating in domestic shipping activities in Malaysia, means that firms in Sabah and Sarawak must first send their goods to a port in peninsula Malaysia before shipments can be exported. This makes the cost of potential products cultivated or manufactured in Borneo prohibitive internationally, and vice versa. This prevents Sabah and Sarawak exporting competitively to South-East Asia, especially the coast of China, Hong Kong and Taiwan. This prohibits the growth of export based agricultural industries.

GLCs have a management problem. There is a public service culture within many GLCs, where there is little passion for the business by employees. Great enterprises are built on passion, which is absent in GLCs. This prevents innovation and improvements in productivity.

The level of corruption within the Malaysian economy is extremely high, due to the large number of government-driven business. Connections and favoured clients/suppliers/contractors prevent open and competitive marketplaces. This also dramatically increases the cost of products and services.

Productivity in Malaysia is steadily declining. Productivity equals value over cost. Most goods and services in Malaysia are based on low value-added production. The lack of rising productivity is a sign of stagnation. The key to raising productivity is raising value, which requires market innovation. This is lacking within the economy.

Wages are in real decline leading to a greater divide in rich and poor of the nation. This is putting pressure on the middle class that grew from the 1990s onwards. The growth of the middle class is stalling due to wage stagnation.

The private sector in Malaysia is not growing. Bank Negara Malaysia has concerns about the pace of private investment, where policy attention to ensure continued economic growth and job creation. Fiscally, the government is attempting to turn parts of the informal sector into the formal sector through mechanisms like e-invoicing.

With less than 1.0 percent population growth per annum, 15 percent of the Malaysian population will be over 60 by 2030. This means, Malaysia will have to rely upon a greater number of foreign guest workers in the future, as the size of the domestic workforce decreases.

It’s actually difficult to find reliable foreign direct investment figures (FDI) for Malaysia. Looking at available figures, FDI appears to be within the RM 30-50 billion range annually. However, must of this FDI comes from low-cost labour investments, which require foreign guest workers. With tax breaks provided by the government, many investments fail to deliver local multiplier effects which enrich the local economies they are situated in. Often the repatriation of profits far out weight the original investment, subsidized by the government.

Finally, Malaysia is facing a massive brain-drain of all its best talent. This is across all races. Most appear to be in search of better economic opportunities elsewhere. This is partly the result of both discriminatory policies, poor salaries, poor working conditions, and favouritism in hiring. The structure of the economy provides very few high-quality work opportunities.

These are some of the major issues the 13th Malaysia Plan must address.