World Bank: Malaysia needs underlying structural economic transformation to boost productivity

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KUALA LUMPUR (March 24): Malaysia needs underlying structural economic transformation to increase productivity growth, according to the World Bank.

East Asia and Pacific Regional Vice President Manuela V Ferro pointed out that while the country has done relatively well compared to its regional peers, it has fallen behind its ambitious peers. that have nearly three times the productivity levels.

“Furthermore, there are significant variations in productivity levels between firms in Malaysia.

“Pre-pandemic estimates suggest that small businesses generally lag considerably behind their larger counterparts,” she said, adding that businesses in the top 25% of the productivity distribution are nearly 12 times more productive than those in the bottom 25%.

“The pandemic has further exacerbated these differences,” she noted.

Ferro said that in recent years, spending on research and development (R&D) activities in Malaysia has declined after a steady increase until 2016.

Gross government expenditure on R&D fell from 1.4% of gross domestic product (GDP) in 2016 to 1.0% of GDP in 2018.

“This is below Malaysia’s envisaged target of 2.0% of GDP and the Organization for Economic Co-operation and Development (OECD) average of 2.6%.”

The World Bank has also found that Malaysian companies are also less likely to spend on R&D than their regional counterparts.

“Our engagement with government has given us the opportunity to examine relevant policy areas to help chart the way forward.

“One of the aspects we are focusing on in our recent work is on increasing the contribution of small and medium-sized enterprises (SMEs) to Malaysia’s economic growth,” Ferro said.

Based on analysis undertaken as part of the ‘SME Program Review’, the World Bank said Malaysia could consider realigning its public support to SMEs not just to enable a private sector-led recovery. post-pandemic, but also to support business-level innovation.

Another World Bank study titled “Assessment of the Malaysian Startup Funding Ecosystem” found that Malaysia’s venture capital activities are relatively weak compared to the region, relative to its level of development. economic.

“Thus, financing activities are operating below their potential, which affects the flow of investable transactions downstream. We also find that public support is concentrated on the most advanced stages of innovative activities, which calls for a possible need to rebalance this towards earlier and therefore riskier stages of the innovation cycle,” she said. added.

Meanwhile, evaluations of the effectiveness of public research institutes have revealed that while links between universities and industry have grown stronger over time, they remain weak overall, affecting the commercialization of research results. research.

“It is encouraging to see that in response to the report’s recommendations, the government has created a research management unit to reorient its technology transfer and commercialization programs to better meet the needs of industry,” Ferro said.

Based on the reports, the World Bank recommended that the government improve evidence-based policymaking for SME development by strengthening monitoring and evaluation of government programs and coordination between agencies, recalibrate SME programs to meet digitalization and skills-upgrading needs, and rebalance the policy mix towards the ideation stage with programs that attract private investment.

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