The manufacturing sector and the future of Malaysia's economic development

Abstract

The paper takes on the increasingly popular view that the service sector should become Malaysia's new engine of growth, given the relative stagnation of its manufacturing sector in the last decade and the rise of post-industrial knowledge economy, in which the engines of growth consist of knowledge-intensive services such as finance, engineering, and design. The paper begins by explaining why the relative decline of manufacturing, or de-industrialisation, occurs and what kinds of negative consequences it may have on a country's productivity growth and balance of payments. After this, the paper makes a number of points criticising the 'post-industrial knowledge economy' discourse. First, the knowledge economy is nothing new, as it was never the physical act of making things but the quality of the knowledge behind production that determined a country's economic success, even in the industrial era. Second, many knowledgeintensive services look 'new' only because they have been 'spun off' or 'outsourced' from the manufacturing firms that previously produced them. Third, we cannot separate the manufacturing sector from the 'knowledge' sector, as it is the key source of new productive knowledge. Fourth, most service activities that have high rates of productivity are producer services for the manufacturing sector and can therefore be sustained without a successful manufacturing sector in the long run. Finally, the present article debunks some myths about the supposed service-based success stories of Switzerland, Singapore, and (more recently) India. In the final section, the paper discusses the policy implications for Malaysia. While warning against making a fetish out of manufacturing, Malaysia needs to further develop its national technological capabilities in manufacturing through sustained investments in machinery, education, training, and R&D, supported by better policies regarding go vernment procurement, social welfare, and other areas, in order to become a truly developed economy.