More work needed to bolster Malaysia's structural story

It apparently suffers from Dutch Disease.

While it has been noted that Malaysia's cyclical growth momentum is likely to stay at a respectable pace, it has also been observed for some time that

Malaysia’s medium-term structural story is not as compelling as other ASEAN economies’ because it suffers from a Dutch Disease of sorts.

According to a research report from Morgan Stanley, benign demographic trends have provided

the labour inputs for growth.

Meanwhile, commodity-related revenue, making up 30% of government revenue, has provided the capital inputs for growth via fiscal pump-priming.

Together, these factors have historically created a comfortable growth buffer, leading policymakers to neglect for some time what is needed on the competitiveness/productivity front.

Here's more from Morgan Stanley:

As a result, the Dutch-Disease symptoms have been evident. Foreign direct investment (FDI) has been on a secular downtrend.

Malaysia’s global share of manufactured exports has fallen. Non-commodity trade balance has been on a secular decline.

In addition, the tertiary-educated make up an increasing share of the unemployed group, pointing to a degree of skills mismatch in the labour market.

In this context, a sustained reversal in the commodity terms-of-trade, without a corresponding improvement in productivity in other non-commodity economic segments, would likely constrain growth prospects for Malaysia in the medium term.

We reiterate our view that engineering a sustainable inflexion point in Malaysia's structural growth story would require policymakers to address issues pertaining to the quality of human capital.

In this context, implementation of the Education Blueprint Plan would be important to watch, and we note that some steps have been taken on that front.

To name a few, establishment of the Performance and Delivery unit (PADU) to monitor and ensure the implementation of the Blueprint initiatives, launch of the District Transformation Programme to accelerate school improvements and close the equity gap between schools, and carrying out the Literacy and Numeracy Screening (LINUS) to enhance literacy and numeracy among students are initiatives that have seen some encouraging results in the first year of launch.

Also, several policy measures have been announced to reinforce the importance of enhancing English language proficiency among both teachers and students, such as making English a must-pass subject for SPM by 2016 as well as a compulsory requirement to graduate from public universities.