Sunday, August 14, 2011

Volume 3 Issue 33: Two-Cent Economics

Why Malaysia Still Needs Manufacturing

We can all pretend that the services industry will provide the high value-added jobs. Following this, the next logical step is probably to focus on creating a lot of jobs in the high-skilled services sectors. That way, Malaysia will transform into a high income economy.

What is wrong with that argument? Here is the article which explains why every country, not just Malaysia needs jobs in the manufacturing sector:
We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth. But countries ignore the health of their manufacturing industries at their peril.
High-tech services demand specialized skills and create few jobs, so their contribution to aggregate employment is bound to remain limited. Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits. For most countries, therefore, it remains a potent source of high-wage employment.
Indeed, the manufacturing sector is also where the world’s middle classes take shape and grow. Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious. Manufacturing may ultimately be central to the vigor of a nation’s democracy.
The bulk of new employment has come in “personal and social services,” which is where the economy’s least productive jobs are found. This migration of jobs down the productivity ladder has shaved 0.3 percentage points off US productivity growth every year since 1990 – roughly one-sixth of the actual gain over this period. The growing proportion of low-productivity labor has also contributed to rising inequality in American society.
The loss of US manufacturing jobs accelerated after 2000, with global competition the likely culprit. As Maggie McMillan of the International Food Policy Research Institute has shown, there is an uncanny negative correlation across individual manufacturing industries between employment changes in China and the US. Where China has expanded the most, the US has lost the greatest number of jobs. In the few industries that contracted in China, the US has gained employment.
As economies develop and become richer, manufacturing – “making things” – inevitably becomes less important. But if this happens more rapidly than workers can acquire advanced skills, the result can be a dangerous imbalance between an economy’s productive structure and its workforce. We can see the consequences all over the world, in the form of economic underperformance, widening inequality, and divisive politics.