Wednesday, March 18, 2009

Trouble for SMEs in mini-budget

Overshadowed by the crowing RM60bn headlines surrounding the mini-budget announced last Tuesday is a measure imposing double levies on foreign workers. This applies to both new and existing foreign workers.

The intentions behind this move are good - to raise employment opportunities for Malaysians, but the timing is terrible. Implementing this could actually lead to even greater unemployment for Malaysians and fewer job opportunities as our businesses, including small-and-medium enterprises (SMEs) have become addicted to cheap labour.

The Barisan Nasional government has for too long now pandered to the business community's lobby for cheap labour and paid too little attention to productivity. Businesses kept asking for cheap labour, which the government obligingly delivered by freely granting work permits for lowly skilled Indonesians, Bangladeshis, Myanmese ...As many as 2,000 approvals PER DAY were granted at the peak, according to Sunday Star report (Mar 15)! The result: no incentive for Malaysian employers and employees to invest in productivity-enhancing measures and low incomes and low standards of living for working-class Malaysians.

The right time to move up the value-added curve is when times are good and companies have extra profits to invest. The worst time is now when businesses are struggling with collapsing revenues. It is a business fact - costs are stickier than revenues. Customers can stop buying your product overnight. But you can't turn around and reduce your capacity overnight. It also works in reverse - if sales go up 10%, your costs don't go up by 10% immediately. So in good times, profit grows quickly; but in bad times, profits can quickly turn into losses as revenues plunge faster than costs.

This double-levy initiative serves to increase business costs at a time when businesses are struggling. It could well tip barely-afloat enterprises into bankruptcy. And that would mean Malaysians would also be thrown out of work, along with the cheap foreign labour. Of course there would be far more cheap foreign workers affected than Malaysians, but this is akin to throwing the baby out along with the bath water. We need to keep whatever employment opportunities we have.

Here's a better idea. Khazanah, despite its miserable execution record, has been given RM10bn to spend under the latest stimulus package. Instead of giving it to Khazanah to fritter away on various projects of 'long-term' benefit (by which time we are all dead, as Keynes astutely observed), let's help small and medium enterprises (SMEs) support Malaysians by offering them a cash payment for each Malaysian employed instead.

It could work this way: For each Malaysian employed, who earns less than RM2,500/month, the government will pay RM1,000 of the wages. This will narrow the gap between the cheap foreign labour and Malaysians, encouraging SMEs to employ locals while still keeping their costs competitive. RM10bn will be enough to cover 420,000 Malaysians for 2 years! After that, the government can slowly reduce this support, say to RM800 per year, then RM500, then zero. This will give both employers and employees time to reinvest in productivity enhancements which result in higher wages AND higher profits.

Before anyone accuses me of plagiarism - let me say here that Singapore is implementing a similar move.


Anonymous said...

Subsidising wages would be a god-sent given that a lot of SMEs that I know is reducing staff left, right and centre. But it is not going to happen given that Najib in a recent speech talked about not putting money directly into people's hands.

As an aside, I would like to say that the second so-called stimulus plan is a joke.

Anonymous said...

There are some inherent negatives to this scheme. The job market gets distorted and you will create a problem of under-employement. The problem starts when you pull back the job credit scheme and people start losing jobs. Some savvy Malaysian companies will also create phantom workers to take advantage of the scheme.

It is still better than leaving all the dosh with Khazanah.


Chi-Chang said...

Thanks Cyril,

You're right, the devil is in the details. In the specific case of some very creative Malaysian businessmen creating phantom workers, we may deter this by requiring that they show proof the Malaysian is replacing a foreign worker who has been employed at least for the last three months.


Anonymous said...

Chi Chang , the SMEs like the middle income earners are going to "die standing soon"......