Malaysia Economic MonitorBrain Drain

April 2011

www.worldbank.org/my

THE WORLD BANK

How is the economy performing post-recovery?

90

95

100

105

110

115

120

07 Q1

Q3 08 Q1

Q3 09 Q1

Q3 10 Q1

Q3

GDP level without crisis (sa)

Actual GDP level (sa)

9.2%

6.3%

MALAYSIA ECONOMIC MONITOR

Real GDP growth, QoQ , sa, percent

Growth momentum picked up late 2010.... but output losses from the crisis persist

3

2.4

0.4

-0.3

-2.5

-3.7

2.7 2.4

3.1

1.71.4

-1.0

2.6

-4

-3

-2

-1

0

1

2

3

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Actual and simulated GDP levels (sa), Q1 2008=100

Note: No-crisis scenario assumes quarterly growth

at averages of 2002-07.

Inflationary pressure is building....but remains benign in regional context

MALAYSIA ECONOMIC MONITOR

CPI inflation, YoY, percent

4

-8

-6

-4

-2

0

2

4

6

8

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Month-on-Month

Year-on-year

-4

-2

0

2

4

6

8

Aug-09 Feb-10 Aug-10 Feb-11

Indonesia

Malaysia

China

Thailand

CPI inflation: YoY and MoM (3mma, saar), percent

Export recovery lagged the region’s....a decline in structural competitiveness?

MALAYSIA ECONOMIC MONITOR

Goods export volume in USD, rebased to Jan 2007=100

5

Note: Export volume of Jan 2011 relative to Jan 07 (=100) in brackets

55

75

95

115

135

155

175

Jan-08 Jan-09 Jan-10 Jan-11

China

Indonesia

Malaysia

Korea

E&E export value, sa, rebased to Jan 2008=100

50

70

90

110

130

150

170

2007M01 2008M01 2009M01 2010M01 2011M01

Hong Kong SAR, China (127)

Korea Republic (138)

Malaysia (117)

Singapore (131)

Thailand (124)

Taiwan, China (130)

Foreign direct investment rebounded....but remains well below potential

MALAYSIA ECONOMIC MONITOR 6

Total FDI inflows, USD billion (UNCTAD data)

Actual and simulated average annual FDI inflows from

24 OECD economies during 2007-09, USD billion,

OECD bilateral FDI data

15.3

7.1

5.5

3.8

0 4 8 12 16

Best practice

Partial improvement

Predicted

Actual

3.9 3.8

0.6

3.22.5

4.64.1

6.1

8.6

7.2

1.4

8.6

0

1

2

3

4

5

6

7

8

9

99 00 01 02 03 04 05 06 07 08 09 10

What is the outlook for growth?

MALAYSIA ECONOMIC MONITOR

In the near term, output is expected to resume growth at pre-crisis rates

MALAYSIA ECONOMIC MONITOR

Actual and forecast real GDP growth, year-on-year, percent

8

6.5

4.7

-1.7

7.2

5.3 5.5

-2

0

2

4

6

8

2007 2008 2009 2010 2011f 2012f

Over the medium term, the challenge is to escape the middle income trap....

MALAYSIA ECONOMIC MONITOR 9

Real GDP growth, percent

-8

-6

-4

-2

0

2

4

6

8

10

12

1961 1967 1973 1979 1985 1991 1997 2003 2009-30

-20

-10

0

10

20

30

40

0 10000 20000 30000 40000

Malaysia

Korea

Hong

Kong

Singapore

Annual growth over 1962-2009 in GNI per capita against level

..... and book further success in reducing poverty and inequality

MALAYSIA ECONOMIC MONITOR

Gini coefficient of inequality and poverty incidence

10

0%

10%

20%

30%

40%

50%

60%

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

1970 1989 1997 2002 2009

Inequality (left)

Poverty (right)

0.3

0.4

0.8

1.1

1.3

2.0

3.2

3.6

3.8

4.2

6.3

8.4

9.8

12.0

42.9

0 10 20 30 40 50

W.P. Labuan

Melaka

N.Sembilan

W.P.KL

Perlis

P.Pinang

Pahang

Selangor

Terengganu

Johor

Kelantan

Perak

Kedah

Sarawak

Sabah

Share of national poor in 2009, percent

The reform agenda: progress has been made, but implementation needs to be accelerated

• Assessment and articulation: significant progress– Frank assessments– Bottom-up and private-sector led approaches– Sound structure of the reform agenda

• Implementation: more needs to be done– New frameworks to facilitate implementation– Positive sentiment on NKEA projects– Interviews suggest skepticism on NEM

• Addressing cross-cutting issues is key, else:– Project-based growth acceleration not sustained– Underlying competitiveness eroded

MALAYSIA ECONOMIC MONITOR 11

Whither the Brain Drain?

Why a report on brain drain?

MALAYSIA ECONOMIC MONITOR

An impediment to Vision 2020?• Malaysia needs talent

• Talent seems to be leaving

A subject of debate and controversy• Anecdotes are abundant

• Systematic studies are few

A topic that raises many questions• How large is the brain drain?

• What is its economic impact?

• How can policymakers respond?

13

(1) How large is the brain drain?

MALAYSIA ECONOMIC MONITOR

• The Malaysian diaspora is estimated at one million as of 2010

• The diaspora is geographically concentrated and ethnically skewed

• About a third of all migration represents brain drain

14

Diaspora is estimated conservatively at 1 million, of which a third is brain drain

Note: in thousands

MALAYSIA ECONOMIC MONITOR 15

827

1,023 1,023

1,415 1,415

277306

335365

453

0

200

400

600

800

1,000

1,200

1,400

Baseline S1 S2 S3 S4

Diaspora in 2010

Brain drain in 2010

conservative estimateAssumptions on

Singapore nonresidents

Share

Malaysian

Share

skilled

Base 0% 0%

S1 15% 15%

S2 15% 30%

S3 45% 15%

S4 45% 30%

Singapore’s nonresident population has grown rapidly

Evolution of population in Singapore, thousands

MALAYSIA ECONOMIC MONITOR 16

2,1942,623

2,9853,230

87

112

287

541

131

311

754

1,305

0

1000

2000

3000

4000

5000

1980 1990 2000 2010

Nonresidents

Permanent residents

Citizens

Diaspora and brain drain are concentrated in just a few countries

Share in diaspora, by destination country

MALAYSIA ECONOMIC MONITOR 17

2%

4%

10%

5%

3%

15%

54%

2%

2%

6%

6%

7%

10%

57%

0% 10% 20% 30% 40% 50% 60%

New Zealand

Canada

United States

United Kingdom

Brunei

Australia

Singapore

Diaspora in 2010

Brain drain in 2010

The rate of brain drain remains elevated.....

Estimates of yearly growth in skilled-migrant population, 25+, 2000-2010

MALAYSIA ECONOMIC MONITOR 18

0.5%

2.6%

2.9%

3.5%

4.7%

4.7%

0% 1% 2% 3% 4% 5% 6%

Canada

United Kingdom

Australia

United States

Brunei

New Zealand

Singapore

4.2%

average

6.0%

6%10%

49%

70%

78% 79%

70%

18%

23%

34%

56%

65%68%

71%

0%

20%

40%

60%

80%

Brunei UK New Zealand USA Australia Canada

1990 2000

Singapore

35%

2010

.... because migration to Singapore is becoming primarily skilled migrationShare of skilled migrants at destination in total migrants at destination, 25+, percent

MALAYSIA ECONOMIC MONITOR 19

(2) What is the economic impact of brain drain?

MALAYSIA ECONOMIC MONITOR

• Brain drain is aggravated by a narrow skill base and a lack of compensating inflows

• Brain drain imposes costs, but can also bring benefits

• Brain drain has likely contributed to an erosion of the already narrow skill base

20

Brain drain is intense relative toa narrow skill base

Gross emigration rate, percent, OECD destinations

MALAYSIA ECONOMIC MONITOR 21

1.2%

4%

8%

11%

14%

30%

1.3%

3%

10%

26%

25%

33%

0% 10% 20% 30%

Japan

China

Korea

Malaysia

Singapore

Hong Kong

1990 20005% global

average

20%

34%

adding Singapore*

Brain drain is not alleviated by compensating inflow of skilled migrants

MALAYSIA ECONOMIC MONITOR 22

0

5

10

15

20

25

30

35

40

1982 1986 1990 1996 2000 2004 2008

Share of migrants with no formal education

Share of migrants with primary education

0

2

4

6

8

10

12

14

1982 1986 1990 1996 2000 2004 2008

Share of migrants in total employment

Brain drain has likely eroded the quality of the skill base

Number of weeks to fill vacancy for skilled technician

MALAYSIA ECONOMIC MONITOR 23

8.8

5.3 5.13.8 3.7 3.4 3.2 2.9

1.6

0

2

4

6

8

10

Bra

zil

20

03

Ma

laysia

20

07

Th

aila

nd

20

07

Ire

lan

d 2

00

5

Ge

rma

ny 2

00

5

Ko

rea

20

05

Ind

ia 2

00

2

Ru

ssia

20

05

Ind

on

esia

20

03

Percent of managers considering skill set of local

skilled production workers ‘poor’ or ‘very poor’.

0 10 20 30 40 50

IT

English language proficiency

Professional communication

Creativity/innovation

Technical/professional

Problem solving

Numerical

Time management

Leadership

Adaptability

Social

Teamworking

Manufacturing

Services

(3) How can policies address brain drain?

MALAYSIA ECONOMIC MONITOR

• Brain drain is a wave to be ridden, not a tide to be turned

• It is a symptom of underlying factors, not a problem in itself

• To address the brain drain at its root, the productivity and inclusiveness agendas are key

• Targeted policies to facilitate the flow of talent can complement but not substitute

24

Brain drain is a symptom of underlying factors... productivity and inclusiveness are key

Source: Survey of the diaspora

MALAYSIA ECONOMIC MONITOR 25

12%

19%

23%

28%

30%

54%

60%

66%

0% 10% 20% 30% 40% 50% 60% 70%

Livability

Study and return

Politics

Safety and security

Study and stay on

Compensation

Social injustice

Career prospects

Percent of respondents listing factor among top three concerns

Brain drain requires a comprehensive approach: (a) Boosting productivity to raise wages....

Note: TFP = total factor productivity

MALAYSIA ECONOMIC MONITOR 26

4.4

1.3

3.4

2.2

-0.4

2.3

7.8

4.5

-1

1

3

5

7

87-97 98-07 87-97 98-07 87-97 98-07 87-97 98-07

Services Industry Agriculture Memo: Manufacturing

TFP

Land

Skills

Capital

Contribution to labor productivity growth, percentage points

....by addressing the supply side (improving education system)

MALAYSIA ECONOMIC MONITOR 27

0 10 20 30 40 50 60

Negeri …

Kelantan

Kedah

Pulau Pinang

Sabah

Johor

Melaka

Selangor

KL

Perlis

Perak

Sarawak

Terengganu

Pahang

Urban

Rural

TIMMS score of 13-year olds in science, by percentile Share of 14 year old with math score below 400, TIMMS

200 400 600 800

Indonesia

Int'l average

Thailand

Malaysia

Australia

US

Hong Kong, China

Russian

Korea

Japan

England

Taiwan, China

Singapore

10th (Science)

90th (Science)

....and addressing the demand side (promoting innovation and competition)

Share of firms considering ‘lack of appropriate source of finance’ as factor hampering innovation activities, according to importance

MALAYSIA ECONOMIC MONITOR 28

10%

30%23% 24%

43%19%

38% 55% 47%

41%71%

32%23%

29%

15%

0%

20%

40%

60%

80%

100%

1990-94 1997-99 2000-01 2002-04 2005-08

Not important or slightly important

Moderately important

Very important

14 1416

20

0

5

10

15

20

25

Manufacturing firms Services firms

2002

2007

Share of firms indicating ‘anti-competitive practices’ as ‘severe’ of ‘very severe’ problem, 2002-2007, percentage points

Brain drain requires a comprehensive approach:(b) Enhancing inclusiveness to leverage on all talent

Share in Malaysian resident diaspora in Singapore, by ethnicity,

MALAYSIA ECONOMIC MONITOR 29

85%

9%

5%

88%

6%5%

0%

20%

40%

60%

80%

Chinese Malay Indian

2000

2010

61%

18%

10%6%

2.3% 2.2%

0%

10%

20%

30%

40%

50%

60%

Chinese

English

Malay

Indian

Other Asian

Other

Share of Malaysian adults in US by language group, 2000

With enabling conditions in place, talent management and diaspora engagement can complement

Expatriates, thousands, by sector employed. Peninsular Malaysia only

MALAYSIA ECONOMIC MONITOR 30

7 5 5 6 4 3 5

19

15 1618 22

22 21

17

13 13

1210

7 7

0

10

20

30

40

50

2004 2005 2006 2007 2008 2009 2010

Manufacturing

Services

Other

Thank you

MALAYSIA ECONOMIC MONITOR 31