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Mohammad Ariff of the Malaysian Institute of Economic Research writes:

In the absence of the massive influx of foreign workers, wages would have risen and employers would have resorted to labour-saving technology to boost productivity (to rein in labour costs). Malaysia would then have automated and moved up the value chain through industrial upgrading. Alas, Malaysia took the wrong turn in the early 1990s.

Ironically, the long-term vision was undermined by a short-sighted growth strategy, which was pursed single-mindedly with a high pre- mium on short-term growth at the expense of long-run goals. Malaysia had inadvertently shot itself in the foot.

In a sense, the “High Income Economy” is a watered-down version of Vision 2020, as Malaysia has to settle for a lower GDP (RM887 billion instead of RM1.37 trillion in real terms) and a lower GNP per capita (US$15,340 instead of US$17,000) in 2020.

Nevertheless, if all goes well, Malaysia can still join the league of developed nations by 2020 with a per capita income higher than the projected minimum (US$14,818) for this category. All this would make sense, only if high income is linked to high productivity.

This is ironic, considering Malaysia is just north of Singapore… a country that successfully joined the league of developed nations while employing a more liberal immigration regime than Malaysia.

Here’s the pitfall Ariff fell in: he equated high productivity with development. Even if the high productivity is achieved inefficiently. Employers choose to hire low-wage workers instead of pursuing productivity through capital investments because it is cheaper. But that doesn’t preclude gains in productivity – accountancy firms, for example, hire less accountants and buy more computers because the gains in productivity boosts efficiency.

Reducing economic efficiency does not make it easier to become a developed economy. If Malaysia closes up its borders to people, the damage is immense – higher cost of living and stunted economic growth. Sure, capital intensity will increase – but at what expense? Those hundreds of thousands of households with foreign maids will either give up their maids (less leisure and work time = less income and less consumption) or hire more expensive local ones (less money to spend elsewhere in the economy). Eating out will now be a once-in-awhile affair, as restaurants can’t hire foreigners as cooks, waiters and cleaners. Their costs will go up, with produce being more expensive with the lack of foreigners working on farms and estates.

The strange assumption here is that the presence of low-productivity sectors will somehow preclude high-tech, high productivity sectors. It is a faulty, unreasonable premise that if Taiwan had factories making clothes and dolls, they wouldn’t be fabricating chips. Had Taiwan allowed more mainland Chinese to “flood” its island, Taiwan will be better off economically.

This faulty logic is based on looking at developed countries today: for the most part, they don’t have much low-skill foreigners around today. But that is hardly explanatory – the United States, Canada, Australia and New Zealand have a large number of low-skill immigrants – documented or not. In the recovery period after the war, West Germany brought in hundreds of thousands of Turks as guest workers, as another example. In fact, if anything, the current developed status of such countries is despite of, rather because of its immigration restrictions.

High-income countries like Western Europe, United States and Canada all have far much better institutions and economic fundamentals compared to Malaysia. A better education system, for example, means a better and more productive workforce that could survive without immigration. Malaysia could develop to become a develop country without immigration. It’s possible, but so much harder.

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