Tighter controls on foreign workers hit Malaysian businesses

9th September 2009

Simon Harding

Strict new laws aimed at reducing the number of foreign workers in Malaysia are having an impact on the country’s small businesses, especially its manufacturing, catering and hospitality sectors. In January the government banned Malaysian companies in the manufacturing and services sectors from hiring foreign workers in a move designed to combat unemployment, which rose 4% in the first quarter of this year. Companies outside of these sectors have had their ability to recruit foreigners severely restricted. The policy has been backed by the country’s unions who see it as a way to improve job security for its members and foreign workers and to drive up wages. 

‘Because of the global economic downturn, we were worried about the impact on jobs for Malaysians as well as foreigners,’ said Raja Sekaran Govindasamy, secretary general of the Malaysian Trade Unions Congress. ‘We don’t want workers to be brought in and abandoned, because that then causes hardship.’

According to official figures there are around 2.2 million foreign workers in Malaysia, a country of 28 million, mostly from Indonesia, Burma, the Philippines and India. As many as a further 1 million foreigners could be working illegally in the country. The recruitment halt will stem this flow, whilst the government’s refusal to renew as many as 300,000 work permits will push this figure lower.

Malaysia faces increasing competition from China in the manufacturing sector, argues Mohammed Ariff, director of the Malaysian Institute of Economic Research. To secure future growth, claims Ariff, Malaysia should move away from labour intensive industries towards higher skilled industries, like financial services, research and development and healthcare. Ariff says that rising wages in manufacturing in the early 1990s prompted employers to consider investing in hi-tech labour-saving production methods, only to abandon their plans when the government allowed them to hire cheaper foreign workers. The recruitment restrictions, he believes, will help Malaysia make the transition towards a high-skilled service-based economy.

However, despite the long term benefits of the policy, small and medium sized businesses are facing considerable staffing difficulties.
‘To run a restaurant, it’s becoming impossible’, said Muneandy Nalepan, who owns five restaurants in Kuala Lumpur. 40 of Mr Muneandy’s 120 staff have been sent home and he is finding it difficult to recruit local Malaysians. ‘If you are going to get a Malaysian to come to work, it’s very difficult,’ said Mr. Muneandy, ‘they feel that by working in a restaurant, their pride is in question. They feel that Malaysians have already come to a stage where they are above certain other Asian countries.’

Businesses are finding that Malaysians simply will not apply for the ‘three D’ jobs – dirty, difficult and dangerous - previously carried out by foreign workers. For Mr Muneandy the problem is so severe that he’s considering closing one of his outlets.

Whilst the Malaysia recruitment restrictions on foreign workers may make long term economic sense as the government tries to bring about a major economic transition, the policy has caused many short term difficulties and may have some undesirable side-effects.
The restrictions are aimed at countering unemployment. But foreign and Malaysian workers do not compete for the same jobs and, as illustrated by Mr Muneandy’s business. Sending foreign workers home could generate more unemployment amongst Malaysians as the small businesses which rely on foreign labour downsize to cope with recruitment difficulties, shedding jobs occupied by both foreign and Malaysian workers.

The presence of 1 million illegal workers suggests that Malaysia’s border controls are not watertight, which means that the likely increase in demand for illegal foreign workers will be easily met. These illegal workers are particularly vulnerable to exploitation, abuse and poor working conditions.

Even in the high-skilled service-based economies of the EU, to which Malaysia aspires, there is still a substantial demand for foreign workers in sectors such as construction, agriculture and healthcare. These foreign workers, such as Polish construction workers in the UK, fill gaps in the labour market. They do not take jobs away from local workers and make a valuable contribution to the economy. Given the problems surrounding the policy, it is hard to see how cracking down on foreign recruitment will benefit the Malaysian economy, especially during the global economic downturn.  The policy may score short term political points, but its ability to spur longer term structural change in the Malaysian economy is debatable.

Also see: ‘Businesses struggle with Malaysia’s restrictions on foreign workers’, Liz Gooch, New York Times. Available at: http://www.nytimes.com/2009/09/01/business/global/01iht-labor.html