MALAYSIA was part of the “East Asian miracle” in the 1990s. But unlike South Korea and Taiwan, its economic growth run stalled and as a result, came up short in taking the country to the next level of development.

       Deindustrialisation, which started in the early 2000s, had likely played a part.

       Given the current economic predicaments, will deindustrialisation pick up in pace? What can be done to slow it down or reverse its trend?

       Deindustrialisation, which typically occurs when an economy undergoes a structural transformation, is not necessarily bad. In high-income countries, it is a normal process of development during which industrial activity declines in importance.

       The process of deindustrialisation manifests itself when, for example, productivity improvements in manufacturing due to labour-saving technologies lead to shifts in resources towards services.

       Consequently, the share of employment in manufacturing will fall while that of services rise.

       When deindustrialisation befalls developing countries, however, the phenomenon is labelled premature deindustrialisation.

       This is because it reflects, among other things, weakening opportunities for industrialisation to take place despite the country never getting fully industrialised in the first place.

       Malaysia’s premature deindustrialisation started manifesting itself when growth dynamics began to weaken in the aftermath of the 1997 Asian Financial Crisis.

       The crisis, in fact, was likely one of the reasons why Malaysia remains caught in the middle-income trap.

       We should thus be worried if premature deindustrialisation picks up in pace. We should also be worried because manufacturing is an important source of technological innovation and productivity gains.

       The agricultural sector, for instance, is a heavy user of fertilisers, pesticides, and agricultural machinery – all of which gain the most from technological innovation.

       In addition, manufacturing output, when compared with services output, is easier to trade internationally.

       Given the pandemic, we think Malaysia’s premature deindustrialisation will pick up in pace if nothing is done. After all, the deleterious impact of crisis-induced recessions can be long-lasting.

       The pandemic’s damage to supply chains has been severe and the impact on trade-dependent Malaysia – amid rising trade protectionism and geopolitical issues – will only nudge us further along the deindustrialisation path.

       To slow down and reverse the trend of premature deindustrialisation, it is critically important that the strategies in the recently announced 12th Malaysia Plan (12MP) be successfully implemented.

       According to the 12MP document, the strategies include, “accelerating structural economic transition”, “enhancing productivity” and “promoting quality investment”.

       It is not surprising that resetting the economy is right at the forefront of the 12MP document and we certainly applaud this. For many years now, Malaysia had in fact needed an economic reset to reinvigorate the economy.

       Had this happened earlier, it is likely that we could be facing the pandemic from a position of strength, not weakness.

       In any case, we think the 12MP’s four catalytic policy enablers, of which “accelerating technology adoption and innovation” is one, will revive the economy and subsequently hold off premature deindustrialisation.

       It is not an exaggeration to say that technology adoption and innovation, especially in the post-pandemic environment, will decide whether an economy falls by the wayside or stays relevant in the global economic arena.

       The adoption of digital labour technologies, in particular, will lead to a more resilient and productive workforce. This would be a major plus for strategies aimed at moving up the value chain and strengthening growth dynamics.

       Forging ahead, our collective futures will depend on, in addition to other factors, successful policy implementation.

       Malaysia, unfortunately, does not have a good track record in that regard. The government recognises this and has set “improving governance and policy” as a priority area.

       The government needs to move fast. If not, the 12MP document could very well end up looking more like a mere listing of the country’s medium-term development aspirations rather than a plan to take the country to the next level.

       Quah Boon Huat is senior economist at Malaysian Rating Corp Bhd (MARC). The views expressed here are the writer’s own.