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MANAGING THE CHALLENGES OF WTO PARTICIPATION: CASE STUDY 25

Malaysia: Strategies for the Liberalization of the Services Sector

Lim Chze Cheen*

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 Disclaimer:
Opinions expressed in the case studies and any errors or omissions therein are the responsibility of their authors and not of the editors of this volume or of the institutions with which they are affiliated. The authors of the case studies wish to disassociate the institutions with which they are associated from opinions expressed in the case studies and from any errors or omission therein.

Case Studies main page
Introduction

   

ON THIS PAGE: 
I. The services sector in Malaysia: a brief update
II. Challenges for the Malaysian services sector in the wake of GATS
> III. Policies and strategic initiatives to prepare the services sector
IV. Conclusion
Bibliography


As Malaysia begins to position itself strategically in the knowledge-based economy, the services sector has been earmarked as its next engine of growth. This idea, in its rudimentary form at least, has been bounced around the discussion circles of policy-makers, policy scholars and various other intellectuals involved in influencing national policy for more than a decade now. Indeed, the importance of the services sector to further Malaysia’s economic growth has been increasingly highlighted in the country’s various development plans.

 
 

I. The services sector in Malaysia: a brief update    back to top

The tradability of services is set to be enhanced further by the development of new transmission technologies facilitating the supply of services (e.g. electronic banking, tele-education, tele-medicine), the deregulation of monopolies (e.g. voice telephony), and the gradual liberalization of hitherto regulated sectors such as financial services and transport combined with changes in consumer preferences. The share of services in the Malaysian gross domestic product (GDP) has expanded from 48.8% in 1987 to 60.8% in 2003, if construction services are included. This simple picture of services growth, painted by existing statistics, can only become more vivid in the near future.

In terms of WTO commitments, Malaysia has signed the agreement under the single undertaking rule and General Agreement on Trade in Services (GATS) as part of the whole package. Under GATS, which follows a positive list approach, Malaysia is expected to identify services sectors or sub-sectors and the modes of supply in which it is willing to make commitments through the process of ‘scheduling’, as well as to indicate any limitations on market access and national treatment.

As of mid-2005, Malaysia had received requests from twenty-one countries. Generally, the requests received covered a wide range of professional services, advertising, news agency services, telecommunications and computer-related services, and focused on areas such as the liberalization of additional sectors not committed under GATS, for example further liberalization or the elimination of restrictions placed under the current commitments (for example, limits on foreign equity and intra-corporate transferees) and transparency of policies and domestic regulatory procedures (e.g. visa approval, incentives, licensing). On the other hand, Malaysia has also forwarded its own list of requests for market access to forty-five countries covering architecture, engineering, accountancy, construction and telecommunication services. These are areas where Malaysian services providers have demonstrated the capacity to export.

In terms of sectoral commitments, foreign companies in the field of accounting, auditing, bookkeeping and taxation, as well as engineering services (joint ventures only) could enter through local partnerships or joint ventures, and their equity in the company should not exceed 30%. The same goes for distributive services such as the wholesale and retail trades, which Malaysia has yet to list in its national schedule of offers under GATS. Regarding legal services, foreign lawyers are not allowed to provide services in Malaysia. However, foreign legal firms can do so through companies incorporated in Labuan. Foreigners in the medical field can practise in private hospitals controlled by Malaysian companies. In the realm of information, communications and technologies (ICT), a Multimedia Super Corridor (MSC)-registered company can be fully owned by a foreign company.

 
 

II. Challenges for the Malaysian services sector in the wake of GATS    back to top

The adoption of WTO trade rules in services presents us with opportunities as well as threats. One thing which is certain is that the globalization process together with participation in the WTO will reduce the areas of domestic policies which can be manoeuvred, in Malaysia and other countries. In order to enjoy greater business opportunities arising from the global liberalization of services, Malaysian services industries will have to adapt to a more open market environment. In this context, the sector needs to build up efficiency, productivity, and thus competitiveness, through essentially market means as it becomes increasingly open to foreign participation and global best practice standards, including transparency of rules and regulations.

Although the pressure on Malaysia to liberalize further will always be present, the GATS provides the flexibility to open up fewer sectors and to impose specified conditionalities in the concessions on market access. Despite such flexibility, the main concern for the policy makers is that there is only a limited number of services suppliers which are competitive by international standards. The Malaysian Ministry of International Trade and Industry (MITI) agrees that the services suppliers need to be ready and approach the ongoing negotiations from the perspectives of both the external and domestic markets.

The gradual liberalization measures will inject some elements of competition and prepare suppliers to the domestic market. The commitments undertaken by Malaysia under the GATS would eventually lead to a greater presence of foreign services providers in the country. This is envisaged as creating stiffer competition to local providers, but the extent of such competition would depend, in part, on the type, quality and price competitiveness of services offered by the foreign providers. Although Malaysia has yet to make any offer in certain areas, there is already a foreign presence in Malaysia. For example, Malaysian legal practitioners are already making good indirect use of alliances with foreign legal firms.

While the multinational corporations (MNCs) and large enterprises are generally ready to deal with changes in the global landscape, most of the small and medium-sized enterprises (SMEs) still require capacity building to prepare themselves.(1) Because of the incipient stage of development of these SMEs, they will find it tough to compete in the domestic market, let alone taking advantage of the vast opportunities associated with services market openings. These SMEs, like their larger counterparts, are also adjusting and learning to cope with WTO commitments in the area of GATS, TRIPS (the Agreement on Trade-Related Aspects of Intellectual Property Rights) and other regulatory changes that are needed for compliance. An indiscriminate liberalization of the services sector can thus create a lot of problems for the SMEs, resulting in their closures, net job loss and so on.

On the other side of the coin, the ongoing negotiations will provide suppliers to the international market with the opportunity to seek further market access in both the developed and developing countries. However, these suppliers encounter various problems as well. There are two aspects of cross-border supply problems: internal and external challenges faced by services suppliers. The internal aspect deals with the capacity and capability of the services suppliers, in terms of financial, technical and human resources. These providers need to explore ways to position themselves better globally. Externally, the services exporters would benefit significantly from understanding the market destination, with respect to trade and non-trade barriers, as well as business and social culture. For example, in the area of professional services, a plethora of regulations in the guise of economic needs tests (and local market tests and management needs tests), processing of visa applications, residency requirements, recognition of educational qualifications, social security contributions, minimum capital and investment required for commercial presence, local partners, profit repatriation and other hindrances stand in the way of obtaining market access.

Thus the challenge is to reconcile the need to protect the national interest in these sectors with the need to benefit from services liberalization. The developments mentioned thus far bring to the fore new challenges for the Malaysian economy, strengthening the need for comprehensive strategies to be formulated to address them.

 
 

III. Policies and strategic initiatives to prepare the services sector    back to top

In preparing the services industry to meet the challenges posed by the globalization and liberalization process under the WTO, the Malaysian government has developed and explored various strategies to enhance the competitiveness of the Malaysian services sector. Some sectors, such as tourism, private education, promoted manufacturing services, health and construction services, have been able to capitalize on greater market liberalization, while others may face problems adjusting to the evolving landscape. These strategic initiatives are aimed at preparing services suppliers domestically and assisting thriving services exporters.

While Vision 2020 provides the general direction of Malaysia’s development aspirations, the specific strategies involved are contained in the two Industrial Master Plans,(2) the three Outlook Perspective Plans, and the various five-year Malaysia Plans. Policies to promote specific services industries, such as shipping, education, tourism and, more recently, ICT, already exist. All that is needed, albeit crucially, is to tie these various industry-specific policies together in a coherent and synergistic manner so as to guarantee their efficacy, thereby providing a powerful boost to the country’s economic growth and development. In the meantime, the Malaysian Industrial Development Authority (MIDA) would be responsible for the development and promotion of the services sector in the country, except for financial services (Central Bank of Malaysia, BNM) and utilities (Malaysian Communication and Multimedia Commission, MCMC). In architectural terms, the successful construction of a building depends in large part on the quality of the blueprint and its execution. Likewise, in creating a new service-oriented economy, there is a crucial need to develop a ‘services master plan’ to guide its development. Up until now, the various planning documents have presented the various services as separate sub-sectors whose roles were regarded as social or facilitative in nature. As a result, the development of services in the past lacked coherence and, more often than not, proceeded in an ad hoc and fragmented manner. Although a framework for the coherent development of the services sector that takes these into consideration is still in the making, the government is profiling the services sector in an attempt to understand the sector better, while the Department of Statistics is looking into ways of measuring the sector more effectively.

To prepare services providers, one of the first steps undertaken is the creation of awareness and dissemination of information on GATS. This includes the provision of briefings and updates on the latest developments with regard to the process of globalization and liberalization, as well as making available to members critical information related to liberalization and the export of services on a timely basis. For example, the WTO Technical Trade Barrier Notifications issued by the Standards and Industrial Research Institute of Malaysia (SIRIM), which provides updates on a regular basis, would be useful. Furthermore, it would be useful to obtain feedback through periodic surveys on the needs of the services providers with regard to liberalization and WTO issues (informational WTO digest) and export-readiness, and then fine-tune or formulate the necessary strategic response based on the findings.

Conversations with chambers of commerce and trade associations reveal that most Malaysian services providers are aware of the WTO and GATS but lack understanding of the implication of the world trading body for their businesses. Respective ministries related to the services sector are involved in the capacity-building efforts one way or another. It is thus essential for the ministries concerned to be in constant discussion with the various professional bodies, chambers of commerce, business associations, and key industry players on the services Malaysia can open up to foreigners and the services in which Malaysian providers can venture overseas. According to Stewart Forbes, executive director of Malaysia International Chamber of Commerce and Industries (MICCI), ‘MICCI engages government at every opportunity to accelerate the liberalization process in the belief that this will attract new technology and processes, which can be passed on to Malaysians and act as catalysts for subsequent development’.

Moreover, MICCI’s president, Jon Chadwick, feels that ‘greater contact between private sectors internationally can only assist in developing a better awareness of business opportunities, a better understanding of doing business in different countries and an ability to find business matches more easily’. In this respect MICCI signed a Memorandum of Understanding (MoU) with the Chamber of Commerce of the Northern Territory (CCNT), Australia, which provides an international business linkage that it hoped would ensure that businesses in Malaysia would be aware and kept informed of trade and investment opportunities. More of such international alliance would serve as a good training ground for Malaysian companies towards full services liberalization.

As mentioned earlier, SMEs are likely to be on the receiving end. In the light of this and the fact that SMEs are most likely to play a bigger role in the services-oriented economy, efforts to encourage SMEs to concentrate on developing specific skills and competencies for the export market are most important. SMIDEC has an array of policies to promote SMEs such as the Global Supplier Programme, the factory audit scheme and Enterprise 50.

MICCI has also launched an SME development programme in the second half of 2004 to include elements such as (i) increased awareness of branding importance and assistance through a branding award for SMEs; (ii) a series of dedicated chamber-to-chamber linkages through IT with a number of other countries so as to offer new and more specific partnership opportunities to smaller companies seeking to develop overseas linkages; (iii) low-cost IT-based trade services aimed at increasing SME exposure and international credibility. The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) has set up the Science, Technology and Innovation Committee to assist SMEs by participating actively at meetings or dialogues organized by relevant government ministries and to contribute to government’s formulation of policies and implementation of programmes and activities to enhance the competitiveness of SMEs.

In the context of market access, various government agencies have identified services sectors where there is current potential for exports. According to the Malaysia External Trade Development Corporation (MATRADE), these include healthcare services, education, construction and related professional services such as engineering and architectural services, printing and publishing services, as well as IT services. In line with Malaysia’s needs and priorities, the government has autonomously liberalized some of these services sector.

Effectiveness in promoting services also depends significantly on the state of export readiness of the Malaysian services sector. Before the government can design programmes to enhance export capability and capacity, they need to identify the ‘what, who, where’ candidates, that is, what services to export, who is ready or at least keen to export and where to export to. After the identification process and the setting up of an extensive database for ease of use by budding exporters in the future, the government (through MATRADE) can educate services exporters to be aware of and compliant with the standards and guidelines in the destination market, in accordance with the WTO rules.

With the objective of supporting and promoting the export of services, the Malaysian government has set up two bodies, the NAPSEC (National Professional Services Export Council), which is responsible for the promotion of export of professional services, and the PSDC (Professional Services Development Corporation), which is tasked with the responsibility of providing capacity building to the professional services sector. The representation of various professional bodies in these two entities is a reflection of the close collaboration between the public and private sectors to promote the export of services.

The key agenda of the PSDC is to enhance the skills and knowledge of all Malaysian professionals and to promote their marketability in an increasingly borderless world. The PSDC believes that Malaysian professionals will need to stand out in the global trading sector of professional services. For them to be recognised and respected as competent, experienced, skilful and dynamic professionals, it is imperative that the PSDC develop their capability and capacity (see Box 1 for the role of the PSDC). According to the PSDC, the local professional services providers lack financial strength, track record, exposure, marketing skills and branding. Besides training, the PSDC is putting these professional services providers together in a consortium in bidding for projects abroad. This would serve to strengthen the providers by leveraging on each other’s complementary skills.

  

Box 1: A background to the PSDC

The setting up of the Professional Services Development Corporation (PSDC) was initially proposed by the National Economic Action Council (NEAC), with the aim of assisting professionals in the construction industry to meet the challenges of globalization. The proposal was subsequently approved by the cabinet and the PSDC was established on 30 April 2002, with initial capital obtained from the Ministry of Finance Incorporated.

Currently, the PSDC looks into the interests of the professional bodies in Malaysia — such as engineering, architectural, legal, accounting, planning, surveying, medical and pharmaceutical — which collectively have more than 80, 000 registered members.

The PSDC is tasked to assist firms to shift from providing low-value- to high-value-added services, where this ‘value migration’ could be done systematically and through a concerted effort. The aim is gradually to create a unique Malaysian brand of multi-disciplinary professionals to perform in the international arena. Among the strategies undertaken are branding, marketing and promoting the Malaysian brand of professionals to other countries; establishing Malaysia as a centre for the capacity- and capability-building of professionals who are competent global players; and establishing Malaysia as an information hub for the enhancement of the intellectual capital of professionals.

To operationalize the strategies, the PSDC would encourage the use of research and development output; promoting the use of best practices; strengthen financial, marketing, management and communications skills through systematic training and continuous re-learning; establish strategic alliances and international networking; promote international accreditation for professional services providers; and maintain an effective representation in the WTO and other similar international bodies. In addition, the PSDC board members provide a wide wealth of knowledge and experience, as well as an excellent track record on the local and international scenes.

In short, the PSDC aspires to be the service provider in capacity building to both foreign and local professionals, the point of reference for professional services development and enhancement (a voice for the professionals and an information hub for all local professionals), and an international hub for professional services’ networking and partnering.

Source : Information obtained from the PSDC.

On the other hand, the NAPSEC, which will complement the PSDC, deliberates on issues, mainly incentives for the services export sector and the identification of priority markets for the export services (see Box 2 for NAPSEC’s functions). MATRADE, in co-operation with the relevant professional bodies and government agencies, such as the Ministry of Health, the Ministry of Education, the Construction Industry Development Board and the Ministry of Entrepreneurial Development, has organized promotional activities overseas for the promotion of the services sector.

 

Box 2: A background to NAPSEC

To assist MATRADE in drawing up programmes and approaches in promoting the services sector, NAPSEC (the National Professional Services Export Council) was launched by the Minister of International Trade and Industry on 20 August 2001. NAPSEC serves as an advisory council to the MATRADE (the Secretariat for NAPSEC) board of directors on matters relating to the export of professional services. It comprises representatives from the relevant professional bodies as well as the public sector. The professional bodies involved are architects, constructors, surveyors, engineers, accountants, lawyers and healthcare. With the participation of these bodies, NAPSEC provides a forum for obtaining private-sector views and inputs in the formulation of strategies and programmes for the export of professional services.

The terms of reference of NAPSEC are

  • to formulate and review national strategies and promotion programmes relating to the export of professional services, including construction services;
     
  • to recommend and facilitate funding for the export of professional services;
     
  • to formulate strategies to increase participation by Malaysian professionals or companies in overseas projects funded by international lending agencies;
     
  • to gather and disseminate information related to market opportunities;
     
  • to review and recommend incentives for the export of professional services;
     
  • to compile databases or directories on export-ready professional services providers with support and feedback from the industry;
     
  • to develop databases on market access issues and regulations affecting export of professional services, including facilitating mutual recognition agreements;
     
  • to identify approaches to publicize the skills and capabilities of the professional services, including construction services, in international markets;
     
  • to monitor global developments and their implications for Malaysian professional services exports; and
     
  • to monitor developments and provide inputs towards the formulation of Malaysia’s position and commitment in WTO negotiations in the professional services sector.

Source: Information obtained from NAPSEC.

Even Malaysia’s usually conservative professional bodies, the legal, medical and engineering fraternities, are beginning to allow their members to utilize IT and the Internet to promote their services, in preparation for the eventual liberalization of services under the ASEAN Free Trade Area (AFTA) and WTO agreements. Moreover, for local services providers to venture abroad, mutual recognition arrangements (MRAs) would need to be negotiated between Malaysia and the foreign countries, ensuring harmonized benchmarks for the services rendered.

In addition, MITI has decided to repeal the Promotion of Investments Act, 1986 (PIA) and replace it with a new act including wider scope for the development of the services sector, as well as fine-tune the Industrial Co-ordination Act, 1975 (ICA) to ensure that procedures and processes add to competitiveness. The government has also identified other constraints to be reviewed such as variations in the granting of incentives, anomalies in conditions for applications of incentives and the lack of clarity on effective dates for tax relief under Pioneer Status.

Changing the attitude of ‘waiting for governments’ should be the next step towards dealing with the WTO. The services providers should come forward and take a pro-active role and lead government policies in countering challenges to the domestic economy. The global trends in business have exposed a nation’s industry to the test of the international standards of productivity. According to Mustapa Mohamed, the Minister in the Prime Minister’s Department, as quoted in the New Straits Times of 10 May 2004, ‘there are quite a few Malaysian companies that have made good abroad, but they are small in number. To build strong companies and strong brands, companies cannot merely rely on government handouts and protection.’

With respect to human resources development, there are currently gaps in terms of what is needed to develop the services sector in Malaysia, particularly those related to highly skilled human resources in the various services industries. Mustapa suggested that ‘radical changes to the country’s education system are both necessary and inevitable, but this will inevitably take some time’. While currently high investments in the education sector should ameliorate the human resource problem in the medium and long term, the increasing mobility of people and the tradability of services leave Malaysia with little time to train effective human resource in the services sector. Hence a succinct and effective action plan is needed, to prepare and equip local undergraduates with competencies and skills to be globally competitive.

Coupled with the government’s efforts to nurture the business community through a variety of entrepreneurial support services, MICCI has also started a series of ‘industry-university’ dialogues to address directly the issue of workplace readiness among graduates, and a soft skills development programme is being explored with an international leadership institute.

The government needs to ensure that domestic regulations are WTO-compliant as well as WTO-consistent. Working closely with the relevant bodies is crucial. A periodic review of the regulations, particularly on professional standards and elements of transparency, would give services providers a big helping hand in preparing for liberalization. For instance, in the area of accounting, Malaysia continues to maintain its philosophy of convergence with international accounting standards, harmonizing its standards by minimizing differences to the greatest extent possible and modelling its standards very closely on international standards.

On the multilateral front, Malaysia has always pushed for the Emergency Safeguard Measures (ESM) provision in GATS, which calls on WTO members to negotiate on measures that can be used temporarily to address the adverse impact of the increased inflow of services imports into the domestic market. Current negotiations are focused on developing modalities for ESM. Malaysia, together with some ASEAN members, submitted a proposal on possible mechanisms. The ESM is important in offering confidence to countries, particularly developing nations, in progressively liberalizing their services sector and imposing temporary safeguard measures, if needed, to prevent irreparable damage to domestic industries.

 
 

IV. Conclusion    back to top

Malaysia is currently experiencing a ‘shifting of gears’ within the economic engine. While it is acknowledged that making the various structural adjustments necessary to realize its goal of creating a service-oriented economy will undoubtedly be a painful process, it is, ultimately, necessary.

To reiterate, a policy framework and strategies for the development of the services sector are vital for Malaysia’s economy to continue to grow and develop. Crucial for the success of these policies and strategies is a supportive physical and human infrastructure. More than the agriculture or manufacturing sectors, the services sector is highly dependent on the abilities and know-how of people. Therefore human resources development must be an integral part of any services sector development plan.

The services industry needs to have a level playing field when competing with foreign services suppliers. While pressing for such privileges at the multilateral front, it is necessary for them to consider domestic reforms in various services sectors where increased competition is likely to surface in the years ahead. The WTO, in this context, provides the ambience for the creation of a credible and reliable system of international trade (in services) rules. It is important to note that services-sector liberalization is not independent of other facets of the economy, for example investment liberalization. And there are many benefits to be gained from recognizing the complementarity between efforts in these areas and undertaking effective actions. The services industry players need to undertake a proactive role rather than a reactive one and take advantage of the system.

 
 

Bibliography    back to top

Bank Negara Malaysia (1995), Annual Report, Kuala Lumpur: Government Printers
 
Mahathir Bin Mohamad (1991), ‘Malaysia: The Way Forward’, working paper presented at the Inaugural Meeting of the Malaysian Business Council, Kuala Lumpur, 28 Feb. Available at http://www.epu.jpm.my/epu-mservis-v2020.html
 
Ministry of Finance (1999), Economic Report, Kuala Lumpur: Government Printers
 
Ministry of International Trade and Industry (MITI) (1996), Second Industrial Master Plan 1996-2005, Kuala Lumpur: Zainon Kassim
 
Ministry of International Trade and Industry, Malaysia (MITI), Annual Report, various years
 
National Economic Action Council (NEAC) (1998), National Economic Recovery Plan: Agenda for Action, Kuala Lumpur: Economic Planning Unit, Prime Minister’s Department
 
Raja Zaharaton bte. Raja Zainal Abidin (1996), ‘Services Industries as Source of Economic Growth’, paper presented at the National Outlook Conference organized by the Malaysian Institute of Economic Research (MIER), Kuala Lumpur, 3-4 Dec
 
Romer, Paul (2000), ‘Perpetual Growth’, speech given at the World Knowledge Forum 2000, Seoul, 17 Oct
 
Saifuddin, Sadna (2004), ‘Mustapa Outlines Eight Key Areas for Malaysia to Focus On’, New Straits Times, 10 May 2004
 
Sieh, Lee Mei Ling(1991), ‘Services in Malaysia: On the Threshold of a New Era’, paper presented at the National Outlook Conference organized by the Malaysian Institute of Economic Research (MIER), Kuala Lumpur, 3-4 Dec
 
Sieh, Lee Mei Ling (1994), ‘The Role of Services in Development: The Case of Malaysia’, in Malaysia’s Development Experience — Changes and Challenges, Kuala Lumpur: INTAN, pp. 726-49
 
Sieh, Lee Mei Ling (2002), ‘The Services Sector as an Engine for Growth: Niches for Malaysia’, paper presented at the National Outlook Conference organized by the Malaysian Institute of Economic Research (MIER), Kuala Lumpur, 17-18 Dec

 
 

NOTES:
1.- Although it is often suggested that only large enterprises have the capacity and capability to export their services, there might very well be some scope for SMEs in this area. back to text
2.- The Second Industrial Master Plan (IMP2) promulgates a two-pronged development strategy — the Manufacturing Plus Plus strategy and the cluster-based development strategy. In broad terms, the cluster-based approach aims to promote specific industries in an integrated and synergized manner to spur the development of higher-value-added activities, while the Manufacturing Plus Plus strategy calls for the participation of domestic producers and service suppliers in the whole value chain of a product, from the initial stage of product design and prototyping to the production stage of processing and assembly and, finally, to distribution and marketing. back to text
 

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* Malaysian Institute of Economic Research.