Alternative industrial strategies and effects of fiscal incentives and trade policy in achieving employment objectives in Malaysian industrialisation
This study is concerned with alternative industrial strategies for employment creation. The two strategies are export-oriented and import substitution industrialisation. Malaysia tried the import substitution strategy and achieved some degree of success in the period 1957 to 1970. But with high unemployment and the limitation of the domestic market, another strategy then had to be pursued. So in the early 1970s, (emulating the newly industrialised countries) Malaysia embarked on an export-oriented industrialisation strategy. Two instruments are used by the Malaysian government to promote those strategies; fiscal incentives and trade policy. The study finds that fiscal incentives have promoted export-oriented industrialisation. Trade policy initially helped import substitution but in later years the policy was liberialised to approach a free trade regime. The effects of these two instruments are examined through their influence on the cost of capital to manufacturers. The study finds that fiscal incentives have reduced capital cost much more than trade policy. The study then examines the manufacturing sector's ability to generate employment. Two methods are used; an estimation of elasticity of substitution and a case study of the characteristics of export-oriented and domestic-oriented establishments. The elasticity of substitution measures flexibility to absorb labour. The estimates show that export-oriented establishments have greater substitution possibilities than domestic-oriented ones. These estimates are substantiated by qualitative information, namely establishments responses to policy changes. This information is obtained through a detailed study of establishments characteristics. Two industries - textiles and electrical/electronics - were chosen as case studies. The characteristics show that in general export-oriented establishments can absorb more labour through high growth rates and employment size. Thus, export-oriented industrialisation can generate more employment than import substitution because its elasticity of substitution is larger and there is higher absorption of labour by export-oriented establishments. The thesis suggests two ways to increase employment: first, to promote EOI because its employment potential is greater than ISI, and second, to increase the proportion of labour used through changes in relative factor price because capital-labour substitution exists. The labour coefficient can be increased by 8 - 25 per cent if factor market distortions are eliminated. This increase represents 120,000 to 360,000 new jobs in the Malaysian manufacturing sector. Two policy thrusts are suggested for the promotion of EOI: (1) Liberalisation of trade policy, namely the reduction not only of average tariff but also its dispersion. The present low and stable exchange rate regime should be maintained, because it encourages exports. (2) Reform of the fiscal incentive system. More direct and indirect exporting industries should be added to the list of promoted industries/activities. In addition, new export incentives should be introduced such as providing utilities for exporters at levels equal to other competing countries and benefits of existing ones increased. Relative factor prices can be changed through trade policy and fiscal incentives. The import duty (tariff) on machinery and equipment should be reduced and exemption of import duty withdrawn, so that capital prices move closer to world levels. One of the fiscal incentives, the Investment Tax Allowance, should stop because its benefits directly favour capital users. On the other hand, benefits to labour users should be introduced, for example the government should offer an abatement of income for labour incentive to support labour use.