Product quality changes and skills' demand: an empirical study of Malaysia's trade in manufactures

Abstract

Being a middle-income country, there are arguments that Malaysia may be squeezed between the low wage competitors that dominate in mature industries such as China and rich country innovators that dominate in hi-tech industries such as the US and Japan (Gill and Kharas, 2007). Are the current winds of change in trade working against Malaysia? It is therefore becomes critical to understand whether Malaysia exports high or low quality goods to the rest of the world (ROW).The objectives of the paper are thus twofold. First, to document the changes in product quality in Malaysia's trade flows with the ROW. Second, to estimate the effects of trade on skills' (between group and within industry) demand in the Malaysian manufacturing sector to explore if product quality changes have led to local upgrading of labour. The paper applies recent measures of quality differentiated intra-industry trade (IIT) trade as proposed by Azhar and Elliott (2006) in examining Malaysia's trade with the ROW. The changes in quality are examined for 2,090 products at the 5-digit level for Sections 5-8 of the SITC (Standard International Trade Classification) spanning the period 1990 to 2005. The effects of trade on skills' demand in Malaysia are estimated using a partial-equilibrium approach based on a translog cost function. A distinguishing feature of the empirical work is the use of a unique panel dataset, specially constructed by integrating labour and industry statistics from the nationally representative manufacturing surveys with trade statistics.