Malaysia in a Middle Income Trap

ECN70104: - MALAYSIA IN A MIDDLE INCOME TRAP
MALAYSIA IN A MIDDLE INCOME TRAP
Abstract: -
Malaysia continues to struggle in addressing the identified challenges that are preventing or
delaying the country’s shift from middle income to high-income status. Malaysia progressed
from lower middle to upper middle income status in 1992 and has been stagnating in a middle
income-status for 55 years since 1960. Malaysia is caught in the middle trap right now and
getting it out is going to be challenging. The term ‘middle-income trap’ was first brought to
attention by Gill and Kharas (2007), to highlight growth slowdowns in many East Asian
economies. These countries experienced rapid growth, enabling them to reach the middle
income status but have not been able to catch up with developed countries and achieve high
income status. (Gill and Kharas, 2007). The paper conducts a review on the existing
literature on the background of Malaysia’s economy, the definition on Middle Income Trap
(MIT), factors which lead Malaysia to fall into the middle income trap and suggested ways
and method to escape from the middle income Trap.
Keywords:-
Submitted by: Anand Sharvanandan (0337677) Page 1

ECN70104: - MALAYSIA IN A MIDDLE INCOME TRAP
1. INTRODUCTION
Before independence, Malaya's economy (before Malaysia was formed) largely
depended on rubber and tin exports as the main source of income and Malaya was third,
after Japan and Singapore in terms of prosperity (Sukirno, 2004). Since independence
till now, Malaysia has enjoyed relative prosperity, initially as a commodity exporter
(rubber, tin, palm oil and petroleum) to a services-oriented economy. Figure 1.1 below
shows the economic growth experience by Malaysia under different periods of time.
 1960- 1985:- Commodity based economy that gradually began to modernise
and industrialise, commencing with import –substitution which then evolved
into export-oriented. Further to that, The New Economic Policy (NEP) was
introduced in 1971 with a goal to eradicate poverty and restructure economy
while aiming to eliminate the identification of ethnicity with economic function
(New Straits Times, 2006).
 1986- 1998:- Manufacturing based economy geared for trade cantered growth.
The Passage for Promotion of Investments Act of 1986 bolstered Malaysia’s
position as an attractive location for overseas investments (Murtada, 2019).
Malaysia had turned into a manufacturing oriented country which produces
electronic and electrical goods, iron, car and cement.
 1998 till present: - After going through two major financial crisis, Asian
Financial Crisis and Global Financial Crisis, the economy underwent major
reform to increase resilience and robustness of its existing sector. Malaysia had
become a service-oriented country. Under this sector, it contains of tourism,
finance and education. The percentage of GDP had the biggest share since year
1985. The economic growth of this sector is around 7% and the employment
rate has been more than 50% since year 1985. Malaysia continued to enjoy
good economic growth and in 2010, New Economic Model (NEM) was
unveiled by the then government to propel Malaysia into the high income
category by year 2020 (Chin, 2010). The goal of NEM was to improve
worker productivity across all sectors while tying it closely to sustainability,
(Star, 2010) besides empowering the private sector and to reduce the financial
disparity between the poor and wealthy Malaysians (Bernama, 2010).
Submitted by: Anand Sharvanandan (0337677) Page 2

ECN70104: - MALAYSIA IN A MIDDLE INCOME TRAP
Figure 1.1: Real GDP and Real Annual Median Income Household Income, 1960-2016 (Malaysia)
Source: - International Monetary Fund, World Economic Outlook Database, October 2018
Figure 1.1: GNI per capita, Atlas Method (current USD), GDP Growth (annual %) & GNI per
capita growth (annual %) (1980-2017) for Malaysia
Submitted by: Anand Sharvanandan (0337677) Page 3