Malaysia in a Middle Income Trap

This article discusses the challenges faced by Malaysia in escaping the middle income trap and suggests ways to overcome it. It explores the background of Malaysia's economy, the definition of the middle income trap, factors leading to the trap, and methods to escape from it.

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:-
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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).
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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
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In 1989, the World Bank (Datahelpdesk.worldbank.org, 2019) began categorising
countries as low, lower middle, upper middle and high income countries based on their
capita gross national income (GNI) as per Table 1.1 below.
GNI per Capita (USD) Classification
Less than $1025 Low Income
Between $ 1026 and $ 4035 Lower Middle Income
Between $ 4036 and $ 12, 475 Upper Middle Income
More Than $ 12,476 High Income
Source: - World Bank
Table 1.1: World Bank Country Classifications by Income level
According to World Bank’s classification, Malaysia progressed from lower middle to
upper middle income status in 1992. Its per capita gross national income (GNI) reached
USD 10,570 in 2015 (Refer Figure 1.2) or 15 percent short of the high income threshold
of USD 12,475. According to a study by Asian Development Bank, Malaysia has been
stagnating in a middle income-status for 55 years between 1960 to 2017. (Estrada et al.,
2017) as indicated in Figure 1.3 which is a common phenomenon for many developing
countries. Figure 1.4 shows that Malaysia is slowly approaching the threshold for a high
income country
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Source: - World Bank, Asian Development Bank
Note :- Country income Classifcation before 1987 follows classification used in (Estrada et al.(2017), which
classifies country income levels using purchasing power parity in constant 2011 from Penn World Tables 9.0.
Country income groups post 1987 uses World Bank classification.
Figure 1.3: Income Group Classification and length of middle income status, Malaysia and selected
countries , 1960-2016
Source: - World Development Indicators
Figure 1.3: Distance to High Income Country threshold , 1987-2016
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MIDDLE INCOME TRAP (MIT)
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).
When a country in stuck in between a low wage poor country which dominates in mature
industries and a rich country which dominates in rapid technological change industries, that
country can also be characterised as a Middle Income Trap country (Gill and Kharas, 2007).
They argued that three transformations were required for emerging Asian countries
(middle-income countries) to continue their growth: (1) transformation from diversification
to more specialization in production and employment; (2) transformation from a focus on
investment to a focus on innovation; and (3) a shift from equipping workers with skills to
adjust to new technologies to preparing them to shape new products and processes. (Gill
and Kharas, 2007).
For instance, Kharas and Kohli (2011) state that there seems to be a connection between
experiencing poverty and the MIT. Although there is no broadly agreed definition, the MIT is
also refers to a situation in which a middle-income country (MIC) falls into economic
stagnation and becomes unable to advance its economy to a high-income level for certain
reasons specific to MICs (Egawa, 2013). Egawa (2013) further suggests that a delay or
failure to change the economic structure from an input driven growth model into a
productivity-driven growth model is a factor in triggering the risk of a MIT.
In addition, Rigg et al. (2014) state that the MIT refers to countries that experience a growth
slow-down when they achieve middle-income status. Glawe and Wagner, 2016 states as per
definition, the Middle Income Trap is seen as sustained slowdown of growth for at least fifty
(50) years. In other words, Middle Income Trap can also be defined as a kind of political
failure whereby institutional and structural reforms are missing.
In order to analyse Middle Income Trap among middle income countries, World Bank
conducted a study in 2012 and found that out of 101 middle income countries in 1960, only
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13 were able to achieve high income status by 2008. This phenomenon primarily hit East
Asian and Latin American countries and Malaysia is one of them.
Tho (2013) tabulates the factors behind triggering and getting stuck in the MIT as follows:
WHAT MADE MALAYSIA FALL INTO THE MIDDLE INCOME TRAP
There are various explanations that have been put forward to explain what causes the
Malaysia to fall into the middle income trap. The economic growth is closely linked to
the amount of human capital, physical capital and technology that people in the country
have accessed to.
 Total Factor Productivity Growth (TFP) in Malaysia
TFP is commonly referred so as a measure for technological progress. It incorporates
the impact of technological change and other factors that rise further than the
quantified contribution of factor accumulation (Solow, 1957). Various studies have
devoted to identify the role of TFP in economic growth dynamics of the country.
Eichengreen, Park and Shin (2018) compared the experience of middle income
countries that successfully moved to high income with that those that were
unable to do so. They found that whole physical and human capital played a
similar role, labor played a less role for the economy to grow and transition to a
high income. TFP growth was found slower and accounted for much lower share
to the GDP for Middle Income Trapped Countries.
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Malaysia is caught in the middle trap right now and getting it out is going
to be tough. With an income that is not too high and not low, Malaysian
find it hard to reach a higher level of income. To really get out from the
middle income trap, Malaysia needs to change what it has been doing
economically for the past 40 years. Middle income trap concept refers to
an easy transition of a low income to a middle income economy due to its
competitive nature in terms of cheap wages and labour- intensive
industries. It is easy to transit from low income to middle income but it will
be hard to transit from middle income to high income due to several
factors. Malaysia is getting into middle income trap and is likely to
experience a small change in factor- price ratio. This means that wages
received by both skilled and unskilled labour does not increase a lot and
doesn’t reach high income level.
In our research paper, we will divide into the four main parts. First, we
discuss the background of Malaysia’s economy and then the factors which
lead Malaysia to fall into the middle income trap, in this part we find out
that there are about six factors which lead Malaysia into the trap. After
that, we discuss on people who are affected due to the middle income
trap. Lastly, ways or method to escape from the middle income trap is
also our main concern. We have some ways to implement to make
developing nations can graduate into becoming fully advanced
economies.
When we look at our economic background, we can clearly see that from
independence to the 1980s, Malaysia progressed rapidly. From an
agricultural society in the 1950s, it evolved into an Asian Tiger Economy
by the 1980s, mainly labour- intensive industrialisation. However,
subsequent effort in deepen our industrialisation make our economic to
remain stagnant while other countries continue to expand rapidly.
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Recently, country’s performance has been disappointing with GDP growth
rate declining to 5.5 percent in 2002 to 2008 from 9.1 percent in 1990-
1997. In the past 1970, about 50% of Malaysian live in absolute poverty
but now decrease to less than 4%. However, Malaysian feels that they are
stuck from increasing where GDP growth has slowed up. However, when
we look at other countries for example Korea, they are at one time the
poorest country in the world but they are growing both economic and
politic. Reason that their economic can grow is because they have higher
purchasing power compared to Malaysia. This is because they receive
averagely higher income and with higher income they will have more
spending power which will boost their economy. Countries such as
Cambodia and Vietnam have very low wages while Malaysia traps in the
middle ground.
How to get into middle income trap
One of the factors Malaysia trapped into the middle income is due to over
dependence on FDI and lack of doing research and development (R&D).
Multinational companies will only provide instant of capital, expertise and
technology into Malaysia but they will not develop or improving Malaysia’s
product. Malaysia’s businessmen seem to be satisfied in making profit by
serving the MNCs and maintaining their original, assembly- based
business models. Besides, labour productivity is growing quite slow than
in the 1990s. Manufacturing in Malaysia has a low value added and had
spent a very low R&D spending. For example, Malaysia had spent only
0.6% of GDP in R&D compared to South Korea which is 3.5%. South Korea
is probably the best example of a developing country which shifts to a
advance country. Companies in Korea like Samsung and LG dominates in
the market. Taiwan is also not far behind. China’s policymakers are aware
that they need to suit with the changes in market if the labor costs rise.
With a low tech manufacturing industries and lack of skilled labour
compared to country such as Singapore, the production in Malaysia is less
competitive and thus less profit which means lower wages paid to the
workers.
Migrant workers which depress wages also one of the factors which cause
Malaysia to fall into the middle income trap. It is a mistake in letting
migrant workers to overflow in Malaysia and depresses wages. This will
limit the improvements of the productivity. Malaysia has too huge amount
of foreign workers which is reportedly has 1.9 million registered workers
and another 600000 unregistered ones accounting for nearly one- fifth of
the working population. These workers are not confined to the so- called
3D jobs where the jobs are difficult, dirty and dangerous that the locals
are unwilling to do those kinds of jobs. Too many of unskilled labour will
lead to low value added in the productivity. Malaysian worker are forced
to receive low wages since competition with the migrant workers are keen
because the migrant workers are willing to accept lower wages and longer
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hours of working. Besides, when we take account the negative
externalities which associates with the excessive presence of migrant
workers, we found that migrant worker is a burden to Malaysia’s economy
as the migrant workforce turns out to be a costly affair. There are cases
where the migrant workers cause social problem in Malaysia and there
were also cases where the migrant workers are abused by their employer.
They are also forced to receive low wages since there is no law to protect
their rights. It is not denied that Malaysia needs the services of foreign
workers, both skilled and unskilled but government need to ensure that
they are well treated and wages should be increased align to the local
wages so that Malaysian wages can be raised higher. In the case of
Malaysia, high wage need not mean high labour costs if an increase of
wages are backed by an increase in productivity. In the other words, low
wages does not mean lower labour costs if the productivity declines.
Apart from that, over subsidies of the subsidised item leads to middle
income trap. Subsidy was implemented in 1961 under the Control Act
1961 and subsidised items include petrol, sugar, gas, rice, salt and other
basic items. Subsidy of these items has made the Government spending
to increase and it is too heavy for government to continue to bear the
cost. For example, the oil price in 1970s was under US$12 per barrel.
However, it increases to almost US$75 per barrel which causes a cost that
is unbearable to the government. Moreover, over subsidies in local
industries for example proton is a burden to the government spending. If
compared to South Korea, such industry had do the same thing in the
beginning but they were weaned off from the government subsidy much
earlier and where Proton is still now subsidised. The high cost of subsidies
restrains the government ability to upgrade infrastructures and involve in
more research and development which increase the productivity and
competitiveness in order to become a high income country.
Price control has been one of the major causes of falling into middle
income trap. The policy where government enforced price control in
Malaya to avoid hardships after World war2 holds until today. Price control
items include basic necessities such as rice, flour, sugar, milk and even
taxi fares. Price of commodities in Malaysia is much cheaper because of
the controls compared to other countries. The problem with the price
control is that workers’ annual pay raises are linked to the nation’s CPI
which is consumer price index. This mean that with a low CPI, the salary
received by the worker remain low and a shift to a higher income will be
very hard. Since 1980s, Malaysian wages have fallen behind wages of the
rest of the world. For an example, a graduate policeman earn at RM 2300
per month compared to RM4400 in Singapore. Apart from restraining
Malaysian wages, price controls also sternly distort domestic economic
factor proportions which cause many factories ending up in inefficient
economic production processes. When we compared through GDP, South
Korea has a GDP per capita of US$16450, Singapore US$34,346, while
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Malaysia still remain at US$7469. The table below shows that the
breakdown weightage allocated for the different categories of items
consumed on a daily basis. For example, “Food and non- alcoholic
beverages” and “Housing, water, electricity, gas and fuels” make up over
52.8% of the weightage. We can see that most of the items are heavily
subsidised or price controlled. Apart from the raw materials, value added
items such cooked food and beverages are always levied at the market
price but not captured in the CPI. Besides, transport which contribute
15.9% of the weightage does not include hire purchase for cars and
motorcycle or the cost of imported spare part for repairing. Some
construction materials such cement and clinker maybe price controlled
but for certain price of rental are determined at market rate.
http://greglopez.files.wordpress.com/2010/06/n5-1.jpg?w=300
Low inflation rate causes wages to be artificially suppressed and it creates
a wide gap between Malaysian working domestically and those workers
who work abroad. With low wages, we will be unable to attract talent from
other countries even though our product and services are relatively
cheaper. Moreover, low or middle income creates a technology gap
making Malaysia to be uncompetitive. Technology goods and services
have become more expensive for Malaysian to purchase including items
such as Iphone, laptop which it is common nowadays. With a cheap
currency, we find it difficult to purchase the most advanced technology to
improve productivity.
Malaysia was emphasizing on agriculture sector in the early 1950s but
when Malaysia’s economic had shift from agriculture sector to
manufacturing sector, agriculture sector had became a drag to the
economy. The dominance of oil palm and rubber in the agriculture sector
is unfortunately a significant drag and had caused the nation’s to cease
from shifting to a high income economy. Those plantation terrain, paddy
harvesting and rubber tapping are not easily mechanised and remaining
done by manual. Agriculture sector with high technology and mechanised
makes more profit by having much efficient and more productivity. Until
today, agriculture with manual worker still remain as low wage activities
and most of the agriculture depend a lot on foreign labour. For example,
textile industry hires most of the workers from Bangladesh since the local
workers are not willing to work in this sector because of the low wages.
The mobility of the foreign workers in plantation is also easy and they
move from estates to factories which mean it is hard for government to
disallow the foreign workers to work in the non- plantation sector. The
cumulative effect is that there are now about 2.3 million low- skill foreign
workers in Malaysia, making up about 20% of the workforce. They are in
the manufacturing, petroleum, construction and domestic- help sectors.
Lately, they are also involving in retailing, food and beverage, tourism and
hotel industries. Such a massive inflow of foreign workers into those
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industries will therefore suppress wages in Malaysia and causes middle
income trap.
Effects of the Middle Income Trap
Malaysia’s caught in the “middle-income trap” right now give awareness
to our policymakers that the export-led growth strategy, according to
some, is no longer an optimal development strategy for developing
countries especially Malaysia. Continued emphasis on export-led growth
will, among other things, increase the reliance of developing countries on
the developed world and dampen domestic market growth. Many export-
dependent developing countries started tweaking their growth strategies
especially after external demand for their exports dried up on account of
the current global financial and economic crisis. Though Malaysia’s growth
strategy had started emphasizing domestic demand since about a decade
back, it still remains largely dependent on external demand for its
economic growth (Quah, 2009). Ex-World Bank chief economist and
Brookings Institution’s Wolfensohn Centre for Development, Global
Economy and Development’s senior fellow, Homi J. Kharas, said there was
an impetus for change and rethinking on policies and strategies in
Malaysia every 10 years based on economic developments. “Malaysia has
been very successful as an exporting nation but has also been very export
dependent. About 90% (of products) are being exported to the United
States, Europe and Japan,” he said, adding that Malaysia needed to
diversify its exports (Malaysia needs to be high-income economy, 2009).
However, the main challenge is domestic market of Malaysia is too limited
due to only 28 million of populations. That’s why we are facing the
dilemma of the exploration of external and domestic market. However,
2010 GDP performance sets strong momentum for a robust 2011. Given
the marked improvement in economic growth in the first half of the year,
domestic demand was clearly the chief momentum driver for the
recovery. Moving forward, the country is anticipated to register a robust
GDP growth of 5.6% in 2011, with domestic demand once again acting as
the back-bone for momentum (RAM Rating Services, 2011).
Besides, middle-income trap also lead to declining private investments.
The old growth model provided three decades of outstanding
performance, permitting Malaysia to provide for the health and education
of its people, largely eradicate poverty, build a world-class infrastructure
and become a major exporter globally. But the progress we have made
over the past half-century has slowed and economic growth prospects
have weakened considerably. We are caught in a middle income trap.
Malaysia has been susceptible to external shocks, as seen during the past
crises. Increases in international commodity prices, like fuel or food, have
direct impact on domestic prices. Similarly, unless production costs and
productivity in Malaysia can keep pace with those abroad, exports are
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likely to lose ground with negative effects on national employment and
income.
Malaysia’s economic engine is slowing. Since the Asian financial crisis of
1997-1998, Malaysia’s position as an economic leader in the region has
steadily eroded. Growth has been lower than other crisis affected
countries, while investment has not recovered. Private investors have
taken a back seat. Since the Asian crisis, aggregate investment as a share
of GDP in Malaysia has continued to decline, with private investment
remaining stagnant due to several factors. In some industries, heavy
government and government linked company (GLC) presence has
discouraged private investment. Cumbersome and lengthy bureaucratic
procedures have affected both the cost of investing, and the potential
returns on investment. Malaysia’s place within the Global Competitiveness
Index dropped to 24th in the 2010 report from 21st previously, indicating
that the country is losing its attractiveness as an investment destination
(New Economic Model For Malaysia, 2010)
A plunge in exports wounded this trade-sensitive economy in 2009. The
impact of weak exports spread to private investment, which fell sharply,
and to private consumption, which was nearly flat. Fiscal stimulation
packages provided some buffer for aggregate demand. Economic growth
will rebound during the forecast period, underpinned by a recovery in
exports and rising incomes. Annual inflation is set to pick up from low
levels. The government plans renewed efforts to encourage private
investment. Fixed investment fell sharply by 5.5%, with many firms cancel
ling or deferring investment decisions. Investment acted as the major
drag on GDP in 2009. The ringgit, having depreciated by 5.0% against the
dollar during the first 3 months of 2009, when increased risk aversion and
deleveraging activities by international investors increased the demand
for dollars has since appreciated. Economic growth, while impressive, has
slowed and private investment, averaging about 30% of GDP just before
the Asian financial crisis, has fallen to around 9.5% of GDP. These
indicators point to the need to address deficiencies in the investment
climate and to reappraise the role of public sector companies that
compete with the private sector. (Rajapakse, 2010)
Other than that, the effect of middle-income trap include lack of
appropriately skilled human capital caused by brain drainA graduate
teacher starts at RM2,500 per month in Malaysia, compared to RM6,196 in
Singapore and RM15,661 in Hong Kong. Malaysian wages have fallen
behind partly due to the gross divergence between the suppressed
Malaysian CPI and that of the world (FONG, 2010). Globalization,
outsourcing, offshoring and business process outsourcing gave rise to
mobility of resources, investment, companies and skilled workers. Skilled
workers flow to locations where they are paid higher and companies move
to locations that are more competitive. Many skilled Malaysian workers
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have been leaving the country, lured by higher pay (Altfa, 2011). Many
Malaysians could be found working overseas as they were often
adaptable, multi-lingual and inexpensive. In terms of composition of the
economy for most developed countries, more than 60% of annual gross
domestic product (GDP) came from the services sector, with Malaysia
somewhere just over 50%. Deputy director in the Public Private
Partnership Centre and Secretariat to the Economic Council of the
Economic Planning Unit Dr Soh Chee Seng said: “Our productivity levels
are not really low, it is just that they are falling behind other rapidly
developing countries like China, India, Indonesia and Thailand:’ According
to HSBC Bank Bhd executive director Jon Addis the country’s
infrastructure was still “patchy” such as in terms of public transit, which
had some idiosyncrasies. (Min)
Malaysia stuck in middle income trap will lead to bring to affect of low
value added industries. According to Wikepedia, value added can be
refers to “extra” features of an item of interest for example product,
service, person and etc that go beyond the standard expectations and
provide something “more” while adding little or nothing to its cost. Value-
added features give competitive edges to companies with otherwise more
expensive products. (Wikipedia) In Malaysia, Small and Medium
Enterprises (SMEs) have evolved to become a key suppliers and service
providers to large corporations, inclusive of Multinational Corporation and
Transnational Corporation (MNCs & TNCs). SMEs contributed to expanding
output, providing the value added activities in the manufacturing sector,
creating employment opportunities, contributing to broadening Malaysia
export based. Our Prime Minister Datuk Seri Najib Tun Razak has urged
SMEs to adopt technology as a core part of their business strategy to gain
a sustainable competitive edge. He said that the SME community in
Malaysia was not adopting technology as rapidly as it should. (Adopt new
technology, Najib urges SMEs, 2011) For this point, SMI Association of
Malaysia president Chua Tiam Wee urged the government should concern
about the problem faced by SMEs, such as securing adequate financing at
competitive rates for new start-ups, the issue of frequent policy changes
in employing foreign workers to overcome shortage, and also the
problems in dealing with government agencies to acquire halal
certification and other licences. (Mustaza, 2011) Besides that, there are
many factors have contributed to the country’s slower growth over the
past year among them to caused less invest from FDIs to Malaysia, we are
loss of comparative advantage with other emerging economics such as
India, Vietnam and China which being supplanted as a low-cost export and
services based. (The Middle Income Trap, 2010)
Another effect of the middle income trap is that Malaysia providing a low
skilled jobs and low wages to attract foreign worker migrant into our
countries. To become one of the high income countries, mean that the
income of an individual is high. The main goals of the New Economics
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Model(NEM) are that Malaysia will toward become a high income country
with target of US$15,000 until 20,000 per capital by 2020. But now
Malaysia stuck in the middle income trap because there are not enough
high wages job created in Malaysia. Normally, high wages are often
related to the high skilled worker. In fact the share of skilled labour has
declined across industries. The figure as shown as below shown that the
use of high skilled labour for differences industries for 2002 and 2007. The
E&E as one of the largest industries contribute in GDP of Malaysia. From
the diagram, the use of high skilled labour in E&E was declined from 54%
to 46%.
The regional competition did lead to some minor transformation over the
years. Although the manufacturing sector in Malaysia was grew rapidly,
but that is resulting shortage of Malaysian workers with higher wages.
Therefore, the foreign labours are welcome to Malaysia to fill the gap. So
the companies could enjoy low wages and production costs to comfortable
profit. The skilled labour force is also linked to education. The labour force
with tertiary education for advanced countries is usually high, so many
skilled Malaysian worker will leaving the country to pursue a higher pay.
The central themes of the 10th Malaysia Plan (10MP) is encapsulated in 10
Big Ideas, says the Economic Planning Unit (EPU) of the Prime Minister’s
Department. These 10 Big Ideas, if vigorously and consistently
implemented would see Malaysia through the challenging times and
enable the nation to be a high-income and developed nation by 2020, said
the Unit under the Prime Minister’s Department. (10MP Encapsulates In 10
Big Ideas, Says EPU, 2010) One of the ideas of the Tenth Big Ideas is to
unleashing productivity-led growth and innovation. Malaysia stuck in the
middle income trap will cause lacking in talent and innovation to do so.
Malaysian graduates tend to more interested to work in abroad because
they offered a high income from the other countries. As they leaving from
Malaysia, it will lose the skilled talent needed to make innovation to
develop the country. Therefore, Malaysia lack of holistic approach and
systematic assessment of innovation. Besides that, the growth model
eventually runs out of steam. As the incomes increase, so the costs also
have to be concern. The low-tech manufacturing industry was
undermining the competitiveness. Therefore, Malaysia tend to move “up
the value chain,” into exports of more technologically advanced products,
like electronics. The economy has to innovate and use labor and capital
more productively. To get to become a high income country, the economy
needs to do more than just make stuff by throwing people and money into
factories. That requires an entirely different way of doing business.
Companies must invest more heavily in R&D on their own and employ
highly educated and skilled workers to turn those investments into new
products and profits. (DAN, 2010)
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Based on the effects of middle-income trap stated above, we strongly
suggest that government has to consider thoroughly before Goods and
Services Tax (GST) is imposed. . Such a plan has pros and cons and
serious implications and has to be thoroughly studied and extensive
consultation made before a final decision is made. Public consultation on
this policy that would have great impact on the Malaysian economy and
investment is seen as vigorous enough that would have an impact on
poorer Malaysians and the government coffers (Altfa, Minimum wage
policy can hurt manufacturers’ competitiveness, 2011). GST wills
worsening the poverty condition in Malaysia as well as deteriorates the
private consumption in economy. The ripple impacts of GST will deepen
the situation of middle-income trap in our country.
WAYS TO GET OUT OF MIDDLE INCOME TRAP
Brain drain refers to significant emigration of educated and talent
individuals to another country. Malaysia being criticised for mismanaging
its talent human resources as skilled and talent Malaysian moved to
countries whom provide better earnings [1]. The problem grew serious as
the statistics of brain drain increasing dramatically. Federal Government
stated that between the beginning of 2008 and August 2009, slightly
more than 300,000 Malaysians migrated to overseas. It is estimated that
in 2009 there were over 700,000 Malaysians living abroad, with up to two-
thirds of them are professionals workers. Therefore it effects the economic
transformation of our country from a low to a high value-added economy.
Therefore to curb brain drain problem, a new Talent Corporation will be
formed to find out and deliver top talent from overseas and locally that
are beneficial to stimulate economic sectors. The Government will attract
Malaysians currently living and working in other countries to return
Malaysia in order to build their careers in Malaysia. According to the
Minister in the Prime Minister’s Department, Tan Sri Nor Mohd Yaacob, this
corporation hopes to draw back at least 70,000 Malaysians from overseas
over the next 10 years by offering a package of very attractive incentives
[2].
Strategies were taken to succeed the talent corporation plan. Three areas
have been identified in 10th Malaysian Plan including soft infrastructure
investment such as skills development, providing enablers to support
concentrated industrial clusters and specialisation and increasing
Research & Development and venture capital funding [1].
Government scholarships especially Public Service Department
scholarship will be given to top students from around the world to further
their studies in Malaysia whom later will be encouraged to contribute to
the Malaysian talent pool [1]. The civil service will increase its focus on
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hiring high-caliber young talent and will offer 60,000 scholarships to
students in local and foreign universities [1].
Moreover, under the 10MP open visas will be offered to highly-skilled
foreign professionals and there will be no time limit on visas for skilled
foreign workers whom earns more than RM8, 000 per month [1].
Despite that, living conditions will also be improved in order to attract
more world-class talent to make their homes in Malaysia. Kuala Lumpur
will be set as a city for people seeking quality and diverse lifestyles, in
close proximity to nature, cultural richness and excellent infrastructure
[1]. Therefore Talent Corporation able to draw back Malaysian talented
workforce to stimulate economy of Malaysia and indirectly could help
Malaysia get out of middle income trap.
Foreign Direct Investment (FDI) plays a significant role in Malaysia’s
economic development. In the 14th century, Malacca had attracted FDIs in
services because of its strategic location in the Straits of Malacca [3].
First, FDI has provided an additional source of capital which directly helps
host country to expand their production activities and thereby generate
more profit. The profits can be used for the purpose of making
contributions to the revenues of corporate taxes of the recipient country
[4]. FDI assists in increasing the income that is generated
through revenues realized through taxation [4].
[1] Lee Wee Lian (2010) The Malaysian Insider: Najib bets on move from
hardware to software.
[2] Malaysian Today online news (2010): Attracting talents back through
the Talent Corporation
[3] 2010 Foreign Direct Investment vs Domestic Investment. New Straits
Times.
FDI allows the transfer of technologies. In general, FDI provides the fastest
and most effective way to deploy new technologies in developing host
countries (UNCTAD 2000). Innovative technologies can help not only
increase returns to investment but also improve productivity [4].
FDI also promoted exports and trade. Without foreign capital, Malaysia
might not have experienced rapid increase in their exports. Exports have
been the main engine of economic growth, especially for Malaysia, where
it moved from mainly primary goods exporters to major exporters of
manufactured goods. The shift in exports reflects the structural
transformation of Malaysia from being agriculture-based to industry-
based. Meanwhile, the countries that get FDI from another country can
also develop the human capital resources by getting their employees to
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receive training and learn extra skills on the operations of a particular
business.
FDI can significantly relevant to boost economy. Therefore, we have to
create more opportunities for major investors to invest in the domestic
economy as FDI able to help Malaysia get out from the middle income
trap. Malaysia will focus and worked out more to strengthen its
investment attraction activities to attract both the domestic and foreign
investment required. As a beginning, corporatization and empowerment of
MIDA announced in the Tenth Malaysia Plan and the expansion of its
scope to cover domestic investment [5]. There are two categories of
investor attraction. First, targeted outreach to potential investors and
secondly, partners as well as broader-marketing campaigns [5]. A
Roadmap for Malaysia Targeted outreach activities include identifying and
negotiating with specific investors to participate in identified projects will
be conducted [5].
[4] Economy Watch: Benefits of Foreign Direct Investment
[5] Chapter 1: New Economy Model of Malaysia: Economic Transformation
Programmed
Fiscal stimulus packages helped increased the spending on green
technologies in many countries. Several countries have focused to
technologies that help improve energy efficiency. Recently, statistics
shows that only 13 percent of China’s domestic electricity consumption is
provided through cogeneration facilities.
Meanwhile, when cogeneration facilities are combined with district
heating and cooling (DHc) systems, further synergies can be created.
Through implementation of a DHc facility and as well as the size and
number of buildings the cost of total capital and investment can be lower
than the cost of traditional methods for heating and cooling individual
buildings. This energy efficiency significantly reduces carbon emissions.
(Article: Escaping the Middle Income Trap)
Moreover, some green technologies have ability to reduce poverty or
inequality gap. For example, renewable energies such as solar power can
facilitate rural electrification, which can help to reduce poverty [6].
Investment to keep green technology efficient could help a country to
escape from middle income by reducing poverty and inequality. However,
public funds get misallocated or finance “white elephant” projects, with
less contribution to the economy. For example, plenty of China’s green
investments are in wind technology. However, some analysts report
shows that a high proportion of China’s current wind assets might be
either not in use or not connected to the national power grid. In other
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cases, promoted new technologies can be far from the economy’s
comparative advantage or their subsidization can harm competitiveness.
In this case, measures that allow the market provide guide when
subsidizing or investing in green economy are required. (Article: Escaping
Middle Income Trap)
[6] World Bank. 2000. Energy Services for the World’s Poor. Energy And
Development Report 2000. ESMAP, World Bank, Washington, Dc.
There are many ways to Malaysia be escape from the Middle trap income.
One of it is by New Economic Model (NEM). NEM is an economic plan in
Malaysia discovered on 30th March, 2010 by Najib Tun Razak, Malaysian
Prime Minister. It is intended to more than double the per capita income in
Malaysia by 2020. According to Najib, the goal of NEM is to transform the
Malaysian economy to become one with high incomes and quality growth.
The keys to the plas as described by Najib are “high income”,
“sustainability” and “inclusiveness”. For the “high income” key, there are
lifting the real growth rate to an average of 6.5% per annum over the
2011-2020 period. Per capita GDP will rise to about USD 17,700 by 2020
and aggregate demand will have to grow at a robust pace as well. [7]
Moreover, the “high income” key in NEM will unlock the value of in
Cite This Work
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HOW TO ESCAPE FROM THE MIDDLE INCOME TRAP
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