Malaysia’s Middle-Income Challenge

ECN70104: - MALAYSIA’S MIDDLE-INCOME CHALLENGE
MALAYSIA’ S MIDDLE-INCOME CHALLENGE
Abstract: -
Malaysia continues to struggle in addressing the identified challenges that are preventing or
delaying the country’s shift from middle-income status to high-income status. Malaysia
transited from lower middle to upper middle income status in 1992 and has been stagnating in
a middle income status for fifty-five (55) years since 1960. The economic resilience of
Malaysia had been continuously challenged by modest levels of income and existing
vulnerabilities to the conditions of global economy. The term ‘middle-income trap’ was first
brought to attention by Gill and Kharas (2007), to highlight growth slowdowns in many East
Asian economies. This paper conducts a review on the existing literatures on the background
of Malaysia’s economy, the definition of Middle-Income Trap (MIT), factors which lead
Malaysia to fall into the middle-income trap and suggested ways to escape the middle-income
trap.
Keywords: - Malaysia, South East Asia, Economic Growth, Middle-Income Trap
Submitted by: Anand Sharvanandan (0337677) Page 1

ECN70104: - MALAYSIA’S MIDDLE-INCOME CHALLENGE
Introduction
Since independence, Malaysia has enjoyed rapid economic growth, initially as a
commodity exporter (rubber, palm oil, tin and petroleum products) to a services-
oriented economy. Figure 1 below illustrates 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) and
making it into a manufacturing oriented country.
 1998 till present:- After going through two major financial crisis, Asian
Financial Crisis (AFC) and Global Financial Crisis (GFC), the economy
underwent major reform to become a service-oriented economy contributing to
the biggest share in GDP since 1985 with an economic growth of around 7%
and a contributing employment rate of 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, besides empowering the private sector and to reduce
the financial disparity between the poor and wealthy Malaysians.
Submitted by: Anand Sharvanandan (0337677) Page 2

ECN70104: - MALAYSIA’S MIDDLE-INCOME CHALLENGE
Figure 1: Real GDP and Real Annual Median Income Household Income, 1960-2016 (Malaysia)
Source: - International Monetary Fund, World Economic Outlook Database, October 2018
Figure 2: 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

ECN70104: - MALAYSIA’S MIDDLE-INCOME CHALLENGE
Countries in the Middle Income Trap
The World Bank estimation in the year 2013 segregated countries into low income
countries and middle income countries. According to the estimation countries having a
per capita gross national income (GNI) of USD 1045 are identified as low income
countries. Countries with a per capita GNI ranging between USD 1045 and 2125 are
classified as lower middle income countries whereas countries with a per capita GNI
lying between USD 4125 and 12,475 are regarded as upper middle income countries.
Some economists researching in the field of economic growth are of the view that
countries belonging to low income group face the fear of falling in poverty trap and
countries belonging to middle income group face the danger of middle-income trap
(Felipe, Kumar and Galope 2017). The situation where middle income nations are stuck
and are unable to make progress towards a high income nation is known as middle-
income trap.
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 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
fifty (55) years between 1960 to 2017. (Estrada et al., 2017) as indicated in Figure 3
which is a common phenomenon for many developing countries. Figure 4 shows that
Malaysia is slowly approaching the threshold for a high income country.
Submitted by: Anand Sharvanandan (0337677) Page 4