Escape from middle income trap in Malaysia

Running head: ECONOMICS
Economics
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ECONOMICS
Escape from middle income trap in Malaysia
Middle Income Trap
The term “trap” in economics defines a stable balance in the economy that cannot be
altered by any other factors in economic literatures. Increase of a factor influencing per capita
income leads to an increase in per capita income. Similarly, a deterioration of such factors lead to
a decline in per capita income. The latter factor causes per capita income to set back to its
original equilibrium position where the effect of economic growth ultimately turns out to be zero
(Eryılmaz and Eryılmaz 2015). There are certain periods when an economy can experience
income traps. The income trap can possibly occur at a low income level as well as a middle
income level. Additionally, following the presence of structural problems, persistently slow
economic growth and blockage can lead to income trap even in high income economies.
The middle income trap exists for some of the countries which make significant progress
in reducing extreme poverty and experience structural change along with growth. after that they
find it quite difficult to make the climb from being a middle income country to achieve high
income fully developed status. the middle income trap is an economic development situation
where a country which attains a certain income gets stuck at that level (Cherif and Hasanov
2015). A country in case of middle income trap have lost its competitive edge in the export of
manufactured goods as a result of rising wages. the middle income trap is however, avoidable in
nature. the middle income trap is the objective challenge which is faced by most of the
economies

ECONOMICS
At the beginning of introduction of the concept of middle income trap, countries having
per capita income equals at least 20 percent of the same in USA were considered as middle
income countries. However, Bulman, Eden and Nguyen (2017) suggested that nations accounting
a yearly per capita income of above USD 16 should be regarded as a middle per capita income
nation (Bulman, Eden and Nguyen 2017). 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 GNP of USD 1045 are identified as low income countries.
Countries with a per capita GNP ranging between USD 1045 and 2125 are classified as lower
middle income countries whereas countries with a per capita GNP lying between USD 4125 and
12475 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. The middle income trap which takes into account per capita income of
nations and measures per capita income in terms of purchasing power parity suggests a vicious
circle of poverty within which a country gets trapped at some levels of income.
Exit strategies for Middle Income Trap and Government Incentives
The low income countries are able to compete in the global markets with their low cost
labor-intensive products exploiting the benefits of comparative advantage attained from low
labor cost. As the two important factors of production (labor and capital) can transfer from a
relatively low productive agricultural sector to the highly productive manufacturing sector
aggregate productivity in the economy increases resulting in an increase in national income.

ECONOMICS
However, as nations attain middle income level, there is a considerable decrease in rural
underemployment, increase in wage which reduces international competitiveness of these nations
(Ozturk 2016). Countries failed to increase productivity using new technology or innovation
could not attain high income level and hence, stuck to the middle income trap.
Several literatures recently conducted on middle income traps mostly focuses of
strategies that a nation can take to escape from the middle income trap. One study on middle
income trap evaluated the literature on the basis of middle income trap exit strategies among the
three groups. The study found that in the first group middle income trap occurs because of
difficulties in getting proper education and other institutional rights. At this point, the study
suggested that government here should be assigned to play a minimum role in ensuring these
rights (Vivarelli 2016). The literature stressed that among the second group faced middle income
trap because of their inability of hold a superiority in the comparative advantage and modify
their export composition. The study found evidence that among the third group exits because of
inefficient and insufficient government support for undertaking industrial upgrade (Lin 2017). If
the industries could be upgraded, then that would lead to improvement to their production
capabilities and help them to export high end products to the international market. The only way
out to break middle income trap of this group is to innovate and adapt advanced technology
through active intervention of government.
Government has an extensive role to play in avoiding middle income trap. It is the
responsibility of government to vitalize the economy by implementing necessary public policies.
Government for example, needs to develop advanced infrastructure, enforces laws to protect
property rights and should undertake necessary reform against the existing wage rigidities in the