In 1970’s, almost
half of Malaysian still lived below the poverty line with a GDP per capita of
around $USD 390. Currently, GDP per capita has reached more than $USD 10,000
and less than 1% of Malaysians live below the international poverty line of
$1.25 per day (World Bank, 2011) . Huge growth rate
between 1980s and 1990s that averaging at 9% per year has successfully transformed
its economy from a poor, agriculture based economy into a modern, upper-middle
income country. However, from 2000 onwards, Malaysia’s economic growth started
to decline and its GDP per capita remained stagnant at middle-income level.
Countries such as Taiwan, Korea and Singapore that have relatively same GDP per
capita level with Malaysia in the early 1970s have overtaken Malaysian in term
of economic growth and successfully put their countries at high-income level
status. Therefore, Malaysia needs to reform its economy in order to escape from
middle-income trap that could transform the country into high-income nation.
Research done by Foxley and Sossdorf (2011), that examine the successful
cases of Korea, Finland, Spain and Ireland to escape middle income trap has
identified four main factors that enable these countries to transform from
middle income to high income economy: 1) good macroenomic management 2) flexible
exchange rates and labour markets 3) high rate of investment in education and
innovation 4) stable political and social condition. Malaysia seems to fulfill
all the requirements mentioned above except for investment in education and
innovation. Malaysia’s main
economic growth contributor relies
heavily on export-oriented manufacturing supported by foreign investment. Malaysia’s
local companies have not done enough innovation to add value to their products.
Report done by World Bank (2010) that examnie the innovation growth in Malaysia
found that there is a huge decline in private investment in Malaysia from
mid-1990s onwards and R&D spending stays low, at about 0.6% of GDP
(compared to 3.5% in South Korea). Malaysia’s educational policy that is
racially biased where it discriminates Chinese and Indian racial minority
admission to public universities hinders the true potential for Malaysia to
fully develop its human capital.
If Malaysia is
going to escape the middle-income trap, the government must implement a massive
reform in educational and research institution. Strengthening the education system by giving
equal access to all people is important to enable Malaysia to have better human
capital that can fulfill high skilled labor demand that can drive innovation in
the country. Instead of relying from foreign firms’ technology, Malaysia should
innovate locally in order to maintain sustainable growth in the future. Unlike
in Taiwan and South Korea, there are only a few industries in Malaysia that has
become world-class industries. As stated by Foxley
& Sossdorf, (2011), South Korea successes in achieving high income
status are largely due to its local innovation successes that have been able to
create homegrown, internationally competitive industries. South Korea for
example has more than 15 companies listed as Fortune Global 500 Company whereas
Malaysia only has one, which is PETRONAS, Malaysian national Oil and Gas
Company. Government can help to foster
local innovation by channeling more financial resources to local start-up
companies and other potentially innovative firms. Economic Transformation
Programme, a Malaysian government initiative that have been introduced in 2010 to
attract private investments in national key economic areas such as oil and gas,
financial services, and manufacturing might help to resolve this issue.
Works Cited
Foxley, A., & Sossdorf, F. (2011). Making the
Transition: From Middle-Income to Advanced Economies. Washington DC:
Carnegie Endownment.
Hazri, H. (2011, January 26). Malaysia’s
Middle-Income Trap. In Asia .
World Bank . (2010). Malaysia Economic
Monitor: Growth through Innovation. Thailand : The World Bank .
World Bank. (2011). World Development
Indicators. World Bank.
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