Trapped in middle income bracket by wrong choices

 

Malaysia should focus on high-tech industries to get out of the middle-income trap, says an economist. (Freepik pic)

PETALING JAYA: An over-reliance on foreign direct investment (FDI) and low productivity have been cited as factors that keep Malaysians trapped in the middle-income bracket.

The way forward is to improve capability and drive competitiveness, according to economists.

Barjoyai Bardai of Universiti Tun Abdul Razak said the progressive wage policy (PWP) is a start.

More than 30 years ago this month, then prime minister Dr Mahathir Mohamad outlined the Vision 2020 plan. One of its many objectives was to make Malaysia a high-income nation by 2020.

The issue was raised again recently by Khazanah Nasional Institute research adviser Jomo Kwame Sundaram, who said that to escape the middle-income trap, Malaysia must recognise its own limits through critical thinking.

What others have achieved

In 1981, when the Vision 2020 plan was announced, there was only a marginal difference in the per capita income among South Korea, Taiwan and Malaysia.

Back then, the per capita income in Taiwan was US$2,691, in South Korea, it was US$1,883 and in Malaysia, it amounted to US$1,920.

That would have been equivalent to RM6,189 in Taiwan, RM4,330 in South Korea and RM4,416 in Malaysia based on the approximate exchange rate of RM2.30 to the US dollar at that time.

Fast forward to 2023 and Taiwan’s per capita income had risen to US$32,687 (or RM150,360 based on today’s exchange rate of RM4.60 to the dollar).

In South Korea, it was US$32,418 (RM149,122) and in Malaysia it was US$12,465 (RM57,339).

The World Bank had, in 2022, categorised a high-income economy as one with a per capita income of US$13,845 (RM63,786) or more.

Factors separating Malaysia from Taiwan and South Korea

There was little difference between the Malaysian and Taiwanese economies. Both had historically been driven by micro, small and medium enterprises (MSMEs).

Barjoyai said MSMEs accounted for 97% of businesses in both countries.

However, Taiwan has successfully risen above the middle-income level by not depending exclusively on FDIs, he said.

“While they did not (reject) FDIs, they also did not rely solely on it to grow. They have developed SMEs where most in the middle-income community are employed,” he said.

On the other hand, Barjoyai said, Malaysia has been relying heavily on multinational corporations (MNCs) in the past seven decades although they account for only 3% of business entities in the country.

He said relying on struggling SMEs to drive the economy only left it sluggish, causing employers to reduce the share of revenue with employees from 37% to 32% over three years.

Taiwan achieved high-income status in 2010 despite it being behind Malaysia in the 1970s.

Its per capita income is 2.6 times higher than Malaysia today.

Lee Hwok-Aun of Singapore’s Iseas-Yusof Ishak Institute attributed Taiwan and South Korea’s escape from the middle-income trap to their focus on nurturing homegrown technological capabilities that would give rise to global leaders in manufacturing.

Acer and Asus, renowned for their computer hardware and electronics, hail from Taiwan, while Samsung and LG, giants in electronics, are from South Korea.

“Their creative and entertainment sectors are also thriving thanks to supportive policies and funding,” Lee said.

Barjoyai and Lee also dismissed criticisms of affirmative action, saying that while “certain policies” have reduced capacity for economic development, they have also achieved the target of raising Bumiputera participation in the economy.

What can we do?

For a start, Lee said, Malaysia needs policies driven by a relentless and uncompromising focus on developing capability and competitiveness to get ahead.

Barjoyai said Malaysia must focus on upskilling through training to create a more productive workforce given that 70% of its workers are considered unskilled.

He said the PWP would serve as a carrot to encourage workers to go for training.

“If they don’t go for training they don’t get a raise. That will force them to upgrade and upskill to become more productive,” he said.

Lee said Malaysia can seek FDIs but should focus on high-tech sectors and priority fields.

However, he said, domestic investments should also be encouraged in line with national priorities.

“Sustaining economic growth at a rate higher than the high-income threshold growth, combined with a strengthening ringgit, will lift Malaysia out of the middle-income trap.

“But we have to broaden the definition of economic development beyond income. There is more to take from Vision 2020 and its multi-dimensional aspirations, as reference points for what Malaysia should strive for,” he said. - FMT