On the Edge

Malaysia is nearing the transition to a high-income, developed economy, but several factors could stand in the way.

By Marta Chmielowicz

Despite the setbacks of COVID-19, Malaysia is likely to make the transition from an upper-middle-income economy to a high-income economy in the next five years. This transition is not an easy one; in the past 30 years, only 33 countries have transitioned to high-income status. Navigating the next stage of development offers an opportunity to assess the quality and sustainability of Malaysia’s economic growth and highlights the need for tough reforms and policy changes.

According to World Bank Group’s study, Aiming High, Malaysia has seen great success in growing from a low- to upper-middle-income economy in just one generation.

  • Gross national income per capita grew an average 6.9% per year between 1960 and 2017.
  • Less than 1% of the population lives below the international extreme poverty line of US$1.90, and only 2.7% live below the average poverty of upper-middle-income countries (US$5.50).
  • The country trades with nearly 90% of countries in the world.
  • Life expectancy at birth has steadily increased from 59 years in the 1960s to 75 years in 2019.

However, Malaysia’s growth is currently slower than other countries that achieved high-income status in recent decades. The country has a lower share of employment at high skill levels; greater inequality; and lower taxes. There is also a growing sense that the economy is not producing a sufficient number of well-paying, high-quality jobs for its middle class; that the proceeds of growth have not been equitably shared; and that increases in the cost of living are outpacing incomes.

In order to ensure sustainable economic growth, Malaysia needs to focus on quality over quantity, with the ultimate goal of providing citizens with freedom and autonomy. To achieve this, Malaysia needs to increase human capital; make institutions more accountable; and develop an economy that provides its citizens with opportunities to engage in fulfilling, productive work.

The World Bank Group offers six areas where reforms are needed to ensure a successful transition to high-income and developed country status.

  • Revitalising long-term growth. Malaysia’s GDP growth rate is expected to fall over the next 30 years. To combat this, reforms are needed to improve quality of schooling, increase female labour force participation, and implement policies to boost productivity and growth.
  • Boosting competitiveness. Malaysia’s private sector will become the primary driver of higher living standards, so the country will benefit from policies that encourage innovation and digital adoption, strengthen market competition, and improve the investment climate.
  • Creating jobs. Skills gaps are an ongoing problem in Malaysia, requiring reforms to improve health, strengthen learning outcomes, facilitate digital literacy, and attract and retain talent.
  • Modernising institutions. The quality of Malaysia’s institutions lags behind its peers, making it hard to meet the rising expectations of the middle class. Greater transparency, inclusion, accountability, and oversight in the government can help make an impact.
  • Promoting inclusion. Whilst the economy has grown, the profits have not been equitably distributed between the rich and the poor. Reforms are needed to ensure equitable access to quality education and employment; to strengthen Malaysia’s social protection system; and to ensure access to services by vulnerable populations.
  • Financing shared prosperity. Transitioning to high-income status requires more diverse tax revenues, progressive tax frameworks, and more effective assistance.
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