Commentary: GE15 – Long-term economic plan needed, or Malaysia will be stuck in middle-income trap

In 2000, Malaysia’s per capita GDP (in 2010 United States dollars) was US$6,393, nearly three times that of China (US$2,194). By 2021, China had more than caught up (US$11,188) and slightly surpassed Malaysia (US$10,827). Moreover, Malaysia’s per capita GDP has remained roughly the same since 2017.

Escaping the middle-income trap will require a boost in productivity and greater innovation-driven growth. This clearly requires coordinated policies and economic reforms.

A 2015 International Monetary Fund working paper noted that high productivity gains and high value-added sectors that build extensive links with the rest of the economy are essential to achieving sustainable growth, and argued that the missing link in Malaysia’s growth strategy is local technology creation.

In March, Bank Negara Malaysia governor Nor Shamsiah Mohd Yunus called for accelerated structural reforms, such as improving labour market flexibility and strengthen insolvency laws, that will help bring about a conducive investment climate and enhance the country’s long-term competitiveness.

This could help sustainably reverse the decline in net foreign direct investments inflows observed between 2016 (RM47 billion, US$10.2 billion) and 2020 (RM14.6 billion, US$3.2 billion).

Apart from helping to address structural challenges and productivity issues, economic reforms are needed to limit the risk of long-term economic scarring from the pandemic.