ONCE considered a promising fifth addition to the rich or industrialised Asian tiger economy in the early 1990s alongside Singapore, South Korea, Taiwan and Hong Kong, Malaysia — now what some critics call a thirty-something-year-old tiger cub — may well be looking at the last leg of its marathon towards high-income status in more ways than one.
Speaking on behalf of my colleague, I recently admitted to a mostly like-minded audience in Shanghai, China, that Malaysia had stayed longer than expected after transitioning from a lower-middle-income to an upper-middle-income country in 1992.
Two World Bank economists Indermit Gill and Homi Kharas introduced the concept of a “middle-income trap” in 2007 to refer to countries that escaped poverty as wages grew but found themselves unable to move into the desired high-income range following a slowdown or stagnation in economic growth, when discussing strategies for an East Asian economic growth renaissance about a decade after the 1997/98 Asian financial crisis.
The transition to high income is not easy.
Only 34 middle-income economies became high-income in 34 years, as middle-income countries need “economic sophistication” to grow.
Without a proper strategy to stand on the shoulders of global giants and absorb technology know-how into the local production chains while investing in local research and innovation, middle-income countries are three times more likely to experience a slowdown in growth compared with high-income countries.
Capabilities can be built if there is a progressive policy direction to move up the value chain and political will to make the necessary reforms.
There are reasons for Malaysia’s protracted journey, including the lack of investments to move from what I called an infusion stage to an investment and innovation stage.
Countries that succeed are often innovators that engage in high-value-added economic activities with products and service that people and countries are willing to pay a premium for.
Infusion is a very deliberate process and doesn’t happen by accident.
This is how the South Korean government gave infusion subsidies in the 1960s to encourage local companies to learn from foreign companies setting up factories there, including the NEC, a Japanese company that made televisions.
Later, Samsung began competing with NEC and others.
Around that time, South Korea switched to innovation subsidies to encourage the improvement of ideas and quality which is the genesis of the country’s innovation in areas such as organic light-emitting diode (OLED) TV and display panel industry that it pioneered in 2007 with champions like Samsung Electronics and LG Electronics to win market share from Japan’s earlier investments in liquid crystal display (LCD) technology.
Today, China is a top producer of OLED and LCD panels.
Asked for my thoughts on comments that Malaysia would have crossed the high-income threshold already had it not been for the ringgit’s devaluation against the US dollar, I suggested looking inward for pain points rather than playing the strong dollar blame game, as currencies can also weaken when countries do not implement necessary reforms.
In that sense, one could say that if not for the rupee, India would be an upper, not lower middle-income country, and if not for the rupiah, Indonesia would be a high-income country.
Ultimately, a currency’s strength is a reflection of the output that a country produces because your currency is a claim on that output.
So basically, if you produce a lot of output, your currency value goes up, unless you print a lot more money.
If you don’t print money, then your currency value goes up because it is a claim on that output.
If your output is worth a trillion, then your currency in circulation is worth a trillion; that is the simplest mathematics.
Malaysia would have definitely reached high-income status by 2015 had the ringgit stayed closer to 2010 levels against the greenback instead of where it is today.
To transform Malaysia into a high-income country, we should replace the New Economic Policy (NEP) that was introduced in 1971 with a more inclusive framework that helps the poor regardless of race and religion.
When asked why Malaysians abroad often choose Singapore over returning home, I explained what many of them have told me: our talent policies are outdated.
Most were formulated in the 1970s and have barely changed since.
Somebody needs to take a hard look at these goals and say, are they still serving the same goals they were supposed to serve, and if those goals have already been served, why have these policies?
If other goals need to be served, why don’t we change these policies?
In this part of the world, it has been more than two decades since any country joined the high-income ranks.
Headwinds are getting stronger when it comes to global trade, with the demographic dividend fast diminishing as the population ages.
Apart from Japan, which was the earliest industrialised country in this region, the other countries and territories that have attained high-income status include the so-called four Asian tiger economies — Singapore, Hong Kong, South Korea and Taiwan, which had gone through rapid industrialisation and export-driven growth since the 1960s.
Singapore overtook Japan in 2010, while South Korea overtook Malaysia in 1978 and surpassed the high-income threshold in 1993.
China is closing in, and Malaysia isn’t far behind.
China will cross maybe two or three years earlier, only with robust economic reforms and capacity-building to ensure the country can remain above the high-income threshold.
Both upper-middle-income countries are expected to cross the high-income threshold by the end of this decade.
China, which is currently closer to the high-income threshold than Malaysia, overtook Indonesia in 1998, the Philippines in 2003, Thailand in 2011, and Malaysia in 2020 in terms of gross national income (GNI) per capita, as calculated using the World Bank’s Atlas method to determine an economy’s income status.
China had a GNI per capita of US$12,850 in 2022 while Malaysia had US$11,830, according to World Bank data.
The existing threshold since July 2023 (2022 data) counts high-income economies as those with a GNI per capita of US$13,846 and above.
Upper-middle-income economies are those with a GNI per capita of between US$4,466 and US$13,845, while lower-middle-income economies are those with a GNI per capita of between US$1,136 and US$4,465.
China, Malaysia, Thailand (US$7,230 GNI per capita), and Indonesia (US$4,580) are upper-middle-income countries, while Vietnam (US$4,010), the Philippines (US$3,950), Laos (US$2,310), Cambodia (US$1,690), and Myanmar (US$1,270) are lower-middle-income countries.
Vietnam overtook the Philippines in 2020.
Not all high-income countries are highly industrialised.
Brunei and Macau’s GNI per capita have been above the high-income threshold for some time, according to the World Bank’s database.
Both have populations below one million, like Guyana and American Samoa, which were the latest to cross the high-income threshold at last year’s review.
Croatia and Panama, which crossed the high-income threshold in 2018 (2017 data), have populations below five million, World Bank data show.
In the Middle East, countries with GNI per capita that is above the high-income threshold include Qatar and the UAE, which in 2021 launched a 10-year industrialisation strategy called “Operation 300 billion”, focusing primarily on high-tech industries like space technology, medical supplies and pharmaceuticals, hydrogen production, machinery and equipment and advanced manufacturing.
Asked for countries comparable to Malaysia, I pointed to Chile (19.6 million population), which crossed the high-income threshold in 2013 (2012 data).
