Malaysia’s high income journey in perspective

By See Pi Yi

Photo by Marisa Heah

Dr Philip Schellekens, senior economist with the East Asia and Pacific Department at the World Bank, gave a presentation at SERI last month, providing the World Bank’s perspective of growth and development in Malaysia, requirements for the country to move forward and the Bank’s assessment of policy initiatives.  

Malaysia has experienced rapid economic growth, with the Growth Commission identifying Malaysia as one of the few countries in the world that experienced at least a seven per cent growth rate for a sustained period of more than 25 years. Nevertheless, there has been no significant boost in income levels per capita. Schellekens noted that poverty inequality in Malaysia was high, with 43% of the poor in Malaysia (excluding foreigners) being located in Sabah alone. While surveys showed that limited innovation takes place locally, it is worth highlighting that Malaysia recorded a marginal improvement on its patenting performance both domestically and internationally over the past 12 years, despite starting out from a low base.  

Schellekens stressed that the brain drain was a problem affecting Malaysia’s human base capital, with data from the year 2000 showing that one out of 10 Malaysians with a tertiary degree migrated to an Organisation for Economic Co-operation and Development (OECD) country. Although this was already twice the world average, it should be noted that this excluded emigrants to Singapore. The fact that this outflow has not been replaced by a compensating inflow and is expected to deteriorate further is a cause for concern.

Photo by Marisa Heah

Recently, China has attracted most of the high quality foreign direct investment (FDI), such as research & development (R&D) for new product development and localisation. With China’s emergence as both a market and a competitor, it will prove to be even more of a challenge for Malaysia to attract FDI. Should Malaysia continue to rely heavily on FDI as a factor for growth?

Schellekens emphasised the “3Cs” of innovation – capabilities, competition and concentration. He suggested that Malaysia could attract and welcome back migrants with attractive programmes while improving the quality skill base by strengthening the education system. Guaranteeing a level playing field could yield important growth dividends, for example the removal of foreign equity investment constraints could raise productivity in the services sector by as much as 40%. This could help reverse the deceleration in productivity after the Asian crisis. He warned that if the capabilities required were absent, competition could potentially discourage innovation.  

Interestingly, there has been a diminishing role of ethnicity in income differentials as shown by the gradual but steady decline in income ratios between Chinese and Bumiputeras, as well as Indians and Bumiputeras. However, the Gini coefficient (a measure of the inequality of a distribution) for Bumiputera households is approximately 0.44, whereas the Gini coefficients for Chinese and Indian households are only slightly lower. This indicates considerable inequality within the ethnic groups themselves, as opposed to inequality between the ethnic groups.  

In wrapping up, Schellekens commended Malaysia’s progress on policy assessment as well as the “heavy involvement of the private sector along with government officials and international consultants.” He also described the structure of the reform agenda as sound. This included the Government Transformation Programme (GTP) public delivery service, Economic Transformation Programme (ETP) sectoral issues and cross-cutting issues.