This article first appeared in Forum, The Edge Malaysia Weekly on January 15, 2024 - January 21, 2024
Very few countries get a second chance; fewer still get a potential massive upswing thanks to the confluence of very major generational global shifts. If Malaysia gets its strategies and policies right this time, and builds a new broad-based political, social and economic consensus that has eluded the nation before, its resurgence as an economic powerhouse and an important middle power will no longer be a far-fetched idea.
Since the term “middle income trap” was invented nearly two decades ago by economists at the World Bank, outside Latin America, Malaysia has been the chief candidate for such a description. We have been a nation drifting purposelessly, and our elites indulged in self-aggrandisement and enrichment to unprecedented levels, as evident in the 1Malaysia Development Bhd scandal, while inequality and precarity became increasingly serious.
Malaysia can get a second chance in the form of a second economic take-off largely due to once-in-a-generation global shifts — decoupling, de-risking, the world not putting all manufacturing eggs in the China basket — and made possible by the advent of Prime Minister Datuk Seri Anwar Ibrahim’s unity government, which provided a sense of purpose and stability not available in the last decade(s).
During the country’s first take-off between 1988 and 1997, Malaysia was confident, broadly coherent, outward-looking, ambitious and hopeful, though acknowledging that exuberance led to financial woes later too. The first take-off had its origins in global shifts as well. In 1985, Japan was forced by the US to appreciate the yen, resulting in the exodus of Japanese firms, and their South Korean and Taiwanese supply chains, to Southeast Asia in search of cheaper production sites. Malaysia experienced a self-imposed recession in 1985 due to an austerity overdose. The government quickly pivoted in the next year to open its arms to foreign investments in manufacturing, thus the Promotion of Investment Act bears the date of 1986, setting the scene for prosperity until 1997.
The Asian financial crisis in 1997 bruised the self-esteem of the nation, and resulted in an inward-looking focus, with a make-do attitude to everything. In 1998, the supposed transition from an older-generation authoritarian leader — Tun Dr Mahathir Mohamad (then 73 years old) — to a much younger and more open-minded deputy — Datuk Seri Anwar Ibrahim (then 51 years old) — not only did not happen but tragedy struck. Both battled and Anwar was sacked, beaten up physically and languished in jail. Politically, there has not been elite cohesion or unity of purpose ever since. In 2001, China joined the World Trade Organization (WTO) and became the factory of the world, rendering economies such as Malaysia’s, which is not sophisticated enough to own its technologies, to become almost a wasteland, struggling and trapped in a neither-here-nor-there situation.
During the first take-off, among Asian developing countries, Malaysia was a distant third, in terms of manufacturing technology, after South Korea and Taiwan, and in terms of service, a near-peer to Singapore. Those should still be Malaysia’s comparisons in the second take-off. Of course, China is so much bigger as an economy and so much more sophisticated as a technology powerhouse now, which benefits Malaysia, as China is a potential source of new technologies and investment, apart from being a sizable market.
In the second take-off, Malaysia needs to be strategic. In the simplest terms, it means choosing what to do and what not to do, and at the right timing. The country should position itself in three “middles”: the indispensable middle in the global supply chain, the middle power and middle ground in geopolitical terms, and an aspiring middle class society.
During the hyperglobalisation years, the world’s factory was in China and “just-in-time” was the motto. Everything was moved through containers in sea freight without taking into consideration the potential risks from pandemics, wars, financial crises and the climate. Now the world operates with “just-in-case” as the dominant assumption, or, in other words, “de-risking”. Major multinational corporations are keeping China’s operations for China’s large middle class markets, but at the same time, guided by their governments, looking for opportunities for home-shoring (to set up manufacturing in the US, Germany, France, Japan and so on); or near-shoring in Mexico, Poland, Ireland or other parts of Eastern Europe; or friend-shoring in a US ally like India.
And, then it’s Southeast Asia. When one looks at Southeast Asia very seriously, Malaysia clearly occupies an indispensable middle position — the economy is admittedly not as sophisticated as Singapore’s but not too far off from it while costs are much lower. Malaysia has similar logistical strength as Singapore — both are situated next to the Malacca Strait. It also has a large English-educated workforce and a common law framework. In fact, more than a million Malaysians working in Singapore are ready to return to Malaysia for a pay equivalent to two-thirds of Singapore’s pay. Yet, Malaysia and Singapore are not exactly in competition. In this new time when supply chain resilience is top on the minds of manufacturers, Singapore needs a hinterland whereas there wasn’t such a need in the past 20 years when the world economy was highly financialised while China was its main factory.
In terms of technologies, Malaysia’s semiconductor cluster and the precision engineering sector that is supporting it, as well as for many other industries, the country is certainly the indispensable middle in the regional and global supply chain. We just have to keep pushing on the technological front to close the gap with South Korea and Taiwan in the years to come.
The second middle, where Malaysia as a middle-power aspirant with a non-aligned foreign policy tradition, is an important economic asset in this new time of global upheavals and realignment. US hegemony, prevalent between the fall of the Berlin Wall in 1989 and until very recent years, is challenged by China and Russia, as well as defied by some other countries, while many others exercise agencies of their own to chart a path not exactly as demanded by the US. The world is likely to be a more multipolar place with the US still the largest power-that-be but with many others competing for influence.
Malaysia’s non-aligned tradition means it is friendly to trade with all sides and, with various endowments such as a multilingual workforce and strategic location, may potentially serve as the Asian or Asean hub for China and Middle East firms, apart from American and European firms. Malaysia should envisage enhancing and developing a comprehensive service sector to be the near-peer of Singapore in all sorts of services such as legal, architecture, engineering and finance.
The third middle is “middle class”. China had a population of about 100 million that was considered middle class when it joined the WTO in 2001. Two decades later, it has at least 400 million people who are considered middle class. The second take-off should envisage Malaysia and our Southeast Asian neighbours becoming a middle class society in the decade or two to come. We should not sell ourselves cheap. As Malaysia aims higher and aims to be technologically more advanced, it doesn’t compete with Indonesia, Vietnam, Thailand or the Philippines. It complements these more populous countries with demographic dividends. It should envisage building a stronger vertical integration with these neighbours, thus not racing to the bottom in terms of wages but lifting all societies in Southeast Asia to some form of a middle class society.
A Southeast Asian middle class society will be a sizable market for intra-region trade as well as a market for global businesses. A strong middle class in Southeast Asia will also be a strong stabilising factor for regional peace. And a peaceful and coherent Southeast Asia is a great balancing force in a troubled world.
All these are achievable if Malaysia is strategic in what it does with this rare and precious second chance moment that is now at hand.
Liew Chin Tong is deputy minister of investment, trade and industry. This article is the preface of his soon-to-be-published book Second Takeoff: Strategies for Malaysia’s Resurgence.
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