This article first appeared in The Edge Malaysia Weekly on April 15, 2024 - April 21, 2024

THERE is “no reason” Malaysia cannot “break through the middle-income trap and become a high-income economy by the end of the decade”, says Asean+3 Macroeconomic Research Office (Amro) chief economist Khor Hoe Ee.

“We are optimistic that as long as [Malaysia] maintains fiscal and monetary discipline, new inflows of investment from abroad will be able to help [the country] raise the growth rate and reach the high-income level that they aspire to,” Khor told reporters on April 8 when releasing the Asean+3 Regional Economic Outlook (Areo) 2024 report.

The report itself does not elaborate on Amro’s assumptions on Malaysia attaining high-income status by 2030 but mentions this: “With the strong and stable growth in national incomes, all the region’s economies have transitioned to [at least] middle-income status, with China and Malaysia well positioned to reach high-income status 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 (see Chart 1).

China had a GNI per capita of US$12,850 in calendar year 2022 while Malaysia had US$11,830, according to World Bank data.

Pending the annual recalibration on July 1 this year, lower middle-income economies are those with a GNI per capita of between US$1,136 and US$4,465; upper middle-income economies are those with a GNI per capita of between US$4,466 and US$13,845, while high-income economies are those with a GNI per capita of US$13,846 and above.

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.

Among the Asean+3 (Japan, South Korea, China) countries, Singapore, Japan, South Korea and Brunei (US$31,410 GNI per capita) have attained high-income status. Singapore overtook Japan in 2010 while South Korea overtook Malaysia in 1978 and surpassed the high-income threshold in 1993.

Amro’s projection on when Malaysia could attain high-income status is later than earlier projections by the World Bank.

In March 2021, economists at the World Bank said Malaysia was within “striking distance” of the coveted status and projected that the country “will exceed the threshold that defines high-income economy status at some point between 2024 and 2028”.

According to the 2021 World Bank report, Malaysia would cross the high-income country threshold by 2025 under a baseline scenario, which was premised on assumptions that Malaysia’s economy would continue to expand at around its potential growth rate, with the ringgit-US dollar exchange rate remaining unchanged at around RM4 per US dollar throughout the forecast period.

At the time, the World Bank said Malaysia could attain high-income status by 2024 under a high case scenario that assumed stronger profiles for gross domestic product growth and ringgit exchange rates; and by 2028 under a low case scenario that assumed the opposite. It is not immediately known what was the currency exchange rate assumed in the low case scenario.

The ringgit had averaged 4.0203 against the US dollar in 2020; 4.1665 in 2021, 4.4045 in 2022 and 4.594 in 2023, according to Bloomberg data.

Malaysia’s GNI per capita of US$11,830 in 2022 would have been US$12,961 or US$13,518 — much closer to the US$13,846 threshold for high-income status — if the ringgit had stayed at 4.0203 against the US dollar in 2020 instead of the weaker average exchange rates for 2022 and 2023, back-of-the-envelope calculations (using average exchange rates on Bloomberg) show.

To be fair, even though Malaysia has been an upper middle-income economy since 1992, the country has generally been able to reduce the gap between its GNI per capita and the high-income threshold since the turn of the millennium.

Since 2015, however, the ringgit’s exchange rate against the US dollar has weakened above the RM4 mark. This contributed to, but is not the only factor for, the gap between Malaysia’s GNI per capita and the high-income threshold widening year on year in 2015, 2016, 2017, 2020 and 2021 instead of closing as in 2018, 2019 and 2022. In 2022, for example, Malaysia managed to narrow the gap between its GNI per capita and the high-income threshold to only US$2,016 despite a stronger greenback (see Chart 2).

Still, Malaysia would have made more progress on the back of a stronger ringgit, given that GNI per capita used for the classification is denominated in US dollars.

Rather than its validation of China’s and Malaysia’s journey towards high-income status, the Amro report, which focuses on the Asean+3 region, acknowledged the region’s export boom from active participation in global value chains (GVCs), favourable domestic policies that attracted large foreign direct investments (FDIs) and brisk improvements in the quality of the labour force, alongside strong involvement in global and regional initiatives that signalled that the Asean+3 region was “open for business”.

Amro warned, though, that the “various tailwinds that facilitated the region’s remarkable growth are dissipating while the headwinds are rising”, noting that the speed of the region’s catch-up with high-income peers has been moderating since the 2008/2009 global financial crisis as global growth slowed on the back of a deceleration in working-age population growth, stalled momentum in GVC expansion, a slower pace of structural transformation for developing economies and slower economic growth in major advanced economies.

“More critically, the region is experiencing this slowdown in an environment increasingly beset by challenges from key secular trends, including population ageing, a global trade reconfiguration, and rapid technological change,” Amro economists wrote in the report, noting that economies “could be caught in a ‘middle-income trap’ if they do not rise above the challenge”.

An October 2023 survey by Amro on the region’s monetary and fiscal policymakers identified the ongoing reconfiguration in global trade and FDI as the most pressing risk to the long-term growth of Asean+3 economies, especially if it leads to a protracted global economic slowdown.

Meanwhile, rapid ageing is triggering fiscal concerns due to the potential rise in healthcare costs and pension liabilities, on top of the needed infrastructure spending that is required to sustain growth.

According to Amro, ageing is happening faster in the Asean+3 region than in other parts of the world, noting that Japan’s population peaked in 2010 while those of South Korea and China reached their peak in 2020 and 2021, respectively. Among the 10 Asean members, Thailand is projected to be the first to reach its population peak in 2029, followed by Singapore in 2041, Brunei in 2049, Vietnam in 2051, Myanmar in 2052, Indonesia in 2060, Malaysia in 2066, Cambodia in 2067, Laos in 2072 and the Philippines in 2092.

Still, the working-age population growth is projected to have peaked in Singapore in 2010, Thailand in 2012, Vietnam in 2013, Brunei in 2018 and Malaysia in 2022 while Myanmar’s is expected to peak in 2025 and Indonesia’s in 2029, according to data appended to the report.

Amro projects the region’s total working-age population to shrink in the second half of this decade, which carries negative implications for the region’s growth potential, macroeconomic stability and the sustainability of public finances. “However, these consequences are not predetermined and can be mitigated somewhat — especially if the population is allowed, and able, to age productively. When considering healthier life expectancies in the Asean+3 region, policies that support and promote healthy longevity could see about 200 million workers re-enter the region’s labour force by 2050,” Amro said, noting that investments need to be made to ensure a commensurate increase in total factor productivity.

Investments in automation and new technologies, such as robotics and artificial intelligence, for example, can help offset the negative impact of a shrinking workforce while augmenting the skills of older workers.

Several Asean+3 economies are “growing old before becoming rich” and could be entering their super-aged status with per capita incomes of less than US$10,000 — a situation that could contribute to the risk of falling into the middle-income trap problem, which many emerging and developing economies are worried about, Amro said, adding that some countries are approaching the ageing status with less than US$4,000 per capita incomes. Thailand, for example, became an aged society with a per capita income of US$6,000 in 2021 — an increase of US$2,000 from when it first became an ageing society in 2004.

Malaysia, which became an ageing nation in 2021 (7% population aged 65 and above) is projected to become an aged nation (14% aged 65 and above) by 2030. Though shy of the high-income threshold, Malaysia’s per capita income has been above US$10,000 since 2018.

Surpassing the high-income threshold is still important, symbolically, even though greater importance should be placed on sustainable reforms that will help a country defend the coveted status.

“Yes, it is more important to ensure sustainable growth at least at potential, if not above potential [and] you can say high-income status is no longer the [development] priority relative to closing the gap between the rich and the poor [under the Shared Prosperity Vision 2030] but will high-income status remain elusive to a country that has successfully industrialised and is indispensable to the global value chain?” an observer asks, noting that Malaysia “knows what it needs to do” to graduate to high-income status.
 

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