This article first appeared in The Edge Malaysia Weekly on June 17, 2024 - June 23, 2024

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.

Indermit Gill, chief economist of the World Bank Group and senior vice-president for development economics, admitted to a mostly like-minded audience in Kuala Lumpur on June 11 that Malaysia had “stayed longer than expected” after transitioning from lower-middle-income to upper-middle-income in 1992.

Gill and fellow World Bank economist 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,” says Gill, noting that middle-income countries need “economic sophistication” to grow. Without a proper strategy to stand on the shoulder 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, he elaborates.

Capabilities can be built if there is 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 Gill calls an infusion stage to an investment and innovation state, he says, noting that countries that succeed are often innovators that engage in high-value-added economic activities with products and services that people and countries are willing to pay a premium for.

“Infusion is a very deliberate process and doesn’t happen by accident,” says Gill, noting 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 NEC TV factory. “And very soon, Samsung started to compete with NEC and others. And around that time, South Korea switched to innovation subsidies to encourage the improvement of ideas and quality,” Gill elaborates on the genesis of South Korea’s innovation in areas such as organic light-emitting diode (OLED) TV and display panel industry that the country 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 his 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, Gill suggests 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] if not for the rupee, India would be an upper [not lower] middle-income country and if not for the rupiah, Indonesia would be high income. 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 manner,” Gill tells The Edge.

At an earlier roundtable on “Economic growth in middle-income countries: How can countries escape the middle-income trap”, Datuk Seri Idris Jala, a former minister in the Prime Minister’s Department, told the audience that 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.

Jala, who was CEO of the Performance Management and Delivery Unit (Pemandu) from 2009 to 2015 that was tasked to spearhead the Economic Transformation Programme (ETP) to transform Malaysia into a high-income country by 2020, also said Malaysia 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.

Asked about the policies on talent and why Malaysians abroad looking to return to “this part of the world” would often choose Singapore rather than Malaysia, Gill replied: “I don’t know Malaysia well enough, but I’ve heard from people that you have policies that were set up in the 1970s and they’ve kind of stuck. Somebody needs to take a 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 there are other goals that 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 getting close. Malaysia is getting close [to high-income status]. China will cross maybe two or three years earlier,” says Gill, flagging the importance of reforms and capacity-building to ensure a 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 but not at the next annual recalibration on July 1 this year for calendar year 2023.

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 last year (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, Gill named Chile (19.6 million population), which crossed the high-income threshold in 2013 (2012 data).

“Chile is very similar to Malaysia. Chile also has natural resources, copper. They depended a lot on copper and were worried because the price of copper could go up and down, and their GDP would go up and down. So, they diversified first into agriculture … they learnt how Norwegian salmon was grown, replicated that and competed with Norwegian salmon, which was [at a] higher price … they weren’t going into the lower-end parts [of agriculture]. They would make sure that the bananas and grapes they grew were in conformity with the taste in the US or Europe and sell to [places where consumers have money] rather than just [neighbouring South American countries like] Argentina,” he elaborates.

Meanwhile, Poland (36.8 million population) — which crossed the high-income threshold in 2010 (2009 data) — has “a lot of factories that Germans wanted”, says Gill. According to him, Poland is a little bit more advanced than Malaysia but is still mostly in the “infusion” state. Like Malaysia, Poland still needs to move up from “infusion” into the “innovation” space like South Korea, which he calls “a power house in innovation”.

While Malaysia “has not progressed as fast as South Korea, Taiwan and Singapore”, the country has done well in building a peaceful society and diversifying from natural resources but needs to make more structural changes that can propel it into the desired innovation stage and high-income status, says Gill, who was last in Malaysia in 1994. “No pain, no gain,” he adds.

From where he stands, the need to escape the “middle-income trap” to achieve high-income status remains as relevant today as it did two decades ago.

“I don’t think it is a distraction, it is a good thing. Suppose you didn’t have [the high-income threshold target], the other target that a lot of countries have is ending extreme poverty. China said it ended extreme poverty in July 2020, that was US$2 a day. Imagine if that was their only goal. It is such a low goal, whereas this [high-income target] is more of an achievement goal, so I think countries need to be ambitious,” he says.

“One shouldn’t obsess too much with the number itself but it is a proxy for how sophisticated and how efficient your economy is. So, if you focus on that part … you can talk about productivity, education levels, how many patents [and so on]. [High income] is a nice summary measure [yardstick] but it should not be the only measure [of success].”

World Bank Malaysia lead economist Apurva Sanghi, who also spoke on necessary reforms at the roundtable as a panellist, wrapped up the session with double-edged humour on how “hope springs eternal” in Malaysia’s marathon towards high-income status. “If you asked a 90-year-old spinster in Indonesia if she was married, she would tell you ‘not yet’.” Rather than take offence, policymakers would do well to bite the bullet on necessary reforms to produce results that will win over the worst of critics and make Malaysia an Asian tiger.

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