(March 18): 2024 was a good year for Malaysia’s economy. The World Bank raised its growth forecast to 4.9%, a solid 14% jump from earlier projections. Growth surged beyond expectations, inflation remained moderate and investments boomed.

The equity market hit a historic high in market capitalisation mid-year, while exports enjoyed impressive growth. The ringgit made a strong comeback, and real median wages saw solid growth for both men and women.

Unemployment reached pre-pandemic levels and hardcore poverty was nearly eradicated. Moody’s rating agency also reaffirmed Malaysia’s “A3” sovereign credit rating with a stable outlook.

These “quantitative” indicators are now being reflected in qualitative ones: the latest Ipsos survey noted how Malaysians are becoming optimistic about the future. Almost eight out of 10 Malaysians expect 2025 to be a better year.

What explains this turnaround? Can this momentum continue into 2025 — a year of global uncertainty? What new growth drivers can Malaysia unlock to secure its economic future?

Several factors, both global and local, have contributed to this turnaround. Despite ongoing geopolitical tensions and high interest rates, the global economy has performed better than expected.

One reason is that inflation has decreased in many parts of the world, leading to a renewed interest in economic growth. This has been especially true in the US, where growth has been stronger than anticipated.

In emerging markets, rising consumer confidence, stronger manufacturing and improved services helped boost economic activity. East Asia, in particular, has grown faster than other regions.

On the domestic front, Malaysia has benefitted from political stability, favourable government policies and improved investor confidence. Its efforts to streamline subsidies, reform civil service pensions and pass the Fiscal Responsibility Act have all helped set the stage for smoother economic growth.

The reform narrative was also nicely dis- played in the recently concluded Forum Ekonomi Madani (organised by the government). Indeed, the country’s per capita output now stands at 12% above pandemic levels, outperforming many regional peers.

Malaysia can now build on this momentum. In an increasingly uncertain and fast-changing world, it is even more important to focus on what can be controlled at home and seize the opportunity — that is to double down on domes- tic reforms.

Now, there is a lot of healthy discussion and debate on mainstream issues such as Malaysia’s diversifying its trade partners, or the role of data centres or on traditional growth areas like semiconductors and commodities.

In this article, however, I draw out three under-tapped potential growth and development drivers that Malaysia has yet to fully embrace. Let’s call them 3S: services, sub- national and sustainability.

Take investment, which is a cornerstone of Malaysia’s economic policy. Prior to 2000, Malaysia’s inward stock of foreign direct investment (FDI) used to be the highest among its Asean-5 peers. But now countries like Thailand and Vietnam have surpassed it.

There are many reasons why investors choose a country, like stable policies, good infrastructure and skilled workers. However, according to the Organisation for Economic

Co-operation and Development’s (OECD) FDI restrictiveness index, when it comes to certain services, Malaysia is twice as restrictive as Vietnam, especially in the service sectors of distribution, electricity and financial services. Reforming services boosts productivity and growth. Globally, services account for more than half of global trade and two-thirds of global GDP, and several countries have benefited from reforming their services sectors. For example, neighbouring Indonesia, between 1997 and 2009, by making services less restrictive to FDI, saw a boost of 8% in productivity of its manufacturing sector.

Other countries like Chile and India have had similar positive results. Interestingly, Malaysia’s FDI restrictiveness is almost zero in manufacturing but that should not be surprising: After all, Malaysia has made a concerted effort to attract FDI in manufacturing, especially in its electrical and electronics (E&E) sector.

The key takeaway is that policies matter. It is time for Malaysia to reduce restrictions not just in manufacturing but also in services.

While services account for around half of Malaysia’s GDP, they remain restricted. For example, a lawyer from Peninsular Malaysia cannot automatically practice in Sabah or Sarawak, and vice versa.

In fact, Malaysia is ranked by the OECD as the seventh most restrictive country in terms of services trade out of 51 countries (with Japan being the least restrictive). OECD analysis finds that horizontally applicable regulations — such as Malaysia requiring residency requirements for the board of directors, imposing limitations on the acquisition and use of land by foreigners and limitations on cross-border transfer of personal data — all restrict trade in services.

Now, one services sector where Malaysia is poised to take off is Islamic finance. It is not as widely known but Malaysia was the first country in the world to issue a green sukuk.

Innovating new Islamic financial models and scaling up tools such as profit-risk sharing instruments of zakat and wakaf can lead to growth that is balanced, sustainable and inclusive — which is what the world, and not just the Muslim world — needs. Indeed, Malaysia’s chairmanship of Asean pro- vides an opportune platform for doing so.

By loosening restrictions and creating a conducive investment environment in key services sectors such as legal, digital and financial, as well as building on its strengths in Islamic finance, Malaysia is poised to fuel new growth.

Many countries, including neighbouring Philippines and Indonesia, have benefitted from fiscal and functional decentralisation to states. But it is a well-known fact that Malaysian states do not have much fiscal autonomy — being unable to raise their own taxes or directly issue debt in markets.

For sure, decentralisation needs to be done carefully and under coherent fiscal policy and accountability frameworks.

It is remarkable, however, that a decision to open a school or hospital in Kelantan or Sabah essentially resides with the federal government. This undermines local development — since local governments have a better idea of local needs — and can also breed unnecessary federal dependency.

Indeed, it is telling that of the 13 states and three federal territories, only five are above our World Bank high-income threshold.

Spatial inequalities run high and are growing. Take Kelantan, for example. In 2023, Kelantan’s per capita gross national income (about US$3,850 or RM17,113 in nominal terms) was comparable to Sri Lanka’s (US$3,540), a lower-middle-in- come country recovering from an economic crisis.

Empowering states with more fiscal autonomy, while maintaining overall fiscal responsibility, could thus stimulate local economies, address spatial disparities and unlock a new growth driver for the country as a whole.

Sustainability as a growth driver is thrown around a fair bit so let me be specific. It may surprise some but Malaysia has a revealed comparative advantage when it comes to producing and exporting green products, like lithium batteries. Between 2015 and 2022, the country’s green exports grew faster than those of other developing nations and was among the highest shares among its structural peers. Malaysia is well-positioned to boost exports of green technologies, such as solar panels and electric vehicle (EV) parts, as well as key minerals like cobalt and nickel.

And it is not just physical goods — Malaysia also has potential in green services. For example, Malaysian companies are offering carbon management services through digital platforms and are already exporting them to Thailand.

Thus, sustainability, via tapping a growing global market for green goods and services, can drive future growth.

Malaysia’s potential is vast and by fully tapping the 3S, Malaysia’s recently found economic renaissance can continue well into the future.

Dr Apurva Sanghi is the World Bank’s lead economist for Malaysia.