Malaysia’s income growth falls short of ETP’s target

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This article first appeared in The Edge Financial Daily, on August 22, 2016.


KUALA LUMPUR: The growth in Malaysia’s gross national income (GNI) per capita and gross domestic product (GDP) has failed to meet the requirement as set out by the Economic Transformation Programme (ETP) despite having the Performance Management and Delivery Unit (Pemandu) created to manage delivery against these targets, say economists.

The ETP, launched in September 2010, was the road map for Malaysia to achieve high-income economy status by 2020.

The country’s GNI per capita is required to grow at an annual rate of 6% between 2011 and 2020 in order to achieve high-income status by 2020 according to the ETP. But Malaysia only recorded an average GNI per capita growth rate of about 4% annually from 2011 to 2015.

The ETP also stressed on the need to achieve GDP of 6% per year in order to reach the World Bank’s definition of a high-income economy by 2020, but Malaysia only managed an average GDP growth of 5.6% per year since 2010. Bank Negara Malaysia expects the economy to grow at a slower pace of 4% to 4.5% in 2016.

Despite not achieving the targets outlined in ETP, Pemandu chief executive officer Datuk Seri Idris Jala observed last week that Malaysia is no longer stuck in the middle-income trap. He based this on the fact that the gap between the World Bank’s high-income threshold and Malaysia’s GNI per capita has narrowed to 15% in 2015 from 33% in 2010.

Malaysia’s GNI per capita has risen from US$8,280 in 2010 to US$10,570 in 2015, while the World Bank’s high-income threshold has been adjusted from US$12,276 in 2010 to US$12,475 in 2015, Idris noted.

An economist, who prefers to remain anonymous, said Idris was not seeing the whole picture, pointing out that in the ETP, the government defines high-income as GNI per capita of US$15,000 (RM60,150) in 2020.

He said Malaysia has to look beyond being a high-income country, and instead emphasise on how it could benefit and include the rakyat in this growth story and to make sure that it is sustainable.

“If you look at the report on the salaries and wages received in 2015, the median was RM1,600, while its average was about RM2,312. It is pointless if Malaysia becomes a high-income nation without the rakyat feeling it,” he said.

The statistics department, in a report published in May, said the median and average salaries per month in Malaysia were RM1,600 and RM2,312 in 2015. For the urban area, the median and average salaries were RM1,855 and RM2,514. In the rural area, the respective figures were RM1,200 and RM1,617.

United Overseas Bank (M) Bhd economist Julia Goh said while the main indicator of economic development is GNI per capita, there are other indicators that should also be considered when reflecting on the country’s economic progress in terms of material well-being, average productivity, quality of life, environmental change, governance, and gender equality.

“These indicators also reflect the qualitative changes and restructuring of the economy in connection with technological and social progress.

“Beyond achieving the minimum GNI per capita threshold to qualify as a high-income nation, the policy agenda should ensure that it is a sustainable and inclusive income target. This includes ensuring steady contributions from labour, capital and technology, as well as balanced growth between labour incomes and company profits,” she said.

Dr Yeah Kim Leng, professor of economics at Sunway University’s business school, told The Edge Financial Daily in an email that if Malaysia can sustain a real per capita income growth of 3% to 3.5% annually until 2020, it should be on track to hit the high-income threshold as defined by the World Bank.

“We are currently achieving that growth pace with GDP growth of 4% to 5% per annum and slower population increase of around 1% to 1.5%. Subtracting the two gives approximately the per capita income growth required to cross the high-income threshold.

“There is, however, the relative inflation and exchange rate uncertainty when converting to the World Bank’s international dollar which the country’s income classification is based. Nonetheless, unless we are hit by growth stagnation over several years, the high-income goal is within grasp, plus or minus one to two years,” he said.

Lee Heng Guie, who was recently appointed as the executive director of Socio-Economic Research Centre (SERC) Sdn Bhd, was more realistic on the path to become a high-income nation, citing the challenges that Malaysia could face in a slowing economy.

“GNI per capita has increased since the implementation of ETP, but in 2015 it dropped to US$10,600 from US$11,100 in 2014. It still remains challenging, depending on how much we can push our GDP growth, national output and, hence, income. If we could do that, we can achieve the target by 2020,” he said.

RHB Research Institute Sdn Bhd economist Peck Boon Soon also noted that the challenges faced by Malaysia, saying the rising cost of living is also another factor that has to be looked into.

“GNI per capita is really just one of the measurements as to where we stand. Rising cost of living is also another crucial issue that we have to look at as we move towards becoming a developed nation,” he said.

There are areas that the government is on track such as the fiscal deficit reduction from 6.6% of GDP in 2009 to 3.2% last year.

While it is too early to tell if Malaysia could break out from the middle-income trap, one thing that economists all agree is the need for a more inclusive and sustainable growth in the country. Most analysts also agreed that Malaysia needs to look beyond becoming a high-income nation, but to become a developed country.

The ETP was designed to drive Malaysia forward from what was described as a “stagnant situation” to be a high-income economy, which is both inclusive and sustainable. With the 2020 deadline on the horizon, it is perhaps crucial for Malaysia to undertake structural reforms as encouraged by World Bank economists and other economists.