My Say: Why is China roaring through the middle-income level and Malaysia trapped in it?

This article first appeared in Forum, The Edge Malaysia Weekly, on May 16, 2022 - May 22, 2022.
My Say: Why is China roaring through the middle-income level and Malaysia trapped in it?
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China’s mercurial economic rise is seen as a modern miracle. It is now the world’s second largest economy and is expected to overtake the top economy, the US, in the not-so-distant future.

Many believe that the accelerating GDP (gross domestic product) numbers are mainly due to the huge population. However, on a per capita basis, it is not a poor country as many may think. The economics world uses GNI (gross national income) per capita as a measure of a country’s well-being. 

The World Bank has defined middle-income countries as economies with a GNI per capita of between US$1,036 and US$12,535. China’s stood at US$10,550 in 2020 based on the World Bank’s data. On a PPP (purchasing power parity) basis, it is an even more stunning number at US$17,2000 PPP dollars. China’s GNI per capita is skyrocketing as the chart from the World Bank shows.

It is quite obvious that it will pop through the top of the middle-income level soon, and in the right smart fashion, too. Here’s the thing: it is a hair’s breadth away from overtaking Malaysia, whose GNI per capita was US$10,570 in 2020. 

A glance at the chart of Malaysia’s GNI per capita shows that it has been stuck in the middle-income level for quite a while, since at least 2014. In other words, it is in the middle-income trap.

Why is that? There are many angles to approach in answering this vexing question but let us start from the top: how each country does its economic planning. 

Like Malaysia, China has its own five-year development plans and industrial master plans. China’s current five-year plan is the 14th, while Malaysia’s is the 12th. All of China’s five-year plans have a vision statement of realising the “China dream of rejuvenating the nation”. That it has remained the same for many years provides stability in planning and execution thereof for the nation. 

It is the 13th five-year plan that is of interest for us for this question. The main target for this plan period is to build a “moderately prosperous society in all respects”. Importantly, realising perhaps that it is in a transition period from being a foreign direct investment-led economy and part of the global supply chain to one that is turning mainly to local brands and final products. Fuelled by local consumption, it has a specific target NOT to fall into the middle-income trap. 

Embedded in China’s 11th five-year plan are three key requirements to guide the thinking (especially important during implementation), a four-pronged comprehensive strategy and six principles to abide by. It also has three strong safeguards for itself. It has six key targets for the plan, most of which are social in nature (China being, of course, a socialist country).

As we have further detailed in our paper, “Malaysia’s 5-year development plan — how does it compare to China’s?”, the plan is for supply side reform, broadly meaning to improve its own final products and brand names. This is well within its powers and shows its practical nature. The plan objectives are cascaded down via 165 initiatives and programmes organised into 23 areas. They are implemented by local governments, rather than ministries. 

Working hand in glove with the five-year plans are the industrial master plans. The current one is the “Made in China 2025” plan, popularly known as “MC2025”. When it was launched, MC2025 shocked the world. The two items that sent traumatic jolts were: (1) To gain access to China’s domestic markets, foreign companies must surrender their technology as required; and (2) The key targets amounted to an import substitution strategy, squeezing out imported goods markedly. 

As we had pointed out in our paper, “China’s industrialisation — are they doing the stepladder sequence?”, the domestic market share targets drew gasps of disbelief from the world. 

Clearly, China intends to launch its own second industrial revolution via the hi-tech field. A clear distinction exists between its five-year plans and industrial plans: the industrial plans focus on whichever segment of industry that had the plans’ spotlight on it (for example, in MC2025, it was the hi-tech field), whereas the five-year plans outlined the major construction plans, sectoral distribution and the government’s strategy policy priorities over a multi-year time horizon, and set targets and directions for national economic development. 

China has enough local producers making final products and brands that is powering it ahead in national wealth generation. Brand names like Huawei, Lenovo, Geely, Haier, Hisense, Tencent, Alibaba, Moutai, Meituan, Xiaomi, Bank of China and so on are now global household names (see table on China’s share of global production by industry in 2018).

The UN’s Statistics Division noted that in 2019, China’s share of global manufacturing output was 28.7%, far higher than second-placed the US at 16.8%. This shows how China is powering its way to high-income levels: industrialisation with local brands and final products. 

By comparison, of Malaysia’s five-year plans, called Malaysia Plans or “MP”, the 11th would be synchronous with the two China plans mentioned above. They leave a lot to be desired. It follows the nation’s vision statement, but changes in government meant that the vision statement changes, putting the MP out of synchronicity. During the 11MP period, there was a change in government. 

The 11MP had six strategic thrusts when it was first written in 2016, with six “game changers”. Midway through, though, the government changed, and the six strategic thrusts disappeared, to be replaced by six policy pillars that had 19 priority areas and 66 strategies. Any planner will tell you that changing targets midway is a sure-fire way of ensuring non-success. 

Sadly, there were no strategic level targets in either 11MP versions. 

Malaysia’s 11MP sub-targets are then cascaded down to federal ministries to implement, rather than local governments like in China. China’s practice would pull the entire nation along with its plans, but Malaysia’s causes a disconnect between the rakyat and the plan. Such fragmentation can only cause less than optimal achievements. 

Malaysia’s 3rd Industrial Master Plan expired in 2020, and after more than a year, the new one is still not on the horizon. 

Malaysia’s current industrial structure is built primarily on the FDI/GSC components with intermediate goods value-add. That, we believe, has maxed out its benefits to the country. It is hard to easily name Malaysian global brands. 

It is time to reindustrialise Malaysia and focus on local final goods and brand names.

Huzaime Hamid is chairman and CEO of Ingenium Advisors Sdn Bhd

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