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MALAYSIA has escaped the so-called “middle-income trap” and is on-course towards attaining high-income developed nation status by 2020 — an achievement envied by many countries abroad yet faced with continued disbelief at home, says Datuk Seri Idris Jala, minister in the Prime Minister’s Department and CEO of the Performance Management and Delivery Unit (Pemandu).

“We do not cook numbers at Pemandu. We use published statistics… Our data source shows we have come unstuck from the middle-income trap… and the fact of the matter is today we are heading towards the direction of getting there [Vision 2020] and people are saying, Idris, we don’t believe your numbers.

“The reality today is issues relating to trust deficit [but] those are not issues for me to tackle. I don’t have an NKEA [National Key Economic Area] on trust deficit,” Jala says, referring to the 12 economic drivers that Malaysia identified to have direct and material contribution towards the nation’s growth.

“The method we are using has tremendous value to helping governments,” Jala tells The Edge, relating how 24 Pemandu officials are in Tanzania the past two years to set up a similar economic transformation programme for the latter. “They [the 24] are paid by the British government, the US government, the Swedish government and the World Bank because they like our methodology.”

To be sure, Malaysia’s gross national income (GNI) per capita rose from US$7,059 in 2009 to US$10,426 in 2014 and looks on track to reach the government’s targeted US$15,000 by year 2020 to be deemed a high-income status country (see Chart 1).

Citing data from the Organisation for Economic Co-operation and Development (OECD), Jala says Malaysia is expected to cross the annually adjusted threshold for high-income status nation by year 2020 — some six years faster than year 2026 for China. The OECD expects Thailand to reach the threshold in 2031, Indonesia in 2042, the Philippines in 2051, Vietnam in 2058 and India in 2059.

Danny Quah, Professor of Economics and International Development and director of the Saw Swee Hock Southeast Asia Centre at the London School of Economics (LSE), concurs that “numerically, Malaysia is well-past middle-income level”.

“Today, Malaysia’s GDP at PPP  (purchasing power parity) US$ is over US$23,000. The threshold for a middle-income trap identified by leading researchers lie between US$11,000 and US$18,000.

“But the middle-income trap matters, not because it’s one fixed glass ceiling. It matters because it describes a failure to sustain growth. And that happens even once a nation gets past some fixed threshold,” Quah says, explaining how escaping the middle-income trap is not just about crossing a numerical barrier.

To really qualify as a developed country and attain sustainable economic growth, he says a nation needs “a skilled workforce whose education allows itself capacity for reflection, debate, and dissent; a government that is accountable, competent, and efficient, equally to all the people; a robust civil society, confident enough in itself to permit diversity and disagreement; political opposition that can see itself loyal to the entire nation; and legislative transparency that ruthlessly weeds out corruption”.

In short, Quah says Malaysia will keep growing only if it has all these factors. Otherwise growth will get “a lot harder”. “So, is Malaysia past the middle-income trap? No.”

Chua Hak Bin, head of emerging asia economics, Bank of America Merrill Lynch (BaML), reckons that Malaysia will “likely remain stuck in the middle income trap in the coming years”.

“This current political and currency crisis is exposing weaknesses in some of the public institutions and policies. The 1MDB (1Malaysia Development Bhd) saga has raised questions about governance, accountability and fiscal discipline. The severe fiscal hit from the oil price collapse has exposed the country's heavy dependence on Petronas and oil-related revenue,” he says, referring to how Malaysia needed to revise lower Budget 2015 in January this year to account for the recent slump in global oil prices.

“The ringgit's volatility and sharp depreciation has raised concerns about excessive leverage, high external debt and the vulnerability to capital flows. A potential Fitch [Ratings] downgrade is a warning sign that Malaysia may be sliding, rather than climbing out of the trap. Longer-term, investments in education and human capital, and the capacity to retain and attract talent, will be necessary to graduate into the ranks of high-income countries,” Chua adds.

The fact that Malaysia’s ringgit is one of the weakest performers in the region is a reflection of wavering investor confidence in the country’s growth prospects, some experts say (see accompanying story).

Bank Negara Malaysia (BNM)’s reserves have fallen 19.4% over nine months from US$132.04 billion end-August 2014 to US$106.4 billion at end-May 2015 is cited as another tell-tale sign.

Jala begs to differ. “Our foreign reserves today are far, far bigger than what we had during the 1997/98 Asian financial crisis. It was US$21 billion and today, it is about US$110 billion and our reserves to short-term debt is 1.1 times coverage — more than adequate for a country — and this is key.

“The world will go through ups and downs and we must build reserves to be able to withstand that and we build resilience by ensuring a few things: first, become less reliant on oil and gas; second, reduce subsidies; and third, build up enough reserves, which is what we have done. We have tremendous reserves,” he says, pointing out that only 29.7% of government revenue is oil-related in 2014 versus 40.3% in 2009.

“Luckily we started the process early. Imagine if we were still there [at 40%] and today if we didn’t pursue the diversification with the ETP (Economic Transformation Programme), we will really be in trouble.” (see Chart 2)

“Fourth and most importantly, you must have confidence of the private sector to invest in our country. This is the most important point because if the private sector does not invest, you cannot create new jobs. If you don’t create new jobs, government revenue cannot increase… The proof of the pudding is realised private investments have increased 13.9% CAGR (compound annual growth rate) over the (2011-2014) period of the ETP. In the years preceding the ETP (2007 to 2010), growth was 5.5% CAGR per annum so after the ETP, it went up by 2½ times.

“This tells you that the country is heading in the right direction because this chart tells of future revenue growth for the government. This chart tells you about jobs, the level of confidence in the country. If people don’t have confidence, nobody will put money into the country,” Jala says, adding that Mida-approved investments are also at record high levels post-ETP. “When all these [approved investments] get implemented in 2015, 2016 all the way up to 2020, I think we are on track. If the private sector does not have confidence in the country, why are they putting record investments year on year?” (See Chart 3)

In addition, Jala says the 12 NKEAs under the ETP have grown at a 6.8% CAGR between 2010 and 2014 to command some 70% of GNI with catalytic effect on non-NKEAs.

Highlighting the 11th Malaysia Plan’s special emphasis to lift the bottom 40% of the population (B40), Jala says Malaysia’s success in reducing the number of poor households from 49.3% in 1970 to 0.6% in 2014 should be acknowledged although more needs to be done for the lower income group.

“When we implemented minimum wage, we lifted 2.9 million above the poverty line… We have made some progress with regard to the B40 and a lot more needs to be done [but] we are not miracle workers… Name a country that has removed relative poverty. There is no one… there are poor people in Singapore, there are poor people in the US, there are even poor people in Scandinavian countries because there is always relative poor.

“I come from very poor background. I am very passionate about [eradicating] poverty… and to me, education is the answer to [overcoming]poverty. By ensuring the children are better off than their parents, they will have better capabilities and there will be more options available and it will then be up to the individual to seize the opportunities,” Jala says, pointing out that Malaysia’s 55.3% reduction in poverty since 2009 is the biggest among Asean countries. Over the same period, the percentage of population below poverty income fell 6% in Indonesia and Vietnam, and 2.5% in the Philippines, while Thailand saw a 62.6% increase (see Chart 4).

Yet, the fact that a large proportion of the population still requires financial assistance from the government to help ease their financial burden suggests that Malaysia has not successfully gotten out of the middle-income trap, a seasoned economist says.

“In 2014, a total of 5.9 million households and two million individuals were provided with the Bantuan Rakyat 1Malaysia (BR1M) by the government. This arose from the over-dependence on the imports of unskilled cheap foreign labour, the lack of upgrading of skills, falling education standards, as well as low level of investment in technology, R&D and innovation, resulting in low productivity growth and low wages. Studies have shown that easy availability of low-skilled workers is part of the causes for the reluctance of SMEs in the country to invest in technology and move up the value chain,” he says.

Tellingly, Malaysia's labour productivity ranked low at 47th out of 60 countries, according to the World Competitiveness Year Book 2014, translating to low wages. The slow rise in wages likely contributed to high household indebtedness, which climbed from 60.4% of GDP in 2008 to 85% in 2014 — one of the highest in the region.

“Measured as a percentage of income, Malaysia's household debt is as high as 146% in 2014, according to a study done by Mckinsey. This, for instance, was much higher than the level of the US (99%) and Indonesia (32%),” the economist says.

Whether Malaysia can succeed in moving out of the middle-income trap in the coming five years will hinge largely on political will and policy changes to help build a business climate that promotes investment in R&D and creates incentives for innovation. He agrees with Jala that better education and skills training are needed to enhance human capital, labour productivity and earning capacity of Malaysians.

“Meanwhile, the biggest challenge for the country is to sustain a stronger economic growth in the period ahead that if achieved and accompanied with higher productivity, would allow the payments of higher wages and income growth for the nation,” the economist adds.

Idris is confident the country is on the right path, thanks to the ETP and the Government Transformation Programme (GTP). That his six-year term as senator ends this September have raised the question of continuity even within Pemandu. For his part, however, Idris says it is up to his boss whether he stays on or continues at Pemandu or a new incarnation to allow him to stay on even without a senatorship. “That is my boss’s decision. My former boss used to say the graveyard is full of indispensable people. Someone else might do a better job than me… the prime minister has said for as long as he is prime minister, there will be Pemandu.”

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This article first appeared in The Edge Malaysia Weekly, on June 8 -14, 2015.

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