Malaysia has a federal structure of government, suggesting substantial decentralization. In practice, however, the autonomy of subnational tiers has been systematically undermined through a range of mechanisms examined in this paper, creating a system that is highly centralized in practice. With power concentrated in the Prime Minister’s Department, the elite core of the dominant United Malays National Organization (UMNO) has increased its resilience to political challenges from within and beyond the party. This has come at the expense of developmental gains — subnational governments have insufficient fiscal and administrative capacities to efficiently leverage the theoretical advantages of decentralized decision making. In short, the relationship between tiers of government is optimized to preserve the power of the UMNO elite, rather than deliver governance improvements and comprehensive growth; this has negative implications for Malaysia’s ability to escape the middle-income trap.