Introduction: The Malaysian Economy Towards 2020 and Beyond

In 1991, Malaysia’s then Prime Minister, Mahathir Mohamed, declared that the country should aim to be “fully-developed” and “industrialized” by 2020. To attain this goal, Malaysia would have to grow at an annual average of 7 per cent (in real terms) for thirty years. Prosperity and economic inclusiveness were overarching objectives, and education levels as well as scientific and technological progress were means to these ends.

Twenty-six years on — and a mere three years away from the target date — Malaysia’s economy has undergone profound transformation, incomes have risen, and extreme poverty has been virtually eliminated. However, the prospect of high-income status is — for now — just beyond reach. The country’s economy has grown at a slower pace in recent years, averaging 4.5 to 5.0 per cent annually. While this is respectably above the global average of 2.5 per cent, it is about half the level achieved by the country before the Asian Financial Crisis. This is also below the target rate needed for sustained progress towards higher income status. Furthermore, in an era of metrics and rankings, the ringgit’s sharp devaluation in 2015 saw Malaysia’s per capita income in U.S. dollar terms actually decrease — a first since 1997.

Apart from a temporary growth slowdown, Malaysia’s economy has also undergone an unusual structural change. The share of manufacturing sector in the country’s gross domestic product (GDP) has declined from 30.9 per cent in 1999 to 20.1 per cent in 2016. While it is common to observe deindustrialization among high-income economies, Malaysia is experiencing it at a lower income level than most economies.

In addition, high-income countries attained this status by exporting an increasingly diverse and sophisticated “basket” of goods and services based on more efficient methods of production. However, in Malaysia’s case, much of its manufacturing sector is dependent on imports for assembly, as well as labour-intensive processes. Multinational corporations are at the heart of production, with limited linkages to local firms that, in turn, have little technological depth.

This raises the question of Malaysia’s economy being stuck in a middle-income trap. Has the country sustainably made the transition from labour- and capital-intensive growth to productivity- and technology-driven growth? Beyond specific income thresholds, the discussion around the trap is — at a deeper level — about the type of economy that can sustainably generate high levels of income from goods and services produced by its citizens.

While macroeconomic stability, good physical infrastructure, and openness to trade and investment are vital (and are areas where the country performs very well), Malaysia needs to make sustained progress on a number of interrelated fronts. Key among these are: the quality of its labour force; the innovative potential of its firms; and the strength of its institutions.

Following the tradition established during the pre-independence period, Malaysia has produced high-level planning documents every five years. The eponymous Malaysia Plans provide detailed data on the country’s progress along a number of fronts, as well as a narrative of the challenges the country sees for itself.

The most recent of these, the Eleventh Malaysia Plan, 11MP (2016–2020) was launched in May 2015. Like previous Plans, the quest for faster growth rates and high-income status remains at the centre of 11MP. With this document as one axis, and the looming date of 2020 as another, the Regional Economic Studies Programme of the ISEAS – Yusof Ishak Institute organized two events — a workshop in October 2015, and a conference in March 2016 — to examine some of the key long-term development issues and policy challenges confronting the Malaysian economy.

Six of the papers from these events are included in this volume. Collectively, they cover a number of dimensions that are key to understanding the long-term changes in — and challenges to — the Malaysian economy as it seeks to attain high-income status.

In the first article, Cassey Lee and Lee Chew-Ging trace the evolution of the Malaysian economic planning process. Through a close reading of...