Escaping the middle-income trap
Malaysia's caught in the middle-income trap right now and it is extremely difficult to breaking out of the "trap". However, would like to break out of the "trap", Malaysia needs to restructure her economic policy for the past 40 years. In the process of graduate into becoming fully advance economies, it can provide us some valuable lesson about development.
To escape the middle-income trap, Malaysia must achieve the next level that is high-income level. In this economy, entrepreneur even companies are requiring to innovate and use labour and capital more productively. Companies must invest more heavily in R&D instead of just assembling product designed by others. It is important for companies employ highly educated and skilled worker further to invest into new products and make profit. However, it is not easy to achieve that we think because it is a "trap".
There is a big question mark about whether Malaysia able to escape from this middle-income trap. If the economy's growth engine remain unchanged and government still using the initial indication, it can confirm that Malaysia will fail to escape the "trap". Companies are encouraged to do innovation or adding value to their production. Private investment has sunk precipitously, from more than a third of GDP in the mid-1990s to only some 10% today and productivity of labour is growing more slowly than in the 1990s. It is very disappointing that the "value-added" in manufacturing in Malaysia trails many of its neighbours because of Malaysia factories are mainly assembling goods designed. R&D spending remains frighteningly low, at about 0.6% of GDP (compared to 3.5% in South Korea). If Malaysia is going to break the "trap," a big effort is require. (Michael Schuman, 2010)
http://curiouscapitalist.blogs.time.com/2010/08/10/escaping-the-middle-income-trap/?xid=rss-topstories
Policy Implication
Research and Development (R&D) important for Malaysia in order to breaking out of middle-income trap. The New Economic Model (NEM) is an economic plan in Malaysia unveiled on 30 March, 2010 by Malaysian Prime Minister Najib Tun Razak which is intended to more than double the per capita income in Malaysia by 2020, this programme aims to shift affirmative action from being ethnically-based to being need-based hence becoming more competitive, market and investor friendly. (Wikipedia, 2010) By implement the New Economic Model, Malaysia might escape middle-income trap successfully.
In the last three decades, the old growth model provided an outstanding performance, permitting Malaysia to provide for the health and education of its people, largely eradicate poverty, build a world-class infrastructure and become a major exporter globally. It can say that our standard of living had been improved due to our people are wealthier and better educated. Compare to previous generation, we live longer, travel more and have greater access to modern technologies. However, the progress we have made over the past half-century has slowed and economic growth prospects have weakened considerably. We need NEM to achieve our nation goal. Malaysia being caught into middle-income trap, we are not amongst the top performing global economies. Amid change in the external environment, many of the policies and strategies we used to achieve the current state of development are now inadequate to take us to the next stage. Our economic growth has come at considerable environmental cost and has not benefited all segments of the population. Government must confront these realities and make tough decisions to overcome this problem.
Malaysia urgently needs a radical change in our approach to economic development which will be sustainable over the long-term and will enable Malaysia to reach high income status. It means that Malaysia needs to change what it has been doing economically for the past 40 years. The NEM will be the catalyst to unleash Malaysia's growth potential.
It is difficult to do business in Malaysia; this is the one weaknesses of Malaysia. Both cost of investing and the potential returns on investment affected by cumbersome and lengthy bureaucratic procedure.
The main goals of the NEM are that Malaysia will become a high income advanced nation with inclusiveness and sustainability by 2020 and thus breaking out of the middle-income trap. In striving to achieve those goals, which is not sustainable that we take the short-cut of pump-priming with wealth from natural resources. After achieving advanced nation status, maintaining that position will require continuous efforts well beyond 2020.
http://en.wikipedia.org/wiki/New_Economic_Model
Ways to get Malaysia out of the Middle-Income Trap.
Having looked at the reasons why Malaysia is still ensnared in the Middle-Income Trap, it is only apt for us to look at the policies which need to be implemented to lift Malaysia out of the Middle-Income Trap and move into a fully advanced economy.
Strengthening corporate and public governance
As discussed, one of the reasons why Malaysia is still lagging behind in terms of economic performance is weak governance. In order to compete with other countries, there is a need to strengthen and restructure the way the economy is being regulated. Gone are the days where the society, the private sector and the key players of the economy can be strictly regulated. The lack of transparency and fairness and the low standards of accountability has hindered many, local companies and foreign alike, contributing to a stagnant Malaysian economic growth. In the Malaysian context, there is a need for a major overhaul of the political, economic and financial architecture to strengthen implementation, enforcement and delivery in a transparent and accountable manner. The traditional top-down governance is now no longer applicable. Instead, there is a need for a close and comfortable relationship between the central government and economic players to boost the economy. For private sectors to thrive in free, open and competitive markets, the public sector has got to work on its strengths and core competence. It is a must in advanced nations for the public sectors to provide and maintain excellent social infrastructure, sound public security, effective protection of property rights, fair and efficient enforcement of laws. There must be an efficient delivery of social services with the minimal levels of corruption and bureaucracy. The pressure is now to be more efficient, socially responsible, innovative and resilient. A lackluster from any one of the important players will not be tolerable. Corporate and public governance must adapt to the rapidly changing environment due to competition, technology and globalization.
To be best in class, there is a need to not only meet but exceed global standards of excellence and performance. And this can only be done if all the relevant sectors have the same aims and efforts to do so. Modern governance revolves around a highly inter-connected network economy. Not only that, it also means being able to rely principally on collective actions, cooperation and coordination as well as competition among the different parts of the network. Any gaps, overlaps and structural weaknesses will only lead to inefficiency and the slow economic growth rate, if not the collapse of it.
Hence, the level of governance in Malaysia must attain that of global standards. Based on World Bank governance indicators, Malaysia is well behind advanced economic countries. Malaysia must therefore seek to be transparent, accountable to citizens and stakeholders, strategically focused, agile, responsive and effectively connected internally and externally. In terms of connectivity, no sectors should be left out - be it the academia, the private sectors, the civil service, the society and the government.
Changing The Way Business Is Done
Up to now, the Malaysian economic growth has come from large-scale physical capital investment, sustained human capital investment and the export of manufacturers, natural resource based goods and petroleum products. Merely increasing investment levels and the quantities of low skilled labour will no longer suffice to drive growth to a higher level or moving up the value chain. Growth must therefore come from higher factor productivity, nurtured by more innovative processes as well as supported by private investment and talent.
To have the dynamism to push the country into a higher income economy, there must be fresh ventures into new and emerging markets and products and this must necessarily be driven by the private sector. Hence, there is a need for a transition from a state-led economy to private-led economy. For instance, in order for our manufacturing sector to move up the chain value there must be competition. Competition through licensing, import liberalization, more open and equitable entry access and a balanced approach to regulation is needed for the services sector. The traditional Malaysian growth largely driven by Government Linked Companies (GLC) and public investment is no longer sufficient. Instead, the size of the GLCs and their presence may inhibit expansion of new firms.
Also, the new way of pushing economic development is to form economic clusters. The traditional way of spreading economic growth geographically is no longer relevant. Instead, we have to learn from the experiences of the advanced nations such as South Korea in forming economic clusters. By forming clusters, firms will find the opportunity to collaborate and compete in the same location. Not only that, the competition between clusters will eventually lead to competitive and innovative development corridors. Besides that, clustering of innovative firms provide a network of talented people to exchange and share ideas that may turn into major hits.
Another way of moving the Malaysian economy into the higher value economy would be to attract technologically capable firms. In the past, the practice was to identify specific winners in different fields and industries. However, such a practice must not be continued as it will only lead to non-competitiveness. The focus, instead, should be on developing a supportive environment for innovative and risk-taking and providing firms the opportunities to develop higher valued products for the market. In that sense, government intervention should be stopped or at least if really unavoidable, should be left at the hands of professionals and experts who are well-versed in the industries.
Growing the Most Important Assets - People.
Globalization has created a very fierce competition for talent and this has forced the companies and governments to recognize that people are the most important assets. Globalization has also made the labour force totally mobile and easily moves and settles in places which are desirable and offer the best working environments. Not only that, they are also more aware of their rights and will choose the best places for them and their family. This includes education for their children, civil benefits and freedom. In order to compete, the labour forces must be flexible, adaptive and competitive in the global, regional and national levels. Therefore, there is a need to invest and implement programmes which will develop talent.
To attract and retain the talent needed to sustain growth of a knowledge-based and innovative economy, companies and the public sector need to improve working and living conditions not just by offering high pay, but also to develop an environment which appreciates and nurtures human creativity. That aside, Malaysia has to retain and attract back its professionals which have left for countries which provide such environments. Also, Malaysia has to attract foreign skilled workers needed to fill in the gaps and to come and build new businesses and opportunities. This can be done by offering incentives and also through the setting up of big talent firms to do whatever it takes to bring the professionals into Malaysia.
In short, technological capabilities cannot be built without a system which recognizes and retains talents. The human capital base must be world-class, implying that talent, either individual or institutions, must flow and be seamlessly integrated into Malaysia. Skilled human capital from abroad will only increase domestic productivity and not replace local talents.
Effective mechanism to evaluate and monitor performance.
Most strategies and implementation plans lack a proper mechanism of feedback to allow for an honest evaluation at the effect of the changes being made in stages. Often, when a policy is being implemented, there exists situations where there needs to be an evaluation. And sometimes, there may be strategies which may not be fully adopted and implemented as there are certain changes in circumstances. As a result, there is a need for a change of policies and there has to be further planning involved. As such, if there is no proper channel to get feedbacks or no unit to evaluate the performance of the economy, the economy is bound to be stagnant. The New Economic Model is a long-awaited change which is much needed. Future growth policies must be constantly checked so as to avoid policy adjustments which may become ad hoc and unimplemented. If left unattended, these defunct policies will not only not steer the economy towards an uptrend but it will also efficiently waste the country's resources. Economic policies must be aligned according to changing realities and remain as relevant as possible at in line with changing times.
http://www.pmo.gov.my/dokumenattached/NEM_Report_I.pdf
