Discarding Labour Intensive To Tackle Middle Income Trap
Many Malaysians might not be aware that it has been 31 years already since the country had been classified as an upper-middle income country group by the World Bank in 1992. Unfortunately, to date, Malaysia has yet to cross the high-income country threshold set by the World Bank. Had the 1991 government’s vision went as planned, Malaysia would have achieved its aspirational goal to become a developed nation by 2020. Unfortunately along the way, we experienced hurdles and challenges which have hampered the attainment of the outlined goal.
Based on the data retrieved from the World Bank website, in 2020 our average GNI per capita is estimated around US$10, 320, i.e. US$2,215 short of that current year’s threshold level of a high-income economy. The pace towards the high-income status was then slowed down by the global pandemic of COVID-19. After factoring in the recent economic scenario, the Bank’s projection suggests that Malaysia’s transition to high-income economy status would only materialise at some point between 2024 and 2028.
For the current 2023 fiscal year, the World Bank defines high-income economies as those with Gross National Income (GNI) per capita of US$13,205 or more. However, for the last three decades, our GNI per capita has been trapped within a GNI per capita of an upper middle income nation in which the latest is set between the range of US$4,256 to US$13,205.
In 2021, our GNI per capita stands at US$10,710, slightly below the pre-pandemic figure of US$10,960 registered in 2019. Nevertheless, according to the World Bank’s forecast, Malaysia could also possibly cross the high-income threshold by 2025 on the premise that its economy will continue to expand at around its potential rate and the ringgit-US dollar exchange rate remaining stable at around RM4 per US dollar throughout the forecast period.
Looking at sluggish wage growth in Malaysia and the weak Ringgit-US Dollar exchange rate, therefore, it is more realistic to assume that Malaysia could possibly only attain the status of high-income nation at the end of the World Bank’s projected time period.
Unlike the Republic of Korea which only takes seven years to leap from upper middle income to high-income in 1995, Malaysia is stuck in what is commonly referred to by the economists as “middle-income trap”—a situation when a country faces growth stagnation and stuck at the level after escaping the poverty trap in the low income development phase.
There are several factors that could be related to the inability of a country to transcend the middle income range and move up the ladder into the high income classification. Many literatures attribute the success story of Korea to its heavy investment in technology and deliberate policy of targeting specific sectors.
By embracing new technologies, manufacturers can improve the way that they work. For one, the shift from low-skilled labour intensive industries to high-skill capital intensive industries would enable firms to achieve an economic competitive advantage and remain in the market for a long run. This is also what has been happening in the Republic of Korea. By doing so, producers managed to increase the number and the volume of products with revealed competitive advantage that gain larger market shares across geography and demography. As a result many of Korea’s products have become household names globally—an achievement that the Koreans could be proud of.
Such an approach can clearly increase the productivity of producers and, also increase the earnings of firms. Normally, firms will pass on profits to workers in terms of salaries or wages increment and other financial perks. The final result of this overall approach is evident in the growth of per capita income of the population. In the case of Korea, much has changed in the last four decades in its income growth as its GDP per capita rose tremendously from US$1,715 in 1980 to US$31,762 in 2019.
Contrary to Korea, in Malaysia, its GDP per capita grows sluggishly from US$1,775 in 1980 to US$11,415 in 2019. Much of the root cause of the issue lies in the heavy reliance on unskilled labour and the delay in technology adoption. In Malaysia, firms’ excessive reliance—especially on low-skilled foreign workers—to maintain their competitive edge indirectly thwarts the country’s efforts to promote the growth of high-value-added industries that can employ skilled workers. Even the existence and dependence on cheap foreign labour is seen as a form of disincentive that prevents companies from making investments in more productive capital and technology.
To some economists, extensive reliance on low-skilled low-paid labour to maintain business margin is a distortion to the economy. Researchers at Bank Negara Malaysia (BNM) argue that employers who favour hiring cheaper foreign workers vis-a-vis locals to keep wages low and obviates the pressure to change the status quo would only distort the natural wage clearing mechanisms that would have otherwise driven wages upwards.
Not only it has the potential to distort wages upwards, Malaysia’s dependence on low skilled foreign workers also adversely create a reputational risk to the country. Foreign investors will shy away from investing in the country because they already have a pre-conceived view of what Malaysia could offer them in terms of human resource i.e. low-skilled low-cost labour.
Most likely the investors will do is to leverage the situation by placing less complex segment of their production chain in Malaysia while moving higher productivity and value added process to neighbouring countries such as the Peoples’ Republic of China, Taiwan or Singapore. As such, the process to escape from the middle income trap will prolong further. It could become more challenging as more local talent migrating in search for higher paying jobs and better quality of life; and at the same time, Malaysia could be facing labour shortages due to population ageing.
Without discounting the importance of other factors contributing to economic growth such as good governance and political stability; it is worth to reiterate that technology brings huge impact on our daily lives. For both manufacturers and business communities, it brings higher labour productivity in many sectors and helps them remain competitive in the marketplace. Though it is said to eliminate low-skilled jobs, nevertheless it compensates this by creating jobs that require different skills with better pay and career opportunity to workers.