Malaysia's path to high-income growth

This was written by Dr Robert J. Shapiro, who was undersecretary of commerce for economic affairs under United States President Bill Clinton. He is now chairman of Sonecon LLC, a global economic consultancy.

MALAYSIA stands at an important crossroads. It has successfully engaged with world trade and globalisation, adopted advanced technologies and undertaken the necessary public investments in education and infrastructure required to achieve middle-income status. 

It has achieved world-class status in certain sectors, most notably vegetable oils, natural gas and certain electronic products.

But Malaysia also faces a challenge common to many middle-income economies: how to manage the transition to join the ranks of fully modernised, high-income nations?

The answer is to intensify its engagement in the global economy, solidify its commitment to economic and political stability, and redouble its public investments in education and infrastructure. 

These are the necessary ingredients to produce an economy truly open to adopting the technological and organisational innovations of the world's most advanced economies and capable of generating some of those innovations on its own.

Since 1990, the share of everything produced in the world that's traded across borders has jumped from 18 per cent to more than 30 per cent -- the greatest increases and highest levels ever seen in history. Moreover, cross-country investment has grown twice as fast as worldwide trade.

The most important kind of transfers has been "foreign direct investments", where multinational companies build factories and other operations around the world.

The use of those foreign direct investments -- and the direct purchase of those technologies by native businesses -- has produced a new dynamic in the world economy: for the first time ever, worldwide growth is driven not by the advanced countries, but by those parts of the developing world, including Malaysia, that effectively have embraced globalisation.

Malaysia was for a time a commodity-based economy, and commodities remain critical to its prosperity. About 22 per cent of Malaysian exports are commodities -- led by palm oil, then followed by oil and natural gas.

It's a strength that Malaysia is the world's second largest producer and exporter of palm oil. Indeed, the palm oil sector's achievements in harnessing new technology, delivering foreign investments to Africa, developing a skilled labour force, and embracing global markets offer Malaysia a sound model for how other sectors should grow and mature. 

The palm oil sector can help point the way towards high-income status. In my recent speech before the Malaysian palm oil industry, I noted the ways in which the palm oil industry is contributing to Malaysia's development and prosperity.

Palm oil has widespread practical application for everyday consumer products; an ingredient for food staples and confectionary products in the developed and developing worlds; health supplements; personal care products such as soaps and detergents; and medical treatments.

In one recent example of many of these dynamics, the area of Lahat Datu in Sabah was recently reported as set to become the country's centre for downstream use of palm oil waste products for the manufacture of pulp and paper.

In the future, we may also see palm oil assume an important place as a biofuel supplement to gasoline or even a biomass source of energy for electricity generation.

In fact, palm oil is already a growing source of biodiesel in the United States and other countries. It is therefore no surprise that the palm oil sector is the largest single contributor to Malaysia's gross domestic product, accounting for 7.5 per cent of that GDP last year.

And perhaps most important for the future modernisation of the Malaysian economy, the industry produces "spillover" benefits by demonstrating to other industries the advantages of adopting advanced technologies and business methods.

The reforms under the New Economic Model and Pemudah will help improve business and could also contribute even more towards economic growth by expanding commitments to research and development and worker training, and promoting greater openness to trade and investment. These, along with a redoubled commitment to public investment in education, will help Malaysia advance towards high-income status.

The West can do its part as well by lowering certain trade barriers and ensuring access to its wealthy markets -- and Malaysia will have to return the favour by lowering its trade barriers. That's also a vital part of engaging in globalisation.

There's not much time. Malaysia is in the midst of an historic baby boom-baby bust cycle, just like the ones that affected the Asian Tigers 40 years ago, and the United States, Europe and Japan 30 years before that.

Today, 30 per cent of Malaysians are under age 15, and only five per cent are over age 65.

The economic miracles of Taiwan, South Korea, Hong Kong, Singapore -- and Germany and Japan before them -- were all built on a convergence of baby booms, investments in education to prepare those boomers to be productive, reforms to increase investment so that jobs were waiting for them, and flows of foreign direct investment to modernise the economy.

Without all of that, baby booms can produce nation-sized mobs of unemployed young people, as seen in parts of Latin America. And just as it has everywhere else, Malaysia's baby boom will be followed by a baby bust, which will produce additional new challenges.

Now is the time to strengthen the policies and commitments that can make the best use of Malaysia's baby boom and help Malaysia strive to be a high-income country a generation from now.

Palm oil, along with electronics, can provide the models. They are among Malaysia's leading export products, developing more and more applications every year. 

As they help develop new technologies and encourage innovation, the oil palm and electronics sectors in Malaysia can help contribute to the evolving "ideas-based economy" that has helped sustain economic growth in another high-income country -- the US -- for so many decades.

3 Responses to Malaysia's path to high-income growth

  1. Good article but I have a questions. Is becoming industrialized the ONLY way to achieve high-income status??? I don't see that. Because if you look at the list of high-income countries (http://en.wikipedia.org/wiki/High_income_economy) there are so many countries that do not have any value-added high tech industries like electronics, shipbuilding etc. Look at these countries: Andorra, a very small European country with just 78,115 people. Their GDP per capita is a whopping $34,240. Look at Barbados, a small Caribbean country with only 284,589 people. GDP per capita is a whopping $15,234, i.e. more than Malaysia.

    How do they achieve high income status. What can you do with 284,000 people, 78,000 people?? You can't have any industry high tech or otherwise with such a minute (small) population??

    How do they achieve high-income status? What is their secret?? How can Andorra, with only 78,000 people have such a high GDP per capita without having any high-tech industry???

    Are we missing something here???

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