In 2000 Malaysia’s GDP per capita (in 2015 $) was $6,393. Romania’s was $4,549. China’s was $2,194. By 2021 their levels of GDP per capita were roughly equal – Romania at $11,590, China’s at $11,188 and Malaysia’s at $10,827.1 Moreover, Malaysia’s GDP per capita was about the same as it had been four years earlier in 2017. Indeed, on a different measure of GDP per capita (from the data providers Macrotrends) Malaysia’s GDP per capita has stagnated since 2014.
The GDP per capita data suggest that Malaysia is a prime example of a country stuck in the so-called middle income trap, where countries develop rapidly initially, taking advantage of supplies of cheap labour, but stagnate when their living standards reach a certain level as they fail to invest in higher productivity activities and lose out on international investment to countries with cheaper labour costs.
I’ve recently been working in Malaysia and can confirm that many Malaysians are very conscious that their pace of economic development has stagnated. Their close neighbour Singapore, who in 1960 had GDP per capita levels of only three times that in Malaysia (and probably not much higher than the level in Kuala Lumpur, arguably the more appropriate comparison), is now one of the richest countries in the world with GDP per capita in 2021 of $66,176. And Korea’s GDP per capita is now three times, and Taiwan’s twice that of Malaysia’s.
Malaysians go to the polls on Nov 19th with their recent economic stagnation close to their minds. The last election generated Malaysia’s first ever change in government when Najib Razak, who has since been jailed for corruption, was thrown out. Indeed, the revulsion against him was such that crowds occupied the runway at Kuala Lumpur International Airport to ensure that he could not escape. The prosecution claimed to have found $273 millions worth of ‘fashion accessories’ amongst his possessions.2
The opposition party, which unprecedently won the previous election, lost MPs who switched sides to other parties (a practice now outlawed under what is quaintly called a ‘no hopping’ law) and split, allowing Najib’s former party back into power after the last election saw their more than 60-year reign come to an end. Next month’s election is made more unpredictable by two factors – the existence of three or possibly four parties instead of the normal two, and an increase in the size of the electorate of about a third resulting from automatic voter registration and the lowering of the voting age from 21 to 18.
A post-election coalition is widely expected but the stability of this is uncertain with two of the larger parties led by former Prime Minister, 97-year-old Dr Mahathir, and by his onetime Deputy and designated successor, Anwar Ibrahim, whom Dr Mahathir jailed and allegedly tortured on what were widely thought to be trumped up charges. Indeed, it was Dr, Mahathir’s failure to hand over power to his successor that sparked the political crisis in Malaysia that has subsequently led to November’s elections.
The export driven Malaysian economy will be hit by the international economic cycle – both the US and China are likely to have a weak 2023, with knock on effects in Europe and Asia. Meanwhile, inflation, though currently low as profits from local energy production are used to subsidise energy prices, is likely to rise. Wages are currently increasing at around 8% per annum which is likely to affect price inflation next year. Unsold property is also likely to act as an overhang on the property sector which has often been a prime source of growth.
Although the fiscal position is relatively strong, the dropping of the unpopular Goods and Services Tax (GST), essentially similar to the VAT in European economies, by the previous government is criticised by most external economic observers as damaging the longer-term fiscal buoyancy.
Malaysia is unlikely to copy Singapore to become a major financial hub. That bird looks to have flown. But there is a new game in town – the possibility of Malaysia becoming a tech hub. Wages, though rising, remain relatively low. The cosmopolitan culture encourages migrants while the labour force is fast growing and reasonably well educated. Malaysia is a pleasant place to live, much more so than many other economies in the region. There appears to be the beginnings of a revival in international investment in the Malaysian stock exchange.
If the election produces political stability, there is a chance that this could translate into the beginnings of a transformation towards a higher productivity economy.
1 All figures based on World Bank data.
2 www.theguardian.com/world/2018/jun/27/najib-raids-273m-of-goods-seized-from-former-malaysian-pms-properties
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