Malaysia is stuck in a middle-income rut. Per capita income last year was about $9,000. The government’s goal is to lift it to $15,000 by the end of the decade, exceeding the World Bank’s threshold for rich nations. The second-quarter growth report gives some clues on how it might succeed.
The last decade has not been kind to the former Asian Tiger. Average GDP growth slowed to five per cent, from nine per cent in the 10 years before the 1997 Asian crisis. A four-decade-old policy of favouring the majority Malay community has long discouraged Chinese and Indian ethnic minorities. The hollowing out of the talent pool is evident in the diaspora of Malaysians living overseas. It quadrupled over three decades to one million people, more than three per cent of the domestic population. The policies dimmed Malaysia’s appeal as China and India emerged as superior investment destinations.
In addition, a China-fuelled boom in palm oil and other commodities has raised wages and eroded Malaysia’s export competitiveness in other industries. The result has been an investment slump. In 2010, the share of private sector’s capital formation in the economy was just 10 per cent, below Malawi’s level, according to the World Bank. Overall capital expenditure, including by the government, fell below three per cent of GDP in the second quarter of last year.
Since then, though, it has improved for four straight quarters. In particular, private investment in the second quarter of 2012 was 24.6 per cent higher than a year earlier. That growth rate was double the rate in 2011 and up from 19.8 per cent in the first quarter.What has changed? The government is now attracting more private investments by boosting its own infrastructure expenditure. Markets get nervous when public spending crowds out private investment by pushing up interest rates. In Malaysia, interest rates are low and steady and the private sector is getting lured in by government plans that include building a brand-new financial district in Kuala Lumpur at a cost of 26 billion ringgit ($8.3 billion).With elections close, Prime Minister Najib Razak may give more handouts to the electorate when he presents his 2013 budget next month. As long as he doesn’t invest less in the process, Malaysia will remain on course to escaping the middle-income trap.