Since gaining independence in 1957, Malaysia has successfully diversified its economy from one that was initially agriculture and commodity-based, to one that now plays host to robust manufacturing and service sectors,whichhave propelledthe countryto become a leading exporter of electrical appliances, parts,and components.
Malaysia is one of the most open economies in the world with a trade to GDP ratio averaging over 130%since 2010. Openness to trade and investment hasbeen instrumental in employment creation and income growth, with about 40%of jobs in Malaysia linked to export activities. After the Asian financial crisis of 1997-1998, Malaysia’s economy has been on an upward trajectory, averaging growth of 5.4%since 2010, and is expected to achieve its transition from an upper middle-income economy to a high-income economy by 2024.
However, the COVID-19(coronavirus)pandemic has had a majoreconomicimpact on Malaysia, particularlyonvulnerable households.Having revised its national poverty line inJuly2020, 5.6% of Malaysian households are currently living in absolute poverty. TheGovernmentis focused onaddressing the well-being of the poorest 40%of the population (“the bottom 40”). This low-income group remains particularly vulnerable to economic shocks as well as increases in the cost of living and mounting financial obligations.
Income inequality in Malaysia remains high relative to other East Asian countries but is gradually declining.While income growthforthe bottom 40 has outpaced the top 60 over much of the last decade, the absolute gap across income groups has increased, contributing to widespread perceptions ofthe poorbeing left behind.Following the removal of broad-based subsidies, theGovernment has gradually moved toward more targeted measures to support the poor and vulnerable, mainly in the form of cash transfers to low-income households.
Malaysia’s near-term economic outlook will be more dependentthan usualon government measures to sustain private sector activity asthe shock of COVID-19reduces export-led growth, andasadepletedfiscal space limits public investment-led expansion. Over the longer term, as Malaysia converges with high-income economies, incremental growth will depend less on factor accumulation and more on raising productivity to sustain higher potential growth. While significant, Malaysia’s productivity growth over the past 25 years has been below thatof several global and regional comparators. Ongoing reform efforts to tackle key structural constraints will be vital to support and sustain Malaysia’s development path.
According to the World Bank’s Human Capital Index, Malaysia ranks 55th out of 157 countries.To fully realize its human potential and fulfil the country’s aspiration of achievingthehigh-income and developed country status, Malaysia will need toadvancefurther in education, health and nutrition, andsocial protection outcomes. Key priority areas include enhancing the quality of schooling to improve learning outcomes, rethinking nutritional interventions to reduce childhood stunting, and providing adequate social welfare protectionforhousehold investmentsin human capital formation.
Last Updated:Nov 29, 2022
