Why Malaysia Should Stop Trying To Be A High-Income Nation

Just recently, at the Barisan National Open House in Penang, Prime Minister Najib Tun Razak reiterated his government's stand to make Malaysia a high-income nation by 2020.

By this, I assume the government means that it intends either to push up our income levels to "rich" levels, or create a much larger class of wealthy people compared to what we have today

While it is certainly comforting to dream about our future lives of fat pockets, fast cars and large bank accounts, this mindset is, to put plainly, foolish.



Here are some statistics for your consideration:

1) For nearly over the decade, the economy has failed to even achieve government-forecast rates of growth, unable to grow past an average of 5%.

2) We have faced budget deficits for the past 12 years, with no change expected in the near future.

3) Our national debt to GDP percentage has grown substantially, from <40% at the turn of the millennium (2000) to >50% as of the present.

4) Our Global Competitiveness Report rankings have been dropping.

5) Our primary and secondary industries are not growing at the same pace of other nations, such as the BRIC nations.

6) Our tertiary sector  is much less developed as compared to most "developed" nations.

While the odds are against us, it can be argued that many countries that were facing economic problems, or even crises, have managed to turn themselves around and rise to high-income status, or are in the process of achieving it. A popular example is China.

This is true, but economic problems are not the reason why we should move focus away from reaching high-income status.


THE ASIAN FINANCIAL CRISIS

The crisis has had a large impact on our country. In 1998, a year after the crisis, our GDP sharply contracted by 7.5%. But that was a minor consequence compared to the fact that from that time onwards, while the economy has seen moderate growth, we have failed to spark a return to pre-1997 levels. More to the point, we have failed to rise to our previous favoured rank of one of the 'Asian Tigers'.

Other moves made at those times have not helped matters. The Financial Minister in charge to resolve the crisis, Dato' Seri Anwar Ibrahim, was sacked, and the council formed to deal with the crisis in his place was found to be ineffective both in helping or stopping growth. The pro-nationalization moves of then-Prime Minister Tun Mahatir Mohammad may have also hurt opportunities for growth, in particular for the secondary industries. (An example is the creation of Proton, which loses money to this day and has prevented us from becoming the hub of automobile manufacturing, ceding this chance to Thailand.)

THE MIDDLE-INCOME TRAP......OR OPPORTUNITY?

The biggest problem Malaysia has now, economy-wise, is stagnation. Because of our sharp drop in growth after the financial crisis in 1997-1998, and the current inability to grow back to pre-1997 levels, we are stuck in a middle-income state.

This means that we can neither move up or down; or rather, we definitely don't WANT to move down, but we CAN'T move up either. Moving up would require either 1) we first move *back* to a low-income status, such that companies will be attracted to use us as cheap labour, which is definitely not a desirable option, or 2) we suddenly have a huge increase in human capital, R&D, education levels, and so on. Even then, our relatively low workforce numbers hamper our growth as we have the compete with the 'big-league' players of USA, China, Germany, Singapore, etc.

If we continue to push, directionless, to try and somehow achieve that fabled "high-income" status, we risk wasting even more resources than we already have (and we have already lost plenty - see the RM 28 billion lost through corruption). Malaysia needs to regroup and refocus, and find where our priorities truly lie.

I say that we should turn our disadvantage around to work for us.

THE NORDIC MODEL

Malaysia should start tapping into what it does best: the middle class. We have one of the most stable and affluent middle classes on this side of Asia. Instead of trying to push some of the middle class into top-earner status, we should be focusing on strengthening it into a strong base the country can rely on.

A strong middle class helps the country in times of crises, as its buying power and income will be enough to sustain both local businesses and the government itself. This helps stave off negative growth, budget deficits, and government debt. It also ensures national stability as a large majority of the population can enjoy a relatively stable and prosperous lifestyle. Although this may result in less wealthy people, we need to ask: does it really matter, as long as most of the country is living in excellent conditions?

This is why I propose moving Malaysia to using the Nordic Model. (Explaining it will take too long, so I will ask you to refer to this Wikipedia link). Adopted by many European nations, it uses relatively high income taxation, high expenditure on education and other social welfare, compounded with healthy market competition, to create a stable mixed economy with a strong safety net ensured for all citizens.

Right now, very interestingly, Malaysia also has a mixed economy and tries somewhat to follow the Nordic system, in the sense that it uses government regulation as a balance with the private sector, but it is so darn confusing, contradictory and directionless that it will take us nowhere. (A few of the many examples include unreasonable sums of corporate subsidies, high intervention - nationalization - in some areas like electricity and extremely low in others like timber and mining.)

Instead running around like a headless chicken, we should use the Nordic Model to build up our middle class and slowly but surely improve our economic situation. Using this route may mean that we would never become the richest nation in the world or something like that, but I contend that it was a mere fantasy in the place. Better to work with reality and reward ourselves better in the process. A look at the countries using this method tells us all we need to know: some of the highest education levels in the world, some of the best healthcare, the best social safety nets, the most effective social welfare programs, competitive industries, good environmental protection, and most importantly content citizens.

Really, need I say any more?