Malaysia warned on longstanding goal

By Kevin Brown in Singapore

Malaysia will remain in a middle-income trap and fail in its longstanding goal of joining the developed world by 2020 unless it can add value to its economy, the World Bank warned on Wednesday.

In a detailed analysis of Malaysia's economic prospects and policies, the bank said the country had recovered well from the global financial crisis and would grow 4.1 per cent in 2010, after a contraction of 2.3 per cent in 2009.

The report said the medium-term outlook was also promising, forecasting growth of 5.6 per cent in 2011 and 5.9 per cent in 2012, assuming a sustained global recovery from the crisis.

But the report warned that Malaysia's growth performance was lagging behind its neighbours because of its continuing inability to decisively generate added value to its economy.

The report said: The economy seems to be caught in a middle income trap unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast-growing markets for knowledge and innovation-based products and services.

The report noted that private investment collapsed after the 1997/98 Asian crisis when Malaysia refused advice from the International Monetary Fund and acted unilaterally to defend its currency and industries.

It said that Malaysia's large private surplus on the current account suggested that investors found it more attractive to invest overseas than domestically: With private investment now at a fraction of what it used to be, there is a genuine concern that the current low level is an impediment to the goal of becoming a high income economy.

The report echoes concerns expressed recently by Najib Razak, prime minister, although Mr Najib adopted a significantly more upbeat tone, arguing that economic reforms including an easing of foreign investment rules would effect a transformation of the economy.

"We were successful in the past in transforming the economy from agriculture to industrial-based. We now have to shift to a new economic model based on innovation, creativity and high-value added activities. Only then, we will be able to remain relevant in a competitive global economy," Mr Najib said.

The World Bank said that Malaysia must act urgently to increase specialisation in the economy, improve skills levels, make growth more inclusive and strengthen public finances if it was to achieve its goal.

"Malaysia's fundamental challenge simply put is the need to revitalise the dynamism of its economy," said Philip Schellekens, the lead author of the report.

Mr Schellekens said in his World Bank blog that competition for export markets and FDI was likely to increase as the global economy recovered, making it all the more necessary for Malaysia to revitalise its economy.

"Revitalising the dynamism of the economy boils down to, among other things, energising the role of the private sector, building an internally competitive economy (which is different from ensuring external competitiveness), and making sure that along the way no one is left behind," he said.