Compare South Korea and Malaysia in 1970 and compare them again in 2009. South Korea was a third poorer back then and is now three times richer. Even more remarkable has been South Korea’s ability to widely share the benefits of this spectacular feat across broad segments of society. South Korea’s strong focus on broad-based human capital development allowed the country to transform itself into a high-income economy, while at the same time reducing income inequality and improving social outcomes.
Malaysia’s inclusiveness strategies have produced some remarkable successes as well. Malaysia dramatically reduced poverty and has all but eliminated hardcore poverty. But the country has been far less than successful in reducing income inequality which, since 1970, steadily fell for two decades but has stagnated at high levels ever since. The last two decades also saw Malaysia’s growth model of high-volume low-cost production being challenged. Economic powerhouses emerged in the region, which led to more intense competition for talent, trade and FDI. For Malaysia to remain competitive, it became clear that it needs to compete on value, not cost, and this requires a refocusing on getting the incentives right for innovation, creativity and entrepreneurship.
The comparison with South Korea is partly flawed and unfair. For one, South Korea did not need to manage the ethnic tensions Malaysia was facing given the differences in demographic make-up. Also, South Korea was clearly an exceptional success story that few countries around the world have been able to replicate. On the flipside, Malaysia’s economic performance cannot be underplayed either. Indeed, the Commission on Growth and Development identified Malaysia as one in only 13 countries around the world that has since 1950 registered over a period of 25 years or longer an average growth rate of more than 7 percent.
Leaving these caveats aside, the sheer difference in growth performance, as well as South Korea’s remarkable success in improving social outcomes, is nevertheless instructive. The comparison offers some insights on what Malaysia could have achieved, andmore importantly can achieve in the future. This characterization also lies at the core of the recent self-diagnosis undertaken by the Government of Malaysia. The New Economic Model, the Tenth Malaysia Plan and the Economic Transformation Programme all speak to the need to update Malaysia’s inclusiveness strategies so as to realign them with the objective of becoming a high-income economy.
The need to update Malaysia’s inclusiveness strategies reflects both new realities and new challenges. The new reality is that poverty is no longer the key issue when thinking about inclusive growth. Poverty still exists—and pockets of poverty remain deep and concentrated—but inequality is now in the spotlight and is presenting a tremendous challenge. The other new reality is that inequality is no longer what it was four decades ago. Nowadays over 90 percent of the level of inequality is explained by differences within ethnic groups rather than differences between these groups. Individual socio-economic characteristics, such as activity status, sector of employment, urban versus rural stratum, and educational attainment are now the capital explanatory factors, no longer ethnicity.
Malaysia’s high-income aspiration is also raising a whole new set of challenges. High-income economies tilt the demand for labor in favor of the skilled, sharpening income inequality across the skills spectrum. They tend to specialize in product niches and concentrate activity in narrow geographical clusters, raising challenges to retrain people and move them around to where the new jobs are. They are also open to competitive forces, creating challenges for those who are unable to compete or unlucky as a result of such competition.
The November 2010 issue of the Malaysia Economic Monitor, which we are publishing today, offers an analysis of where Malaysia is today and where it could go tomorrow by updating its inclusiveness strategies. Our recommendations on this highly charged topic do not come out of the blue—they are based on a detailed analytical study of the latest household income, labor force, and enterprise surveys, which the authorities have made available to our team. We are also leveraging on the experiences of other countries around the world, who have addressed or are coping with similar challenges. But let me dwell no further and invite all of you to read the report and, most importantly, share your thoughts, comments and suggestions.