There are about 245 million migrants worldwide – around 3% of the world population. Roughly one-fifth are tertiary educated. Middle-income countries have a smaller proportion of immigrants than high-income countries (about 1% versus 12%). But for a number of middle-income countries with more immigrants than others, there is uneasiness about relying on unskilled foreigners as they strive to leap from low-wage labor and imitation to high-skilled labor and innovation. There are palpable concerns in Malaysia, for example, with some 2.1 million registered immigrants – about 7% of its population - and likely over 1 million undocumented immigrants. Things reached a crescendo early last year when all new hiring of unskilled foreign workers was suspended as the Malaysian government re-evaluated the management and need for foreign workers. The freeze was subsequently lifted for select sectors amid complaints of labor shortages.
With Aaron Flaeen and Saurabh Mishra
Many developing countries have successfully made the transition from low-income to middle-income status, thanks to rapid economic growth, but have subsequently got stuck in a middle income trap. A great deal of research has been done on what explains much faster growth in the developing world than in the developed world (Acemoglu et al 2011; Baldwin 2011; Commission on Growth and Development 2008; Rodrik 2013; UNIDO 2011). But little is known about why so few countries succeed in making the transition from middle-income to high-income status (The Economist, 2013). This is a worrying trend and an issue of major concern, especially because the majority of poor people now live not in low-income but in middle-income countries (Chandy and Gertz, 2011; Sumner and Kanbur, 2011). So what is a middle income trap? What should policy makers do?
We have examined these questions in the context of Malaysia, whose structural transformation from low to middle income has made it one of the most prominent manufacturing exporters’ in the world. However, in a competitive global economy, like many other middle-income economies, it is sandwiched between low-wage economies on one side and more innovative advanced economies on the other.