The winds of change are blowing in Malaysia

The winds of change are blowing in Malaysia, as the government is taking on an ambitious agenda of structural reform. The objective is to climb up the income ladder and join the league of high-income economies. This is a difficult challenge – one which not many countries have successfully met in the post-war period.

Against this backdrop, the World Bank’s launch of a new report on the Malaysian economy (full disclosure: I lead the team who authors the report) is timely. The Malaysia Economic Monitor, which will be published twice a year, aims to provide context to the challenges facing Malaysia and serves as a platform for discussion and the sharing of knowledge.

Knowledge-sharing is a requisite for the innovation- and knowledge-dependent economy which Malaysia aspires to develop. In this spirit, the Malaysia Economic Monitor is accompanied with a major outreach effort to policymakers, private sector leaders, market participants, civil society, think tanks and journalists.

What in a nutshell are some of the key findings of our report?

One finding is that the recent crisis was to some extent a distraction from Malaysia’s fundamental challenges. Yes, Malaysia was hard hit in terms of headline GDP figures and yes, the fiscal deficit rose to levels that raised investor concern. But Malaysia was spared the financial impact of the crisis that crippled advanced economies and the crisis remained very much a manufacturing-for-exports crisis with only moderate spillovers to the rest of the real economy. The fiscal deficit is also much lower when looking beyond headline numbers and including the entire public sector.

Malaysia’s fundamental challenge – simply put – is the need to revitalize the dynamism of its economy. Epitomizing this challenge is the anemic performance of private investment, which fell with the Asian crisis from 30 percent to some 10 percent of GDP and – unlike other countries in the East Asia and Pacific region – remained at that level and never recovered. The flipside of this is the large current account surplus, which indicates that the Malaysian private sector is voting with its feet.

National savings have increasingly gone to finance opportunities abroad, which by revealed preference seem to attract greater returns. Looking ahead, with the emergence of China and India on the global stage, this trend is unlikely to be reversed. In addition, as the global economy rebalances, competition for export market share and foreign direct investment will likely intensify. These external factors make it all the more necessary for Malaysia to revitalize the dynamism of its economy, so that national savings can find their way back into the country.

Revitalizing the dynamism of the economy boils down to, among other things, energizing 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. To put these general thoughts into practice, our report recommends a four-pillar strategy that rests on greater specialization of the economy, better education and skills formation, effective and well-targeted social safety nets and insurance programs, and solid public finance. The report contains ample details on each of these suggestions.

But let me say no more and, much in the  spirit of the purpose of this report, ask for your perspectives about the challenges and opportunities facing Malaysia. Focusing on the all-important million-ringgit question, what do you think it will take for Malaysia to make the next step up the income ladder?