Michael Schuman of Time recently returned from a trip to Kuala Lampur, the capital of Malaysia, and he brings up a fascinating point about how the nation exemplifies the problem of the "middle-income trap," which lies within the development process.
It's a term you're probably familiar with, but if not, Schuman does an excellent job of summarizing the problem. Essentially, it's a challenge that emerging economies deal with as they rise out of poverty. The elements that have to be present in order to move from a middle-income to a high-income economy are far more challenging than those of moving from a low to a middle-income economy -- think of it as a massive marginal tax on growth. It's easier, and sometimes more appealing, for nations to stay where they are -- to avoid innovation and economic growth -- and in so doing, they get stuck in the trap.
As Schuman writes, "Every go-go economy in Asia has confronted this 'trap,' or is dealing with it now. Breaking out of it, however, is extremely difficult." Success stories include South Korea and Taiwan, but Malaysia is still facing significant challenges. While it has an economy that has performed well, and achieved positive effects for citizens (the poverty statistics are a particular positive), Schuman believes that they're caught in the trap -- destined to be surpassed by other nations in the region unless economic reforms are put in place:
How can Malaysia achieve that? The World Bank report has pages of recommendations. The basics include slicing apart the bureaucratic red tape that stifles competition and suppresses investment, bolstering the education system so it can churn out more top-notch graduates, and funneling more financial resources to start-ups and other potentially innovative firms. To its credit, the government of Malaysia is fully aware of what it needs to do. In March, Prime Minister Najib Razak introduced a reform program called the New Economic Model. You can read the initial report here. The NEM shows that Najib realizes that excessive government interference in the economy is dampening investor sentiment and holding back Malaysian industry. All eyes now are waiting for the more detailed policy recommendations for the NEM (though it is not clear when those might appear).
The report Schuman cites acknowledges this fact:
Malaysiaâ??s economic engine is slowing. Since the Asian financial crisis of 1997-1998, Malaysiaâ??s position as an economic leader in the region has steadily eroded. Growth has been lower than other crisis-affected countries, while investment has not recovered ...Doing business in Malaysia is still too difficult. Cumbersome and lengthy bureaucratic procedures have affected both the cost of investing, and the potential returns on investment. Malaysiaâ??s place within the Global Competitiveness Index dropped to 24th in the 2010 report from 21st previously, indicating that the country is losing its attractiveness as an investment destination.
This kind of clarity shows that at the very least, the drafters of the NEM have a clear view of what's wrong, and the approaches they outline deserve further study. The entire report is worth reading here, or at the very least, the Executive Summary.
One final note: a persistent problem that will have to be resolved if Malaysia is to make their way forward is the politically divisive New Economic Policy -- an affirmative action program designed to benefit local Malays at the expense of the immigrant population. Indeed, Schuman's blog led to a series of comments with contesting views about the effect of the policy on Malaysia's culture and economy. The NEM addresses this issue partially, but more work may be necessary on that front -- it strikes me as exactly the sort of policy which tightens the grip of the trap.
Benjamin Domenech, a former speechwriter for Tommy Thompson and Sen. John Cornyn, is editor of The New Ledger and a research fellow with The Heartland Institute. He writes on defense and security issues for The Compass.
