Moody’s: Malaysia might be stuck in middle-income trap

Urbanised areas would disproportionately benefit from change in industry composition, widening the income gap between states


MALAYSIA may not be able to escape the middle-income trap due to its inability to achieve high-income status through consistent strong growth, said bond credit rating firm Moody’s Investors Service Inc.

Although the country’s progress over the past four decades has been commendable, several challenges remain for the nation to continue its current growth trajectory, analytics economist Denise Cheok said.

She said Malaysia has struggled to move up the value chain and there are concerns of the country being stuck in the “middle-income trap”, unable to sustain high rates of growth to reach high-income status.

“While manufacturing continues to drive economic growth, Malaysia is moving towards diversifying its economy through services such as tourism and Islamic banking.

“Prevailing demographic and human capital trends, however, indicate that urbanised areas would disproportionately benefit from this change in industry composition, widening the income gap between states,” she said in Moody’s Analytics report Malaysia’s Shifting Regional Diversity.

The report also said despite the country’s rapid growth in the 1980s from a low to middle-income country, the country now faces the challenge of maintaining its competitive edge against both ends of the value chain.

There have also been concerns over Malaysia’s relatively low foreign direct investment (FDI) to GDP ratio hampering its economic potential.

“While Malaysia ranked above most Asean countries, as well as China and India in 1990, it had struggled to maintain its FDI lead of the past 10 years,” Cheok said. As a longer-term projection, she suggested that Malaysia needs to adapt broader trends.

As South-East Asia’s fourth-largest economy, Malaysia is diversifying towards a more knowledge-based and service-providing industries comprising tourism and Islamic banking, among others.

As a net exporter of petroleum and palm oil, the country is largely affected by volatile commodity prices and changes in global demand.

“Although crude oil as a share of exports has decreased steadily from a high of 6.5% in 2008 to 3.7% in 2018, palm oil has increased from 3.6% in 2005 to a peak of 8.5% in 2011, before falling back to 3.9% in 2018,” Cheok said.

There has also been a move from key trading partners towards more environmentally friendly products.

“The European Union (EU), for instance, is looking at imposing new limits on food contaminants in refined fats and oils, including palm oil. The crude oil industry is also challenged by demand for cleaner energy.

“Malaysia has plans to diversify its energy sources, but on palm oil, it is planning to challenge the EU in the World Trade Organisation rather than adapting to trends,” Cheok said.

Besides that, income inequality has been a growing issue between Malaysian states, particularly the richer manufacturing hubs and states that rely on agriculture, as well as other natural resources like palm oil and mining.

Cheok said the nation’s ageing population appears to exacerbate this, as the younger workforce migrates to urbanised areas while the older population moves back to rural areas to retire.