Malaysia Meets (and Remains in) the Middle-Income Trap: Lost Coalition amidst Industrial Value Migration

Abstract

Once an aspiring nation on the path towards achieving high-income status, Malaysia’s efforts to break its vicious cycle of low productivity-cum-low wage were hindered by ineffective attempts to form an upgrading coalition. The coalition not only failed to make material progress in addressing industrial needs, but also faced an increasingly isolationist international trade and investment climate where transnational corporations were encouraged to reshore/friendshore productive activities back to their home/like-minded economies. This paper analysed three structural reasons miring the nation in the middle-income trap. Firstly, the Malaysian economy was struggling to establish its competitive niche. This occurred as Malaysia grew increasingly reliant on extractive and service-based industries, while its labour-intensive activities struggled in adapting to the demands of Industry 4.0. Secondly, there was insufficient interest in promoting indigenous technologies and championing industrial upgrading. The state-business coalition primarily focused on highly regulated, non-tradable industries such as utility provision, banking and real estate. Finally, we observed a skills mismatch between the push for science and technology education and the labour market’s demand for general, undifferentiated skills to support low value-added operations. Unless these interrelated challenges are effectively addressed, the nation will likely experience frustration in breaking through the impasse.