Malaysia – Middle Income Trap in Relation to Employment Essay Example

the other hand, we should note that the World Bank practices Atlas method of conversion o smooth fluctuations in prices and exchange rater. An international dollar has the same purchasing power over IN as a U.

S. Dollar has in the United States. For operational and analytical purposes, the World Banks main criterion for classifying economies is Gross National Income (IN) per capital. Based on its IN per capita (Atlas Method), every economy or country is classified as low income of $1035 and below, middle income (subdivided into lower middle classification with the income of $1 ,036 to $4,085 and upper middle classification with the income of $4,086 to $12,61 5), or high income exceeding $12,616 or equal.

The well-known sovereigns which fulfills the criteria of being the high-income nations include United States, Japan, Korea, as well as our neighboring country, Singapore. The Tenth Malaysian Plan underlines strategies to achieve a high-income nation status due to year 20205. Classified as an upper-middle income economy with a IN per capita (Atlas Method) of $8,770 and $9,800 per capita in 2011 and 2012 respectively, Malaysia is now banking on various aspects to achieve its ambitious goal of attaining such status.

Table 1. 1 : Malaysia IN per capita (Atlas Method) and High-Income Threshold, 007-2012 (source : world sank) The Government, while launching the Economic Transformation Programmer (HTTP) on 25th September 2010, followed the World Banks threshold for a high-income economy of IIS$12,195 (of year 2009) and factored in its published historical global inflation rate of 2% until 2020, which could probably attain $14,800.

The HTTP was formulated as part of Malaysia's National Transformation Programmer to achieve the

high-income economy status by 2020 by targeting IN per capita of IIS$1 5,0007. From the table, it is observed that the World Bank has been annually revising the horseshoed for high-income economy status, such that references on the amount of IN per capita required may vary according to different years. For instance, 2009 Annual Report from Central Bank indicated high-income economy status as IN per capita exceeding SIDE 1,905, which is the threshold of year 2008 set by World Bank.

Hence, by year 2020, it can be stipulated that the high-income threshold would be revised to an approximate amount of $14,800 as aforementioned, and it is hoped that the policies imposed are also able to ensure that the economical growth is also sustainable and inclusive. Ill. Why is Malaysia trapped in the "middle-income nation? " Prelude: In this part, we are going to explain and contemplate the problems faced in the process of acquiring the high-income status, as well as to reasons why Malaysia is trapped in the 'middle-income trap'.

Malaysia averaged its IN per capita annual growth with more than 8% between year 2001-2010, and by calculation, it is notable that even with the conservative approach in having a constant IN per capita growth of 3%, Malaysia could achieve the high-income status around year 20189. However, e could argue, but-for the existence of these reasons, Malaysia could have reached the high-income status much earlier.

Besides, the high-income status, in our argument, should not be merely a status to be pursued, but the policies in acquiring it should be more pervasive in benefiting different classes of society in Malaysia. 2. 0 Meaning of "Middle-Income Trap"

The term "middle income trap" was coined by Gill and Sharks to describe apparent growth slowdowns of many former East Asian miracle economies. 10 According to them, the middle-income country trap is a development stage that characterizes entries that are squeezed between being low-wage producers and highly-skilled, fast-moving innovators.

It happens when one's country economic growth slows and eventually reaches periods of stagnation or even decline or stuck at growth rates that are extremely low. Cost advantages in labor-intensive sectors, such as the manufactured exports which once drove growth, start to decline in comparison with lower-wage poor country producers. With rising wages, middle income nations are less competitive compared to lesser developed, low wage economies in the cheap production of manufactured goods.

Likewise, they are unable to compete with advanced economies in high skill innovations. 11 These countries cannot make a timely transition from resource-driven growth, with low cost labor and capital, to productivity-driven growth. 12 As stated by Spence : "Middle-income transition refers to that part of the growth process that occurs when a country's per capita income gets into the range of At this point, the industries that drove the growth in the early period start to become globally uncompetitive due to rising wages.

These labor-intensive sectors move to lower-wage countries and are replaced y a new set of industries that are more capital-, human capital-, and knowledge- intensive in the way they create value. "13 2. 1 The Management of Governmental Intervention In Socio-Economy & The Dutch Disease To set out one of the Macroeconomics goals which is equitable distribution of income and wealth, it is noted that poverty eradication is often

related with this objective.

The Malaysian government has imposed National Economic Policy (NEAP) which was essentially a crafted statement of goals to be achieved over a 20-year period (by 1990), with one of t was "to reduce and eventually eradicate poverty," as well as "to accelerate the process of restructuring Malaysian society to correct economic imbalance, so as to reduce and eventually eliminate the identification of race with economic function" 14. The ethnicity-oriented policy also concentrated in a policy that focuses on reducing inter-ethnic inequality appears to provide a solution to eradicate poverty.

It follows that what matters for this approach with regards to equality is the equality is between groups rather than between individuals. However, the blatant issue to be issued in this paper about NEAP would be focused only in regards to intra-ethnic equality. Indeed, the government acknowledged that intra-ethnic income inequality is still high, particularly among the Bumpier, the concern for the high intra-Malay inequality could be drawn from the following excerpt: "Intra-ethnic income disparities are still sizeable, with inequality among the Bumpier being higher relative to that of the non-Bumpier.

The Gin coefficient (measure of income inequality) in 1990 for the Bumpier was 0. 428 while that for the Chinese was 0. 423 and the Indians 0. 94. As another comparison, whilst the mean income of the top 20 percent of the Chinese household was about 8. 6 times the income of the bottom 20 percent, the disparity between the top and bottom income households for the Bumpier was about 9. 2 times. "1 5 The above concern is confirmed by the figures taken from the report by MAPLE II. However,

it is claimed that intra-Malay or intra-ethnic inequality is not the focus of the NEPAL.

Thus, despite the significance of the intra-ethnic inequality problem, the government continued to insist that inter-ethnic inequality would remain the main Ochs of Malaysia's economic policy. Restructuring of corporate ownership and wealth, with its 30 percent target, was the most ambitious of the NEAP targets as well as the most controversial, and as expected proved to be the hardest to reach, as seen from the repetition of goals set up in again in National Development Policy (DIP) as well as 10th Malaysian planar.

The 30 percent bumpier equity ownership is also a factor by itself aggravating the intra-ethnic inequality issue among Malay. Far from eradicating poverty, NEAP has modified the associational model by reinforcing the action of "MONO-putrid" political dominance, or the United Malay National Organization party (MONO) as "first-among-equals" in the power-sharing pact. It has the explicit aim of bridging gaps by a structure which is "ethnic" at the grass roots but "supra-ethnic" at the top"18.

Besides, the inequality of income amongst the Malay-ethnic could be worsening from time to time. The disparity of income does not form over a single night, the people's poverty involves several factors such as the employment and its inefficiency in structuring as well as the human capital development. The data allows us to question the effectiveness of DEBT on the matter of 30 percent bumpier equity ownership, specially on the allocation of government expenditure with the rationale to curb the socio-economical problems.

Over the decades, the Government of Malaysia has used the fiscal policy through tax measures or allocation of operating and development

expenditures to attain a broad range of macroeconomic objectives: growth & equity (e. G. The NEAP and AND), macroeconomic stability, reform & restructuring of economy, as well as sector and regional at targeted sectors. By imposing expansionary fiscal policy, the government increased its expenditure in developing infrastructure and lowered taxes. On reflection, starting with the New Economic Policy (NEAP) Malaysian government was directly and heavily involved in economic activity.

This involvement or the so called government intervention in the economy has led the Malaysian federal government expenditure to increase significantly. Particularly in 1981, statistics from Economic Planning Unit, Malaysia (PEP) show that the total Malaysian federal government expenditure has Jumped about 41% from its previous year total expenditure while the development expenditure growth percentage of that year compared to the previous year hiked about 52!. In general, the ratio of development expenditure on total expenditure is about 1:3 in the decade.

In 1981, the ratio peaked at 1:2, and showed the same trend again in year 1982. In 1983, the Malaysian government endorsed its prprevaricationolicy as one of the national policies, with its rationale to "facilitate the cocountry'sconomic growth, reduce the financial and administration burden of the Government, reduce the Government's presence in the economy, lower the level and scope of public spending and allow market forces to govern economic activities and improve efficiency and productivity n line with the National Development Policy'22.

Only by then, the government policies shifted the latter approach from government led growth to private sector led growth. Figure 2. 1 : Demand-Pull Inflation Aggregate Demand (AD) is the total demand for goods and services produced within the economy over a

period of time. Aggregate Demand (AD) is composed of various components, namely Consumption (C), Investment (l), Government Expenditure (G), Net Export (Export subtract Import [X - M])23. The aforementioned government policies suggest us that the allocation of expenditure could have been more far- eacachingextensive and wide-ranging in achieving its ends.

Undoubtedly, the infrastructure development leads to the increase of Job opportunities, whereas the reduction of taxes increases the disposable income of the society, thus giving rise to the Consumption (C), which then lead to the shift of AD curve to the right. Indeed, the GDGAPas increased (from YlYello Y2Yin time, however, it gives a rise to the price level (from Pl to P2UP this may as well reflect inflation. Table 2. 2 Consumer Price Index (2005=100), Index Numbers For Main Groups, Malaysia Year Consumer Price Index (CPICP000 91 . 75 2001 93. 05 2002 94. 73 2003 95. 67 2004 97. 2 2005 2006 103. 61 2007 105. 71 2008 111. 46 2009 112. 11 2010 114. 03 2011 117. 68 *2012 119. 62 (Source: International Monetary Fund, National Financial StStatisticsAn example to be observed is the rising cost of goods which negates the benefits of the cash aid provided in BBIBMnd BRI M, such that the financial aid could be a short term relief but would further burden the consumers upon ininflationFrom Table 2. 2, with the constant Consumer Price Index (CPICPof year 2005 = 100, it is evident that the price ndindexas soared in year 2008 with the CPICPeading of 11 1. 6, and it went up to 119. 62 in year 2012. The data shows an increase in CPICPn a gap of

10 years stated the one of highest (23. 95) between year 2003-2012, barely compared to the 10 year-gap upon year 2000 when the nation is recovering from its economical crisis. Correspondingly for non-alcoholic consumers goods, the report of CPICPwith constant CPICPf year 2010=100) has shown the increase of reading from 106. 3 in October 2011 (upon the presentation of Budget 2012 which introduces BRI M) to 1 1 1. 9 in August 201326.

As he cash aids specifically targets students, single mothers or fathers with dependents, family with household within RMRAMMERsingle individuals with income below RMRAMMERnd senior citizens, it would also be unfair not to mention that people who were not benefiting from BRI M aggrieved from its financial constraints facing the rising cost of goods. Nevertheless, the calculation of high-income status has almost disregarded the fluctuation of price index by using the Atlas Method as mentioned. As though, cash aid has seemed to be a practice of government in its policy in the recent years.

The issue is also how should we focus in alleviating poverty and the disparity of income in our nation (and intra-ethnic society) as a whole with a substantive and efficient measure, such that the focus should not be only on the amount of income which often affected by the price index, but also on the buying power or the income with Purchasing Power Parity (PPAPP We would discuss later in the suggestion of measures to be taken, as well as the focus on Aggregate Supply (AS). On the other hand, the middle-income trap has its correlation with the management of sectors in economy.

In the 19sass'sMalaysia's economy was commodity

based, relying heavily on primary sector of economy including agriculture, forestry, fishing, mining and quarrying, totaling more than 34% of national GDGAPn year 197127. Its focus on primary sector has been lessened by decades, accounting for 8. 60% of total GDGAPnd 17. 04% of the total employment in year 200028. It is then noted that our economy shifted to secondary sector (manufacturing and construction) from primary sector, accounting for 19. 80% of GDGAPnd 21 . 14% of total employment in year 1987, and plummeted to 28. % and 32. 62% respectively in year 199729. Until now, the tertiary sector (services) has a moderate growth since 19sassranging from 45% to 57% of total employment and 49% to 56% of total GDGAPf the nation. According to Japan Institute of LaLaborit is stated that Malaysia has been endowed with a combination of fafavorableonditions for economic growth at the first and foremost stage - "a rich resource base, relatively low population pressure, good of supply of entrepreneurial skills, reasonably efficient bureaucracy as well as adequate infrastructural facilities"30.

Malaysia is the country which easily developed from their low-income economic status toward middle income using an excess cheap lalaborupply and natural resources. The other side of the coin is, however, it is often debated that "Dutch Disease" phenomena has been occurring since then. In the 19sassthe Netherlands experienced a vast increase in its wealth after discovering large natural gas deposits in the North Sea. Unexpectedly, this ostensibly positive development had serious repercussions on important segments of the country's economy, as the Dutch guilder became stronger, making Dutch non-oil exports less omnominative

This syndrome has come to be known as "Dutch disease",

which often associated with dependence and exploitation of natural resources. According to official fgfiguresgrowth of real GNP averaged 7. 6 percent per annum in the 19sassthen slowed to 5. 9 percent in the 19sassThe major difference between the two decades is that commodity price trends were more favorable in the 19sasswhen all significant commodity prices followed a rising trend) than in the 19sasswhen all except timber fell), a decade punctuated by a severe recession which threw growth into reverse in 1985-86.

The exchange rate is, actually, the main variable to be studied by macroeconomics, since it plays a strategic role in economic growth of a nation. Exchange rate refers to the price of a unit of one foreign currency in terms of another. As we have inferred previously that Malaysian economy was commodity-based in 19sassthe demand of primary sector goods in Malaysia in international trading has given rise to the exports, which eventually surge the demand of Malaysian RiRingingurrency.

From the table above, the currency of Malaysian appreciates in the 19sass'schanging from 1 MYMYRA $3. 05 to 1 MYMYRA $2. 18 in year 1980. Since the Malaysian RiRingingurrency has been overvalued, the export of Malaysian manufacturing goods has been facing great resistance due to the elelatedlyess-competitive exchange rates compared to other countries such as Cambodia and Vietnam as the exported goods became more expensive for other countries to buy.

Being unable to compete with the low income nations which offers relatively low-priced goods, Malaysia also does not have enough highly skilled lalaboro become a high income nation, thus trapping in the middle-income stage. A relatively depreciated exchange rate is necessary in order to have a

constant upward trend in exports and, as a consequence, an opportunity for lucrative investments.

Malaysia has been abandoning this policy in the 19sasswith the exception from year 1997 onwards due to ASSEANinancial crisis) and accepted conventional ororthodoxy'srecommendation of growing with foreign savings, thus appreciating their exchange rate, the outcome was the balance-of-payment crisis : a crisis that soon made them revert to the usual macroeconomic policy for those countries: strict fiscal adjustment, low interest rates, and competitive exchange rarattersMeanwhile, factors regarding Human Capital and Education would be discussed later in this paper, as they are lolooselyelated to measures to be taken along side. V. Policies - Measures to be Taken Malaysia's structural transformation from low income to middle income status is a success story, despite its struggle through the Dutch Disease and the industrialization stage between the 19sassnd 19sassThe below graph shows the RoRostersodel of GrGrowthwhich we are going to use to reflect Malaysia's economical development : Figure 3. 1 : RoRostersodel of Development In short, the Transitional Stage signifies the preparation for development and the tendency to accept changes (political, social and educational structure) in society,