Paolo Casadio from HELP University and
Professor Geoffrey Williams from Malaysia University of Science and Technology
pointed out in their latest article – ‘The trap of the ‘middle-income trap’’
that among mature economists, the classification of countries into high-,
middle- or low-income economies has no particular economic meaning and formally
it is simply a way of deciding whether or not a country will be eligible for
financial assistance from international agencies.
For 2021, the high-income economies are
those with a Gross National Income (GNI) per person of US$12,536 (RM51,341),
using a statistical calculator called the World Bank Atlas method which adjusts
for exchange rates and purchasing power.
High-income status doesn’t tell us much
about the level of development and, for example, some high-income economies,
including the oil exporting countries of the Middle East, are classified as
developing countries. It tells us nothing about how the high income was
achieved and among the 83 high-income countries we find many oil-based
economies with little or no manufacturing and financial services or high-tech
industries touted as the future of growth.
The average income per person also tells
us nothing about the distribution of income with massively wealthy elites and
desperately poor masses in even the highest income countries. The US$12,536
limit is best viewed as a bureaucratic cut-off point, an achievement rather
than a policy target.
The World Bank has projected Malaysia to
join the club of high-income nations, but at a slower pace than its
predecessors. For a vital and dynamic economy like Malaysia with historical
growth close to five per cent, reaching this threshold is more a matter of time
than a measure of extraordinary performance. Therefore, the authors pointed
that focusing on high-income as a policy target is not only misleading, it can
be a dangerous distraction from the more urgent underlying challenges in
economic growth, development and distribution.
The challenges, for example, the
downward trend in growth rate for Malaysia, must be placed above the
high-income target. Structural unemployment rises with slower rate of growth.
Why? The economy has insufficient capacity to accommodate the flow of people
entering the labour market. And with automation and substitution of workers due
to the Fourth Industrial Revolution (IR4.0) this could get worse. Meanwhile, many
college graduates are underemployed, suffering from low wages coupled with ever
higher cost of living.
The second implication of lower
potential growth is the further contraction of the fiscal space. When the
government targets a fixed level of debt and deficit to GDP, lower growth
constraints resources available for economic and social interventions.
We need to be more creative and
innovative in our economy. We should move away from labour intensive investment
to digital infrastructure. And skills upgrading on a continuous level to
prepare the workforce for the new knowledge economy. Solve current issues
including Covid-19 and political instability to attract more foreign investments.
So, instead of focusing on a high-income target which will happen anyway, its
best to resolve urgent concerns of the current lower underlying growth.
Reference:
1.
Paolo
Casadio and Geoffrey Williams, The trap of the ‘middle-income trap’, 4 May
2021, Malay Mail
2.
Malaysia:
On track for long-term growth, 20 March 2020, Standard Chartered
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