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.
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