Malaysia has experienced five decades of rapid and inclusive economic growth, positioning the country on the brink of achieving high-income status, according to Dr. Luiz de Mello, Director of the Economics Department at the Organisation for Economic Cooperation and Development (OECD).
Speaking at the launch of the 2024 OECD Economic Survey of Malaysia, Dr. Luiz highlighted the impressive economic performance that has characterized Malaysia’s journey since the 1960s. The country has averaged a yearly growth rate of over six percent during this period, enabling it to outpace its regional peers in terms of per capita income.
Malaysia’s Path to High-Income Status
Dr. Luiz pointed out that in 1989, Malaysia’s per capita income was only one-third of the threshold needed to be classified as a high-income country by the World Bank. However, the nation is now on track to surpass this threshold by 2028, marking a significant milestone in its economic development.
“Significant policy reforms in the 1980s played a crucial role in this trajectory, allowing Malaysia to attract substantial foreign direct investment (FDI). This influx of capital transformed the country into a global manufacturing hub for chips and electronics,” Dr. Luiz stated.
Strengthening Growth and Productivity
Despite the positive outlook, Dr. Luiz emphasized the need for further reforms to sustain and enhance Malaysia’s growth and productivity. He suggested that easing restrictive regulations and fostering a more competitive environment between state-owned enterprises (SOEs) and private firms would be beneficial.
“Such reforms would particularly benefit the services sector and small and medium enterprises (SMEs),” he added, highlighting the potential for these changes to drive further economic progress.
The Need for Improved Public Services and Economic Governance
With rising incomes, Dr. Luiz noted that there is increasing demand for better public services, necessitating a shift in policy focus. “The public sector will need to deliver more and become more effective, which calls for improved economic governance,” he said.
He also underscored the importance of addressing gaps in Malaysia’s social protection system, which will require increased public expenditure.
Malaysia’s Economic Resilience and Future Growth
Dr. Luiz commended Malaysia’s resilience in the face of global economic challenges, including the COVID-19 pandemic, supply chain disruptions, and the economic fallout from Russia’s war against Ukraine.
The OECD forecasts that Malaysia’s growth will accelerate, driven primarily by expanding domestic demand. Exports are also expected to rebound, buoyed by stronger external demand, while inflation, which has recently fallen below historical averages, may rise again as energy subsidies are gradually withdrawn.
“Growth is projected to reach 4.9 percent in 2024, followed by 4.7 percent in 2025. The combination of robust domestic demand, new opportunities in technology-intensive sectors, and a recovery in exports will likely encourage private investment, despite higher financing costs,” Dr. Luiz explained.
Monetary Policy and Inflation Outlook
On the monetary front, Dr. Luiz noted that the tightening cycle initiated by Malaysian authorities in 2022, in response to inflation approaching five percent, has been effective. This inflation was largely driven by global energy prices and currency depreciation.
“With inflation currently near its two percent long-term average, the current monetary policy stance is appropriate. It provides room to accommodate a temporary increase in inflation as energy subsidies are withdrawn,” he said. However, he cautioned that monetary authorities should be prepared to raise interest rates if higher energy prices lead to secondary inflationary effects.
Conclusion
As Malaysia approaches high-income status, the country stands as a testament to the effectiveness of strategic economic reforms and resilience in the face of global challenges. With ongoing efforts to improve public services, economic governance, and social protection, Malaysia is well-positioned to continue its upward trajectory, securing its place as a leading economy in Southeast Asia.
