How to Avoid Middle Income Traps

In: Business and Management

Submitted By ChernHong
Words 540
Pages 3
Over the past several decades, Malaysia has experienced remarkable rates of economic growth. Indeed, the real growth in GDP per capita in the period since 1980 has averaged over 3.6 percent, a rate that results in a doubling of income levels in just a 20-year period. By way of comparison, the industrial countries of Britain and the United States realized an average growth in GDP per capita of between 1.3 and 1.8 percent during their own respective periods of industrialization. Yet, relative to the more advanced Newly-Industrializing Economies (NIE) of Singapore; Taiwan, China; and the Republic of Korea, the record of Malaysian growth appears more sobering.1 These countries recorded real per-capita growth rates of 4.4, 5.7 and 7.5 percent, respectively, during the same period. As shown in Figure 1, Malaysia was at a similar level of development as Korea and Taiwan, China in 1980, and yet while these countries have made the transition from middle-income to high-income status during the subsequent decades, Malaysia has found such an evolution more difficult. In addition, Malaysia’s absolute productivity gap with high-income (OECD) countries has also widened; in the case of the industry sector, the productivity differential nearly doubled from $21,786 in 1980-1985 to $38,946 in 2000-2004 (Felipe et al, 2007).
After markedly reduced rates of productivity and growth after the Asian financial crisis of 1997-98, there is a growing concern that emerging markets like Malaysia might fall into a “middle income trap”, unable to subsequently achieve high levels of economic growth and further economic transformation.2 The form and pace of structural and spatial transformation is a crucial driver shaping whether countries come out of the middle income trap. The objective of this paper is to examine prior patterns of growth in Malaysia, document the cross-country evidence of how…...

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