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UNIVERSITI TEKNOLOGI MARA

BACHELOR OF BUSINESS ADMINISTRATION (HONS) BUSINESS

ECONOMICS

ECO649 ECONOMIC ISSUES AND POLICIES

CASE STUDY:

THE MIDDLE INCOME TRAP IN MALAYSIA

NAME : NORAZLINA BINTI ALI HASSAN

ID STUDENT : 2016707089

GROUP : BM2505A2

COURSE CODE : ECO649 ECONOMIC ISSUES AND POLICIES

NAME OF LECTURER : SIR SHEIKH JUNAIDI SHEIKH MOHAMMAD

DATE OF SUBMISSION : 22 NOVEMBER 2018

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TABLE OF CONTENT

PAGE

1.0 INTRODUCTION 3

2.0 FACTORS THAT AFFECT MIDDLE INCOME TRAP 4-6

3.0 DATA ANALYSIS 7

4.0 NEGATIVE IMPACT OF MIDDLE INCOME TRAP 8

5.0 GOVERMENTS ACTION TOWARDS MIDDLE INCOME 9

TRAP IN MALAYSIA

6.0 RECOMMENDATION 10

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7.0 CONCLUSION 11

8.0 REFFERENCE 12

1.0 INTRODUCTION

Firstly,I have choose a topic for case study ECO649 which is “Middle Income
Trap in Malaysia”.In the topic that I have choose,we can get deeper understanding
about the factors of middle income trap in Malaysia its impact for economic growth.

In general,Malaysia nowadays are seeking to a developing country and the aim to

achieve a higher level of economic growth as well.Malaysia actually changeover from

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low to middle income status,however Malaysia have been concern as might be fall
into “middle income trap”.Hence,Malysia unable to be make a transformation and
expansion their economic growth

Middle income trap is development stages that have restraints between low wage
producer and high skilled also fast innovation.Then,Malaysia caught in this trap
because of there grow more slowly and actually often fall behind.Then, there lower
wage countries might be can drive toward the economic growth and there is more cost
advantages in labor-intensive sectors.

In addition,it can facced with kind of new challenges toward economic growth
also include the distrubution and social issues.This happen can effect a larege of
number people who have low income sources and poverty.There is many mmiddle
income countries have common mistakes such as there is take long time to have
succesful policies and exit prematurely from the business sector that have been as the
bases for specialization process.This timis have been mentioned from the researcher
such asKharas, Zeufack, and Majeed (2010).

2.0 FACTORS THAT AFFECT MIDDLE INCOME TRAP

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This topic is to be examine how middle income trap can be influence the economic
growth and it is be a long run economic growth.Middle income trap is a phenomenon
as the country will fast growing that can be avoid from the poverrty trap and it
achieve the middle income levels on percapita basis.This middle income traps occurs
because of several factors can influence towards economic growth.

1) Low wage countries

Firstly,low wage countries is main factors that occur in the middle income trap
eventhought it has advantages in getting high return based on the capital also advance
technology.But some worker still not getting higher pay wages and salaries because of
the limitation of source of income.This will be sustain the economic growth at the
lower rate as there will aim to achieve the high income country.

This is concern as Malaysia has the low wages and salaries alco can be apparent
lifestyle changes of Malaysians.As the Bank Negara Annual Report year 2017 ,Bank
Negara points out that there is expenditure of the bottom at the 40% of Malaysian
households has be expanded at a faster pace more than their income.

In the context , the economic growth stagnate or even it is decline and be remaind
in the middle income phase of the economic growth.This is because the source of
income are limited in developing country and it is difficult to get the higher wage
because the economic are unstable.Based on the reseacher,there are many reseacher
interpreted and it is differently opinions and perspectives.However,as much to middle
income trap and it is stated by the World Bank and the past researcher such as Kharas
and Kohli (2011), Ohno (2009), and Carnovale (2012).

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2) Lack of Saving

People are commonly not very concern about the long term saving and
investment.Nowadays,with the rising cost of living, it is very difficulties to have a
greater stable living standard especially for middle income.Savings actually very
important for future use if there have any emergency in future.Usually the middle
income have a problem in savings money,if there have any emergency,there will
involves the borrow money from the lending instution.Middle income usually have
seriously difficult to have any sources of income and rare involves in long term
investment or insurance.

Beside the government expenditure,there Keynes theory of economic that can be

explained in determining the output levels in the investment expenditure as mentioned
by Mankiw & Scarth(2007).This theory described that the higher investment is the
important roles in developing country.However,it can be influence by the aggregate
demand and as an important expenditure contributes in developing countries.In
additions,investment can increase capital stock and help to increase production goods
and services as refers to research by Kunchoro (2005).Accordingly,the role of
investment very significantly towards the productivity of country’s economy.

The middle income class have a survey shows that they have hopes and
asspirations have been conduct on 17 found that 53 per cent of 500 respondents
believe that saving for their retirement years is one on the hardest challange and its
ability to achieve financial stability when they retire.

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According to AIA chief marketing officer Thomas Wong, there most in the
insurance industry would be find that the majority would need to earn 10 times more
than a middle class person’s average salary to have a comfortable retirement financial
plan.

3 ) Lower productivty economic growth

In that perspective,there is the factor that to create high productive growth during
initial phase of the development is difficult when middle income.It is need to have
new sources of growth to be maintain increase in per capita income as well.As the
middle income traps are impact towards decreasing marginal returns in physically.

As mentioned by the past reseacher, Eichengreen, Park and Shin (2011) agrees
that are at the productivity growth slowdowns whereby 85 percent of the slowdown in

the rate of output growth which is it can be exlained by a slowdown in the rate of total
productivity growth.This is shows that our country need to enhance more middle
income to be compete in the global market by producing the high productivity with
produce low cost product but in high technology.

The developing countries with the middle income are unable to achieve the high
productive because it countries cannot be change their strategies in economic and they
need to move and find themselves in middle tap between the poor counries that are
globally competitive based on labor and input.Then,it is the labor force that should be
new develop technology and generate ideas is very difficult to solve.It is because they

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need ultimately to lift the middle income class to high income should have a generous
productivity improvements.

3.0 DATA ANALYSIS

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TABLE 1.0

The table 1.0 above shows that the data analysis for the population of the country
can be explained towards the middle income trap especially Malaysia.I have been take
the time series for 5 years which is between 2013 to 2017.The data analysis above
take by the source of World Bank websites.From the observation of the population in
Malaysia,since 2013 there is number of people become increasing until
2017.Hence,the highest population on the year 2017 which is 31 million of
populations.The number of population keep increasing over the year.

Based on the observation,the population can affect towards the middle income
trap because there is the more competition of people who seeking jobs in future.This
can leads towards the low productivity occur the middle income trap.This condition
can leads to citizens have moved from middle-income to high-income countries in a
short span of time.Moreover, there have many number of work lack of highly skill
workers can leads toward the there lack of innovations on the market.Then,the middle
income countries as Malaysia have grown slower than either rich or poor
countries.When the number of population keep increasingly,the development stage
would be characterizes the countries are squeeze between low-wage producer and also
the highly skill especially fast moving innovators.

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4.0 NEGATIVE IMPACT OF MIDDLE INCOME TRAP

Middle income trap will impact a country which lacking of the talent and
innovation that the middle income country graduates are more attracted to work in
abroad.Besides that,the fresh graduade are more choose for the offer a higher wage
form the high income countries.

Hence,this situation will impact to our country because it will lose many number
of skilled talent that need to create an innovation and dedicated to work.In
Malaysia,workers have been leaving the country to seeking the higher pay and
satisfaction of the job offered.For example,the starting pay for graduate teacher in
Malaysia is 2,500 per month compared to Singapore pays for RM6,195.

Moreover,middle income trap will impact toward the growth fell in both services
and manufacturing.This relatively strong capital on the formation as the
manufacturing amount are much of the productivity.Then , there has a decreased rate
of capital accumulation as in the total economy.This occur when there a large in
productivity both the manucfaturing and services in Malaysia over the years.

Besides,Malaysia caught in this trap tend to grow more slowly and often fall than
other countries.This is because there start to decline in lower-wage countries.Then,the
middle income trap also can be lack of the istitutions,capital markets and critical of
highly skilled workers.Hence,the country should be make an innovation like other
developing countries to make the stabilize in economic growth.

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5.0 GOVERMENTS ACTION TOWARDS MIDDLE INCOME TRAP IN

MALAYSIA

Over the years , Malaysia has be one of the country that leveraged in the three
of the channel of globalization which is trade,economic management and the
capital.This is to expands its sector and become one of the most exporters of the
goods in the international.Then,as previously Malaysia’s economic strategy to
become a high income countries by the year 2020.This statement getting a storngly
suppord by the Economic Transformation Program (ETP), Strategic Reform
Initiatives (SRIs), and Government Transformation Program (GTP).

The goverment take action by promote the entrepreneurship and the innovation to
the benefits of information network and also skilled labor before and gain the cheap
labor and knowledge.Moreover,goverment would be take the secondary option and
improve the education system in producing more graduates with the skills that need to
compete in the market.

Moreover, The ways of goverment be escape from Middle income is New

Economic Model (NEM) which is discovered on 30th March 2010 by Dato Seri Najib
Tun Razak,the former Prime Minister. The goverment focused on to attracting the

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highly productive especially from foreign firm to locate their production in

Malaysia.So that,it can be direct benefits for the demand high wages,improted the
capital equipment,substantial tax revenue and broader the economy.

Besides,the goverment would be provide more training opportunities to build

social entreprenues and support the product innovation.The promise of service
globalization means that Malaysia should be provided a good information and
technologies to enhance the business innovation for them.This can leads to achieve
the high income in the high productivity skilled worker.

6.0 RECOMMENDATION AND IMPROVEMENT

There are alternative solutions that I choose that should improve their strategies
towards to the solve the problems on middle income trap.

HOW IT WILL SOLVE THE MAJOR PROBLEM?

Based on the journal of Kohli et. Al.(2011) has stated that there are many of middle
income countries around the world could not able to avoid the stagnation in growth
either if after a faast growing the economy then reaches middle-income status.Then,a
few countries able to stablize their economy growth after reaching middle income
status.For examples,Hong Kong ,South Korea ,Singapore and Taiwan are maintaining
high economy with the strong domestic demant.It is also focus in appoach to

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transferring the low wage to high wage , export their manufacturing into the
knowledge.

Moreover,the countries must become dependent on the new innovation and

differentiation as referred to Abdon et. al., 2012; Agenor et. al., 2012; Kharas et. al.,
2011; Kohli et. al.(2011).The countries should be investing in educational
instution,generate more skill-trainings programs and efficient the financial system to
allocate the resources and attract more skilled worker.The goverment should take
action in developing strategies toward the economic and be competitive because the
labor and input is limited compared to the other countries.

Lastly,the economic must be switch with the knowledge growth and get the
microeconomics prices,framework institutions and macroeconomic balances.Then,it
is important to a country to escape from middle income trap by requires in investment
in education,make research and development and also the improvement infrastucture
( Lin et al,2012).In order to achieve the succesfully,the industry must be conduct an
advancement and diversification to competitive.Then,the developing country must
make a productivity is rising so fast expecially in Asia because it competed with the
other foreign worker.

7.0 CONCLUSION

Malaysia is the one country that structural transformation from low to

middle income has made it one of the most prominent manufacturing exporters in
the world.However,the high of skilled workers and a good professional job is the

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value to inprove the manucturing.Malaysia economy has well know as the skilled
crisis.This occur when Malaysia has highly productive foreign firms to the
production locate is another area that policy makers in Malaysia should focus.

Moreover,the migrant worker also influence fir the depress of wages that can
leads as the factor into middle income trap.This situation will be limit the
improvement based on the productivity of workers.Besides,in Malaysia has too
huge amount of foreign workers which is reported as 1.9 million of
workers.Then,we can found that migrant worker burden toward the economic in
Malaysia as there would a costly affair.

Apart form that,the low inflation rate it will cause towards the wages to be
create a large gap to Malaysian working domestically and those the workers on
abroad.This can leads to difficulty to our workers attract talent from other
countries because our product and services is very low.However,with the cheap
of currency in Malaysia,it is very difficult to workers to purchase their most
advance technology to improve their productivity.

Besides,Malaysia need to make a change as doing economically for past 40

years to get out of the middle income trap.There also need the effort on to make
our economic to be come stagnant while the other countries continue to expand
rapidly in future.Hence,the lower wage does not ever mean loweer labor costs if
the productivity also declines.

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REFERENCES

1. Aaron Flaaen, Ejaz Ghani, and Saurabh Mishra,How to Avoid Middle-Income

Traps? Evidence from Malaysia(2013,June).

Retrieved from www.worldbank.org/economicpremise.

2. Rob Van Tulder,How to escape the middle-income trap(2018,September 11)

Retrieved from http://www.nationmultimedia.com/detail/opinion/30354174

3. Nungsari, A. R., and A. G. Zeufack.“Escaping the Middle-Income Trap.” In

Readings on Development: Malaysia 2057.Khazanah Nasional Berhad,2009.

4. UNIDO (United Nations Industrial Development Organization).Industrial

Development Report: Breaking In and Moving Up,New Industrial Challenges

for the Bottom Billion and the Middle-Income Countries.(2009)

Retrieved from www.unido.org.

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5. Woo,W.T.Understanding the Middle-Income Trap in Economic Development:

The Case of Malaysia. World Economy Lecture delivered at the University of
Nottingham, Globalization and Economic Policy,2011

6. Sudhir Shetty,Malaysia Economic Monitor Towards A Middle-Class

Society(2014,December).

Retrieved from http://www.worldbank.org/malaysia

7. Jefrey Cheah Institute on Southeast Asia Working Papers Series,Explaining

Malaysia’s Past Economic Growth and Future Prospects,JCI Working Paper
No.2,2017

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