Malaysia: Achieving High-Income Status through Resilience and Inclusive Growth

Author:Alex Mourmouras - Niamh Sheridan
December 2015
9 9
Malaysia: Achieving High-Income Status through
Resilience and Inclusive Growth1
By Alex Mourmouras and Niamh Sheridan
Malaysia’s economic
performance since its
independence in 1957
has been strong. It is now
an upper-middle income
economy whose income per
capita has grown 20-fold
over the past 40 years. Economic growth was inclusive, with
the share of households living below the national poverty line
falling from over 50 percent in the 1960s to less than 1 percent
currently. Natural resource wealth has been well-managed and
widely shared; inflation has been stable, and a strong financial
sector has been developed that is at the center of global Islamic
finance. Despite facing significant shocks, the Malaysian
economy has shown remarkable resilience, and has recovered
quickly from the Asian financial crisis and from the global
financial crisis. The reform process is ongoing with the aim to
achieve high-income status by 2020.
Successful Structural Transformation
Malaysia’s transformation was achieved t hrough
a wide range of struct ural reforms throughout the last
four decades, with conti nuous reform eorts to support
growth, boost product ivity, and strengthen resilience.
To gain a systematic understanding of t he stages of
structur al reforms in Malaysia we follow the classication
of the stages of struct ural reforms adopted in recent IMF
research (IMF Board paper on st ructural reforms, IMF
2015). e main insight is that the reform agenda evolves
as economies develop: each stage of development brings
its own reform challenges. e payo in ter ms of higher
productivity al so evolves through time. Governments
need to prioritize reform areas de pending on the level
of development in their country.
1 This article summarizes the main conclusions from a forthcoming book,
“Malaysia: Achieving High Income Status through Resilience and
Inclusive Growth,” edited by Alex Mourmouras and Niamh Sheridan, with
contributing authors from various departments within the IMF, the World
Bank, American University, and Malaysian government agencies.
e focus of reforms in the 1960s and 1970s was on tac kling
Malaysia’s extensive rural povert y and upgrading
its undiversied agr iculture- and natural resource
extraction-base d economy. Various government programs
aimed to increase producti vity and eradicate rural pover ty,
for example, a land settlement scheme provided po or
farmers with ri ghts to the land; and sizable resources were
channeled to improve agricult ural infrastruc ture (irrigation
and drainage sy stems). Agricultu ral extension and support
services were provided in r ural areas, and government
supported research and development in high-yield ing
agricultu ral products. ese reforms paid o: improvements
in agricult ure productivity contributed to the reduction
of poverty and income dispa rities.
e release of surplus rura l labor helped to lay the
foundation for i ndustriali zation. Malaysia fo llowed a
public sector-led development strategy during t he 1970s.
Public investment and the state- owned enterprise (SOE)
sector both grew signi cantly. Higher public outlays boosted
economic growth to around 8 percent and reduced p overty
from about 50 percent in 1970 to 37 percent by 1980, but also
led to double-digit scal decit s and record high public debt
in the early 1980s. i s coupled with a downturn in external
demand and a fall i n the prices of Malaysia’s major primary
export commoditie s, resulted in a sharp recession in 1985.
In response to the recession, the author ities launched
far-reaching struct ural reforms in the mid-1980s aiming
to revitaliz e the private sector and restore
macroeconomic stability.
e next stage of reforms, from the m id-1980s to the
mid-1990s, focused on trade, na ncial liberalization, and
infrastr ucture. Trade liberalization was g reatly accelerated
when Malaysia adopted an outward-or iented development
strategy in t he 1980s. Import duties on manufactures that
had enjoyed extensive tari protect ion were dismantled .
Industry was dereg ulated and industrial licensing a nd
ownership rules were relaxed . e capital account was
liberaliz ed and tax incentives and targeted a llowances for
foreign direct investments led to la rge FDI inows into the
Research Summary

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