Malaysia is a highly open, upper-middle income economy. Malaysia was one of 13 countries identified by the Commission on Growth and Development in its Growth Report to have recorded average growth of more than 7 percent per year for 25 years or more. Economic growth was inclusive, as Malaysia also succeeded in nearly eradicating poverty.
From an economy dominated by the production of raw natural resource materials, such as tin and rubber, even as recently as the 1970s, Malaysia today has a diversified economy and has become a leading exporter of electrical appliances, electronic parts and components, palm oil, and natural gas. After the Asian financial crisis of 1997-1998, Malaysia continued to post solid growth rates, averaging 5.5 percent per year from 2000-2008. Malaysia was hit by the Global Financial Crisis in 2009 but recovered rapidly, posting growth rates averaging 5.7 percent since 2010.
Less than 1 percent of Malaysian households live in extreme poverty, and the government’s focus has shifted toward addressing the well-being of the poorest 40 percent of the population (“the bottom 40”). This low-income group remains particularly vulnerable to economic shocks as well as increases in the cost of living and mounting financial obligations. Income inequality in Malaysia remains high relative to other East Asian countries, but is gradually declining. For example, from 2009 to 2014 the real average household incomes of the bottom 40 grew at 11.9 percent per year, compared to 7.9 percent for the total population of Malaysia, thus narrowing income disparities. Following the removal of broad-based subsidies, the government has gradually moved toward more targeted measures to support the poor and vulnerable, mainly in the form of cash transfers to low-income households.
Malaysia’s near-term economic outlook remains broadly favorable, reflecting a well-diversified economy, despite some risks. Domestic demand is expected to continue to anchor economic growth, supported by continued income growth and stable labor market, while expected improvement in global trade would contribute positively to the external sector. The government have implemented a series of reforms and remains committed to fiscal consolidation, with the fiscal deficit target set at 3 percent of GDP for 2017. Going forward, fiscal consolidation may require a second wave of reforms in the public sector as the scope for further reducing operating expenditures narrows and collection from goods and services tax (GST) plateaus. The government may consider additional reforms to raise revenue and improve public sector efficiency. Going forward should external conditions worsen, improvements in the efficiency of social assistance programs, including a shift toward more targeted social policies, could provide immediate support to vulnerable households. Accelerating structural reforms to enhance public sector performance and boost the productivity of public spending will be vital to sustain robust growth in an adverse external environment.
While significant, Malaysia’s productivity growth over the past 25 years has been below those in several global and regional comparators. As factor accumulation is expected to slow, accelerating productivity growth is the main path for Malaysia to achieve convergence with high-income economies. Accelerated implementation of productivity-enhancing reforms to increase the quality of human capital and create more competition in the economy will be key for Malaysia to secure a lasting place among the ranks of high-income economies.