MIDDLE-INCOME TRAP: REFLECTION ON MALAYSIA'S ECONOMIC DEVELOPMENT AND POLICY IMPLICATIONS.

This paper comprehensively reviews the literature on "middle-income trap" and reflects upon the case of Malaysia's middle-income transition with attention to drawing relevant policy implications. The review looks into the discussions on middle-income trap and its causes from both economic and institutional perspectives. The investigation on Malaysia is conducted through the analysis of structural change and sources of growth in comparison with the performance of the two Asian Tigers, South Korea and Taiwan. Malaysia achieved remarkable growth during its lower-middle-income stage, but was "trapped" in the upper-middle-income years as its growth declined substantially. The slowdown was driven by the significant decline in private investment, resulted mainly from the outflow of capital together with decreasing inward FDI. This was somehow triggered by macro uncertainties from the Asian Financial Crisis leading to pervasive pessimism among investors about the economic prospects, coupled with the long-lasting unfavorable business environment due to discriminatory policies favoring the Malays and the crowding-out of government-linked corporations. Malaysia consistently faced multiple structural issues throughout its middle-income stage, including sluggish total factor productivity growth, relatively modest structural change, slow industrial upgrading and premature deindustrialization, which had root in the slow upgrade of human capital, technological capabilities, indigenous capacity, and the integration with the FDI sector. Low and lower-middle-income nations like those of ASEAN region should pay strategic attention to all these issues from the early years of their economic catch-up endeavors in order to overcome unforeseen shocks and maintain sufficient growth momentum for middle-income transition. [ABSTRACT FROM AUTHOR]