Last updated: March 2018
Since gaining independence in 1957, Malaysia has successfully diversified its economy from one that was initially agriculture and commodity-based, to one that now plays host to robust manufacturing and services sectors, that have propelled it to become a leading exporter of electrical appliances, electronic parts and components. Malaysia is one of the most open economies in the world, with a trade to GDP ratio averaging over 140 percent since 2010. Openness to trade and investment have been instrumental in employment creation and income growth, with about 40 percent of jobs in Malaysia linked to export activities. After the Asian financial crisis of 1997-1998, Malaysia’s economy has been on an upward trajectory, averaging growth of 5.4 percent since 2010.
With less than 1 percent of Malaysian households living 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 favorable, reflecting a well-diversified and open economy that has successfully weathered the impact of external shocks. This is bolstered by strong macroeconomic management, with low and stable inflation and on-track fiscal consolidation. The financial system remains well-functioning and regulated, boasting a well-capitalized banking system and deep capital markets. Domestic demand is expected to continue to anchor economic growth, supported by continued income growth and a stable labor market, while an improving external environment would contribute positively to demand for Malaysia’s tradable goods and services. Ongoing efforts to push for structural reforms to enhance public sector performance and boost the productivity of public spending will be vital to sustain robust growth in a challenging external environment.
While significant, Malaysia’s productivity growth over the past 25 years has been below those in several global and regional comparators. Over the medium to long-term, the need to accelerate productivity growth has become more pressing as traditional growth engines have slowed. Additionally, reinforcing the role of factor accumulation, such as female labor force participation, as well as creating more competition in the economy, will continue to be needed in order to complement productivity gains. As factor accumulation is expected to slow, accelerating productivity growth is the key path for Malaysia to achieve convergence with high-income economies.