Last updated: April 2016
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 2008 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: the share of households living below the national poverty line (USD 8.50 per day in 2012) fell from over 50 percent in the 1960s to less than 1 percent currently.
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.
Though poverty is less than 1 percent, pockets of poverty remain and income inequality remains high relative to other developed countries: Malaysia’s gini coefficient of income inequality stood at 0.41 in 2014, compared with 0.31 and 0.33 in the Republic of Korea and Japan (both as of 2010), for example. Real income of the bottom 40 percent of households increased by an average 6.3 percent per year between 2009 and 2012, compared to 5.2 percent for the average household, suggesting the benefits from growth were being shared.
Malaysia’s near-term economic outlook remains overall favorable, despite some risks. The economy has diversified from commodities and the Government has taken steps to broaden the revenue base by introducing a Goods and Services Tax in 2015. Short-term risks include further declines in oil prices and oil related taxes that still account for around 17 percent of public revenues, although this is partially compensated by the removal of fuel subsidies in 2014. Other risks are related to the volatility in capital flows from the normalization of US monetary policy. The long-term sustainability of this favorable outlook hinges on structural reforms to strengthen medium-term fiscal planning, and to boost capabilities and competition within the economy.
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. Malaysia has been working to address these challenges. In 2010, Malaysia launched the New Economic Model (NEM), which aims for the country to reach high income status by 2020 while ensuring that growth is also sustainable and inclusive. The NEM includes a number of reforms to achieve economic growth that is primarily driven by the private sector and moves the Malaysian economy into higher value-added activities in both industry and services.