Malaysia: Update Inclusiveness Strategies to Boost Economy and Reduce Inequality, says World Bank

November 8, 2010

Kuala Lumpur, November 8, 2010 — In spite of a spectacular year-on-year recovery, the growth rate of the Malaysian economy has weakened. Growth is expected to soften from 7.4 percent in 2010 to 4.8 percent in 2011, with the weakness of the global economy as a key source of near-term uncertainty. “On the positive side, Malaysia has started to transition from stimulus to a more sustainable growth led not by exports and global demand but healthier domestic private consumption and investment activity”, says the World Bank’s 2010 Malaysian Economic Monitor launched here today by World Bank Managing Director, Sri Mulyani Indrawati.

The Malaysian Economy in Review

A biannual analysis and forecast of the country’s economy, the report says renewed domestic demand and investment led to a recovery in employment with some 140,000 new jobs added in Q2 with manufacturing capacity returning to normal levels and prices rising. Investment inflows improved, pursuing healthy returns in Malaysia’s financial markets as well as longer-term investment opportunities. As a result, the Ringgit recorded the strongest appreciation in the region from the start of 2010 to Q3 against the US dollar. However, Malaysia’s hard-won recovery remains tenuous—exports and some industrial production indicators weakened mid-year—and will continue to soften as the world’s major economies grapple with the fallout of a lengthy financial downturn.

“Meeting the growth targets of the 10th Malaysia Plan will require a significant rise in productivity and investment,” says Philip Schellekens, lead author of the Monitor. “The dual approach in the Economic Transformation Program of combining cross-cutting policies with private sector-led projects provides an excellent platform. The proof of the pudding, however, will be in the consistent execution of policy reforms,” he said. “Also, until solid implementation of policy reforms is seen there is unlikely to be a groundswell of positive sentiment of foreign investors towards Malaysia.”

Meeting the Aspiration of Inclusive Growth

“While achieving Malaysia’s Vision 2020 goal of high-income status requires a higher growth rate than that achieved in recent years,” said World Bank Sector Director for Human Development, East Asia & Pacific, Emmanuel Jimenez, “the challenge is also to ensure that the benefits are broadly shared across all layers of Malaysia’s society. While Malaysia has made truly impressive reductions in poverty, inequality persists at high levels.” He said, “The bulk of inequality today can be explained by differences in socio-economic factors within ethnic groups rather than differences across groups. It is time to bring all Malaysians within the ambit of greater economic opportunity.”

How is this challenge to be met? The Malaysia Economic Monitor suggests a three-pronged approach:

  • Raising economy-wide opportunities by strengthening the investment climate and revitalizing labor markets,
  • Promoting investment in human capital by strengthening education and vocational skills training, and
  • Providing well-targeted social protection to help those that cannot help themselves.

Many Malaysians cannot take advantage of income-earning opportunities because they lack the skills to do so, despite massive investments in education, says the report. “For others, skill needs have changed more quickly than the availability of educational and training opportunities.” As Malaysia seeks to increase knowledge and innovation in its economic activities, it is even more important not to marginalize the unskilled workforce.

A complement to education is the necessity of labor market reforms that raise the level of employment, streamline the regulatory environment for businesses and remove barriers for new investment. Even if income-earning opportunities exist and access to them is broadly adequate, some Malaysians will inevitably remain excluded or require temporary support. Important elements of a social protection system are in place in Malaysia, but significant gaps remain. Social safety net programs could have a stronger poverty focus, targeting mechanisms could be improved and fragmented programs could be replaced by a well-coordinated social protection system, says the report.