Malaysia Must Now Go for Growth Through Innovation, says World Bank Report

April 18, 2010

Kuala Lumpur, 19 April, 2010 — Having recovered well from the effects of the global economic crisis, Malaysia must now take on the challenge of shifting its comparative advantage from low cost to high value by promoting greater innovation, says the World Bank’s latest review of the country’s economic health.

In the second edition of its Malaysian Economic Monitor entitled “Growth through Innovation”, the World Bank presents an upbeat outlook for the country—forecasting GDP growth of 5.7 percent for 2010—after hitting a low of negative 1.7 percent last year.

A slightly lower growth forecast of 5.3 percent for 2011 and 5.6 percent for 2012 factors in the gradual implementation of the Government’s proposed structural reforms outlined in the New Economic Model as well as the continuation of fierce competition for trade, talent and foreign direct investment for the years to come.

Malaysia’s rebound was aided by a marked revival in the exports sector after one of the most severe slumps in history, driven by regional and, increasingly, global demand. Manufacturing is becoming the locomotive of growth again after services had provided a beacon of strength through the crisis, says the report.

"Now that Malaysia has broadly recovered from the effects of the global economic crisis, it needs to return to its medium-term reform agenda," said World Bank chief economist for the East Asia and Pacific region, Vikram Nehru. "In this context, the recent announcement of the New Economic Model is very encouraging as it proposes to move Malaysia’s economy up the value chain and promote inclusive and sustainable growth led by innovation."

By encouraging businesses beyond the high technology sector to engage in innovation, broad sectors of the Malaysian economy can gain a much-needed competitive advantage, the report says. For this to happen, sources of innovation need to be energized.

"Multiple market failures as well as imperfections in the enabling environment hold back Malaysia’s innovation potential," says Philip Schellekens, the World Bank senior economist for Malaysia and the report’s principal author.

"The experience of countries around the world suggests that, if implemented well, the right combination of policies can make a big difference to a country in unleashing its innovation potential."

The report targets reforms in three dimensions for Malaysia:

Improving innovation capabilities for innovation by ensuring that firms have sufficient access to talent, technology and finance for innovation

Enhancing the driving force of innovation, by promoting and protecting the process of competition

Amplifying the impact of innovation, by concentrating efforts on promising product niches and concentrating economic activity in geographical clusters.

The main upside risk to Malaysia’s long-term outlook, says the report, is if the reform program under the New Economic Model is implemented comprehensively and expeditiously. On the flipside, however, the stalling of the reform momentum, could drive down growth prospects and worsen the government debt-to-GDP ratio. The strength of the global recovery remains a key near-term risk, which could surprise on the upside as well as on the downside.