Pulling Malaysia out of the middle-income quicksand

Senator Abdul Wahid Omar is not your typical politician. The ninth of 11 children, he comes from a humble background, and was poached by prime minister Najib Razak to join his team with no prior political experience. Sixteen months into the job, Mr Omar is determined to extricate Malaysia from an 18-year middle-income trap.

Malaysia’s ethnic and religious tensions could complicate things. The New Economic Policy, the preferential economic policy for ethnic Malay people, was launched in 1971 and is still a source of unease. Large Chinese and Indian populations have sometimes felt excluded.

In vocabulary worthy of a political veteran, Mr Omar embraces this diversity. “I think of Malaysia’s multi-racial, multi-religious aspect not as a problem. Maybank’s diverse set of employees, for example, has contributed to a strong and sustainable performance relative to competitors within Malaysia and across the south Asian region,” he says.

Destination high-income

Mr Omar is buoyant about Malaysia reaching high-income status by 2018. Gross national income per capita hit $10,106 in 2013, up by $6283 since 2000. The government’s target for 2020 is $18,000 (the high-income floor is $15,000). Gross domestic product (GDP) is growing, too. After slumping from 5.6% growth in 2012 to 4.7% in 2013, the economy grew by 6.4% in the second quarter of 2014.

Malaysia has also excelled in eradicating poverty. The poverty incidence rate dropped from 49.3% in 1970 to a quasi-nil 1% by mid-2014.

Increasing higher value-added jobs and shifting the economy’s focus to the tertiary sector are key structural changes under way. Raising the wage-to-GDP ratio is essential to Mr Omar. “We must make sure the people are able to feel the overall improvement. We want to make sure workers’ rewards are fair relative to capital providers,” he says.

The ratio of wages to GDP grew from 29.3% in 2008 to 33.6% in 2013. “It is still low compared with, say, the UK, where the ratio is more than 50%. But we don’t want to reach that level to avoid losing competitiveness or having a high tax regime. We ideally want to reach a 40% ratio on an after-tax basis,” says Mr Omar.

In terms of economic transition, manufacturing is down to making up about one-quarter of the economy, while the tertiary segment now accounts for 55% of GDP.

Technology is also growing significantly. “Biotechnology has been one of the new growth areas. I am particularly excited about our home-grown agri-based biotechnology. It is time for us to focus on how we can commercialise some of these inventions, such as palm oil-based innovation technology,” says Mr Omar.

Striking a balance

Despite healthy growth in the banking sector, Mr Omar says that Malaysia will not focus on financial services per se. “We want to make sure the financial sector plays a supportive role for other sectors and for overall economic growth," he says.

In response to growing demand, Islamic finance has been driving Malaysia’s financial sector development. “Some three years ago, we decided that Malaysia could play a leading role in this space. We invested a lot to develop the right legal framework to accompany this growth,” says Mr Omar.

Islamic finance as a proportion of Malaysia’s financial sector has been growing at a pace, currently accounting for 22% of the total industry. About two-thirds of sukuk issues globally so far have been done out of Malaysia.

“When talking about debt capital markets and Islamic finance, our markets’ depth and breadth is unrivalled within south-east Asia,” says Mr Omar.

Mr Omar is also reducing government expenditure through fuel subsidy cuts, which have historically contributed to the state’s deficit. Fuel subsidies in 2013 totalled more than RM23.5bn ($7.24bn). “That is a lot of money and it clearly is not sustainable. We need to reduce expenditure by cutting subsidies. We got the ball rolling last year by reducing petrol and diesel subsidies by 20 cents per litre, and by removing sugar subsidies,” says Mr Omar.

Fuel subsidy cuts have weighed on inflation, currently at 3.4%. The consumer price index will jump further to probably 5%, after a 6% general sales tax is implemented in April 2015. However, Mr Omar thinks inflation will normalise at 4% by April 2016.

Saving on fuel subsidies means the state can spend more on building schools, hospitals and improving public transport. Funds can also be redirected towards the 'people assistance programme', which provides funds and insurance plans to the population’s lowest income brackets.