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Breaking free from the middle-income trap

New Straits Times (online), 31 May 2016 - By Prof Dr Nik Rosnah Wan Abdullah. OVER the past decades, many low-income countries (LICs) have succeeded in becoming middle-income countries (MICs), yet only a few have managed to leap to high-income status.

The World Bank estimated that out of 110 MICs in the 1960s, only 13 made it to high-income status. The rest remained in the “middle-income trap” — unable to compete with low-income, low- wage economies in manufacturing exports and unable to compete with advanced economies in high skill innovations.

Of the 13 countries that were able to transition from middle to high-income status, five were from East Asia — Hong Kong, Japan, South Korea, Taiwan and Singapore. Among the Asian countries caught in the middle-income trap is Malaysia.

According to the Global Competitiveness Report 2014-2015, Malaysia’s economy was the highest ranked among the developing Asian economies, ranking 20th in the world. Nonetheless, Malaysia needs to be in full shift gear in its development strategy in looking for and harnessing drivers for maintaining growth, such as productivity, innovation and competitiveness.

There is a particular view that growth does not occur randomly. Rather, it responds to the quality of public policies and institutions, and the efforts and entrepreneurship of the private sector.

There is an agreement that government action (or inaction) can and does affect the growth of the country.

South Korea has been singled out as a model of impressive rapid growth from a low-income to a high-income country, with a number of public policies that Malaysia can draw upon. Such measures include a high level of government efficiency and leadership, and modern and productivity-enhanced industrialisation.

A particular lesson is that investing in human capital is critical. There is a strong correlation between quality education and economic performance. A quality education system can stimulate creativity and in turn fuel the innovation process.

From Education Ministry records in 2012, Malaysia did well in terms of access to education, with enrolment rates having risen substantially at every education level. However, the outcome has not been encouraging.

Malaysia’s position in the World Bank’s Knowledge Economy Index is generally the same as two decades ago (48th out of 145 countries). The index records the capacity to produce, embrace and diffuse knowledge and to make effective use of knowledge. International comparisons show that Malaysian student competencies are far from satisfactory.

While both basic skills and advanced skills are important for developing countries, only quality education can deliver the advanced skills needed.

Malaysia’s focus on technical and vocational education and training (TVET) to improve the competencies of the workforce and accelerate the supply of skilled labour is to be lauded. Indeed, internationally, TVET is known as a potent means for fast-tracking technological progress, citizens’ capacities, economic growth and national development.

As revealed by Education Minister Datuk Seri Mahdzir Khalid, the Economic Transformation Programme (ETP) will require 2.5 times more TVET enrolment by 2025 for 60 per cent of jobs. However, the stigma enveloping TVET remains a significant problem as shown in the slow take-up rate.

From Economic Planning Unit records in 2010, only 10 per cent of students enrolled in upper secondary TVET vocational training, compared with an average enrolment rate of 44 per cent in the Organisation for Economic Cooperation and Development countries, pointing to a crucial need to increase enrolment rate for the supply of skilled workers.

Innovation is also the name of the game. From the World Bank’s Knowledge Economy Index Report 2012, a comparison with high income and other East Asian countries shows that Malaysia lags in the areas of innovation and education.

For innovation-based economies like South Korea, Japan, and Taiwan, the values of Gross Domestic Expenditure on Research and Development (GERD) and educational investments as a percentage of Gross Domestic Product (GDP) are 3.4, 3.3 and 2.9 per cent, respectively. South Korea, for example, invests 7.6 per cent of its GDP in education, and Taiwan and Japan invest 5.8 and 4.9 per cent, respectively.

In contrast, Malaysia’s expenditure in education was 4.5 per cent of its GDP; GERD to GDP was 1.13 per cent and research and development (R&D) expenditure was 1.3 per cent of GDP, with the business sector as a major contributor (RM6.8 million, 64.45 per cent) of R&D, followed by institutions of higher learning at RM3 million (28.67 per cent) and government agencies and research institutes at RM730,000 (6.88 per cent).

There is a limited collaboration between industry and research institutes which results in R&D output not being linked to indus try demand

Another task is to foster a climate for growth of the entrepreneurial spirit by developing strategies to increase outputs of knowledge-intensive technologies and high value-added products. This, in turn, depends on the ability to establish the necessary ecosystem to trigger R&D, innovation, and entrepreneurship activities.

All these would require effort not just by the government but also the public, for a major shift to an entrepreneurial mindset and entrepreneurial skills that could allow one to push boundaries and generate ideas that can be applied not just to creating businesses, but also to changing public policy, improving the country’s economy and changing the quality of our lives.

The writer is with the Tun Abdul Razak School of Government,
Universiti Tun Abdul Razak


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