Question

In the midst of pandemic COVID-19, discuss critically how Malaysia can enhance the productivity towards achieving the status of developed country and higher income economy?

Answer 1

COVID-19 is a humanitarian crisis on a global scale. The virus continues to spread throughout the globe, placing health systems under unprecedented stress in the battle to save lives. The human scale of this tragedy is set to worsen as the virus spreads to lower income countries with weaker healthcare systems. Malaysia is being hit by two shocks—the spread of COVID-19 and the sharp decline in oil prices. The first COVID-19 confirmed cases was reported on January 25, 2020. A strict Movement Control Order (MCO), introduced on March 18, has been effective until May 4. Reopening the economy. The authorities started easing restrictions by allowing most businesses to reopen under a Conditional Movement Control Order (CMCO) from May 4. A Recovery Movement Control Order (RMCO) took effect on June 10, lifting most restrictions on domestic activities and movement. Schools started gradually reopening from June 24, with all students are expected to return by July 22. Borders remain closed and overseas travel restricted until at least August 31. A fiscal stimulus package of RM 6 billion (0.4 percent of GDP) was approved on February 27, 2020, including increased health spending; temporary tax and social security relief; cash transfers to affected sectors; and rural infrastructure spending. Additional measures—electricity discounts and temporary pay leave—for RM 0.62 billion (less than 0.1 percent of GDP) were announced on March 16, 2020. Some investment spending planned for 2020 is being frontloaded. A second stimulus package of RM 25 bn (1.7 percent of GDP) was released on March 27, 2020, including additional health spending; cash transfers to low income households; wage subsidies to help employers retain workers; and infrastructure spending in East Malaysia. The government also setup a RM 50 bn fund for working capital loan guarantees for all COVID-19 affected businesses.

Since gaining independence in 1957, Malaysia has successfully diversified its economy from one that was initially agriculture and commodity-based, to one that now plays host to robust manufacturing and service sectors, which have propelled the country to become a leading exporter of electrical appliances, electronic parts and components. Malaysia is one of the most open economies in the world with a trade to GDP ratio averaging over 130% since 2010. Openness to trade and investment has been instrumental in employment creation and income growth, with about 40% of jobs in Malaysia linked to export activities. After the Asian financial crisis of 1997-1998, Malaysia’s economy has been on an upward trajectory, averaging growth of 5.4% since 2010, and is expected to achieve its transition from an upper middle-income economy to a high-income economy by 2024. However, the COVID-19 (coronavirus) pandemic has had a major economic impact on Malaysia, particularly on its vulnerable households. With less than 1% of Malaysian households living in extreme poverty (according to the official national poverty line), the government’s focus has shifted toward addressing the well-being of the poorest 40% of the population . This low-income group remains particularly vulnerable to economic shocks as well as increases in the cost of living and mounting financial obligations. Income inequality in Malaysia remains high relative to other East Asian countries but is gradually declining. While income growth for the bottom 40 has outpaced the top 60 over much of the last decade, the absolute gap across income groups has increased, contributing to widespread perceptions of the poor being “left behind.” Following the removal of broad-based subsidies, the government has gradually moved toward more targeted measures to support the poor and vulnerable, mainly in the form of cash transfers to low-income households. Malaysia’s near-term economic outlook will be more dependent than usual on government measures to sustain private sector activity as the shock of COVID-19 reduces export-led growth, and as a depleted fiscal space limits public investment-led expansion. Over the longer term, as Malaysia converges with high-income economies, incremental growth will depend less on factor accumulation and more on raising productivity to sustain higher potential growth. While significant, Malaysia’s productivity growth over the past 25 years has been below that of several global and regional comparators. Ongoing reform efforts to tackle key structural constraints will be vital to support and sustain Malaysia’s development path.