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 vulnerable households. Having revised its national poverty line in July 2020, 5.6% of Malaysian households are currently living in absolute poverty. The Government is focused on addressing the well-being of the poorest 40% of the population (“the bottom 40”). 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.
According to the World Bank’s Human Capital Index, Malaysia ranks 55th out of 157 countries. To fully realize its human potential and fulfil the country’s aspiration of achieving the high-income and developed country status, Malaysia will need to advance further in education, health and nutrition, and social protection outcomes. Key priority areas include enhancing the quality of schooling to improve learning outcomes, rethinking nutritional interventions to reduce childhood stunting, and providing adequate social welfare protection for household investments in human capital formation.
As an upper middle-income country Malaysia is both a contributor to the development of low- and middle-income countries, and a beneficiary of global experience in its own journey towards high-income and developed nation status.The World Bank Group Inclusive Growth and Sustainable Finance Hub in Malaysia (the Hub) serves as a partner to the country and its people in developing and implementing global development solutions. The Hub draws on global knowledge to further unlock Malaysia’s potential; catalyzes knowledge, research, and application for impact; and shares Malaysia’s development experience for the global development agenda.
The World Bank Group, through its Inclusive Growth and Sustainable Finance Hub in Malaysia, is committed to supporting the Government of Malaysia and her people, to implement reforms and achieve their aspirations toward an inclusive, developed nation. Key highlights over the past five years include the following areas, such as engaging the government and the private sector in policy reforms that have increased competition, reduced prices, and increased speeds for broadband internet via new analysis and research on Malaysia’s digital economy, established a new asset class for the world with the Green Sukuk, an Islamic green bond, pioneered in Malaysia by Bank Negara Malaysia (BNM) and the Securities Commission with the support of the World Bank Group, development of ‘A Green Taxonomy for Sustainable Finance’ with Bank Negara Malaysia, which will help the Malaysian financial sector classify economic activities transparently and consistently. From this experience, the World Bank Group published a Global Guidance document to help other countries develop their own green taxonomies, reduced the costs of doing business in Malaysia, through advisory support and workshops provided to the PEMUDAH special task force to facilitate business, modernized Malaysia’s indirect tax framework with the extension of the Sales and Services Tax to include digital transitions and helped make the direct tax framework more progressive with the introduction of a new top rate of personal income tax, through advice provided to the Ministry of Finance, increased investments in childcare by an additional allocation of about US$7 million and increased incentives for employers and employees to encourage female labor force participation, through close engagement with the Government based on the report Breaking Barriers: Toward Better Economic Opportunities for Women in Malaysia, conducted numerous capacity building sessions, notably Macro-Econometric Modeling workshops for MOF, technical workshops on the Long-Term Growth Model for economists and policy makers in government, and seminars with academia to build a robust community of policymakers.
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