Digital Malaysia: An Escape from the Middle Income Trap

Digital Malaysia: An Escape from the Middle Income Trap

One of the great issues with which the Economic Transformation Programme (ETP) is concerned is the so-called middle income trap — that is, the phenomenon by which poor countries vault rapidly to middle-income status, then never seem to break free into wealthy or developed-nation status — and how to break out of it. This is a public policy concern that has bedevilled the best and brightest economists across the globe, and there appears to be no easy solution.

Prime Minister Datuk Seri Najib Razak’s approach is revolutionary, and appears to turn conventional wisdom on its head. Most countries that try to leave middle-income status do so by moving up the value chain in production, that is, by moving from commodity and cheap industrial exports to high-technology and service exports. With the possible exception of South Korea, this has not been a successful strategy: No country attempting this transition has succeeded on this model.

Even China and India, for all of their formidable, and growing economic strength, are sandwiched inside this trap. Both have per-capita incomes well below developed-nation status, and alarmingly high portions of their populations live in abject poverty.

Najib’s approach is a bold gamble, that by changing the level of human, infrastructure, and development capital, along with a leap up the value chain, Malaysia can beat the trap that almost no one else can. To do this, the Government is attempting to accelerate the country’s already-prodigious rate of internet penetration and integration into our economic system.

In October, the Government launched the Digital Malaysia initiative, a specific attempt to drive Malaysia up the value chain both in terms of the product it exports to the world and the nature of the labour and infrastructure that produce that product.

The Government is building on a solid foundation. Malaysia is one of the leading advanced developing countries in terms of the integration of its internet activity and economic presence, and with our incredible rates of broadband penetration and connectivity, this will likely only increase.

Indeed, like many recently-advanced-developing countries, we begin with an advantage over older countries: Our telecommunications capital stock is new (and thanks to Government initiatives, cutting-edge), and so we are not stuck dealing with antiquated copper wire and primitive relays in our internet infrastructure. This has made broadband and wireless penetration even easier to achieve.

This initiative should also help overcome one of the persistent difficulties of the middle income trap: An overt reliance on foreign direct investment instead of domestically-produced investment. China is currently experiencing a variation on this, as its complete failure to stimulate significant internal demand remains stubbornly in place despite a decade of every policy trick in the book.

Here, again, the Government is building on a solid foundation, as its liberalising economic policy, careful privatisation of key companies, and other aspects of the ETP are designed to produce a Malaysia with strong internal demand and a strong capital base from which to invest.

Another aspect of the middle income trap is the environmental development trap: Higher-tech value chain production tends to produce higher environmental impact, and the developed nations tend to frown on doing business with open, unabashed polluters among developing nations. Here, too, a transition to a digital economy can help, by minimising our carbon footprint over time.

The Digital Malaysia is also implicitly an attempt to ape South Korea’s leap up the income chain. One of the problems Najib faced on taking office was a Malaysia where internal investment and technological growth were at a standstill, being outpaced by other countries (even those still in the middle income trap). South Korea teaches that one of the critical elements to moving into fully-developed status is to produce home-grown firms and industry that self-invest, innovate, research and grow.

Thus, giants like Hyundai and Samsung, and a thousand smaller but effective concerns, have helped South Korea because they do what advanced industries in developed nations do: They spend huge fractions of their revenue on competitive research, marketing studies, and internal evaluation. Their workers demand higher wages because they know the companies produce those revenues. The population demands better products and the market responds internally.

Without saying as much, Digital Malaysia is an attempt to kickstart this process at home, much as the ETP and Najib’s other reforms have been. An implicit part of this entire transformation process is Najib’s apparent belief that Malaysia’s best days remain before it, and that we can reach them within a decade.

By way of contrast, Pakatan Rakyat’s policies — whatever their complaints against the Government — presume that Malaysia is already as developed as it will ever be, and it is time to start splitting the spoils. There can be no greater contrast between the two coalitions’ core assumptions than this, and it will only become more apparent as GE13 approaches.

In the end, all of Najib’s transformation programmes may come to nothing. The middle income trap may be unbeatable. But if there is a way to beat it, Digital Malaysia looks to be part of the solution.