Breakingviews - Malaysia throws cash into middle-income trap

A view of Kuala Lumpur skyline in Malaysia February 16, 2017. REUTERS/Edgar Su

TOKYO (Reuters Breakingviews) - Prime Minister Najib Razak says his 2018 “mother of all budgets” will propel Malaysia into the ranks of the world’s top economies. Its $1.5 billion of handouts will enrich farmers, fishermen, rubber traders and other interests. In terms of upgrading competitiveness, it falls woefully short.

Najib has talked a good reform game since he assumed control of the United Malays National Organisation – the party that has dominated the country for 70 years – in 2009. He pledged to dismantle a 46-year-old affirmative-action programme championed by his father, former Prime Minister Tun Abdul Razak, which afforded the ethnic Malay majority preferred access to government jobs, universities and housing. He also promised to lower trade barriers. But apart from implementing a goods and services tax in 2015, nothing much else has happened.

Instead Najib stuck with the low-wage manufacturing formula, delaying a transformation to a higher-value services economy. Even as Chinese companies began eating into Malaysia’s export market share, Najib protected government-linked companies at the expense of the more competitive private sector. As a result, per-capita income looks stalled at $9,500 a year, suggesting Malaysia is snared in the “middle-income trap”, a term referring to the economic plateau many developing nations reach as incomes near $10,000 per annum and cheap labour cost advantages evaporate.

The scandal surrounding 1Malaysia Development Berhad may have sapped what appetite for reform the prime minister had left. Set up by Najib, the fund remains at the heart of multibillion-dollar embezzlement and money laundering probes ranging from Washington to Zurich.

This latest budget is heavy on goodies, such as eliminating tolls on highways through politically contested districts, and it throws more bonuses at the bloated civil service. It’s otherwise devoid of fresh ideas to increase innovation, boost wage equality, reduce living costs, or share more of the 5.2 percent growth rate with non-Malays. Since 2015 Malaysia has fallen five places in the World Economic Forum’s competitiveness report, to 23rd from 18th.

The giveaways may be an attempt to fight off a comeback by Mahathir Mohamad, whose premiership, which ran from 1981 to 2003, is credited for transforming the country into an Asian tiger. Mahathir dismissed Najib’s spending priorities as “sweets”.

The government denies that economic progress has paused. But this complacent budget won’t move Malaysia forward.


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