Malaysia’s Middle Income Trap and Us

The difference between Indonesia and Malaysia is the main issue arouse nowadays. Indonesia is still grappling with poverty, while Malaysia is talking about middle income trap. Indonesia is still facing the developing country’s basic problem, while Malaysia is aiming to join the elite group of developed countries.

To some extent, certainly Indonesia and Malaysia have similar initial condition to build their country in the wake of their independence from Western imperialism. On the onset both countries rely on the trade of abundant commodities to develop their countries. Both countries also invited foreign direct investment luring the investor with economic zones, tax holiday and low-waged workers. In 1990s the result was less different, both countries were dubbed as Asian miracles. It was 1998 financial crisis, revealed the real strength of both countries. Malaysia could get through the crisis in grace. Led by then Prime Minister Mahathir Mohammad, Malaysia turned down IMF’s aid and advice. Indonesia plunged into deep crisis, first economic crisis and then followed by political crisis toppling President Soeharto. Since then Malaysia development slowed down but still gaining its stature, unfortunately Indonesia never comes back as Asian miracle country.

At present Malaysia’s income per capita is 3 times more than Indonesia’s. Malaysia is categorized as middle income country and for them it is time to talk about the next step.

Previously Malaysian strategy was to produce low added value goods. It worked and raised Malaysian living standard, and developed Petronas twin tower and Multimedia Super Corridor. But it does not work now. Logically speaking, only high price products can bring the workers high wages. High price products are only created by sustainable innovation. And innovation is a strange thing that cannot exist just because you want it to exist. Even in America the innovation spirit of Sillicon Valley cannot be easily cloned to other parts of America. Innovation is a mixed ingredient such as education, property rights, and crazy investor. It needs also people who has abundant creativity and love to take risks.

Malaysia has identified their situation and what they want to achieve. They realize they are caught in middle income trap and why it happened. They promulgate New Economic Model (NEM) to spur economic growth and reach developed nation in 2020 through innovation.

I am very sad about Indonesia situation. We are wasting time on law enforcement, basic economic policy direction, regional elections calamity, high chilly price, poor infrastructure, etc. In consequence Malaysians appear with the new stage of development and Indonesians still come out with proposal of poverty eradication after 65 year freedom.