Can Political Dynamics Cause Thailand and Malaysia to Fall into the Middle-Income Trap?

January 15, 2014

By Véronique Salze-Lozac'h

Despite the troubling political unrest and protests that continue to unfold across Asia in 2014, the New Year actually looks good for the region’s economies. Asia continues as one of the world’s fastest growing regions, projected to experience 5.25 percent growth in 2014, with emerging Asia expected to grow at an even higher pace of over 6 percent, according to the IMF. As my team and I blogged last week, these rosy projections certainly give reason for optimism. However, such optimism must be coupled with caution, as some of Asia’s greatest economic success stories face the very real threat of falling into the dreaded “middle-income trap.”

While Asia continues to set pace as the world’s fastest growing region, some Asian middle-income countries are showing signs of economic slowdown and face stiff competition from lower-cost economies. Photo/Karl Grobl

The middle-income trap (MIT) concept refers to the risk of a country that has experienced rapid growth based on low-wage, unskilled labor, low-added value manufacturing, and heavy reliance on exports, stagnating at the middle-income level and failing to graduate to upper-income status. The implications that could result from this economic growth slowdown in middle-income countries are of serious concern to economists and political decision-makers.

To shed light on the situation, The Asia Foundation just launched a new report in Bangkok that examines the underlying political and economic dynamics that may keep two middle-income countries – Thailand and Malaysia – from making the reforms needed to advance their countries to upper-income status. Rather than relying on technical economic analysis only, the two case studies in the report look at the political barriers to continued rapid development that may hamper Malaysia’s and Thailand’s rise to the same level of success enjoyed by the “Asian Tiger” economies.

Key points from the Malaysia case study include:

• Malaysia’s impressive poverty reduction and growth record was interrupted by the 1997 Asian Financial Crisis. More recent annual growth rates of around 5 percent remain respectable by international comparison but may fail to translate into real economic progress if not accompanied by political and institutional change.
• Despite a raft of bold policy initiatives and long-term plans, Malaysia is struggling to address identified challenges that prevent or delay the shift to high income status, including lack of innovation, low investment in technology, declining standards in education, high labor costs, and stagnant productivity.
• Leaders have ensured political stability in the country by safeguarding the interests of the country’s majority, as well as those interests of the minority. However, insufficient checks and balances have led to increasing concentration of power within the executive, persistence in patronage politics, and opaque governance practices.
• As in Thailand, Malaysia has successfully reduced absolute poverty but income inequality and relative poverty remain high, and real wages low.
• Behind the economic challenges lies the larger overarching problem of weak governance that has compromised the implementation of sound economic policies.
• Despite some recent positive policy innovation, reform measures continue to focus on the symptoms alone. Reform efforts have been contested vigorously by strong pressure groups that benefit from maintaining the status quo.
• Lesson: Reforms and policy action must promote more inclusive and less discriminatory economic growth, equality of opportunity, electoral and government transparency, further decentralization, and the strengthening of independent institutions.

Thailand:

• Export-led development strategies based on cheap labor, exploitation of natural resources, and relatively low-technology foreign direct investment brought about impressive growth performance during the 1980s and early 1990s.
• Increased per capita income obscures the fact that many households are struggling to make ends meet.
• Other problems include a wide range of environmental and social concerns as well as ongoing political instability.
• An increasingly strong evidence base suggests that persistent inequalities limit growth and contribute to political unrest.
• Public expenditure in education and other sectors has long been disproportionately skewed toward the capital city, Bangkok.
• Education is identified as a key driver of growth and of increasing importance for middle-income countries. Data show that quality matters more than quantity and that increased public expenditure is not a guarantee of higher educational quality.
• Technical recommendations for increasing productivity and tackling barriers to more inclusive economic growth have repeatedly been made, but are only partially acted upon. The principal obstacle to their adoption is the persistence of entrenched and vested interests at national and local levels.
• Whether successive Thai governments were elected democratically or came to power by other means, they have been founded on oligarchic politics. Overlapping power centers contest for dominance.
• There has been little interest from any major political actors in institutional reforms to support a more sustainable, just, and democratic society.
• Lesson: Priority measures to address these problems include increased accountability and further promotion of decentralization, democratization, and civil society activism in order to create the space for necessary reforms.

Possible solutions to avoid the middle-income trap, particularly the technical ones, are topics frequently debated with great enthusiasm among researchers, academics, governments, and the international community alike. We hope that this report calls attention to the political realities underscoring the reforms that are needed for Asian economies like Thailand and Malaysia to avoid what need not be inevitable.

The full report is available on The Asia Foundation’s website.

Véronique Salze-Lozac’h is The Asia Foundation’s senior director for Economic Development Programs based in Bangkok. She can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not necessarily those of The Asia Foundation.

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