Malaysia: Is Becoming A High-Income Nation A Dream Or A Reality?

Bukit Bintang Kuala Lumpur

Malaysia is gearing itself towards being a high-income economy. In a new series, iMoney considers what it means for Malaysians today and their finances.

In 2010, the Malaysian government rolled out the Economic Transformation Programme to turn the country into a high-income economy by the year 2020.

It is a comprehensive economic transformation plan to propel Malaysia’s economy into the high-income bracket where the programme seeks to lift the gross national income (GNI) to US$523 billion by 2020 and raise per capita income from US$6,700 to at least US$15,000. This meets the World Bank threshold for a high-income nation.

Malaysia is projected to achieve the set targets if GNI grows by 6% per annum.

The year 2020 is just three years away. According to Pemandu, the government arm tasked with seeing the programme through, the country is still on track.

Its chief, Datuk Seri Idris Jala, said Malaysia was merely 15% short of the GNI annual per capita criteria set by the Bank to be a high-income nation. He cited challenges such as the current global economic climate.

But with the rising cost of living and the perceived gloomy economy, is such a goal even attainable? What does being high-income nation mean to Malaysians?

Defining a high-income economy

For the 2017 fiscal year, this is how the World Bank defines the various economies:

GNI per capita
Low-income US$1,025
Lower middle-incomeUS$1,026 to US$4,035
Upper middle-incomeUS$4,036 to US$12,475
High-income economiesUS$12,476 or more
Source: World Bank

So, for Malaysia to be a high-income economy, it needs to have a GNI per capita of US$12,476 or more. The country’s GNI per capita stands at US$8,821 (RM39,231), according to 2016 estimates.

The difference between GDP, GNP and GNI

Gross Domestic Product (GDP) is the total market value of all goods and services produced in a country for a given time period. The time period most often used is one year, which is then compared to past years as a way to measure the improvement/decline of a country’s economic situation.

Some measurable items used in GDP calculations include sales of cars, food, salon services, financial services and even movie tickets.

Gross National Product (GNP) is also like the GDP where it is a broad measure of a nation’s total economic activity. It is the value of all finished goods and services produced in a country in one year by its nationals.

It includes income earned by citizens and companies abroad, but does not include income earned by foreigners within the country.

Gross National Income (GNI) has gradually replaced GNP in international statistics and while being conceptually identical, it is calculated differently.

The World Bank defines GNI as the sum of value added by all resident producers plus any product taxes (minus subsidies) not included in the valuation of output net receipts of primary income (compensation of employees and property income) from abroad.

Sources: Money Crashers, Investing Answers, World Bank

How does the World Bank categorises economies?

For starters, the words economy and country are one and the same. It is used interchangeably and does not imply political independence but refers to any territory for which authorities report separate social or economic statistics.

The World Bank divides economies into four income groupings – low, lower-middle, upper-middle and high – based on GNI per capita in US dollars, converted from local currency using the Bank’s Atlas method.

The Bank has been developing similar groups in the late 1970s but countries were not classified consistently. For example, “developing economies” were divided into low-income and middle-income; OECD membership was used to define “industrial” countries; and other economies were listed as “capital surplus oil exporters” and “centrally planned economies.”

Note: A country can always fall back to its previous level if its economic fundamentals are not strong. Being a developed nation is not just about meeting the numbers set by the inter-governmental organization, but it is also about achieving quality, equitable and sustainable growth for the long term.

Source: Global Economic Symposium

In 1989, the low-, middle- and high-income group thresholds were established based largely on operational thresholds that had previously been established.

In fact, these indicators are always up for revision. Last year, in its World Development Indicators, the World Bank decided to no longer distinguish between “developed” countries and “developing” ones in the presentation of its data.

The World Bank Atlas Method

In calculating gross national income (GNI—formerly referred to as GNP) in US dollars for certain operational and analytical purposes, the World Bank uses the Atlas conversion factor instead of simple exchange rates. The purpose of the Atlas conversion factor is to reduce the impact of exchange rate fluctuations in the cross-country comparison of national incomes.

The Atlas conversion factor for any year is the average of a country’s exchange rate for that year and its exchange rates for the two preceding years, adjusted for the difference between the rate of inflation in the country and international inflation; the objective of the adjustment is to reduce any changes to the exchange rate caused by inflation.

For more on the Atlas method, read this World Bank article.

So what does all of that mean to you and me?

One of the reasons is purchasing power, or the number and quality or value of goods and services that can be purchased with a unit of currency.

The ringgit has taken a beating and Malaysians are left complaining about how difficult it is to make ends meet or to purchase goods.

Generally, a higher real income – income of individuals adjusted for inflation – means a higher purchasing power.

The question therefore is whether incomes are rising faster than the cost of living? For example, if your cost of living rises at 2% but average income rises at 5% a year, then your real income is increasing by 3%  – that still makes you better off, despite the increased living costs.

If prices are rising, but your income stays the same, then your real income is falling, hence you are worse off because you cannot afford to buy as many goods.

So, raising incomes over the inflation rate will be a precondition of raising real living standards. The New Economic Model addresses these issues and among one of its observations is a skilled workforce.

But it also puts the question of income inequality out there for Malaysians to mull over. While absolute equality is nothing but a unicorn, what the country can afford to do is reach for a level of income inequality where the B40 group are able to afford a decent standard of living.

That, however, means introducing “unpopular” policies such as more labour protection and more taxation. On taxes, you are looking at taxing any type of capital income – property, shares and business income.

Some of the government’s recent moves such as the Employment Insurance System is one example of this.

It is undeniable that Malaysia is on the cusp of graduating from an upper-middle income to a high-income economy and that is what economic policymakers are working towards – especially with emphases in the news in recent years.

But are some segments of society actually prepared for the country to join the high-income club, because it is surely going to require some parting of ways with their money. That is the question.

*Now you are familiar with the definition, look out for our next high-income nation article next week.

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