At the beginning of 1990s, the then Prime Minister Mahathir Mohamad set the goal that Malaysia in 2020 should become a high‐income economy and a vigorous and economically just middle class society. We are not far away from 2020. We therefore raise the question whether Malaysia is close to or far away of becoming a high‐income economy with this economic trap issue in the article. Instead, we focus on income inequality as an inroad to economy seen from an OECD country level perspective. In our examination of this question, we first discus different strands in the debate on transformation from middle‐income to high‐income economies. The debate has focused on the middle‐income trap issue especially from an economic perspective. It is an interesting and fruitful input to the transformation debate, particularly the question whether lack of industrial upgrading and deepening keeps middle‐income economies back from becoming high‐income economies. We do not deal so much with Malaysia's transformation problems. From our point of view, income inequality (high Gini coefficient) is an important but often neglected element in the mosaic to explain Malaysia's transformation problems both in a domestic and global policy perspective. We examine income inequality and transformation to a high‐income economy from different angles. We look into the business structure; income distribution compared with high‐income economies; household income distribution, consumption, lifestyle and the middle class; education and tax system as lever or barrier for reducing income inequality; old and new political coalitions as drivers for maintenance or change of income inequality. Through this analysis, we seek at the same time to highlight whether Malaysia is close to become a vigorous and economically just middle class society.
Policy Implication
- Malaysia is not far away of becoming a high‐income economy seen from a World Bank per capita income by gross national income (GNI) measurement. But it is far away of being an OECD high‐income economy. Our research results would recommend the new government coalition Parakan Harapan to look closer into what barriers the high‐income inequality in Malaysia create for becoming an OECD high‐income economy.
- In its 61‐year old regime, the BN coalition has been successful in creating a new entrepreneurial class through its ethnic favouritism policy. We have shown that this policy has had serious negative implications for developing a more just income distribution. The old government coalition realised that it was very difficult to scrap the ethnic favouritism policy because strong political groups within UMNO, the leading party in the BN coalition, want to preserve this ethnic favouritism policy. The new government coalition, which has declared that it aims at a more equal income distribution, should invite representatives from these political groups to dialogue meetings about how the income distribution should be in the coming high‐income economy.
- There seems to be an awareness in the new government coalition of the problems of high‐income inequality and bottom 40 per cent (B 40 per cent) difficulty of climbing up i in the middle‐class. Our analysis would recommend that the new government to explore education and tax system as vehicles for uplifting B 40 per cent.
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