How To Avoid Middle-Income Traps? Evidence From Malaysia – Analysis

The Johor-Singapore Causeway as viewed from the Woodlands Checkpoint in Singapore towards Johor Bahru, Malaysia.

The middle-income trap is a development stage that characterises countries that are squeezed between low-wage producers and highly skilled and fast-moving innovators. Cost advantages in manufactured exports that once drove growth start to decline in comparison with other lower-wage countries. Caught between these two groups, many middle-income countries are without a viable high-growth strategy. They are faced with new challenges, including social cohesion, a large pool of young people in search of jobs, as well as millions who still live in misery and poverty, particularly in lagging regions.

Aaron Flaaen, Ejaz Ghani and Saurabh Mishra,

Many developing countries are stuck in the middle-income gap. Focusing on Malaysia, this column argues that countries trapped in the middle-income conundrum will need to expand their ‘modern’ sectors. Traditional sectors with low productivity must shed labour, and high-productivity modern sectors (be they in goods or services) must hire more labour if they want to grow.


Many developing countries have successfully made the transition from low-income to middle-income status, thanks to rapid economic growth, but have subsequently got stuck in a middle-income trap. A great deal of research has been done on what explains much faster growth in the developing world than in the developed world (Acemoglu et al 2011, Baldwin 2011, Commission on Growth and Development 2008, Rodrik 2013, UNIDO 2011). But little is known about why so few countries succeed in making the transition from middle-income to high-income status (The Economist 2013). This is a worrying trend and an issue of major concern, especially because the majority of poor people now live not in low-income but in middle-income countries (Chandy and Gertz 2011, Sumner and Kanbur 2011). So what is a middle-income trap? What should policymakers do about it?

We examine these questions in the context of Malaysia, whose structural transformation from low to middle income has made it one of the most prominent manufacturing exporters’ in the world. However, in a competitive global economy, like many other middle-income economies, it is sandwiched between low-wage economies on one side and more innovative advanced economies on the other.