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Aiming High Navigating the next stage of Malaysia’s development CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY Aiming High Navigating the next stage of Malaysia’s development © 2021 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Aiming High Navigating the next stage of Malaysia’s development Acknowledgements This report was prepared by a core World Bank team consisting of Richard Record (task team leader), Achim Schmillen (co-task team leader), Kenneth Simler (co-task team leader), Bradley Larson, Mahama Samir Bandaogo, Norman Loayza, Rajni Bajpai, Shakira Teh Sharifuddin, Smita Kuriakose and Yew Keat Chong. Chapter 1 was prepared by Bradley Larson and Yew Keat Chong, with inputs from Shakira Teh Sharifuddin and Richard Record. Chapter 2 was prepared by Sharmila Devadas, Jorge Guzman, Young Eun Kim, Norman Loayza and Steven Pennings. Chapter 3 was prepared by Smita Kuriakose, with inputs from Haris Tiew, Antoine Coste, Juni Tingting Zhu, Jan Orlowski, Graciela Miralles Murciego, Seidu Dauda, Rekha Reddy, Ravi Gupta and Mahama Samir Bandaogo. Comments were provided by Cecile Thioro Niang, Mohammad Amin and Ana Maria Aviles. Chapter 4 was prepared by Achim Schmillen, Amanina Abdur Rahman, Harry Moroz, Harsha Aturupane and Hui Sin Teo with inputs from Monica Biradavolu, Soonhwa Yi and Sachiko Kataoka. Chapter 5 was prepared by Rajni Bajpai, Kai Ostwald and Jeevakumar Govindasamy, with inputs from Siddharth Sharma, Bradley Larson, Carmen Loo, Natasha Halid and Abdullah Maamor Ibrahim. Comments were provided by Alma Kanani, Bernard Myers and Deryck Brown. Chapter 6 was prepared by Kenneth Simler and Zainab Ali Ahmad, with inputs from Monica Biradavolu, Vijayendra Rao, Marie Stella Ambrose and Wei San Loh. Chapter 7 was prepared by Shakira Teh Sharifuddin, with inputs from Yew Keat Chong, Mahama Samir Bandaogo, Rozani Osman and Richard Record. Several chapters of the report drew upon the findings of a joint World Bank-University of Malaya qualitative living standards survey, undertaken by a team of researchers led by Niaz Asadullah. Overall guidance was provided by Mara Warwick, Ndiame Diop and Firas Raad. Hassan Zaman, Aaditya Mattoo, Achim Fock, Lars Moller, Rinku Murgai, Philip O’Keefe, Souleymane Coulibaly, Gabriel Demombynes, Mei Ling Tan, Andrew Mason, Ergys Islamaj, Francesca de Nicola and Frederico Gil Sander provided helpful comments and input during the preparation process. The peer reviewers were Gabriela Inchauste, Simon Davies and Ximena Del Carpio. Joshua Foong, Min Hui Lee and Daniel Subramaniam led external communications and the production and design of the report. Irfan Kortschak provided editing assistance, while Aziaton Ahmad provided administrative support. Kane Chong designed the report and its cover, while Francis Sim provided design and layout assistance. Photography by Samuel Goh. Stock images from bigstockphoto.com. The report benefitted from close partnership and extensive discussion with staff of the Economic Planning Unit, the Ministry of Finance and Bank Negara Malaysia. 4 Aiming High – Navigating the Next Stage of Malaysia’s Development Abbreviations ASEAN Association of Southeast Asian Nations MASCO Malaysia Standard Classification of Occupations Atlas of Social Protection Indicators of Resilience MNC Multi-National Corporation ASPIRE and Equity MVA Manufacturing Value Added B40 Bottom 40 percent (of the population) NACP National Anti-Corruption Plan BNM Bank Negara Malaysia NCD Non-communicable Disease BR1M 1Malaysia People’s Aid (Bantuan Rakyat 1Malaysia) NDP National Development Planning BSH Cost of Living Aid (Bantuan Sara Hidup) NEM New Economic Model BTI Bertelsmann Stiftung Transformation Index Organisation for International Cooperation and OECD COL Critical Occupations List Development COVID-19 Coronavirus Disease 2019 PISA Programme for International Student Assessment CPI Corruption Perceptions Index PLI Poverty Line Income Comprehensive and Progressive Trans-Pacific PMB Private Member Bills CP-TPP Partnership PRO Public Research Organization CSO Civil Society Organization R&D Research and Development DOSM Department of Statistics Malaysia RCA Revealed Comparative Advantage E&E Electrical and Electronic RCEP Regional Comprehensive Economic Partnership EAP East Asia and Pacific RPGT Real Property Gains Tax EIU Economist Intelligence Unit SC Securities Commission Malaysia ESCS Economic, Social, and Cultural Status SDGs Sustainable Development Goals ESG Environmental, Social and Corporate Governance SDR Special Drawing Rights FDI Foreign Direct Investment SME Small and Medium Sized Enterprise FLFP Female Labor Force Participation SOE State-Owned Enterprise GDP Gross Domestic Product SPV Shared Prosperity Vision GLC Government Linked Corporation SRI Sustainable and Responsible Investment GLIC Government Linked Investment Corporation SST Sales and Services Tax GNI Gross National Income T20 Top 20 percent (of the population) GPI Ginarte Park Index TFP Total Factor Productivity GTFS Green Technology Financing Scheme Trends in International Mathematics and Science TIMSS GVC Global Value Chain Study HCI Human Capital Index TiVA Trade in Value Added HEI Higher Education Institution TVET Technical and Vocational Education and Training HHI Herfindahl-Hirschman Index UHC Universal Health Coverage HIS Household Income Survey UN United Nations ICT Information and Communications Technology V-DEM Varieties of Democracy IFC International Finance Corporation VBI Value Based Intermediation IPR Intellectual Property Rights WBG World Bank Group Department of Social Welfare (Jabatan Kebajikan WDI World Development Indicators JKM Masyarakat Malaysia) WDR World Development Report LTGM Long Term Growth Model WIPO World Intellectual Property Organization M40 Middle 40 percent (of the population) Aiming High – Navigating the Next Stage of Malaysia’s Development 5 Table of Contents Acknowledgements 4 Abbreviations 5 Summary 8 CHAPTER 1 Preparing for the high-income transition 14 Malaysia needs an enhanced social contract for sustainable growth as a high-income and developed economy 15 A growth model based on factor accumulation has delivered high returns over past decades 22 Malaysia will achieve high-income status, but at a slower pace than its predecessors 24 Boosting productivity while ensuring equitable access to good jobs 30 Accountable institutions that serve the interests of the people 33 Broader access to well-paying jobs and a stronger social safety net 36 What will it take for Malaysia to become a high-income and developed economy? 38 References 39 CHAPTER 2 Revitalizing long-term growth 40 Malaysia will soon have a high-income economy 41 The historical growth drivers are in decline 42 A business-as-usual scenario shows a slowing rate of growth 50 Reforms to the drivers of growth will boost the growth trajectory 52 A combination of reforms results in the strongest growth pathway 61 What will it take to boost long-term growth? 62 References 63 CHAPTER 3 Boosting competitiveness 64 Raising productivity growth is the key to building a more competitive economy 65 Manufacturing has played a significant role in Malaysia’s growth 66 Accelerating productivity growth is Malaysia’s central economic policy challenge 71 Malaysia needs to embrace an innovation-based