Introduction
Just a few years after independence from the United Kingdom in 1957, had the World Bank’s country‐classification system been in place, Malaysia would have qualified as a middle‐income country. Since then, it has continued to enjoy relative prosperity, initially as a commodity exporter (rubber, tin, then palm oil and petroleum), with total income rising at 6–7 percent each year from 1970 until 2000. As a result, the number of poor persons (that is, those consuming less than the purchasing power parity US$1 per day metric) has fallen to fewer than a million, or 3.9 percent of the population of 26.2 million people (compared to about half of the population in 1970).
With a per capita yearly income measured at about US$5,300 in 2007, Malaysia is now an upper‐middle‐income country. It has gone through several of the structural changes that its income comparators have experienced; nevertheless, it remains highly dependent on favorable external terms of trade to support domestic economic growth (figure 1). The share of agriculture has fallen from above 30 percent of GDP to below 10 percent, and that of industry (manufacturing) rose from 27 (12) to about 50 (31) percent. The initial growth response to the purposeful and increased industrialization of the economy from the mid‐1970s was favorable, with volatility declining and the overall rate of growth rising towards 10 percent per year in the late 1980s (figure 2). FDI and manufactured exports (especially high technology products) played an important role, with the latter rising from 5 percent of total exports to above 75 percent today, even as the share of total exports rose from 40 percent (mainly commodities) to 80 percent of GDP.
Capital formation in the economy stepped up sharply in the late 1980s, with a government‐led heavy industry push paralleling a high rate of domestic and foreign private investment (from an average 17 percent of GDP in the 1960s to 23 percent in the 1970s and 29 percent in the...