By: Professor Dato Dr Ahmad Ibrahim
Budget 2025 has raised some concern. The increase in minimum wage from RM1500 to RM1700 is most discussed. The decision to pay EPF to foreign workers is not welcome. In the plantation sector, both news are disturbing especially for small plantation companies. The only concession is the revised windfall tax threshold. Even that, the adjustment is small. But economists say the move to increase wages is inevitable as the majority struggle with cost of living issues. Many agree reform is painful. But it is inevitable.
The transition to a high-income economy for Malaysia is challenging. Malaysia’s economy has been historically driven by manufacturing, especially in electronics, and commodities like palm oil and rubber. A transition to high-income requires a shift toward high-tech industries. This could result in job displacement. Workers may find themselves jobless if they lack the new skills needed. This requires large-scale retraining efforts.
Automation could further accelerate job losses in low-skilled roles. A high-income economy demands a highly skilled workforce proficient in areas such as STEM, as well as in creative and innovative industries. However, Malaysia’s education system has been criticized for not keeping pace with the demands of a global, technology-driven economy. Graduates often lack the critical thinking and problem-solving skills needed. Those in low-skill jobs may struggle to transition to new industries, leading to wage stagnation or unemployment.
As the country transitions to a high-income economy, there is a risk that the benefits of growth will be unevenly distributed, with wealth concentrating among the highly skilled. This could exacerbate existing inequalities. Wealth and economic opportunities are often concentrated in urban centres, while rural areas, dependent on agriculture or low-skill industries, may be left behind, leading to social polarization, potentially straining social cohesion.
Malaysia’s productivity growth has been relatively low compared to other high-income economies. Moving to a high-income status requires sustained productivity gains, but some industries may resist modernizing due to high costs. The need for businesses to invest in new technologies and infrastructure could lead to financial strain, especially for small and medium-sized enterprises (SMEs).
Malaysia has been in the “middle-income trap,” for years now. The country cannot compete with low-income economies on cost or with high-income economies on innovation. This is a critical challenge in making the leap to high-income status, as the country may struggle to foster the level of innovation, research, and development needed to sustain a high-income economy. Malaysia needs to enhance its global competitiveness by moving up the value chain, but this transition can be slow and painful. Moving toward high-income, living costs, particularly in urban areas, are likely to rise. However, if wage growth doesn’t keep pace with inflation, this could lead to the erosion of disposable income. Middle- and lower-income families may experience declining purchasing power, which can fuel dissatisfaction and create social unrest. Real estate prices in urban centres could soar, putting homeownership out of reach for many citizens, further exacerbating inequality.
The shift to a high-income economy often requires significant infrastructure expansion. This can lead to environmental degradation if not managed properly. Malaysia’s reliance on commodities like palm oil, oil and gas, and other natural resources could limit its sustainability agenda, making it difficult to balance economic growth with environmental conservation. As Malaysia grows, environmental challenges such as climate change could pose risks to industries like agriculture and tourism, further complicating the transition.
Achieving high-income status requires agile governance. Slow decision-making processes, and bureaucratic hurdles can impede necessary reforms. If policies do not support innovation, and skills development, the transition to a high-income economy could stall. The government faces the challenge of maintaining social welfare programs and subsidies while also fostering economic growth and innovation. Reducing fuel subsidies or social safety nets to prioritize investments in growth can lead to public discontent.
As Malaysia transitions, it faces stiff competition from other emerging markets. Competing with countries like Singapore, South Korea, and Japan, which are well-established high-income economies, will require significant economic agility. Global economic slowdowns, or disruptions in key industries example semiconductors could derail Malaysia’s trajectory toward high-income status. What is clear is that high income would only come with high cost.
The author is an Associate Fellow at the Ungku Aziz Centre for Development Studies (UAC), Universiti Malaya, and may be reached at uacds@um.edu.my
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