Introduction

Distinguished guests, ladies and gentlemen. Assalamu’alaikum and good morning. It is my great pleasure and honour to be here. Thank you to the Faculty of Economy, UUM for giving me the opportunity to speak this morning.

Malaysia today is a highly diversified economy. We have a thriving E&E and petrochemical industry base. We have wide-ranging services that serve both our local and global needs. And we have a supportive financial sector that continues to facilitate real economic activity. But Malaysia did not start off this way. In the first decade of independence, our poverty rate was at 49.3%. Tertiary education was an exception, not the norm. Tin and rubber accounted for a sizeable chunk of our exports.

Our economic journey to where we are today is not one of sheer luck. While Malaysia has always been endowed with natural resources, today was never a given. We had to earn it. In my remarks today, I will reflect on Malaysia’s successes and setbacks in its transformation journey. I will touch on the global forces that we have to contend with, and the areas that we have to focus on to set us on a path towards a high-income nation with better living standards for the Rakyat.

Ladies and gentlemen.

Importance of institutions and industrial policies

Let me start by highlighting two important factors to achieve sustainable and inclusive economic development.

The first centres around the importance of inclusive institutions. In the book “Why Nations Fail – The Origins of Power, Prosperity and Poverty”, Nobel laureates Daron Acemoglu and James A. Robinson asked a simple yet thought-provoking question: why are some countries richer than others? The answer they found is not geography, culture or climate. It is the presence of inclusive institutions – defined as fundamental rules and structures of society that ensure equal access to economic opportunities for all citizens, not just a privileged few.

Several features are common across countries with inclusive institutions. First, they have fair laws and property rights which create confidence for entrepreneurs to invest and innovate. Second, they operate under market-based structures which promotes not only competition, but also choice. And perhaps most importantly, they focus on institutions that provide public services which level the playing field such as education, healthcare and infrastructure that give everyone a fair chance to succeed.

Think of these inclusive institutions as the foundation of a house. Without strong foundations, no matter how well you design the upper floors, the structure will be unstable.

The second factor where economic literature has evolved significantly is on the role of industrial policies. Industrial policies have often been criticized as distortionary and protectionist. In more recent periods, opinion towards industrial policy has shifted. In the past 5 years, the use of such policies increased by nine-fold – two-thirds of this were by advanced countries. This shift in acceptance reflects the move beyond simplistic debate on state versus markets, or that of picking winners versus market supremacy. Modern industrial policies, championed by economists such as Dani Rodrik and Mariana Mazzucato, offer a more nuanced and practical approach:

First, it addresses market failures – situations where free market alone does not provide optimal outcomes. For example, when businesses underinvest in research and development because they cannot capture all the benefits, modern industrial policies step in to foster innovation and technology upgrading.

Second, it promotes coordination between public and private sector, while maintaining market discipline. This isn’t about the government dictating to businesses what it should or should not do, but rather creating platforms where policymakers, researchers and businesses can identify opportunities and solve obstacles together.

Third, it comes with strict conditionality and accountability. Gone are the days of open-ended subsidies and protections. Today’s industrial policies come with clear performance metrics, strict governance and regular reviews and monitoring. They maintain market discipline where businesses must still compete, innovate and adapt to survive. 

In summary, the key insight that emerges from modern development thinking is that successful economic transformation requires both strong inclusive institutions and smart, targeted industrial policies to work in tandem. It's not an either-or choice – we need both. The institutions provide a stable foundation, while industrial policies provide the strategic direction and support needed to climb the development ladder.

Ladies and gentlemen.

Malaysia’s transformation journey: Reflecting on our past

Malaysia has experienced significant economic growth since the 1970s. Income per capita rose substantially as the economy diversified and industrialized, increasing 32-fold from USD380 in 1970 to USD11,970 in 2023. Millions of Malaysians were lifted out of poverty. We witnessed a significant increase in living standards with vast improvements in educational attainment and health outcomes. The percentage of population ages 25 and over that completed upper secondary education grew 22-fold, from 3.2% in 1980 to 69.8% in 2022. Life expectancy at birth increased from 63 years in 1970 to 76 years in 2022.

However, we started to hit a wall around the last decade. The economy still grew but at a slower pace. Growth in income per capita also slowed from 7.9% before 2014 to 1.1% thereafter. Other measures of industrial progress also decelerated, such as the pace of capital deepening. The question: is Malaysia stuck in a middle-income trap?

As we reflect upon this question, let’s look back at our economic transformation journey so far. I will draw on two specific experiences.

The first is our aspiration in early 1980s to create heavy industries such as automotive and steel that would serve as the backbone of our industrialised economy. The establishment of the Heavy Industries Corporation of Malaysia (HICOM) exemplified this bold vision.

Our experience in this aspect is, however, was mixed. Take Proton, for example. While it created a domestic automotive industry, it struggled to achieve international competitiveness. The protection it received, while well-intentioned, ultimately reduced pressures for innovation and efficiency improvements. This experience taught us valuable lessons about striking the right balance between nurturing infant industries and maintaining market discipline.

Another strategy was the market-oriented industrialisation approach that we adopted in the 1980s, to take advantage of the Japanese firms relocating production to Southeast Asia following the Plaza Accord of 1985. By liberalizing foreign investment regulations, we created a more conducive environment for foreign direct investment. This shift paid dividends even until today as Malaysia became integrated into global supply chains, particularly in the electrical and electronics (E&E) sector.

Looking back at these two experiences, several key lessons emerge. First is that industrial policy alone, no matter how well-intentioned, cannot succeed without strong supporting institutions. Second, creating competitive advantages require more than just financial support and protectionism, it needs an ecosystem of institutions that encourage innovation, competition and continuous improvement.

Most importantly, we learned that economic transformation is not a linear process. It requires constant adaptation and refinement of both policies and institutions. Success in one phase of development does not guarantee success in the next. The institutions and policies that served us well in the industrialisation stage need to evolve as we move towards knowledge-intensive industries.

Megatrends affecting today’s world

Ladies and gentlemen, that brings us to today. Let me touch on two megatrends that are significantly shaping the world, creating both challenges as well as unprecedented opportunities for Malaysia.

First, we face a profound geopolitical shift. For the past three decades, globalisation was the defining feature of our global economy. There was a worldwide effort not only to encourage trade and do business with one another, but also to institutionalise these arrangements. Hence, we saw, for example, the creation of the World Trade Organisation, and the rise in bilateral and multilateral trade agreements. But today, geopolitical tensions have led to greater trade fragmentation. The use of tariff and non-tariff restrictions are disrupting trade flows, causing supply chain challenges and investment risks.

Second, we are also experiencing what is arguably the most significant technological transformation in human history. Unlike previous technological revolutions that revolve around mechanisation and automation of routine tasks, today’s AI-led revolution will lead to large-scale disruptions. The IMF estimates that almost 40% of global employment is exposed to AI and that even ‘skilled’ jobs will need to adapt to new technologies.

With these two megatrends in mind, Malaysia is at a crossroad. In my opinion, we have two major tasks before us. The first is to seize opportunities amid these disruptive global shifts.

Let’s start with trade fragmentation. As countries and companies reassess their supply networks, many are pursuing a strategy to diversify their manufacturing and operational base. Therefore, if we can offer a compelling value proposition, Malaysia will be able to secure a larger share of these trade and investment diversion. On technological revolution, we are already seeing digital companies like Google and Microsoft, semiconductor firms like Infineon and AT&S exploring opportunities here. It echoes the pioneering E&E investments five decades ago.

Therefore, it is critical that we continue to preserve our competitive edge in business-friendly climate, skilled workforce, and top-notch infrastructure so that Malaysia can continue to be a place where international businesses want to establish and expand.

Moving forward: Driving the transformation of the Malaysian economy

Ladies and gentlemen. The second major task is to transform the economy from one that is based on cost-competitiveness to one that is powered by innovation. I will be frank: this is not an easy journey, and there are no overnight successes. According to the World Bank, there are 108 countries that are stuck in the middle-income trap^[1] and only a handful of countries have graduated into high-income countries.

As I illustrated earlier, Malaysia has a solid track record of economic transformation. While the challenges may appear daunting, we have no choice but to embark on this if we want to continue to improve the standard of living of the Rakyat. In this regard, let me put forward three critical pillars that we need to focus on: (i) building effective, accountable and inclusive institutions, (ii) undertaking necessary structural reforms, and (iii) strengthening social protection system. Let me elaborate on these three pillars. 

Effective, Accountable, and Inclusive Institutions

First is to build effective, accountable and inclusive institutions. This includes having capable public institutions to successfully implement our reform agenda. A critical aspect to this is the need to forge stronger collaboration between the public and private sectors, including with the academia.

Equally important is to continually focus on strengthening governance in public institutions, thus securing public trust in these institutions. Addressing leakages and corruption is a key aspect of building inclusive institutions. Corruption is not just a moral issue – it is an economic crisis in disguise. An IMF study assessed that global cost of bribery could be as high as 1.5 trillion dollars, or around 2 percent of global GDP. In this regard, the launch of the National Anti-Corruption Strategy 2024 - 2028 is an essential framework for combating corruption across various sectors and levels of governance, aiming to strengthen integrity, transparency, and accountability in Malaysia.

Ladies and gentlemen.

Structural reforms and industrial policies

The second pillar is to undertake the necessary structural reforms. The first is attracting high quality investments. Our history has shown that investments are key in getting our industries to level up. In the past, our focus was often on the quantity of investments – either in terms of the size of it, or the number of jobs it creates. This is understandably so as we were less developed then.

But today is different. Unemployment has averaged 3.5% over the past two decades. Malaysia is well plugged into the global supply chain from E&E to petrochemicals. We must therefore favour investments that create high-skilled jobs and develop local supply chains. This is very important. From 2021 to 2022, we have 266 thousand graduates, but we have only created 105 thousand high-skilled jobs. This has led to high skills-related underemployment at 37%, where those with tertiary education end up working in semi- to low-skills jobs.

The impact of this on salaries is also stark. BNM’s study found that the median starting salary of fresh graduates was RM1,624 in 2022, 20% lower than 2019 at RM2,066. The difference in median starting salary of graduates and non-graduates also narrowed to RM101 per month in 2022 from RM568 in 2018. In another BNM study, we found that real starting salaries have declined from 2010 and 2018^[2]. For existing workers in the labour force, wage growth has also been relatively sluggish and below productivity gains. 

Therefore, attracting high quality investments is critical so that high quality jobs can be created. But what do we mean by quality investments? These are investments that bring five important elements: the creation of new products and technologies that raise our economic complexity, high-skilled job creation that elevates our workforce, activities that leverage and extend local supply chains, inclusive and sustainable development, and integration into emerging industries that position Malaysia for the future. These are the overarching goals behind the National Investment Aspirations (NIA) and New Industrial Masterplan 2030 (NIMP).

Consider digital services trade, where Malaysia has unique advantages. Our technology-savvy workforce, robust digital infrastructure and favourable business environment make us an ideal hub for global digital services. But Malaysia’s role in the digital economy should not be confined to being a hub for data centres, with limited domestic spillover. Instead, this should act as a catalyst to bring in further high-quality investments in areas like cloud computing services, digital content creation, and fintech innovation. Recognizing our potential, the New Industrial Masterplan 2030 (NIMP) has set ambitious goals to TechUP the Nation to become a digitally vibrant society. Companies like Google and Microsoft are already establishing significant digital service operations here, bringing with them not just jobs, but expertise in emerging technologies.

Green technology represents another frontier where quality investments can transform our economy. As the world transitions towards ESG, investing into greening our production is critical in retaining market access, as trade partners introduce environmental policies such as green tariffs and regulations. Already, Malaysia has set ambitious goals for renewable energy adoption and carbon reduction, laid out in the National Energy Transition Roadmap (NETR). But these are not just environmental targets – they're also new growth areas for a modern economy. Our automotive sector, for instance, is positioning itself for electric vehicle production, not just assembly. Our semiconductor expertise makes us an ideal location for manufacturing power electronics and energy management systems, based on local R&D and technology.

Encouragingly some policies have started to bear fruit. Investments grew by double digits in the recent two quarters: 11.5% and 15.3% in 2Q and 3Q respectively. More importantly, these investments are mainly private sector driven and concentrated in services and E&E manufacturing industries, which are of higher quality. This is expected to raise Malaysia’s exports and productive capacity in the future.

While these are encouraging signs, we must not forget our previous shortcomings. Selectiveness and discernment in our investment promotion is key. We want investors that can commit to R&D and be collaborators in innovation, as opposed to just building production facilities.

But perhaps the most critical area of reform that will secure Malaysia’s long-term success is in our labour market. This means creating a highly skilled, future-ready workforce that is adaptable to the rapidly evolving market conditions, while ensuring they are paid their fair share.

What do we mean by a future-ready workforce? Let me highlight some of the capabilities we need to cultivate. First, our workers must be technologically fluent – not just in using digital tools, but in understanding the principles behind them. This means proficiency in data analysis, artificial intelligence, and digital systems. Second, they need adaptive capabilities – the ability to learn, unlearn, and relearn as technologies evolve. Third, they must possess strong soft skills – critical thinking, problem-solving, and cross-cultural collaboration – enabling a productive work environment. I invite the community of UUM to reflect on how we can strengthen the quality of our education to equip ourselves with these skills.

More broadly, we also need greater investments in up- and reskilling opportunities for Malaysians to seize these opportunities that are being created. This becomes more important because greater adoption of technology will invariably change the nature of work in Malaysia.

BNM study showed that 55% of jobs in Malaysia are at risk of being displaced due to automation. Additionally, our survey of 25 financial services institutions^[3] found that 84% of these institutions have at least one AI project in active use. As the nature of work changes, so must our workforce. Malaysians should be provided with opportunities to continuously retool themselves throughout their career, in response to evolving demands.

Ladies and gentlemen.

Strengthening our social protection

Finally, the third pillar is to strengthen our social protection system. The convergence of geopolitical tensions and technological advancements not only reshape our economic landscape, but also adversely affects the more vulnerable segments of our society. Therefore, our social protection must be strengthened so that no part of our society is left behind.

Nevertheless, the COVID-19 pandemic has unearthed deep structural issues surrounding Malaysia's prevailing social protection framework. Critical issues include a fragmented and overlapping ecosystem of programmes, gaps in the overall coverage and fiscal challenges. Implementing reforms to narrow these gaps is vital to address these fundamental issues affecting a sizeable proportion of our population.

Our broad-based subsidy system, while well-intentioned, has become increasingly unsustainable. Last year alone, we spent over RM72 billion on various subsidies, money that could have been invested in education and healthcare, infrastructure and supporting emerging industries. Let me be clear – this is not about abandoning our commitment to helping those in need. Rather, it's about being smarter in how we provide assistance.

A robust and effective social protection system is not just about providing more financial assistance. What we want to have is a coherent set of interventions and incentives such that affected individuals can bounce back stronger.

BNM’s role in a future-ready economy

Ladies and gentlemen

In rethinking our industrial policy framework, it is important that we take a holistic view of macroeconomic stability. In creating a conducive environment for growth, price stability and a strong and healthy financial sector both play a critical role.

Let me assure you that Bank Negara Malaysia (BNM) is fully committed in its part in supporting Malaysia’s transition to a future-ready economy. Through prudent monetary policy, regulatory oversight and a broad policy toolkit, BNM helps create a stable macroeconomic environment and financing conditions that is foundational to a future-ready economy.

Ensuring access to finance for all segments of society is a crucial priority under BNM’s Financial Sector Blueprint 2022-2026 (FSBP). Access to financing is essential for SMEs, startups and underserved communities who may face barriers to financial services. By expanding financial inclusion, BNM aims to foster an environment where all Malaysians can participate in and benefit from economic opportunities. For startups, access to financing is often a critical factor in determining whether innovative ideas can scale into successful businesses, fuelling entrepreneurship, job creation, and economic diversification. BNM’s focus on ensuring broad-based financial accessibility is not just about equity; it also drives growth by mobilizing a more extensive network of economic contributors and helping communities build their own financial resilience.

Conclusion

Ladies and gentlemen, let me conclude. Malaysia is a small ship in a vast ocean. Geopolitical tensions and rapid technological advancements have made the waves a lot choppier. While there are ebbs and flows to our fortunes, Malaysia has navigated many rough oceans – and we have always emerged stronger. Our story is one of adaptability and resilience.

This time is no different. If you must leave this lecture today with just one takeaway, I urge you to leave with this: We must not fear the future. We know what needs to be done: nurture effective and inclusive institutions, undertake structural reforms to transform our economy, and strengthen our social protection frameworks so that nobody gets left behind. At the end of the day, all we want is better standards of living for the Rakyat.

Thank you.

Bank Negara Malaysia

17 November 2024

^[1] World Bank. 2024. World Development Report 2024: The Middle-Income Trap. Washington, DC: World Bank. doi:10.1596/978-1-4648-2078-6.

^[2] https://alumni.bnm.gov.my/documents/20124/6429370/ar2018_en_box1_wages.pdf 

^[3] comprising banks, insurers and payments operators