Introduction

By the time the World Bank started to classify countries by per capita incomes into low, middle and high income countries in the 1980s, Malaysia was already a middle income country. The World Bank used Gross National Income (GNI) per capita of US$1,006–3,975 and US$3,976–12,275 in 2010 to classify countries into lower and upper middle incomes, respectively (World Bank 2011a). Based on the 1985 World Bank classification, Malaysia was already a middle income country with a per capita income of US$2,161 (US$2,027 in current prices) (World Bank 2011b). With a per capita income of US$5,264 in 1985 prices (US$8,519 in current prices), Malaysia managed to remain an upper middle income country. This chapter attempts to explain how Malaysia became an upper middle income country.

Natural resources (minerals, forest products, and agriculture) and industrialization have been the prime routes taken by developing countries to reach middle income status. Major oil exporters such as the North African, Middle Eastern, and Venezuelan economies have relied almost exclusively on oil exports to record middle incomes. Oil has only been one of the exports that drove income growth in Brazil, Malaysia, and Mexico. The only developing countries to graduate into developed high income economies, i.e., Korea, Singapore, and Taiwan, used manufacturing as the prime path to rapid Gross Domestic Product (GDP) growth. Malaysia was no different from most developing countries as its economy was driven by plantation agriculture and tin mining during the British administration until the New Economic Policy (NEP) was launched. The Malaysian government recognized that the supply of natural resources would not be infinite and that dependence on agriculture alone could be catastrophic if the terms of trade are affected by the fallacy of composition problem.Hence, the approach the government took was to diversify primary exports and to stimulate manufacturing growth by attracting foreign direct investment (FDI) (Malaysia 1971).

At the time the NEP was introduced, ethnic identification of the economy in Malaysia was sharp as the Bumiputeras populated mainly in the rural areas, the Chinese concentrated in urban business and mining, and the Indians confined to plantation agriculture and urban occupations as labourers. Coming after the bloodshed on 13 May 1969 that had threatened to erupt into an ethnic crisis, the NEP was crafted with the twin goals of alleviating poverty and restructuring the economy to remove ethnic identification.