ECONOMIC inequality between Malaysian states have widened despite an overall increase in the gross domestic product (GDP) rates in the last two years, according to the mid-term review (MTR) of Malaysia’s 11th economic blueprint.

The states of Selangor, Federal Territory of Kuala Lumpur (KL), Sarawak and Johor continued to be the main contributors of economic growth at 57.5% of the national GDP, while states such as KL, Labuan, Sabah, Malacca, Selangor, Johor and Penang recorded higher GDP rates than the national average of 5.1%, driven by services, manufacturing and construction activities.

However, economic disparities between the states widened despite the increasing GDP per capita, said the report.

“Kelantan, Kedah, Perlis and Sabah, which were dominated by traditional sectors, recorded substantial gaps compared to the national average of RM42,228 (GDP per capita) in 2017.”

The biggest gap was Kelantan at 67.8% below the national average, while the gap between the east coast state and KL widened to 8.2 times in 2017 compared to 7.9 times in 2015.

High-income status will not be achieved

The review noted that whilst Malaysia registered moderate growth the last two years despite difficult external challenges in 2016, it is unlikely that the country will graduate from its upper middle-income status by 2020.

“GDP in real terms rose at an average rate of 5.1% (2016 and 2017) while GNI per capita increased at an average rate of 6.7% from RM36,119 (2015) to RM41,093 (2017),” said the review report which was released today.

“In terms of purchasing power parity, Malaysia’s GNI per capita reached US$28,650 (RM119,000) as estimated by World Bank, placing it in the top 25% of 217 countries,” it said.

But based on World Bank’s minimum threshold of a high-income economy of US$12,056 for 2017, there is still a gap of 21% before Malaysia can graduate from its upper middle-income status.

“Given the current pace of growth, the target of high-income economy is expected to be achieved post 2020.”

The review noted that private investment continued to drive the economy, contributing 67.7% of total investment of RM659 billion (average growth of 6.8%) but public investment contracted at 0.2% due to re-prioritisation of big scale projects.

Among the targets that had yet to be achieved in the five-year plan were per capita income and average household income.

11MP had targeted per capita income to reach RM54,100 (RM41,093 in 2017) and average household income of RM10,540 (RM6,958) by 2020, said the report.

The review also highlighted how productivity had fallen behind growth, while employee compensation was slow.

Wage hikes-to-GDP expansion share recorded only a marginal improvement at 35.2% in 2017, as compared to 34.8% in 2015.

“This slow improvement will present a challenge in meeting the employee compensation target of 40% of GDP by 2020,” said the report.

Unskilled labour dependence

The review noted the structural economic issues remained unresolved under the Barisan Nasional government.

“Among others, the economy is more dependent on traditional factor inputs and less on productivity to drive growth. Investment is more focused on physical structures instead of machinery and equipment.

“Many industries are still on the low- to mid-range of value chain for products and services, creating limited number of high-income jobs.”

The review also noted that industries were still largely dependent on semi- and low-skilled workers and foreign labour.

“Semi and low skilled workers made up 72.5% of total employment in 2016 while foreign workers were 15.5%.

“The over dependence on low-skilled foreign labour has perpetuated a labour intensive economy, suppressed wages and served as a disincentive to automation thus impeding efforts to increase productivity.” – October 18, 2018.