There are always chatters in the background how Malaysia is growing slower now compared to years ago, mostly with the 1990s in mind. The general sentiment and popular line parroted is that country is stuck in the middle income trap as growth is too slow for Malaysia to break from the middle pack and become part of the developed world . For good measures, some would cite Indonesia and the Philippines as growing faster now, though that is not strictly true all the time.
So, the idea is that we are in for a bad time in some quasi-permanent way. Growth is slacking behind some preferred rates. Some have courageously applied the term secular stagnation, as if the troubles faced by the US, Europe and Japan are the same as Malaysia’s. I dislike using the term within domestic context.
But I have wondered for a long time now. Is Malaysia really in a trap or is it merely the plain old convergence brought by the forces of diminishing returns as explained by the orthodox growth theory.
I am leaning towards the latter answer.
An economy can never grow at a high rate forever. At the heart of the mainstream growth theory taught at most respectable universities is the idea of diminishing returns (even with the AK model and its variants, which are a step up from the famed Solow one, you can see diminishing returns given some parameters). Beyond the savings, (human) capital, technological progress and population growth that complicate the models, at the center is the idea that growth will slow down eventually as an economy becomes bigger and richer: this is diminishing returns.
Why poorer countries tend to grow faster than richer countries? Why richer ones find it harder to grow in contrast? Poorer economies have an easier time at growing because of weaker diminishing returns factor. Build a bridge and you would grow the economy by a lot. For more advanced economy, you might need to build a lot more bridges to see some growth: the bigger you are, the harder is it to grow. In the same vein, you do expect a country to grow slower the richer it becomes.
Granted, there are challenges to the mainstream theory. The convergence predicted always needs to be qualified but it is still one reason why we should be careful with the idea of middle income trap. There are alternative, in fact I think stronger explanation, to the so-called middle income trap.
Through experience, most casual proponents of middle income trap narrative in Malaysia are ignorant about the mainstream idea of growth and its links to diminishing returns. With the belief that there is no alternative explanation given ignorance about mainstream growth theory, it makes it easier for them to take the slower growth rate automatically as the proof that Malaysia is in such a trap and so we need to do something to push growth higher and faster. A politically convenient story as well, if you know what I mean.
I do not think the rate is a proof in itself. There has to be something deeper to justify the allegation that we are in such trap (with secular stagnation) instead of just because the average growth rate now happens to be lower than those registered in the booming 1990s. Before believing in the middle income trap hypothesis, we have to ask ourselves, are there something causing economic growth to slow and stuck at a low rate, or is it a natural growth process — the diminishing returns — described by the orthodox growth theory?
Because of this, I have come to think the middle income trap is at best a heterodox side note to the orthodox growth theory and at worst, an irrelevant lemma: it is a ”just so” statement that is true within the larger model to trivially prove the idea of diminishing returns, rather than being a special problem by itself.