From Manufacturing Success to High Income: How Malaysia Must Rethink Its Growth Model

The Asian Development Bank–Islamic Development Bank report finds that Malaysia is close to achieving high-income status after decades of export-led growth, but faces risks from premature deindustrialization, limited innovation, and overreliance on mid-level roles in global value chains. To sustain growth, Malaysia must upgrade into higher-value manufacturing and services, strengthen domestic firms, and adapt to green and digital global transitions.

Prepared jointly by the Asian Development Bank and the Islamic Development Bank, Accelerating Economic Growth: Malaysia’s Transition Toward a High-Income Economy examines how Malaysia’s long journey from a commodity-based economy to an upper-middle-income nation has reached a decisive moment. Since independence, Malaysia has used trade openness, foreign investment, and export-led industrialization to move beyond rubber and tin into manufacturing, especially electronics, and services. This strategy delivered decades of strong growth, rising incomes, and major social gains. Today, Malaysia’s income level sits just below the World Bank’s high-income threshold. While the milestone is within reach, the report warns that sustaining growth beyond it will require bigger structural change, not just more of the same policies.

Manufacturing’s Rise, and Early Decline

Manufacturing played a central role in Malaysia’s development, lifting productivity, creating jobs, and integrating the economy into global markets. However, the report finds that Malaysia’s manufacturing sector peaked earlier than expected. Its share of the economy began falling in the late 1990s, when income levels were still relatively low compared with today’s advanced economies. This “premature deindustrialization” raises concerns because manufacturing remains more productive than most services. Although services now dominate employment and output, much of their growth has been in lower-value activities. Without a stronger, upgraded manufacturing base, Malaysia may struggle to generate the productivity gains needed to reach and sustain high-income status.

Trade Strength with Hidden Risks

Malaysia remains one of the world’s most open economies. Trade flows are larger than the country’s total economic output, reflecting deep integration with regional and global markets. Electronics dominate exports, followed by mineral fuels, machinery, and palm oil, with East Asia and Southeast Asia as key destinations. This openness has been a major advantage, but it also brings risks. Exports are concentrated in a narrow range of products and partners, making the economy vulnerable to global slowdowns, supply chain disruptions, and geopolitical tensions. The report stresses that openness must now be paired with diversification and resilience.

Stuck in the Middle of Global Value Chains

A central finding of the report is that Malaysia is deeply embedded in global value chains, particularly in electronics, but mostly in mid-level activities such as assembly and testing. These roles generate scale and employment but capture limited value and offer fewer opportunities for innovation. Much of the value added in Malaysian exports is ultimately realized abroad, while domestic firms remain weakly connected to multinational production networks. Export complexity has barely improved in two decades, especially compared with fast-upgrading economies like the People’s Republic of China and Viet Nam. Continued reliance on resource-based exports, which face long-term pressure from climate policies, adds to the challenge.

What Malaysia Must Do Next

The report argues that Malaysia’s future growth depends on upgrading, not retreating from globalization. This means diversifying into higher-value manufacturing such as medical devices, aerospace parts, and electric-vehicle components, while also expanding modern services like digital trade, logistics, and finance. Stronger links between multinational firms and local suppliers, especially small and medium-sized enterprises, are essential to spread skills and technology. Investment in innovation, research, and advanced skills must increase, alongside reforms to trade, services, and investment policies. Malaysia’s openness in digital and services trade is a key advantage that can support this shift. By capturing more value from global production networks and adapting to green and digital transitions, Malaysia can turn its development success into a sustainable high-income future rather than stall just short of it.