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Effects Of The Middle Income Trap Economics Essay

Malaysia’s caught in the “middle-income trap” right now give awareness to our policymakers that the export-led growth strategy, according to some, is no longer an optimal development strategy for developing countries especially Malaysia. Continued emphasis on export-led growth will, among other things, increase the reliance of developing countries on the developed world and dampen domestic market growth. Many export-dependent developing countries started tweaking their growth strategies especially after external demand for their exports dried up on account of the current global financial and economic crisis. Though Malaysia’s growth strategy had started emphasizing domestic demand since about a decade back, it still remains largely dependent on external demand for its economic growth (Quah, 2009). Ex-World Bank chief economist and Brookings Institution’s Wolfensohn Centre for Development, Global Economy and Development’s senior fellow, Homi J. Kharas, said there was an impetus for change and rethinking on policies and strategies in Malaysia every 10 years based on economic developments. “Malaysia has been very successful as an exporting nation but has also been very export dependent. About 90% (of products) are being exported to the United States, Europe and Japan,” he said, adding that Malaysia needed to diversify its exports (Malaysia needs to be high-income economy, 2009). However, the main challenge is domestic market of Malaysia is too limited due to only 28 million of populations. That’s why we are facing the dilemma of the exploration of external and domestic market. However, 2010 GDP performance sets strong momentum for a robust 2011. Given the marked improvement in economic growth in the first half of the year, domestic demand was clearly the chief momentum driver for the recovery. Moving forward, the country is anticipated to register a robust GDP growth of 5.6% in 2011, with domestic demand once again acting as the back-bone for momentum (RAM Rating Services, 2011).
Besides, middle-income trap also lead to declining private investments. The old growth model provided three decades of outstanding performance, permitting Malaysia to provide for the health and education of its people, largely eradicate poverty, build a world-class infrastructure and become a major exporter globally. But the progress we have made over the past half-century has slowed and economic growth prospects have weakened considerably. We are caught in a middle income trap. Malaysia has been susceptible to external shocks, as seen during the past crises. Increases in international commodity prices, like fuel or food, have direct impact on domestic prices. Similarly, unless production costs and productivity in Malaysia can keep pace with those abroad, exports are likely to lose ground with negative effects on national employment and income.
Malaysia’s economic engine is slowing. Since the Asian financial crisis of 1997-1998, Malaysia’s position as an economic leader in the region has steadily eroded. Growth has been lower than other crisis affected countries, while investment has not recovered. Private investors have taken a back seat. Since the Asian crisis, aggregate investment as a share of GDP in Malaysia has continued to decline, with private investment remaining stagnant due to several factors. In some industries, heavy government and government linked company (GLC) presence has discouraged private investment. Cumbersome and lengthy bureaucratic procedures have affected both the cost of investing, and the potential returns on investment. Malaysia’s place within the Global Competitiveness Index dropped to 24th in the 2010 report from 21st previously, indicating that the country is losing its attractiveness as an investment destination (New Economic Model For Malaysia, 2010)
A plunge in exports wounded this trade-sensitive economy in 2009. The impact of weak exports spread to private investment, which fell sharply, and to private consumption, which was nearly flat. Fiscal stimulation packages provided some buffer for aggregate demand. Economic growth will rebound during the forecast period, underpinned by a recovery in exports and rising incomes. Annual inflation is set to pick up from low levels. The government plans renewed efforts to encourage private investment. Fixed investment fell sharply by 5.5%, with many firms canceling or deferring investment decisions. Investment acted as the major drag on GDP in 2009. The ringgit, having depreciated by 5.0% against the dollar during the first 3 months of 2009, when increased risk aversion and deleveraging activities by international investors increased the demand for dollars has since appreciated. Economic growth, while impressive, has slowed and private investment, averaging about 30% of GDP just before the Asian financial crisis, has fallen to around 9.5% of GDP. These indicators point to the need to address deficiencies in the investment climate and to reappraise the role of public sector companies that compete with the private sector. (Rajapakse, 2010)
Other than that, the effect of middle-income trap include lack of appropriately skilled human capital caused by brain drainA graduate teacher starts at RM2,500 per month in Malaysia, compared to RM6,196 in Singapore and RM15,661 in Hong Kong. Malaysian wages have fallen behind partly due to the gross divergence between the suppressed Malaysian CPI and that of the world (FONG, 2010). Globalization, outsourcing, offshoring and business process outsourcing gave rise to mobility of resources, investment, companies and skilled workers. Skilled workers flow to locations where they are paid higher and companies move to locations that are more competitive. Many skilled Malaysian workers have been leaving the country, lured by higher pay (Altfa, 2011). Many Malaysians could be found working overseas as they were often adaptable, multi-lingual and inexpensive. In terms of composition of the economy for most developed countries, more than 60% of annual gross domestic product (GDP) came from the services sector, with Malaysia somewhere just over 50%. Deputy director in the Public Private Partnership Centre and Secretariat to the Economic Council of the Economic Planning Unit Dr Soh Chee Seng said: “Our productivity levels are not really low, it is just that they are falling behind other rapidly developing countries like China, India, Indonesia and Thailand:’ According to HSBC Bank Bhd executive director Jon Addis the country’s infrastructure was still “patchy” such as in terms of public transit, which had some idiosyncrasies. (Min)
Malaysia stuck in middle income trap will lead to bring to affect of low value added industries. According to Wikepedia, value added can be refers to “extra” features of an item of interest for example product, service, person and etc that go beyond the standard expectations and provide something “more” while adding little or nothing to its cost. Value-added features give competitive edges to companies with otherwise more expensive products. (Wikipedia) In Malaysia, Small and Medium Enterprises (SMEs) have evolved to become a key suppliers and service providers to large corporations, inclusive of Multinational Corporation and Transnational Corporation (MNCs

Analyse The Concept Of Consumer Surplus Economics Essay

The definition for consumer surplus is the difference between the amount of money money willing to pay by the consumer for a service provided or a good and the actual price paid for the good. Consumer surplus is a measurement to measure the wellfare of fellow consumers who had purchase our products at a certain level of price. The market demand curve tells us how much amount of money is willing to be paid by the consumers at a certain level of price.
The concept of consumer surplus can be explained by the graph above. Assume that there is only one quantity of a good in the market, if the price of good is at P1, the consumer are able to buy one unit of the good. Under this condition, it is assumed that this particular consumer has a relatively strong desire to buy the good at a high price or the consumer has a high income. If the price is lowered from P1 to P2, the consumer might be induced to buy another unit of the good. This condition can also be said that the price reduction has encouraged more consumers to buy the good. Similarly, when the price of good is reduced from P2 to P3, more consumers would buy the good or the first consumer is tempted to buy three units of the good.
The second category would be the producer surplus. Producer surplus is the difference between the price of sellers willing to accept for one unit of good and the price that producers actually receive. The market supply curve would show the amount of units of good that a business would supply at a certain price that might prevail. In other words, the market supply curve tells us the willingness of a producer to accept any amount of quantity of goods demanded in the market.
Lets assume that currently there is only one quantity of good is demanded in the market. In the graph shown above, a certain business is willing to agree to the price P1 when only one unit of good is produced. However, if two units of good is produced, then the minimum price would rose to price P2. If a higher price, P3 of goods supplied is charged, this would induce the business to increase the quantity supplied to 3.
Part B
A production possiblity frontier (PPF) shows the maximum output combination of two goods that can be produced given that we only have limited resources and technology within a certain period of time. The PPF graph is able to explain several economic concepts, mainly efficiency, opportunity cost and marginal rate of transformation(MRT).
Ceteris paribus, it means that any factor which is related to demand of a certain good must be maintained and fixed. In reality,in order to increase a goods quantity, another good’s production has to be sacrificed.
Quantity of margarine
Quantity of butter
Based on the graph above, in order to produce more margarine, the production of butter has to be sacrificed and decreased. Assume that the factors of production of the goods is fixed, to increase the production of margarine would mean that the required resources to produce butter has to be redirected to produce margarine. If the production of the good is efficient, the economy can choose different combinations of outputs of the two products. Hence, every point on the curve are maximum points, it has the maximum output for both products. Which means at these points, the production of goods are efficient. Any point which lies inside of the frontier are inefficient productions. Any point which lies outside the frontier would be unachievable in a short run.
Quantity of margarine
Quantity of butter
If the productive resources remain fixed, increasing the production of good 1 would be impossible, unless production of good 2 decreases. The resources to produce good 1 is transferred to produce good 2. The sacrifice of production of good is known as opportunity cost. Opportunity cost is measured in the number of unit of second good that has been neglected for the first good. The opportunity cost is determined through the shape of the curve and varies depending on the ending and starting point. Based on the graph above, producing 10 more butter would cost the opportunity of margarine by 5 (point A to B). At point C, production of margarine is reduced by 5 to produce 10 more butter (point B to C). But at point B, the economy is close to having the maximum output. The ratio of opportunity cost is determined by the MRT.
Quantity of margarine
Quantity of butter
Any of the point that lies on the curve of the PPF is called the MRT. It shows how the output of good 1 can be transformed to output of good 2. It is the opportunity cost of X in term of Y at the margin, which is also called as the “opportunity cost” of a commodity. It can also measure the unit of good Y that has been forgone for unit of good X. The shape of PPF is usually drawn as a downward curve to denotes an increasing opportunity cost. Thus as MRT increases, one moves from the top left of the curve to the bottom right. The marginal opportunity cost of margarine in terms of butter is simply the reciprocal of the marginal opportunity cost of butter in terms of margarine. For example, slope at point A is 2, in order to produce extra 1 unit of butter, production of 2 margarine must be sacrificed.