THE spectre of the “middle-income trap” haunts many nations. Having clawed their way out of poverty through grit and low-cost manufacturing, they find progress stalling.
Wages rise, eroding their competitive edge against poorer rivals, yet they
lack the advanced technology and productivity to compete with wealthier nations. It becomes an economic purgatory.
The diagnoses often point to two flaws: over-dependence on cheap labour and chronically low investment in innovation. Malaysia is among many. Having examined the evidence, the arguments are not only persuasive but fundamental to understanding and eventually escaping this trap.
Relying primarily on low wages is a strategy with an expiration date. As economies grow, basic supply and demand will push wages up. Workers will demand better living standards.
Suddenly, factories producing simple garments or assembling basic electronics will find themselves undercut by nations entering the development ladder with even lower costs, like Vietnam or Bangladesh, previously undercutting China.
This model creates a fragile economy – global demand shifts or automation can devastate sectors built solely on
cost arbitrage. Profits are thin, capital accumulation is slow and reinvestment in upgrading is difficult. The workforce
is not pushed or trained to handle
more complex tasks, hindering upward mobility. This is where the second flaw becomes crippling.
Without significant, sustained investment in research and development (R&D) and the absorption of new technologies, economies cannot climb the value chain. Low innovation investment means efficiency gains will stall. Output per worker will not increase sufficiently to justify higher wages without losing competitiveness and countries will remain stuck producing low-margin goods, unable to create or adopt high-value products and services.
Bright minds will seek opportunities elsewhere and domestic firms will lack the capacity to innovate, missing out on new markets.
Breaking free requires a deliberate, often difficult, shift in economic strategy. Massive, targeted investment in human capital is imperative. This goes beyond basic literacy; it means providing high-quality STEM education, world-class universities and lifelong vocational training aligned with future industries.
Skills must constantly evolve. Governments must lead in R&D spending (3%+ of GDP) through direct funding, powerful tax incentives and creating robust research institutions. Malaysia now spends around 1% GDP on R&D. Crucially, private sector R&D must increase.
Foster dynamic innovation ecosystem
This requires strong intellectual property rights to incentivise invention and attract foreign tech. We need venture capital funding for risky, long-term bets.
University-industry linkages need strengthening to turn academic research into marketable products. There
should also be digital and physical infrastructure for high-speed internet, reliable power and efficient logistics.
Governments must identify and nurture nascent high-potential sectors (for example, green tech, advanced manufacturing, AI and specialised services) – not through protectionism but by facilitating technology transfer, providing temporary support and demanding performance benchmarks.
Move beyond just exporting cheap goods – attract high-value foreign direct investment, integrate global knowledge networks and leverage trade agreements for technology access.
South Korea stands not just as an example but as the definitive case study in escaping the middle-income trap through this formula. Korea consciously moved away from pure cheap labour in textiles and shoes in the 1970s and 80s. It made a massive, state-backed bet on heavy industry (shipbuilding and steel) and on technology (electronics and semiconductors).
Korea now consistently ranks among the world’s top R&D spenders as a percentage of GDP (over 4%). This wasn’t accidental; it was a national priority driven by government policy and massive corporate investment.
A relentless focus on education, particularly in technical fields, created
a highly skilled workforce capable of driving complex industries.
The government provided direction, subsidies and protection while demanding export performance and technological upgrading from giant conglomerates.
However, this model also had downsides – inequality and cronyism – but it delivered the technological leap. Korea transformed from a war-torn agrarian economy to a global leader in electronics, automobiles and pop culture within two generations. It did not just escape the middle-income trap; it soared into the high-income stratosphere.
The diagnosis is sound: overreliance on cheap labour is a dead end and chronic under-investment in innovation is a recipe for stagnation.
South Korea’s extraordinary journey provides the most compelling evidence that escaping the trap is possible but it requires immense political will, strategic vision and sustained, massive investment in people and technology. It demands moving from imitation to creation.
For nations currently trapped, the path is clear: break the addiction to cheap wages and ignite an innovation revolution. The alternative is to remain forever on the treadmill, watching the world race ahead.
The Korean model isn’t perfect, nor easily replicated in full, but its core lessons – prioritise education, invest ruthlessly in R&D and strategically
target high-value industries – are the indispensable keys to unlocking sustained prosperity.
The trap is not destiny but escape, which demands a fundamental rewrite of the economic playbook.
Prof Datuk Dr Ahmad Ibrahim is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an associate fellow at the Ungku Aziz Centre for Development Studies, Universiti Malaya. Comments: letters@thesundaily.com