Understanding and Unlocking State-Level Growth Potential in Malaysia

Malaysia is approaching the status of a high-income economy in the next few years. However, current levels of inequality mean that a large portion of its population may not experience the benefits of this prosperity. By the end of this decade, only less than half of its citizens will be classified as high-income individuals.

This report examines growth patterns across Malaysian states using new spatial data and analytical methods to shed light on regional income divergence. It makes a landmark contribution to the subnational development literature by introducing new estimates of state-level potential growth and district-level economic activity, combining satellite night-light data with traditional economic indicators. This approach offers a clearer picture of how growth differs across regions and provides a stronger evidence base for discussion on subnational development among policymakers, researchers, and practitioners.

DOWNLOAD REPORT

Key Findings

• Richer states have grown faster than poorer states, resulting in divergence and increased regional income inequality.

• Contrary to global trends, most Malaysian states have increased their potential growth in the last decade. Poorer states could have caught up to richer states if their actual growth had matched their potential growth. However, most states underperformed relative to their potential growth, with poorer states exhibiting a larger disparity from their potential compared to richer states.

• Several structural factors help explain these outcomes, including some friction in labor and capital mobility, limited structural transformation, and lower educational attainment in lagging regions.

• Even within individual states, economic potential varies significantly across districts. Indeed, some districts exceeded or fell short of their estimated economic potential in both richer and poorer states.

• Beyond district boundaries, nighttime light data indicates that regions surrounding high economic activity experience stronger economic performance, a trend further supported by the growth of city size over time.

• Malaysian states have relatively limited functional responsibilities and a much smaller fiscal envelope than those in other federations. They rely on sizeable discretionary federal transfers, which are characterized by limited transparency in allocation.

• The report offers policy recommendations designed to address identified issues:

  ৹ Unlock growth drivers in mid-sized cities with unrealized potential and minimal spatial constraints

  ৹ Implement differentiated development strategies that consider the unique characteristics and needs of each district or city

  ৹ Deepen fiscal decentralization through rule-based transfers and enhanced federal state collaboration

DOWNLOAD REPORT