Cheap Labour, 1% R&D and the Middle-Income Trap: Checking an Aliran Op-Ed Against Malaysia's Numbers

On 5 September 2025, the reform movement Aliran published an op-ed titled "Why cheap labour won't save Malaysia from economic limbo". Its author, Prof Dato 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. He argues that countries which grew on low-cost manufacturing stall in the middle unless they invest heavily in people and research, and that South Korea shows the way out (Ibrahim, 2025).

The questions are still live. Budget 2027, tabled on 9 October 2026, raised the minimum wage, and the government is still preparing a new levy on foreign workers. This post summarises the op-ed, then checks it against World Bank, Department of Statistics Malaysia (DOSM), Ministry of Science, Technology and Innovation (MOSTI) and Bank Negara Malaysia (BNM) figures.

The op-ed's argument in brief

The author describes the middle-income trap as economic purgatory: wages rise and erode a country's edge over poorer rivals, but it lacks the technology and productivity to compete with richer ones. He blames two flaws, and counts Malaysia among the countries that have them.

• Cheap labour is a dead end. As wages rise, factories making simple garments or assembling basic electronics get undercut by lower-cost newcomers, as Vietnam and Bangladesh undercut China. Demand shifts or automation can wipe out sectors built on cost alone, profits are thin, and workers are not trained for complex work.

• An innovation deficit. Without sustained research and development (R&D) and technology absorption, output per worker does not rise enough to justify higher wages, countries stay in low-margin products, and talent leaves.

His prescription:

• People. High-quality STEM education, world-class universities and lifelong vocational training.

• R&D. Government-led R&D spending of 3% of GDP or more, through direct funding, tax incentives and research institutions. He notes that Malaysia spends around 1%, and says private R&D must rise too.

• An innovation ecosystem. Strong intellectual property rights, venture capital, university–industry links and good infrastructure.

• Targeted sectors. Temporary support for green technology, advanced manufacturing, AI and specialised services, tied to performance benchmarks.

• Openness. High-value foreign direct investment (FDI) and global knowledge networks.

South Korea is his model. He says it moved away from cheap labour in textiles and shoes in the 1970s and 1980s, made a state-backed bet on shipbuilding and steel, then moved into electronics and semiconductors. It now spends more than 4% of GDP on R&D, driven by government policy and conglomerates such as Samsung, Hyundai and LG. He names inequality and cronyism as downsides, and says the model cannot easily be copied in full.

Where Malaysia stands on the income ladder

The World Bank sorts economies by gross national income (GNI) per person, converted to US dollars with its Atlas method, which smooths exchange-rate swings. For its 2027 fiscal year, July 2026 to June 2027, high income means more than US$14,375 per person in 2025 (World Bank, n.d.-c). Malaysia's figure was US$12,380, up from US$11,650 in 2024 (World Bank, n.d.-a). It remains upper-middle income, about US$2,000 short; its income per person would need to rise by about 16% to cross the line.

Sources: World Bank (n.d.-a, n.d.-b, n.d.-c), retrieved 13 October 2026. The R&D series is compiled by the UNESCO Institute for Statistics.

The trap is real in the aggregate. The World Bank's World Development Report 2024 counted 108 middle-income economies at the end of 2023, home to about 6 billion people, and found that only 34 middle-income economies had reached high income since 1990 (World Bank, 2024).

The op-ed's worry is less about the line than about what drives growth once cheap inputs run out, which is also the report's framing. It proposes a staged strategy:

• 1i, investment, for low-income countries.

• 2i, plus infusion, for lower-middle-income countries: bringing in technologies and business practices from abroad and spreading them at home.

• 3i, plus innovation, for upper-middle-income countries such as Malaysia, which should start pushing the technology frontier themselves.

The op-ed maps onto this neatly: high-value FDI is infusion; R&D, intellectual property and venture capital are innovation. The report warns that countries "cannot leap all at once from investment-driven growth to innovation-driven growth" (World Bank, 2024).

Claim: Malaysia spends about 1% of GDP on R&D

Confirmed. The latest national survey, run by MOSTI with DOSM for the 2022 financial year, put gross expenditure on R&D at 1.01% of GDP, up from 0.95% in 2020 (Ministry of Science, Technology and Innovation [MOSTI], 2025). That was RM18.16 billion (RTM, 2026). The World Bank's database shows the same 1.01% as Malaysia's latest figure.

The longer trend is flat. Malaysia first reached about 1% in 2009, peaked at 1.42% in 2016, then fell to 1.04% in 2018 and 0.95% in 2020 (World Bank, n.d.-b).

Two figures move the way the author wants. Businesses accounted for 51% of R&D spending in 2022, up from 34% in 2020, and there were 55 researchers per 10,000 people in the labour force, up from 33 (MOSTI, 2025).

Claim: South Korea spends over 4%, and 3% is the bar

Confirmed. Korea's R&D spending was 4.94% of GDP in 2023 in the World Bank's data, up from 2.05% in 2000 (World Bank, n.d.-b). Korea's own survey, released by the Ministry of Science and ICT in December 2024, put it at 4.96%, or 119.1 trillion won, second only to Israel (Asia Business Daily, 2024).

One nuance concerns who pays. The op-ed says governments must lead R&D spending, but in Korea, companies carried out 79.2% of R&D in 2023, and government money funded 23.6% (Asia Business Daily, 2024). Korea's high ratio is mainly a corporate story, which supports the author's other point, that private R&D must rise. Malaysia's business share, at 51%, is well below Korea's.

Malaysia's own target sits below the author's 3%, and it has moved. MOSTI's July 2025 release cited both 3.5% of GDP under the MADANI Economy agenda and at least 2.5% by 2030 under the National Science, Technology and Innovation Policy 2021–2030 (MOSTI, 2025). In July 2026, Deputy Science, Technology and Innovation Minister Mohammad Yusof Apdal told the Dewan Negara the target is 2.5% by 2030 (RTM, 2026). Even that is almost two and a half times the 2022 ratio. China, with income per person close to Malaysia's, spent 2.58% in 2023.

Spending is not the whole story. The World Bank's report cites Brazil, which from 2001 subsidised innovation while taxing payments for foreign intellectual property; patent applications rose, but the patents were of low quality (World Bank, 2024). How R&D money is spent matters as much as the ratio.

Claim: reliance on cheap labour holds Malaysia back

Malaysia's central bank made much the same argument in 2018. A box article in BNM's Annual Report 2017 found that documented foreign workers rose from 10.8% of the labour force in 2002 to a peak of 18.8% in 2007. BNM estimated that a foreign worker then cost about 30% less per hour than a local one, partly because of longer hours and exemptions from statutory contributions, and argued that cheap labour weakens firms' incentive to replace labour with technology (Bank Negara Malaysia [BNM], 2018).

That points to a nuance the op-ed leaves implicit: cheap labour is not only a choice firms make, but is shaped by policy on foreign worker quotas and levies. BNM noted that the rules on who pays the levy had changed three times in ten years, and welcomed a multi-tier levy, then expected in 2019, under which firms more dependent on foreign workers would pay more (BNM, 2018).

That levy has been slow to arrive:

• July 2025. The 13th Malaysia Plan (13MP) said it would be implemented in 2026, and set targets to cut foreign workers to 10% of the workforce by 2030 and 5% by 2035 (Free Malaysia Today, 2025).

• February 2026. Human Resources Minister Ramanan Ramakrishnan said it would roll out that year, with higher costs for firms that stay heavily dependent and collections going into a trust fund for automation and reskilling. He gave no rates or timeline, and put foreign workers at about 15% of the workforce, under a cap of 2.5 million (The Edge Malaysia, 2026).

• October 2026. We could not find published rates or a start date as of 13 October.

Wages are moving. The minimum wage rose from RM1,500 to RM1,700 a month on 1 February 2025 for employers with five or more workers, and for all employers on 1 August 2025; it covers foreign workers too (Lau, 2024). In Budget 2027, Prime Minister Anwar Ibrahim announced a rise to RM2,000 from June 2027, with micro, small and medium enterprises with annual sales below RM50 million exempted, and a minimum of RM2,500 for semi-skilled workers and graduates (The Star, 2026).

The labour share is the clearest test of the op-ed's wage story. Compensation of employees was 33.9% of GDP in 2025, or RM686.9 billion, up from 33.6% in 2024. Gross operating surplus, broadly the return to capital, took 62.0% (Department of Statistics Malaysia [DOSM], 2026). The 13MP aims to raise the employee share to 40% by 2030 (The Edge Malaysia, 2025).

Claim: South Korea shows the way out

The broad sequence holds up. The World Bank presents Korea as perhaps the best support for its staged strategy (World Bank, 2024):

• Income. Under US$1,200 per person in 1960; about US$33,000 by 2023.

• The 1960s. Public investment and incentives for private investment kick-started growth.

• The 1970s and 1980s. High investment plus infusion. Firms got tax credits for royalty payments, and the family-owned conglomerates, or chaebols, led in copying technology, mainly from Japan.

• Later. As the chaebols caught up, policy shifted towards innovation, backed by a push for engineering and management skills.

• The result. A Korean worker's average productivity rose from 20% of a US worker's in 1980 to more than 60% by 2019.

Two points need more nuance than the op-ed gives them.

Electronics came early. Economist Nathan Lane's study of Korea's Heavy and Chemical Industry (HCI) drive, published in The Quarterly Journal of Economics in 2025, shows that the drive, announced in January 1973, targeted six sectors at once: steel, nonferrous metals, shipbuilding, machinery, electronics and petrochemicals. Before 1973, Korea's export incentives applied across all industries rather than to chosen sectors (Lane, 2025). Electronics was part of the big push from the start.

The conditions were unusual. The drive followed President Park Chung-hee's self-coup in late 1972, relied on directed credit and tax breaks, and was wound down after his assassination in 1979. Lenders had been sceptical: in 1969 the World Bank and the US Export-Import Bank declined to back an early Korean steel mill, with the World Bank judging that Korea had no comparative advantage in steel. Lane finds that the targeted industries expanded faster than the rest of manufacturing, gained comparative advantage in world markets, and kept their gains after the policy ended (Lane, 2025).

That supports both the author's view that Korea's bet worked and his caveat that it is hard to copy: the push was temporary, as he recommends, but carried out by an authoritarian government. The World Bank also finds that preservation of the status quo, often by incumbent firms and elites, is the strongest force in middle-income economies (World Bank, 2024), a risk close to the cronyism the author flags.

Malaysia is not starting from garments

The op-ed's picture of cheap-labour factories fits parts of the economy, but not its export core. Malaysia accounts for about 13% of global semiconductor testing and packaging. The National Semiconductor Strategy, launched in 2024, offers RM25 billion in incentives and aims to train up to 60,000 Malaysian engineers, build 10 local champions in chip design and advanced manufacturing, and attract RM500 billion of investment (Hamzah & Ng, 2024).

The World Bank estimates that Malaysia's AI-related exports, mostly chips and other intermediate goods, rose from about 28% of GDP in 2023 to about 34% in 2025 (World Bank, 2026). These are gross export values, not value created in Malaysia, as we noted in our look at the World Bank's April 2026 update.

The New Industrial Master Plan 2030 (NIMP 2030) also targets wages, not only output: manufacturing value added of RM587.5 billion by 2030, up from RM364.1 billion in 2022, and a median monthly manufacturing salary of RM4,510, up 128% from RM1,976 in 2021 (Ministry of Investment, Trade and Industry [MITI], n.d.; Hong Leong Bank, 2023).

So the task is less about escaping cheap garments than moving up within electronics, from assembly and testing towards chip design and front-end manufacturing, where R&D matters most.

Checking the op-ed

The core diagnosis holds up: Malaysia's R&D ratio is about a fifth of Korea's and where it was in 2009, and the central bank has long argued that cheap foreign labour blunts the incentive to automate. The nuance is in who leads R&D, how Korea's path unfolded, and how far Malaysia's exports have already moved.

What to watch

• The multi-tier levy. Its rates, tiers and start date.

• June 2027. The RM2,000 minimum wage, and how many firms the small-business exemption covers.

• The next R&D survey. The National Survey of R&D 2025, covering 2024, will show whether spending is climbing towards 2.5% (Malaysian Science and Technology Information Centre, n.d.).

• July 2027. The World Bank's next classification, based on 2026 incomes.

References

Asia Business Daily. (2024, December 29). Last year, South Korea's R&D investment reached 119 trillion won... maintaining 2nd highest share relative to GDP worldwide. https://view.asiae.co.kr/en/article/2024122919164122724

Bank Negara Malaysia. (2018). Low-skilled foreign workers' distortions to the economy [Box article]. In Annual report 2017. https://www.bnm.gov.my/documents/20124/829200/cp01_001_box.pdf

Department of Statistics Malaysia. (2026, July 29). Gross domestic product income approach 2025. https://www.dosm.gov.my/portal-main/release-content/gross-domestic-product-income-approach-2025

Free Malaysia Today. (2025, July 31). Multi-tier levy for foreign workers delayed to 2026. https://www.freemalaysiatoday.com/category/nation/2025/07/31/multi-tier-levy-for-foreign-workers-delayed-to-2026

Hamzah, R., & Ng, Y. C. (2024, July 22). Malaysia's final push to support its semiconductor dreams. The Edge Malaysia, via MIDA. https://www.mida.gov.my/mida-news/malaysias-final-push-to-support-its-semiconductor-dreams/

Hong Leong Bank. (2023, September 4). Malaysia: New Industrial Master Plan (NIMP) 2030 [Research alert]. https://www.hlb.com.my/content/dam/hlb/my/docs/pdf/Global_Markets/research/04-09-2023.pdf

Ibrahim, A. (2025, September 5). Why cheap labour won't save Malaysia from economic limbo. Aliran. https://aliran.com/thinking-allowed-online/why-cheap-labour-wont-save-malaysia-from-economic-limbo

Lane, N. (2025). Manufacturing revolutions: Industrial policy and industrialization in South Korea. The Quarterly Journal of Economics, 140(3), 1683–1741. https://doi.org/10.1093/qje/qjaf025

Lau, S. (2024, December 12). Minimum Wages Order 2024 gazetted. Skrine. https://www.skrine.com/insights/alerts/december-2024/minimum-wages-order-2024-gazetted

Malaysian Science and Technology Information Centre. (n.d.). National Survey of Research and Development. Retrieved October 13, 2026, from https://mastic.mosti.gov.my/sti-survey/

Ministry of Investment, Trade and Industry. (n.d.). Macroeconomic targets for manufacturing sector (impact based). New Industrial Master Plan 2030. Retrieved October 13, 2026, from https://www.nimp2030.gov.my/index.php/pages/view/107?mid=486

Ministry of Science, Technology and Innovation. (2025, July 17). Increased investment and participation in research and development (R&D) strengthens Malaysia's aspiration to become a high-income, innovation-driven nation [Press release]. https://www.mosti.gov.my/wp-content/uploads/2025/07/17072025.1080073394.pdf

RTM. (2026, July 29). GERD disasar meningkat kepada 2.5 peratus daripada KDNK [GERD targeted to rise to 2.5 per cent of GDP]. Berita RTM. https://berita.rtm.gov.my/nasional/senarai-berita-nasional/senarai-artikel/gerd-disasar-meningkat-kepada-2-5-peratus-daripada-kdnk/

The Edge Malaysia. (2025, July 31). Malaysia aims for 4.5%-5.5% GDP growth under 13th Malaysia Plan 2026-2030; allocates RM430b for development projects. https://theedgemalaysia.com/node/764715

The Edge Malaysia. (2026, February 10). Higher costs, penalties for firms reliant on foreign workers under new multi-tier levy — HR minister. https://theedgemalaysia.com/node/792395

The Star. (2026, October 9). Budget 2027: Minimum wage to rise to RM2,000 from June 2027, says Anwar. https://www.thestar.com.my/news/nation/2026/10/09/budget-2027-minimum-wage-to-rise-to-rm2000-from-june-2027-says-anwar

World Bank. (n.d.-a). GNI per capita, Atlas method (current US$) [Data set]. World Development Indicators. Retrieved October 13, 2026, from https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

World Bank. (n.d.-b). Research and development expenditure (% of GDP) [Data set]. World Development Indicators. Retrieved October 13, 2026, from https://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS

World Bank. (n.d.-c). World Bank country and lending groups. Retrieved October 13, 2026, from https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups

World Bank. (2024). World development report 2024: The middle-income trap. https://doi.org/10.1596/978-1-4648-2078-6

World Bank. (2026). Industrial policy in the digital age [Overview]. East Asia and Pacific Economic Update (April 2026). https://doi.org/10.1596/978-1-4648-2327-5