[COLUMNIST] Can Malaysia replicate South Korea’s economic miracle? Lessons from wage-led growth

FOR decades, the “Miracle on the Han River” has stood as a testament to South Korea’s transformative journey from a war‐torn nation to a high‐income economy. Central to that success was a comprehensive industrial strategy that included wage growth as one of its many components. While wage increases triggered short‐term inflation, they played a role in boosting domestic consumption, enhancing labour productivity, and ultimately strengthening the nation’s economic stature. By 1995, South Korea had been categorised as a high‐income country (Choi, 2019) driven not only by average 50% wage rise by 1990 compared to the end of 1986 but also by targeted investments in industrial upgrading and innovation.

Crucially, South Korea’s story is not one of wage increases in isolation. In the 1960s and 1970s, the nation embarked on rapid industrialisation through an outward‐looking strategy that promoted labour‐intensive exports. According to Savada and Shaw (1990), the initial growth was underpinned by aggressive industrial policies and a significant inflow of foreign capital that supplemented domestic savings. This foundation allowed for later shifts in policy; when the industrial sector in the 1970s began to face challenges from low value‐added, labour‐intensive goods, the government reoriented its focus towards high value‐added sectors such as steel, shipbuilding, electronics, and petrochemicals (Lan, 2024). Wage growth was a byproduct of this shift rather than its initial catalyst.

Yet, even as rising wages in South Korea initially risked inflationary pressures, improvements in production capacity utilisation and labour productivity helped mitigate these challenges over time. By the late 1980s, higher wages expanded domestic demand—allowing workers to purchase luxury items for the first time—and naturally (by necessity) spurred investment in technological upgrading and industrial diversification. As EMIR Research argued earlier, contrary to canonical beliefs, increased productivity is the key force that offsets inflation. Rather than relying solely on tightening fiscal or monetary policy, enhancing the economy’s productive capacity (primarily through innovation) can dampen inflationary pressures—a lesson that resonates with the South Korean experience.

However, it is also important to note that South Korea’s chaebol-dominated economy played a significant role in absorbing wage hikes due to economies of scale, with large conglomerates able to leverage their resources and operational efficiencies. In stark contrast, Malaysia lacks such industrial behemoths. With the economy dominated by small and medium enterprises (SMEs), significant wage hikes may strain these businesses unless accompanied by targeted policies aimed at upgrading and scaling local industry. This disparity raises a critical question: Does Malaysia have—or can it develop—industrial champions capable of sustaining wage-led growth?

In contrast to South Korean experience, Malaysia’s economic landscape today presents a set of distinct challenges. The nation remains heavily reliant on low value‐added exports and labour‐intensive production. According to the Observatories of Economic Complexity (OEC), electronics and machinery made up 44.61% of Malaysia’s 2023 exports, yet most were low-value components—43.8% of electronics and machinery export were integrated circuits (ICs) for higher-value electronics. Despite producing large volumes of ICs and semiconductors, local industries fail to convert them into high value-added goods.

Moreover, in many sectors—from agriculture to manufacturing—Malaysia’s reliance on cheap foreign labour, with over 2.4 million foreign workers in Malaysia as of September 2024, dampens the potential multiplier effect of wage‐led growth, as a substantial share of wage increases flows abroad as remittances (The Star, 2024).

A further complication is the persistent brain drain. Unlike South Korea’s historical environment—where wage increases were buttressed (due to necessity) by massive investments in education, research and development, and by an innovation‐friendly ecosystem—Malaysia faces persistent brain drain due to, low wages and slow wage growth, limited career progression, unconducive work environment, and a lack of opportunities for innovation, as well as other well-established push factors (refer to EMIR Research earlier report “Malaysian Brain Drain: Voices Echoing Through Research”), highlighting that wage increases alone will not be sufficient to retain talent without broader structural reforms.

Compounding these economic challenges are Malaysia’s institutional and governance issues. South Korea’s success was not solely due to economic policies but was also underpinned by strong governance, institutional stability, and disciplined long-term planning. Malaysia, however, has struggled with inconsistent policy execution, political instability, and challenges in corruption control.

Therefore, South Korea’s experience provides valuable lessons for adjusting Malaysia’s strategy.

Data from Moon’s administration, as reported by Lee (2023), shows that a well‐designed income‐led growth policy can yield positive outcomes. For instance, the share of low‐wage workers earning less than two‐thirds of the median wage in South Korea fell from 22.3% in 2017 to 19% in 2018 and further to 17% in 2019, while the labour share for self‐employed income increased from 68.1% in 2017 to 72.2% in 2019.

These statistics underscore the potential for wage‐led policies to reduce inequality and boost domestic demand when embedded within a broader reform agenda.

So, how might Malaysia adjust South Korea’s blueprint for today’s context? The answer lies in a multifaceted approach that goes beyond simply increasing wages. All of the following strategic thrusts must be pursued simultaneously, as neglecting any single component could seriously undermine the overall effectiveness of the strategy.

Investing in Human Capital

Substantial wage increases must be coupled with a concerted effort to develop local talent. Enhancing and expanding education, vocational training and research and development initiatives is critical to creating an environment where skilled workers can innovate and grow. As EMIR research has highlighted, the absence of robust career advancement opportunities—especially in research and development—has been a major push factor driving talent overseas (“Malaysian Brain Drain: Voices Echoing Through Research”). Without addressing these gaps, wage increases alone may serve as a temporary fix rather than a catalyst for sustainable growth.

Shifting the Industrial Focus

Malaysia must accelerate its transition from low value‐added production to high‐tech, innovative industries. Our export composition, heavily dominated by basic components, calls for targeted fiscal incentives for high‐tech manufacturing and greater investment in R&D. South Korea’s shift from labour‐intensive exports to high value‐added goods demonstrates how a strategic industrial reorientation can lead to long‐term prosperity. In doing so, Malaysia can also address the broader challenges, ensuring that wage growth translates into enhanced competitiveness and productivity.

Reforming Labour Market Policies

An effective wage‐led growth strategy in Malaysia must tackle the dual challenge of a significant foreign workforce and structural labour market inefficiencies (refer to “Complete Reform of 3D Sectors Needed to Reduce Reliance on Foreign Workers”). Strengthening regulations to ensure fair wages for local workers—and curbing reliance on low‐skilled, often illegal, migrant labour—is essential. Without such reforms, wage increases risk being absorbed by a system in which the benefits do not circulate within the domestic economy, limiting the overall impact on local demand.

Mitigating Inflationary Pressures

As evidenced by South Korea’s experience—where rapid wage hikes in the 1970s led to inflationary pressures later mitigated by improved productivity (Kim, 1991)—Malaysia must carefully calibrate its fiscal and monetary policies. Strategic government interventions, such as targeted subsidies and expanded social safety nets, can help cushion the economy from short‐term inflation while ensuring that wage increases ultimately foster sustainable growth.

Addressing Brain Drain

Perhaps the most critical element is retaining high‐skilled talent. EMIR Research meta-analytical review on Malaysian brain drain (“Malaysian Brain Drain: Voices Echoing Through Research”) emphasises that enhancing the quality of the work environment, providing robust career development opportunities, fostering an innovation‐friendly ecosystem, and strengthening institutions and governance system are as vital as competitive wages. Malaysia must create an environment that not only attracts but also retains talent by addressing job security, promotion prospects and workplace culture.

Ultimately, South Korea’s experience offers valuable lessons. Its transformation was built on a comprehensive framework—wage increases, industrial upgrading, labour market reforms and human capital development. For Malaysia, the challenge is to tailor these principles to its own context by addressing over‐reliance on foreign labour and persistent brain drain.

We should aim for an economy where wage increases drive sustainable progress—raising incomes, spurring innovation, retaining talent, and moving toward high‐income status. While Malaysia’s MADANI approach seeks to merge income‐led growth with expanded social safety nets, policymakers must take bolder measures to avoid missing a transformative opportunity like South Korea’s.

By learning from global success stories and addressing structural challenges head‐on, Malaysia can achieve robust, inclusive growth—a future where wage‐led growth is not just a policy tool, but the cornerstone of our economic evolution.

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Chia Chu Hang is a Research Assistant at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.

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