Sustainable GDP growth matters, but ...

THERE has been widespread discussion about the gross domestic product (GDP), claiming that the GDP measurement is meaningless or there are fundamental flaws behind the GDP metric.

Critics argue it fails to capture true societal progress, and ignores well-being and equality.

Why it matters? Tracking GDP, whether by production (output) or income (expenditure) approach allows the policymakers, economists and investors to gauge a country’s economic momentum – if it is increasing, shrinking or stagnating.

We have to adjust total economic output (nominal GDP) for inflation (the time value of money) to derive real GDP, which provides an accurate picture of whether actual production is increasing and not inflated by price effect.

In essence, GDP acts as the primary scorecard for assessing an economy’s size and overall economic health, and tracking whether an economy is growing or shrinking.

It is monitored closely in order to understand where the economy currently stands, and where the economy is headed in the future.

While we concur that GDP alone – a single concrete number, is an imperfect metric for growth and prosperity, its relevancy as a foundational economic tool remains undeniable despite its well-documented limitations.

For the time being, it is a universally accepted measurement that no other metric can currently be replicated.

What constitutes a “good” GDP growth rate? It primarily depends on a country’s stage of economic development, and structural maturity.

For a developed economy, an annual GDP growth rate of 2% to 3% is considered ideal and sustainable.

Any GDP growth rate above the said rate is a strong sign that an economy is expanding and prospering. For developing or emerging economies, a “good” rate is typically much higher, often ranging between 6% and 7%.

Malaysia’s GDP trajectory over the four decades reflected a different phases of economic structural evolution transitioned from a resource-driven base in the 1960s to export-led manufacturing in the 1980s and 1990s, before evolving into a modern, service-based economy focused on digital innovation and regional integration.

The GDP compound annual growth rate (CAGR) for each decade was: 1970s (8.4%), 1980s (5.6%), 1990s (6.9%) and 2000s (4.3%).

Domestic price stability (long-term inflation averages of 2.1% in 2000 to 2025) and stable labour market conditions (unemployment rate of 3.4% in 2000 to 2025).

Malaysia is classified by the World Bank Group as an upper-middle-income economy. Real GDP has grown by a CAGR of 5.2% in 2021 to 2025, a strong improvement compared to 2.7% in 2015 to 2020.

Gross national income (GNI) per capita grew by 4.5% per annum to reach RM57,200 (US$13,360) in 2025 from RM36,710 (US$9,395) in 2015.

This places Malaysia in the upper-middle-income bracket as calculated by the World Bank Atlas method, ranging between US$4,636 and US$14,375.

Median household income grew by 4.3% per annum to RM7,017 in 2024 from RM4,585 in 2014.

The income distribution gap has indeed narrowed, with the GNI coefficient improving from 0.404 in 2022 to 0.390 in 2024, representing a 1.4-percentage-point decrease in income inequality.

This positive trend is supported by a drop in the Urban inequality to 0.378, while rural inequality declined to 0.344.

Because of the limitations of GDP measurement, the policymakers emphasise a thriving society requires metric beyond GDP.

The Ekonomi Madani framework uses the “Raise the Ceiling, Raise the Floor” strategy to transition Malaysia into a high-income economy while ensuring equitable wealth distribution.

The United Nations Sustainable Development Goals (SDGs) are fully integrated into the 13th Malaysia Plan (13MP; 2026 to 2030), structurally advancing sustainability, human well-being, and green growth.

Key SDG priorities and targets address areas lagging behind, focusing on improving gender equality, good health and well-being, peace and strong institutions, and climate action.

Overall, the Malaysian Well-being Index, comprising the components of economic well-being, social well-being and environmental, increased by 1.3% per annum over a four-year period (2021 to 2024), rising to 120.6 in 2024 (114.6 in 2020).

The Economic Well-being Index increased by 1.7% per annum to 128.8 in 2024, on better transportation, income and distribution.

The Working Life Index declined, indicating further enhancements in work–life balance, address skilled under unemployment, strengthen social protection and labour well-being.

The 1.4% per annum rise in the Social Well-being Index in 2021 to 2024 was primarily driven by better improvement in entertainment and recreation, housing, culture and governance.

However, the healthcare and public safety declined by 0.6% per annum each in 2021 to 2024, underscoring the need to improve access to quality healthcare services, and create safer living environments for thriving communities as well as to foster social cohesion and national unity.

The Education Index grew moderately by 1.1% per annum over the same period. Access to quality education is vital as it directly dictates future employment opportunities and fosters emotional skills.

The Environmental Well-being Index increased marginally by 0.2% per annum in 2021 to 2024, due to declines in the air quality and biodiversity resources.

Although some positive steps were taken, the sub-composite was held back by the broader pressures on natural resources and

localised environmental degradation. Malaysia is advancing climate action, energy security, and resilience.

The Compensation of Employees (CE) to GDP ratio measures the proportion of a nation’s total economic output (GDP) that is paid to workers as wages, salaries, and benefits, compared to the share that goes to capital owners and businesses.

A higher ratio means workers are taking home a larger portion of the national “economic pie,” while a lower ratio indicates that a larger portion of revenue is retained as corporate profits or operating surpluses.

The CE ratio is used to track progress in wealth equality. Under the 13MP, the target is to raise the CE to GDP ratio to 40% by 2030.

The CE stood at 33.6% of GDP in 2024, slipping from a high of 37.4% in 2020 and average of 35.6% in 2015 to 2019.

This ratio trails mature, developed economies: Germany (53.4%), the United Kingdom (48.7%), South Korea (47.5%), Australia (47.2%) and Singapore (39.9%).

Improving the CE to GDP ratio requires structural reforms that ensure wage growth outpaces or matches the employees’ qualification and skillset.

Despite registering low unemployment rate and historic high labour force participation rate, many employees, particularly tertiary graduates are employed in jobs below their qualification level, pointing to persistent skills mismatches and limited absorption of high-skilled talent.

Skills-related underemployment is increasingly weakening the link between education, productivity, and wage growth.

Skills-related underemployment is highest among younger

workers. As of the first quarter of this financial year, 39.7% of tertiary-educated workers aged 25 to 34 are in jobs below their skill level, but the rate falls steadily with age.

Structural actionable strategies to raise the CE to GDP ratio are increasing awareness for implementing a Productivity-Linked Wage Systems, which ties wage adjustments to individual productivity and corporate performance, including employee share option scheme, and aligns labour costs with revenue growth, ensuring effective and wider implementation of progressive wage policy and enforcing minimum wage legislation, encouraging industrial upgrading toward high-value sectors, upskilling the workforce with digital competencies, artificial intelligence (AI) skills, and technical and vocational education and training to justify higher wages as well as the strengthening of collective bargaining right.

Addressing skill underemployment requires bridging the gap between an employee qualifications and job requirements. Strategies include enrolling in upskilling or reskilling programmes to meet high-demand fields industries (such as AI, semiconductor technology, data science, or green energy), gaining targeted certifications to boost the resume with industry-recognised credentials and professional certificates, seeking out mentorship, and actively volunteering to build specialised experience in the desired field.

Good GDP growth is not the whole story. The government needs to sustain trust in institutions as public trust is the bedrock of effective policy implementation.

Sustaining trust in institutions requires consistent accountability, transparency, and responsiveness.

When citizens trust institutions, they are more likely to voluntarily comply with rules and regulations, support (buy-in) reforms for ensuring economic sustainability, and engage with the government.

The government need a broader way to judge whether the economic development is working.

It calls for complementing the GDP with a practical dashboard of indicators that captures what GDP misses: well-being, equity, sustainability and resilience.

People feeling the impact of good GDP growth requires effective execution of economic policies and development programmes that directly translate economic expansion into generating better

paying jobs, improving living standards, lowering costs of living, generating boosting real wages, and implementing targeted structural reform.

Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.