share on
Malaysia is edging closer to high-income status, but sustaining that progress will depend on raising productivity, modernising regulation and investing in education to equip workers with the skills needed for a more innovation-driven economy, according to the OECD.
Malaysia has made significant economic progress over the past few decades, transforming from a commodity-based economy into a regional manufacturing and export hub. Strong growth, resilience against global shocks and rising living standards have placed the country on track to achieve high-income status between 2028 and 2030, according to the OECD.
However, reaching that milestone is only part of the journey.
According to the OECD Economic Surveys: Malaysia 2026, the country's next phase of growth will depend less on expanding its labour force and more on improving productivity, strengthening human capital and ensuring businesses can innovate in a more competitive economy. Long-standing challenges, including slowing productivity growth, regulatory complexity and widening skills mismatches, will need to be addressed if Malaysia is to deliver higher incomes and better opportunities for more people.
The report notes that while Malaysia's economy has demonstrated resilience through events such as the Asian Financial Crisis, the Global Financial Crisis and more recent geopolitical and trade-related disruptions, the policies that supported its earlier development may no longer be sufficient.
Instead, the OECD says future growth will rely on reforms that encourage innovation, strengthen competition and improve education outcomes, alongside more effective public services and stronger social protection.
Productivity must become the next engine of growth
One of the report's key messages is that productivity growth has slowed considerably over the past decade, possibly falling short of Malaysia's own ambitions despite the country maintaining higher productivity levels than many regional peers.
The OECD attributes this to a combination of regulatory barriers, limited competition in certain sectors and persistent shortages of skilled talent. These issues, it says, have made it more difficult for businesses, particularly smaller firms, to innovate, adopt new technologies and scale their operations.
As Malaysia's population ages and labour supply growth slows, improving productivity will become increasingly important in sustaining economic expansion and supporting higher wages.
Opening the economy to strengthen competition
The survey suggests Malaysia has room to create a more competitive business environment by reducing unnecessary regulatory barriers.
Foreign investment continues to face restrictions, including foreign equity caps and requirements affecting cross-border digital services. While recognising that safeguards may still be appropriate for genuinely strategic industries, the OECD says easing these restrictions could encourage greater foreign investment, improve knowledge transfer and strengthen Malaysia's participation in global value chains.
Beyond attracting investment, simplifying regulations could also make it easier for businesses to operate domestically.
The report recommends gradually reducing blanket price controls in favour of more targeted support for vulnerable households, while simplifying logistics regulations and making insolvency procedures more business friendly. Together, these measures could improve resource allocation and create stronger incentives for firms to innovate and grow.
Creating a more level playing field
The OECD also highlights the prominent role played by government-linked companies in several sectors of Malaysia's economy.
While acknowledging their contribution to economic development, the report notes that preferential treatment can limit competition and reduce opportunities for private businesses.
To create a more level playing field, it recommends strengthening competition policy, improving governance standards and reinforcing merit-based appointments alongside greater transparency in state-owned enterprises. Stronger anti-trust enforcement and fairer procurement practices could also help improve investor confidence and encourage private sector participation.
Helping MSMEs become more productive
Micro, small and medium-sized enterprises remain central to Malaysia's economy, but public support for these businesses is spread across numerous ministries, agencies and programmes.
According to the OECD, consolidating these schemes and evaluating them more systematically would improve their effectiveness. Rather than focusing primarily on the number of programmes available, future support should place greater emphasis on helping businesses adopt digital technologies, strengthen innovation capabilities and expand into export markets.
Digitalisation extends beyond businesses
The report also points to significant opportunities to improve productivity through greater digitalisation across the public sector.
Although Malaysia has made progress in digital government initiatives, implementation remains uneven across agencies. Stronger coordination, common interoperability standards and more consistent evaluation of digital investments could improve efficiency and service delivery.
Healthcare is highlighted as one area where digital transformation could deliver substantial gains, provided investments are better coordinated and outcomes are regularly assessed.
Governance remains an important enabler
Alongside regulatory reform, the OECD argues that improvements in governance will be essential to support long-term productivity growth.
The report recommends streamlining ministries and agencies, strengthening project evaluation and procurement controls, improving asset disclosure requirements for senior public officials, and ensuring anti-corruption and anti-money laundering institutions remain independent and effective.
According to the OECD, these governance reforms would not only improve public sector efficiency but also strengthen investor confidence and support sustainable economic growth.
Improving skills and education to support long-term growth
While boosting productivity is one side of the equation, the OECD says strengthening Malaysia's education and skills ecosystem will be equally important in preparing the workforce for a more knowledge-intensive economy.
Although Malaysia's education system has played a significant role in helping the country reach the threshold of high-income status, learning outcomes have weakened in recent years, while employers continue to report growing skills mismatches. As industries such as information technology, advanced manufacturing and electronics expand, demand for a broader and more specialised range of skills is expected to increase.
The report argues that addressing these gaps will require improvements across the entire education journey, from early childhood education to higher education and technical and vocational training.
Stronger foundations begin in early childhood
The OECD highlights early childhood education as one of the most effective ways to improve long-term learning outcomes while reducing inequalities.
Malaysia has already made preschool compulsory for five-year-olds and aims to achieve almost universal enrolment by 2030. However, the report notes that access to childcare remains limited, with public and registered private childcare currently serving only a small proportion of children below the age of five.
To improve participation, the OECD recommends making compulsory preschool education free for families and, over time, extending access to children aged three and four, bringing Malaysia closer to practices seen in many OECD economies. Additional investment will also be needed, as spending per preschool student remains substantially lower than expenditure on primary and secondary education.
The survey also suggests reducing fragmentation across early childhood services by placing childcare and preschool education under a single ministry, allowing for better coordination, more consistent standards and improved quality.
Raising standards in schools
Improving learning outcomes in schools is another major priority identified in the report.
Malaysia's performance in the 2022 OECD Programme for International Student Assessment (PISA) ranked among the bottom third of participating economies in mathematics, reading and science. Between 2018 and 2022, the country also recorded one of the largest declines across all three subjects, while the proportion of low-performing students was around twice the OECD average.
According to the OECD, improving these outcomes will require stronger support for teachers alongside greater school autonomy.
Among its recommendations are implementing the teacher assessment framework more actively, establishing a clearer professional framework for career progression, reducing teachers' administrative workload, and selecting school leaders based on capability rather than seniority. Giving schools greater autonomy while holding them accountable for outcomes could also contribute to better student performance.
Making TVET more responsive to industry needs
Technical and vocational education and training (TVET) is expected to play an increasingly important role in preparing workers for changing labour market demands.
The OECD welcomes Malaysia's ambition to place TVET on par with academic pathways but notes that the sector remains highly fragmented, comprising hundreds of public and private institutions.
To improve quality and transparency, the report recommends using the country's new TVET rating system to assess institutions based on graduate employability, wage outcomes and collaboration with employers. Closer engagement with the private sector in curriculum development would also help ensure graduates acquire skills that reflect evolving industry requirements.
Closing the gap between universities and employers
The report also points to growing signs of skills mismatches within higher education.
More than one-third of tertiary graduates were found to be in skill-related underemployment in 2025, while tertiary enrolment has declined in recent years as graduates encounter greater challenges entering suitable jobs.
To better align education with labour market needs, the OECD recommends strengthening collaboration between universities and businesses, particularly in curriculum design and programme development.
It also suggests giving public universities greater autonomy and accountability, including more flexibility over leadership appointments and institutional management, to help them respond more quickly to changing economic and workforce demands.
Going forward
The OECD concludes that Malaysia has demonstrated resilience despite heightened geopolitical uncertainty, global trade tensions and external economic shocks. Growth is projected to remain solid at 4.9% in 2026 and 5.0% in 2027, supported by continued investment, resilient domestic demand and the expansion of technology-related industries. However, sustaining that momentum will require reforms that go beyond short-term economic performance.
Ultimately, the OECD argues that maintaining Malaysia's growth trajectory will depend not only on economic resilience but also on its ability to equip businesses and workers with the capabilities needed for an increasingly digital and knowledge-driven future.
To view the full findings of the report, click here.
ALSO READ: Singapore and Malaysia respond as US imposes forced-labour tariffs on selected exports
share on
