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This study examines the Malaysia development record in the context of widespread concerns that the country, and others like it, may encounter major difficulties in graduating to the ranks of high‐income economies. It stresses the country’s rapid socioeconomic development, built on openness, reasonably competent macroeconomic management and attention to equity issues. It then investigates the country’s significant slowdown in investment and economic growth since the late 1990s, and asks whether this trend is related to the more general graduation issue. Our principal conclusion is that the slowdown has less to do with the problem of graduation and more to do with a set of country‐specific institutional and political economy challenges. Thus, the current concern within the country that it is in some sense ‘stuck in the middle’ points to the need for a set of major policy reforms to accelerate growth.

This paper updates estimates of the trends in income distribution in the eight countries of the developing East and Southeast Asian region. In the last update by Krongkaew (1994), inequality was found to be increasing in the newly industrialising economies of Hong Kong, Korea, Singapore and Taiwan, while in the ASEAN−4 (with the exception of Thailand) it was declining. Since then, the region has undergone the East Asian financial crisis of 1997–98. Recent data indicate that income distribution in Hong Kong and Taiwan continues to improve. Income inequality in South Korea declined until 1993 but began to increase slowly until the crisis sharply widened the disparity. The evidence for Singapore is mixed, with one set of estimates showing a dip in inequality while another indicates a widening of income disparity during the crisis. The crisis had the immediate impact of improving income distribution in all the ASEAN–4 countries, mainly because of reductions in the income shares of the top income groups. Later data show that inequality has since risen in all of them, except for Malaysia (for which no recent data are available).

The Malaysian manufacturing sector has been experiencing a gradual change in its production process as it shifts from labor‐intensive to more capital‐intensive techniques. This has led to a change in the skills required by the industries where skilled workers are in greater demand and where the wage ratio between skills favors the skilled workers. There are many factors that can influence an indi‐vidual's earnings. These include educational attainment, job location, types of industries and sex. This paper attempts to measure the determinants of earnings differentials among skilled, semi‐skilled and unskilled workers in the Malaysian manufacturing sector. The analysis is based on a survey of 2065 workers in six major industries conducted in 1999. These are the electrical and electronics, textile, wood‐based, transport equipment, food and chemical industries. The determin‐ants of earnings differentials are obtained by using the coefficients of the earnings functions. These factors are decomposed into several categories, namely human capital, individual characteristics and the residual. The results reveal that human capital variables, which comprise education, training and experience, play a significant role in determining the earnings differentials, particularly between skilled and semi‐skilled workers and between semi‐skilled and unskilled workers.

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