Editor's Note: In recent years, many viewpoints have claimed that Southeast Asian countries have fallen into the "middle-income trap," and have proposed various reform suggestions to address this issue. However, objectively speaking, is the "middle-income trap" a real problem or just an excuse for blaming the wrong political and economic structure? What kind of new political order should "Global South" countries call for during this era of great changes?
Regarding these questions, in June 2025, at the academic conference "Global South and Southeast Asia," Observer Net had a dialogue with Dr. Jomo Kwame Sundaram, a Malaysian economist and founder and chairman of the International Association of Development Economists.
[Interview/Observer Net, Tang Xiaofu; Translation/Xue Kaihuan]
Observer Net: You once called the IMF's austerity policies "the root of inequality," and in your articles, you pointed out that the IMF's structural adjustment programs have created "permanently austere states" in the Global South. Thirty years after the Asian financial crisis, how should Malaysia and other middle-income countries reform their fiscal and monetary policies to achieve macroeconomic stability while overcoming this legacy issue?
Dr. Jomo Sundaram: You have raised a difficult and important question. The financial crisis of 1997–98 had both universal characteristics and unique features, which we must distinguish. We need to recognize that some unique characteristics of the crisis, due to changing conditions caused by the continuous evolution of the financial system, are less likely to reoccur. At the same time, we must fully understand these changes and take preventive measures accordingly.
Professor Jomo answering questions from Observer Net
An important safeguard in the old system was Article VI of the IMF Charter, which gave countries the right to control their capital account. Unfortunately, in the 1990s, it was the IMF itself, which was supposed to ensure countries' ability to control their capital account, that actually urged them to give up control over their capital account. This was one of the main problems leading to the 1997 and 1998 financial crisis and also led to a series of other new problems. Therefore, such systemic issues need to be addressed.
Unfortunately, the role of the IMF and other international financial, monetary, and regulatory institutions has greatly weakened today, resulting in countries no longer being able to effectively control their capital accounts. Most countries now have powerful financial interest groups that oppose any policy constraints, discipline, or behavioral norms. They continuously erode countries' control over capital outflows, continuing to retain the freedom to move money out.
This is particularly serious for developing countries, as many of these capital outflows are illegal or at least non-compliant. Once the funds leave the country, there is almost no motivation for them to return, causing the remaining value that should stay within the country to be taken away by the elite, neither used for investment nor helpful for capital accumulation and economic growth. This is a very serious problem for the entire system.
At the same time, we must also recognize that with the development of the international financial system, new challenges continue to emerge. One major challenge is that many international monetary and financial instruments have been "weaponized." For example, the West has seized many financial assets of certain countries and governments they dislike, such as Venezuela and Russia.
This has become a serious issue. The consequence is a decline in trust in the international monetary and financial system among countries, leading them to seek other ways to protect their interests. In this context, central bank digital currencies and so-called cryptocurrencies have recently tried to find a place for themselves and have achieved some success, but they have also brought new problems.
Observer Net: Your research reveals how WTO rules "force the opening of Southern food markets." You mentioned that "30% of Malaysia's rice is imported," which is a "time bomb." Considering climate change and geopolitical issues, what are your recommendations for the future of staple crop production? Should we violate trade orthodoxy and rebuild local agriculture, even if it means violating free trade agreements?
Dr. Jomo Sundaram: I don't think there is a serious violation of existing free trade agreements here. The main problem is that there are almost no incentives encouraging farmers to produce for food security. Farmers receive incentives mainly for growing cash crops for export, sometimes even just for exporting to neighboring countries. This is a big problem currently.
Malaysia grows a large amount of cash crops
Many foods are actually imported. Rice, for example, is only partially produced domestically, but even so, farmers can earn more by growing other crops. Therefore, they prefer not to grow food whenever possible. The problem of food production has become serious, and it has become a major隐患.
Recently, there have been cases of food shortages, such as during the pandemic and other emergencies, including the Malaysian government, which had to hastily implement policies to respond, which not only failed to solve the problem but worsened it. In other words, the situation became worse. Therefore, even economies that previously imported food from Malaysia have reduced their imports from Malaysia.
I think for many small countries, it is extremely difficult to completely self-sufficiently produce all food, and I would not insist on doing so. But I believe it is important for countries to have the means to ensure food security. Food security does not mean completely not importing anything. I think we need a more comprehensive policy.
However, our current single-crop economy model has been quite successful so far, mainly because the crops grown—especially palm oil—are highly resilient, easy to cultivate, and less susceptible to disease. Therefore, this model has achieved considerable success.
Observer Net: Malaysia's per capita GDP is very close to China's, so the international community also has similar concerns about us, worrying that Malaysia may also face the middle-income trap. Especially considering that Malaysia's per capita GDP has remained stagnant between $11,000 and $12,000 from 2010 to 2023, with slow productivity growth and over-reliance on low-value manufacturing. How do Malaysian economists view these issues? Where is the problem? What do you think is the most critical solution to overcome the middle-income trap?
Dr. Jomo Sundaram: The middle-income trap is a trap imagined by World Bank economists. Because they have proposed many suggestions for the development of many countries, especially Latin American countries, but what they promised has not been fulfilled. So they blamed the Latin American countries themselves and claimed that there is a middle-income trap.
We should not describe such issues with the term "middle-income trap." In fact, the main problem Malaysia is facing now is that the income of most of its labor force does not match their productivity level. In fact, Malaysia is still trying to compete with low-income countries for the opportunity to produce similar goods.
On the contrary, Malaysia has a high level of education and should pay workers higher wages to achieve higher productivity. Take China as an example, we see that China initially started large-scale production at a low income level. But as mechanization and other factors increased workers' productivity, when income rose, we found that workers could get better working conditions and higher income, etc. This is what Malaysia and other economies need to do, and these economies should not overly rely on strategies that keep most people in low income.
An economy may have a high income on paper, but in reality, the income of most of its population is relatively low. This is the situation faced by Southeast Asian countries, unlike Northeast Asian countries, where workers enjoyed a higher standard of living when productivity increased in Japan, South Korea, and China.
Observer Net: The transformation of resource-dependent economies is a key case study in the research of "Global South" countries. Currently, about half of Malaysia's electricity still relies on coal, and green energy transition faces high costs. What are your thoughts on this dilemma? In your book "Growth After the Asian Crisis" published in 2020, you proposed the concept of "smarter government intervention." How should Malaysia adapt to the green transition? Will it adopt policies similar to government-led R&D or subsidies for small and medium enterprises?
Dr. Jomo Sundaram: In today's world, accelerating the green transition is possible, especially in the energy sector. Today, over a billion people cannot even access electricity, and many others have unstable electricity supply, which is a major issue.
The decline in the cost of new energy power generation means that countries can almost start from scratch and directly enter the new energy era
Now, new renewable energy, especially photovoltaic solar panels and wind turbines, can generate electricity at an average cost lower than almost all fossil fuels, except coal. Coal remains the cheapest fossil fuel and is still widely mined and used.
To encourage poor countries to move away from fossil fuels, the world should incentivize and popularize photovoltaic solar panels. Unfortunately, the West does not want to do this now, mainly because more than 70% of photovoltaic solar panels in the world are produced in China. South Korea and Malaysia also once produced a large number of photovoltaic solar panels, but their prices were not as low as Chinese products. Therefore, we should ensure that China continues to increase the production of photovoltaic solar panels and promote their use as widely as possible.
Previously, when talking about energy transition, people thought that countries needed to first transition from fossil fuels to renewable energy, but now everything can start from scratch. If a place has no electricity, it can directly install photovoltaic solar panels or wind turbines. This is feasible and cheaper for most parts of the world.
But the premise is that the necessary basic conditions are in place, and most of the poorest developing countries cannot even afford the cost of solar panels, so they often have to rely on coal power. If we continue like this, the scale of global energy transition will probably be too small.
I don't talk much about Malaysia's situation because the proportion of fossil fuel energy used in Malaysia is only a small part of the world. As a middle-income country, Malaysia has the ability and should accelerate the green transition process. Unfortunately, about thirty-five years ago, the government made a big mistake when issuing power generation licenses to private companies. Private companies, driven by the pursuit of maximum profit, chose to continue using coal for power generation instead of renewable energy.
Observer Net: Chinese companies are actively expanding overseas in industries such as new energy and semiconductors. Chinese electric vehicle giants like BYD are setting up factories in Malaysia. Can Malaysia use Chinese investment to achieve industrial upgrading, rather than——quoting your 2023 IDEAS speech——staying merely in "factory workshops"? China has always advocated the spirit of "consultation, co-construction, and sharing" in the "Belt and Road" initiative. How can negotiations avoid falling into "technological dependence"?
Dr. Jomo Sundaram: I think it is very difficult to completely avoid technological dependence on foreign sources initially, because Malaysia has not done enough in R&D. However, there are already some existing joint ventures, which are good starting points to reduce technological dependence.
Take the cooperation between Geely and Proton as an example. They are collaborating to produce multiple car models. Currently, Proton mainly produces Geely cars for the Malaysian market, but Proton could export cars to the world. For instance, in Malaysia, we use right-hand drive cars, while in China, we use left-hand drive cars. Why can't China outsource the production of right-hand drive cars to Malaysia for production?
Similarly, why can't more successful Chinese electric vehicle companies set up production bases in Malaysia to produce for the international market? Because the problems China is currently facing are likely to persist, so cooperating with genuine joint ventures in places like Malaysia to produce and export to other parts of the world always has advantages.
Geely and Proton collaborating in car production
Observer Net: Let's talk about semiconductors. Washington has recently listed four Malaysian chip companies on the blacklist, citing their cooperation with Chinese companies. Is our semiconductor industry suffering from "collateral damage" in this cold war? What survival guide do you suggest?
Dr. Jomo Sundaram: I haven't been following these specific details you described, so I can't comment on them. But as you know, the U.S.-China conflict is not only taking place between the United States and China, but also involving many other countries around the world. That's why I have long advocated that Malaysia, Southeast Asian countries, and many developing countries should maintain a non-aligned stance.
They should not directly get involved in the U.S. camp, but instead should maintain a non-aligned stance, build good relationships with all countries, and strive to promote more international cooperation, making it the foundation of world peace, rather than fueling such competition. Now, the U.S.-China rivalry is not just competition, but economic warfare. It involves not only tariffs but also many other areas such as technology.
If there is more cooperation and peace, rather than war (including economic warfare), the world would be much better, and we could all progress together, benefiting the entire world.
Observer Net: Let's turn to ASEAN. We know that ASEAN integration is beneficial and has shown significant results, but there are still shortcomings in the way it is advanced. You wrote that ASEAN integration "looks good on Excel, but not in the slums." How should Malaysia push for a fairer regional value chain?
Dr. Jomo Sundaram: The ASEAN Free Trade Area was established in the 1990s. In terms of free trade, its progress has been minimal. Unfortunately, many people in developing countries believe that free trade is beneficial for everyone. In fact, this is not the case. There is little evidence to show that free trade benefits all parties involved.
Of course, each situation is different, and it is impossible to generalize. Therefore, we should always be skeptical of claims that free trade is "foolproof"; more importantly, free trade often means that the productive capacity of many economies is destroyed, thereby losing the possibility for developing countries to nurture new productive capacity and eventually stand in international competition.
We should consider various forms of cooperation to promote common progress among East Asian countries. Economic cooperation is extremely important and can achieve mutual benefits with various possibilities. In trade negotiations, both sides are often zero-sum games, either winning or losing. However, broader economic cooperation aims for common prosperity and achieving a win-win situation.
I think this is particularly desirable for countries like Malaysia and China, and should become the foundation of East Asian economic cooperation. For this reason, I have strongly advocated accelerating the RCEP (Regional Comprehensive Economic Partnership, which includes ASEAN countries and China, Japan, and South Korea). Together, we occupy more than 40% of the global economy and are located in the region with the fastest-growing global economy, which is crucial for the future.
For me, "ASEAN+3" or RCEP is more important than ASEAN alone. For example, after the East Asian financial crisis of 1997–1998, countries had more cooperation in monetary affairs. In 2022, the Governor of the Bank of Korea, Lee Chang-yong, delivered a keynote speech titled "Enhancing the East Asian Regional Financial Safety Net" at the BIS-hosted "East Asian Financial Safety Net Roundtable," explicitly supporting the idea of transitioning to an Asian Monetary Fund.
We must explore new forms of cooperation within East Asia to achieve mutual benefits, not just limited to free trade. Free trade is a double-edged sword, bringing certain benefits but also paying a high price.
Observer Net: Okay. Perhaps we can talk about your experience at the United Nations. When Malaysia pegged its currency to the dollar in 1998, you called capital controls "necessary heresy." With your extensive experience at the United Nations, how do you think ASEAN should overcome the dominance of the dollar in this wave of de-dollarization?
Dr. Jomo Sundaram: Although the dominance of the dollar and its so-called "excessive privilege" is not liked by most countries in the world, in my opinion, this is not the primary issue. The behavior of the Washington leadership in recent years has led to the decline of the dollar, because when the U.S. seizes the property of other countries under its own reasons and excuses, it undermines confidence in the dollar worldwide.
President Trump threatened countries that tried to move away from the dollar, mainly Brazil and South Africa. In fact, even the BRICS countries may not agree to immediately de-dollarize.
Observer Net: As a former UN official, how should "Global South" countries reform the international financial architecture—particularly the voting rights of the IMF—to make representation truly meaningful? Or, as some left-wing scholars say, should China play a leading role in helping establish a new Bretton Woods system to bypass Western dominance?
Dr. Jomo Sundaram: I think this is a very important time to raise this question. We can see that President Trump changed the rules at the beginning of his second term, abandoning many existing rules. Other countries in the world do not agree with this behavior. At the same time, we must also recognize that the old rules were not good solutions. Therefore, we should take advantage of this opportunity to try to push for reforms to improve the international monetary and financial system, to ensure greater financial stability.
Professor Jomo at the GSN meeting GSN
I would like to further explain that the reason the Bretton Woods Conference is called the United Nations Monetary and Financial Conference is not only because it created the IMF and the World Bank, but also because it envisioned a framework for post-war reconstruction and post-colonial development.
Today, we see that this system has been abused and in many cases has not worked effectively. Now is the time for us to work together and try to improve this system, not to benefit one country at the expense of others, but to seek a solution that is more beneficial for all of us.
For example, the problem with the current reserve currency system essentially comes down to the issue of payment settlement. Long before the establishment of the Bretton Woods system, Keynes and others in Britain proposed their own schemes to coordinate trade surpluses and deficits, but the U.S. was convinced that it would always have a trade surplus and was not interested in these proposals, insisting on creating the Bretton Woods system.
However, less than two decades later, in the 1960s, the U.S. completely lost its trade surplus advantage. This is the root of the current problem: for half a century, the U.S. has been issuing a lot of dollars to the world, and in fact, other countries have been providing "subsidies" for the issuance of dollars.
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