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Malaysia Economy

From an economy dominated by the production of raw natural resource materials, such as tin and rubber, even as recently as the 1970s, Malaysia today has a diversified economy and has become a leading exporter of electrical appliances, electronic parts and components and natural gas. After the Asian financial crisis of 1997-1998, Malaysia continued to post solid growth rates, averaging 5.5 percent per year from 2000-2008. Malaysia was hit by the Global Financial Crisis in 2009 but recovered rapidly, posting growth rates averaging 5.7 percent since 2010, through 2017. The gross domestic product (GDP) growth rate is predicted to rise to 4.9% for 2017.

Malaysia is a highly open, upper-middle income economy. Malaysia was one of 13 countries identified by the Commission on Growth and Development in its Growth Report to have recorded average growth of more than 7 percent per year for 25 years or more. Less than 1 percent of Malaysian households live in extreme poverty, and the government’s focus has shifted toward addressing the well-being of the poorest 40 percent of the population (“the bottom 40”). This low-income group remains particularly vulnerable to economic shocks as well as increases in the cost of living and mounting financial obligations. Income inequality in Malaysia remains high relative to other East Asian countries, but is gradually declining. For example, from 2009 to 2014 the real average household incomes of the bottom 40 grew at 11.9 percent per year, compared to 7.9 percent for the total population of Malaysia, thus narrowing income disparities. Following the removal of broad-based subsidies, the government has gradually moved toward more targeted measures to support the poor and vulnerable, mainly in the form of cash transfers to low-income households.

Malaysia’s near-term economic outlook remains favorable, reflecting a well-diversified and open economy that has successfully weathered the impact of external shocks. Domestic demand is expected to continue to anchor economic growth, supported by continued income growth and a stable labor market, while an improving external environment would contribute positively to demand for Malaysia’s tradable goods and services. Accelerating structural reforms to enhance public sector performance and boost the productivity of public spending will be vital to sustain robust growth in a challenging external environment.

While significant, Malaysia’s productivity growth over the past 25 years has been below those in several global and regional comparators. As factor accumulation is expected to slow, accelerating productivity growth is the main path for Malaysia to achieve convergence with high-income economies. Accelerated implementation of productivity-enhancing reforms to increase the quality of human capital and create more competition in the economy will be key for Malaysia to secure a lasting place among the ranks of high-income economies.

Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy. Since it became independent, Malaysia's economic record has been one of Asia's best. Real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005. Performance peaked in the early 1980s through the mid-1990s, as the economy experienced sustained rapid growth averaging almost 8% annually. High levels of foreign and domestic investment played a significant role as the economy diversified and modernized. Once heavily dependent on primary products such as rubber and tin, Malaysia today is a middle-income country with a multi-sector economy based on services and manufacturing. Malaysia is one of the world's largest exporters of semiconductor devices, electrical goods, and information and communication technology (ICT) products.

Prime Minister Najib Razak (Najib) made generating new domestic and foreign investment a centerpiece of his economic reform program introduced in March 2010 as the New Economic Model (NEM). Although FDI inflow continued to recover from the effects of the 2008-2009 global financial crises, Malaysia’s performance in attracting FDI relative to both earlier decades and the rest of the Association of Southeast Asian Nations (ASEAN) slowed. According to a Organization for Economic Cooperation and Development (OECD) Investment Policy Review of Malaysia, FDI to Malaysia began to decline in 1992, and private investment overall started to slide in 1997 following the Asian financial crises. By 2013, FDI levels are at record high levels in absolute terms, but at an all-time low as a percentage of GDP. Moreover, Malaysia’s percentage of overall investment in the ASEAN member states is now lower than its share of the group’s GDP.

As a destination for FDI, Malaysia’s attractiveness for lower-wage manufacturing has diminished as years of steady economic growth have increased average wage levels making Malaysia an upper middle-income country. The NEM seeks to move the economy further “up the value chain” to high income status by promoting investment in higher value added manufacturing and service sectors.

The government continues to actively manage the economy. Malaysia's New Economic Policy (NEP), first established in 1971, was a 10-year plan that sought to rectify a situation whereby ethnic Malays and indigenous peoples ("bumiputera"), who comprised nearly 60% of the population, held less than 3% of the nation's wealth. Policy makers implemented a complex network of racial preferences intended to promote the acquisition of economic assets by bumiputera. In 1981 when the racial preferences were set to expire, the government extended the NEP for another 10 years, stating that its goals had not been achieved. The policies again were extended in 1991 and in 2001.

The constitution provides for equal protection under the law and prohibits discrimination against citizens based on sex, religion, race, descent, or place of birth. However, the constitution also provides for the "special position" of ethnic Malays and the indigenous groups of the eastern states of Sabah and Sarawak (collectively, bumiputras), and discrimination based on this provision persisted. Government policies and legislation gave preferences to bumiputras in housing, home ownership, awarding of government contracts and jobs, educational scholarships, and other areas. Non-bumiputras regularly complained about these preferences, arguing that government subsidies for disadvantaged persons should be dispensed without regard to race.

The law and government policy provide for extensive preferential programs designed to boost the economic position of bumiputras. Such programs limit opportunities for nonbumiputras in higher education, government employment, business permits and licenses, and ownership of land. Businesses are subject to race-based requirements that limit employment and other economic opportunities for non-bumiputra citizens. According to the government, these programs are necessary to ensure ethnic harmony and political stability.

Despite the government's stated goal of poverty alleviation, these race-based policies are not subject to upper income limitations and appeared to contribute to the broadening economic disparity within the bumiputra community. Ethnic Indian citizens, who did not receive such privileges, remained among the country's poorest groups. Another goal of this policy is for bumiputras to hold 30 percent of the nation's wealth. According to several studies, the program reached or exceeded this target; however, official government figures placed bumiputra equity at 18.9 percent. The government did not respond to public requests to make its methodology available.

Unlike America's affirmative action, Malaysia''s version is far more aggressive and pervasive and has been remarkably successful in creating a sizable and stable Bumiputra middle class. The price tag is significant: distortion of freemarket dynamics and consequent inefficiency. Perversely, the policy impairs rather than strengthens Bumiputras'' ability to compete.

The Malaysian economy went into sharp recession in 1997-1998 during the Asian financial crisis, which affected countries throughout the region, including South Korea, Indonesia, and Thailand. Malaysia's GDP contracted by more than 7% in 1998. Malaysia narrowly avoided a return to recession in 2001 when its economy was negatively impacted by the bursting of the dot-com bubble (which hurt the ICT sector) and slow growth or recession in many of its important export markets.

Since coming to office in 2003, Prime Minister ABDULLAH has tried to move the economy farther up the value-added production chain by attracting investments in high technology industries, medical technology, and pharmaceuticals. The Government of Malaysia is continuing efforts to boost domestic demand to wean the economy off of its dependence on exports. Nevertheless, exports - particularly of electronics - remain a significant driver of the economy. As an oil and gas exporter, Malaysia has profited from higher world energy prices, although the rising cost of domestic gasoline and diesel fuel forced Kuala Lumpur to reduce government subsidies. In July 2005, the government removed the 7-year old peg linking the ringgit's value to the U.S. dollar at an exchange rate of RM 3.8/U.S. $1.0. The dollar peg was replaced by a managed float against an undisclosed basket of currencies, and the currency appreciated 6% per year against the dollar in 2006-08. The new exchange rate policy was designed to keep the ringgit more broadly stable and to avoid uncertain currency swings which could harm exports. Although this helped to hold down the price of imports, inflationary pressures began to build in 2007 - in 2008 inflation stood at nearly 6%, year-over-year.

The government presented its five-year national development agenda in April 2006 through the Ninth Malaysia Plan, a comprehensive blueprint for the allocation of the national budget from 2006-10. ABDULLAH unveiled a series of ambitious development schemes for several regions that have had trouble attracting business investment. Real GDP growth has averaged about 6% per year under ABDULLAH, but regions outside of Kuala Lumpur and the manufacturing hub Penang have not fared as well. The central bank maintains healthy foreign exchange reserves and the regulatory regime has limited Malaysia's exposure to riskier financial instruments and the global financial crises.

The Malaysian financial system exhibited noteworthy resilience to the 2008 global financial crisis. Malaysian banks were well capitalized and had no measurable exposure to the U.S. sub-prime market. The central bank maintains high levels of foreign exchange reserves and a conservative regulatory environment, having prohibited some of the riskier assets in vogue elsewhere. However, decreasing demand in the U.S. and elsewhere is taking a toll on Malaysian exports, resulting in slower economic growth going forward.

In January 2019, the EU changed its policy on palm oil products as it believes that the development of the palm oil industry contributes to deforestation and causes destruction of wildlife habitat and greenhouse gas emissions. It also plans to propose to the WTO to gradually phase out palm oil-based biofuels, which has triggered a strong backlash from Malaysia. From January to March, the EU's "ban" on palm oil has triggered strong protests from the Malaysian government, mainly due to the special status of palm oil in the country.

First of all, Malaysia is the world's second largest palm oil producing country after Indonesia, with palm oil products being its most important primary products, while the EU is the No.2 export market for Malaysian palm oil products. If the EU really bans palm oil, Malaysia's trade with the EU, as well as its palm oil industry, will undoubtedly suffer a heavy blow.

Second, the palm oil industry is also a pillar industry for agricultural development in Malaysia, involving hundreds of thousands of jobs. Statistics show that the planting area of palm trees in Malaysia accounts for more than half of the country's total cultivated land. In 2017, the planting area of palm trees stood at 5.81 million hectares.

As to employment related to palm tree plantations and the related industrial chain, Malaysia's Foreign Affairs Minister Datuk Saifuddin Abdullah once said that the impact of the EU's palm oil ban would be devastating for the 650,000 smallholders and two million Malaysians who are highly dependent on the industry for their livelihood.

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Page last modified: 03-04-2019 16:35:45 ZULU