MALAYSIA: In-depth country analysis Background Malaysia, a federation of 13 states forming a constitutional monarchy, comprising two distinct regions separated by some 650 km of the South China Sea, was formed in 1963 when the former British colonies of Singapore and the East Malaysian states of Sabah and Sarawak on the northern coast of Borneo joined the Federation. Being a middle-income country, it has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy.
In the last decade, the economy has moved farther up the value-added production chain by attracting investments in high technology industries, medical technology, and pharmaceuticals. The political and legal system is largely based on the fact executive power lies with the government. The government is led by the prime minister and is composed of members of parliament who are in turn elected by their constituencies. The central organ of government is the cabinet, which is appointed by the prime minister. Economic Overview Malaysia, largely because of its expanding industrial sector, grew with 8%–9% yearly growth rate from 1987 to 1997.
During the 1997–98 Asian financial crisis, growth contracted and the government was forced to cut spending and defer several large infrastructure projects. The economy began recovering in 1999, and growth continued into the early 21st century. Malaysia is a large producer of rubber and tin; palm oil, crude petroleum and petroleum products, electronics, textiles, and timber are also important. Since the late 1980s, the government has moved to privatize large industries that had been under state control, and foreign investment in manufacturing has increased significantly.
Subsistence agriculture remains the basis of livelihood for about 13% of Malaysians and agriculture provides about 8% of GDP. Malaysia’s exports include electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, chemicals, and textiles. The main imports are electronics, machinery, petroleum products, plastics, vehicles, iron and steel, and chemicals. ECONOMIC PERFORMANCE GDP /capita (PPP) and GDP Growth Rate Since the Asian Crisis in 1998, Malaysia’s growth performance has been mixed.
As with other countries in the Southeast Asian region, Malaysia has suffered two recessions during the past seven years. Malaysia enjoyed a decade of consistently high growth rate driven by manufacturing investments and exports until the Asian financial crisis in 1997-1998, which saw Malaysia experiencing real GDP contraction by 7. 4% in 1998. In 2001, Malaysia was hit again by a downturn in global demand resulting in a plunge in exports and a sharp fall in GDP growth- GDP only grew by 0. 3% as depicted in exhibit 1. 1. Growth resumed in 2002 and picked up significant momentum in 2004, when the economy expanded by 7. % but in 2001-2005 growth performance at 4. 5% was far below both its potential growth rate of 6. 7% and target growth rate of 7% which is required to reach a developed nation status by 2020. According to Asian Development Bank (ADB) study, Malaysia is ranked sixth in terms of real per capita income among developing Asia-Pacific economies. Inflation Malaysia has a remarkable record of maintaining a low and stable price environment. Despite its robust economic growth in 1980s and 1990s, Malaysia’s inflation rate had been relatively low by international standards.
Even after the severe regional financial crisis in 1997/98, Malaysia’s inflation rate has been contained at a relatively low level. Inflation rate has almost double during 2005-2007 owing to rise in global energy and food prices but is still under control and lower than the regional inflation rate (exhibit 2. 1). The main reasons for the surge in inflation included high global oil prices, removal of domestic fuel subsidies, high global food prices (in particular grain prices), rise in electricity tariff, and rise in excise duties on cigarettes.
Unemployment Malaysia’s economic policies have a strong focus on human resource development, and it is firmly believed that workers are valuable human resources for social development. The government shows strong interest in human resource development and closely monitors the state of the implementation of vocational and other training. With the remarkable growth in manufacturing and service sectors, the percentage of workers employed in these two sectors in the total workforce also rose sharply.
Supported by stable economic growth, the labor market has enjoyed near full employment with the unemployment rate shifting from 2 to 3. 5% since the middle of the 1990s. Malaysia enjoyed a highly stable labor market condition with the unemployment rate was only at 3. 6 per cent in 2001 and 3. 7 per cent in 2008 (exhibit 3. 1) as the Government is taking immediate efforts to create new jobs in the private and public sectors and facilitate retrenched workers to take on new jobs through training and placement programmes.
FDI inflows, FDI potential index, FDI performance index Malaysia remained as a favorable economy to foreign investors as implied by the FDI position which grew two fold since 2001. The continuous reinvestment as well as new capital injection among the existing foreign companies indicated their confidence in the investment climate of Malaysia. Malaysia utilized its abundant natural resources and well-trained pool of labor to its advantage and attracted many multinationals. The Malaysian government also put in place a plethora of incentives to woo in foreign investors.
These include pioneer status incentives, labor utilization incentives, locational incentives and tariff protection and duty exemptions. Although these incentives are not particular only to Malaysia, it was among the first in the region to introduce and aggressively pursue these incentives. Due to these initiatives, FDI increased substantially in the period of 2006 and 2007 mainly due to mergers & acquisitions (M) of existing multinational companies (MNCs), joint ventures and new investment activities. Manufacturing sector contributed to the largest proportion of FDI in Malaysia.
Most of the FDI came from Singapore, USA and Japan. Although the flows witnessed alternating ups and downs in the period 1999-2005, substantial surges were reported in year 1999, 2002, 2004 and 2006 as showed by exhibit 4. 1 Country’s competitiveness index Malaysia, at 21st place (exhibit 5. 1), benefits from the excellent functioning of its goods, labor and especially financial markets. Efficient labor markets and goods markets function well with strong competition and business-friendly taxation. The quality of scientific research institutions is a competitive advantage.
The financial market continues to perform well with a sound banking sector and a relative ease of access to various forms of finance for business development. Other strengths include the quality of the country’s transport infrastructure and its strong business sophistication and innovative potential, which have contributed greatly to the country’s growth over recent years. However, Malaysia lags in the area of education, where attainment rates at the secondary level remain low, and in addressing the relatively poor health of the workforce.
Finally, greater fiscal discipline would better ensure sustainable macroeconomic stability going into the future, with repeated government deficits to build up substantial government debt over the years. FACTORS ACCOUNTING FOR ECONOMIC CHANGES Economic freedom Malaysia’s economic freedom score is 64. 6, making its economy the 58th freest in the 2009 Index. Its score is 0. 7 point better than last year, largely reflecting slight improvements in trade freedom and business freedom. Malaysia is ranked 9th out of 41 countries in the Asia–Pacific region.
Malaysia scores above the world average in eight of the 10 economic freedoms as depicted by exhibit 6. 1. The trade freedom has enhanced as corporate tax rate has been reduced to 26 percent and will be further reduced to 25 percent in 2009. The top income and corporate tax rates are moderate, and the overall tax burden is low as a percentage of GDP. The tariff rate is low, although non-tariff barriers still limit overall trade freedom. Monetary stability is relatively well maintained. Under a single-tier tax system that became effective on January 1, 2008, dividend income is exempt from income tax.
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 24. 9 percent of GDP. Energy and food subsidies constitute nearly 10 percent of total operating expenditures. As far as Monetary freedom is concerned, most prices are determined in the market, but the government influences certain prices through state-owned enterprises; controls the prices of petroleum products, steel, cement, wheat flour, sugar, milk, bread, and chicken; and usually sets ceiling prices for a list of essential foods during major holidays.
Malaysia ranks 43rd out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. Bribery is a criminal act, but perceptions of widespread corruption and cronyism persist. The labor sector is relatively flexible, with simple employment procedures and no minimum wage. Relatively flexible labor regulations could be further improved to enhance employment and productivity growth. Corruption changes Ranked as 47th in the world and 10th in the Asia pacific region, Malaysia’s score in the Corruption Perceptions Index (CPI) has not improved this year, according to a survey conducted by Transparency International.
The trend of the CPI for Malaysia has remained mediocre at mid-point, with no improvement over the last eight years. A number of high profile cases had dampened public confidence in the integrity of government institutions, alleged corruption cases in government procurement, abuses in land excision and fraud on land transfer, and corruption in business transfers at the local municipality level. Governance changes As depicted by exhibit Malaysia’s political stability has declined from 2005-2008 but the effective governance has slightly enhanced in these years.
Political instability is majorily due to internal problems in the differences and existence of various races, especially between the three major races, that is the Malay, Chinese and Indian community. The control on corruption shows that despite the efforts there no significant changes in the corruption levels during years in the governance. The trends are captured from exhibits 7. 1 to 7. 6. Exhibit 1. 1 [pic] Source: CIA World Factbook Exhibit 1. 2 [pic] Source: CIA World Factbook Exhibit 2. 1 pic] Source: CIA World Factbook Exhibit 3. 1 [pic] Source: CIA World Factbook Exhibit 4. 1 [pic] Source: IMF Exhibit 6. 1 World Rank: 58 Regional Rank: 9 of 41 Ten Economic Freedoms of Malaysia |70. 8 |Business Freedom |Avg. 64. 3 |40. 0 |Investment Freedom |Avg 48. 8 | |78. 2 |Trade Freedom |Avg. 73. 2 |40. 0 |Financial Freedom |Avg 49. 1 | |83. 0 |Fiscal Freedom |Avg. 4. 9 |50. 0 |Property Rights |Avg 44. 0 | |81. 4 |Government Size |Avg. 65. 0 |51. 0 |Fdm. from Corruption |Avg 40. 3 | |79. 9 |Monetary Freedom |Avg. 74. 0 |71. 5 |Labor Freedom |Avg 61. 3 | [pic] Trend of overall ranking: [pic] Exhibit 7. 1 [pic] Exhibit 7. 2 [pic] Exhibit 7. 3 [pic] Exhibit 7. 4 [pic] Exhibit 7. 5 [pic] Exhibit 7. 6 [pic]
