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DMEG 6013 MALAYSIAN ECONOMY

Chapter 1 : Background of Economic Development in Malaysia

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The concept of economic growth and economic development

• Economic growth – The increase in the country’s national income, or sometimes

its per capita national income.– The ability of an economy to produce a greater level of

outputs.– The steady process by which the productive capacity of the

economic is increased over time to bring about rising levels of national income.

YEAR ANNUAL GROWTH RATE

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• Economic development

– A broad and comprehensive concept. Changes in the social and economic equalization, employment, education, current needs of society.

– Has both quantitative and qualitative dimensions • Involve much more than economic growth• The process of improving the quality of all human live

– Eg: (i) socio-economic change all citizen have equal

opportunities in education, health, good and increase in social amenities for housing, health, water and electricity

(ii) technology change an innovation; the development of research and technology in the production of

output and services

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Economic Development in Early Period of Independence

• Malaysia was rich with natural resources– Attracted the British to come and colonized in the

18th and 19th centuries» The British establish large-scale plantation and introduced

new commercial crops (rubber in 1876, palm oil in 1917 and cocoa in the 1950s).

» Also developed a large mining sector and encouraged migration of Chinese and Indian workers to the plantations and mines.

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Economic Status during 1960s-1980s• In 1960s; economy still heavily dependent on agriculture sector but did not provide enough

growth impetus for overall economy

• In the mid-1960s (October 1965), First Five-Year Plan (1965-1960) of the Federation of Malaya was launched Followed by a Second Five-Year Plan (1961-1965)

– Known as First and Second Malaya Plan (FMP and SMP)– After the establishment of Malaysia, 1st Malaysian Plan have been

introduced by the government.

• Social issues in the 60s ;– Races are clearly divided by specific economic functions :– Malays : rural dwellers, traditional farming in the villages, traditional fishing, low

income.– Chinese : rural dwellers, tin miners, shop owners, trade and manufacturing activities,

high income.– Indians : rubber plantation workers, manual labourers in road, rail and ports, some

ventured into small business, low and medium income.– Great economic imbalance among races results in racial tension and conflicts.– In 1969, racial riots broke out

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• In 1970s; implementation of import substitution and export-oriented industrialization

• Manufacturing sector growth average 10.3% per annum during 1970-1990 ad 10.5% per year during 1991-1998. Agriculture decelerates in growth rate from 5% per annum in 1970s to 0.8% in 1990s.

• Manufacturing grew at an average of 7.7% between 1971 and 1998. The share of employment contribution increased from 9.1% in 1968 to 15.8% in 1980. It grew 8.6 % per annum between 1990 to 1998.– The manufacturing sectors were electrical & electronic machinery and

appliances, transport equipment, rubber, plastic, paper & wood industries.

• The quest for industrialization affected the country’s external trade pattern. Rubber, tin, sawn logs and timber accounted for 68% of total gross exports in 1960, but in 1980, it reduced to 32%. Manufactured products accounted for 17% in 1960, but increased to more than 27% in 1980.

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Economic Status during 1990s• Economy structure has changed;

– The proportion of manufactures production grew from roughly 20% of GDP in the early 1980s to 31.5% of GDP in the late 1990s

• 1985, first Industrial Master Plan and in 1996, Second Industrial Master Plan

• Feature shift of industrial focus from an investment driven economy (70s & 80s) to productivity driven economy (90s).

• Manufactured products accounted for around 85 % of gross export earning in 1999, with electronic goods becoming one of the most important product.

• The role of mining has steadily declined during the last few decades (Malaysia was one of the world’s largest exporters of tin in the1970s), now contributing just 7 percent of GDP.

• Malaysia continues, however , to export tin, gold, bauxite, ilmenite (a titanium ore), oil and gas.

• 1997-98, financial crisis. Output contracted by 10.2% in 1998. The main reasons were the weak demand from the Asia-Pacific region and the depressed global market for semiconductors.

• In 1998, the agriculture sector declined by 4%. Reasons, lower external demand, labor shortages, unfavorable prices, reduced cultivated area and lower use.

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• Meanwhile, the role of agriculture in the country’s economy has also been declining, although it provides employment to large numbers of Malaysians.

• Nevertheless, Malaysia remains one of the world’s leading exporters of rubber and produces almost half the world’s palm oil.

• Tourism is another important and rapidly growing sector of the economy, with about 17.55 million tourists visiting the country in 2006 and contributing RM36.3 billion to the national economy.

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Overview of Malaysia’s Economic Development Plans

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Table : Malaysia Policy Package and Reform

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Objectives of Development Policies

• To achieve national unity• To achieve high growth• To promote industrialization• To promote balanced growth• To achieve economic stability• To increase global competitiveness• To increase sustainable development

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Economic Diversification Policy• Economic diversification is an attempt to diversify product (business) or

the location of the company that made a firm to maximize profits so that the company's cash flow can be more stable, these companies do to address the economic crisis, so that if a company experienced revenue decline in one product or country / area, the product or country / region other to get the excess revenue, so that deficiencies can occur covered.

• Over reliance on primary industries has many disadvantages : – Supply and demand for primary products are price inelastic– Primary products are subject to price fluctuation– Agricultural products are seasonal, mostly perishable, and subject to weather

changes– Minerals & non-minerals resources are mostly non-renewable depletion– Industrial (manufactured) goods are devoid of problems faced by primary goods

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Economic Diversification Policy (cont.)

• Concentrate on three sectors:1. Modernization of agriculture sector2. Industrialization programs3. Development of services sector

• The diversification policy runs across various development plans

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Malaysia’s Economic Transformation

From an economy that was highly dependent on the primary sector for its GDP, employment and export revenues

to

A diversified economy with industrial sector as the engine of growth, plus a more commercialized agriculture sector and a modern services sector through a series of development plans.

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Economic sector in Malaysia

• 1) Primary sector

– The primary sector of the economy extracts or harvests products from the earth (natural resources)

– The primary sector includes the production of raw material and basic foods. examples of economic sectors included in the primary sector is the crop, livestock and fisheries, forestry, mining and quarrying

– The packaging and processing of the raw material associated with this sector is also considered to be part of this sector.

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• 2) Secondary sector– economy manufactures finished goods. – 2 economic activity in this sector are

• (i) manufacturing sector• (ii) construction sector

– Activities associated with the secondary sector include metal working and smelting, automobile production, textile production, chemical and engineering industries, aerospace manufacturing, energy utilities, engineering, breweries and bottlers, construction, shipbuilding and etc.

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• 3) Tertiary Sector– Also known as a services sector

Provide services to the general population and to businesses

– Activities in this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music, theater, etc.), restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law.

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Figure : Services sectors as a percentage of GDP, 2008

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Structural transformation in Malaysian Economy

• Define-Radical shift from an inward-looking (import substitution strategy) to an outward-looking (export orientation strategy)

• Changing structure of Malaysian economy is reflected in the changing composition of the country’s gross domestic product (GDP), changing pattern of sectoral employment and export and import

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• Driving factors (push and pull) and the impact on GDP and employment in particular :

(i)Push factors: decline in the agricultural sector: - instability of primary commodity prices - Its low productivity

- Low employment absorption - Low income - The extinction of natural resources

(ii) Pull factors: Increased contribution of secondary and tertiary sector :

- Price stability - High productivity - High employment absorption - High-income - A large market size / area

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• Added pull factors: development of the manufacturing sector

1) government incentives (investment and infrastructure)

2) Political and economic stability (to encourage investment)

3) increase in FDI4) The development of supporting

industries (inst.kewangan and transportation networks)

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Chart : Malaysia: DGP by Industry of Origin (share of percentage)

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Figure : Export by sector, 1990-2005.

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Effects of Changes in Economic Structure

• Government's efforts to change the structure of the national economy has created many implications ;– Structural changes affect the economy positively to employment and

national income. 1. foreign investment

» the industrial sector attract foreign investors to invest» foreign investors also bring technological advances such as new techniques,

capital, and marketing and management skills» to encourage the inflow of foreign investment, government has introduced

(a) the Investment Incentives Act 1968(b) giving pioneer status(c) the creation of industrial zones(d) establish MIDA (Industrial Development Authority) and HICOM (Industrial CorporationWeight Malaysia)

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2. the development of manufacturing sector economic structural changes - eg : (i) electronic and textile industries which are export oriented - the manufacturing be the driving force of economic growth and open more job

opportunities and reduce the nation's unemployment

3. the development of services sector- development of the services sector due to the development of economic,

income and living standards and migration to services sector- this led to an increasing demand for communication services, financial and

administrative

4. job opportunity- change in economic structures to create new jobs- second and third-sector a major contributor of employment

5. increases in national income- economic diversity activity and import-substitution industries reduce imports

activities and increase exports activities-this reduces the foreign exchange and increase national income

6. increase standard of living- the development of second-and third-sector create job opportunities-this increases the income of the population and increasing the purchasing power

the standard of living has also increased