BBB3633 | Malaysian Economics · PDF file3. Structural Transformation • During 1970s, Malaysia experienced economic transformation. • Agricultural diversification was in place,

BBB3633 | Malaysian EconomicsPrepared by Dr Khairul Anuar

L1: Economic Growth and Economic Policies

www.notes638.wordpress.com

Assessment

• Two assignments

Assignment 1 -individual 30%

Assignment 2 –group 30%

• Final exam 40%

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100%

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Reference Books

Malaysian Economy 3/e – Dr Poon Wai Ching (2015)

Content

1. Introduction

2. Malaysian Business Cycles: 1972-2012

3. Structural Transformation

4. The Expansion Phase (1990-1997 Pre-crisis)

5. The Slowdown Phase (1997 Post Crisis - 1999)

6. The Recovery and Upturn Phase (1999-Current)

7. Selected indicators of quality of life - 1970-2013

8. Consumer Price Index (CPI) and Inflation

9. Quality of Life

10. Planning Horizon in Malaysia

11. Industrial Master Plans

1. Introduction

• It is essential for one to grasp an understanding of the

Malaysian macroeconomic overview.

• An overall review of the Malaysian macroeconomic

performance would be an ideal appetiser before

digesting the issues and policies relating to Malaysian

economic development.

• First, we examine the Malaysian business cycle in the

past decades, followed by a discussion of

macroeconomic indicators.

• In the second part, we will discuss the development

planning horizon and the Malaysian economic policy

framework


• Strong growth is normally accompanied by low

unemployment and stable inflation.

• Higher productivity enhances efficiency in the use of

resources that increase competitiveness

• Over the last four decades (1972-2012), the Malaysian

economy has experienced large cyclical patterns

(Figure 1.1 ).



• During 1970s, Malaysia experienced economic transformation.

• Agricultural diversification was in place, timber and palm oil had emerged as important export commodities and the production of crude petroleum began to gain significance.

• Liberalisation measures were introduced across the board to help improve competitiveness and productivity.

• The industrial revolution laid the foundation for the transformation of the economy from agriculture towards industrialisation.

• The objective of industrialisation was to maximise growth rate and to modernise the Malaysia.

• Malaysia's industrial strategy was a form of state capitalism with fringe benefits to achieve international competitiveness and to minimise value-added as incentives for potential foreign investors.


• There were two strategies for pursuing industrialisation

in Malaysia.

1. import substitution industrialisation (ISI) during the

1960s, which pursued tariff protection, import

restriction and investment incentives.

2. export oriented strategy (EOS) was imposed during

the 1970s and 1980s especially in the textiles,

garments and electronics sectors.


• ISI was used to realise industrialisation where machinery and raw materials were imported, and then industries, in turn supplied the input required for the modernisation of the agricultural sector and consumer goods demanded.

• The rationale for the implementation of ISI was due to rapid population growth and the realisation that heavy dependence on the agricultural sector would not absorb the expected increase in the labour force.

• Therefore, there was a need to diversify the economy to eliminate total dependency on rubber and tin. Nevertheless, there were drawbacks in ISI. The industrial sector was inefficient in operation and the size of the domestic market was small.

• As such, small domestic markets could not make the long-term requirements of this strategy sustainable, and the objectives of the government for setting up this strategy were not realised. Hence, the country changed from ISI to EOS.


• EOS was used to realise industrialisation where goods were produced locally for export.

• Generally, this was perceived as better than the ISI strategy, partly because it was easier to detect the effectiveness of export promotion policies as performance could easily be observed.

• Generally, the ISI policy was prone to domestic assembly and capital-intensive, compared to the pre-implementation of the ISI policy that mostly imported from abroad.

• Meanwhile, a low-wage, labour-intensive production technique was used in EOS to attract investors. EOS gave industries greater opportunities to enlarge markets and achieve economies of scale.


• After the country registered a significant growth with

slightly more than 13% for three consecutive years

from 1988-1990, came the Gulf War on August 2,

1990.

• Thereafter, with another cycle of oil shock, oil prices

increased double from US$18 per barrel from pre-Gulf

level to an average of US$36 in October 1990.

• Nevertheless, Malaysia's economic performance

remained strong and continued during the 1990s prior

to the Asian financial crisis.


• This period was viewed by many as the golden age of Malaysian

economic growth. For instance,

real GDP growth averaged at 9.2% p.a. (Table 1.1),

current account deficit gap closed,

unemployment was below 3 percent, and

there was a low inflation rate of 3.5 percent and a stable

exchange rate of 2.5 percent.

• In addition, as a result of gradual appreciation of the effective

exchange rate, the investment-led growth strategy was

successful in raising output and income, while investment had

deteriorated quality-wise. This eventually led to major balance

sheet weaknesses in the banking and corporate sectors, and

exposed the economy to the contagion effect during the Asian

financial crisis.


• Some key factors that lead Malaysia's strong economic performance during the expansion phase are as follows:

Strong fundamentals growth

Substantial poverty reduction

Improve quality of life and standard of living

Political stability and harmonious society

Supportive government policies towards FDI

High-quality social services

Well-developed infrastructure

Educated and trainable workforce

Competitive investment incentives

Private sector led growth

Investment in human resource development

Supportive fundamental policy framework, particularly in agricultural and industrial sectors.


• Malaysia experienced strong fundamental growth record prior to the crisis.

• However, the domestic economy fluctuated widely due to the financial crisis of July 1997.

• Market confidence shrunk with the rest of the region's members.

• Figure 1.1 shows that the average GDP growth rate pre-Crisis was 7.6% and it had declined to 5.1 % post-Crisis while the growth private investments declined by almost 1. 7 times.

• Large portfolio outflow occurred and the substantial decline in equity and property values followed.


• The initial response of the authorities was to increase interest rates and tighten fiscal

policy in an attempt to anchor market confidence.

• In September 1998, the authorities launched policy packages designed to insulate

monetary policy from external volatility by pegging to the U.S. dollar and adopted

capital controls, complemented with a fiscal stimulus package to increase capital

spending.

• On 1 September 1998, Malaysia implemented capital control to tighten control on

capital mobility. The purpose of this restriction was to restrain non-residents

speculating on capital transactions by eliminating ringgit-based transactions outside

Malaysia. This implied that the ringgit held no value in foreign countries.

• One of the advantages of capital control was that it increased the efficiency of capital

allocation and prevented external capital transactions from having an adverse impact

on the domestic economy. Permission was required for capital transfer between

accounts owned by non-residents. The use of money in accounts owned by non-

residents was limited to purchasing assets in Malaysia. As a result, ringgit-

denominated assets outside the country would have had to flow back home. This had

eased the liquidity problem.


• Interest rates are particularly important to companies

and governments because they are the key ingredient

in the cost of capital.

• Most companies and governments require debt

financing for expansion and capital projects.

• When interest rates increase, the impact can be

significant on borrowers. Interest rates also affect

prices in other financial markets, so their impact is far-

reaching.


• Theoretically, the direct exchange rate control prohibited transaction of foreign currency assets in order to restrict capital transfers.

• When capital is transferred from a country with a low interest rate to a country with a high interest rate under an open economic system, it promotes economic progress.

• However, short-term capital transfers are often undertaken by speculators. Due to the emergence of hedge funds, short-term capital transaction volumes have increased. Not only would this hinder the efficient allocation of capital, but also adversely affect the domestic economy.

• Capital outflow reduces the value of domestic currency and capital inflow increases money supply. Hence, both enhance the acceleration of inflation.


• Malaysia's recovery in 1999 was supported by accommodating macroeconomics policies.

• Strong GDP growth and a gradual easing of capital controls helped to improve investors' confidence.

• Recovery was also accompanied by reduced vulnerability of the financial system.

• Some firms gained much progress with operational restructuring of the corporate sector via the corporate debt restructuring programme.

• Following the favourable economic conditions in general, and the buoyant world demand for electronics in particular, imports of intermediate and consumption goods have been on an uptrend since January 1999 allowing a build-up of international reserves, unemployment declined, and inflation remained low.


• Malaysia managed to recover and grew faster after the financial crisis due to other key reasons too.

• They were:

i. substantial potential for catching up;

ii. relatively well-educated workers,

iii. strategic geographical and favourable structural policies;

iv. demographic changes working in favour of more rapid growth; and

v. economic policies and strategies that were conducive to sustain growth.


• The Malaysian economy has grown rapidly over the decades.

• Malaysia is a tremendous economic success story. e real GDP growth on an average of 7.8% per annum over the last decade between 2000 and 2010 (refer Table 1.1 ).

• Malaysians are living longer with better health care overtime. The average life span has marginally extended to 72.6 years and 77.2 years compared to 61.6 years and 65.6 years in 1970 for males and females, respectively (Table 1.2).

• The average literacy rate has remained relatively stable at 94 percent. All these reflect better quality of life for the people.


• 1.2


• CPI is commonly used to calculate inflation rate of the country.

• In Malaysia, the CPI has been reclassified with the current base

year being 2010 (Figure 1.4).

• Maintaining a low and stable inflation rate has become one of the

challenges in the macroeconomic management for most

countries.

• However, to sustain low and stable inflation is not an easy task.

• Malaysia's inflation rate was generally very low during the sixties.

During the 1970s, the average inflation rate of 5.5% was higher

than during other decades (1980s: 3.65%; 1990s: 3.66%; 2000s:

2.78%; 2010-2013: 2.04% (Figure 1.5).


• 1.5


• 1.5

9. Quality of Life

• High economic growth is associated with better quality of life.

• In the Economist Intelligence Units, Quality of Life Index has been known as "Where-to-be-born Index" (WTBBI). Components used to measure quality of life in this index include life expectancy, job security, work-life balance, life satisfaction, education, physical security, material wellbeing, health, family quality, community life, civil society engagement, governance, and gender equality, among others.

• Results from WTBBI 2013 revealed that Malaysia was ranked 36 out of 80 countries with a score of 6.62 out of 10 (1 being the best, 10 being the worst). Comparatively Singapore was ranked the 6th and Thailand the 50th.

• On the other hand, the OECD's "Better Life Index" measures what matters most to people in the globe.

• Five areas that ranked highly for Malaysian were health, work-life balance, life satisfaction, education and safety

9. Quality of Life

• The Malaysian Quality of Life Index (MQLI) is an aggregate measure of welfare and quality of life from a broader perspective using forty-two indicators, representing 11 components that include working life, housing, transport and communications, health, education, social participation, income and distribution, culture and leisure, family life, environment and public safety.

• Various indicators measuring each component are depicted in Table 1.8.

• Economic growth has translated into higher quality of life for society. The quality of life in Malaysia has improved during 2000-2010 period, as indicated by the 11.9% point rise in the MQLI.

• All the 11 components in the MQLI recorded improvements (Table 1.8 & Figure 1.7). The education component recorded the highest increase of 20.4 points, followed by transport and communications (20.3 points) and housing (15.7 points).

9. Quality of Life


• Malaysia is a small open economy that employs mixed economic

system of free enterprise with active government intervention.

• The government provides the broad thrusts and sets direction for the

economy in a federation, and ensures the achievements of socio-

economic goals.

• The private sector is free to operate, given a bundle of appropriate

policies, institutional and infrastructural support.


• Multi-layer model has been adopted, where the Malaysian

government implemented three-tiered cascading planning horizons,

ranging from short-term to long-term development plans.

Short-Term Plan includes the Annual Budget,

Medium-Term Plan includes the 5-year development plans (for

example, the Tenth Malaysia Plan, 2011-2015, and the Mid-Term

Review (MTR) of the five-year Plans, which are carried out in the

middle of the five-year cycles. They are reviewed every 2o and a

half years under the MTR. The plan is reviewed and makes

adjustments, if needed.

• From the post-independence period till present, there have been

various Long-Term Plans that spell out various economic policies.

10. Planning Horizon in Malaysia 28

11. Industrial Master Plans (IMPl: 1986-1995; IMP2:

1996-2005; IMP3: 2006-2020) • The Government implemented two Industrial Master Plans (IMPs) in the last two

decades - to develop and transform the manufacturing sector

• IMP 1 (1986-1995) provided the base for the manufacturing sector to become

the leading growth sector of the economy. This plan recommended export-

targeting linked to incentives, as many industries needed domestic market

protection to facilitate the export markets at much lower prices.

• IMP2 (1996-2005) further developed the manufacturing sector by strengthening

industrial linkages, increasing value-added activities, and enhancing

productivity.

• IMP3 (2006-2020) was launched in 2006 as the roadmap that drives Malaysia

towards an industrialised nation status.

During IMP3, the services sector takes on a greater role in generating

economic growth while the manufacturing sector will continue to be an

important driver of growth. The overall objective of this plan is to achieve

global competitiveness through innovation and transformation of three

strong economic pillars that are the manufacturing, services, and agricultural

sectors

Documents

BBB3633 | Malaysian Economics · PDF file3. Structural Transformation • During 1970s, Malaysia experienced economic transformation. • Agricultural diversification was in place,