ECONOMICS IN MALAYSIA

ECONOMICS IN MALAYSIA

Malaysia has the third largest economy in Southeast Asia, with an annual GDP of around $500 billion. Indonesia and Thailand have bigger ones. Since the 1970s, Malaysia has transformed itself from an economy dependent on raw materials production and with a largely poor population to a multisector economy with a middle-income population. These changes have been most evident in Peninsular Malaysia, but there have also been significant changes in East Malaysia. The industrial sector has been the primary source of economic growth since the 1980s, particularly the manufacturing of electronics for export. However, export dependence has exposed the economy to global market fluctuations and to economic changes in its top export destinations and key sources of foreign investment, such as Japan and the United States. Both government and independent economists contend that private consumption has led to growth in the services sector and boosted economic growth overall. From 1997 to 2002, the country’s economy declined for many reasons, but it has rebounded because of government policies such as fiscal stimulus packages, healthy foreign exchange reserves, low inflation, and low external debt. [Source: Library of Congress]

Heavily dependent on exports, Malaysia is a middle-income country. Under current Prime Minister Najib, Malaysia is attempting to achieve high-income status by 2020 and to move farther up the value-added production chain by attracting investments in Islamic finance, high technology industries, biotechnology, and services. Najib's Economic Transformation Program (ETP) is a series of projects and policy measures intended to accelerate the country's economic growth. The government has also taken steps to liberalize some services sub-sectors. The Najib administration also is continuing efforts to boost domestic demand and reduce the economy's dependence on exports. [Source: CIA World Factbook]

Nevertheless, exports - particularly of electronics, oil and gas, palm oil and rubber - 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, combined with strained government finances, has forced Kuala Lumpur to begin to reduce government subsidies. The government is also trying to lessen its dependence on state oil producer Petronas. The oil and gas sector supplies about 35 percent of government revenue in 2011.

Statistics vary but often suggest similar trends with Gross Domestic Product (GDP)/Power Purchasing Parity (PPP). According to the World Bank, from 1975 to 2004 the GDP (in current US$) grew from US$9.9 billion to US$118.3 billion, averaging 6.4 percent annual growth. Government figures put the 2005 GDP at US$130.1 billion. From 1975 to 2004, PPP (in current international dollars) grew from US$13.8 billion to US$255.8 billion, and GDP per capita expressed as PPP per capita (in current international dollars) grew from US$1,130 to US$9,630. According to the Malaysian government, the agricultural sector provided 8.7 percent of the GDP in 2005, industry provided 48.8 percent, and services provided 46.3 percent (these figures do not total 100 percent because import duties and imputed bank service charges are also factored into calculations of GDP by sector). Fiscal Year: Malaysia’s fiscal year runs from October 1 through September 30.

According to the Asia Economic Institute: “Malaysia, like its Asian neighbors, has seen rapid growth rates and successful export-oriented economic policies in recent years. Local and foreign investments in high technology industries, medical technology and pharmaceuticals have helped increase the country's value-added production chain. In addition, oil and gas exports, combined with recent high world energy prices, have filled up government coffers. However, despite of these economic successes, Malaysia recently has been forced to take necessary actions to cushion effects of the global financial crisis. Since the 1997 Asian Financial Crisis, Malaysia has enjoyed an average real GDP growth rate of 5.6 percent [Source: Asia Economic Institute]

Economic Statistics for Malaysia

GDP (purchasing power parity): $492.4 billion (2012 est.), country comparison to the world: 30; $471.2 billion (2011 est.); $448.4 billion (2010 est.). GDP (official exchange rate): $307.2 billion (2012 est.) [Source: CIA World Factbook]

GDP - real growth rate: 4.5 percent (2012 est.), country comparison to the world: 72; 5.1 percent (2011 est.); 7.2 percent (2010 est.)

GDP - per capita (PPP): $16,900 (2012 est.), country comparison to the world: 79 $16,500 (2011 est.)l $15,900 (2010 est.).

Unemployment rate: 3.2 percent (2012 est.), country comparison to the world: 27; 3.1 percent (2011 est.). Unemployment, youth ages 15-24: total: 11.3 percent (2010) country comparison to the world: 103.

Inflation rate (consumer prices): 1.9 percent (2012 est.), country comparison to the world: 30 3.2 percent (2011 est.). Approximately 30 percent of goods are price-controlled ccording to World Bank figures, inflation (in terms of consumer prices) averaged nearly 3.6 percent annually from 1975 to 2004 but was 3.0 percent each year from 2000 to 2004. Since 2000 inflation has resulted largely from fiscal policies, such as reduced government subsidies for fuel and higher taxes on cigarettes and liquor.

Money of Malaysia

Currency and Exchange Rate: The official currency is the ringgit (MYR), which is subdivided into 100 sen. Exchange rates: ringgits (MYR) per US dollar — 3.07 (2012 est.); 3.06 (2011 est.); 3.22 (2010 est.); 3.52 (2009); 3.33 (2008);

The August 2006 average exchange rate was MYR3.67/US$1. In 2005 the average exchange rate was MYR3.79 to US$1. From October 1997 to July 2005, the government fixed the ringgit’s value at MYR3.80 to US$1 and made it nonconvertible in other countries. The government created these controls after the 1997 Asian economic crisis in order to limit economic exposure to regional economic changes and to stabilize domestic prices and exchange rates. The government reportedly lifted these controls to make the currency competitive with the Chinese yuan, which China revalued in July 2005.

According to the International Primitive Money Society bronze drums are still used as currency in Malaysia.

According to National Geographic: Some countries choose to represent their histories on their banknotes; Malaysia opts for its future. In 1996 the Malaysian central bank unveiled a new currency with the theme Wawasan, or Vision, 2020, a nationwide initiative to make Malaysia a fully developed country by the year 2020. Equipped with state-of-the-art security features hidden in its design, the ringgit emphasizes modern symbols, such as transportation and communications on its six denominations. [Source: National Geographic]

According to Bank Negara Malaysia: Bank Negara Malaysia is issuing a new RM10 note, the third lowest denomination in a completely new design Malaysian currency notes series. The new series incorporate new security features and retain some of the existing security features to deter counterfeiting. The new series will circulate along the existing series until the existing series are gradually phased out. [Source: Bank Negara Malaysia]

The theme of the new series, "Wawasan 2020" reflects Malaysia's economic development and achievement towards a fully developed country. For the RM10 denomination, the background motif depicts modern transportation by air, land and sea. This is represented by Malaysia Airlines' aircraft, Light Rail Transit System's train and Malaysia International Shipping Corporation's container vessel plying the imagery sea routes around the world to signify the importance of the transportation in Malaysia's economy. The new series will also use RM as the currency symbol for the Malaysian Ringgit.

Security Features on Malaysia’s Banknotes

The security features of the RM10 denomination are highlighted here as a guide to the public. These features include the security thread with the repeated text BNM RM10, three-dimensional watermark portrait, anticopy feature known as "PEAK" and security fibres in the paper. The new RM10 note retains the red colour and the size is slightly reduced to facilitate easier handling. The intaglio (raised printing) of the portrait of the First Seri Paduka Baginda Yang di-Pertuan Agong is retained as a dominant feature. The public is advised to look carefully to differentiate the genuine notes from the counterfeits. [Source: Bank Negara Malaysia *+*]

Malaysia's light-rail transit streaks into the future. Layered ink is used for security. Micro-lettering near the Malaysia Airlines aircraft is only visible with magnification. Security threads that change color in ultraviolet light pass through an image of a commercial vessel. Malaysia’s first king appears in the front of every bill in a security watermark. A high-rise tower and satellite represent Malaysia’s emerging telecommunications network. A map of Southeast Asia under ultraviolet light will appear fluorescent and change color. Malaysia’s central bank logo, a kijand , or deer, is also on its gold coins. Security fibers scattered in this area show up red, yellow and blue in ultraviolet light. [Source: National Geographic]

Security Features: 1) Watermark Portrait: The shaded watermark can be recognised by tints that are lighter or darker than the surrounding paper. This watermark portrait which has a three-dimensional effect appears soft and shady without sharp outlines. At the base of the watermark, the numeral 10 is clearly visible. 2) Security Thread: The thread is embedded in the paper and appears on the reverse side of the note as a silver coloured dotted line [a]. When the note is held against the light, it is seen as a continuous dark coloured line and the repeated text BNM RM10 can be read [b]. When viewed under ultra-violet light, the thread is seen in various changing colours known as the "rainbow effect". *+*

3) Security Fibres: When viewed under ultra-violet light, the security fibres in the paper become visible in three colours: red, yellow and blue. 4) Intaglio Print: The intaglio print is a raised printing effect produced by applying layers of tactile inks on various parts of the obverse and reverse sides of the notes, such as the portrait of the First Seri Paduka Baginda Yang di-Pertuan Agong, denomination figures, ornamental elements and the wordings "BANK NEGARA MALAYSIA". 5) PEAK (Printed and Embossed Anti-Copy Key): When changing the angle of view by shifting the note, the numeral 10 will be revealed in the centre of the PEAK square. The whole square will glow under ultra-violet light.

6) Perfect See-Through Register: When the note is held against the light, the hibiscus flower on the obverse will register perfectly with the same flower on the reverse of the note. This flower will also glow under ultra-violet light. 7) Modulated Micro-Letterings: In this tactile rectangle, the micro-letterings with the text RM10 are all legible under a magnifying glass and collectively form the word "BNM" if viewed from a distance. 8) Background Micro-Letterings: The pattern of the red and greenish rectangles contains legible micro-letterings of "BNM" when viewed under a magnifying glass while some of the greenish yellow rectangles will fluoresce under ultra-violet light. 9) Micro-Letterings: Part of the ring shape design near the aircraft and the container vessel contain legible micro-letterings of the word "BANKNEGARAMALAYSIA" in white and orange when viewed under a magnifying glass. *+*

10) Invisible Fluorescent Elements: Various elements of the background on the obverse and reverse including the serial numbers will fluoresce in different colours when viewed under ultra-violet light. 11) Anti-Scanner/Copier Feature: The note features certain areas, designed such that these will change appearance when copied/scanned. 12) Phosphorescence Square: 13) The round braille markings feature a layer of tactile ink printed in intaglio that can be felt by touching. 14) Novel Numbering (14) The serial numbers increase in size to make it more difficult to counterfeit. The numbers fluoresce under ultra-violet light.

Macroeconomics in Malaysia

Much of Malaysia’s national policy—in education, government spending, industrial planning and language— is oriented towards making Malaysia strong economically and a competitor in the global marketplace. The heavy concentration of key assets into the hands of the state and politicalllt-connected Malay cronies, according to the New York Times, “is a byproduct of Malaysia's decades-old development policies, crafted to ensure a large stake in the economy for the majority ethnic-Malays and help them catch up with their ethnic-Chinese and Indian compatriots.”

Bloomberg reported: “Malaysia risks being caught in a middle- income trap, no longer able to compete as a low-cost nation, nor having moved sufficiently up the value chain to take on high- income nations. The middle-income trap describes economies that remain stuck when the factors that contributed to strong early growth, such as low-cost labor, reach their limits and momentum slows.”

Bank Negera Malaysia (central bank) maintains healthy foreign exchange reserves, and a well-developed regulatory regime has limited Malaysia's exposure to riskier financial instruments and the global financial crisis. Nevertheless, Malaysia could be vulnerable to a fall in commodity prices or a general slowdown in global economic activity because exports are a major component of GDP. In order to attract increased investment, Najib has raised possible revisions to the special economic and social preferences accorded to ethnic Malays under the New Economic Policy of 1970, but he has encountered significant opposition, especially from Malay nationalists and other vested interests. [Source: CIA World Factbook]

Indonesia and Malaysia have developed stronger more diversified economies than the Arab countries because they used their oil wealth to open up new sectors in their economies. They opened their markets to free trade; devalued their currency to offset high prices; invested heavily in education; and established special export to encourage manufacturing. Approximately 30 percent of goods are price-controlled.

John H. Drabble of the University of Sydney wrote: “Malaysia owes its successful historical economic record to a number of factors. Geographically it lies close to major world trade routes bringing early exposure to the international economy. The sparse indigenous population and labor force has been supplemented by immigrants, mainly from neighboring Asian countries with many becoming permanently domiciled. The economy has always been exceptionally open to external influences such as globalization. Foreign capital has played a major role throughout. Governments, colonial and national, have aimed at managing the structure of the economy while maintaining inter-ethnic stability. Since about 1960 the economy has benefited from extensive restructuring with sustained growth of exports from both the primary and secondary sectors, thus gaining a double impetus. [Source: John H. Drabble, University of Sydney, Australia]

“However, on a less positive assessment, the country has so far exchanged dependence on a limited range of primary products (e.g. tin and rubber) for dependence on an equally limited range of manufactured goods, notably electronics and electronic components (59 percent of exports in 2002). These industries are facing increasing competition from lower-wage countries, especially India and China. Within Malaysia the distribution of secondary industry is unbalanced, currently heavily favoring the Peninsula. Sabah and Sarawak are still heavily dependent on primary products (timber, oil, LNG). There is an urgent need to continue the search for new industries in which Malaysia can enjoy a comparative advantage in world markets, not least because inter-ethnic harmony depends heavily on the continuance of economic prosperity. [Ibid]

GDP - composition by sector: agriculture: 11.9 percent, industry: 41.2 percentm services: 46.8 percent (2012 est.). Investment (gross fixed):25.2 percent of GDP (2012 est.), country comparison to the world: 50 [Source: CIA World Factbook]

Reserves of foreign exchange and gold: $140.4 billion (31 December 2012 est.) country comparison to the world: 20; $133.6 billion (31 December 2011 est.). Debt - external: $95.55 billion (31 December 2012 est.), country comparison to the world: 46; $89.71 billion (31 December 2011 est.).

Central bank discount rate: 3 percent (31 December 2011), country comparison to the world: 107; 2.83 percent (31 December 2010), Commercial bank prime lending rate: 4.9 percent (31 December 2012 est.), country comparison to the world: 160l 4.83 percent (31 December 2011 est.)

Malaysia wants to attract more foreign investment, especially in the services sector so as to reduce its reliance on exports. The country is the third most export-dependent economy in Asia and has been hit hard by the global economic downturn. Reforming Malaysia's race-based political system is one of the keys to unlocking economic reforms. A system of economic and social privileges for Malays has been blamed by many for hurting the country's competitiveness and fostering corruption.

New Economic Policy: Malaysia’s Affirmative Action Plan

The New Economic Policy (NEP) is an affirmative action plan implemented in the 1970s in response to the ethic riots of 1969 to counter the economic dominance of the country's ethnic Chinese minority and improve economic position of naive Malays. The policy has helped indigenous Bumiputras (native Malays, literally "sons of the soil") improve their positions by giving them preferential treatment in education, business and government, and setting quotas that limited the number of Chinese and Indians in universities and public jobs. Malays were given preferences in housing, bank loans, business contracts and government licenses.

The policy is backed by a special clause in the Constitution guaranteeing preferential treatment for Malays. It imposes a 30-percent bumiputra equity quota for publicly listed companies and gives bumiputras discounts on such things as houses and cars. Money is provided by banks and investment firms to Malays and indigenous people to start businesses. Businesses are required to have a bumiputra partner, who would hold at least a 30 percent equity stake.

The policy was adopted when Abdul Razak, the father of current Prime Minister Najib, was Prime Minister. Shamim Adam of Bloomberg wrote: “ The 1969 riots started in part because the Malays felt the Chinese controlled the economy. To raise the share of national wealth held by Malays and indigenous groups to at least 30 percent, Najib's father crafted a policy that gave them cheaper housing as well as priority for college enrollment, government contracts, and shares of publicly traded companies. For the most part, the pro-Malay policy has kept the peace. "Malaysia has done very well, and affirmative action was a strong contributor to the stability that allowed for such development," says Masahide Hoshi, a director at Phalanx Capital Management HK in Hong Kong. "However, these same policies could impede Malaysia in the long term.[Source: Shamim Adam, Bloomberg, September 09, 2010]

The policy worked quite well for the Malays. Over they years Malays have taken over many business run in the past by Chinese and Malays prospered without destroying Chinese business. By the 1990s, Malays controlled the nation's major businesses and achieved more prosperity while it seemed relatively few Chinese and Indians resented the quotas. One minister of Chinese descent told National Geographic, "I've been quite critical of some specific cases when Chinese people got blatantly unfair treatment. But the situation we had at the end of the sixties, where the distribution of wealth was so skewed—it couldn't last. It made for an inherently unstable society. Because of NEP, there is less racial resentment now, and more a feeling of Us—you know, Us Malaysians."

The Malay privileges stem from a "national social contract," drawn up by various races at the time of independence in 1957, which put the majority community on a higher footing in exchange for sharing political power with minorities and giving them citizenship. According to Associated Press: “Today the policy is considered by most Malays as their birthright. No notable politician of any race has ever suggested scrapping it for fear of alienating Malays. [Source: Associated Press, August 6, 2005]

Criticism of the New Economic Policy

Many people feel the New Economic Policy has outlived its usefulness. The Malays have made great advances and are no longer a marginalized people like they were when the policy was adopted in 1970. According to Associated Press : “The policy is widely acknowledged to be only a moderate success, benefiting largely a few Malay elite and taking away from others the incentive to excel. Although Malays form 60 percent of the country's 26 million population, they control only 19 percent of the corporate equity and most of the country's wealth is in the hands of the Chinese. Indians are about 7 percent and are at the bottom rung of the economic ladder.

Thomas Fuller wrote in York Times: “The government's apparently indefinite extension of an affirmative action program for the Malays, a policy that has been in place since 1971, has stirred impatience among the country's Chinese and Indians. Terence Gomez, a Malaysian academic who has written widely about Malaysian politics and the ethnic Chinese, and who is now a research coordinator at the United Nations Research Institute for Social Development in Geneva, says the notion that one race should have supremacy is an anachronism in a country where ethnic identities are becoming less important in everyday life. "The idea of being Malay or being Chinese or Indian is not something that is part of their daily thinking or discourse," Gomez said. The political elite, he said, "seems to be caught in a time warp."[Source: Thomas Fuller, New York Times, December 13, 2006 \\\]

“The government says the affirmative action program is still needed to narrow the overall income gap between the Chinese and Malays, the original justification for the policy. But determining which race has the highest ownership levels in the country is also now a point of contention, involving disputes over how assets should be calculated.” \\\

John Burton wrote in the Financial Times, “There has been a debate whether the policy should remain in place since it is seen as obstacle to Malaysia's international competitiveness. A study by a local think tank suggested that Malays had exceeded the government's goal of owning 30 percent of domestic businesses, which called into question the continuation of the affirmative action policy. The government this week revealed its own statistics on Malay corporate ownership, saying the Malays owned 37 percent of listed companies but only 24 percent of all registered companies. [Source: By John Burton, Financial Times, November 9, 2006]

“Economists warn that the NEP represents a barrier to improving Malaysia’s economic efficiency when the country is facing increased competition for foreign investment from regional rivals such as Vietnam. Mr Abdullah has sought to ease some affirmative action provisions in response to those concerns. But when he announced last year that the government would waive such rules for a new economic zone near Singapore, he was criticised by hardliners in his own United Malays National Organisation, Malaysia’s dominant party.” [Source: John Burton, Financial Times, January 9, 2008]

Economic Results of the New Economic Policy 1970-90

John H. Drabble of the University of Sydney wrote: “The program of industrialization aimed primarily at the domestic market (ISI) lost impetus in the late 1960s as foreign investors, particularly from Britain switched attention elsewhere. An important factor here was the outbreak of civil disturbances in May 1969, following a federal election in which political parties in the Peninsula (largely non-bumiputera in membership) opposed to the Alliance did unexpectedly well. This brought to a head tensions, which had been rising during the 1960s over issues such as the use of the national language, Malay (Bahasa Malaysia) as the main instructional medium in education. There was also discontent among Peninsular Malays that the economic fruits since independence had gone mostly to non-Malays, notably the Chinese. The outcome was severe inter-ethnic rioting centered in the federal capital, Kuala Lumpur, which led to the suspension of parliamentary government for two years and the implementation of the New Economic Policy (NEP). [Source: John H. Drabble, University of Sydney, Australia \+\]

The main aim of the NEP was a restructuring of the Malaysian economy over two decades, 1970-90 with the following aims: 1) to redistribute corporate equity so that the bumiputera share would rise from around 2 percent to 30 percent. The share of other Malaysians would increase marginally from 35 to 40 percent, while that of foreigners would fall from 63 percent to 30 percent. 2) to eliminate the close link between race and economic function (a legacy of the colonial era) and restructure employment so that that the bumiputera share in each sector would reflect more accurately their proportion of the total population (roughly 55 percent). In 1970 this group had about two-thirds of jobs in the primary sector where incomes were generally lowest, but only 30 percent in the secondary sector. In high-income middle class occupations (e.g. professions, management) the share was only 13 percent. 3) To eradicate poverty irrespective of race. In 1970 just under half of all households in Peninsular Malaysia had incomes below the official poverty line. Malays accounted for about 75 percent of these.

The principle underlying these aims was that the redistribution would not result in any one group losing in absolute terms. Rather it would be achieved through the process of economic growth, i.e. the economy would get bigger (more investment, more jobs, etc.). While the primary sector would continue to receive developmental aid under the successive Five Year Plans, the main emphasis was a switch to export-oriented industrialization (EOI) with Malaysia seeking a share in global markets for manufactured goods. Free Trade Zones (FTZs) were set up in places such as Penang where production was carried on with the undertaking that the output would be exported. Firms locating there received concessions such as duty-free imports of raw materials and capital goods, and tax concessions, aimed at primarily at foreign investors who were also attracted by Malaysia's good facilities, relatively low wages and docile trade unions. A range of industries grew up; textiles, rubber and food products, chemicals, telecommunications equipment, electrical and electronic machinery/appliances, car assembly and some heavy industries, iron and steel. As with ISI, much of the capital and technology was foreign, for example the Japanese firm Mitsubishi was a partner in a venture to set up a plant to assemble a Malaysian national car, the Proton, from mostly imported components (Drabble, 2000).

Wealth Ownership ( percent): Bumiputera in 1970: 2.0 percent; 20.3 percent in 1990. Other Malaysians: 34.6 percent in 1970; 54.6 percent in 1990. Foreigners: 63.4 percent in 1970; 25.1 percent in 1990.

Employment ( percent) of total workers in each sector: A) Primary sector (agriculture, mineral extraction, forest products and fishing): Bumiputera: ,67.6 [61.0]* percent in 1970; 71.2 ,[36.7]* percent in 1990; Others: 32.4 percent in 1970; 28.8 percent in 1990. B) Secondary sector (manufacturing and construction): Bumiputera: 30.8 [14.6]* percent in 1970; 48.0 ,[26.3]* percent in 1990. Others: 69.2 percent in 1970; 52.0 percent in 1990. C) Tertiary sector (services): Bumiputera 37.9 ,[24.4]* percent in 1970; 51.0 ,[36.9]* percent in 1990. Others: 62.1 percent in 1970; 49 percent in 1990. [Note: * is the proportion of the ethnic group thus employed. The "others" category has not been disaggregated by race to avoid undue complexity. Source: Drabble, 2000, Table 10.9]

The data above shows that, overall, foreign ownership fell substantially more than planned, while that of "Other Malaysians" rose well above the target. Bumiputera ownership appears to have stopped well short of the 30 percent mark. However, other evidence suggests that in certain sectors such as agriculture/mining (35.7 percent) and banking/insurance (49.7 percent) bumiputera ownership of shares in publicly listed companies had already attained a level well beyond the target. While bumiputera employment share in primary production increased slightly (due mainly to the land schemes), as a proportion of that ethnic group it declined sharply, while rising markedly in both the secondary and tertiary sectors. In middle class employment the share rose to 27 percent. \+\

As regards the proportion of households below the poverty line, in broad terms the incidence in Malaysia fell from approximately 49 percent in 1970 to 17 percent in 1990, but with large regional variations between the Peninsula (15 percent), Sarawak (21 percent) and Sabah (34 percent) (Drabble, 2000, Table 13.5). All ethnic groups registered big falls, but on average the non-bumiputera still enjoyed the lowest incidence of poverty. By 2002 the overall level had fallen to only 4 percent. \+\

The restructuring of the Malaysian economy under the NEP is very clear when we look at the changes in composition of the Gross Domestic Product (GDP). Structural Change in GDP 1970-90 ( percent shares):1970: Primary (agriculture, forestry, fishing): 44.3 percent; Secondary (manufacturing, construction): 18.3 percent; Tertiary (services): 37.4 percent. 1990: 1970: Primary (agriculture, forestry, fishing): 28.1 percent; Secondary (manufacturing, construction): 30.2 percent; Tertiary (services): 41.7 percent. [Source: Malaysian Government, 1991]

Malaysia’s New Economic Model: Becoming a High-Nation by 2020

The goal of Malaysia's New Economic Model (NEM) unveiled by Prime Minister Najib Razak in 2010 is to raise Malaysia from a middle income nation to a high-income nation by raising per capita income to $15,000 by 2015 from $7,000 in 2010 as well as maintaining a growth rate of six percent a year.

Philip Schellekens wrote on a World Bank blog: The objective of NEM is for Malaysia to join the ranks of the high-income economies, but not at all costs. The growth process needs to be both inclusive and sustainable. Inclusive growth enables the benefits to be broadly shared across all communities. Sustainable growth augments the wealth of current generations in a way that does not come at the expense of future generations. [Source: Philip Schellekens, World Bank bogs, March 30, 2010]

A number of strategic reform initiatives have been proposed. These are aimed at greater private initiative, better skills, more competition, a leaner public sector, pro-growth affirmative action, a better knowledge base and infrastructure, the selective promotion of sectors, and environmental as well as fiscal sustainability.

The NEM represents a shift of emphasis in several dimensions: 1) Refocusing from quantity to quality-driven growth. Mere accumulation of capital and labor quantities is insufficient for sustained long-term growth. To boost productivity, Malaysia needs to refocus on quality investment in physical and human capital. Relying more on private sector initiative. This involves rolling back the government’s presence in some areas, promoting competition and exposing all commercial activities (including that of GLCs) to the same rules of the game.

2) Making decisions bottom-up rather than top-down. Bottom-up approaches involve decentralized and participative processes that rest on local autonomy and accountability —often a source of healthy competition at the subnational level, as China’s case illustrates. 3) Allowing for unbalanced regional growth. Growth accelerates if economic activity is geographically concentrated rather than spread out. Malaysia needs to promote clustered growth, but also ensure good connectivity between where people live and work.

4) Providing selective, smart incentives. Transformation of industrial policies into smart innovation and technology policies will enable Malaysia to concentrate scarce public resources on activities that are most likely to catalyze value. 5) Reorienting horizons towards emerging markets. Malaysia can take advantage of emerging market growth by leveraging on its diverse workforce and by strengthening linkages with Asia and the Middle East. 6) Welcoming foreign talent including the diaspora. As Malaysia improves the pool of talent domestically, foreign skilled labor can fill the gap in the meantime. Foreign talent does not substract from local opportunities--on the contrary, it generates positive spill-over effects to the benefit of everyone.

Overall, the New Economic Model demonstrates the clear recognition that Malaysia needs to introduce deep-reaching structural reforms to boost growth. The proposed measures represent a significant and welcome step in this direction. What will matter most now is the translation of proposed principles into actionable policies and the strong and multi-year commitment to implement them.

Malaysia’s New Economic Model and Ethnic Issues in Malaysia

According to The Star: The New Economic Model (NEM) points out that a key challenge of inclusive growth is the design of effective measures that strike a balance between the special position of the Bumiputera [Malays] and legitimate interests of different groups. While saying that ethnically divide societies are more prone to violent conflicts, NEM emphasises that the multi-racial composition of the Malaysian population is still its outstanding feature and this ethnic diversity will always be with us. As such, the market-friendly affirmative action programmes in line with the principle of inclusiveness will target assistance to the bottom 40 percent of households, of whom 77.2 percent are Bumiputra and many are located in Sabah and Sarawak, and ensure equitable and fair opportunities through transparent processes. It also allows access to resources on the basis of needs and merit to enable improvement in capacity, incomes and well-being, and has sound intellectual frameworks for better monitoring and effective implementation. [Source: The Star, March 30, 2010]

"The ETP (Economic Transformation Programme) will provide mechanisms to strengthen the capability of the bottom 40 percent so that they can take advantage of opportunities to secure better jobs, raise their productivity and grow their income. "This group will be assisted with programmes to build skills so that they can use their entrepreneurial instincts to start and grow their businesses," it says.

The NEM will also ensure equality be achieved through competition that is complemented with merits and recognition. "Families will be endowed with the opportunity and capabilities to pursue their aspirations in connected, sophisticated modern cities, townships and villages. They will live, work and study in localities free from the fear of crime, the indignity of discrimination and the anxiety of need," it says.

Malaysia's Stimulus Packages

According to the Asia Economic Institute: “In November 2008, the Malaysian government introduced a 7 billion ringgit (US$1.93 billion) stimulus package to enhance domestic growth and improve market confidence. An article in The Wall Street Journal, written by Deputy Prime Minister and Minister of Finance Najib Razak, states that the stimulus package is funded by savings on subsidies coming from falling global oil prices and will be supervised by Malaysia’s Project Monitoring Unit. [Source: Asia Economic Institute]

The stimulus package is valued to be about 1 percent of Malaysia’s GDP. It will provide funding for several infrastructure projects, including building of low and medium-cost houses, upgrading police stations, living quarters and army camps, maintaining public amenities such as roads, schools and hospitals and building and upgrading roads in rural areas. The government hopes that pumping money into these projects will have a multiplier effect on the rest of the economy.

This first stimulus package is not without its criticisms. Analysts argue that it is too little and too late, and that stimulus packages should at least amount to 2 percent of GDP to have a significant effect on the economy. They also argue that its focus on the construction industry makes the multiplier effect more muted than the government had hoped. This is because the construction sector employs a large number of foreign workers who send back the money they earned to their home countries, constituting a leakage from the domestic economy. Indeed, a World Bank Migration and Remittances Report states that remittance outflows from Malaysia were 3.7 percent of the country’s GDP in 2006.

Even former Prime Minister Dr. Mahathir Mohamad recently said that the first stimulus package is “insufficient, not well-directed and ineffective” and that an additional 28 million ringgit can be (should be?) pumped into the economy to stimulate activity.

The government is confident that it has used its experience in the 1997 Asian Financial Crisis wisely to make the country better equipped and well-prepared for the current crisis. “We have learned from the 1997-1998 crisis and have put in place various check and balances,” Najib said. A World Bank report states that Malaysia will be able to survive the current global financial crisis due to its sound banking sector, high current account surplus, and with proper government measures, sustained increases in private domestic consumption .

Unpegging the Ringgit Is a Sign of Malaysia's Strength

In July 2005, William Pesek Jr. of Bloomberg wrote: “Malaysia received little attention when it followed China's lead by scrapping the ringgit's peg to the U.S. dollar. That's just fine by officials here in Kuala Lumpur. Staying below the radar serves two purposes. One, it helps Malaysia avoid the speculative frenzy that has focused on China since its decision last Thursday to revalue the yuan. Two, it's a reminder of how much Malaysia's leadership has changed since the Asian crisis years. Malaysians have little to fear from the relative lack of excitement over its move to unpeg the ringgit. Yet the step is important, and timely. [Source: William Pesek Jr., Bloomberg, July 28, 2005]

A vestige of the Asian crisis, the ringgit's peg had outlived its usefulness. Because it brought stability and predictability to the economy, however, the government was reluctant to scrap it. The fact that the ringgit was undervalued also helped bolster exports. Scrapping the peg and letting the ringgit rise should be seen as a sign of confidence and maturity. It indicates that Malaysia's financial system has completed a sweeping change and is again ready to face the judgment of global markets.

Malaysia's rapidly developing middle class and expectations for 5 percent to 6 percent economic growth this year after a 7.1 percent rate in 2004 are pulling investors back to a place many fled in the late 1990s. The economy's recovery and speculation that the currency would appreciate spurred investors to buy 11.1 billion ringgit, or $2.93 billion, of Malaysian assets in the fourth quarter of 2004 and a further 4.3 billion ringgit in the first quarter. There's no reason that trend will not continue, pushing down bond yields and bolstering stocks.

On the negative side, expectations of further changes in currency policy could increase. Currency speculators, the crowd that prompted Mahathir bin Mohamad to peg the ringgit in 1998 - are again at Malaysia's gate. The good news is that this time they're exploiting not weaknesses in its economy, but its strengths. Another plus for Malaysia is that the hedge funds that attacked the ringgit in 1998 - and those clamoring to profit from today's currency trends - are probably more focused on China. Malaysia will see its share of hot-money flows, though China may grapple with far more. Economic historians can debate whether Mahathir was right to impose the peg and capital controls.

Red Tape in Malaysia

Ooi Sue Hwei wrote in Malaysian Business, “Bureaucracy could hurt Malaysia’s position as the world’s 17th largest trading nation and thwart efforts to attract foreign investors. Despite all that the country has to offer — a skilled workforce, stable political environment, good infrastructure, high technology facilities and tax incentives — red tape could be the one factor that could repel foreign investors. [Source: Ooi Sue Hwei, Malaysian Business, January 1, 2007]

Bureaucracy remains one of the main gripes of investors. In the early 2000s, then Deputy Prime Minister Datuk Seri Najib Razak expressed unhappiness when he found out that bureaucracy had stymied the plans of India’s largest IT company, Infosys Technologies Ltd, to invest in Malaysia six years ago. Infosys chairman NR Narayana Murthy had said the problems they faced included the limited movement of IT specialists to Malaysia and immigration and other travel-related matters. He described red tape in Malaysia as “numbing”, especially when it came to getting work permits for knowledge workers. He said despite Malaysia’s concern about keeping out illegal immigrants, the Government and its agencies should be aware that skilled workers were essential to any IT company. Such incidents make one wonder whether Malaysia is really serious about developing its IT industry. It has to realise that its hesitation to issue visas to skilled foreign workers is discouraging investors and driving world-class IT companies to other countries.

This is by no means a unique incident. In May 2006, US investors who attended the World Congress on Information Technology in Austin, Texas, said that while they valued the political stability and top-class infrastructure in Malaysia, they faced major hurdles in getting work permits for their expatriate staff. A press article reported a senior official with a US IT company in Malaysia as saying, ?If my bosses know how hard it is for us to get permits from the Immigration Department, there is a good chance that we would look elsewhere. Singapore and Ireland are so far ahead when it comes to clearing the red tape.

Chairman of the Consortium of Indian Industries in Malaysia, Umang Sharma, was reported as saying that despite the visa issue being constantly brought up at various forums, it was still a major problem. Business visas are not issued immediately, which poses difficulties for many foreigners, especially those in the IT sector. How can foreigners be attracted to Malaysia when getting a work permit, even by multinational corporations, takes almost a year, he said.

Delay in the issuance of work permits is not the only problem. Other complaints include immigration issues, a poor delivery system, and policy changes and inconsistencies. A senior official from a European embassy tells Malaysian Business of his six-month wait to bring in his car from a neighbouring country. On the other hand, prior to his transfer, it took only one month to transfer his car to that country.

Chew Seng Kok, a partner at law firm Zaid Ibrahim & Co, once said in a press article: “Malaysia has too much bureaucracy and there is not enough coordination among the authorities.” He said investors wishing to set up plants in the country had to deal separately with both the federal and state governments in matters of business licensing and land use. This is different from Singapore, whereby investors only go to one place.

See Foreign Investment in Malaysia

Malaysia’s Plan to Build 'Green Economy'

In May 2011, Malaysia announced an ambitious plan to build a "green economy" with the help of an advisory council that includes economist Jeffrey Sachs and the UN climate change chief. AFP reported: “The initiative is part of economic reforms instituted by Prime Minister Najib Razak aimed at pushing the Southeast Asian country towards developed-nation status by 2020. Malaysia's vision of a "green economy" would see it moving beyond its status as a manufacturing hub, and establish "low carbon emissions, highly efficient use of resources, and a healthy, well-educated populace." [Source: AFP, May 18, 2011]

"Malaysia's ambitious goal is to simultaneously reduce poverty and achieve a green economy," Najib said in a statement from New York. "We see science and technology innovation as key to achieving that goal, guided by the advice and active support of some of the world's most distinguished entrepreneurial, scientific and economic experts. These experts will liaise and work actively with key Malaysian agencies and institutions to develop 'quick wins' in the palm oil industry, in the creation of a smart city and smart village, and in education." As well as Sachs and Rajendra Pachauri, the chairman of the UN's Intergovernmental Panel on Climate Change, the panel also includes media tycoon Steve Forbes and two Nobel laureates.

Najib said the council would aim to "raise the number of scientifically and technically-trained individuals, entrepreneurs and innovators in our country." Malaysia also hopes to develop smart cities and villages, where the Internet is available and resources, such as water and electricity, are managed efficiently through information technology.

Malaysia suffers from urban sprawl and traffic congestion in its capital Kuala Lumpur, and a lack of basic services in rural areas. Malaysia has previously sought out high-profile international advisers like Microsoft's Bill Gates when it launched its Multimedia Super Corridor project to build up its information technology industry in the 1990s. "It's a very fuzzy thing; we don't know what it is... The word 'green' is used very broadly," Gurmit Singh, chairman of the Centre For Environment, Technology and Development Malaysia, said of the latest scheme. "There seems to be a lot of hot air. In terms of what happens sometimes at the ground level, it's a repackaging of projects," he told AFP.

Malaysia Is Well on its Way to Achieving High-income Status

In April 2013, The Star reported: Malaysia is well on its way to achieving high-income status by 2020 or earlier, going by official data and economic performance thus far. In terms of gross national income (GNI), Malaysia saw its GNI per capita increase to US$9,970 (RM30,239) as of end last year compared to US$6,700 (RM20,321) in 2009, a surge of 49 percent in the three years since the ETP was launched. [Source: The Star, April 30, 2013 *^*]

“The ETP was launched in October 2010, which saw gross domestic product (GDP) rise 7.2 percent year-on-year in that year. Projects under the ETP have given the economy a much-needed boost amid a slowdown in trade and the bleak global outlook, with GDP up 5.1 percent in 2011 and 5.6 percent last year. *^*

“For one thing, robust domestic demand, especially in private consumption, continues to be an indication that people's incomes have risen, while the continued growth of the economy also indicates income growth, especially since many jobs have been created in areas which have pushed the country's manufacturing sector up the value chain. *^*

“At end-2012, projects under the ETP had attracted committed investments of RM211.34bil and grew GNI to RM135.64bil, creating 408,443 jobs. The ETP as a whole envisions investments worth RM1.4 trillion and the creation of 3.3 million jobs in the 2011 to 2020 period for the country to achieve high-income status. According to the Performance Management and Delivery Unit (Pemandu), Malaysia had surpassed its GNI and GDP targets for last year. *^*

“Pemandu pointed out that the country might even reach high-income-nation status by 2018, two years ahead of the 2020 goal, should current projections hold true, when measured against GDP growth, especially after the rollout of the ETP. Growth last year even outpaced Asia-Pacific's, which rose an average of 3.8 percent. Again, this was supported by private investments and consumption. “We believe that these developments were largely driven by the economic transformation agenda undertaken by the Government from 2010 to propel Malaysia towards becoming a high-income nation by 2020,” Pemandu said in its 2012 annual report. *^*

“The states of Kedah and Kelantan are lagging behind. According to the latest available data from the Statistics Department, Kedah's GDP per capita (a measure of the standard of living and not an indicator of per-capita income) was valued at RM9,557, with Kelantan at RM6,496 based on constant 2000 prices compared to the country as a whole, where GDP per capita was at RM19,772. The data showed that Kedah, largely an agrarian state with paddy rice production among the major crops, recorded a 4.4 percent GDP growth, among the lowest in 2010, while Kelantan, also with an economy largely driven by agriculture with fisheries and cottage industries among its main economic activities, saw GDP grow 4.1 percent. *^*

“Kedah's poor performance was compounded by weak finances, as noted by the 2011 Auditor-General's Report. In fact, the report said the state had been facing losses since 2008, reflecting the performance of its economic development unit, Kedah Corp Bhd. The report described some of the unprofitable investments like shrimp farms, rubber and oil palm as well as logging projects as “wasteful”. As for Kelantan, it only attracted a meagre 0.3 percent or RM187mil of Malaysia's total domestic and foreign investment in 2010 of RM33bil. *^*

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Malaysia Tourism Promotion Board, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated June 2015

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