Under Mahathir, Malaysia’s economy grew at a rate of over 8 percent per year until mid-1997, when a currency crisis in neighbouring Thailand caused the Asian financial crisis plunging the whole of Southeast Asia into recession.

Malaysia experienced rapid economic growth from the 1980s. After a 1985–86 property market depression, growth returned through to the mid-1990s. Mahathir increased privatisation and introduced the New Development Policy (NDP), designed to increase economic wealth for all Malaysians, rather than just Malays. The period saw a shift from an agriculture-based economy to one based on manufacturing and industry in areas such as computers and consumer electronics. It was during this period, too, that the physical landscape of Malaysia changed with the emergence of numerous mega-projects. Notable amongst these projects were the construction of the Petronas Twin Towers (at the time the tallest building in the world, and, as of 2010, still the tallest twin building), KL International Airport (KLIA), the North-South Expressway, the Sepang International Circuit, the Multimedia Super Corridor (MSC), the Bakun hydroelectric dam and Putrajaya, the new federal administrative capital. [Source: Wikipedia]

In the late 1990s, Malaysia was shaken by the Asian financial crisis, which damaged Malaysia's assembly line based economy. Mahathir combated it initially with IMF approved policies. However, the devaluation of the Ringgit and the deepening recession caused him to create his own programme, based on protecting Malaysia from foreign investors and reinvigorating the economy through construction projects and the lowering of interest rates. The policies caused Malaysia's economy to rebound by 2002, but brought disagreement between Mahathir and his deputy, Anwar Ibrahim, who backed the IMF policies. This led to the sacking of the Anwar, causing political unrest. Anwar was arrested and banned from politics on what are considered trumped up charges.

New Development Policy

John H. Drabble of the University of Sydney wrote: “Positive action to promote bumiputera interests did not end with the NEP in 1990, this was followed in 1991 by the New Development Policy (NDP), which emphasized assistance only to "Bumiputera with potential, commitment and good track records" (Malaysian Government, 1991, 17) rather than the previous blanket measures to redistribute wealth and employment. In turn the NDP was part of a longer-term program known as Vision 2020. The aim here is to turn Malaysia into a fully industrialized country and to quadruple per capita income by the year 2020. This will require the country to continue ascending the technological "ladder" from low- to high-tech types of industrial production, with a corresponding increase in the intensity of capital investment and greater retention of value-added (i.e. the value added to raw materials in the production process) by Malaysian producers. [Source: John H. Drabble, University of Sydney, Australia +]

The Malaysian economy continued to boom at historically unprecedented rates of 8-9 percent a year for much of the 1990s. There was heavy expenditure on infrastructure, for example extensive building in Kuala Lumpur such as the Twin Towers (currently the highest buildings in the world). The volume of manufactured exports, notably electronic goods and electronic components increased rapidly. +\

Second Phase of Development: Exports and Technology

While the export of raw material remained an important part of the Malaysian economy, manufacturing became more of a focus under Mahathir. Important manufactured goods have included rubber gloves, catheters, rubber-threads, room air conditioners, semiconductors and audio visual equipment.

By the 1990s Malaysia had become the world's largest exporter of semiconductors, an industry that dates back to the mid-1970s when many U.S. and Japanese companies set up factories in Malaysia. At that time there was also a trend to produce more assembled products like cameras and VCRS from semiconductors in Malaysia.

Malaysia's rapid development has been attributed to the transparency of government policies, its educated and skilled workforce, well-developed infrastructure, good communications facilities and efficient bureaucracy.

High tech industries developed in Malaysia in the 1990s and 2000s included advanced electronics, scientific instruments, biotechnology, automated manufacturing systems, electra-optics and non-linear optics, advanced composite materials, optoelectronics, software engineering, alternative energy sources and aerospace.

Malaysia in the 1990s was reminiscent of South Korea in the 1980s and Japan in the 1960s and 1970s, when people are intoxicated with their new affluence and happy to leave their poverty behind them.

Over these three decades Malaysia accomplished a transition from a primary product-dependent economy to one in which manufacturing industry had emerged as the leading growth sector. Rubber and tin, which accounted for 54.3 percent of Malaysian export value in 1970, declined sharply in relative terms to a mere 4.9 percent in 1990 (Crouch, 1996, 222). +\

High Growth Rates in Malaysia in the 1980s and 90s

Malaysia was one of the fast growing economies in the world until the Asian economic crisis in 1997-98. The growth rate in Malaysia averaged 8 percent between 1986 and 1996, one of the highest rates in the world. In that time Malaysia grew from near developing country status to the world's 13th largest economy. The Per capita income in Malaysia rose from US$2,255 in 1990 to US$3,908 in 1995 and was expected to reach US$6,500 a year in the year 2000 before the Asian economic crisis in 1997-98 hit.

Malaysians, like Indonesians, and Thais, tripled their income levels between 1965 and 1995. By contrast the The Four Tigers—South Korea, Taiwan, Hong Kong and Singapore—raised the per-capita incomes sixfold in the same period. The growth rate in Malaysia averaged 5.2 percent in the 1960s, jumped to 8.3 percent in the 1970s, fell in the 1980s because of a drop in the price of oil, palm oil and rubber. Between 1987 and 1995, it averaged 8.8 percent a year and topped 8 percent for eight consecutive years.

Growth between 1991 and 1995: China (11.8 percent); Singapore (8.6 percent); Malaysia (8.5 percent); Thailand (8.5 percent); South Korea (7.6 percent); Indonesia (6.9 percent); Taiwan (6.7 percent), Hong Kong (5.6 percent), the U.S (2.0 percent), the Philippines (2.4 percent), Japan (1.2 percent).

Growth in Japan and the Four Asian Tigers in 1960-69, 1971-80 and 1981-89: A) Japan 10.9 percent in 1960-69; 5.0 percent in1971-80; 4.0 percent in1981-89. Asian "Tigers" : B) Hong Kong: 10.0 percent in 1960-69; 9.5 percent in1971-80; 7.2 percent in1981-89. C) South Korea 8.5 percent in 1960-69; 8.7 percent in1971-80; 9.3 percent in1981-89. D) Singapore 8.9 percent in 1960-69; 9.0 percent in1971-80; 6.9 percent in1981-89. E) Taiwan 11.6 percent in 1960-69; 9.7 percent in1971-80; 8.1 percent in1981-89. [Source: Drabble, 2000, Table 10.2]

Growth in ASEAN-4 in 1960-69, 1971-80 and 1981-89: A) Indonesia 3.5 percent in 1960-69; 7.9 percent in1971-80; 5.2 percent in1981-89. B) Malaysia 6.5 percent in 1960-69; 8.0 percent in1971-80; 5.4 percent in1981-89. C) Philippines 4.9 percent in 1960-69; 6.2 percent in1971-80; 1.7 percent in1981-89. D) Thailand 8.3 percent in 1960-69; 9.9 percent in1971-80; 7.1 percent in1981-89. [Source: Drabble, 2000, Table 10.2]

Malaysia posted these impressive growth rates and per capita income gains with modest inflation increases of only 4.0 percent. This meant that incomes grew while the low cost of living remained relatively low. In 1995, the growth rate was 9.5 percent and the unemployment rate was 2.8 percent.

Mahathir is credited with creating export-driven industrialization programs, improving the work ethic in Malaysia and increasing entrepreneurial skills. The boom was spearheaded by money from Japanese companies and Malaysian Chinese businessmen, who maintained their influence despite affirmative action for Malays. The manufacturing sector of the GDP increased from 6.7 percent in 1960 to 27 percent in 1990 behind expansion of production of textiles, cars and electronic items.

Japanese electronics manufacturers began setting up assembly plants, primarily in the Penang, in the 1960s and 1970s. Many of the workers were women in their 20s who worked for low wages. The United States also set up electronics assembly plants in Malaysia. To boost moral factory owners organized Miss National Semiconductor, Miss Advanced Micor Devices and Miss Free Trade Zone beauty contests.

Asian Financial Crisis in 1997-98 in Malaysia

During Asian Financial Crisis in 1997-98, the stock market in Malaysia crashed 75 percent and the currency plummeted 40 percent to a 24 year low. One billion dollars in foreign reserves were blown trying to prop up the currency. Ethnic Chinese tycoons were hit hard by the Asian financial crisis. Many remained technically bankrupt for years afterwards.

One of the causes of the crisis in Malaysia was that it had a high current-account deficits (when imports exceed exports), which made it a target for currency speculators. The deficit was partly caused by money poured into infrastructure projects. Growth was spurred by government spending and tax breaks than efficiency.

John H. Drabble of the University of Sydney wrote: “The Asian financial crisis originated in heavy international currency speculation leading to major slumps in exchange rates beginning with the Thai baht in May 1997, spreading rapidly throughout East and Southeast Asia and severely affecting the banking and finance sectors. The Malaysian ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar by January 1998. There was a heavy outflow of foreign capital. To counter the crisis the International Monetary Fund (IMF) recommended austerity changes to fiscal and monetary policies. Some countries (Thailand, South Korea, and Indonesia) reluctantly adopted these. The Malaysian government refused and implemented independent measures; the ringgitbecame non-convertible externally and was pegged at RM 3.80 to the US dollar, while foreign capital repatriated before staying at least twelve months was subject to substantial levies. Despite international criticism these actions stabilized the domestic situation quite effectively, restoring net growth especially compared to neighboring Indonesia. [Source: John H. Drabble, University of Sydney, Australia +]

Overall Malaysia wasn't in as bad of shape as Thailand before the crisis and after. In Malaysia, the corruption wasn't so bad, banks and companies were not as indebted as their Thai and Indonesian counterparts, and investment money wasn’t wasted on frivolous real estate developments like it was in Thailand (instead it was poured into expensive public works projects).

Mahathir Statements on Speculators and Globalization

At an World bank-IMF meeting in Hong Kong after the Asian Financial Crisis in 1997-98 began, Mahanthir said that Western banks had developed a conspiracy to knock off Malaysia as a competitor. Mahanthir called the currency speculators Jews, "neo-colonialists," "racists," "international criminals," "wild beats" and unidentified "sinister force." he then added, "They should be shot." He then said that "currency trading is unnecessary, unproductive and immoral."

When the Russian rubble tanked after foreign currency poured out of that country Mahathir said, if currency speculators continued to attack Russia “they may want to drop the bombs on those who attack them.” In 2001, he said, “There are so many corporate giants hiding their teeth and intent on gobbling us up...The second great Asian colonialism is upon us.”

Mahathir said "people who are in control of the media and in control of the big money seem to want to see this Southeast Asia countries in particular Malaysia stop trying to catch up with their superiors and to know their place." He also said, "We are Muslims, and the Jews are not happy to see Muslims progress...We may suspect them of having an agenda, but we do not want to accuse them."

Mahathir called financier George Soros "a moron" even though he was buying not selling Malaysian currency at the time of the crisis. Soros responded by called Mahathir "a menace to his own country" and a "loose cannon" who should not be taken seriously. There had been bad blood between Soros and Malaysia for some time. Malaysia's central bank, the Bank Negara, was burned when Soros made his $1 billion profit by speculating on the British pound in 1992. The Malaysian bank had backed the pound and ended up losing $5.73 billion during a two year period around 1992.

Mahathir's Policies During the Asian Financial Crisis in 1997-98

Malaysia didn't seek IMF help like Thailand, South Korea and Indonesia and didn’t have the massive foreign debt that these countries has either. Instead it tried to revive the economy through domestic policies such as lowing interest rates and government spending, reducing corporate and bank debts, and enacting legislation that reduced the power that foreign investors could have the Malaysian economy.

Mahathir encouraged Malaysians to "Buy Malaysia," and helped put together "Love Malaysia" trade exhibits. He told students studying abroad to come home, discouraged companies from hiring foreign workers and told rich families to send their foreign servants home. Malaysians were even urged not eat one of their favorite snacks, curry puffs, because they were made with Australian beef.

Mahathir imposed capital controls and tried to restrict the activities of speculators. The government imposed sweeping controls of the capital markets, passing legislation that made it more difficult to take ringgits out of the country. It pegged the ringgit against the dollar at a fixed rate, banned trading of the ringgit, and banned foreign capital from leaving the country for a year.

Mahathir also adopted isolationist and protective policies to protect Malaysian industry and relaxed some rules to help ailing companies stay afloat. He also made strong statements, implying that if his policies were not followed Malaysia risked breaking apart and collapsing into ethnic riots.

The capital controls were made largely after the foreign capital had already left and the currency had fallen and thus had little impact. Over $7 billion of taxpayers money was spent to liquidate nonperforming loans and bail out ailing banks. Malaysia's isolationist policies initially stymied its recovery. When Mahathir banned some trading practices, investors fled taking their money with them. When he set up special share-buying funds, people only sold into it and the stock market crashed 21 percent in 10 days. But in the end Malaysia recovered pretty quickly. Things started to pick up after the capital controls were relaxed and infrastructure projects were cut to save money. The market responded and jumped 12.4 percent in a single day.

Effects of the Asian Financial Crisis in 1997-98 in Malaysia

The downturn in Malaysia after the 1997-1998 Asian financial crisis was shorter and shallower than in other Asian countries. The economy shrunk by 6 percent in 1998 but started growing again after that. Malaysia’s bad loan problem was not as bad as some of its neighbors. Most of its $13 billion in bad loans was cleared up in four years Most of the loans were bought by the government at about 46 percent of their original value.

For a while banks couldn't give out loans. At the peak of the crisis in Malaysia bank credit equaled 160 percent of GDP; Debt collectors received more work than they could handle and number of Mercedes sold in Malaysia dropped 60 percent. Malaysia was forced to delay its ambitious construction plans, stretching out loan payments to banks on the airport and other infrastructure projects.

The 1997 economic crisis resulted in a reduction of pollution as people drove less, car sales plummeted, factories reduced their output or were closed, construction ceased and development projects were scrapped. Spending on the environment fell from 67 cents per person to 53 cents.

Recovery After the Asian Economic Crisis

The Malaysian economy contracted by nearly 7 percent in 1998. By 1999, the economy had rebounded. Growth was 5 percent that year. In 2000, growth was 8 percent, unemployment was 3.2 percent, and inflation was 1.8 percent. Growth slipped again to under 1 percent in 2001 but stabilized at between 4 and 5 percent growth in 2002-04. In 2003, growth was 4.5 percent, second in Southeast Asia to Thailand. The recovery was driven by exports an the use of government funds to prop up ailing companies and finance employment-providing infrastructure projects.

Since the 1997 Asian Financial Crisis, Malaysia has enjoyed an average real GDP growth rate of 5.6 percent. As an export-oriented economy, the country’s major exports in 2007 were electronics, electrical machinery, chemical products, palm oil and crude oil. Its top five trading partners are the U.S., Singapore, Japan, China and Thailand. In addition to exports, Malaysia’s economy also has strong manufacturing, services and tourism industries.

Mahathir trumpeted the recovery as a sign that his economic policies were working. Some economists disagreed, saying the recovery had little to do with controls and in fact occurred in spite of them. Whatever the case, th ability of Malaysia to weather the crisis gave it more confidence. Still some economists felt that Malaysia could have rebounded even more strongly. Foreign investors were still reluctant to invest in Malaysia out of fear that capital controls might be imposed again

In July 2005, Malaysia scrapped the ringgit’s peg to the dollar which had been in place since 1998. See Unpegging the Ringgit Is a Sign of Malaysia's Strength


Polices pursued by Mahathir that were continued under Prime Minister Abdullah Ahmad Badawi, who took office in October 2003. Abdullah cut development and infrastructure project to reduce the deficient while consolidating the banking sector, boosting the stock market and improving corporate management.

Abdullah aimed to shift the emphasis in development to smaller, less-costly infrastructure projects and to break the previous dominance of "money politics." Foreign direct investment was still pursued but priority was given to nurturing the domestic manufacturing sector.

In July 2005, William Pesek Jr. of Bloomberg wrote: “Mahathir's successor as prime minister, Abdullah Ahmad Badawi, is a quieter sort, who prefers steady, behind-the-scenes policy making to banner headlines. Abdullah's success in paring the deficit bolstered the country's debt ratings, making it cheaper for companies like Telekom Malaysia to borrow overseas. Admittedly, Mahathir was more fun for journalists to cover; his periodic outbursts against capitalism and Jews brought terrible publicity to Malaysia's economy and financial markets. It's hard not to think that the less-controversial Abdullah is exactly what Malaysia needs right now. [Source: William Pesek Jr., Bloomberg, July 28, 2005]

"As the exchange rate appreciates, that could improve the government debt ratio, and we also think that it could be good for domestic demand, which could raise the level of economic growth," says Steven Hess, an analyst at Moody's Investors Service. "We view the move as a positive."

“Abdullah also has been pushing Malaysia's economy toward the next phase of development. He is cracking down on corruption, demanding greater transparency, improving ties with neighbors like Singapore and reviewing deals between politically connected business people and the government. Education reforms are being stepped up, as are efforts to make the government more efficient when dealing with the business world. These steps are meant to attract foreign investment at a time when so much of it is flowing to China.

Economic Policy Under Abdullah Ahmad Badawi

Dante Pastrana wrote in the World Socialist Web Site: “When Mahathir stood down in 2003, Abdullah took over as prime minister and, under pressure from business, began to moderate the previous economic controls. He offered a more moderate image, cracked down several figures known for their corruption under Mahathir and won a landslide victory in 2004. He called for more foreign investment, the privatisation of government assets and signed a free trade agreement with Japan, one of Malaysia's major trading partners. [Source: Dante Pastrana, World Socialist Web Site, April 2, 2009]

Philip Bowring wrote in the New York Times, Change was also “driven by the ending of the ringgit peg to the dollar, which has been a form of protection for inefficient industries and held back both corporate reform and consumption. The currency has been seriously undervalued. A current account surplus that was running at 8 percent of gross domestic product even before the commodity price boom has ballooned to nearly 20 percent. High commodity prices can be either a crutch supporting hand-outs and extravagant schemes, or used to spur productivity and a shift toward a higher-wage, service-oriented economy. The chances now are better that the end of the peg will help Abdullah's strategy to reduce the links between government and business. [Source: Philip Bowring, New York Times, August 5, 2005]

But there were problems. Thomas Fuller wrote in the New York Times, “From the vantage point of central Kuala Lumpur, the country appears to be booming. The sounds and sights of jackhammers, cranes and backhoes across the city are testament to the continued transformation of what was once a sleepy backwater into a thriving, cosmopolitan Southeast Asian capital. But many Malaysians say they are worried about the country’s economic prospects. In a survey of 1,026 registered voters released by the Merdeka Center in January, only 19 percent of ethnic Chinese, who form the cornerstone of the country’s business community, said they expected the economy to improve in the coming year.Price increases for food and fuel, both of which are subsidized here, are major campaign issues. Voters surveyed listed inflation, inequality, ethnic relations and a rise in crime as their top concerns. Income distribution in Malaysia is the least equal of all Asian countries but Papua New Guinea, according to United Nations statistics. [Source: Thomas Fuller, New York Times, March 7, 2008]

By 2006, things were starting to wrong for Abdullah. By that time he had lost much of the goodwill he received when he took office in 2003. Associated Press reported: “Abdullah was blamed for failing to properly manage inflation, crime, corruption and most importantly ethnic tensions between the minorities and the majority Malays. Minorities have complained of increasing discrimination, citing a 37-year-old affirmative action program for Malays that shows no sign of being diluted despite their rising standards of living. The program gives Malays preference in government jobs, business, education and religion. [Source: AP, March 7, 2008]

“Mr. Abdullah is being portrayed both by the opposition and by some high-profile members of his own party, the United Malays National Organization, as sluggish and listless. Mahathir bin Mohamad, who preceded Mr. Abdullah as prime minister and is from the same party, reiterated his regret for having chosen him as his successor and called for Malaysians to elect a strong opposition — a stunning reversal for a man who while in office sent opposition politicians to jail. “He looks a bit out of touch,” said Ibrahim Suffian, director of the Merdeka Center, an independent polling agency. At a time of rising crime, higher food prices and ethnic tensions, he added, “He’s basically telling people that there are no problems.” /~/

Growth in Malaysia in the Mid-2000s

Growth was 7.2 percent in 2004, the fastest in four years. Semiconductors, hard-disk drives and other electrical and electronic products accounted for around half of Malaysia’s exports. Growth was 5.1 percent in 2005. In July 2005, Malaysia scrapped the ringgit’s peg to the dollar which had been in place since 1998. In November 2005, Malaysia raised its benchmark interest rate for the first time in more than seven years to curb inflation. Again exports were strong.

Growth was 5.9 percent in 2006.That year there was 2.5 percent inflation and 3.5 percent unemployment. Growth was 6.3 percent in 2007. That year there was 2 percent inflation and 3.3 percent unemployment.

Problems were brewing however. In January 2008, Radio Australia reported: “Malaysian retailers have begun rationing cooking oil purchases due to the government introducing restrictions to curb a shortage. It's believed price-hike rumours have caused panic buying of cooking oil. Rationing of five kilograms per customer per purchase was supposed to be enforced from Monday. The parliamentary opposition has criticised the measures, which it says is harming restaurants, consumers and vendors. Supermarket shelves were stripped of cooking oil in several states of Malaysia last week, with retailers not able to replenish supplies fast enough. [Source: Radio Australia, January 7, 2008]

Malaysia and the Global Financial Crisis in 2008-2009

During the Global Financial Crisis in 2008-2009 growth slowed and unemployment rose in Malaysia as its palm oil, rubber, oil and natural gas sectors were hit by falling commodity prices and its electronics industry and exports in general were hit hard by declining global demand.

During the economic slowdown Malaysia into its first recession in a decade. Growth reached a record low of -6.2 percent in the first quarter of 2009 but bounced back reaching an all time high of 5.9 Percent in the third quarter of 2009 . The economy contracted by 1.7 percent in 2009.

In August 2009, Liz Gooch wrote in the New York Times, “Malaysia recorded 31,392 layoffs from January through July, and the country’s unemployment rate rose to 4 percent in the first quarter of 2009. That was up from 3.1 percent in the fourth quarter of last year. The average monthly wage in the manufacturing industry has risen to 650 to 700 ringgit ($183 to $197) in the last three months, up from 450 ringgit, the national news agency Bernama reported. Figures released by the government showed that the economy had emerged from recession in the second quarter. Mr. Rajasekaran, the labor leader, said that although job losses were easing, the unions thought the freeze on foreign workers should continue. If there is a need for more workers in the coming months, he said, companies should be able to extend the visas of foreign workers already in the country. [Source: Liz Gooch, New York Times, August 31, 2009]

Malaysia Introduces a $16 Billion Stimulus During the Global Financial Crisis in 2008-2009

In March 2008 as the Global Financial Crisis in 2008-2009 was taking hold and elections were a few weeks away, the Malaysian government announced an ambitious $16 billion stimulus program. Elffie Chew wrote in the Wall Street Journal, “Malaysia's government unveiled a 60 billion ringgit ($16.26 billion) economic-stimulus plan that will strain government finances in an effort to shield the economy from the global downturn. The plan — larger than expected and the biggest economic stimulus initiative Malaysia has ever taken — amounts to 9 percent of gross domestic product and will drive the fiscal deficit to 7.6 percent of GDP this year. It will be implemented during 2009 and 2010, Finance Minister Najib Razak said. [Source: Elffie Chew, Wall Street Journal, March 11, 2008]

The plan follows seven billion ringgit in stimulus steps announced in November and complements efforts by the central bank to support the economy. Bank Negara has cut policy interest rates a total of 1.5 percentage points in three policy moves since November. Yeah Kim Leng, chief economist at Kuala Lumpur-based rating agency RAM Holdings Bhd., said the new spending will help boost confidence as it focuses on curbing unemployment and helping distressed companies affected by the downturn in exports. "The plan should help cushion the negative effects from the deteriorating global conditions and prevent the local economy from spiraling downwards," Mr. Yeah said.

The program will include 15 billion ringgit in fiscal spending and 25 billion ringgit in so-called guaranteed funds. The government also will make 10 billion ringgit in equity investments, and plans 10 billion ringgit of other measures including tax breaks.Malaysia, a major producer of palm oil and rubber, is taking these steps amid a climate of falling commodity prices. Its electronics industry has been hit hard by declining global demand, hammering the country's exports.

Robert Prior-Wandesforde, a Singapore-based economist at HSBC Bank, said the measures are too late to provide much support to growth in the first half of the year when the economic pain will be at its peak. But they will start to kick in just as the central bank's rate cuts begin to work and possibly as China's slowing economy regains its footing, helping support regional trading partners such as Malaysia, he said.

Malaysia had forecast a 4.8 percent budget deficit for this year before unveiling these new measures, which will involve large amounts of public debt to pay for the excess outlays over revenue. Higher public borrowing often tends to push up market interest rates, making it more expensive for private companies to raise funds or access the bond market. But Mr. Najib played down the impact of the aggressive plans, saying that "financing of the deficit will not crowd out the private sector." He said "there is ample liquidity in the domestic financial system" to absorb a pumped-up level of sovereign debt. He also said conditions in the economy could get worse.

Mr. Najib predicted unemployment would hit 4.5 percent this year, higher than the 3.7 percent registered in 2008. He also said he expects foreign direct investment flows into Malaysia to fall to 26 billion ringgit in 2009 from 51 billion ringgit in 2008. "It will be a deep and prolonged global recession," he said.

See Stimulus Under Macroeconomics

Economic Policy Under Najib

Najib, who has a bachelor's degree in economics, took over at a time when a re-energized opposition led by Anwar was seeking to take over the government and when economic growth was is the doldrums due to global financial turmoil and Malaysia' was losing investment money to more nimble neighbors. Growth in Malaysia's export-oriented economy in 2009 fell to it lowest numbers since 2001. The budget deficit soared due to spending on fuel subsidies and national infrastructure projects, according to the Malaysian Institute for Economic Research, a leading think-tank. "I pity Najib. He's taking over from the worst of times and from a man who messed things up," Abdullah Ahmad told Reuters, referring to the outgoing premier Abdullah Ahmad Badawi.

Eileen Ng of Associated Press wrote: Najib “has embarked on a series of economic and government transformation efforts to revamp his coalition's image, including abolishing security laws widely considered repressive, wooing investment from abroad and bolstering public welfare including cash handouts for civil servants and the poor. With his battlecry of "1 Malaysia," Najib also trimmed affirmative action policies but is restrained by hardliners in his ruling Malay party. He has pointed to the National Front's stewardship that turned Malaysia from an agricultural backwater into a modern, stable nation.[Source: Eileen Ng, Associated Press, April 29 2013]

To mark his 100th day in office, Najib unveiled a range of economic sweeteners including a cut in road toll charges and business license fees A nationwide poll around that time by the independent Merdeka Center research firm showed Najib's approval rating had risen from 45 to 65 percent in less than a month following his pledges to tackle complaints of corruption and racial discrimination. [Source: Razak Ahmad, Reuters, June 6, 2009 ]

“Malaysia's focus on heavy industries and manufacturing in the 1980s drew multinational corporations to its shores but it has since lost out to neighboring countries as a low-cost manufacturing base. Government spending in the last decade helped bolster growth as foreign investment ebbed. A 2011 World Bank report said Malaysia's brain drain was intensifying with more than one million of its citizens, mainly ethnic Chinese, living in Singapore and other countries largely due to higher wages, unhappiness over poor governance and lack of meritocracy. It warned the outflow of skilled people could bog down Malaysia's economy.”

Shamim Adam of Bloomberg wrote: “Najib Razak wants to engineer a return to Malaysia's glory days between 1987 and 1996 when its economy boomed, investment poured in, and local share prices almost quintupled. Although Malaysia's economy has expanded since those heady times, its average annual growth has declined from 7.2 percent in the 1990s to 4.7 percent in the last decade. A fast-rising China has attracted investment that might otherwise have gone to Malaysia, while neighbor Singapore has built new industries, wooed multinationals aggressively, and outstripped Malaysia in growth. "Beyond commodities, it's difficult to see Malaysia's competitive advantage vis-à-vis other Asian countries," says Joseph Tan, Singapore-based Asian chief economist at Credit Suisse Private Bank (CS). [Source: Shamim Adam, Bloomberg, September 09, 2010 ///]

“In response, Najib, in office since April 2009, has moved to streamline the government, made it easier for foreigners to invest, backed cutting-edge industries, and promoted a productive, educated workforce. His most controversial initiative is to start dismantling the policies that favor the ethnic Malay majority that put him in office—policies adopted by his father 40 years ago, when Abdul Razak was Prime Minister and the country was still recovering from riots between the Malay majority and the Chinese minority that left hundreds dead.” ///

Najib slowly dismantled the New Economic Policy, the affirmative action policy that helped Malays. Najib said the NEP failed to meet its target of raising Malay share of corporate wealth to 30 percent by 2010. It stood at 19 percent in 2009. The government still wants to meet the target by reforming the system and creating a new investor-friendly economic model, Najib said.

In 2013, the Najib government said gross national income per capita rose nearly 50 percent from 2009 to just under $10,000 in 2012, but critics say that figure is misleading because it does not take into account inflation and the uneven distribution of wealth. [Source: Niluksi Koswanage, Reuters, May 2, 2013]

Economic Reforms Under Najib

In June 2009, not long after Najib Razak became prime minister, The Economist reported: “ In the government's most symbolically important move, longstanding race-based investment quotas are to be dismantled. Other reforms of service sectors, including financial services, are also in the works. However, the government's distorting role in the economy will remain substantial despite such moves. On April 22nd the government announced plans to eliminate local-equity requirements for investment in sections of the services sector. Under the old rules, companies in the sector had to offer a 30 percent stake to investors from among the bumiputera (ethnic Malays and other indigenous peoples). The announcement that the rule would be scrapped was followed a few days later by the announcement of several liberalisation measures for the financial sector. [Source: The Economist, June 5 2009 \^/]

“Mr Najib has made clear his determination to pursue business-friendly policies, to improve the efficiency and competitiveness of the Malaysian economy and to attract foreign investment. Prior to his appointment as prime minister on April 3rd, Mr Najib had hinted to the foreign press that he intended to introduce gradual reforms to the government's policy of preferential treatment for ethnic Malays, who make up some 60 percent of the country's population, as part of wider efforts to restructure the economy. The aim of such restructuring is to increase the share of the services sector in the economy from 55 percent of GDP to more than 60 percent by 2020. Mr Najib has said he believes that the services sector offers tremendous scope for growth over the medium term. \^/

“The lifting of the 30 percent bumiputera equity rule in certain parts of the services sector is politically the most significant of the government's recent reforms, and has positive implications for foreign investment. The equity rule has been lifted in 27 services subsectors, including health and social services, tourism, transport services, business services, and computer and related services. In addition, up to five international law firms with expertise in Islamic financial services will be allowed to set up practices in Malaysia. The bumiputera equity requirement was part of a policy directive introduced in 1971 by Mr Najib's father, Abdul Razak, Malaysia's second prime minister, and was intended to reduce the economic and social backwardness of the Malay majority. Critics of the policy believe that it has acted as a barrier to foreign investment and that only the Malay elite has benefited from it. Preferential treatment for Malays is strongly resented by the country's ethnic Chinese and Indians, and some have argued that it has harmed the efficiency, resilience and growth of the Malaysian economy. Although the scrapping of the equity requirement represents a partial liberalisation of the service sector, the wider economy will continue to feel the heavy hand of government in the form of the dominance of government-linked corporations, excessive regulation and bureaucratic slowness. \^/

“Maintaining the 30 percent bumiputera equity rule would have proved unsustainable in a globalised economy, and would have hindered efforts to strengthen trade links with many of Malaysia's neighbours. However, the special position of the Malays is laid down in the constitution, which specifies ways in which the king should protect the interests of the bumiputera. Article 153 of the constitution urges the establishment of quotas for entry to the civil service, public scholarships and state education. This special status of Malays has been championed by the United Malays National Organisation (UMNO), which dominates the ruling Barisan Nasional coalition. Fearing a backlash from its members against the elimination of the bumiputera equity rule, senior UMNO politicians have been at pains to stress that the move is merely an adjustment and should not be seen as a fundamental change of policy. Critics of the government have expressed doubts as to whether Malaysia's slow-moving bureaucracy will actually implement the change. Trade unionists, meanwhile, are concerned over the possibility that an influx of foreign investment could result in an erosion of workers' rights. \^/

“In a broader bid to restructure the economy and attract greater foreign investment, in April Mr Najib declared that the government would gradually liberalise other services subsectors. He said that such measures were necessary in order to comply with a commitment made to the Association of South-East Asian Nations (ASEAN) to open up Malaysia's services sector. The government has announced the establishment of a M$100m (US$28.7m) capacity-development fund to strengthen the services sector, as well as the creation of a committee to vet investment applications for a large part of the services sector, with the major exception of financial services. \^/

“Approved investments in the services sector in 2008 totalled M$50.1bn (US$14.4bn); the share of foreign investments stood at 11 percent. In 2007-08 Malaysia recorded a surplus on the services account of the balance of payments, but this was largely owing to growth in tourism. By contrast, there have been persistent deficits on transport and the "other services" category of the services account. The latter category is the most sensitive to a change in policy, as it includes all services subsectors not related to transport or travel, including communications, construction and insurance; financial services; computer and information services; royalties and licensee fees; and other business services. If the liberalisation policy succeeds in attracting foreign investment, the services surplus is likely to expand. \^/

“Measures to liberalise the financial sector have proved to be less controversial than the decision to scrap the bumiputera equity rule. They include steps to increase the number of foreign financial institutions allowed to operate in Malaysia, to allow foreign institutions to raise their equity participation in Malaysian banks and insurance companies, and to grant greater operational flexibility to foreign banks. Malaysia currently hosts 13 locally incorporated foreign banks and three foreign Islamic-banking operators. No new licences for foreign commercial banks have been issued for a decade. However, Bank Negara Malaysia (the central bank) plans to issue new licences in the next three years. The central bank has stressed that preference will be given to applicants that could serve a previously untapped banking segment in the country. The central bank's selective approach emphasises that foreign financial institutions wishing to establish operations in Malaysia will need to be large, to have special expertise and offer international linkages, and to be able to promote the further development of the Malaysian financial sector (especially Islamic finance and insurance). The latest liberalisation measures do not signal a radical change in policy, as they broadly follow initiatives laid out in the Financial Sector Master Plan, which was unveiled in 2001. \^/

Over the next three years new licences will be issued to foreign institutions: two for Islamic banks, five for commercial banks, and two for Islamic insurance (takaful). The two new Islamic banks will be allowed to have a foreign-equity interest of up to 100 percent, whereas the foreign-equity limit for local non-Islamic commercial banks will remain at 30 percent. Furthermore, with paid-up capital of at least US$1bn each, the two new Islamic banks would be the largest in the world. The new banks are expected to offer specialist expertise in areas such as the financing of infrastructure, agriculture and technology. Equity limits for foreign investors will be raised from 49 percent at present to 70 percent in existing local Islamic-finance institutions, including investment and commercial banks and takaful operators. \^/

The measures to liberalise the financial sector are likely to have a far greater immediate economic impact than the removal of the 30 percent bumiputera equity rule. Financial services accounted for 11 percent of GDP in 2008. Growth in the financial and insurance sector has averaged 8.8 percent a year in the past three years, outpacing real GDP growth of 5.6 percent a year in the same period. \^/

New Economic Model

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 in the Early 2010s After the Global Financial Crisis

According to the Malaysian Institute of Economic Research (MIER), economic growth was 7.2 percent in 2010, 5.1 percent in 2011 and 4.5 percent in 2012. In 2010, Malaysia's economy rebounded from a recession in 2009 after expanding 10.1 percent year-on-year in the first quarter of 2010, its fastest pace in a decade. In July 2010, the government cut fuel subsidies by about 3 percent to curb its fiscal deficit and said more hikes are expected. That raised the gasoline price to 1.85 ringgit (58 cents) a liter and diesel to 1.75 ringgit (55 cents) a liter. [Source: Associated Press July 20, 2010]

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. ^

India and Malaysia are expected to surpass China and have the world’s fastest growing economies in between 2006 and 2020. They are expected to have 5.5 percent growth while China is expected to have 5.2 percent growth in that period.

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.

Last updated June 2015

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