MALAYSIA'S STRUCTURAL IMPEDIMENT IN PURSUIT TO HIGH-INCOME STATUS: DECOMPOSITION ANALYSIS OF OUTPUT GROWTH,

Size: px

Start display at page:

Download "MALAYSIA'S STRUCTURAL IMPEDIMENT IN PURSUIT TO HIGH-INCOME STATUS: DECOMPOSITION ANALYSIS OF OUTPUT GROWTH,"

Vivian Preston
5 years ago
Views:

1 MALAYSIA'S STRUCTURAL IMPEDIMENT IN PURSUIT TO HIGH-INCOME STATUS: DECOMPOSITION ANALYSIS OF OUTPUT GROWTH, Zakariah Abdul Rashid Malaysian Institute of Economic Research (MIER) Introduction Since its Independence in 1957, over a long period, Malaysia has evolved into a robust modern economy. Hardcore poverty has almost been eradicated from the people and they are provided amply with universal basic needs such as health, education, communication and other amenities and services; such that it has achieved a commendable level in quality of life for the vast majority of the people. To continue its development pursuits to high quality of life, the country has set a target that by 2020 it will achieve an advanced economy status. But now the economy is stuck in the middleincome trap. The economy needs to be transformed structurally if it seriously wants to achieve a high-income status. Malaysian government has initiated the Economic Transformation Program (ETP), comprises the New Economic Model (NEM) that incorporates the necessary structural and market reforms (Strategic Reform Initiative, SRI) to be undertaken urgently, including a massive private-led investment plan. The NEM, covering a period of , details out its implementation plan in two five-year development plans, the Tenth ( ) and Eleventh ( ) plans, with the remaining period left from now till Can Malaysia achieve the objective? Undoubtedly, Malaysia has had an impressive development performance since Independence 1, which has always been described as a typical economic development success story among LDCs. Its GDP grew at an average rate of 6 per cent in 1960s, rose to 8 per cent in 1970s, and then decelerated to around 5.5 per cent in the 1980s. In 1985, because of falling prices of its major commodities exports, crude petroleum and palm oil, Malaysia's economy shrunk with a negative growth for the first time ever. The Asian Financial Crisis of the late 1990s shocked again the economy, shrinking it for the second time in Responding to the crisis, the Government s expansionary policy in stimulating the economy and counteracting the weakening private sector demand had resulted in deteriorating public sector finances in 1998, even though it had managed to keep it right for 5 years after many years of deficits. In 2009, the economy once again went into recession due to the global financial and economic crisis of 2008/2009. Its exports were badly hit, though recovery was quick. Because of its export-oriented character, the economy will certainly continue to be affected by global boom and bust. The global economic outlook will continue to offer greater challenges as globalization and liberalization proceeds. The country's Economic Transformation Program (ETP) is more than a mere investment plan, aiming at transforming Malaysia into a high-income nation by 2020 by augmenting domestic demand in response to the prevalence of weak external demand. What about its structural and technological capability in delivering the target? How serious are the structural impediments to the target? We would like to examine, given the paucity of input-output data, structural change that had taken place in the economy during the period of 1991 to To this end, we proposed to examine first changes in sectoral output over the period, followed by examining relative contribution of each of the final demand components to output growth. The results are indeed useful for policy prescription in directing the economy towards a more enhanced growth. 1 Malaysia got its independence from British in

2 Problem Statement Malaysian economy has evolved into a modern industrialized nation, exporting among other products, high-tech and oil and gas products to the world market. The economy had once known to the world in 1950s as the largest producer of rubber and tin. Being small, yet export oriented the economy is open to global economic and financial uncertainties, which offer a formidable challenge to the country's aspiration to be a developed nation by Realizing the fact that a long-term sustainable growth is a requisite for the achievement of the aspiration, the economy has to be made up of a more efficient one leaving behind its factor-driven strategy. This requires an economic transformation program as outlined in the NEM. Many authors attributed Malaysia s economic development success story to its export-led strategy. With the sustained difficulty in global economic environment, the economy cannot rely exclusively on export. Due to its smallness, by the same token, the economy cannot rely on the domestic demand either. It is logical therefore that the answer lies on the supply side economics, enhancing its innovation and technological capability that will spur productivity. This will be an interesting case study to be reckoned with. Extending the methodological framework, if we simulate impact of investment plan on an hypothetical supposedly superior production structure, we could see to what extent the potential outcome the economy can go. We shall assess Malaysian technological capability based on the most recent input-output table, table 2005, whether it is capable to deliver the NEM targets and superior than that of the selected countries. The later will determine technological gap, if there is any, among these countries. Methodology An empirical analysis of the sources of economic growth, in our case will cover period, essentially examines comparative static structural change of an economy. We shall use an input-output methodological framework, which will decompose output change as a sum of change in the structure and sources of industrial growth of the economy 3. In other words, the analysis will decompose output change into identifying factors that lead to output change. The economy's input-output sectors for initial and terminal years were aggregated to 76 conformable sectors to each other between the two tables 4. In an open Leontief system (see Leontief, 1941), the basic material balance between supply and demand can be written as: (i) 2 The period covers the Sixth Malaysian Plan to the Ninth Malaysia Plan periods. 3 The basic methodology uses factor decomposition, which was originally developed by Chenery (1960). Since two input-output tables belonging to different years, one for 1991 and another for 2005, were used in our comparative static analysis, they were to be expressed in the common based year; for this we used GDP deflator 4 will be provided by the author on request 2

3 where X, D, W, E, and M are respectively vectors of gross output, domestic final demand, intermediate demand, export demand, and import. As the intermediate demand of the i-th sector can be determined by multiplying the input-output coefficients by total sectoral -output coefficients), while the import ratio 1979) 5, The decomposition of increase in X, X, can be expressed as follows: R μ1 D (represented the change in domestic demand) R E (represented the change in export demand) R μ1 A X0 (represented the change in intermediate demand) R μ (A0 X0 D0) (represented the change in import substitution). The subscripts 0 and 1 designate the initial year and the terminal year, respectively. This study uses 1991 and 2005 input-output tables published by the Department of Statistics, Malaysia. 5 Equation (i) can be rewritten as: (ii) μ represents the diagonal matrix of domestic supply), (iii) -μa) o and Robinson 1979), X X1 X0 R (μ1d1 1 X0 1A1) 1 ) R μ1 (D1 D0 R μ1 R 0 R (E1 E 0 R E0 X0 R μ1 R μ1d0 R E0 X0. The last two terms of the above expression can be expanded as follows: R μ 1D0 R E0 0 R μ1d0 R E0 R R1 X0 R μ1d0 R E0 R 1)X0 R μ1d0 R E0 R X0 R μ1 A1 X0 R μ1(a1 0) X R μ1 A0X0 R μ1 D0 R(X0 E0) R μ1 A X0 R μ1(a0 X0 D0 R(X0 E0) (R μ1 A X0 R μ1 (A0 X0 D0 R μ0 (A0 X0 D0) X0 0 R μ1 A X0 R μ(a0x0 D0). X0 E0 0 Y0; Y0 A0X0 D0) R μ1 D R E R μ1 A X0 R μ (A0 X (iv) 3

4 We extend the above analysis, in examining inter-country cross-sectional technologicalgap among the selected countries, we used except for Malaysian table selected countries 2005 input-output tables that were published by OECD. The Malaysian table, which was published by the national statistical office, was aggregated and made conformable to those of the selected countries. We then employ standard open Leontief equation, X = (I- A) -1 F, where X represents output vector F represents final demand vector and A represents structural matrix. In this analysis, X is endogenously determined by a given F, which is the ETP Malaysian investment plan, and a variable A, representing different technological capability, a proxy A, of those of the selected countries. Results and Discussion During the period, Malaysian total output not only has grown from RM305.3 billion to RM1604 billion in nominal terms but its pattern of sectoral contribution too has changed somewhat. Rate of growth of sectoral output varied considerably. Our methodological framework provides an analysis of primary, secondary and tertiary broad sectors of the economy to be identified as one of the followings: export-driven, domestic-demand driven, import substitution driven or technological change driven sector. During the period, we found that sources of output growth were mainly (about one-half) come from export demand followed by import substitution, which contributed nearly one-third while domestic demand contributed about one-tenth only. Thus, Malaysian economy has remained dependent considerably on international trade, especially on export Sources of Growth ( ) Sources of Demand Formula % Export demand R(E1-E0) % Domestic demand -D0))% Intermediate demand A0) X0) % 7.31 Import substitution demand Total Economic Input Structure Change 1978, 1991 and 2005 We examine three Malaysian input-output tables of the past years, 1978, 1991 and 2005, to see in more details their per unit of output of Total Intermediate Input, Import and Value-Added. Generally, we found that intensity of total intermediate input to total output remained unchanged over the period but that of value-added decreased continuously. The intensity of import was found to be increasing markedly over the period. This implies that as the economy's production process became more dependent on import, its capacity in generating domestic value-added deteriorated. Is the economy's production structure became more inferior as times go by? Furthermore, we compare each of the above variables for Malaysia in 2005 with those for Poland, South Korea and Japan so as to gain insights into technological and structural differences among these economies. The cross-sectional inter-country analysis will draw comparison between Malaysian total intermediate input, value-added and import coefficients with those of these countries. We found that Malaysia's value-added coefficient, which measures a country's general productivity level, was lower than that of these countries in The coefficient will ultimately determine a country's ability to generate domestic values in its production process. In many of the country's development plans, Malaysia puts it explicitly that it aspires to be a developed country by But the recent uncertainty in the external environment has 4

5 been quite a testing time for the economy, its technological capability in delivering the target of GNI per capita of a developed nation. The country took up the challenge by drafting the New Economic Model (NEM), planning to transform the economy structurally and technologically into a more robust one. Moreover, a massive investment plan was also drafted, known as Economic Transformation Program (ETP) to ensure achievement of the target. The ETP is a private-sector led and will allocate RM1156 billion of investment to be spent by 2020 according to National Key Economic Area (NKEA) priority. A sum of twelve National Key Economic Area (NKEA) sectors has been identified by regrouping 120 sectors of the economy. We use Malaysian 2005 input-output table to estimate output, household income and employment multipliers of the economy and calculate the impact of ETP investment plan on the economy in terms of those variables referred above. The ETP investment plan can be undertaken gradually during the period until It is important to note that during the period, production technology will undergo some kind of changes from one structure to another, therein the gradual ETP investment will be subjected to. Our impact calculation, however, referred to the effect of a full lump-sum investment expenditure undertaken on one occasion. Therefore, it is appropriate here we add a caveat that the following analysis is not investigating the actual, rather looking at the potential impact of such investment expenditure. The present study found that what would only be expected from such an investment program and given the current economic structure, additional output generated would be RM1,603 billion, household income generated would be RM billion and employment generated would be 9.7 million jobs. These are aggregate figures wherein their sectoral variation is quite remarkable. In order to see the impact of the investment program on a different economic structures, which presumably represents different levels of technological capability, we run the impact analysis of ETP investment on other selected countries input-output tables, whose results were then compared with that of the Malaysian case. We found that Malaysian input-output table produces the least additional output compared with those of the selected countries input-output tables; Japan would produce 10.79%, Poland 28.36% and North Korea 38.26%, respectively, higher than Malaysia. Similar pattern is also displayed in our calculation of the impact on household income respectively, 8.66%, 29.33% and 33.13% and employment respectively 4.%, 39.59% and 25.64%. These imply that technological gap existed between Malaysia and these selected countries in Conclusion and Policy Implications We now know that the existing Malaysian production structure is unable to deliver NEM target and technological gap existed between Malaysian and selected countries. The target will not be met unless the economic transformation program (ETP), comprising the structural reform initiatives (SRI) and the National Key Economic Areas (NKEA) are undertaken seriously. The former is the foundational measures that are necessary while the later is private sector led investment projects to spur aggregate demand. The implementation of ETP investment plan alone will not be able to ensure success unless it was necessarily supported by the market and structural reform, which form the necessary condition. The structural reform initiatives (SRI) should be viewed as a continuos adjustment efforts to ensure the economy is always moving on the optimal growth path. Under the current dynamic situation an economy can easily be off the optimal path because changes in internal and external eco-system will make the current structure be non-optimal and irrelevant. These cross-cutting measures not only would need to be implemented consistently and holistically but their right mix and sequencing are also critical. However, SRIs' successful implementation depends critically on the political will and determination of all Malaysian. 5

BBB3633 Malaysian Economics

BBB3633 Malaysian Economics Prepared by Dr Khairul Anuar L1: Economic Growth and Economic Policies www.lecturenotes638.wordpress.com Content 1. Introduction 2. Malaysian Business Cycles: 1972-2012 3. Structural