BBB3633 Malaysian Economics Prepared by Dr Khairul Anuar L1: Economic Growth and Economic Policies www.notes638.wordpress.com
Assessment Two assignments Assignment 1 -individual 30% Assignment 2 group 30% Final exam 40% ------- 100% =====
Reference Books Malaysian Economy 3/e Dr Poon Wai Ching (2015)
Content 1. Introduction 2. Malaysian Business Cycles: 1972-2012 3. Structural Transformation 4. The Expansion Phase (1990-1997 Pre-crisis) 5. The Slowdown Phase (1997 Post Crisis - 1999) 6. The Recovery and Upturn Phase (1999-Current) 7. Selected indicators of quality of life - 1970-2013 8. Consumer Price Index (CPI) and Inflation 9. Quality of Life 10. Planning Horizon in Malaysia 11. Industrial Master Plans
1. Introduction It is essential for one to grasp an understanding of the Malaysian macroeconomic overview. An overall review of the Malaysian macroeconomic performance would be an ideal appetiser before digesting the issues and policies relating to Malaysian economic development. First, we examine the Malaysian business cycle in the past decades, followed by a discussion of macroeconomic indicators. In the second part, we will discuss the development planning horizon and the Malaysian economic policy framework
2. Malaysian Business Cycles: 1972-2012 Strong growth is normally accompanied by low unemployment and stable inflation. Higher productivity enhances efficiency in the use of resources that increase competitiveness Over the last four decades (1972-2012), the Malaysian economy has experienced large cyclical patterns (Figure 1.1 ).
2. Malaysian Business Cycles: 1972-2012
3. Structural Transformation During 1970s, Malaysia experienced economic transformation. Agricultural diversification was in place, timber and palm oil had emerged as important export commodities and the production of crude petroleum began to gain significance. Liberalisation measures were introduced across the board to help improve competitiveness and productivity. The industrial revolution laid the foundation for the transformation of the economy from agriculture towards industrialisation. The objective of industrialisation was to maximise growth rate and to modernise the Malaysia. Malaysia's industrial strategy was a form of state capitalism with fringe benefits to achieve international competitiveness and to minimise valueadded as incentives for potential foreign investors.
3. Structural Transformation There were two strategies for pursuing industrialisation in Malaysia. 1. import substitution industrialisation (ISI) during the 1960s, which pursued tariff protection, import restriction and investment incentives. 2. export oriented strategy (EOS) was imposed during the 1970s and 1980s especially in the textiles, garments and electronics sectors.
3. Structural Transformation ISI was used to realise industrialisation where machinery and raw materials were imported, and then industries, in turn supplied the input required for the modernisation of the agricultural sector and consumer goods demanded. The rationale for the implementation of ISI was due to rapid population growth and the realisation that heavy dependence on the agricultural sector would not absorb the expected increase in the labour force. Therefore, there was a need to diversify the economy to eliminate total dependency on rubber and tin. Nevertheless, there were drawbacks in ISI. The industrial sector was inefficient in operation and the size of the domestic market was small. As such, small domestic markets could not make the long-term requirements of this strategy sustainable, and the objectives of the government for setting up this strategy were not realised. Hence, the country changed from ISI to EOS.
3. Structural Transformation EOS was used to realise industrialisation where goods were produced locally for export. Generally, this was perceived as better than the ISI strategy, partly because it was easier to detect the effectiveness of export promotion policies as performance could easily be observed. Generally, the ISI policy was prone to domestic assembly and capital-intensive, compared to the pre-implementation of the ISI policy that mostly imported from abroad. Meanwhile, a low-wage, labour-intensive production technique was used in EOS to attract investors. EOS gave industries greater opportunities to enlarge markets and achieve economies of scale.
4. The Expansion Phase (1990-1997 Pre-crisis) After the country registered a significant growth with slightly more than 13% for three consecutive years from 1988-1990, came the Gulf War on August 2, 1990. Thereafter, with another cycle of oil shock, oil prices increased double from US$18 per barrel from pre-gulf level to an average of US$36 in October 1990. Nevertheless, Malaysia's economic performance remained strong and continued during the 1990s prior to the Asian financial crisis.
4. The Expansion Phase (1990-1997 Pre-crisis) This period was viewed by many as the golden age of Malaysian economic growth. For instance, real GDP growth averaged at 9.2% p.a. (Table 1.1), current account deficit gap closed, unemployment was below 3 percent, and there was a low inflation rate of 3.5 percent and a stable exchange rate of 2.5 percent. In addition, as a result of gradual appreciation of the effective exchange rate, the investment-led growth strategy was successful in raising output and income, while investment had deteriorated quality-wise. This eventually led to major balance sheet weaknesses in the banking and corporate sectors, and exposed the economy to the contagion effect during the Asian financial crisis.
4. The Expansion Phase (1990-1997 Pre-crisis) Some key factors that lead Malaysia's strong economic performance during the expansion phase are as follows: Strong fundamentals growth Substantial poverty reduction Improve quality of life and standard of living Political stability and harmonious society Supportive government policies towards FDI High-quality social services Well-developed infrastructure Educated and trainable workforce Competitive investment incentives Private sector led growth Investment in human resource development Supportive fundamental policy framework, particularly in agricultural and industrial sectors.
5. The Slowdown Phase (1997 Post Crisis - 1999) Malaysia experienced strong fundamental growth record prior to the crisis. However, the domestic economy fluctuated widely due to the financial crisis of July 1997. Market confidence shrunk with the rest of the region's members. Figure 1.1 shows that the average GDP growth rate pre- Crisis was 7.6% and it had declined to 5.1 % post-crisis while the growth private investments declined by almost 1. 7 times. Large portfolio outflow occurred and the substantial decline in equity and property values followed.
5. The Slowdown Phase (1997 Post Crisis - 1999) The initial response of the authorities was to increase interest rates and tighten fiscal policy in an attempt to anchor market confidence. In September 1998, the authorities launched policy packages designed to insulate monetary policy from external volatility by pegging to the U.S. dollar and adopted capital controls, complemented with a fiscal stimulus package to increase capital spending. On 1 September 1998, Malaysia implemented capital control to tighten control on capital mobility. The purpose of this restriction was to restrain non-residents speculating on capital transactions by eliminating ringgit-based transactions outside Malaysia. This implied that the ringgit held no value in foreign countries. One of the advantages of capital control was that it increased the efficiency of capital allocation and prevented external capital transactions from having an adverse impact on the domestic economy. Permission was required for capital transfer between accounts owned by non-residents. The use of money in accounts owned by nonresidents was limited to purchasing assets in Malaysia. As a result, ringgitdenominated assets outside the country would have had to flow back home. This had eased the liquidity problem.
5. The Slowdown Phase (1997 Post Crisis - 1999) Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of capital. Most companies and governments require debt financing for expansion and capital projects. When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in other financial markets, so their impact is farreaching.
5. The Slowdown Phase (1997 Post Crisis - 1999) Theoretically, the direct exchange rate control prohibited transaction of foreign currency assets in order to restrict capital transfers. When capital is transferred from a country with a low interest rate to a country with a high interest rate under an open economic system, it promotes economic progress. However, short-term capital transfers are often undertaken by speculators. Due to the emergence of hedge funds, short-term capital transaction volumes have increased. Not only would this hinder the efficient allocation of capital, but also adversely affect the domestic economy. Capital outflow reduces the value of domestic currency and capital inflow increases money supply. Hence, both enhance the acceleration of inflation.
6. The Recovery and Upturn Phase (1999-Current) Malaysia's recovery in 1999 was supported by accommodating macroeconomics policies. Strong GDP growth and a gradual easing of capital controls helped to improve investors' confidence. Recovery was also accompanied by reduced vulnerability of the financial system. Some firms gained much progress with operational restructuring of the corporate sector via the corporate debt restructuring programme. Following the favourable economic conditions in general, and the buoyant world demand for electronics in particular, imports of intermediate and consumption goods have been on an uptrend since January 1999 allowing a build-up of international reserves, unemployment declined, and inflation remained low.
6. The Recovery and Upturn Phase (1999-Current) Malaysia managed to recover and grew faster after the financial crisis due to other key reasons too. They were: i. substantial potential for catching up; ii. relatively well-educated workers, iii. strategic geographical and favourable structural policies; iv. demographic changes working in favour of more rapid growth; and v. economic policies and strategies that were conducive to sustain growth.
7. Selected indicators of quality of life - 1970-2013 The Malaysian economy has grown rapidly over the decades. Malaysia is a tremendous economic success story. e real GDP growth on an average of 7.8% per annum over the last decade between 2000 and 2010 (refer Table 1.1 ). Malaysians are living longer with better health care overtime. The average life span has marginally extended to 72.6 years and 77.2 years compared to 61.6 years and 65.6 years in 1970 for males and females, respectively (Table 1.2). The average literacy rate has remained relatively stable at 94 percent. All these reflect better quality of life for the people.
7. Selected indicators of quality of life - 1970-2013 1.2
8. Consumer Price Index (CPI) and Inflation CPI is commonly used to calculate inflation rate of the country. In Malaysia, the CPI has been reclassified with the current base year being 2010 (Figure 1.4). Maintaining a low and stable inflation rate has become one of the challenges in the macroeconomic management for most countries. However, to sustain low and stable inflation is not an easy task. Malaysia's inflation rate was generally very low during the sixties. During the 1970s, the average inflation rate of 5.5% was higher than during other decades (1980s: 3.65%; 1990s: 3.66%; 2000s: 2.78%; 2010-2013: 2.04% (Figure 1.5).
8. Consumer Price Index (CPI) and Inflation 1.5
8. Consumer Price Index (CPI) and Inflation 1.5
9. Quality of Life High economic growth is associated with better quality of life. In the Economist Intelligence Units, Quality of Life Index has been known as "Where-to-be-born Index" (WTBBI). Components used to measure quality of life in this index include life expectancy, job security, work-life balance, life satisfaction, education, physical security, material wellbeing, health, family quality, community life, civil society engagement, governance, and gender equality, among others. Results from WTBBI 2013 revealed that Malaysia was ranked 36 out of 80 countries with a score of 6.62 out of 10 (1 being the best, 10 being the worst). Comparatively Singapore was ranked the 6th and Thailand the 50th. On the other hand, the OECD's "Better Life Index" measures what matters most to people in the globe. Five areas that ranked highly for Malaysian were health, work-life balance, life satisfaction, education and safety
9. Quality of Life The Malaysian Quality of Life Index (MQLI) is an aggregate measure of welfare and quality of life from a broader perspective using fortytwo indicators, representing 11 components that include working life, housing, transport and communications, health, education, social participation, income and distribution, culture and leisure, family life, environment and public safety. Various indicators measuring each component are depicted in Table 1.8. Economic growth has translated into higher quality of life for society. The quality of life in Malaysia has improved during 2000-2010 period, as indicated by the 11.9% point rise in the MQLI. All the 11 components in the MQLI recorded improvements (Table 1.8 & Figure 1.7). The education component recorded the highest increase of 20.4 points, followed by transport and communications (20.3 points) and housing (15.7 points).
9. Quality of Life
10. Planning Horizon in Malaysia Malaysia is a small open economy that employs mixed economic system of free enterprise with active government intervention. The government provides the broad thrusts and sets direction for the economy in a federation, and ensures the achievements of socioeconomic goals. The private sector is free to operate, given a bundle of appropriate policies, institutional and infrastructural support.
10. Planning Horizon in Malaysia Multi-layer model has been adopted, where the Malaysian government implemented three-tiered cascading planning horizons, ranging from short-term to long-term development plans. Short-Term Plan includes the Annual Budget, Medium-Term Plan includes the 5-year development plans (for example, the Tenth Malaysia Plan, 2011-2015, and the Mid-Term Review (MTR) of the five-year Plans, which are carried out in the middle of the five-year cycles. They are reviewed every 2o and a half years under the MTR. The plan is reviewed and makes adjustments, if needed. From the post-independence period till present, there have been various Long-Term Plans that spell out various economic policies.
10. Planning Horizon in Malaysia 28
11. Industrial Master Plans (IMPl: 1986-1995; IMP2: 1996-2005; IMP3: 2006-2020) The Government implemented two Industrial Master Plans (IMPs) in the last two decades - to develop and transform the manufacturing sector IMP 1 (1986-1995) provided the base for the manufacturing sector to become the leading growth sector of the economy. This plan recommended exporttargeting linked to incentives, as many industries needed domestic market protection to facilitate the export markets at much lower prices. IMP2 (1996-2005) further developed the manufacturing sector by strengthening industrial linkages, increasing value-added activities, and enhancing productivity. IMP3 (2006-2020) was launched in 2006 as the roadmap that drives Malaysia towards an industrialised nation status. During IMP3, the services sector takes on a greater role in generating economic growth while the manufacturing sector will continue to be an important driver of growth. The overall objective of this plan is to achieve global competitiveness through innovation and transformation of three strong economic pillars that are the manufacturing, services, and agricultural sectors