Malaysian Economy
(For TARC and UTAR May 2013 semester)
Topic 1: Malaysia Economic Development: A Story [Week 1]
When we gained our independence, we ranked among the poorest
countries in the world. Now, we are classified as a high human
development index nation. Our nominal per capita income is RM20,900
– a 26 fold increase from the time of Merdeka.
Abdullah Ahmad Badawi (2007)
Introduction
Above is the Prime Minister of Malaysia, Abdullah Ahmad Badawi’s speech for
Malaysian 50th Merdeka celebration. Since Malaysia achieved its independence in 1957,
the economy has gone through ups and downs. Nevertheless, the country celebrated its
golden jubilee independence in a happy mood, proud of what has been achieved so far
and what will the nation achieve in near future. In year 2007, Malaysia has its first
angkasawan (astronaut). The name of Air Asia, Malaysian internationally renowned
budget airline appearing vividly as sponsor of the referees in the world most followed
English Premier League as well as the advertising in Old Trafford, home of Manchester
United football club. Nicol David, a Malaysian become the world number one in squash
and subsequently honored as the inaugural Asian Sportswomen of the Year. Petronas twin
towers were once the tallest building in the world. Malaysia was one of the so-called
Asian Tigers economies that have achieved consecutive years of high growth that dubbed
as the Asian Miracle. Despite the Asian financial crisis setback, Malaysia rebounded very
fast with its brave capital control policy that was heavily criticized at the beginning of the
implementation but later being complimented as “brilliant”. Other brilliant achievements
included low unemployment rate, low inflation and high literacy rate. Hence, there is no
doubt that Malaysiaku Gemilang, the theme for its 50th year independent celebration.
There might be no doubt for anyone to conclude that Malaysia has economic growth and
development but questions still remain as whether Malaysia should has done better giving
its blessing with natural resources, good weather and free of natural disaster like
earthquake or volcano. Malaysia barely has 23 years to reach its day of reckoning the
Vision 2020 to become a developed industrial nation. Will Malaysia realized its vision
then? So, let this chapter rewinds the time clock to examine what Malaysia has achieved
to bring it here as today and whether what has been achieved is enough to carry Malaysia
to fulfill its vision to become a developed industrial nation by year 2020. Metaphorically,
Malaysia is like half way crossing a river, having gone so far from one side of the
riverbank but still have a long swim ahead to reach the other side of the river. With
globalization current forcing in, Malaysia cannot afford to just try to stay afloat in the
middle of the river but yet may have already exhausted itself, leaving insufficient energy
to finish crossing the river. That is the story of Malaysia and its economic development.
Story of Malaysia: The Development Path
Prior to independent, Malaysian economy has been heavy reliance on tin mining and
rubber plantation. Malaysia, then known as Malay Peninsula contained substantial
deposits of tin. In the nineteenth century, world demand for tin rose due to the discovery
of a more efficient method for producing tinplate (for canned food). At the same time
deposits in major suppliers such as Cornwall (England) had been largely worked out, thus
opening an opportunity for Malaysia as a new major producer. The discovery of large
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deposits in the Peninsula states of Perak and Selangor in the 1840s attracted large
numbers of Chinese migrants. By the end of the century Malayan tin exports supplied just
over half the world output at approximately 52,000 metric tons. Despite rich in tin, the
country seems benefit little as tin mining industry was dominated by European capital,
especially colonial British. Thoburn (1970: 28) reported that percentage of Malaysian
ownership in Malaysian-incorporated and United Kingdom-incorporated tin dredging
companies in Malaysia is 56.3% and 20.0% respectively. Total Malaysian ownership in
both Malaysian-incorporated and United Kingdom-incorporated tin dredging companies
in Malaysia is 35.1%. Hence, question remains that will Malaysia be much developed if
the tin mining industry was dominated by the locals? Perhaps, maybe because of the
greed of the colonial power and foreign capitalists that cause excessive mining, tin in the
Malay Peninsula was fast exhausted. Since the Paley Report in 1953 claimed that
Malaysia’s tin reserves of tin will exhaust round year 1980s, the government started to
look for alternative source of economics growth.
Besides tin mining, agricultural sector especially rubber planting is a very important
source of growth in Malaysian colonial era, as illustrated in Table 2.1. Rubber trees
planted in Malaysia are originated from the specimens of the tree Hevea Brasiliensis
from Brazil introduced by British. Barlow (1985: 57) claimed that rubber expansion
in Malaysia began on estates, being stimulated by very high prices and enabled by
capital and management from Europe with labour from South India. It was soon
followed by a parallel development on independent rubber shareholdings, as both
Malay farmers and immigrant Chinese workers perceived the high income to be
earned from the new crop. Rubber price rose until around year 1910 where it reached
an average of RM9.70 per kg. Average values fell thereafter but the area of rubber
plantation in Malaysia grew rapidly up to 1930. Besides price factor, various reasons
contribute to the rise and fall of rubber plantation sector. Suitable local weather,
investment from British and new technology of extracting the rubber latex from the
trees (called tapping) by an incision with a special knife expedite the rise of rubber
production. Meanwhile, Malaysia replaced rubber with palm oil and manufacturing as
source of growth due to manufacturing sector has higher value-added, rise in rubber
production cost as well as increased in substitution competition from synthetic rubber.
During 1950s in Malaysia, there were growing labour shortage and consequent rise in
real price of labour in rubber plantation sector as rubber is a labour intensive crop.
Table 2.1: Exports of Major commodities, Malaysia 1950 – 81 (% of Annual Totals)
1950a
1960a
1972
1981
Crude petroleum
7
26
–
–
Rubber
71
71
27
14
Sawn logs and timber
1
2
18
13
Machines and transport
6
2
11
–
Palm oil and kernel
2
3
7
10
Tin and tin concentrates
19
15
19
8
Manufactures food
7
7
–
–
Food and others
7
9
13
11
Totals: (in percentage)
100
100
100
100
(in RM million, nominal)
2.1
2.5
4.8
27.1
Note: a Figures for 1950 and 1960 are net exports. Figures for 1972 and 1981 are gross
export. Source: Barlow (1985: 60)
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Fading tin and rubber industries pave way for major structural transformation from heavy
reliance on tin mining and rubber plantation to an industrial based economy. Malaysia
started off industrialization with import-substitution industrialization (ISI) for light
industry from 1958 to 1968, followed by simultaneous export-oriented industrialization
(EOI) for light industry and import-substitution for heavy industry. Among the focuses of
import substitution for consumer goods include food industries, perfumes & cosmetic,
automobiles and bicycles producing industries. Petroleum & coal, animal feeds,
textiles, leather products & paper products were among intermediate goods being
promoted under Malaysian ISI. Meanwhile, EOI focused on consumer goods such as
wearing material, soaps & cleansing detergents and medicinal & pharmaceutical
products while promoting several import substitution intermediate goods for export
purposes like petroleum & coal, paints & varnishes, non-metallic minerals and textile
manufactures. Despite proud achievement of Malaysian ISI and EOI development,
there are still some development issues to be pondered. Jomo & Edwards (1993)
highlighted several problems of Malaysian ISI. For example, with the ISI policy, rent
seeking become widespread in Malaysia. Companies prepared to lobby Malaysian
politician and offer them directorships on the boards of subsidiary companies in
Malaysia in return for protection from competition. Thus, there is no pressure on the
companies to seek out exports. This meant that, for industries subject to economies of
scale, production was limited to a small domestic market and was therefore high cost
of production. The import substitution tended to be limited to final consumer goods,
with protection being higher on those goods. This increased the consumer goods
prices and results in inflation. The majority of the import-substituting industries were
set up by foreign-owned companies. Thus, not only did protection give rise to high
profit to them at the expanse of domestic consumers, but the profit accrued to foreign
companies were more likely to be remitted out of the countries. There was a regional
concentration of industry. This bias towards consumer goods and domestic market
while geographically, bias towards large town on west coast of the Peninsula. After
incorporated into the Federation in 1963, East Malaysia (Sabah and Sarawak) paid
higher prices for protected manufactured goods while getting few of the
industrialization benefits. Besides, most of the industrialization efforts, especially the
development of heavy industries in Malaysia were kicked off using the big push1
approach through Heavy Industrial Corporation of Malaysia (HICOM), a government
funded agency. Such an approach has caused high financial and administrative burden to
the government. Hence, in 1983, Malaysian then Prime Minister, Mahathir Mohamad
announced the government’s intention to embark on a privatization policy to ease public
sector involvement in the economy. However, the privatization in Malaysia has resulted
in both success and failure.
The progress of Malaysian economy is highly influenced by three critical factors namely
public delivery system, foreign direct investments and financial markets. It is believed
that the poor public delivery system has caused the slow down of the Malaysian’s
economy development progress. As a result, Prime Minister, Abdullah Badawi, in year
2007, has instructed the public services and government-link companies to increase their
efficiency level. In addition, foreign direct investments (FDI) are important as they can
contribute both financial and human capitals to the economy in Malaysia. Table 2.2
shows some sources of FDI inflow. FDI in Malaysia can be divided into four phrases. The
first phrase is the early development phase where British colonial encouraging FDI in
primary sector, predominantly in plantation and mining sector and active
1
Big push model claims that coordination for simultaneous industrialization is important for success.
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discrimination in favor of British investors. This is follow by the import substitution
phrase where foreign investments were further encourage by reducing restriction on
foreign capital despite impose a 30% Bumiputera ownership requirements. Then, in
the export orientation phrase (prior to the Asian Crisis), FDI inflow increase
significantly from US$959 million in 1985 to US$17.6 billion in 1990 based on
manufacturing projects approved by the government. Special efforts and incentives
were made to attract foreign multinational to locate their offshore assembly operations
in Malaysia. Investor-favored policy such as Promotion of Investments Act 1986 and
the gazette of Free Trade Zone Act on September 5, 1991 acted as important FDI pull
factors. FDI from USA, Japan and Singapore began to overtake British investments in
this phrase.
Sources of Foreign Investments in Approved Projects, 1985 -2002 (percentage)
1985 1986 1987 1988 1989 1990 1998
U.K.
2.8
2.9
3.7
0.4
8.8
4.9
3.6
USA
11.6 3.1
7.9
11.0 3.6
3.2
49.2
Japan
27.5 6.8
34.7 25.1 31.3 23.9 14.2
Taiwan
3.3
6.4
11.8 17.0 24.7 35.9 7.6
Singapore
10.4 10.9 12.5 8.6
10.6 5.0
7.4
Korea
2.6
0.2
0.2
0.9
2.2
3.6
0.5
Germany
n.a.
n.a.
n.a.
n.a.
n.a.
0.7
1.2
Sources: MIDA (various issues, cited in Poon 2005: 190)
1999
1.5
44.4
8.1
2.1
2.1
0.2
1.5
2000
3.8
37.7
14.5
4.6
4.6
3.6
8.3
2001
0.6
18.0
17.8
6.0
6.0
9.0
13.8
2002
1.4
23.0
5.0
2.1
2.1
3.1
44.9
After the Asian Crisis, Malaysian development path entered into knowledge and
information technology based economy, most notably is the creation of the Multimedia
Super Corridor (MSC). In this MSC development phase, many incentives were given to
develop Malaysia as centre for high-tech industries. Those incentives included
companies located in the MSC will be given MSC-Status, which entitles them to a 10year Pioneer Status Tax Holiday, a 100 percent Investment Tax Allowance on new
investments made in cyber cities, and tax exemption on import of multimedia
equipment and duty-free for importations of multimedia and training equipments.
Recently, three special investment zones were developed in an attempt to attract foreign
direct investments. They are the Iskandar Development Region (IDR), the Northern
Corridor Economic Region (NCER) and Eastern Corridor Economic Region (ECER).
IDR was officially launched on November 2006 while NCER and ECER were both
launched in 2007, thus reflecting yet another big push industrialization approach. Last but
not least, the development of financial markets is also essential to the Malaysian economy
development, particularly its industrialization progress. This is because vibrant and strong
financial markets are needed to facilitate the absorption of foreign funds and domestic
credit expansion. Lessons from the Asian Financial Crisis has resulted Malaysia to take
steps in ensuring the efficiency and effectiveness of the financial market. These steps
include restructuring of domestic banking system as well as merger of the Kuala Lumpur
Options and Financial Futures Exchange (KLOFFE) and the Commodity and Monetary
Exchange of Malaysia (COMMEX Malaysia).
Common development path is an agrarian country, included Malaysia started off in
traditional agriculture sector, which is known as “traditional society” stage in Rostow’s
Stages of Growth model. Then the economy goes into transition to modern economic
through application of new technology. Modern economic consist of modern
agricultural and industry sector but countries usually prefer the later as engine of
growth, therefore leaving the agriculture sector lagging behind, forming economy
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dualism. Malaysia preferred industrialization. Hence, during the next stage of
Malaysian economic growth (known as the take-off stage), new techniques and
capitals are widely introduced in industry sector only under ISI and EOI policies.
Nevertheless, this trend sees noticeable change during the Ninth Malaysian Plan and
thereafter where agricultural modernization is given emphasis. Major focuses of
agricultural modernization in the Ninth Malaysia Plan are (i) increase agricultural
output included exploration of new resources with bigger involvement from private
sector, (ii) expand processing activities based on agricultural and various products,
(iii) enhance the global marketing and linkage, (iv) increase the income of small
planters, farmers and fishermen and (v) improved the service delivery system. In
NCER, biotechnology development and modern commercialized agricultural sector
are made as core focuses.
Topic 2: Economic Planning of Malaysia [Week 2]
Malaysia Economic Planning Time Frame
Okposin, S. B., Abdul Halim & Ong, H. B.( 1999). The changing phrases of Malaysian
economy. Subang Jaya: Pelanduk Publication. [Refer Chapter 2: 43 – 66].
The major objectives of New Economic Policy (NEP) and the government’s efforts to
achieve those objectives.
Major objectives of NEP
Government’s efforts
To eradicate poverty:
Eradicating poverty by raising
Various programmes that raise productivity
income level, increase employment
and income, the expansion of opportunities
opportunities irrespective of race,
for inter-sectoral movements from low
increase productivity and increase
productivity to high productivity activities
standard of living of low income
and provision of wide range of social
group.
services especially designed to raise the
living standard of the low-income groups.
To restructure Malaysian society:
To correct economic imbalance,
reduce identification of race from
economic function with the
purpose that Malays and other
indigenous groups play full role in
all aspect of economic function.
Modernization of rural life, rapid and
balanced development of urban activities,
establishment of new growth centre and the
creation of a Malay commercial and
industrial community.
National Development Policy (NDP): The Main Focuses
(i)
Striking optimum balance between economic growth and equity.
(ii)
Ensuring a balanced development for major sectors of the economy to increase
their mutual complementarities to optimize growth.
(iii) Reducing and ultimately eliminating social and economic inequalities and
imbalances in the country.
(iv)
Promoting and strengthening national integration by reducing the wide
disparities in economic development between states, urban and rural areas in
the country.
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(v)
Developing a progressive society in which all citizens enjoy greater material
welfare, while simultaneously imbued with positive social and spiritual values,
and an increased sense of national pride and consciousness.
(vi)
Promoting human resource development to meet the challenges in industrial
development.
(vii) Making science and technology an integral component of socio-economic
planning and development.
(viii) Ensuring that in pursuit of economic development, adequate attention will be
given to the protection of environment and ecology to maintain the long term
sustainability of the country’s development.
Vision 2020 Challenges
Tun Dr. Mahathir outlines nine challenges that Malaysia must overcome to achieve
Vision 2020 as follows:
 Challenge 1: To form a nation that stands as one.
 Challenge 2: To produce a Malaysian community that has freedom, strength, and
full of self confidence.
 Challenge 3: To develop a mature democratic community.
 Challenge 4: To form a community that has high morale, ethics and religious
strength.
 Challenge 5: To cultivate a community that is matured and tolerant.
 Challenge 6: To form a progressive science community.
 Challenge 7: To cultivate a community rich in values and loving culture.
 Challenge 8: To ensure the formation of a community with a fair economy.
 Challenge 9: To cultivate a prosperous community.
Other Policies
(i) National Agriculture Policy (NAP) 1984: Aims to combine small size farms
into mini estates to redistribute rural land >> to attain economies of scale by
increasing production.
(ii) Look East Policy: Emulate the “East”, particularly Japan, South Korea and
Taiwan in developing industrialization and economic management.
(iii) 70 million Population Policy: Aims to achieve large population base (70
million) by the end of 21st century for various reasons (particularly to create
internal market to support industrialization and provide sufficient and
competitive labor forces).
(iv) Malaysia Incorporated Policy: The policy aim to establish and strengthen
cooperation that would benefit both private and public sectors, especially to
complement privatization. This policy perceived the nation as a corporate entity
that is jointly owned by both public and private sectors.
Topic 3: Industrialization [Week-3 to 5 (ISI, EOI & Heavy Industry)]
Three other sources of growth for Malaysian economy:
The three sources are domestic demand expansion, import-substituting
industrialization and export expansion (export-oriented industrialization). The former
are more important than the later in Malaysian economy context during 1958 to 1968.
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Import-substituting industrialization (ISI)
Malaysia preferred import-substituting industrialization (ISI) during the early stage of
industrialization (1958 – 1968) due to the following reasons:
(i) Malaysian government wanted economic self-sufficient & conservation of
foreign exchange.
(ii) Raise in the price of foreign-produced input that Malaysia, as a small country
has no control (to reduce the price).
(iii) Technological innovation as Malaysian infant industries experiencing
economies of scale.
(iv) Compatible with achieving high employment (low unemployment) target
because ISI is labour-intensive.
Problems during the early phrase of import-substitution industrialization (ISI) in
Malaysia:
(i) Rent seeking become widespread in Malaysia. Companies prepared to lobby
Malaysian politician and offer them directorships on the boards of subsidiary
companies in Malaysia.
(ii) No pressure on the companies to seek out exports. This meant that, for industries
subject to economies of scale, production was limited to a small domestic
market and was therefore high cost.
(iii) The import substitution tended to be limited to final consumer goods, with
protection being higher on those goods. This increased the consumer goods
prices and results in inflation.
(iv) The majority of the import-substituting industries were set up by foreign-owned
companies. Thus, not only did protection give rise to high profit to them at the
expanse of domestic consumers, but the profit accrued to foreign companies
were more likely to be remitted out of the countries.
(v) There was a regional concentration of industry. This bias towards consumer
goods and domestic market while geographically, bias towards large town on
west coast of the Peninsula. After incorporated into the Federation in 1963, East
Malaysia (Sabah and Sarawak) paid higher prices for protected manufactured
goods while getting few of the industrialization benefits.
The problems of export-oriented industrialization (EOI) in Malaysia:
(i) There was little net foreign exchange saving. Reason 1: material input averaged
70% of gross sales. Even though sales from Export Processing Zones (EPZs)
(the large majority of which were exports) totaled RM23,057 million over
eleven-year-period 1972-82, net export totaled only RM6,853 million after
deducting the material inputs (the large majority of which were imported) of
RM16,204 million. Reason 2: most companies producing in EPZs were foreignowned. So, most of the profit will have been remitted. Net foreign exchange
earnings are estimated to only a little over 10% of gross sales.
(ii) Wages in EPZs have been very low. With increase in low-wage EPZ
employment, by 1978 the real wages in manufacturing sector was below that of
1968.
(iii) There was little technology transfer or development of skills in the industries
established in the EPZs and few linkages with the rest of the economy.
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The reasons for heavy industrialization failure in Malaysia, including the failure cases
of cement project, Perwaja Steel and national car (Proton) project:
(i) Costs of production and management were high. Heavy capital investments need
long gestation (payback) periods. Foreign financing (needed to support the big
push heavy industrialization strategy) sustained the real exchange rate, thus
rendering Malaysian manufacturing less competitive. Thus, the firms suffered
financial losses and unable to compete in international market.
(ii) Low capacity utilization due to sluggish domestic market and inability to
compete in international market. Thus, we failed to achieve economies of scale.
(iii) Created few linkages only, thus fail to create positive externalities effect.
(iv) Cement project: production capacity doubled the domestic consumption in the
mid-1980s.
(v) Perwajar Steel: RM1.2billion investment on prototype found not viable but only
could get back RM467million compensation.
(vi) Proton car project: The project was based on estimates of annual car sales rising
8% from 110,000 in 1982. Instead, total sales dropped to only about 30,000 in
1987.
Further reading for EOI (optional)
Refer to: Okposin, Samuel Bassey, Abdul Halim Abdul Hamid & Ong, Hway Boon.
1999. The changing phases of Malaysian economy. Subang Jaya: Pelandik
Publications. [Chapter 2: page 43 to 66].
Other further reading (optional)
Jomo, K.S. & Edwards, C. (1993). Malaysian industrialization in historical perspective. In
Jomo, K.S. (ed). 1993. Industrializing Malaysia: Policy, performance, prospect. London:
Routledge: 14 – 39.
Topic 4: Agricultural policy [Week-6]
Effect of agricultural modernization to Malaysian Industrialization: Positive Effects
1. Provide enough food for the industrial sector population.
2. Increase productivity in agricultural sector release labour surplus to industrial
sector.
3. Generate higher income to agricultural sector population. This lead to higher
domestic demand and savings that support the industrial sector.
Effect of agricultural modernization to Malaysian Industrialization: Negative Effects
(i)
Since prices are mainly determined by the conditions in the world markets,
high productivity and output in agriculture may, without offsetting changes in
relative prices, may induce the flow of resources into the agricultural sector,
thereby squeezing out the manufacturing sector.
(ii)
Greater export earnings contribute to increasing foreign reserves, which in
turn appreciating the real exchange rates. Real appreciation of Ringgit
squeezes manufacturing profits, thus lead to de-industrialization.
Agricultural modernization: Major focuses of Ninth Malaysia Plan:
1. Increase agricultural output included exploration of new resources with bigger
involvement from private sector.
2. Expand processing activities based on agricultural and various products.
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3. Enhance the global marketing and linkage
4. Increase the income of small planters, farmers and fishermen.
5. Improved the service delivery system.
Topic 5: Investment Policy [Week-7]
Foreign direct investments: Positive or negative to economy?
Positive effect of FDI to Malaysia economy development:
(i) Investors introduce modern technology and management, increasing level of
technical efficiency as well as promote R&D.
(ii) Investors fill in the gap between domestic saving and investment.
(iii) Foreign exchange reserve increase due to inflow of funds.
(iv) Training by foreign firms help develop Malaysian human capital.
(v) Profit generated from FDI contributes to corporate tax revenue.
(vi) Increase employment opportunity.
(vii) New firms lead to setting up of supporting industries that are required by the set
up of factories and bring prosperity to the local population.
Negative effect of FDI to Malaysia economy development:
(i) FDI may harm environmental if foreign firms investing in Malaysia are because
of less stringent environmental rules.
(ii) Create fierce competition for workforce to the local industries.
(iii) Global capitalists “imperialism”.
(iv) Cultural friction that may even harm international diplomatic.
(v) Various incentives and infrastructure spending to attract FDI are from public
fund (either through government borrowing or tax).
Source of FDI in Malaysia
Sources of Foreign Investments in Approved Projects, 1985 -2002 (percentage)
1985 1986 1987 1988 1989 1990
U.K.
2.8
2.9
3.7
0.4
8.8
4.9
USA
11.6
3.1
7.9
11.0
3.6
3.2
Japan
27.5
6.8
34.7 25.1 31.3 23.9
Taiwan
3.3
6.4
11.8 17.0 24.7 35.9
Singapore
10.4 10.9 12.5
8.6
10.6
5.0
Korea
2.6
0.2
0.2
0.9
2.2
3.6
Germany
n.a.
n.a.
n.a.
n.a.
n.a.
0.7
Sources: MIDA (various issues, cited in Poon 2005: 190)
1998
3.6
49.2
14.2
7.6
7.4
0.5
1.2
1999
1.5
44.4
8.1
2.1
2.1
0.2
1.5
2000
3.8
37.7
14.5
4.6
4.6
3.6
8.3
2001
0.6
18.0
17.8
6.0
6.0
9.0
13.8
2002
1.4
23.0
5.0
2.1
2.1
3.1
44.9
FDI in Early Development Phase
1. British colonial encouraging FDI in primary sector, predominantly in plantation
and mining sector and active discrimination in favour of British investors.
2. 70% held by British corporations and agencies with most investment being in
rubber and tin industries.
FDI in the Import-Substitution Phase (1966 – 1980)
1. Reduce restriction on foreign capital; despite impose a 30% Bumiputera
ownership requirements.
2. The main beneficiaries were still the British firms.
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FDI in Export-Oriented Phase (Pre-Crisis 1997/8)
o FDI inflow increase significantly from US$959 million in 1985 to US$17.6 billion
in 1990 based on manufacturing projects approved by the government.
o FDI from USA, Japan and Singapore began to overtake British investments.
o Special efforts and incentives were made to attract foreign multinational to locate
their offshore assembly operations in Malaysia. Examples are:
 Promotion of Investments Act 1986 would grant pioneer status. The incentive
given is an abatement of 70% of statutory income for 5 years.
 Incentives which allowed a tax relief up to 10 years, exemption from
Malaysian income tax for 5 years and it is renewable to 10 years.
 Declaration of electronics products as priority products for the purpose of
extension of the tax relief period.
 Establishment of Free Trade Zone (FTZ) facilities for export oriented
industries. The Free Trade Zone Act was gazetted on September 5, 1991.
FDI in MSC Development Phase (Post-Crisis 1997/8)
1. To develop Malaysia as centre for high-tech industries in ICT.
2. Incentives included:
 Companies located in the MSC will be given MSC-Status, which entitles them
to a 10-year Pioneer Status Tax Holiday.
 A 100 percent Investment Tax Allowance on new investments made in cyber
cities, and tax exemption on import of multimedia equipment.
 Importations of multimedia and training equipment are duty-free.
 Ensure no internet censorship and provide competitive telecommunications
tariffs.
 Freedom to borrow fund globally.
 Unrestricted employment of local and foreign knowledge workers.
 Exemption from selective exchange control measures.
Investment Region / Corridors:
Iskandar Development Region (IDR) [now known as Iskandar Malaysia]
Background Information
(i) Officially launched on the 4th Nov. 2006
(ii) Key engines of growth identified under the 9th Malaysia Plan
(iii) Located in the state of Johor at southern Peninsular Malaysia
(iv) Covers 2217 km2 of land area
Plan, Incentives and Expectation
(i) Plan to make IDR a strong and sustainable metropolis of international standing.
(ii) The government has committed more than RM 4 billion towards infrastructure
development in the region.
(iii) On March 22, Prime Minister Datuk Abdullah Badawi announced an attractive
package of investment incentives (include 10-year examption from corporate
tax) for qualifying companies in six target sectors.
(iv) The six target sectors are creative industries, educational services, financial
advisory and consulting, healthcare, logistics and tourism-related services.
(v) Foreign workers in IDR would be able to import or purchase a duty-free car for
their personal use.
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(vi) Companies will be free to employ foreign workers within the IDR.
(vii) IDR expected to draw FDI worth US$40billion in the first seven years.
(viii) IDR projected that 817,500 jobs will be created in the region up to year 2025.
(ix) Despite allow employing foreign workers, Malaysian are expected to make up
the majority of the workforce there.
Northern Corridor Economic Region (NCER)
For Agriculture:
(i) Thrust 1: Improve scale and professionalisation.
(ii) Programs for Thrust 1: Professional land management (Estate concept) and
professional marketing company to create regional brand identity.
(iii) Thrust 2: Technology & quality standards.
(iv) Programs for Thrust 2: Better seeds, Good Agricultural Practices (GAP) and
NorthStar Agriculture Scholarships.
For Manufacturing:
(i) Trust 1: Increase E&E value added
(ii) Trust 2: Develop new sub-sectors
(iii) Programs: Micro-Electronics Centre of Excellence; funded secondment
programs; biotechnology, agriculture downstream; oil & gas
For Services
(i) Trust 1: Strengthen tourism
(ii) Trust 2: develop logistics & trading services
(iii) Programs: Develop 2-3 of Langkawi’s outer islands; 2-3 main tourism clusters
on mainland; incentives to encourage flow of raw & semi-finished goods into
NCER
Eastern Corridor Economic Region (ECER)
(i) Kelantan: Centre for trading, center of education excellence and to promote
agro-based activities such as poultry rearing and herbal plants cultivation.
(ii)
Terengganu: Would be geared as a tourism gateway. Harnessing its current
strengths in the oil, gas and petrochemical industries. To be a center of
education excellence. In agriculture, goat rearing and cultivation of citrus fruits
is encouraged.
(iii) Pahang: Focus on manufacturing that would be extended to develop a palm oil
industrial cluster. Developed integrated logistic distribution hub as part of its
port city development. Agriculture sector development included promoting
cattle rearing and pineapple cultivation.
Sabah Development Corridor (SDC)
Main thrusts are:
(i) Transform Sabah into a regional gateway for trade, investment and tourism;
(ii) Continue to make Sabah a harmonious and prosperous State, irrespective of race
and religion;
(iii) Make Sabah more technology-savvy for a better quality of life in the State;
(iv) Create more job opportunities in the State; and
(v) Make Sabah a comfortable place to live in amidst its rich diverse cultures,
heritage and environment.
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Sarawak Corridor of Renewable Energy (SCORE)
(i) The core of the SCORE is development of abundant energy resources, which are
hydropower (28,000MW), coal (1.46 billion tones) and natural gas (40.9 trillion
sq cu ft) found in the central region.
(ii) Tanjung Manis: To be a manufacturing and small industries centre. To be an
important regional port city by 2030.
(iii) Similajau: To be an industrial city underpinning a new industrial center, housing
heavy industries such as oil & gas, aluminum, steel and silica, with a deepwater
port.
(iv) Mukah: To be an education hub and “Smart City”, drawing not only academic
and research institution but also skills training centers.
Topic 6: Privatization & Efficiency in Public Delivery System [Week-8]
Privatization Policy and Malaysia Incorporated Policy: Both instituted in 1983:
Privatization Policy:
i. The Privatization Master Plan (PMP) issued by EPU in 1991 spell out several
methods for privatization.
ii. Privatization process: Prepare action plan for 1991 and 1992 >> Review
implementation in 1991 & prepare plan for 1992-93 >> (continue year by year).
Malaysia Incorporated Policy:
i. Main aim was to establish and strengthen cooperation that would benefit both
private and public sectors.
ii. Steps taken: reduce misunderstanding; to make achieving national objectives as
common goal; promote and maintain good image for the country; to change the
rules and work procedures that are not appropriate in the public sector (the
private sector to recommend); and to enhance relationship between government
ministries, departments and statutory bodies.
Major reasons to support privatization in Malaysia:
a. To relieve the government’s financial burden >> reduce government expenditure
>> avoid budget deficit.
b. To improve work efficiency and productivity (through increase competition).
c. To facilitate economic growth >> more productive.
d. Reduce the size and present of the public sector in the economy >> to be lead by
private in a more efficient way.
e. To meet the New Economic Policy (NEP) >> create more business opportunity for
Bumiputera participation.
Major reasons to considered privatization in Malaysia as failure:
a. There is no complete transfer of ownership or management power to private
entities. Government still retain majority share holding or remain powerful
through “golden share” system.
b. There are quite a number of privatized companies (still existing) suffering
continues losses. Example needed. This indicates failure to improve efficiency and
profitability.
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c. Government took back already privatized companies. Example needed. This
proves that at least not all privatized companies can survive.
Directive to increase efficiency by Prime Minister, Abdullah Badawi:
Summary of the “Conference to improve the delivery system of government services
– to improve the development process as well as property management” held on 13
April 2007: Four major changes and initiatives emphasized are OSC, CCC, COB &
BTS (article printout given).
One-Stop-Center (OSC)
Set up to ensure that development projects, especially BTS, high impact projects,
projects attracting foreign investment and government projects are given fast-lane
approval within 4 months. Approval will be within 6 months for all other normal
development projects. OSC committee will replace the local authority’s planning and
development division.
Certificate of Completion (CCC),
To replace Certificate of Fitness for Occupation (CFO). CCC will only be issues after
all parties satisfied that the building has been completed. Benefits of the CCC system
included overcoming the problems associated with the CFO where home-buyers
received the house keys but cannot move in because the CFO has not been issues,
improvement in accountability and transparency.
Commissioner of Building (COB)
Through the new Building and Common Property (Maintenance and Management)
Act 2007, state government empowered to appoint COB to settle disputes and to
ensure smooth management of the building even after strata title are issued. COB are
empowered to (i) appoint a managing agent to maintain and manage common
property if the maintenance and management of a building is not carried out
satisfactorily by developer or Joint Management Body (JMB), (ii) take action against
parcel purchasers who fail to pay maintenance charges and (iii) use the deposit paid
by the developer to carry out rectification of defective works during the defect
liability period.
Build Then Sell (BTS) concept
As alternative to STB concept, government encourages BTS where housing
developers have to complete a housing project completely before selling it to buyers.
Two-year transition period is given for evaluation and possible full implementation of
BTS concept. Fast-lane approval will be given to encourage the use of BTS concept.
Topic 7: Financial Markets [Week-9 & 10]
Role of Financial System
The financial sector provides six major functions that are important both at firm level
and at level of economy as a whole.
1. Providing payment services: It is inconvenient, inefficient and risky to carry
around enough cash to pay for purchased goods and services. Financial
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institutions provide an efficient alternative. Examples are personal and
commercial checking and check clearing and credit and debit card services.
2. Matching savers and investors: Although many people save, such as for
retirement, and many have investment projects, such as building a factory or
expanding the inventory carried by a family micro-enterprise, it would be only by
wildest of coincidences that each investor saved exactly as much as needed to
finance a given project. Therefore, it is important that savers and investors
somehow meet and agree on terms for loans or other forms of finance. The
presence of banks, venture capitalists or stock markets can greatly facilitate
matching in an efficient manner. Small savers simply deposit their savings and let
the bank decide where to invest them.
3. Generating and distributing information: One does not always think of this
function. Financial system (e.g. stock markets) facilitates price matching and
discoveries for stock and bond prices. Banks collect information about the firms
that borrow from them, rating agencies evaluate credit worthiness of bond issuers
while other financial institutions (e.g. securities firms) have research and data
compilation on firms, equities, bond and economic condition.
4. Allocating credit efficiently: Channeling investment funds to uses yielding the
highest rate of return allows increases in specialization and the division of labour,
which has been recognized since the time of Adam Smith as key to wealth of
nation.
5. Pricing, pooling and trading risk: Insurance markets provide protection against
risk, but so does the diversification possible in stock markets or in banks’ loan
syndications.
6. Increasing asset liquidity: Some investments are very long-lived; for example,
investment for a hydroelectric plant may last a century or more. Thus, most
investors in such plants would like to sell them at some point. In some cases, it
can be quite difficult to find a buyer at the time one wish to sell. Financial
development increases liquidity by making it easier to sell, for example in stock
market or to a syndicate of banks or insurance companies.
Major objectives of Bank Negara Malaysia:
1. To issue currency and keep reserves safeguarding the value of the currency.
2. To act as a banker and financial adviser to the Government.
3. To promote monetary stability and a sound financial structure.
4. To promote the reliable, efficient and smooth operation of national payment and
settlement systems and to ensure that the national payment and settlement systems
policy is directed to the advantage of Malaysia.
5. To influence the credit situation to the advantage of the country.
The problem of micro-finance in Malaysia:
A. Loss of Direction:
a.
Revision of loan ceiling caused the average loan size jumped by 400 percent
between 1994 and 1998, and this was accompanied by an increase in portfolio
risk (larger loans amount to 'mission drift').
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b.
c.
An increase in numbers of 'drop outs' from the program, especially among
poorer members, was noted from 1994 as loan sizes increased (leakage of loans
to the 'not so poor' and the 'non poor'').
AIM's expansion from 1994, at which time it had reached some 50 percent of its
target group in Peninsular Malaysia appears to have been more in terms of value
of loans outstanding than increased outreach to the hardcore poor.
B. Inefficiency of Microfinance in Malaysia:
a.
In Sabah state, for example, the Yayasan Usaha Maju microfinance program
grew too fast. Last year, the program lent out some $10.7 million in loans to
12,732 borrowers. But interest income on those loans was only $115,000 and
operating costs were over $1.2 million. The program is now faced with cutting
the number of branch offices by half.
b. AIM’s setback was due to the Single Mother Loan Scheme (SKIT), which
contributes to its poor performance of collection of about 36% and also from
fisherman Loan Scheme.
c.
AIM still depends on the support from the government and related agencies for
funding. With a fixed administrative charge of 4%, it does not cover its
operating costs and could not be sustainable and self-dependent.
Topic 8: Asian Financial Crisis [Week-11]
Crisis: Lessons Never Learn?
Stanley Fischer (1999), speaking as the First Deputy Managing Director of the
International Monetary Fund at the conference of the Economic Strategy Institute,
Washington DC, on April 28, 1999 listed seven lessons of the Asian Crisis. Firstly,
globalization is here to stay, implying countries should strengthen economy openness,
increase integration with the rest of the world and strengthening the role of market
forces. He quoted Latin American countries particularly Argentina as good examples.
However, one may easily find contrasting view in a renowned Asian economist, Jomo
Kwame Sundaram (1998), who has once claimed, economic and business historians
remind us, there have been important precursors to the recent crisis in East Asia.
Unfortunately, the market, which is increasing being left to its own devices, has
neither an institutional memory nor a capacity to develop natural immunity. Besides,
Latin American countries themselves have been suffering from crisis to crisis,
prompting doubt that they neither learned any lessons from crisis nor does free market
mechanism work. Secondly, Fischer stressed that domestic policy, especially the
strength of the financial system is critical. He claimed that in Asia, although country
circumstances varied, the crisis reflected to a major extent fundamental structural
problems, financial sector weakness and poor corporate governance. Thirdly, the
crises in Thailand, Indonesia, Korea, Russia, and Brazil, were all associated with
exchange rates that had been more or less fixed, thus indicating powerful evidence
suggesting that such systems are crisis-prone. Forth, Fischer interesting pin point
ownership as a critical factor. According to him, when a country "owns" its economic
program, when it is the program of the government, supported by a broad political
consensus, the chances of successful reform are greater. Fifth, he claimed that
Keynesianism is alive and well, and living in Asia (and elsewhere). Examples given
included Ireland and Denmark budget deficit cutting that had very positive impacts on
economic growth. However, the forth and the fifth lessons that reflect Keynesian
school of thought seem contradicting his first lesson that support globalization and
15
role of market forces. Sixth, Fischer claimed that the question of how to involve the
private sector in the prevention, mitigation, and solution of crises is critical, and not
yet fully resolved. Lastly, Fischer stressed that the IMF is here to stay (which is very
much expected from him to say so as he is First Deputy Managing Director of IMF).
As the lessons of the recent crisis, he mentioned that it is becoming clear that the
international community will continue to rely on the IMF to play its central role in the
international system. IMF does that in at least three ways: through surveillance;
through its lending policies; and, in the language of the IMF Articles of Agreement, as
the institution that "provides the machinery for consultation and collaboration on
international monetary problems". Has the world learned any lesson remained
everyone guess. Perhaps, the recent sub-prime problems in the United State already
reveal the answer – lessons never learned.
Nevertheless, it is worth mentioning Malaysia’s financial policy response to Asian
Crisis. After regional currencies, including Malaysian Ringgit, the Thai Baht and
Indonesia Rupiah facing seem bottomless fall, the government increase interest rate.
When this move is not working, Malaysia took a drastic step to fix the Ringgit at
RM3.80 per dolor. Capital control (restricting the Ringgit from trading overseas) was
imposed to complement the move. With the local currency fix, expansionary policy
can be implemented without fearing depreciation pressure to the currency. Thus,
budget was deficit while interest rate was lower. Base Lending Rate calculation
changed from using Kuala Lumpur Interbank Offer Rate (KLIBOR) to three months
interest rate plus Bank Negara (Central Bank) intervention rate. The purpose is to
fasten monetary policy impact. Bank Negara lowered the intervention rate from 11%
prior to crisis to 5.5% in September 2000. Gradually, bank Negara lowered the bank
statutory requirement ratio (SRR) from 13.5% on February 1998 to 6% on September
1996. As a result, an estimated of about RM38 billion were released into Malaysian
economy system. Furthermore, in 1998, government instructed the banks to achieve a
minimum 8% annual credit growth to avoid credit crunch, violating the instruction
results in fine including revoking of license. Such combination of responses,
especially the fixing of currency and capital control, initially draw heavy criticism
from around the world. Later, when Malaysian economy enjoyed a fast recovery,
criticisms turned into acknowledgements and praises.
The selective exchange control measures implemented by Malaysia during the Asian
crisis:
(i)
The offshore Ringgit market was eliminated and currency speculator no longer
had access to Ringgit funds. This was done by “freezing” the external Ringgit
accounts of the non-residents in Malaysia. They were not allowed to sell or lend
the Ringgit to another non-resident but could invest their fund freely in
Malaysia. Thus the currency traders were unable to short-sell the Ringgit and
change its exchange rate. Only the government could determine the exchange
rate.
(ii) The government fixed the exchange rate at RM3.80 to the US dollar.
(iii) A “twelve-month rule” was imposed prohibiting the repatriation of portfolio
funds for twelve months. This rule was necessary given the prevailing instability
of the financial market. When the situation stabilized, six months down the road,
this “twelve-month rule” was replaced (for new funds)
with a levy and
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subsequently even this levy was diluted further to apply only to dividends
repatriated. The “twelve-month rule” expired in September 1999.
The rationales for the establishment of Danamodal Nasional Berhad:
(i) To ensure that the banking sector re-capitalization process is commercially
driven and that investment decisions are made according to market-based
principles.
(ii) Delays in addressing re-capitalization and non-performing loans issues will have
a drag effect on the financial system and economic recovery.
(iii) Direct capital injection by the government into banking institutions is not
desirable and would lead to conflict of interest.
The challenges faced by the financial sector in Malaysia
(i) Global financial crisis could affect Malaysian banking stability.
(ii) Competition from Singapore. Example: Development of KLCI futures and CPO
futures in Singapore futures exchange.
(iii) Rapid development of Islamic banking sector could be both helpful and harmful
to conventional banking >> reduce economies of scale in both banking sector,
hence a “lose-lose” situation. Banks need to restructure and re-invest for Islamic
banking (including information technology application which is costly). There
may be legal loophole in Islamic banking that consumers’ took advantage, thus
destabilizing overall banking sector.
(iv) Transforming equity trading system to electronic trading may cause jobless
growth in equity brokering sector. Further, there are several electronic technical
problem happened in Bursa Malaysia, which may destabilize confident if
problem persist.
(v) Liberalization under WTO requirement and ASEAN’s AFAS may bring in
strong foreign competitors. Local financial sectors (banks, securities firms, etc)
may lose out and collapse.
Topic 9: Fiscal and Monetary Policies Issues [Week-12]
Other issues for further discussion are to be determined later.
Comparison between the rationales of government’s policy to reduce fuel subsidies
and the arguments against that policy:
Government: Global oil price increase, thus increase the government’s financial
burden to subsidize.
(ii) Arguments: Malaysia is a net oil exporter. Thus, increase in oil price should be
beneficial to Malaysia. Increase in net oil revenue could be channel towards
domestic fuel subsidies.
(iii) Government: Fuel (petrol) price in other foreign countries are much higher.
Examples are Singapore, Finland, and United Kingdom. Fuel in Malaysia is
under-priced.
(iv) Arguments: Those countries that have higher fuel price are non oil-exporting
countries. Furthermore, theirs income per capita are much higher than Malaysia.
(v) Government: Petronas already contributed much of its profit back to
government for subsidies. Government could not take all of Petronas profit as
(i)
17
the company needs retain profit for further development.
(vi) Arguments: Repayment from Petronas is enough; only the usage of its
repayment is questionable. Example is channeling government revenue to
infrastructures and giving tax relief incentive for the benefit of industry players
is actually another form of “subsidy”, but not to the poor but to the capitalist.
Unnecessary projects and corruption cause leakage to the needed fund to
subsidy for fuel. Deals with IPP also seen as leakage and benefit to capitalists
rather than the poor citizen.
(vii) Government: Malaysia’s oil reserve will finished in near future. Therefore,
government needs to have prudent saving from current oil revenue for the
benefit of the future. Otherwise, a more shocking bigger fuel hike may happen
once Malaysia turn from net oil exporter to net oil importer.
(viii) Arguments: Those reports about exhaustion of Malaysia oil reserve are based on
assumption that no other oil field would be found in Malaysia. Thus, if more
new oil field found, Malaysia would still be net oil exporter. Furthermore,
Petronas is currently exploring oil field overseas instead of locally. Petronas
should be encouraged to continue doing so to prolong exhaustion of oil reserve
in Malaysia. Investment returns from Petronas could also be another source of
funds for fuel subsidies.
Topic 10: Other Policies [Week-13]
Three phrases of Multimedia Super Corridor (MSC):
(i) Phrase 1: In this phrase, Multimedia Development Corporation (MDC) created
the MSC, attract a core group of world-class companies, launch seven flagship
applications, establish the framework of cyberlaws and establish Cyberjaya as
the world first intelligent city.
(ii) Phrase 2: MDC would link the MSC to other cybercities in Malaysia with the
world, create a web of corridors and establish more clusters of harmonize
cyberlaws within the global society, and establish more intelligent globally
linked cities.
(iii) Phrase 3: In this final phrase, it is expected that Malaysia will be transformed
into a knowledge-based society. Being a global test bed for new multimedia and
information technology applications of more world-class multimedia companies.
It will have a bunch of intelligent cities that linked to the global information
super highway and become the platform for the international Cybercourt of
Justice in MSC.
(iv) Time frame: Phrase 1 (1996 – 2003), Phrase 2 (2003 – 2010) and Phrase 3 (2010
– 2020).
Multimedia Super Corridor (MSC) strives to offer the following:
(i) A platform for attracting world-class technology-led companies to Malaysia.
(ii) A Multimedia Utopia that offers a productive, intelligent environment within
which a multimedia value chain of goods and services will be produced and
delivered across the globe.
(iii) An island of excellence with multimedia-specific capabilities, technologies,
infrastructure, legislation, policies and systems for competitive advantage.
(iv) A global community living on the leading edge of the Information Society.
(v) A world of Smart Homes, Smart Cities, Smarts Schools, Smart Cards and Smart
Partnerships. Examples of Smart Cities are Putrajaya (electronic and paperless
18
government) and Cyberjaya (multimedia industries, Multimedia University,
MDC).
The four major objectives of Smart School according to the Malaysian Smart School
– A Conceptual Blueprint:
Smart School Project was made one of the seven Flagship Applications of the
Multimedia Super Corridor. Minister of Education conceptualized the Smart School
in 1997 and seek to covert all public primary and secondary schools in Malaysia to
smart school by the year 2010.
(i) Emphasis on maturity of though, application of information technology and the
assimilation of noble values.
(ii) Proficiency in science and mathematics.
(iii) Enhance performance according to individual capabilities.
(iv) Contribution to the development of knowledge.
Knowledge economy (K-economy):
Poon, W. C. (2005). The development of Malaysian economy. Kuala Lumpur: Pearson
Prentice-Hall. [Refer Chapter 10: 306 – 318].
Education and Manpower Development: “Smart school”, “Vision school” & “English
Teaching in Science and Mathematics”
Poon, W. C. (2005). The development of Malaysian economy. Kuala Lumpur: Pearson
Prentice-Hall. [Refer Chapter 10: 265 – 268].
Multimedia Super Corridor (MSC):
Poon, W. C. (2005). The development of Malaysian economy. Kuala Lumpur: Pearson
Prentice-Hall. [Refer Chapter 10: 319 – 332].
Topic 11: Income Distribution and Poverty
Reading material / notes will be provided later.
Topic 12: Globalization
Reading material / notes will be provided later.
APPENDIX
Further handout will be given separately (if any).
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