Economy of Malaysia

Malaysia is a small and relatively open economy. In 2005, it was the 33rd largest economy in the world by purchasing power parity. Its gross domestic product for 2005 was estimated to be $290 billion.

Background

The Malay Peninsula and indeed Southeast Asia has been a center for trade for centuries. Various items such as porcelain and spice were actively traded even before Malacca and Singapore rose to prominence.

In the 17th century, large deposits of tin were found in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were introduced for commercial purposes. Over time, Malaya became the world’s largest producer of tin, rubber, and palm oil. These three commodities along with other raw materials firmly set Malaysia’s economic tempo well into the mid-20th century.

During the 1970s, Malaysia followed the footsteps of the original four Asian Tigers and committed itself to transition from reliance on mining and agriculture to manufacturing. With Japan’s and the West's assistance, heavy industries flourished and in a matter of years, Malaysian exports became the country's primary growth engine. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s.

Current GDP per capita grew 31% in the Sixties and an amazing 358% in the Seventies but this proved unsustainable and growth scaled back sharply to 36% in the Eighties rising again to 59% in the Nineties led primarily by export-oriented industries.

Tiger economy

Macro-economic trend

This is a chart of trend of gross domestic product of Malaysia at market prices estimated by the International Monetary Fund with figures in millions of Malaysian Ringgit.

Year	Gross Domestic Product	US Dollar Exchange	Inflation Index (2000=100)
1980	54,285	2.17 Ringgit	51
1985	78,890	2.48 Ringgit	64
1990	119,082	2.70 Ringgit	70
1995	222,473	2.50 Ringgit	85
2000	343,216	3.80 Ringgit	100
2005	494,544	3.78 Ringgit	109

For purchasing power parity comparisons, the US Dollar is exchanged at 1.70 Ringgit only.

From 1988 to 1997, the economy experienced a period of broad diversification and sustained rapid growth averaging 9% annually.

By 1999, nominal per capita GDP had reached $3,238. New foreign and domestic investment played a significant role in the transformation of Malaysia's economy. Manufacturing grew from 13.9% of GDP in 1970 to 30% in 1999, while agriculture and mining which together had accounted for 42.7% of GDP in 1970, dropped to 9.3% and 7.3%, respectively, in 1999. Manufacturing accounted for 30% of GDP (1999). Major products include electronic components -- Malaysia is one of the world's largest exporters of semiconductor devices -- electrical goods and appliances.

During the same period, the government tried to eradicate poverty with a controversial race-conscious positive discrimination program called New Economic Policy (NEP). First established in 1971 after race riot known as the May 13 Incident occurred, it sought to eradicate poverty and end the identification of economic function with ethnicity. In particular, it was designed to enhance the economic standing of ethnic Malays and other indigenous peoples (collectively known as bumiputras in Malay. The NEP ostensibly ended in 1991, however the policies persist in the form of other programmes such as the National Developmnent Policy. The policies are enforced overtly through race-based quotas for low-cost housing units, university placement, business equity ownership, etc.

Rapid growth was achieved partly through privatisation of inefficient state owned enterprises, thus subjecting them to commercial pressures and forcing them to better utilise their resources. Mostly deals were done behind closed doors and put through rather quickly. In one example Khazanah Nasional alienated shares in DRB Hicom to Mega Consolidated. This led to such deals being labelled mega projects.

Foreign funds were attracted to invest making the local money market and bourse liquid. This created opportunity for local businesses to raise capital on the KLSE, and carry out infrastructure development in areas like telecommunications, highways and power generation to meet bottlenecks caused by rapid industrialisation. An intense labor shortage created employment for millions of foreign workers. Subsequent events show that more than 50% were illegal.

The influx of foreign investment led to the KLSE Composite index trading above 1,300 in 1994 and the ringgit trading above 2.5 in 1997. At various times the KLSE was the most active exchange in the world, with trading volume exceeding even the NYSE.

Some of the more visible projects from that period are Putrajaya, a new international airport (Kuala Lumpur International Airport), a hydroelectric dam (Bakun dam), the Petronas Towers and the Multimedia Super Corridor. Proposals that were eventually cancelled include the 95km Sumatra-Malaysia bridge (would have been world's longest), the Mega International Sea and Air port on reclaimed land in Kedah (would have been worlds biggest) and the KL Linear City (would have been worlds largest mall. And worlds first city built over a river)

Concerns were raised during the time about the sustainability of the rapid growth and the ballooning current account. The mainstream opinion prevalent at that time was that the deficit was temporary and would reverse once imported equipment started producing for export. In spite of that, measures were taken to moderate growth especially when it threatened to overheat into the double digits. The main target was asset prices, and restrictions were further tightened on foreign ownership of local assets. Exposure of local banks to real estate loans were also capped at 20%.

As was widely expected, the current account deficit did narrow steadily, year to year, from 9% to 5% of GDP.

Malaysia has the largest operational stock of industrial robots in the Muslim world. [1]

Asian financial crisis and subsequent recovery

Further information: Asian financial crisis

The year 1997 saw the drastic changes in local scenarios. Foreign direct investment fell at an alarming rate and Ringgit depreciated substantially from MYR 2.50 per USD to much levels lower (up to MYR 4.80 per USD at its bottom) as capital flowed out. The Kuala Lumpur Stock Exchange’s composite index fell from approximately 1300 to nearly merely 400 points in a few short weeks. In response, the Malaysian government imposed capital controls and pegged the Malaysian Ringgit at 3.80 to a US dollar while refusing economic aid from International Monetary Fund (IMF) which came with austere lending conditions. By refusing aid and thus the conditions attached thereof from the IMF, Malaysia was not affected to the same degree in the Asian Financial Crisis as Indonesia, Thailand and the Philippines.

Regardless, the GDP suffered a sharp 7.5% contraction in 1998. It however rebounded to grow by 5.6% in 1999. The Government of Malaysia predicted 5.8% real GDP growth in the year 2000, but most analysts predicted growth will exceed 8% for the year.

In order to rejuvenate the economy, massive government spending was made and Malaysia continuously recorded budget deficits in the years that followed. Economic recovery has been led by strong growth in exports, particularly of electronics and electrical products, to the United States, Malaysia's principal trade and investment partner. Inflationary pressures remained benign, and, as a result, Bank Negara Malaysia, the central bank, had been able to follow a low interest rate policy. Later, the country enjoyed faster economic recovery compared to its neighbors though in many ways, the level of pre-1997 affluence has yet to be achieved.

The fixed exchange rate regime was abandoned in July 2005 in favor of managed floating system within an hour of China's announcing of the same move. In the same week, Ringgit strengthened a percent against various major currencies and was expected to appreciate further. As of December 2005, there has been no further appreciation of the ringgit. In spite of the large positive current account surplus, foreign reserves have started to fall at a rapid rate.

Trade

Malaysia is an important trading partner for the United States. In 1999, two-way bilateral trade between the U.S. and Malaysia totaled U.S. $30.5 billion, with U.S. exports to Malaysia totaling U.S.$9.1 billion and U.S. imports from Malaysia increasing to U.S.$21.4 billion. Malaysia was the United States' 12th-largest trading partner and its 17th-largest export market. During the first half of 2000, U.S. exports totaled U.S.$5 billion, while U.S. imports from Malaysia reached U.S.$11.6 billion.

The Malaysian Government encourages Foreign Direct Investment (FDI). According to Malaysian statistics, in 1999, the U.S. ranked first among all countries in approved FDI in Malaysia's manufacturing sector with approved new manufacturing investments totaling RM5.2 billion (US$1.37 billion). Principal U.S. investment approved by the Malaysian Investment Development Authority (MIDA) was concentrated in the chemicals, electronics, and electrical sectors. The cumulative value of U.S. private investment in Malaysia exceeded $10 billion, 60% of which is in the oil and gas and petrochemical sectors with the rest in manufacturing, especially semiconductors and other electronic products.

See also

• Islamic banking in Malaysia

External links

Read longtime Prime Minister Mahathir bin Mohamad's interview with the PBS series "Commanding Heights" on the subject of East Asian economic development.

• Prime Minister of Malaysia since 1981, Dr. Mahathir bin Mohamad has overseen Malaysia's transformation into one of the wealthiest nations in Southeast Asia and has become a vocal critic of Western-style globalization.
• Key Statistics for Malaysia