Current Economic Status Of Malaysia Essay, Research Paper

Private Sector PopulationThe outstanding characteristic of Malaysia’s population today is its highly variegated ethnic @mix makers it one of the prime examples of a multi-racial society in the whole world. The @multi-ethnic character of Malaysia’s population has come into being over the course of the @last 150 years. Broadly speaking Malaysia’s ethnic groups fall into two main categories: @those with culture affinities indigenous to the region and to one another, who are classified as bumiputera; and those whose cultural affinities lie outside. Malaysia is a multi-cultural nation of friendly, warm hearted people. It has population of 17.9 @million people. Penisular Malaysia has 14.6 million people while Sabah and Sarawak have 3.3 @million people. Agriculture, Forestry, FishingThe agricultural sector (including forestry and fishing) plays an important role in the economy although its share of the GDP has declined from 34 percent in 1987 to 18.6 percent in 1992. This sector contributed about 29 percent to Malaysia’s total exports and employed about 30 percent of the total labour force. Malaysia is the world’s leading producer of natural rubber and a major producer of many other exportable commodities including palm oil, cocoa and pepper. Other important cash crops include coconuts, tea and pineapples. The principal subsistence crop is rice. However, Malaysia is still not self sufficient in rice and local production accounted for only about 80 percent of domestic requirements. The National Padi and Rice Authority (LPN), the sole importer of rice, imported rice from Thailand, Pakistan, India and Australia. Malaysia also has substantial supplies of tropical hardwoods. Sarawak is the main timber producer (43 percent), followed by Sabah (26 percent) and Peninsular Malaysia. After three consecutive years of decline, there was an increase in marine fish landings in 1987. This was due to the introduction of incentives by the government to encourage deep sea fishing activity. The Malaysian is also promoting the development of aquaculture centres to supplement diminishing marine resources in coastal areas and to increase fishermen’s income. MiningThe mining sector’s share of GDP has remained in the region of 9-10 percent over the past years. Malaysia is currently the world’s fourth largest producer of tin, accounting for about 15 percent of world production. Malaysia’s other minerals include copper, which is mined in Sabah and relatively small reserves of iron and bauxite. The main export markets for Malaysia’s tin were the Netherlands, Japan and USA. Exports of tin amounted to M$684 million in 1991 compared to M$902 million in 1990. ManufacturingThe manufacturing sector has replaced the agricultural sector to be the leading sector in the Malaysian economy since 1987. It accounted for 26.8 percent of GDP in 1992 and employed about 17 percent of the working population. The Malaysian government has accorded top priority to this sector. Under the Sixth Malaysia Plan (1991-95) the manufacturing sector is expected to account for 32.4 percent of Malaysia’s GDP by 1995 and it will maintain its position as the largest sector of the economy. Output of the manufacturing sector is projected to increase at an annual average rate of 7.9 percent during 1986-95 and the leading growth sectors are expected to be electrical and electronic products, textiles, machinery and transport equipment and basic metal products. Peninsular Malaysia accounts for about 90 percent of the country’s total manufacturing output. Malaysia is currently the world’s largest producer of semi-conductors and the second largest producer of room air-conditioners. General Description of Economy Malaysia has a relatively open, market-oriented economy; real GDP has grown between 6 and 8 percent per year from 1964-1984. Since independence in 1957 the Malaysian economy has shown sustained growth and has diversified away from the twin pillars of the colonial economy, tin and rubber. In 1985-1986, the collapse of commodity prices led to Malaysia’s worst recession since independence, with real GDP falling one percent. Since then, the economy has rebounded, led by strong growth in both foreign and domestic investment and exports of manufactures, with real GDP growing at an average rate of over 8percent. In 1995 real GDP growth reached nearly 9.6 percent. After a decade of such sustained economic growth, during which real GDP increased in excess of 8% annually, Malaysia’s economy at mid-year 1998 was headed for recession. Real GDP contracted by 1.8% in the first quarter, year-on-year, the first quarterly contraction since 1985. By years end the government announced that the GDP had contracted by nearly 2%. Malaysia since July 1997 has been buffeted by the economic and financial downturn that currently plaques most of Asia. Despite stronger fundamentals relative to its neighbors, growing investor concerns over excessive commercial property investment, high levels of domestic corporate debt, government-funded megaprojects, and the lack of transparent policies regarding support for troubled firms contributed to record declines in the local stock market and value of the Malaysian currency. As of mid-July 1998, shares on the Kuala Lumpur Stock Exchange were trading at 9-year lows, with the KLSE Composite Index well below 450. The ringgit has slid from RM2.5 to roughly RM4.2 against the US dollar in the span of twelve months. The ringgit currently is currently traded at about 3.5 to the dollar. Role Of Government General Policy Framework While the government plays a diminishing role as a producer of goods and services, it continues to hold equity stakes (sometimes significant ones) in a wide range of domestic companies. These entities are rarely monopolies; instead, they are one (generally the largest) player among several competitors in a given sector. Government-owned entities are major players in some sectors, particularly plantations and financial institutions. In 1986, the government began privatizing many entities, including telecommunications, the national electricity company, the national airline and the government shipping firm. For example, the government sold off its remaining shares in Malaysia Airlines Systems (MAS) in 1994. Similarly, in 1995 the government sold its controlling interest in Heavy Industries Corporation of Malaysia (HICOM), owner of the national car manufacturing facilities, to a private company. Seaports, government hospitals and post offices are in various stages of privatization.

Malaysia supports global trade liberalization measures and encourages direct foreign investment, particularly in export oriented manufacturing and high tech products. Malaysia’s 1996 federal budget reduced import tariffs on over 710 items and abolished import duties and sales tax on 800 items of raw materials and equipment. Multinational corporations control a substantial share of the manufacturing sector. U.S. and Japanese firms dominate the production of electronic components (Malaysia is the world’s third largest producer of integrated circuits), consumer electronics, and electrical goods. Foreign investors also play important roles in petroleum, textiles, vehicle assembly, steel, cement, rubber products, and electrical machinery. Total US exports to Malaysia 1997 were 10,779,991,890. US total exports in the same year 689,182,431,220. Fiscal PolicyThe government follows a conservative fiscal policy, actually with a surplus in its operating account. The government reduced the personal income tax from a maximum tax rate of 32 percent to 30 percent in the 1996 budget, bringing it to the same level as the corporate income tax rate. Monetary PolicyMalaysian monetary policy is aimed at controlling inflation while providing adequate liquidity to stimulate economic growth. Monetary aggregates are controlled by the central bank through its influence over interest rates in the banking sector, open market operations and, occasionally, changes in reserve requirements. Exchange Rate Policy Malaysia has a substantially open foreign exchange regime. The Malaysian currency, the ringgit (RM), floats against the U.S. dollar. Bank Negara (the central bank) does not specifically peg the ringgit, but does intervene in the foreign exchange market to smooth out fluctuations and discourage speculation on the ringgit. It generally tracks the ringgit’s value against a trade-weighted basket of currencies in which the U.S. dollar has a large weighting. Bank Negara’s stated policy is to maintain a stable exchange rate which reflects the currency’s true underlying value rather than to manipulate the rate to boost exports. Structural Policies Pricing PoliciesMost prices in Malaysia’s economy are market determined, but the government controls prices of some key goods, notably fuel, public utilities, cement, motor vehicles, rice, flour, sugar and tobacco. Overall tariffs average less than 10 percent on a trade-weighted basis and import licenses are required for a small range of goods, e.g., automobiles, meat, tobacco and plastic resins. Since 1993 the federal government has lowered or eliminated tariffs on over 5,200 items to defuse domestic inflation and to meet commitments in the Uruguay Round and the Association of South East Asian Nations (ASEAN) Free Trade Agreement (AFTA). The agricultural sector, however, does contain some restrictive tariffs and Non-tariff barriers. For example, the government fixes floor prices for locally grown rice and tobacco to encourage domestic production and to boost depressed rural incomes. Despite this price incentive, local rice production does not meet demand; the sole authorized importer, a government-owned corporation, must import about 40 percent of the country’s rice needs. Inthe case of tobacco, the government pushes cigarette manufacturers to use a high proportion of local tobacco. Imports of tobacco are restrained by high import duties and controlled through import licenses. Debt Management Policies Malaysia has a strong credit rating in international financial markets; most public and private companies apparently have no difficulty accessing funds. Malaysia’s foreign debt (both public and private sector) was around $27.4 billion at the end of 1995, about 32 percent of GDP. Currently I am not sure what it is c Service BarriersMalaysia protects most service sectors. For example foreign lawyers, architects, etc., are generally not allowed to practice in Malaysia. Financial ServicesBanking, insurance and stockbroking are all subject to government regulation which limits foreign participation. For example, no new banking licenses are being granted for either local or foreign corporations (with the exception of the Bank of China which reportedly will be allowed to open a branch.) Foreign-controlled companies are required to obtain 60 percent of their local credit from Malaysian banks. Worker Rights The Right of AssociationUnions may organize workplaces, bargain collectively with an employer, form federations, and join international organizations. As of 1994, there were 519 unions registered in Malaysia. A trade union for which registration has been refused, withdrawn or cancelled is considered an unlawful association. Strikes are legal and relatively few (14 strikes in 1994). Government policy places a de facto ban on the formation of unions in the electronics sector, but allows in-house unions. During Recession The government has taken a strong pro-active role in the development and industrialization of the Malaysian economy. This has included significant state sector investment, a close alliance between government and the private business community, a steady trend of privatizing state enterprises, and a variety of policies and programs to bolster the economic status of the Malay and indigenous communities. While the government has taken significant preemptive measures to strengthen the financial system, Malaysia’s banking sector has come under increasing stress as non-performing loans continue to mount. Bankruptcies are on the rise, and several major Malaysian corporations, burdened with heavy debt loads, have recently sought court protection from creditors. Malaysia, nonetheless, remains intent on developing its own solutions to the economic and financial crisis, and has resisted further liberalization of its economy. The government recently announced plans to establish a corporation to relieve banks of their non-performing loans. On the fiscal side, it announced two economic stimulus packages to increase government spending for infrastructure, health, education, and other areas.