Malaysia Economic Growth and the Drivers of the Economy - Case Study Example

Running Head: Malaysia Economic Growth and the Drivers of the Economy Name Course Instructor Date Malaysia Introduction Since Malaysia gained independence in 1957, the country’s economy has continued to grow. Coupled with a population that was increasing by day and taking into consideration that she was primarily relying on the agricultural sector, the Malaysian government needed to act fast to diversity the Malaysian economy and shift from an agricultural dependent economy to a manufacturing economy with the objective of creating an economy that would sustain Malaysia in the long run (Duasa, 2000). She is dubbed as a country which is recognized in the world for having one of the most rapidly expanding economies in the world. What then are the drivers of the economy in Malaysia? What would make Malaysia stand out among other world economies? When addressing the question on drivers of the Malaysian economy, emphasis is on the factors that have contributed to the Malaysian economic growth. Drivers of the Malaysian Economy Manufacturing Industry From the word go, when the country started to invest more into the manufacturing industry is when Malaysian economy showed some tremendous improvements. The manufacturing sector is considered as one of the economic drivers of the country’s economy, when Malaysia started to export more of manufactured products rather than the raw agricultural products although we cannot discredit the fact that agriculture also plays a major role in the country’s economy. Electronics and electrical products constitute the back bone of the country’s exports with most of the raw material imported into the country been used in the production of exports (Duasa, 2000). ICT Integration in the economy In the global context and where countries have to compete for markets for their exports, being free minded is not the only thing that is required for a country to expand its economy. Malaysia on the other hand has adopted some strategies that has seen her economy expand but also compete in the global arena. Another key driver of the Malaysian economy is the adoption of Information and Communications Technology. The Malaysian government has adopted ICT in a bid to make maximum benefits that accrue when modern technologies are incorporated. Malaysia has adopted ICT in her various sectors for instance in communication and thereby reducing communication costs, logistics and education just but a mention of a few. As discussed above, ICT related products for instance, electronics remains a key driver of the Malaysian economy. Developing an Economy that is Knowledge based. On the same note, her government is keen in adopting ICT in the education sector and this result in a labor force that is technologically advanced and ready to utilize technology for the production of goods and services. Having a work force that is technologically advanced is among the ingredients that are needed to make an economy that is digitized. Malaysian government expenditure on education constitutes 26% of Malaysian Government budget to increase with more public polytechnics, universities and colleges. To top it all, Malaysian government has created an environment where learning in Malaysian schools is ICT based. There are more personal computers in schools with internet connectivity with the rural area schools being incorporated in creating an environment which is ICT based and ensuring that graduates are not out of context with the global shift to a technological world. Investments in education is among the surest way a country can hope to increase its production of goods and services and also increase exports and have what is termed in economics as a favorable balance of trade, when the exports are more than the imports. Improving services Delivery Economic growth being achieved through having the ability to produce more and therefore supply more of the product and service and at the same time, increase domestic market for goods and services in Malaysia, through the upgrade of services delivery in Malaysia, economists ascertain that Malaysia will be able to produce more of the services in the long run and thus economic growth. The service sector that Malaysia has laid emphasis on is education, with the government having increased its investments in creating more public colleges, polytechnics and universities, with a great example of the Multimedia University that’s generates ICT literate individuals who can either work in Malaysia or the labor be exported to other countries (Yusuf & Nabeshima, 2007). On the same note, Malaysia imports of labor reduce significantly and thus economic growth. Other sectors clearly targeted in the Malaysian Ninth Plan and Third Industrial Master Plan is Islamic finance, Medical Technology, Pharmaceuticals and technology industries (EPU, 2001). Favorable trading policies by the Government The government is not left behind when economy of a country is being discussed. For economic growth to be achieved a conducive environment needs to be created by the ruling government and Malaysian government is creating the environment through the leadership of Prime Minister Najib (Anon, n.d). Government accelerates economic growth through development plans that goes a long way in creating investors’ confidence in the Malaysian economy. Government has also been at the fore front in fighting poverty and thus increasing the living standards of the Malays. The government has also enacted policies that allow investors to favor Malaysia when it comes to conducting business in the country through fewer restrictions and bureaucracies in setting up a business in Malaysia. The central bank also actively maintains the healthy foreign exchange reserves (Anon, n.d) and this goes a long way in shielding Malaysia from financial instruments which are risky. The move also to shift to Islamic banking is in an effort to ease up the sector in Malaysia. Economic growth and development of a country cannot be achieved without the help of the government. Incorporation of world economies Malaysia is known to trade with major economies of the world for instance, U.S.A. Malaysia has also shown interest in negotiations with trading partners in trade agreements with countries like Singapore, Australia, Vietnam, Peru and New Zealand just to mention a few that Malaysia want to have free trade with them (Anon, n.d). This is a clear move that the country is ready to board major world class economies for the improvement of its economy. Key Vulnerabilities in Malaysian Economy The most prominent vulnerability in the Malaysian economy is the government overreliance in the revenue generated from the sale of oil products in form of taxes. In the eventuality of a failure in the oil market, government will suffer in terms of revenue. It is also estimated that Malaysia will only be able to produce oil for a period of 18 years and hence the need for the government to move away from overly relying on revenues generated from oil (Anon, n.d). Malaysia being a free and open economy is susceptible to risks in external markets. For instance, Australian economy fell in 2009 in terms of its exports due to the hard financial times that hit the world coupled with the risk of Malaysia being a country that is vulnerable to speculative risks. Speculative risks are risks which when they occur they can either result to a gain or a loss. Reliance on capital inflow generate by the share value appreciating in the Malaysian economy are some of the speculative risks that the country faces. Investing in short term sources of finance for a country makes the country’s currency be in a position of being speculated and when such investments do not do well, the Ringgit can undergo devaluation (Arndit, 1999). Also in a bid to revolution the private sector, credit accumulation in Malaysia is bound to increase. One of the disadvantages of such credit accumulation to an economy is that some of the debtors may not be trustworthy and they may eventually fail to repay giving rise to bad debts (Arndit, 1999). On the same note, if policies to use interest rates to discourage heavy borrowing from banks are not put in place, the problem will further aggregate to devaluate the Ringgit. So it may not all be a smooth road to lending to the private sector and privatizing most of the institutions in Malaysia. Australian government targets low unemployment with plans being laid to curb unemployment in Australia. Unemployment is when people are willing to work at the going wage rates and that they have been actively searching for jobs but they cannot get them (Palley, 1997). Unemployment reduces the purchasing power of consumers and therefore the demand for goods and services in an economy falls. Output in a country also falls due to unemployment. The federal government in targeting low unemployment rates does so by increasing government spending in projects where people can get employed. On the other hand, the reserve bank of Australia targets low inflation in the country. Inflation as defined is the general rise of prices of goods and services in a given economy and in most cases caused by increasing the amount of money supply in the economy. Inflation is measured using the CPI (Consumer Price Index) and PPI (Producer Price Index) (Palley, 1997). Potential output Short - run aggregate supply Inflation AD UNEMPLOYMENT Y* Y Economic growth is achieved when the aggregate demand for goods and services in an economy increases and this can be brought about by an increase in people’s disposable income (Palley, 1997). The reserve bank of Australia will have to increase lending interest to discourage people from borrowing and thus bring inflation to manageable levels. The two goals in Australia cannot be meet in that while the government main plan is low unemployment and thus increases its expenditure in the economy of Australia, firstly, the amount of money supply in the economy will increase and this will further fuel inflation. On the other hand, the reserve bank of Australia is targeting low inflation which will not go hand in hand with the federal government’s plans of curbing unemployment. In regard to the diagram, when inflation is low, unemployment in the country is also low. When the rate of inflation is high, suppliers are willing to bring more of the commodity in the market because it fetches a high price. When the rate of inflation is low, suppliers brings less of the commodity to the market due to the low prices. On the other hand, in times when the inflation is low, unemployment rates are also low. AD = C+I+G+(X-M), aggregate demand arrived at when consumption (C) is added to government spending (G) and investments (I), Plus the difference in Exports (X) minus Imports (M) (Palley, 1997). Inflation has the effect of reducing people capacity to invest and can be caused by the increase in government expenditure in an economy in a bid to create jobs, thus increasing money supply. When more of the country’s work force is unemployed, the output of the nation decreases since the available man power is not properly utilized for the production of goods and services in the economy. The country will therefore experience unfavorable balance of trade; therefore these two competing goals cannot be met. References Arndit, W. (1999). Southeast Asia’s Economic Crisis: Origins, Lessons, and the Way Forward. ISEAS current economic affairs series. Institute of Southeast Asian Studies. Duasa, J. (2000). Determinants of Malaysian Trade Balance. An ARDL Bound Testing Approach. Journal of Economic Cooperation. 28, 3, 21 – 40. EPU (Economic Planning Unit) (2001). The Ninth Malaysian Plan. 2006 – 2010, Prime Minister’s Department. Anonymous, n.d. Malaysia: A Bold New Bold Vision. An Interview with Malaysia’s Trade Minister Mustapa bin Mohamed. Economic Development. Retrieved on 5th October, 2011. http://www.forbescustom.com/EconomicDevelopmentPgs/MalaysiaBoldNewVisionP1.html Palley, T. (1997). "Keynesian theory and AS/AD analysis". Eastern Economic Journal, fall Yusuf, S. & Nabeshima, K. (Eds) (2007). How Universities Can Promote Economic Growth. The e World Bank Publications Read More