Industrialization in Malaysia-Import Substitution and Infant Industry Performance - Case Study Example

Name: Course: Tutor: Date: Introduction Background information about Malaysia Malaysia as a country consists thirteen states with one federal in each state. The total landmass for the country is 329,847 square kilometers. To the south, Malaysia is separated by South China Sea with two regions namely; the peninsular Malaysia and Malaysian Borneo. It borders Thailand, Indonesia and Brunei with maritime borders such as Singapore and Vietnam. The capital city for Malaysia is known as Kuala Lumpur. The Malaysian population is approximately 28.5 million (Radelet and Jeffrey 63). Managerial economics Managerial economics is the study of various economic factors such as gross domestic product, gross national product, consumer price index and inflation rate, per capita income and unemployment and how are applied by an economy to make important macroeconomic policies of a country (Doraisami 233). This report will use the case of Malaysia as one of the upper middle income countries in Asia to see how they have been used to see Malaysia to be where its now economically. Gross domestic product (GDP) In the case of Malaysia the gross Domestic Product (GDP) for Malaysia expanded by over 1.5 percent in the fourth quarter of the financial year 2010 when compared with the previous year 2009 (Ministry of Finance, Malaysia). For the last four years starting 2007 to 2010, the average growth rate of Malaysian GDP, has been found to be 1.20 percent for every quarter. Malaysia being an upper middle income country, it has kept developing and now is among the great economies in Asia (Ministry of Finance, Malaysia). It has undergone several transformations since the 1970s when it primarily dealt with production of raw materials to a greater multi-industry economy. Figure 1 below is a graph showing the percentage growth of the GDP for every quarter for each year staring 2007. Interpretations In reference to the graph above showing the percentages of Malaysian GDP, the GDP has continued to grow since the year 2007, except in the following quarters; the first quarter of 2007, the first quarter of 2008, the first and the second quarters of 2009 and first quarter of 2010 (Ministry of Finance, Malaysia). Its clear that the economy of Malaysia has been doing well in last quarters of the year when compared with the first quarters and this can be attributed to influx of foreigners who come into country as tourists and also given the fact that this time many students close schools for end years holidays, the household expenditures go high thus contributing greatly to the business by putting more moneys into circulation). Since the country’s GDP has continued to increase over years, to my own opinion, this can also be attributed to a stable political and economical environment that has been created by the government for doing business. Gross national product (GNP) Gross National Product (GNP) is the total value of all goods and services produced by a nation in a given financial year whereby the income earned by the indigenous is added while the income earned by the foreigners is subtracted (Hassan 78). GNP is an important tool in measuring the economic condition of any given country. Figure 2 below is a table showing the status of the GNP growth for Malaysian economy for four years from 2007 through 2010 as captured from the various key sectors of the economy.     2007 2008 2009 2010 GNP (in 2000 factor)Ringgit Malaysia in Million 454,625                      482,239              496,077         504,864 Private consumption                   230,222                        255,028              276,527      286,205 Private investment                      54,643                          59,996                60,896          50,118 Public consumption                  61,258                         65,299                    72,880         78,187 Public investment                   52,473                          57,378                   57,775          57,378                   Exports of goods & services 592,89 617,628                    626,824       522,913 Imports of goods & services 516,412                     544,059                    556,015        473,102 Source: central bank of Malaysia report 2011 As shown from the table above, GNP for Malaysia has continued to increase in two sectors of the economy namely the private and public sector while other sectors recorded a decline in 2010. This has been attributed to high cost of doing and investing and doing business as well as shock from world economic recession which has affected export and import of goods and services (central bank of Malaysia report 2011). Consumer price index (CPI) The CPI is a tool for measuring consumer prices and the inflation rates in the market place. CPI and its major components growth rate (%YoY) Base 2005=100 weight 2007 2008 2009 2010 CPI 100 3.6 2.0 5.4 0.6 Core Inflation (Ex -Food & NAB) 68.6 3.7 1.6 3.0 -1.1 Food & Non-Alcoholic Beverages. 31.4 3.4 3.0 8.8 4.1 Alcoholic Bev. & Tobacco 1.9 6.9 7.8 7.3 6.1 Clothing & Footwear 3.1 -1.3 -1.4 -0.5 -0.9 Housing, Water, Electricity, Gas & Fuels 21.4 1.5 1.3 1.6 1.4 Furnishing & Household Equipment 4.3 1.1 1.1 3.0 2.9 Health 1.4 2.2 1.6 2.2 2.3 Transport 15.9 11.0 2.3 8.8 -9.4 Communication 5.1 -1.4 -1.2 -0.6 -0.5 Recreation Services & Culture 4.6 0.8 1.4 1.8 1.5 Education 1.9 1.6 1.8 2.3 2.4 Restaurants & Hotels 3.0 3.7 3.7 6.6 2.9 Misc. Goods & Services 6.0 2.3 1.0 3.3 3.8 Source: Department of statistics Kenanga research Interpretation As indicated in the table above, the CPI report by Kenanga research recorded varied results. In 2007 the CPI was 3.6 percent, 2.0 percent in 2008, 5.4 percent in 2009 and 0.6 in 2010. The different CPI results can be associated to continuous changes in various commodities and cost of production. For example clothing and footwear recorded continuous decrease of CPI percentages because of low cost of production and availability of raw materials locally. Communication components also recorded low percentages in CPI because of new information innovations that make it more affordable. However, the rest of the components such as Misc. Goods & Services, Food & Non-Alcoholic Beverages and Recreation Services & Culture recorded high and low CPI percentages because of high cost of production and change of seasons that affect the demand for the same services (Ministry of Finance, Malaysia). Inflation rate The word “inflation,” in general terms refers to the increase of prices of goods and services at the market place. The process of measuring inflation is done by looking at two sets of goods or services at two different times in order to calculate cost increase without factoring in quality (Claassen, 2000). Figure 3 is table showing inflation levels in the case of Malaysia for four consecutive years starting 2007. Year Inflation rate 2007 4.1 2008 0.5 2009 2.0 2010 2.8 Source: TradingEconomics.com; Department of Statistics Malaysia According to the figures provided by the Department of Statistics Malaysia in 2011, inflation rate was at its lowest in 2008 with 0.5% while 2007 recorded the highest rate of inflation at 4.1%. However, in general terms the inflation rate has remained below 5% which means that the prices of goods and services are not that high. This is because Malaysian economy is able to produce much of the goods and services locally thus not easily affected by global recession (Ministry of Finance, 2009). Unemployment level in Malaysia Unemployment rate can be expressed as a percentage of those individuals who are willing and able to work but are not employed against those who are employed plus those who are not employed according to the ILO and OECD. It actually gives the true figure of those people who are willing and able to work but are not employed. Figure 4 below is a table showing the inflation rate in the case of Malaysia. Year Inflation rate 2007 3.2 2008 3.3 2009 3.6 2010 3.3 Source: International Monetary Fund - 2011 World Economic Outlook With reference to the statistics provided by the International Monetary Fund -World Economic Outlook in 2011, Malaysia’s unemployment rate is relatively low and stable with very small variations in the four years. In 2007 the unemployment rate was 3.2 percent before rising to 3.3 percent in 2008 and then 3.6 percent in 2009 before going down again to 3.3 percent in 2010. For this reason it is arguable that unemployment rate is not a big problem something that can be attributed to economic stability (Ministry of Finance, 2009). Factors contributing to unemployment Corporate governance and institutional restructuring Since the world of business has become more competitive, every investor is out to seek the best ways that can be used to do business as away of saving much of the operational cost and this has necessitated the need to introduce modern technologies which require a view people to operate. For example the introduction of information technology (IT), in doing business has seen many people sent home earlier than expected since their services are no longer required and this problem is more in middle income countries where Malaysia is one of them (Rasiah 45). Global recession Global recession has had a very serious effect in terms of employment since many investors have closed down their businesses since the cost of doing business cannot be managed (Alavi 96). The problem has been greatly motivated by the fact that most of the raw materials and other resources have been overexploited and to acquire the view remaining especially energy, needs intensive capital investment which the business might not realize. Liberalization of international trade The international economy has seen many changes in the business since the post-Soviet era. This has seen many countries introduce export-oriented strategies to intensify their economic activities. However, the challenge with liberalization is the ability of young local investments to compete with well advanced global companies and for this reason many investors have failed to survive the stiff competition since they cannot produce cheaper goods as their counterparts and the end result is unemployment and increased higher rates of laying-off (Alavi 96). Per capita income for Malaysia Income per capital refers to the average individual disposable income for the citizens of a given country. In this case we take our consideration of Malaysia as a growing economy. Malaysia is categorized as one of the countries in the upper middle income countries in the world. Malaysia is one of the most developed of the countries that are in the middle upper in terms of income earnings per individuals. Figure 5 below is a table showing per capital income for Malaysia for the last 4 years. Income per capita (percentage growth) Year (Income per Capita) 2006-2007 14.0 2007-2008 16.5 2008-2009 19.0 2009-2010 21.0 Source: Malaysian central bank annual report 2011. From the table above, it’s clear that the income per capita for the country has been on the increase for the last five years meaning that the spending pattern of the citizens is generally higher and we can conclude that they economically empowered to make purchases (Al-Yousif 68). Macroeconomic policies Management of capital controls and exchange rate stability In dealing with the stability of the local currency against the dollar, the government of Malaysia has applied a selective control as a respite to the currency in order to ensure that local currency remains relatively stable despite external forces. The move has seen the Malaysian ringgit that is abroad to be non-legal tender and therefore has made investors to return the ringgit to current. In my view this is a very bold move since it has seen the scarcity of it in the global market thus raising the demand for it (Abdul and Musalmah 348). This move however, has been made possible by the fact that the government has instructed that all receipts generating from capital account transactions except the FDI, to be held within the country for at least one year before they are discharged. This policy has also helped the country to deal with exchange controls and open economies. Fiscal stimulus Since the advent of open market economy, Malaysia’s biggest worry has been how to deal with unprecedented contraction of the economy and in this case government top priority has been how to tackle prolonged recession. In order to rekindle the economy and deal with recession, the government has employed the use of fiscal stimulus strategy whereby excess physical surplus is reversed back to the budget to fill the deficits. Also in dealing with budget deficits, the government of Malaysia has been applying a projection selection criterion where the government budget is performance based and as such small-scale projects have been encouraged since they bear less risk (Ariff 69). Monetary issues In order to foster economic performance, the Malaysian monetary policy has been to stimulate domestic spending. The major monetary policy that has been applied in the economy is the reduction of interest rates. The step is essential since it allows small investors to access credit facilities by reducing the cost of carrying out economic activities. However, to my view, lowering of interest rates if not well managed can encourage moral hazard related problem and to manage the policy effectively the government has to put in place prudent evaluation procedures before lending practices are implemented (Bhagwati 34). Fiscal policies Like many other world economies, Malaysia has been on the run to counter external shocks and one best way to tackle economic crises is by use of sound fiscal policy by ensuring that exchange rates are stable. The Malaysian fiscal policy has been directed towards revenue generation and provision of basic expenditure towards basic infrastructure that is supportive of the economic activities. However, fiscal policy alone has not been sufficient and I believe that combining it with liberal and corporate income tax-cuts as well as other tax incentive will real stimulate the economy even more (Conference—Towards Economic Recovery, 2003). Political economy of Malaysia Like many other world economies, Malaysia in one way or the other has fallen victim of the global recession has had a fair share of being dominated by foreigners in their commercial sector. The Chinese businessmen over years have contributed over 70 percent ownership of the commercial sector in Malaysia (Julian and Allen 730). This dominance by the Chinese created a lot of anxiety and even reprisals in May 13th 1971 by the Malays. This kind of business environment has prompted Malaysia as one of the biggest economies in South East Asia to introduce a policy that will offer preferential treatment or rather protectionism to the indigenous from foreigners’ dominance. This school of thought was introduced primarily to allow the bumiputra referring to the son of the earth as compared to the light-skinned Chinese to have over 30 percent ownership of firms. This position has offered mixed fortunes especially during the Asian financial crises of 1997/98 when Malaysia was also adversely affected and to my thought this had something to do with the country’s policy that was not attractive to direct foreign investors (Romer 1034). However, in the last one decade, Malaysia has gradually liberalized its commercial sector and especially during the Prime Minister Datuk Seri Najib Tun Razak’s era in order to attract more foreign investors to bring in professionalism, new technology as well as promote fair competition and increase employment opportunities. Economic grouping of Malaysia Malaysia as an economy belongs to the Association of Southeast Asian Nation (ASEAN) which was established in August 8, 1967, in Bangkok/Thailand. The member state for this economic grouping include: Myanmar, Indonesia, Brunei Darussalam, Singapore, Thailand, Vietnam, Laos, Malaysia, Cambodia and Philippines (Rivera-Batiz & Romer 540). According to the ASEAN Website report of 2011, the association had approximately 591 million people, the GDP was US$1.496 trillion; and Total Trade was US$1.536 trillion. Two major goals for the Association are: 1. To ensure that economic growth, cultural development as well as social progress is accelerated in the region. 2. Ensure regional stability and peace by adhering to the United Nations Charter. Currency and the rate against the US $ The Malaysian currency is called the Ringgit and it is written as RM. The currency is divided into 100 sen and its conversion factor has 6 significant digits. According to the latest report updated by the International Monetary Fund (IMF) in October 12th, 2011, the RM currency had hit the record higher at 2.93 against the USD (International monetary fund report, 2011). According to the projections of this report, the Ringgit is expected to appreciate even more against the USD perhaps because of the conducive environment of doing business in the country which has attracted many foreign investors and also because of the combined bargaining power of the association (International monetary fund report, 2011). Given the strength of the Malaysian Ringgit, it means then that Malaysians will now pay less for imported goods and services and therefore the burden of high inflation rate is significantly reduced. In my view also the stronger currency is likely to increase the purchasing power of the Malaysians, increase savings as well allow more Malaysians to travel abroad for education and business. Country’s resources and its major trading partners Malaysia as a country is well blessed with different natural resources in various areas such as forestry, agricultural produce and mineral resources. Malaysia is a large producer of agricultural products. The most valuable product in Malaysia is petroleum. At one point, Malaysia was the biggest producer of tin and rubber in the whole world. Most of the world rubber is being produced in Malaysia. Timber and other related products are also produced in large quantities (Athukorala and Peter 85). Other products produced locally include cocoa, pineapple, pepper and tobacco. These products are dominant in the agricultural products. Malaysia also has got large deposits of gas and oils something that has promoted the industry greatly. The oil sector in Malaysia provides up to 35% of the country’s federal tax collections. There are custodians of oil and gas called petronas. These are stores for oil and gas resources. This has attracted many contactors to assist in production. The government has put every strategy in place in order to see the country’s economy grow and become less relying on the export from income. This has necessitated the need to develop the country’s tourism industry. Presently tourism sector is the third largest revenue generator to the country (Ekonomika 59). The Malaysian policy on technology by the ministry of science and technology and other related ministries such as agriculture and environment have promoted the training of students in various fields of science and technology that has the country’s research and development related to economic activities grow up to 54% (Bank Negara Malaysia, 2011). Major Malaysian trading partners The graph below depicts the amount of various commodities that Malaysia import from its partners in the year 2010 in percentages. Source: WorldeconomyWatch.com report 2011 Malaysian economic competencies Malaysian as a country has persistently managed to survive global recession and other economic shocks especially the financial crises which hit the Asian countries in 1997/98 by employing various microeconomic policies (Jomo 90). There are several instruments that have employed by the country to ensure that economic stability is maintained which include: 1. Ability to cope with global change 2. Ability to contend with complexity in the global environment 3. Ability to confront business complexity in the local environment 4. Ability to conform with conscience Recommendations In order to sustain economic development the following recommendations can form an important part of the Malaysian policy with regard to economic development and management: 1. There is need to respond to global forces by ensuring that the country is more an astute marketer than ever before as this will enable the country to respond more quickly and appropriately to global challenges and opportunities as this will form an important premium package to effective global business strategy (George and Wensley 80) 2. There is need to embark and invest more on research especially in areas that deals with information technology as this will facilitate the involvement of the international market and ensure subsequent expansion. Use of highly innovative information systems will aid the country to coordinate the operations by far-flinging the international markets (Peter & Keen, 2001) 3. Finally, as the country continues to consolidate its position in the international market the act of deploying resources across the world is essential as it helps to averse the risk by exploiting the opportunities that prevail in the global market. For Malaysia to continue to prosper there is need also to continually evolve, adapt as well as respond to ever changing realities in the global market by ensuring its macroeconomics policies are relevant (Grossman and Helpman 89). Works cited Abdul H. and Musalmah J. Improved Management of the Financial Sector for Its Enhanced Stability and Support to Trade and Investment Flows. Malaysia: MIER, 1998. Alavi, R. Industrialisation in Malaysia-Import Substitution and Infant Industry Performance. London: Routledge, 2006. Al-Yousif, K. On the role of exports in the economic growth of Malaysia: A multivariate analysis. International Economies Journal. 13.4, 67–75, 2009. Ariff, M. The Financial Crisis and Reshaping of the Malaysian Economy: Trends and Issues. Malaysia: MIER, 1999. Ariff, M. and Syarisa A. Domestic Reforms and International Co-operation.” The Malaysian Perspective. Malaysia: MIER, 1999. Athukorala P. and Peter W. Vulnerability to a Currency Crisis: Lessons from the East Asian Experience. (Preliminary draft). Asia Pacific School of Management and Economics, ANU, Canberra, March, 1999. Bank Negara Malaysia. Annual Report. Malaysia: BNM , 2011. Bhagwati, J. Protectionism. Cambridge: MIT Press, 1988. Claassen, E. Financial Liberalization and its Impact on Domestic Stabilization Policies: Singapore and Malaysia. Journal of the Kiel Institute of Economics. Tubingen, Germany, 2000. Conference—Towards Economic Recovery: The Fiscal Policy Side. Malaysia: MIER, March, 2003. Doraisami, A. Export growth and economic growth: a re-examination of some time series evidence of the Malaysian experience. Journal of Developing Areas. 30.6, 223-233, 2006. Ekonomika. Bulletin of the Malaysian Economic Association. 10.2. October, 1998. George K. and Wensley, F. Marketing Theory with a Strategic Orientation. Journal of Marketing. 47 (Fall): 79-89. 2003. Grossman, G. and Helpman E. Innovation and Growth in the Global Economy. Cambridge, Massachussette: MIT Press, 2009. Hassan, T. Challenges and Prospects for Economic Recovery in Malaysia. (Keynote address). Kuala Lumpur: MIER,. 1998. Institute of Developing Economies. Study on Trade and Investment Policies in Developing Countries–Malaysia. IDE, Tokyo, March. 1998. Jomo, K. S. Tigers in Trouble-Financial Governance, Liberalisation and Crises in East Asia. London: Zed Books, Ltd. 1998. Julian M. and Allen J. Configurations of Strategy and Structures of Multinational Corporations. Journal of International Business Studies (Fourth quarter): 729-753. 1999. Ministry of Finance, Malaysia. Economic Report. Malaysia. 2011. Peter G. & Keen W. the Future. Boston, MA: HBS Press, 2001. Radelet, S, and Jeffrey S. The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. US: Harvard Institute for International Development, 1998. Rasiah, R. Busting the Bubble: Causes and Consequences of the Southeast Asian Financial Crisis. National University of Malaysia, 1998. Rivera-Batiz, L. & Romer, P. Economic integration and endogenous growth. Quarterly Journal of Economics, 106.7, 531-556, 2001. Romer, P.M. Increasing returns and long-run growth. Journal of Political Economy, 94.8, 1002- 1037, 2006. Read More