Malaysian Economy - Assignment Example

Malaysian Economy Name Institution Course Lecturer Date Using the Malaysia as the case study this paper is to explore the performance of the Malaysian economy in relation to the international trade. It keenly scrutinizes the various financial policies that the country has taken and the way that they are affecting the performance of the economy. Important business aspects like imports, exports, are well covered. At the end, different recommendations are given on the changes that need to be taken in the economy According to Lean and Smyth (2010), tride openness in Malaysia in terms of international trade has earned the economy such a great prosperity that it has shifted from an ordinary traditional primary producer to a Modern industrialised Nation. Through this trade, the economy has been exposed to the international ups and downs not forgetting the GFC that touched nearly every economy in the world as well as the Asian crises. The Trade Current Account The economy has been registering a surplus since the well known Asian crises. Export of goods has greatly outpaced the country’s imports and hence the deficits in the income and service account have been offset. According to BEKHET (2014) this great performance of the export account has been due to the diversification of the country’s markets. However, the great financial crises marked the start of modernization trend to the current account surplus. In the recent years, there have been lower exports for Malaysia due to lower commodity prices and weak global demand. The table below shows the trends in the Exports As Ariff and Hill (2011) observes,the economy is export oriented with the main export products being electronics and electrical products which take 35% of the total exports followed by palm oil(15%),petroleum products(9%) and liquefied gas that takes 7 %.Malaysia also export other products in small quantities and they includes machinery, chemicals, and manufacturers metals. The country’s main export partners are Singapore (13% of the total imports ad 15% of the total exports) and China (15 % of the total imports and 13 % of the total exports).Other trade partners are, united s States, Emu, Japan taking and China taking 13%. Top five Export products in Malaysia Adopted from: Asia Regional Centre The government conduct licensing for exportation of some products like textiles, palm oil and timber. All goods exported that are exported from Malaysia are exported have a GST of a zero % rate. IMPORTs As Jomo (2013) explains, the government uses tariffs as the main instrument of regulating trade. The duties imposed ranges from o to 50 %. Further to that, the government carry out import licensing for different products. These includes the arms and explosives, motor vehicles, certain drugs and chemicals, heavy construction equipments, soil and essential food staffs among many others. Imports of poultry and beef are regulated through sanitary controls and licensing. All the imported lamb and beef as well as poultry products have to originate from the facilities that are approved by the Malaysian Authorities as Halal or are accepted for the Islamic Consumption Goods and service tax (GSM) is taxed on all the goods and services that are imported into the economy. .The government is not part of the WTO procurement agreement and therefore foreign companies that are interested in trading in the Malaysia economy do not have the same privilege as the local companies in competing for the contracts available. In most of the cases, these companies are required to have local partners so as to have these bids considered. However, the country is a member to some trade blocks and agreements. Some of these are the Asian Free Trade or FTA. That aims at reducing the trade barriers among the member Economies in a 15 year period. The country has also signed FTA with nations like Pakistan New Zealand and Japan and is seeking other bilateral FTAs with Australia Chile and India. There are other trade agreements that the country has like Question 3 The Malaysian financial sector has been liberalised and made many cross border linkages. The Central Bank of Malaysia has announced measures to enhance economic linkages with other economies. This is to ensure that the financial sector is able to play a key role as a catalyst for economic growth. These measures are in line with the objectives outlined in the financial sector Master Plan. This master plan was issued in 2011 to in order to develop a resilient, efficient and a diversified financial sector (Gammra, 2009). According to Anwar and Sun (2011), there has been oversees expansion of the Malaysian financial institutions over the decades. This has facilitated the increase in the investments abroad through pursuing the new markets and opportunities. At this present time, out of eight banks in the country six have an established branch or presence in not less than 19 Nations worldwide. This internationalization of the Malaysian financial sector has further been enhanced by the liberalization of the sector over the recent decades. The reforms taken in the country in the financial sector has yielded a lot of fruits. Malaysia has approximately 27 banks from about 14 nations that have greatly invested in the financial sector. The financial institutions contribution to the Malaysian balanced growth has been made possible by a number of factors. One is the strengthening of the domestic financial institutions and according of the operational flexibilities. It is this liberalization of the financial sector that has enabled the development of the domestic banks in a highly competitive market (Saleh, Zulkifli, & Muhamad, 2010) As Tang (2013) observes, Malaysia has applied different exchange rate policies in its economic history. The currency used is Malaysian Ringgit. The country moved to a floating exchange rate in the year 2005 after the great Asian crises. Before that, the Malaysian ringgit was pegged against a US Dollar. It was formerly known Malaysian Dollar. In the floating exchange rate, ringgit is consistently referenced against a basket that is composed of currencies of different trade partners and is then allowed to move according to the forces playing in the market. The central bank is thus limited to maintenance of order in the foreign exchange market conditions. This is done in the view of avoiding the any extreme movement in the exchange rate which could destabilize the whole economy. With time, the government intervention in the foreign exchange rate has become less frequent and the more focus has been on the times of the market dysfunctions. When the inflows or outflows have been more extreme, the central bank has intervened to mitigate volatility, reducing any destabilization and maintaining order in the market. A good example is the period between year 2007 and 2008 when the central bank intervened to deal with the high portfolio inflows as was against the US dollar and had extremely increased the international reserves to USD 125.8 billion in June 2008 from the2007 Januarys 83.5 billions (Kawai,2008) There are assets that have been highly restricted on matters pertaining to foreigners. Land is one According to Zoomers (2010); the Malaysian law is very clear on the route that a foreign company takes to invest in the economy. To establish a business, one need to take that form of partnership, sole proprietorship, incorporation of a local company or through a foreign company via operational branch, branch office or a regional branch there are limits stipulated in the law concerning the amount of land that a foreigner can own. The law outlines the size a foreigner can own and the purpose for which can use the land. A foreign interest cannot own a piece of land that is more than MYR 500000 and for the purposes below and have to be registered through a locally incorporated firm. And subject to the conditions: To carry out agricultural activities at a commercial level by means of high technology To carry out any agric tourism project There are much rigidity that are stipulated concerning the piece and the size of land that can be owned by a foreign company Most economists argue that capital flows bring considerable economic benefits as well as considerable costs to and an economy. It refers to any policy that is designed to redirect or limit the capital account transactions. Capital flow control in Malaysia has a long history. In 1998, the financial authorities introduced these capital controls. The main aim of this was doing away with the offshore ringgit activities as well as restricting the portfolio capital outflows .The portfolio investors at that time were barred from repatriating any fund invested in Malaysia for not less than one year. There was also the prohibiting of the offshore trading of ringgit. Following this, Malaysian sovereign debt rating was downgraded by the international credit rating agencies. Malaysia was erased as an investment benchmark by many investors. Some of these investors included Dow-Jones investment Indices and IFC. The economy continued to stabilize, these controls were eased and later removed (Ostry, Qureshi, Habermeier, Reinhardt, Chamon & Ghosh, 2010). Foreign Debt According to the ministry of finance records, the government debts reached 54.8 percent of the country’s GDP IN YEAR 2013.The figure below shows the variation of the government debt up to 2014 from 2004 4. Evaluation and Recommendations To a great extent I can consider many policies adopted Malaysia as sober, helpful and to be contributing greatly to the expansion of the economy. The liberalization of the economy is moving along well with the set objectives. Being an attractive investment hub, the policy has given many foreign investors a chance to contribute to the expansion of the economy without any fear. Membership to different trade blocks and agreement like FTA it has signed with Pakistan and New Zealand has been helpful in the diversification of the country’s markets The country’s financial policy assisting in the expansion of the economy the liberalization of the financial sector is an important step taken by the country. This contributed to the expansion of the banking sector. There are over 27 Malaysian institutions well established abroad as well On the other hand, there are other policies that inhibit the full potential of the resources. Chief among them is the international capital control. It is good to make note of the fact that there are many investment agents that had erased the country as an investment benchmark. It also caused downgrading of the Malaysian debt rating status by international credit agencies. In addition to the above side effects of credit control, such action if taken again will lead the economy into some complications. One important effect is the loss of the confidence by the investors. Even if the control is lifted, they always feel that in case of future crises, they will be the casualties. The country should at all cost avoid any kind of capital control. The other issue that need to be addressed in the protection of the domestic firms. The high degree adopted by the country is reducing the competitiveness of the firms. Full exploitation by these firms can only be seen if they are given very small advantages over foreign companies. Otherwise, with the high degree of protection, these firms are likely to give low quality goods to consumers To allow full exploitation of the land resource, the country need to come up with measures that will ensure that the land resource is fully exploited. There are much rigidity that have been put on land limiting the extent to which a foreigner can utilize it 5. Conclusion In conclusion, there are many lessons that can be derived by the steps taken by the country. Its openness to the international trade has opened up the economy. The diversification of the market through trade agreements is a step that many nations need to emulate as it has enabled the economy to move from a primary producer to a strong economic force in Asia References Anwar, S, & Sun, S 2011 Financial development, foreign investment and economic growth in Malaysia Journal of Asian Economics, 224, 335-342 Ariff, M, & Hill, H 2011 Export-oriented industrialisation: The ASEAN experience Vol 49 Routledge BEKHET, H A 2014 Assessing economic connectedness degree of the Malaysian economy: Input-Output Model approach International Journal of Economics and Finance, 12, p134 Ben Gamra, S 2009 Does financial liberalization matter for emerging East Asian economies growth? Some new evidence International Review of Economics & Finance, 183, 392-403 Jomo, K S Ed 2013 Industrializing Malaysia: policy, performance, prospects Routledge Kawai, M 2008 Toward a regional exchange rate regime in East Asia Pacific Economic Review, 131, 83-103 Lean, H H, & Smyth, R 2010 Multivariate Granger causality between electricity generation, exports, prices and GDP in Malaysia Energy, 359, 3640-3648 Ostry, M J D, Qureshi, M S, Habermeier, M K F, Reinhardt, D B, Chamon, M M, & Ghosh, M A R 2010 Capital inflows: The role of controls International Monetary Fund Saleh, M, Zulkifli, N, & Muhamad, R 2010 Corporate social responsibility disclosure and its relation on institutional ownership: evidence from public listed companies in Malaysia Managerial Auditing Journal, 256, 591-613 Tang, T C 2013 The effects of exchange rate variability on Malaysia's disaggregated electrical exports Journal of Economic Studies, 352, 154-169 Zoomers, A 2010 Globalisation and the foreignisation of space: seven processes driving the current global land grab The Journal of Peasant Studies, 372, 429-447 Read More