About The Malaysia Economy That Is A Low Income Economy - Article Example

Economic Development of Malaysia since 1980 Name: Professor: College: Course: Date: Economic Development of Malaysia since 1980 Economic Development of Malaysia since 1980 The economic development of a given economy or country is closed anchored on socio-cultural, historical and economic values of a particular nation. The Malaysian economy is a resource-rich country with the strong traditional economy that results from its commodities. The country is central in rubber and tin and produces more than half of the global palm oil. Further, the country is a net exporter of gas and oil. As estimated in January 2013, the proven reserves of oil were to be 3.7 billion oil barrels alongside 1.3 trillion cubic meters gas by volume. During the 1980s and 1990s, there were several alterations in the character of the economy radically. The economy developed into a predominantly manufacturing economy that with an intense focus on export-oriented electronic and electrical equipment. The period saw a major economic contribution by the manufacturing sector at 24.2% of the Gross Domestic Product in 2012. In addition, cars and a wide range of commodities for the domestic market also are key drivers to the economic development of Malaysia. The growth in the manufacturing output has been remarkable as it grew by more than nine percent per year during the two decades 1980 to 2000. Also, the manufacturing sector output has grown by 3.4 percent per year between 2000 and 2010. Further, there has be unmistaken growth in the service sector in these decades that have been on a rapid momentum. The long-term economic plan in Malaysia is to transform the manufacturing industry from the assembly of import component to a design, as well as the production of original commodities. The motivation for this transformation of the manufacturing sector is the need to attain industrialized economy status by 2020. The economic planners of Malaysia have earmarked such strategies as advanced materials, biotechnology, energy technology, microelectronics, Information Technology as well as automated manufacturing as the key sectors that will drive this goal. The Gross National Income of Malaysia by 2012 was US$287.0 billion whereas the Gross National Income Per Capita was US$ 9820. Further, the Gross Domestic Product growth was 4.3% per annum between 2008-2012 while the inflation grew by 2.5% per year between 2008 and 2012. The economy went into a brief recession in the mid-1980s. However, the economic growth followed strongly until 1997 when the collapse of some Southeast Asian financial markets caught the Malaysian economy in the fall. Such a crisis caused great interruption to the rapid growth of the Malaysian economy and subsequently throwing the economy into a fierce recession. Thus, this interruption shrunk the economy by 7.4 percent in 1998. Further, the demand for the economy’s exports greatly collapsed particularly that of Japan for semiconductors. The country was forced to postpone many projects as many companies experienced challenges. In addition, the rate of unemployment shot high at a faster rate. The government in 1998 took measures to stimulate the economic growth and development. The measures instigated the growth of the economy in the second quarter of 1999 and by 2000, the Malaysia had once again became very strong spearheaded by the manufacturing sector. Particularly, exports of electrical and electronic commodities soared with a sharp rise in interest in foreign investment. Nonetheless, in 2001, the Malaysian economy stalled once more as demand for the exports slowed. However, this picked-up again with the increasing international and commodity prices in 2002. There was a subsequent firm growth of more than 5% per annum that continued during the period between 2003 and 2007. However, during the world’s economic downturn as well as the fall in global demand of 2008 to 2009 also affected the economy slowing it down in 2008. This led to the economy to contract by 1.5% in 2009. However, the economy further revamped strongly in 2010 as it grew by 7.4% spreading at four to six percent per annum in the period between 2011 and 2014. The economy of Malaysia has recorded a high growth rates since 1980s resulting from the strong economic growth of 1970s capped at 7.8% on average with respect to the nation’s Gross Domestic Product. In the 1980s, the economic growth showcased a promising trend despite the recession of the mid-1980s. The economic growth of the nation has been on a growing trend in rates averaging over 8 percent in the last ten years since 1987. The GDP growth of the country climaxed at 9.5% in 1995. Further, the employment rate in the nation has also greatly diminished from 8.3% in the 1986 to 2.5% in 1986. Indeed, The Malaysian economy has however experienced teething challenges based on labor shortage particularly in the plantation, and manufacturing and construction sectors characterized by the immigrant workers. The country has 9 million domestic workforce supplemented by about 2 million foreign workers. However, the economy has registered a high Gross Domestic Product growth without inflationary pressures apart from the period of mid-1970s where there was a double-digit inflation in the midst of the oil shock. The high growth period of Malaysia between 1987 and 1996, the economic policies in the country maintained the inflation at 3-4 percent. In 1996, the nation economy kept the inflation at below 3.0 % while it decelerated further as low as 2.7% in the first half of the 1997. However, the country has faced a sigh of overheating resulting from the ever-increasing deficit in the current account of the nation’s Balance of Payment (BOP). Unlike the traditional periods where the economy enjoyed surpluses based on sporadic current account deficits resulting from exorbitant shortfalls in the services account. For instance, in 1995, the Malaysian current account Balance of Payment deficit accumulated to 10.5% of the Gross National Product but further declined in 1997 to 5.0% of the GNP. However, these challenges have lately been under control by the Malaysian economic planners since they had been offset by the substantial foreign investment inflows. The macroeconomic management of the Malaysian economy has fairly been promising despite the small system weaknesses revealed in the recession of the mid-1980s. The country’s budget deficits were huge by Asian standards whereas the external debt burden disproportionately heavy. Moreover, the economy has registered subsequent economic reforms ushered in conservative budgetary measures. Subsequently, these reforms have limited the country’s budgetary alternatives to balanced or surplus budgets. Furthermore, the economy has embraced and implemented prudent monetary policy as the Central Bank pursues realistic interest rates. The Central Banks have always intervened in the foreign exchange markets as it transgressed its boundaries in 1992 through its active participation in the foreign exchange market following the severe pressure of the British Sterling leading to the loss of billions of dollars in the process. Reasons for Performance The country has embraced an open-economy strategy to foster its economic development that has sufficiently paid handsome dividends. The decision by the Malaysian economy to embrace this overtly outward-looking strategy has been propelled by its resource endowment, plural societal fabric, and geographical setting as well as the colonial heritage right from the beginning. The liberal trade policy, as well as the FDI-driven export-oriented industrialization, have been key drivers of the Malaysian rapid economic development without being limited by the scarcity of capital, technological handicaps and smallness of the local market (Krueger 1978). The country has also continuously sought for the foreign investment to supplement its firm commitment to long-cherished open-economy tradition. The nation does this to benefit from the modernized economy, diversified production framework, increased the creation of employment, as well as the increased transfer of technology. Moreover, the country has always sought for foreign investment as a means to industrial dispersion as well as the export orientation of the manufacturing sector to facilitate its economic development (Tan & M. Ariff 1997). The economy has also been driven by the investment incentives schemes that fostered the achievement of such policy objectives, In addition, and the country has further preferred the foreign investment as compared to foreign debts. This is because the Malaysian policy makers fear as the debts have strings attached and have to be serviced regardless of the economic export performance of the nation. Therefore, the foreign investment has been a key driver of the economic performance of Malaysia as foreign investment in export-oriented activities generate adequate foreign exchange earnings prior to profits being repatriated. Thus, the country economic development rested on the principle that foreign debt is always an economic burden and hence paving the way for the massive recognition and implementation of foreign investment-oriented policies. Further, the Malaysian economic performance rests on the agricultural sector that has remained relevant despite the sharp decline in the relative significance of the sector with respect to its plug-in to Gross Domestic Product as well as earnings from export (Aziz 1994) . Subsequently, commercial crops have continued to be a key driver of the Malaysian economy resulting from the sufficient Research and Development investments facilitating the handsome technological breakthroughs. The Malaysia economy also benefited from turning the palm oil and cocoa into lucrative primary export commodities when several African producers lamented about the diminishing terms of trade. Such activities have, however, been smoothly executed thanks to the country’s cost-saving production methods as the activities are easily being revolutionized. Accordingly, the economy has received an upshot as crop production has been less land-intensive primarily because of the invention of a high-yielding clones that have showcased a shortened gestation but attached to exorbitant productivity benefits with the simultaneous reduction of costs that are further diverted to upshot sectoral development. Further, the economy has also benefited from the consistent with the outward-looking growth approach. The country has been forefront in keeping its tariff levels at relatively lower levels to match those of the developing countries standards. In essence, the adopted more of effective rates of protection as compared to nominal protection rates with the tariff regime paving way for the distortions in the manufacturing sector. This pampered some activities and punishing some others despite the inappropriate protection structure with respect to import substitution phase as the nation moved towards export promotion the tariff systems remained relevant with the coexisting export-oriented industries (Bhagwati 1988). However, the economic policies counteracted the anti-export bias in the tariff framework neutralizing it by the issuance of export incentives. However, the country present tariff rates have been lowered. Moreover, the unilateral, regional and multilateral initiatives in the recent years causing the trade-weighted average tariff. The tariffs have consequently been capped as low as 8% down from the earlier 15% at the commencement of the industrialization initiative. The Malaysian government has also intervened to ensure promising economy that has been quite pervasive. The government interventionist policies circumvented primarily around the NEP. The government embraced legislations as well as the guidelines to foster the achievement of NEP goals and objectives. The equity structure, however, remained unaffected despite the laudable NEP policies of the several public enterprise. The NEP policies were stringent to the business society and hence NEP never limited the business sector particularly based on the equity structure. The NEP raised the role of government in the economy. For example, the public sector spending increased to 38.3% in 1982 as a proportion of the Gross Domestic Product. However, the public expenditure further fell to 24.4% in 1988 after the adoption of the policy reforms. Table 1 Sectoral Share of GDP (%) Sector 1980 1985 1990 1995 1997 Agriculture 22.9 20.8 18.7 13.5 12.2 Mining 10.1 10.5 9.7 7.5 6.8 Manufacturing 19.6 19.7 27 33.1 35.5 Construction 4.6 4.8 3.5 4.5 4.8 Services 40 43.5 42.3 44.3 45 Table 2 Share of Employment as (%) of GDP Sector 1980 1985 1990 1995 1997 Agriculture 39.7 31.3 27.8 18 15.2 Mining 1.7 0.8 0.6 0.5 0.5 Manufacturing 15.7 15.2 19.5 25.9 27.5 Construction 5.6 7.6 6.4 8.3 9.2 Services 37.4 45.9 47.2 47.3 47.6 Table 3 Sectoral Share of Malaysian Exports Sector 1980 1990 1995 1996 Agriculture 48.5 22.3 13.1 11.1 Mining 26.4 18.3 5.8 6.4 Manufacturing 20.6 58.8 79.6 80.6 Others 4.5 0.6 1.5 1.9 Table 4. Gross Imports of Goods by Economic Function Activity 1980 1985 1990 1995 1996 Consumption goods share (%) 31.7 20.3 16.4 14.2 14.6 Investment Goods Share (%) 52.7 31.1 37.5 40.5 40.0 Intermediate Goods Share (%) 87.4 47.7 45.4 44.7 45.2 Total Imports (RM billion) 13.45 30.44 79.12 194.34 197.31 Source: Bank Negara of Malaysia. Reference Aziz, A. 1994. “The Changing Face of Malaysian Agriculture” in Malaysian Development Experience: Changes and Challenges, Kuala Lumpur: National Institute of Public Administration. Bhagwati, J. N. 1988. “Export Promoting Strategy: Issues and Evidence”, Research Observer, Washington, DC: World Bank. Cline, W. R. 1982. “Can the East Asian Model of Development be Generalized?” World Development, Vol. 10, No. 2. Krueger, A. O. 1978. Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences, Cambridge: Mass., Ballinger, for the National Bureau of Economic Research. Tan, E. C. and, M. Ariff 1997. “Structural and Sectoral Change in the Malaysian Manufacturing Industry”, paper presented at the Australia-Malaysia Conference, Canberra: Australian National University. World Bank 1993.The East Asian Miracle: Economic Growth and Public Policy, Oxford University Press. Read More