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MALAYSIA

Rank: 51
Regional Rank: 8 of 30

alaysia’s economy is 64.5 percent free, according to
M our 2008 assessment, which makes it the world’s 51st
freest economy. Its overall score is essentially unchanged 100
The economy is 64.5% free

from last year, reflecting worsened scores in three of the
10 economic freedoms. Malaysia is ranked 8th freest out
of 30 countries in the Asia–Pacific region, and its overall 80
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score is higher than the regional average. @
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Malaysia scores above average in eight of the 10 areas 60 @
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measured and scores highest in government size, freedom
from corruption, and labor freedom. The labor sector is
40
highly flexible, with simple employment procedures and Asia-Pacific Average = 58.7
no minimum wage. The top income and corporate tax World Average = 60.3
rates are moderate, and overall tax revenue is relatively 20
low as a percentage of GDP. Inflation is minor, and direct
subsidies do not widely distort market prices. The tariff
rate is fairly low, and the government has been working
1995 2008
to eliminate some non-tariff barriers.
Malaysia suffers from weak investment freedom and
financial freedom. Despite efforts to liberalize procedures, QUICK FACTS
impediments include limited voting shares in companies, Population: 25.3 million
enforced hiring of ethnic Malays, and case-by-case gov-
ernment pre-investment approval. The financial sector is GDP (PPP): $275.8 billion
5.2% growth in 2005
fairly well developed but subject to government interfer-
5.6% 5-yr. comp. ann. growth
ence and some restrictions on foreign involvement.
$10,882 per capita
BACKGROUND: Malaysia is a constitutional monarchy, and Unemployment: 3.6%
politics is dominated by the ruling United Malays National Inflation (CPI): 3%
Organization. Prime Minister Abdullah Ahmad Badawi
FDI (net flow): $996.0 million
has pledged to achieve developed-nation status by 2020.
A leading exporter of electronics and information technol- Official Development Assistance:
ogy products, Malaysia has industries that range from agri- Multilateral: $7.4 million
cultural goods to automobiles. Government ownership in Bilateral: $219.3 million (1.5% from the
U.S.)
certain key sectors, such as banking and airlines, remains
high. The government recently relaxed capital controls and External Debt: $51.0 billion
foreign investment restrictions in a bid to attract foreign Exports: $161.4 billion
capital. It also indicated a willingness to ease politically for- Primarily electronic equipment, petro-
midable affirmative action policies that have discouraged leum and liquefied natural gas, wood
foreign investment and economic development. and wood products, palm oil, rubber
Imports: $130.6 billion
How Do We Measure Economic Freedom? See Chapter Primarily electronics, machinery, petro-
leum products, plastics, vehicles, iron
4 (page 39) for an explanation of the methodology or
and steel products, chemicals
visit the Index Web site at heritage.org/index.
2005 data unless otherwise noted.

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MALAYSIA’S TEN ECONOMIC FREEDOMS tional 10 percentage points is deducted from Malaysia’s
Business Freedom 69.0 ▲ monetary freedom score to account for policies that distort

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Trade Freedom 76.2 ▼ domestic prices.

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Fiscal Freedom 82.2 ▲

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Government Size 80.8 ▲ INVESTMENT FREEDOM — 40%

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Monetary Freedom 78.6 ▼

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Rules have been eased, but foreign investors still face such
Investment Freedom 40.0 –

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Financial Freedom 40.0 – restrictions as limited voting shares, prior approval, and

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Property Rights 50.0 –▼ mandatory hiring of ethnic Malays. Investment is banned

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Fdm fm Corruption 50.0 in the news media, lotteries, or security paper. Foreign-

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Labor Freedom 78.7 ▲

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ers may own 100 percent of certain kinds of new compa-
0 50 100 nies, but most existing corporate equity requires that a 30
100 = most free, = world average percent stake be Malay-owned, and foreign ownership is
capped in most sectors. Certain kinds of investment are
BUSINESS FREEDOM — 69% screened, though commercial operations can begin before
The overall freedom to start, operate, and close a busi- approval. Residents and non-residents may hold foreign
ness is somewhat limited by Malaysia’s regulatory envi- exchange accounts, subject in many cases to government
ronment. Starting a business takes an average of 24 days, approval. Nearly all capital transactions are prohibited, are
compared to the world average of 43 days. Obtaining a subject to restrictions, or require government approval.
business licenses takes more than the world average of 19
procedures and 234 days. Bankruptcy proceedings are rela- FINANCIAL FREEDOM — 40%
tively straightforward. Nine of the 32 commercial banks as of September 2006
were domestically owned, and 13 were foreign-owned.
TRADE FREEDOM — 76.2% Ten Islamic banks account for over 10 percent of assets.
Malaysia’s weighted average tariff rate was 4.4 percent in The government owns a majority of the two largest local
2005. Liberalization has progressed, but import restrictions, commercial banks and is active in creating larger “anchor
high service market access barriers, high tariffs, import and banks” to compete internationally. Banks must lend to cer-
export taxes, non-automatic import licensing for import- tain groups like low-cost housing projects. There are sever-
sensitive industries, non-transparent regulations and stan- al offshore banks, insurance companies, and other financial
dards, non-transparent government procurement, export institutions. Non-performing loans remain a problem. The
subsidies, and weak protection of intellectual property 41 insurance companies are subject to (among other limits)
rights still add to the cost of trade. An additional 15 per- restrictions on expatriate employment and foreign equity.
centage points is deducted from Malaysia’s trade freedom Foreigners may trade in securities and derivatives, but
score to account for non-tariff barriers. participation in stock brokering and trust management is
restricted.
FISCAL FREEDOM — 82.2%
Malaysia has moderate tax rates. The top individual income PROPERTY RIGHTS — 50%
tax rate is 28 percent, and the corporate tax rate has been Private property is protected, but the judiciary is subject to
reduced to 27 percent in 2007 and 26 percent in 2008. Other political influence. Corporate lawsuits take over a year to
taxes include a capital gains tax and a vehicle tax. The real file, and many contracts include a mandatory arbitration
property gains tax has been abolished. In the most recent clause. The International Intellectual Property Association
year, overall tax revenue as a percentage of GDP was 16.3 estimates piracy-related 2004 industry losses in Malaysia
percent. at $188 million. The manufacture and sale of counterfeit
products and medicines have led to serious losses for pro-
GOVERNMENT SIZE — 80.8% ducers of consumer products and pharmaceuticals.
Total government expenditures, including consump-
tion and transfer payments, are moderate. In the most FREEDOM FROM CORRUPTION — 50%
recent year, government spending equaled 25.3 percent of Corruption is perceived as present. Malaysia ranks 44th
GDP. The retains considerable industrial and commercial out of 163 countries in Transparency International’s Cor-
holdings. ruption Perceptions Index for 2006. Bribery is a criminal
act, but perceptions of widespread corruption and “crony
MONETARY FREEDOM — 78.6% capitalism” persist.
Inflation is moderate, averaging 3.3 percent between 2004
and 2006. Relatively unstable prices explain most of the LABOR FREEDOM — 78.7%
monetary freedom score. Most prices are determined in Relatively flexible employment regulations could be fur-
the market, but the government influences certain prices ther improved to enhance employment opportunities and
through state-owned enterprises; controls the prices of productivity growth. The non-salary cost of employing a
petroleum products, steel, cement, wheat flour, sugar, milk, worker is low, but dismissing a redundant employee can
bread, and chicken meat; and usually sets ceiling prices for be difficult and costly. There is no national minimum wage,
a list of essential foods during major holidays. An addi- and restrictions on the number of work hours are flexible.

266 2008 Index of Economic Freedom