INTRODUCTION

Malaysia is a highly open, upper-middle income economy. Malaysia was one of 13

countries identified by the Commission on Growth and Development in its 2008
Growth Report to have recorded average growth of more than 7 percent per year
for 25 years or more. Economic growth was inclusive, as Malaysia also succeeded
in nearly eradicating poverty.
From an economy dominated by the production of raw natural resource
materials, such as tin and rubber, even as recently as the 1970s, Malaysia today
has a diversified economy and has become a leading exporter of electrical
appliances, electronic parts and components, palm oil, and natural gas. After the
Asian financial crisis of 1997-1998, Malaysia continued to post solid growth rates,
averaging 5.5 percent per year from 2000-2008. Malaysia was hit by the Global
Financial Crisis in 2009 but recovered rapidly, posting growth rates averaging 5.7
percent since 2010.
Though extreme poverty is less than 1 percent, pockets of poverty remain and
income inequality remains high relative to other developed countries: Malaysias
gini coefficient of income inequality stood at 0.41 in 2014, compared with 0.31
and 0.33 in the Republic of Korea and Japan (both as of 2010), for example. Real
income of the bottom 40 percent of households increased by an average 6.3
percent per year between 2009 and 2012, compared to 5.2 percent for the
average household, suggesting the benefits from growth were being shared.
Malaysias near-term economic outlook remains broadly favorable, reflecting a
well-diversified economy, despite some risks. The Government has taken steps
to broaden the revenue base, in particular by introducing a Goods and Services
Tax in 2015 and by removing fuel subsidies in 2014. Recent increases in the
minimum wage and public sector salaries to support households income may
prove challenging to sustain as fiscal consolidation continues, which raises the
importance of boosting labor productivity and increasing the efficiency of the
social protection. Introducing unemployment benefits may also help to improve
matching in the labor market and provide support as the labor market softens.
Other risks are related to the volatility in capital flows from the normalization of
US monetary policy. The long-term sustainability of this favorable outlook hinges

on structural reforms to strengthen medium-term fiscal planning, and to boost

capabilities and competition within the economy.

Accelerated implementation of productivity-enhancing reforms to increase the

quality of human capital and create more competition in the economy will be key
for Malaysia to secure a lasting place among the ranks of high-income
economies. Malaysia has been working to address these challenges. In 2010,
Malaysia launched the New Economic Model (NEM), which aims for the country to
reach high income status by 2020 while ensuring that growth is also sustainable
and inclusive. The NEM includes a number of reforms to achieve economic
growth that is primarily driven by the private sector and moves the Malaysian
economy into higher value-added activities in both industry and services.