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IV.

POLICY LESSONS FOR THE LEAST DEVELOPED COUNTRIES DRAWN FROM MALAYSIA’S EXPORT DIVERSIFICATION EXPERIENCE
As indicated in chapter II, Bangladesh, Myanmar and Nepal have implemented a number of policies to enhance their exports. Owing to these initiatives, the export of certain commodities in these selected least developed countries has increased significantly in recent years. However, the empirical results in chapter III found that the exports of these LDCs are very much concentrated, implying that only very few commodities still account for a significant share of total exports. In analysing the experiences of the LDCs, it was generally noted that the ensuing policies to promote export diversification at times may be hindered by a number of factors. For example, policies to promote exports may be in conflict with other national policies; institutional capacity within a country to implement the necessary export diversification policies may be weak; market mechanisms and the enabling environment required to promote international commerce may not be fully in place; further, the limitations in infrastructure may render the physical transport of goods difficult. The empirical results in chapter III also found that a developing country such as Malaysia could achieve high economic growth in the 1980s by broadly diversifying its exports in both traditional commodities (horizontal diversification) and non-traditional commodities (vertical diversification). Therefore, the present chapter draws lessons from the successful experience of Malaysia in diversifying exports and achieving rapid economic development and it provides some policy recommendations that may help LDCs to enhance and diversify their exports.

A. The Malaysian economy
The Malaysian Government has actively promoted economic development and industrialization through significant State sector investment in the economy, close alliance between the Government and the private business community, the trend towards privatization of State enterprises and the formulation and implementation of policies and programmes to bolster the economic status of the Malay and indigenous communities.22
22 The Economist Intellegience Unit, Country Profile: Malaysia, 1999, <http://db.eiu. com/composite.asp?topicid=MM>.

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however.23 These schemes provide tax concessions and exemptions on inputs. and the maintenance of an overseas sales office. the supply of free samples abroad. Export incentives schemes A number of incentive schemes are available in Malaysia. using moderately advanced technology. (b) A double tax deduction is permitted for export-credit insurance premiums for non-traditional markets taken out with an insurance firm approved by the Ministry of Finance. public relations work connected with exports. the cost of overseas travel and accommodation. Companies with pioneer status may accumulate deductions to be used against their post-pioneer income. 1. Nonetheless the economy has been vulnerable to changes in the relative attractiveness of different countries as locations for investment. while the Customs Department provides information on licensing and tariffs. repatriation of FDI profits is a large debit item on the invisibles account. This development strategy. the supply of technical information abroad. the need to finance these transfers has not imposed serious financial strains on the economy. Tax exemptions (a) A double tax deduction is allowed for expenses incurred by resident companies exporting manufactured and agricultural products. the preparation of tenders for the supply of goods overseas. market research. Bank Negara is in charge of setting and supervising all foreignexchange controls. Although Malaysia’s net foreign indebtedness is low.Further. In Malaysia. the Ministry of International Trade and Industry is responsible for the formulation and implementation of trade regulations and policies. B. or the sale of goods produced primarily for export. However. Malaysia has taken advantage of the trend among companies in developed countries to relocate their production lines to lower-cost areas. carries penalties. the manufacturing process. since the prospects for further investment have ensured a high proportion of reinvested profits. which reduced the country’s need to borrow overseas or to generate domestic funds in order to finance investment. Some of the deductible items are expenditures for overseas advertising. 23 64 Idem. exhibits and participation in trade or industrial exhibitions. 64 64 646464 . Malaysia’s well-developed infrastructure and administration and its well-educated workforce has attracted foreign direct investment (FDI).

the Offshore Insurance Act and any other law pertaining to offshore financial activities. there were 64 IOFC-licensed banks. Labuan International Offshore Financial Centre Labuan International Offshore Financial Centre (IOFC) was established in 1990 as Malaysia sought to become a regional capital market centre. Delivery of goods to a free zone or to the islands of Langkawi or Labuan (see Box IV. secretarial and legal services provided to offshore companies became exempt from tax on up to 65 per cent of statutory income. and expatriates employed in a managerial capacity by offshore companies are granted an exemption of 50 per cent of employment income for the 1993-1998 assessment. Net profits from offshore trading activities conducted from Labuan are taxed. Income from offshore non-trading activities is exempt from tax. financial institutions had to obtain approvals and licences from up to six different authorities.com/composite.asp?topicid=MM>.1. which administers and enforces the Offshore Companies Act. Country Profile: Malaysia. the following incentives were introduced: (a) income derived from qualifying professional services such as financial. and for sales tax on any goods used to produce the items. 6 of which were Malaysian. upon election at a concessionary rate of 3 per cent or a fixed sum of M$ 20. <http:/db. the Offshore Banking Act. and (c) the period of stay in Labuan for individuals to be eligible for qualified duty-free goods was reduced from 72 hours to 24 hours. Box. as well as 20 trust companies. Previously. the Labuan Trust Companies Act. (d) Manufacturers of export items may claim drawback of excise duty for parts. accounting.000. ingredients and packaging materials.) is considered exportation for the purpose of qualifying for drawback.1.(c) Firms manufacturing finished products for export are eligible for full exemption from customs duty on imported raw materials. 65 . In 1997. (b) the current income tax exemption of 50 per cent on gross income of foreign workers in a managerial capacity serving in offshore companies was extended from assessment year 1998 to assessment year 2000 (the exemption took effect from assessment year 1997). IOFC offers attractive incentives. The Centre is under the regulation of the Labuan Offshore Financial Services Authority. provided that the materials are not available locally at an acceptable quality and price. 21 insurers and 1 reinsurer in Labuan. 1999. eiu. IV. Source: The Economist Intelligence Unit. In February 1998.

roofing tiles. Source: The Economist Intelligence Unit. are calculated on the basis of a threshold price. fish.2. In addition to import duties. a sales tax of 10 per cent is levied on most imported goods. Export licences are necessary for 38 product groups. dairy products. with the trade-weighted average tariff being 8. metal waste.state. raw materials used directly in the manufacture of goods for export are exempted from import duties if such materials are not produced locally or if the local materials are not of acceptable quality and price. textiles. Import duties range from nil to 300 per cent. Malaysia. applies to the very large Malaysian imports of semiconductor components for the fabrication of completed semiconductors for export.com/composite. and star fruit. the sales tax is not applied to raw materials and machinery used in the production of exports. Another 12 products may be exported only after meeting specific criteria for the protection of wildlife. Export duties on principal commodities. including animals and animal products. pepper. palm oil and tin. Portland cement. This provision. Quantitative import restrictions are seldom imposed except on a limited range of products for the protection of local industries or for reasons of security. Country Commercial Guides Fiscal Year 1998: Malaysia. Malaysia also has a system of export licensing to ensure compliance with bilateral export restraint agreements. As with import duties. which operates a system of import licensing. <http://www. Malaysia introduced a “cess” in 1990 to assist in the management of logged-over forests. cinematographic films. Funds raised from the Forest Development Cess were used to implement a programme designed to achieve the International Tropical Timber Organization guidelines that all timber must come from sustainably managed forests by the year 2000. some chemicals.1 per cent in 1997. veneer chips.Box IV. however. iron and steel. waste paper. rubber. <http://db. including petroleum. eiu. protect the environment and maintain an adequate supply of certain goods in the domestic market. has added heavy construction equipment and certain electrical household goods to the number of goods requiring permits. palm-oil products. The export levies for timber-based products were revised and removed entirely for some species to encourage and spur exports in the light of the economic downturn in 1997. pineapples. Export duties on petroleum products and oil obtained from bituminous minerals and crude were cut to 20 per cent from 25 per cent in the 1997 budget. Exemption from duties is also available for machinery and equipment used directly in the manufacturing process or such items not available locally. vegetables. The Government imposed taxes on selected species of sawn timber to ensure an adequate supply of timber for timber-based industries. tin ingot. bricks. as is the export of logs or rattan from peninsular Malaysia. cocoa. rubber.asp?topicid=MM>. rice. for example. cement clinker. United States Department of State. plywood.html>. However. military clothing and equipment. timber. Export taxes are imposed to raise revenue. and no duty is charged if the price falls below the given threshold. sugar. health and antiquities.gov/www/aboutstate/business/com-guides/1999/eastasia/malaysia99. 66 66 66 666666 . 1999. The export of coral (except for coral that has been processed and is being used as jewellery) and turtle eggs is prohibited. Country Profile: Malaysia. Malaysia maintains a number of trade restrictions for exports as well as imports. timber. Trade restrictions Although this chapter discusses policies to diversify and promote exports. minerals and ores.

primarily along the west coast of peninsular Malaysia. Goods exported from Malaysia to a free zone are eligible for duty drawbacks. cargo consolidation and integration before distribution to the final consumers. Companies which export at least 80 per cent of their output and depend on imported goods. and (d) goods handled through Malaysian ports and airports. they are subject to normal customs duties as though imported from a foreign source. Free zones Currently. components. Raw materials. The incentives allow IPCs to (a) open one or more foreign-currency accounts with any licensed commercial bank to retain export proceeds without any limit. with minimum paid-up capital of M$ 500. which offer centralized procurement of manufacturing services and the purchase of raw materials. International procurement centres The 1997 budget also sought the establishment of international procurement centres (IPCs). components or finished products without payment of custom duties into free zones or licensed manufacturing warehouses for repackaging. The Ministry of Trade and Industry processes and approves all applications for IPC status. which give companies greater freedom of location while enabling them to enjoy privileges similar to those operating in a free zone.000. However. for which the following criteria apply: (a) local incorporation under the Companies Act 1965. If goods from a zone are sent out of the zone for domestic consumption. (b) minimum total business spending of M$ 1.2. (b) enter into foreign-exchange contracts with any licensed commercial bank to sell forward export proceeds based on projected sales. Malaysia permits the establishment of licensed manufacturing warehouses. and (d) bring raw materials. components and finished products. raw materials and components may be located in these free zones. in which export-oriented manufacturing and warehousing facilities may be established. (c) minimum annual business turnover of M$ 100 million. (c) be exempt from the requirements of the Ministry of Domestic Trade and Consumer Affairs Guidelines on foreign-equity ownership and retail trade. 67 . In addition to the free zones. machinery and equipment used directly for export production in a zone are eligible for exemption from import and excise duties and from sales and service taxes. 3. there are 14 free zones. firms may apply to the Ministry of Finance to such sales exempted have from import duties.5 million per year. Firms seeking to set up operations in a zone are required to apply to the appropriate state’s economic development corporation.

The rate for the Export Credit Refinancing Scheme was lowered to 7 per cent from 8. Input suppliers have access to this facility through the issuance of domestic letters of credit or domestic purchase orders issued by the exporter in favour of its suppliers. official schemes are available for the refinancing. Country Profile: Malaysia. a confirming-bank policy. enables exporters to obtain short-term financing for up to six months for the post-shipment facility and four months for the pre-shipment facility. Export insurance and credit In Malaysia.01-3. 68 68 68 686868 . All locally incorporated banks may apply for cover under the MECIB export-finance-insurance policy and bond-indemnity-support facility. once maintained by Bank Negara Malaysia and transferred to the Exim Bank effective January 1998.3 per cent in December 1998 to reflect the lower interest rate trend in the local money market. that is those on the east coast. particularly on banker’s acceptances. Although local content of 65 per cent is normally required. provides commercial banks with coverage of losses against loans to exporters and suppliers.eiu. Free port In an effort to divert shipping to Malaysian ports. MECIB covers 90 per cent of commercial risks and 95 per cent of political risks for exporters at premiums of 0. with an underwriting capacity of up to M$ 125 million. Facilities offered by MECIB include a comprehensive short-term policy. MECIB issues comprehensive short-term policies for up to 180 days and only on a repetitive basis.5 per cent. <http://db. Port Klang has been designated a “free port.asp?topicid=MM>. Other Malaysian ports. In 1998 policies with maturities of 90 days accounted for nearly 75 per cent of all policies outstanding. depending on the company’s stability.com/ composite. a banker’s export-finance-insurance policy. Refinancing facilities are granted for up to 100 per cent of export value (post-shipment) and 80 per cent of export order value or the eligible amount 24 The Economist Intelligence Unit. insuring and guaranteeing of export credits.” The free port status is aimed at promoting the trans-shipment trade. the goods’ destination and the terms of payment. 1999. this criterion may be waived. and diverting and redistributing shipping traffic from neighbouring ports to Port Klang. All locally incorporated firms that export goods wholly or partly produced or manufactured in Malaysia are entitled to MECIB insurance facilities. a bond-indemnity-support facility and a buyer-credit-guarantee facility.4.24 Malaysia Export Credit Insurance Berhad (MECIB). An export-credit-refinancing facility. are also to be given so-called free port status. C.

Measures introduced on 2 September 1998 applied to short-term portfolio investments. certain goods – crude rubber. dividends. Malaysia’s Exim Bank was incorporated on 29 August 1995 with initial paid-up capital of M$ 150 million. Individual payments abroad of less than M$ 100. This measure also encourages residents to repatriate foreign-exchange earnings to offset the services account deficit in the balance of payments. and are aimed at containing currency speculation and minimizing the impact of short-term capital inflows on the domestic economy. Buyer credits amounting to M$ 1. foreign investors in manufacturing are still given the flexibility to maintain foreign-currency accounts to conduct their normal operations. Exim Bank approved loans and guarantees of M$ 2. The minimum amount of financing is M$ 10. when 40 per cent of the total had been disbursed. Eligible goods must have local content of at least 30 per cent of the raw materials used and a minimum of 20 per cent by value. The financing is granted through commercial banks. which was raised to M$ 300 million at the end of 1998. primarily to retain export proceeds in foreign currencies (to reduce foreign-exchange risks and avoid conversion costs).160 million between its inception and the end of August 1998. Exporters and residents may open foreign-currency accounts with Tier-1 banks in Malaysia and at overseas branches of Malaysian-owned banks. In Malaysia.000 (or its equivalent in foreign currency) may be made by any entity without Bank Negara approval or government paperwork. These measures do not affect operations of long-term investors in manufacturing and related support and service sectors. The limit on exporters’ overnight balances ranges from a US$ 1 million to US$ 5 million 69 . Commercial banks are authorized to approve remittances in any amount. D. rental and commissions is freely permitted. for example – are exempt from the local-content requirement. vegetable oil products. Repatriation of capital. profits.030 million formed the bulk of the approved funds. cocoa products. Trade-related payment and exchange controls Until 1998. Payment must be received within six months of the date of export. followed by overseas-investment credits (M$ 390 million). Malaysia maintained a fairly liberal system of exchange controls.determined by Bank Negara Malaysia (pre-shipment facility).000 for both facilities. which applied to transactions with most trading partners. interest. supplier credits (M$ 387 million) and guarantees (M$ 298 million). The maximum limits for pre-shipment and for post-shipment refinancing are M$ 30 million per exporter. food products and textiles. export proceeds may be received in most foreign currencies or in Malaysian currency (ringgits) from an external account.

however. allow non-resident-controlled companies to borrow M$ 10 million (not including short-term trade financing) from domestic sources without prior central bank approval. including trust receipts. indicating Malaysia’s strongest banks. export-credit programmes. Import payments to a non-resident are freely permitted subject only to the completion of a statistical form for remittances of over M$ 100. depending on the amount of the export receipts.000 exclusive of the special concession in relation to the export earnings mentioned above. or placing deposits with. These limits were still in effect in May 1999. Banks are authorized to approve such payments regardless of the amount. Trade agreements As a member of the Asia-Pacific Economic Cooperation group and ASEAN. but companies are limited to overnight balances of US$ 500.equivalent in foreign currency.) Individuals who are not net borrowers in their domestic accounts may hold unlimited amounts in foreign-exchange accounts overnight. guarantees and foreign-exchange lines. As long as commercial banks comply with the risk-weighted ratio set by Bank Negara. E. banker’s acceptances. whenever such transactions are financed by a credit facility in Malaysia. Malaysia is committed to reduce trade restrictions and increase economic openness. non-residents. however. In addition. they may trade in foreign exchange. The banks must refer to the controller for approval only on payments made for investing in securities of immovable property abroad and for extending credit to. they must source 60 per cent of their loans (including trade credits) from financial institutions that are incorporated in Malaysia and controlled by Malaysians. which is 70 70 70 707070 . With the introduction of measures in 1998. is not subject to any limitation. The regulations on domestic borrowing by foreign firms. (These funds may be used for currency options and other derivatives to hedge trade-related currency risk. Malaysia is a member of the ASEAN Free Trade Area.000. more than 300 money changers are licensed under the Exchange Control Act of 1953 to buy and sell foreign currency. which are allowed to offer a wider array of services. as set out in the exchange-control liberalization measures of December 1994 and the steps to liberalize capital markets of June 1995. the ringgit has been pegged at M$ 3. Bank Negara also imposed a US$ 2-million limit on ringgit sales at the height of the 1997 currency turmoil to reduce the effectiveness of speculators.80 to US$ 1. The supply of foreign exchange. merchant banks may do so only if they have attained Tier-1 status. Finance companies are not allowed to trade in foreign exchange. Non-residentcontrolled companies may access any amount of short-term (fewer than 12 months) trade finance facilities.

Malaysia has invested heavily in the development of its infrastructure. Furthermore. The agreements protect against expropriation.aimed at reducing trade barriers between the member countries over a 15-year period. To encourage trade with non-traditional markets such as South America. bottlenecks persist in the supply of labour. Concluding remarks During the past few years. Existing constraints to the entry and expansion of foreign financial institutions limit the offering of the most efficient financial services that along with telecommunications are likely to form the foundation of a knowledge-based. China and Viet Nam. capital-intensive economy. By adopting those policies in industry. 71 . Through horizontal and vertical diversification. Malaysia has signed investment-guarantee agreements with members of ASEAN and its major trading partners. The policies initiated in the Eight Malaysian Plan illustrate how the Malaysian Government has stimulated and promoted a diverse and resilient export base. the Multifibre Arrangement and the Information Technology Agreement. F. the central bank has designed a model bilateral agreement that guarantees payment. While the transport and communications infrastructure is well developed. provide for prompt and adequate compensation in cases of nationalization and ensure the freedom to transfer profits. which includes a variety of products. Malaysia has also ratified the provisions of the Convention on the Settlement of Investment Disputes between States and Nationals of other States established by the World Bank for investment disputes that cannot be settled through local administrative and judicial facilities. capital and other payments. and bureaucratic obstacles sometimes make it difficult for expatriate employees to obtain work visas. G. Malaysia has not only built a more value-added electrical and electronic sector that provides the bulk of its exports. capital-intensive information industries. Malaysia is trying to build a diverse export base. To date. Malaysia has been diversifying its industry and agriculture. shortfalls in training and technology are apparent. Malaysia has signed bilateral payment arrangements with 26 countries and bilateral trade agreements with about 54 countries based on the most-favoured-nation principles of the World Trade Organization. Malaysia has also agreed to tariff reductions under the terms of the Uruguay Round of the General Agreement on Tariffs and Trade. Infrastructure In order to transform its economy from labour-intensive assembly operations to knowledge-based. the slowdown in economic growth and depreciation of the ringgit as a result of the 1997 regional financial crisis may eventually affect key infrastructure projects.

Agricultural services. At the same time. In this case. should also be provided. training services and the provision of credit facilities and basic infrastructure. 5. the Malaysian Government has built within the same sector of industry diverse production with different levels of processing. 6. 4. such as R and D. agricultural production can achieve horizontal diversification by building up the processing ladder. by encouraging research and development (R and D) and providing other incentives.but it also has developed other resource-based industries that can reduce the risk of over-reliance on a certain sector. Banks and other financial authorities should also offer services to diversify and strengthen the agricultural sector. 2. The Government should play a leading role in directing investment into various sectors of industry. the Government may consider in situ land development strategies to better use land resources and to organize diversified plantations. The following are some policy suggestions for the three LDCs: 1. These approaches and initiatives are definitely worth paying attention to if a certain LDC wants to learn some lessons from the Malaysian experience in diversifying its exports. the Government can ensure that investment goes for more than just one specific sector so that a diverse industrial base can be built. The same can be said of its agricultural development. The banking system can also help to diversify industry by its loan patterns. In terms of horizontal diversification of agricultural production. 3. In so doing. 7. The Government should provide an environment conducive to attracting new investment in the country. The Government should put efforts into R and D activities to upgrade the level of industry. Fiscal and financial incentives should be provided to stimulate R and D and technological innovation activities. 72 72 72 727272 .

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