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 Chapter 1

Overview of Malaysian
Economy
Rajah Rasiah

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 Learning Objectives

❑ Brief economic history of Malaysia

❑ The structure of the Malaysian economy
❑ The prime drivers of economic growth in Malaysia
❑ Inflation and unemployment trends in Malaysia
❑ Government economic planning in Malaysia

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 1.0 Introduction

❑ A brief economic history of Malaysia

❑ The evolution of the Malaysian economic structure
since the 1960s
❑ The importance of ethnic instruments in government
economic development programmes
❑ The main government economic plans targeted at
engendering growth and structural change
❑ Malaysia’s record and the rationale over changes in
the macroeconomic variables of GDP and GDP per
capita growth rates, unemployment and inflation
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 1.0 Introduction (cont.)

❑ The significance of export- and import-substitution

policies used to promote industrialization in Malaysia
❑ Government initiatives to transform Malaysia from a
middle-income to a high-income country by 2020

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 1.1 Past Works

❑ The development of the primary sectors of mining and

plantation agriculture
❑ Ownership and control
❑ The impact of protection on economic performance
❑ Ethnicity, class and equity
❑ Foreign direct investment
❑ Industrialization
❑ Labour and labour markets
❑ Technology development
❑ Small and medium enterprises
❑ Governance structures

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 1.2 Rationale

❑ The need to capture latest developments and hence

an update
❑ Malaysia remains an important test-bed for
economic theory
❑ The need to provide a balanced and comprehensive
coverage of the Malaysian economy

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 1.3 Growth and Structural
Change
❑ GDP and GDP per capita growth
❑ Changes in the structure of GDP by economic
activities
❑ Changes in the structure of GDP by expenditure
❑ Inflation and unemployment

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 Figure 1.1 GDP and GDP per capita growth rates in Malaysia, 1961–2009 (%)

Note: Growth rates computed using 2000 purchaser prices in US$.

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 Table 1.1 Structure of Malaysian GDP by economic activity, 1965–2009 (%)

1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

Agriculture 31.5 29.0 27.7 22.9 20.8 15.2 12.9 8.6 8.4 9.5

Mining 9.0 13.7 4.6 10.1 10.5 11.8 6.2 10.6 14.4 12.9
Manufacturing 10.4 13.9 16.4 19.6 19.7 24.2 26.4 30.9 29.6 26.6
Construction 4.1 3.5 3.8 4.6 4.8 3.9 6.2 3.9 3.0 3.3

Electricity, gas
and water 1.1 1.1 2.0 1.4 1.8 2.2 2.6 3.0 2.7 2.6

Services 43.9 38.8 45.5 41.4 42.4 44.3 47.8 46.2 44.0 48.3

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 Table 1.2 Structure of GDP by demand aggregates, 1965–2009 (%)

1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

Consumption 77.1 78.3 76.2 67.1 67.3 65.6 60.3 53.9 57.2 64.0
Government
consumption 17.0 18.3 17.6 16.5 15.3 13.8 12.4 10.2 12.4 14.1
Private
consumption 60.2 60.0 58.6 50.6 52.0 51.8 47.9 43.8 44.8 49.9

Savings 20.1 20.0 26.3 22.8 30.5 33.9 35.9 35.0 31.3
Gross fixed
capital 17.8 20.2 22.8 27.4 24.8 32.4 43.6 26.9 20.0 23.9
formation
Exports 41.8 41.4 43.0 56.7 54.1 74.5 94.1 119.8 117.5 123.1

Imports 37.6 37.3 42.5 54.3 49.1 72.4 98.0 100.6 94.6 106.3

Note: All figures over 1965–1980 are for Peninsular Malaysia only.

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 Figure 1.2 Inflation and unemployment in Malaysia, 1961–2010 (%)

Note: Figures from 1961 until 1984 refer to Peninsular Malaysia. Figures for 2010 are for the period until
October end 2010.

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 1.4 Main Arguments

❑ Economic growth and structural change in the

country evolved from a backdrop of colonial
relations.
❑ Ethnic political economy has dominated government
policy formulation in the country with important
ramifications for corporate control and affirmative
action.
❑ While the primary sectors of agriculture and mining
initiated early economic growth, manufacturing
became the prime driver since the 1980s.

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 1.4 Main Arguments (cont.)

❑ Successful economic catch up has entailed the

pursuit of innovation and hence it is pertinent any
assessment of technological catch up by Malaysian
firms require a profound understanding of
innovation policies and corporate structures.
❑ Increasing integration into the global economy has
exposed the country to the benefits of scale and
scope economies, but also to volatile fluctuations in
prices and financial crisis.

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 1.5 Subsequent Chapters

❑ Macroeconomic Policies
❑ From Tin to Petroleum
❑ Development of Agriculture
❑ Industrial Policy and Industrialization
❑ Innovation and Technological Progress
❑ Education and Human Capital Formation
❑ Trade and Environment
❑ Poverty and Income Distribution
❑ Affirmative Action and Ethnic Inequality
❑ Privatization of Infrastructure Services in Malaysia
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