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Malaysia

Global Business Project

GLOBAL BUSINESS PROJECT


FINAL REPORT

By: Anjali Raj Anirudh Chaudhari Swathi Rao


Country: M alaysia Faculty Guide: Prof.Shylajan IBS Hyderabad

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W e confirm hat this is our own report and is the final version have acknowledged each use of w t . We ords or ideas of another person whether writtenor oral .

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AUTHORIZATION

W e, AnjaliRaj, AnirudhChaudhari,and SwathiRao hereby declare that the project titled, Analysisof the Malaysian Economy an original and genuine work and carried out under the guidance of Prof. C. is th S. Shylajan (Faculty Guide) from August to November, 2011 in fulfillment of Global Business 24 Project subject. W e declare that the report submitted by us is a bona-fide work of our own. However, any discrepancies, if any found in the project will be completely our responsibility.

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Anjali Raj Enrollment No: 10BSUHH010006

Anirudh Chaudhari Enrollment No : 10BSUHH010005

__________________________ Swathi Rao Enrollment No: 10BSUHH01000

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ACKNOW LEDGEM ENT

No task is a single mans effort as there are various factors, situations and people combine together to form the background for the accomplishment of any task. The project report bears the imprint of some very important people, from the institution IBS Hyderabad who are directly or indirectly related in shaping up this project. W e are highly grateful and sincerely acknowledge valuable contribution imparted by these eminent people towards the completion of this project. Most importantly, we deeply want to express our profound gratitude and thankfulness to Prof. C S Shylajan for having faith in our endeavors and abilities. Knowledge gained from him will always inspire and encourage us to scale new heights in the future. At the last but not the least we would like to thank our coordinator Mrs.Sashikala Banoor who has helped us to prepare this report.

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CONTENTS

1. Executive Summary 2. Introduction to Malaysia 3. Growth of the country a. Real GDP b. Nominal GDP c. Per Capita Income Rea l d. Per Capita Income Nomina l e. PPP valuation of Malaysia f. PPP Per Capita Income 4. Role of sectors in growth 5. Asian financial crisis and recovery a. Prior to the crisis b. Crisis c. Effect of the crisis d. Policies taken 6. Inflation 7. Unemployment a. Time Series Data b. Causes c. Policies 8. Poverty a. Indicators b. Trends c. Reduction in Poverty d. Millennium Development Goals 9. FDI a. FDI b. FDI and Economic Growth c. FDI during Crisis d. Policies 10. Balance of Payment 11. Tables 12. References

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List of Tables
1. GDP 2. Per Capita Income 3. PPP 4. Unemployment 5. Inflation 6. Poverty 7. FDI

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List of Graphs
1. GDP at Constant Prices 2. GDP at Current Prices 3. Per capita incom e constant 4. Per capita incom e current 5. PPP valuation of the country 6. PPP per capita GDP 7. Inflation 8. Unem ploym ent 9. Phillips Curve 10.FDI

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11. Executive Summary


In the past two decades, Malaysia has witnessed an outstanding economic and social development to a level not matched by many other countries in Asia. GDP per capita is one of highest in South-east Asia at $US 3.853 in 2000, with a current level of poverty of only 8%, and with healthcare of a high relatively standard. Economic and trade relations between the EU and Malaysia are of increasing importance. The European Union figures among Malaysias four most important trade partners, together withSingapore and the US, Japan. The Union is Malaysias third most important export market the US and Singapore) and the fourth (after most important source of Malaysian imports (after the US, Singapore and Japan). The EU is the second most important foreign investor in Malaysia, after theMalaysia has experienced a long period of US. political and economic stability. However, the present economic slowdown has brought to global evidence challenges for Malaysias further development, as the need to accelerate deregulation and such corporate restructuring, to reform the financial system,to eliminate weaknesses in the market, and labor and sectoral over-capacity and over-investment. Malaysias trade surplus is a sign of economic but vigor, further effort is needed to stimulate domestic demand and broaden the components of growth. Disparities exist between Kuala Lumpur, other industrializedand tourism-oriented regions on one side, and the more remote parts of the country, in particular Sabah and Sarawak, on the other. In ethnic and religious terms, Malaysia is a microcosm of several religions (i.e. Islam, Christianity, and Hinduism Buddhism) and various ethnic groups. Two decades of export-led growth and intensive foreign investment are challenged to translate into a skill-based economy, able to compete with Asia. Northeast The Malaysian economy staged a strong recovery over the course of 2010, but the momentum of growth had progressively weakened over the year. The strong rebound was driven mainly by the domesticprivate sector, with some support from commodity exports towards year-end. Electronics underperformed , however, raising concerns about underlying competitiveness. Private consumption remainedfirm, despite flat sequential growth, amid favorable labor and credit market conditions.with domestic demand, line In growth in the services sector was sustained. Industrial production pickedbetter performance in on up domestic-oriented industries, with capacity utilization at normal levels again. Malaysias positive growth performance was accompanied by a build-up in inflationary pressure and a surge in foreign capital inflows. W hile still benign, inflation rose on higher food and fuel prices amidst sharp increases in global commodity prices. Meanwhile, the continued inflow of foreign capital saw the recovery of foreign direct investment from its steep decline in 2009. Estimates suggest FDI continues to underperform, however, and Malaysia could tap into a large unrealized potential.

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Introduction
Malaysia is a federal constitutional monarchy in Southeast Asia. It consists of thirteen states and three federal territories and has a total landmass of 329,847 square kilometers(127,350 sq mi) separated by the South China Sea into two regions, Peninsular Malaysia and Malaysian Borneo. Land borders are shared with Thailand, Indonesia, and Brunei, and maritime borders exist with Singapore, Vietnam, and the Philippines. The capital city is Kuala Lumpur, while Putrajaya is the seat of the federal government. In 2010 the population exceeded 27.5 million. Malaysia has its origins in the Malay Kingdoms present in the area which, from the 18th century, became subject to the British Empire. The first British territories were known as the Straits Settlements, with the other states forming protectorates. The states on Peninsular Malaysia, then known as Malaya, were first unified as the Malayan Union in 1946. Malaya was restructured as the Federation of Malaya in 1948, and achieved independence on 31 August 1957. Malaya united with Sabah, Sarawak, and Singapore on 16 September 1963, with si being added to give the new country the name Malaysia. However, less than two years later in 1965, Singapore was expelled from the federation. Since independence, Malaysia has had one of the best economic records in Asia, with GDP growing an average 6.5% for almost 50 years. The economy has traditionally been fuelled by its natural resources, but is expanding in the sectors of science, tourism, commerce and medical tourism. The head of state is the Yang di-Pertuan Agong, an elected monarch chosen from the hereditary rulers of the nine Malay states every five years. The head of government is the Prime Minister. The government system is closely modeled on the Westminster parliamentary system and the legal system is based on English Common Law. The country is multi-ethnic and multi-cultural, factors that influence its culture and play a large role in politics. Islam is the state religion, although freedom of religion is protected by a secular constitution. Malaysia contains the southernmost point of continental Eurasia, Tanjung Piai, and is located near the equator and has a tropical climate. It has a biodiversityrange of flora and fauna, and is considered a mega diverse country. It is a founding member of the Association of Southeast Asian Nations and the Organization of Islamic Cooperation, and a member of Asia-Pacific Economic Cooperation, the Commonwealth of Nations, and the Non-Aligned Movement. Malaysia is a federal constitutional elective monarchy. The system of government is closelyon modeled that of the Westminster parliamentary system, a legacy of British colonial rule. The head of state is the Yang di-Pertuan Agong, commonly referred to as the king. The Yang di-Pertuan Agong is elected to a five-year term by and from among the nine hereditary rulers of the Malay states; the other four states, which have titular Governors, do not participate in the selection. By informal agreement the position is systematically rotated among the nine, and has been held by Mizan Zainal Abidin of Terengganu since 2007. The Yang di-Pertuan Agong's role has been mostly ceremonial since changes to the constitution in 1994. Legislative power is divided between federal and state legislatures. The bicameral federal parliament consists of the lower house, the House of Representatives and the upper house, the Senate. The 222member House of Representatives is elected for a maximum term of five years from single-member constituencies, which are determined based on population. All 70 senators sit for three-year terms; 26 are elected by the 13 state assemblies, and the remaining 44 are appointed by the Yang di-Pertuan Agong upon the Prime Minister's recommendation. The parliament follows a multi-party system and the

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government is elected through a first-past-the-post system. Since independence Malaysia has been governed by a multi-party coalition known as the Barisan Nasional. Each state has a unicameral State Legislative Assembly whose members are elected from single-member constituencies. State governments are led by Chief Ministers, who state assembly members from the are majority party in the assembly. In each of the states with a hereditary ruler, the Chief Minister is required to be Malay, appointed by the ruler upon the recommendation of the Prime Minister. Parliamentary elections are held at least once every five years, the most recent of which took place in March 2008. Registered voters of age 21 and above may vote for the members of the House of Representatives and, in most of the states, for the state legislative chamber. Voting is not mandatory. Except elections in for Sarawak, all state elections are held concurrently with the federal election. Executive power is vested in the Cabinet, led by the Prime Minister. The prime minister must be a member of theHouse of Representatives the opinion of the Yang di-Pertuan Agong, commands a , in majority in parliament. The cabinet is chosen from members of both houses of Parliament. The Prime Minister is both the head of cabinet and the head of government. The incumbent, Najib Razak, appointed in 2009, and is the sixth prime minister since independence. Malaysia's legal system is based on English Common Althoughthe judiciary is theoretically Law. independent, supporters of the government hold many judicial positions. The highest court in the judicial system is the Federal Court, followed by the Court of Appeal and two high courts, one for Peninsular Malaysia and one for East Malaysia. Malaysia also has a special court to hear cases by or against ught bro Royalty. Separate from the civil courts are the Syariah Courts, which decide on casesinvolve h whic Malaysian Muslims and run parallelto the normal court system. Internal Security Act allows The detention without trial, and the death penalty is in use for crim as drug trafficking. es such Malaysia is a relatively open state-oriented and newly industrializedmarketeconomy. Thestate plays a significant but declining role in guiding economic activity through macroeconomic plans. Malaysia has had one of the best economic records in Asia, with GDP growing an average 6.5 annually from per cent 1957 to 2005. 2010 the GDP per capita (PPP) was $414.4003rd largest economy in ASEAN and In the 29th la rgest economy in the world. In the 1970s, the predominantly mining and agricultural-based Malaysian economy began a transition towards a more multi-sector economy. Since the 1980s the industrialhas led Malaysia's growth. sector High levels of investment playedsignificant role in a this. TheMalaysian economy recovered from the 1997 Asian Financial Crisis sooner than neighboringcountries, and has since recovered to the levels of the pre-crisis era wi a GDP per capita of $14,800. th Inequalities exist between different ethnic groups, with a major issue being that the Chinese minority accounts for 70 per cent of the country's market capitalizationeven though it only make about one-third of it. , s up International trade, facilitated by the adjacent Strait of Malacca shipping route, and manufacturing are key se ctors of the country's economy. Malaysia is an exporter of natural and agricultural resources, the most valuable export resource being petroleum. one time, it was e largest producer of tin, ed At th rubber and palm oil in the world. Manufacturing has a large influenc country's economy, e in the although Malaysias economic structures ha been moving away from it. Oil palm plantations make Malaysia one of the largest producer s of palm oil in the world. In an effort to diversify the economy and make Malaysias economy less dependent on exported goods, the government has pushed to increase tourism in Malaysia. As a result, tourism has become Malaysias third largest source of income from foreign exchange, although it is threatened by the negative effects of the growing industrial economy, with large amounts of air and water pollution along with defore station

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affecting tourism. country has developed into a centre of Islamic banking, and is the country with the The highest numbers of female workers in that industry. Knowledge-based services are a expanding. lso Science policies in Malaysia are regulated by the Ministry of Science, Technology, and Innovation. The country is one of the world's largest exporters of semiconductor devices, electrical goods, and information and communication technol products. ogy Malaysia began developing its own its own spa ce programme in 2002, in 2006 Russia agreed to transport one Malaysian to the International Space and Station as part of a multi-billion dollar purchase of 18 Russian Sukhoi Su-30MKM fighter jets by the Royal Malaysian Air Force. an effort to create a self-reliant defensive ability and support national In development, Malaysia privatizedsome of its military facilities in the 1970s. This has created a defence industry, which in 1999 was brought under the Malaysia Defence Industry Council. The government continues to try and promote this sector and its competitiveness, actively mark defence industry. eting the As of the 2010 census, the populationMalaysia was 28,334,135, of making it the 43rd most populated country. The population of Malaysia consists of many ethnic groups. Malays make up 50.4 per cent of the population, while other bumiputra make up another 11 per cent. According to constitutional definition, Malays are Muslims who practice Malay customs and culture. They play a dominant role politically. Bumiputra status is also accorded to certain non-Malay indigenous peoples, including ethnic Thais, Khmers, Chams and the natives of Sabah and Sarawak. Non-Malay bumiputra make up more than half of Sarawak's population and over two t of Sabah's population. hirds There also exist aboriginal groups in much smaller numbers on the peninsula, where they are collectively as Orang Asli. known Laws over who gets bumiputra status vary between states. Other minorities who lack bumiputra status make up a large amount of the population. 23.7 per cent of the populationis of Chinese descent, while those of Indian descent comprise 7.1 per cent of the population.The Chinese have historically been dominant in the business and commerce community, and form the majority of the population of Penang. Indians began migrating to Malaysia in th e early 19th century.The majority of thendian community is I Tamils. Malaysian citizenship is not automatically granted to those born in Malaysia, but is granted to a child born of two Malaysian parents outside Malaysia. Dual citizenship permitted. Citizenship the is not in states of Sabah and Sarawak in Malaysian Borneo are distinct from citizenship in Peninsular Malaysia for immigration purposes. Every citizen is issued a biometric smart chip identity card known as MyKad at the age of 12, and must c the card at all times. arry The education system features a non-compulsory kindergarten education followed by six years of compulsory primary education, five years of op and tional secondary education. Schools in the primary education system are divided into two categories: national primary schools, which teach in Malay, and vernacular schools, which teach in Chinese or Tamil. Secondary education is conducted for five years. In the final year of secondary education, students sit for the Malaysian Certificate of Education examination. Since the introduction of the matriculation programme in 1999, students who completed the 12-month programme in matriculation colleges can enroll in local universities. However, in the matriculation system, only 10 per cent of places are to non-bumiputra students. open The infant mortality rate in 2009 was 6 deaths per 1000 births, and life expectancy in 2009 was irth at b 75 years. With the aim of developing Malaysia into a medical tourism destination, 5 per cent of the government social sector development budge spent on health care. t is The population distribution between the two halves of the country is highly uneven. It is concentraPeninsular Malaysia ted on where 20 million of approximately million Malaysians live. per centof the population is urban. Kuala 28 70 Lumpur is the capital the largest city in Malaysia, well as its main commer and financial and as cial centre. Putrajaya is the seat of government, many executive and judicial branches of the federal as government were moved there to ease growing estion within Kuala Lumpur. cong

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Due to the rise in labor intensive industries, country is estimated to have over 3 million migrant the workers; about 10 er cent of the population. p Sabah-based NGOs estimate that out of the 3 million that make up the population of Sabah, 2 milli illegal immigrants. on are Malaysia hosts a population of refugees and asylum seekers numbering approximately 171,500. Of this population, approximately 79,000 are from Burma, 72,400 from the Philippines, and 17,700 from Indonesia. Malaysian officials are reported to have turned deportees directly over to human smugglers in 2007, and Malaysia employs RELA, a volunteer militia with a history of controversies, to its immigration law. enforce Kampung Laut Mosque in Kota Bharu is one of the oldest mosques in Malaysia, dating to early 18th century. The Malaysian constitution guarantees freedom of religion while making the state religion. Islam According to the Population and Housing Census 2010 figures, ethnicity and religious beliefs correlate highly. Approximately 61.3% of the population ispracticing Islam. 19.8% Buddhism; 9.2% Christianity; 6.3% Hinduism; and 1.3% practice Confucianism, Taoism and other tra Chinese religions. ditional 0.7% declared no religion and the remaining 1.4% practicedother religions or did provide any information. not All ethnic Malays are considered Muslim law of the Constitution. y b Statistics from the 2010 Census indicate that 83.6% of the Chinese population identify as Buddhist, with significant numbers of adherents following Taoism (3.4%) and Christianity (11.1%), along with small Hui-Muslim populations in areas like Penang. Themajority of the Indian population follow Hinduism (86.2%), with a significant minority identifying as Christians (6.0%), Muslims (4.1%). Christianity is the predominant religion of the nonMalay bumiputra community (46.5%) with an additional 40 .4% identifying as Muslims. Muslims are obliged to follow the decisions of Syariah courts in matters concerning their religion. The Islamic judges are expected to follow Sharis legal school of Islam, which is the madh'hab of the main Malaysia. Thejurisdiction of Shariah courts is limited only to Muslims in matters such as marriage, inheritance, divorce, apostasy, religious conversion, and custody among others. No other criminal or civil offences are under the jurisdiction of the Shariah courts, which have a similar hierarchy to the Civil Courts. Despite being the supreme courts of the land, the Civil Courts (including the Federal Court) do not hear matters re lated to Islamic practices. The official language of Malaysia is Bahasa Malaysia, standardised orm of the Malay language. a f Historically English was the de facto administrative language, with Malay becoming predominant after the 1969 raceriots. English remains an active second language, and serves as the medium of instruction for maths and sciences iall public schools. n Malaysian English, also known as Malaysian Standard English (MySE), is a form of English derived from British English. Malaysian English sees wide use in business, along with Manglish, which is a colloquial form of English with heavy Malay, Chinese, and Tamil influences. The government discourages the misuse of Malay and has instituted fines for public signs thatmix Malay and English. Many other languages are used in Malaysia, which contains speaker living languages. s of 137 Peninsular Malaysia contains speakers 41 of these languages. native tribes of East Malaysia have their own of The languages which are related to, but easily distinguishable from, Malay. The Iban is the main tribal language in Sarawak while Dusunic languages are spokethe natives in Sabah. n by Chinese Malaysians predominately speak Chinese dialects from the southern provinces of China. The more common dialects in the country are Cantonese, Mandarin, Hokkien, Hakka, Hainanese, and Fuzhou. Tamil is used predominantly by Tamils, who form a majority of Malaysian Indians. Other south Asian languages are also widely spoken Malaysia, as well as Thai small number of Malaysians have Caucasian ancestry in A and speakCreole languages, such as the Portuguebased Malaccan Creoles, the Spanis based se and h Chavacano language.

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Economic Growth
Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. Malaysia is a rapidly developing economy in Asia. Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy. The Government of Malaysia is continuing efforts to boost domestic demand to wean the economy off of its dependence on exports. Nevertheless, exports - particularly of electronics - remain a significant driver of the economy. Since it became independent in 1957, Malaysia's economic record has been one of Asia's best. Real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005. Performance peaked in the early 1980s through the mid-1990s, as the economy experienced sustained rapid growth averaging almost 8% annually. High levels of foreign and domestic private investment played a significant role as the economy diversified and modernized. Once heavily dependent on primary products such as rubber and tin, Malaysia today is a middle-income country with a multi-sector economy based on services and manufacturing. Malaysia is one of the world's largest exporters of semiconductor devices, electrical goods, solar panels, and information and communication technology (ICT) products. Malaysia struggled economically during the 1997-1998 Asian financial crisis and applied several valuable lessons to its economic management strategies that contributed to the economys resilience to the 2008-2009 global financial crisis. After contracting 1.7% in 2009, Malaysias GDP grew 7.2% in 2010. Malaysian banks are well capitalized, conservatively managed, and had no measurable exposure to the U.S. sub-prime market. The central bank maintains a conservative regulatory environment, having prohibited some of the riskier assets in vogue elsewhere. Malaysia maintains high levels of foreign exchange reserves and has relatively little external debt. (Source: tradingeconomics.com ) GDP Real: An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price", "inflation-corrected" GDP or "constant dollar GDP" (www.investopedia.com)

From the above graph it is very evident that the GDP of Malaysian economy has been rising at an

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increasing rate since 1970 except during the Asian Financial Crisis and the World Economic Crisis in 2008. GDP Nominal: A gross domestic product (GDP) figure that has not adjustedfor inflation. been Also known as "current dollar GDP" "chained dollar GDP". or

Except in 2008 the nominal gdp of Malaysia has been increasing steadily. Per Capita Income Constant Prices: This value is the per capita income of an individual in Malaysia with respect to Real GDP.

Per Capita Income Current Prices: This value is the per capita income of an individual in Malaysia with respect to Nominal GDP.

Purchasing Power Parity Valuation of the country: An economic theory that estimates amount of adjustment needed the exchange rate between the on countries in order the exchange to be equivalent to each currency's for purchasing power. The relative version of PPP is calculated as:

W here: "S" representsexchange rate of currency 1 to currency 2 "P1" represents the cost of good "x"currency 1 in "P2" represents the cost of good "x"currency 2 in
(Source: www.investopedia.com) Malaysia calculates their PPP with US currency.

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Purchasing Power Parity per Capita Income:

A measure of the PPP per capita income of a country that the PPP valuation of a country and takes divides it by the number of people in the country. The per capita valuation is especially useful when comparing one country to another because it shows the relative performance of the countries. A rise in per capita GDP signals growth in economy and tends to translate an increase in productivity. the as

Role Of Sectors In The Growth Process


ROLE OF AGRICULTURE GROWTH IN MALAYSIA: Development economists in general and agriculture economists in particular, have long focused on how agriculture can best contribute to overall economic growth. However, after almost two decades of relative neglect, interest in agriculture is returning in a big passionate

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way, as manifested in Malaysia where it is heralded as the next engine of growth and promoted as NEW AGRICULTURE in Malaysias latest 5-year development plan - the ninth Malaysian plan. Timmer (2005) contends that empirical evidence suggests that most Asian countries encounter difficulty in transitioning from the food security to the farm income. strange as it may seem, especially in this world of the world, a country or region without agriculture was, up till recently, considered for many of the worlds poorest countries, especially in Africa. GROSS DOMESTIC PRODUCT (2009): From this table, we can say that agriculture growth is more in Sarawak and slight less in Sabah. Whereas, the agricultural growth is less in Kuala lumpur.

In retrospect, Malaysia has tremendous inherent strengths in agriculture, particularly in tree crop agriculture and management of large scale production of industrial crops like oil palm and rubber as well as selected crops and fisheries enterprises.

ROLE OF SERVICE SECTOR: Services sector in Malaysia has played an important role in the growth and development process of the economy.

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The greater presence of the services sector in the Malaysian economy is indeed in line with the growth transformation. Which taken place in many of the developed economies in which the services sector forms a major structural component of the economy compared to that of the manufacturing or primary sector with the greater role of the services sector over the years. Malaysia has moved into the third stage of economic development, whereby the economic growth is powered by both the manufacturing and services sectors. The service sector dominant feature of post-industrial economies accounting for between 60 and 70 percent of employment and GDP.

Growth in services is also recognized as an important aspect of economic development and is strongly associated with income growth and modernization. Malaysias services sector currently accounts for about 57% of GDP and about 58% of employment. ROLE OF INDUSTRIAL SECTOR: Malaysia is a newly industrialized country that experienced an economic boom and underwent rapid development during the late 20th century. Malaysia was the worlds largest producer of tin, rubber and palm oil. When the tin market collapsed during the early 1980s, the Malaysian government was forced to diversify and modernize the economy. Since then, the government has played an active role in industrialization and economic development. Today, Malaysia has moved into the third stage of economic development, with growing emphasis on services. Malaysias industry sectors: Services in Malaysia have been growing in importance for the economy in the past few years. In 2010, Services was responsible for 49.3 percent of the GDP According to the 10th Malaysia Plan, the goal for the service industry is to achieve 61 percent of GDP share by 2015 with an annual growth of 7.2 percent. In 2010, Malaysia was the 28th largest oil producer and the 17th largest natural gas producer in the world.

PERFORMANCE OF INDUSTRIAL PRODUCTION INDEX HIGHLIGHTS: Sectors Index June 2011 % Changes Year- % Changes on-Year Month-on-Month

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IPI Mining index Manufacturing index Electricity index

108.0 83.4 118.2 124.9

1.0 -8.6 4.5 3.6

3.5 11.6 1.5 -2.0

This is the performance of industrial production year wise and month wise percentage based on different types of index. GROWTH PROCESS: Malaysia is generally regarded as one of the most successful non-western countries to have achieved a relatively smooth transition to modern economic growth over the last century or so. Since the late nineteenth century it has been a major supplier of primary products to the industrialized countries; tin, rubber, palm oil, timber, oil, liquefied natural gas, etc. However, since about 1970 the leading sector in development has been a range of exportoriented manufacturing industries such as textiles, electrical and electronic goods, rubber products etc. Government policy has generally accorded a central role to foreign capital. At independence (from the United Kingdom) in 1957, Malaysia had a population of just 7.4 million. Its population has since grown rapidly such that 2005 by, country had some 26.8 million people and, on current estimates, will rise by 2010 to nearly 29 million. . Before 1957, Malaysia was a lowincome agrarian economy, whose main stays were rubber and tin production and trade centered on Penang and Malaya. . Business enterprises were smallscale, largely localized, and predominantly family based.

Asian Financial Crisis and Recovery


Prior to the Crisis: Since 1991, the economy has been consistently growing above what is deemed as its potential growth path. Zero output gaps is when actual and potential GDP are equal in size. The output gap increased during 1994-96, as actual GDP grew faster than potential GDP. This has generated price pressures,

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especially in the form of wage increases above productivity gains. Instead of improvements to efficiency, growth during this period was primarily brought about through augmenting input, a situation that is clearly not sustainable in the longer term. It is a greater cause of concern when a significant proportion of these inputs (both capital and labor) were imported. The deficit in the current account corresponds to the saving-investment gap. Despite having one of the highest savings rate in the world, Malaysia ran into current account deficit problems because of its high investment rate .The investment boom led to the current account deficit, and when coupled with the declining efficiency in capital utilization, is a legitimate cause of concern. The current account deficit was only partially financed by net long-term capital inflows for some of the years. At the same time, reverse investments have steadily increased from RM4.0 billion in 1993 to RM11.4 billion in 1996, an increase of 2.8 times. Malaysian investment overseas in 1997 was estimated at RM9.9 billion. (Source: www.mir.com) Crisis: After the value of the Thai baht collapsed in mid-1997, currency speculators turned their sights on other economies in the region perceived to have maintained similarly unsustainable US dollar quasi-pegs for their currencies. The Malaysian ringgit (RM) had oscillated around RM2.5 against the US dollar during the first half of 19972 with some arguing that it was slightly overvalued.3 After the Thai baht was , floated on 2 July 1997, the ringgit, like other currencies in the region, came under strong pressure, especially because Malaysia, like Thailand, had maintained large current account deficits during the early and mid-1990s. The monetary authorities efforts to defend the ringgit actually strengthened it against the greenback for a few days before the futile ringgit defense effort was abandoned by mid-July, having allegedly cost some RM9 billion (then over US$3.5 billion). The ringgit was then floated, following the Thai baht, Indonesian rupiah, and Filipino peso, and fell to its lowest level ever by January 1998 to almost half the value it had held against the US dollar in mid-July 1997. Devaluation lowered the foreign exchange value of Malaysian assets, including share prices. The stock market fell severely, with the main Kuala Lumpur Stock Exchange (KLSE) Composite Index (KLCI) dropping from over 1,300 in the first quarter of 1997 to less than 500 in January 1998, then to around 300 in August 1998 and to 262 on 2 September 1998, after the initial announcement of the capital control measures the day before. The stock market collapse, in turn, triggered a vicious cycle of asset price deflation involving the flight of foreign as well as domestic portfolio capital. Lower asset prices also caused lending institutions to make margin calls, requiring additional collateral. Foreign lenders became more reluctant to roll over their short-term loans. Interest rates also increased, for a variety of reasons, exacerbating the effects of reduced liquidity. Like the currencies of other crisis-hit economies, the ringgit fluctuated wildly until mid-1998, weeks before it was fixed at RM3.8 against the US dollar on 2 September 1998. Much of the downward pressure on the ringgit was induced by regional developments as well as by adverse perceptions of the regional situation. Ill-advised political rhetoric and policy measures by the political leadership exacerbated the situation.4 Foreign and domestic speculators fueled the panic as investors scrambled to get out of positions in ringgit and other regional currencies. This caused currencies to fall yet further and with them the stock and other markets, constituting a rapid vicious circle. W ith financial liberalization, fund managers had an increasingly greater variety of investment options to choose from and could move their funds much more easily than ever before, especially with the minimal

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exit restrictions the Malaysian and other authorities in the region had prided themselves on. The nature and magnitude of hedge fund operations, as well as other currency speculation, undoubtedly exacerbated these phenomena, with disastrous cumulative consequences. (Source sundarampathways malaysia.pdf) : There was speculative short-selling of the Malaysian currency, the. Foreign direct investment ringgit fell at an alarming rate and, as capital flowed out of the country, the value of the ringgit dropped from MYR 2.50 per USD to, at one point, MYR 4.80 per USD. The Kuala Lumpur Stock Exchange 's composite index fell from approximately 1300 to nearly merely 400 points in a few short weeks. A National Economic Action Council was formed to deal with the monetary crisis. Negara imposedcapital controls peggedthe Malaysian ringgit at 3.80 to the US dollar. and Malaysia refused economic aid packages fromInternational Monetary Fund the (IMF) and the W orld Bank, surprising many analysts. By refusing aid and thus the conditions attached thereof from the IMF, Malaysia was not affected to the same degree in the Asian Financial Crisis as Indonesia, Thailand and the Philippines. Regardless, the GDP suffered a sharp 7.5% contraction in 1998. It however rebounded to grow by 5.6% in 1999. The Government of Malaysia predicted 5.8% real GDP growth in the year 2000, but most analysts predicted growth will exceed 8% for the year. (Source: tradingeconomics.com)

Effect of the crisis: Currency movements have varying implications on competitiveness and external trade, debt, and investment. Because of ringgit depreciation, Malaysia's competitiveness has been enhanced after taking into account the combination of the currencies of Malaysia's trading partners and correcting for inflation among the countries. Malaysia's real effective exchange rate has declined starting from July 1997. This means that Malaysian goods are relatively cheaper and more competitive than its trading partners. The currency depreciation will generally help to improve the balance in the current account. W ith cheaper ringgit, exports grow faster than imports, which help to reduce the size of the current account deficit. For importers, an exchange rate of RM4.00 to US$1 means that they now have to pay about 37.5 per cent more compared to pre-July 1997 when the exchange rate was at RM2.50. On the part of exporters, the depreciation of the ringgit has given an export boost to Malaysian products. W hen compared with the previous year, the value of exports in 1997 grew by 12.4 per cent in ringgit terms, but only 0.5 per cent in USD terms. Compared with the corresponding period in 1997, export

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growth for April 1998 grew by 44.5 per cent in ringgit terms. However, if the exchange rate of RM3.732 to US$1 is used, the export growth for April 1998 fell by -3.1 per cent. About 60-80 per cent of the inputs for these industries are imported. In 1997, imports grew by 12.0 per cent in ringgit terms and 0.2 per cent in USD terms. The exports from the manufacturing sector are largely from non-resource based industries and contribute 80 per cent of total exports. The feedback from the private sector suggests that there are limits to the beneficial effect of a devalued currency on manufactured exports. Many firms are already operating at full capacity and cannot increase exports quickly to take advantage of the depreciating ringgit. Typically, there is a time lag before the beneficial effects of the currency depreciation trickle down to the real economy. In addition, importers overseas are pressing Malaysian exporters for discounts so that the value of exports is reduced. The cost of imports, which go into manufactured exports, has also increased substantially, and this can result in a subdued improvement in the current account. In terms of primary commodities, there was little effect on the ringgit depreciation on rubber prices since they are quoted in ringgit. Rubber prices (RSS1) rose slightly from 279.3 sen per kg. In June 1997 to 287.3 sen per kg. In April 1998 due to exporters adjusting the upwards since this increment would be negligible in US dollar terms. On the other hand, palm oil price is quoted in US dollars and had risen significantly from RM1, 215 per tonne in June 1997 to RM2, 366 per tonne in April 1998 with strong world demand for vegetable oils and the export ban on palm oil by Indonesia since January 1998. The prices of logs and sawn timber are on the downward trend due to falling demand in Japan and the continued anti-tropical wood sentiment in Europe. The ringgit depreciation has varying effect on rubber products. Dry rubber-based industries, such as rubber tyres and footwear, have been adversely affected because they have high import content and oriented to the domestic market. However, latex-based products, such as gloves, condoms and catheters, that use local materials and sold in US dollars have benefited. The furniture industry is enjoying high profits because the export prices are quoted in US dollars and 80 per cent of the materials are obtained from local sources. The sectors heavily dependent on imported machinery and materials are worst hit by currency depreciation. The civil engineering subsector, which uses imported materials and heavy machinery equipment priced in US dollars for infrastructure development, is burdened by higher cost of repayment and interests of over 50 per cent with the depreciation of the ringgit. In the case of cement production, the higher cost of imported inputs, such as coal, gypsum, and other raw materials, will increase production costs by RM180 million based on the exchange rate of RM4.00 to US$1. (Source:www.mir.com ) Impacts : Impact on Business Confidence Levels:

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To gauge the perceptions at the ground level, Malaysian Institute of Economic Research (MIER) conducted a survey among companies in the manufacturing sector to determine the impact of the currency control measures on their business operations and future investment plans two months after the controls were imposed. Among the more interesting findings was the fact that most of the companies surveyed found that the controls and the currency peg had brought about much needed stability and would enable companies to plan ahead. However, slightly more than half of the companies surveyed expected an increase in their transaction costs and bureaucratic red tape. Nevertheless, the majority (85 per cent) indicated that they planned to maintain their level of investment in the next one-three years, although a number of respondents expected some slowdown in foreign investments. To a certain extent, the findings reflected a cautiously optimistic sentiment among the survey respondents. In the case of the fixed exchange rate, the survey showed that it had certainly been effective in reducing the instability caused by the fluctuation of the exchange rate. It had also been helpful in a sense that businesses with international links no longer had to factor an exorbitant exchange rate risk premium into the calculations of their business plans, and thus were able to keep their prices and costs relatively low .

Impact on Foreign Direct Investment: W hile currency and capital controls have brought about stability and restored confidence at home in the immediate term, their medium- and long-term effects are likely to be somewhat unfavorable. Although the measures were not specifically targeted toward foreign direct investment (FDI), it has become increasingly apparent that foreign investors are uneasy about Malaysias capital control measures (MIER 1999b), mainly because they reflect negatively on policy coherence and predictability, at least in the perception of foreign investors. The removal of Malaysian stocks from the Morgan Stanley Capital International (MSCI) Index and the International Finance Corp. (IFC) Indexes, as well as the downgrading of Malaysias sovereign ratings represented an additional blow to international investors confidence and recognition of Malaysia as a good place to invest. The recent move by the IFC to reinstate Malaysia can be seen in a positive light, as it may signal a similar development within the international financial community. There was a 14 per cent increase in the value of FDI approved in 1998 compared to the previous year. For the first quarter of 1999, total FDI approvals amounted to RM 1.3 billion, still significantly below the average quarterly amount of FDI approvals in 1998. Nevertheless FDI approvals do not necessarily reflect the actual situation because not all approvals necessarily translate into implementation. In addition, the current years net FDI inflow may include the implementation of the previous years approvals and exclude some of the current years approvals. As such, increases in approvals need not reflect increases in net inflows for the year in question. A better indicator in this respect is represented by new FDI applications, which for the manufacturing sector, for the whole of 1998, totaled RM 12.7 billion (a slight decline from RM 14.4 billion in 1997). This figure marks a 12 per cent contraction in potential foreign capital compared with 1997. W hile the decline could be ascribed to a general sense of weariness by international investors toward economies in the region, it could also reflect a decline in investor confidence in the Malaysian economy, though this may be changing for the better.

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Impact on Industrial and M anufacturing Sector: Based on the first quarter 1999 results of the business conditions index (BCI) which registered a 3.5 point increase to reach 48.5 points, there seems to be a significant turnaround in domestic demand and business confidence. Preliminary results of the second quarter BCI survey show a very sharp upward trend and are indicative of an upturn in economic activities. The performance of the manufacturing sector has been particularly encouraging with higher sales recorded due to improved domestic demand. In addition, the index of industrial production (IIP) has recently showed some positive growth. Since February 1998, the IIP had been on the decline with industrial output contracting by 3.4 per cent and manufacturing output shrinking by 4.3 per cent in the first quarter of 1999. Given strong evidence of increased demand, the shrinking IIP suggested that manufacturers were instead opting to run down their inventories instead of producing more. However, industrial production for the month of April 1999 has shown a 2.6 per cent growth year-on-year, while manufacturing output grew even more strongly by 4.5 per cent compared to the previous year. In all probability, industrial production in general and manufacturing in particular will record a significant increase in the second and subsequent quarters. Impact on Trade: In the early days of the crisis, trade was dampened as export demand by economies across the region fell. Recently though, export growth in U.S. dollar terms has shown some signs of recovery, and in fact, since the last quarter of 1998, has become positive. The improvement in external demand is largely boosted by the weak ringgit. In the short-term, this is acceptable, although it remains to be determined whether this strategy is sustainable in the long run, especially in the event of the currency peg removal or a revision of the current RM 3.80 exchange rate to the U.S. dollar. Imports, in U.S. dollar terms, increased for the first time, after many months of continuous fall, in December 1998.In particular, imports of intermediate goods have increased. Although these are implications for the trade balance, this development is favorable light as it indicates rising external and domestic demand. Impact on M onetary Policy: Following the adoption of an easier monetary policy, as mentioned earlier, the statutory reserve ratio (SRR) requirement was reduced to 4 per cent in September 1998. Interest rates also declined precipitously with the interbank (three-month) rates falling from approximately 11 per cent in September 1998 to 6.4 per cent in February 1999. The base lending rate (BLR) for commercial banks declined from 11.96 per cent in March 1998 to 8.05 per cent in March 1999. In order to stimulate the economy and to reach a growth rate of at least 1.0 per cent, Bank Negara had set a loans growth target of 8.0 per cent to be achieved by the end of 1998. Unfortunately, the target was not achieved and overall, loans growth still remains sluggish. To a certain extent, this is due to an overly cautious stance by banks and a depressed demand for credit. W hile loans growth is needed to stimulate the economy, the compulsion on banks to achieve a set target may inadvertently result in loans being extended to companies of doubtful credit standing or for nonviable projects. In the long run, this may have adverse implications for the asset quality of banks. Impact on Financial Sector:

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Malaysia has made remarkable progress in terms of financial-sector restructur- ing. Nevertheless there are still some remaining sources of concern, including the banking systems risk management, and the consolidation of the banking and financial sector through mergers. Serious attention must be given to the process of corporate-debt restructuring, under the jurisdiction of the Corporate Debt Restructuring Committee (CDRC). It must be emphasized here that out of sixty applications for debt restructuring, the CDRC has approved only six. As restructuring of corporate debt is an important component of the entire framework of financial sector reform, it is essential that more progress be made in this respect. Asset management is also a pivotal arm of the financial-sector reform framework. All care must be taken to ensure that after acquiring the assets, they are managed well. Ironically, we may never know until it is too late just how well the assets are being managed. It is encouraging to note that in terms of NPL resolution, Korea and Malaysia have made the most progress based on a region-wide survey by the international rating agency Fitch IBCA (Chin 1999). However, it must be remembered that reading NPL figures can be very misleading, especially in the Malaysian case. After September 1998, the government reverted back to the precrisis definition of NPLs as loans not serviced for six months, after having earlier changed the definition of NPLs as loans not serviced for three months, in an attempt to downsize the problem on paper. For example, at the end of December 1998, the ratio of NPLs to total loans stood at 9 per cent based on the six-month definition, or 14.9 per cent based on the three-month definition. Indeed, although Malaysian banks have been on a stronger footing compared to those in other regional economies, even on the eve of the crisis, Bank Negara Malaysia had made a conscious effort to upgrade its supervision.

Challenges:
Some of the more salient challenges for Malaysia to overcome in the future are listed below: Continuing to Pursue Liberalization: The recent move by the government to institute exchange and capital controls has elicited a variety of responses from many quarters. W hen capital controls were first imposed, there was a fear that Malaysia was going to become more protectionist and worse still, shut itself off from world markets. However, anyone with sound knowledge of the Malaysian economy should know that this is certainly not the case. In reality, as a small open economy that depends critically on foreign markets, foreign capital, foreign technology, and even foreign labor, Malaysia cannot afford not to be liberal. The fact remains that Malaysia has become increasingly more liberal over time, the recent imposition of temporary exchange and capital controls notwithstanding. For one thing, the controls were not aimed at foreign direct investments. In addition, in the face of the current crisis, the Malaysian authorities have further liberalized equity rules, permitting 100 per cent foreign equity for new investments in the manufacturing sector until the year 2000. Import duty exemptions on raw materials and intermediate inputs which were previously confined to export manufacturing only, have now been extended to domestic-oriented manufacturing as well. Regulations on foreign equity have also been relaxed for some industries in the services sector such as telecommunications, energy, and insurance, although there is still some reluctance on the part of policymakers to open up the banking sector citing the unreadiness of the banking sector to face international competition. However, the banking sectors current inefficiency stems from the fact that it has been sheltered for too long from international competition. Exposure to foreign competition will instead force the local banks to innovate and cut costs. Foreign ownership of domestic banking

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institutions is still limited to 30 per cent, with foreigners having equity stakes in twelve Malaysian-owned banks, notwithstanding the thirteen (of a total) thirty-five commercial banks in the country which are fully foreign owned. Foreigners currently account for about 24 per cent of the total banking system assets. The challenge for the future, as the current crisis has highlighted, is to continue to liberalize the banking industry as it would benefit from new capital injections. However, the establishment of special purpose vehicles like Danaharta and Danamodal has circumvented the above need to a certain extent. The whole issue of liberalization is rather complex in Malaysia, and therefore should be approached with caution, especially the size and speed of liberalization which some have argued may be the cause of the crisis. On the whole, further efforts toward liberalization are desirable in the Malaysian context, although a gradual, rather than big bang, approach is recommended. Foreign Direct Investment: W hile the various emergency measures implemented by the government in September 1998, as well as the domestic resources that it can avail itself of, can help to halt further economic erosion and to stabilize the situation, they cannot by themselves lift the Malaysian economy back to its original growth trajectory. W hat is needed in this respect is the resumption of large inflows of foreign capital into the economy. Malaysia has had to resort to external borrowing to finance its recovery, but even this has been a costly maneuver given the downgrading of the countrys sovereign rating. Fresh capital inflow remains the only viable alternative. Currently, the Malaysian economy is quite anemic following the massive outflow of capital during the period between the onset of the crisis in July 1997 and the imposition of capital controls in September 1998.A substantial capital transfusion is needed to revive the flagging economy, and to achieve this objective, effective policies to attract both Malaysian capital parked abroad and also new foreign capital are sorely needed. After the onset of the crisis, investment figures were less than encouraging. In 1998, FDI approvals (RM 13.1 billion) exceeded FDI applications (RM 12.3 billion), which is not surprising since project approvals during a period may include project applications received in the preceding period. Figures from the Malaysian Industrial Development Authority (MIDA) show a 15.9 per cent increase in the FDI project approvals in 1998, but a decline of 7.4 per cent in new FDI applications. Most approvals have yet to be translated into actual investments. In January 1998, the number of total new FDI applications was even smaller than the monthly average for 1998. Clearly, the foreign exchange controls are not entirely conducive to capital injection from abroad. W hile it is clearly stated that the controls will not affect FDI, the controls seem to exert an indirect negative effect on FDI, especially in terms of the general erosion of investor confidence in Malaysia. The replacement of the one-year moratorium on portfolio investment profits with a graduated exit tax scheme is a step in the right direction, though further easing of controls is deemed to be necessary. Besides easing capital controls, the Malaysian government must continue to attract more long-term investors by further liberalizing the services sector, particularly the banking and insurance sector. The focus of the government until now had been the liberalization of the manufacturing sector. Given the current level of excess capacity in this sector, however, it is unlikely that foreign investors would want to invest further. This alone should provide the impetus for the government to seriously consider the liberalization of other sectors, especially the services aswell. sector,

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Building Good Governance and an Ethical Regulatory Framework As there is increasing evidence that governance problems exert an adverse effect on economic performance, a broader consensus has emerged on the central importance of transparency and good governance for achieving economic success. In the case of Malaysia, public-sector macroeconomic governance has been comparatively good by regional and global standards. Fiscal discipline and monetary prudence have been the hallmarks of the Malaysian government since the mid-1980s onwards. Bad public sector governance is not the main cause of the current crisis, though it must be mentioned that government excesses in the form of ambitious growth targets, heavy industrialization programs and costly infrastructure projects had become increasingly prevalent, especially during the period leading up to the crisis. It has been argued that one of the main causes of the current crisis is poor private- sector governance. Examples include the use of short-term borrowings to finance long-term investment projects, the preference for debt-financing as opposed to equity-financing, and the basing of lending, borrowing, and investment decisions on noncommercial considerations. Realizing that technical, top-down macroeconomic management is now beginning to lose its importance, the role of government must instead be redirected toward being a facilitator, orchestrator, and regulator of private economic actors. In a recent survey on corporate governance, it is interesting to note that more than half of the total respondents from both public-listed companies as well as institutional groups indicated that improvements needed to be made on the corporate governance regime in Malaysia . There is some evidence to show that the government recognizes this fact and is moving toward this goal. In March 1998, the government set up the Finance Committee on Corporate Governance to look into the matter. Recently, the committee has come up with some seventy recommendations aimed at improving the market practices of listed companies by setting good governance principles. Mere principles however, will not translate automatically into practice without regulation and enforcement. As such, one would expect that good governance and best practice principles would take a fair amount of time to seep into the system. In the realm of finance and banking, Danaharta and Danamodal are in the best position to insist on best banking practices as a condition for debt-restructuring and recapitalization. The Securities Commission and KLSE also have a role to play by encouraging greater corporate disclosure, codes of conducts, and business ethics, as well as the implementation of other internal controls by all the publiclisted firms. Currently, companies seeking to be listed on the KLSE Second Board are required to have a minimum paid-up capital of RM 40 million, up from the RM 10 million required previously. Meanwhile, the KLSE has introduced new measures to improve corporate governance and transparency by making it compulsory for listed companies to release their financial results on a quarterly basis and by limiting the number of directorships that an individual may hold in listed companies to ten. Moral hazard, in this context a phenomenon associated with reckless borrowings and lendings during good times, based on the assumption that governments will come to the rescue during bad times, is also strongly related to the issue of governance because its occurrence is often the result of bad governance practices. It is worrying to note that although efforts are being made by the government to improve the corporate governance climate in the country, there has also been some backsliding, for example, the use of public funds such as

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the Employees Provident Fund for propping up the stock market and rescuing privatized public enterprises, an occurrence that was especially apparent during the present economic downturn. There is also a need to safeguard the interests of minority shareholders who are often sidelined in major corporate restructuring exercises. From a moral and ethical standpoint, when things go wrong, it is those who are responsible for the fiasco in the first place who should bear the burden of paying for their mistakes, and not the public at large. Failure to do so will result in a skewed condition whereby profits are privatized, but losses are virtually socialized. By making privatization projects, development projects and public procurement exercises fully transparent, and enabling greater and easier access to this information, the problem of moral hazard can be alleviated. In addition, a competition policy can help to lay the ground for the creation of a level playing field for all firms. Restructuring and Upgrading the Industrial and Technological Base In order to build an even stronger foundation and achieve a more sustainable economic growth, as well as to ensure Malaysias international competitiveness in the future, fundamental changes have to be made upon the industrial base of the economy. Economists argue that the governments persistence in promoting capital- intensive industries could divert much-needed funds into sectors that few expect to become regionally competitive (Lopez 1999). In retrospect, it can be said that Malaysias foray into heavy industries in the 1980s was a mistake given the near absence of the countrys short-term comparative advantage to tap into the world market. In addition on, its small domestic economy precludes it from taking advantage of the economies of scale. The automobile and steel industries have long been the recipients of protection on the grounds of infant industry status and do not seem to show any signs of progressing beyond this stage. Perwaja Steel for example, the countrys iron and steel manufacturer is saddled with a huge debt and its products remain internationally uncompetitive. Restructuring therefore, becomes imperative. It is heartening to note that in the case of Malaysias automotive sector, a merger of motor vehicles vendors that feed the two national car manufacturers, Proton and Perodua, is being planned to create a multi-tiered vendor system with a global orientation. The underlying problem in Malaysias industrial sector lies in the fact that it is losing its comparative advantage in labor-intensive goods and services in the face of growing competition from countries such as China and India that enjoy considerable cost advantage in unskilled and semi-skilled labor. At the same time, the Malaysian economy has yet to fully realize its comparative advantage in producing skillintensive, high-technology goods and services. Given Malaysias small domestic labor force, one solution, though clearly untenable in the long-term, is to maintain the economys dependence on migrant labor. Clearly, Malaysias development path in the future is in higher value-added industries and due emphasis of this fact has been given in the Seventh Malaysia Plan. Relatedly, any attempt to upgrade Malaysias industrial sector will depend on the soundness of its technology policy. To be truly effective, attention must be paid to crafting policies on education and human resource development, improving the technological infrastructure, expanding the Asia-Pacific market and moving away from dependencies on migrant labor.
(source: The Developing Economies, XXXVII-4 (December 1999))

Economic Impact :

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In general, the economic impact of the crisis include, a dramatic decrease of gross domestic product (GDP) growth with uneven impact across economic sectors, domestic business collapse and insolvency, drastic local currency depreciation, inflation and increased cost of living, retrenchment and unemployment, substantial decrease in income, reduced personal consumption, and reduced government spending. The real GDP growth rates of Malaysia indicate that economy obviously contracted in 1998, Malaysia from 7.7 percent in 1997 to 7.5 percent in 1998. While the real GDP growth indicates that the Malaysian economy grew faster than the Philippine in 1999, the standardized index shows that the Philippines was doing better than Malaysia in 1999, no matter what year (1996 or 1997) was used as reference. Among the four affected countries, the Philippines was affected the least for several major reasons; its experience of the financial crisis during 1983-1985, the improved political and public governance in relation to financial and economic management, and its export market structure which is tied with the US and European markets. M alaysias M anagement of the Crisis: The three key decisions. The Malaysian governments response was characterized by three key decisions. First, there were illadvised attempts to assert Malaysias sovereignty over market forces and economic policy. Subsequently, Malaysia swung to orthodox macroeconomic policies (albeit without IMF assistance), but then retreated from that stance as its contractionary impact was felt. Finally, Malaysia decided to apply capital controls to support reflationary monetary policies. The Reassertion of National Control over Economic Policymaking The initial Malaysian governments response to the crisis was led by Prime Minister Mahathir, who portrayed the collapse of the ringgit as being due exclusively to speculative attacks on Southeast Asian currencies.5 In September 1997, Mahathir declared that currency trading is unnecessary, unproductive and immoral, and argued that it should be stopped and made illegal. More damagingly, he threatened a unilateral ban on foreign exchange purchases unrelated to imports (which never happened). All this upset market sentiment and seemed to exacerbate the situation until he was finally reined in by regional government leaders and his cabinet colleagues. 6 The partial truth in his rhetoric was not enough to salvage his reputation as a maverick in the face of an increasingly hostile W estern media, and Mahathir came to be demonized as the regional bad boy. Mahathirs early policy responses to the crisis probably made things worse However, this ill-conceived measure adversely affected liquidity, causing the stock market to fall further. The governments threat to use repressive measures against commentators making unfavorable reports about the Malaysian economy strengthened the impression that the government had a lot to hide from public scrutiny. Anwars mid-October 1997 announcement of the 1998 Malaysian budget was perceived by the market as reflecting denial of the gravity of the crisis and its causes, ostensibly including populist fiscal deficits (which was not the case). A postcabinet meeting announcement, on 3 September 1997, of the creation of a special RM60 billion fund for selected Malaysians was understandably seen as a bailout facility designed to save cronies. Although the fund was never institutionalized, government-controlled public funds including the Employees Provident Fund and Petronas were later deployed to bail out some of the most politically well-connected and influential individuals and organizations, including Mahathirs eldest son; the publicly listed corporation set up by Mahathirs party cooperative (KUB); and the countrys largest

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conglomerate (Renong), previously controlled by the prime ministers party and believed to be ultimately controlled by his confidant Daim Zainuddin. The protracted United Engineers Malaysia (UEM)-Renong saga from mid-November 1997 was probably most damaging. The nature of this bailout to the tune of RM2.34 billion gravely undermined public confidence in the Malaysian investment environment as stock market rules were suspended, at the expense of minority shareholders, causing the stock market to collapse by a fifth or RM70 billion in the next three days. The bailout prompted the embarrassed finance minister (Anwar Ibrahim) to distance himself from Mahathirs turn to promarket policies and to IMF-recommended, procyclical measures. The situation was initially worsened by the perception that Mahathir (and Daim Zainuddin) had taken over economic policymaking from Anwar, who had endeared himself over the years to the international financial community. However, measures introduced by the finance ministry and the central bank from early December 1997 were perceived as preempting the intended role and impact of the National Economic Action Council (NEAC). The NEAC had been established in late 1997 and was chaired by the prime minister, with Daim in charge as executive director. Daim was later appointed minister with special functions, operating from the prime ministers department, in late June 1998. Daims return to the front line of policymaking generated doubts about who was really in charge from early 1998. He was subsequently made first finance minister in late 1998, with his protg, Mustapha Mohamad, serving as second finance minister while retaining the Ministry of Entrepreneurial Development portfolio. The Orthodox Package of Policies and Its Rejection As the economic situation deteriorated in November 1997, Finance Minister Anwar became more receptive to IMF policy advice. In this, he was strongly, but quietly, supported by other senior government officials and, apparently, by the entire cabinet before Mahathirs late arrival at the weekly cabinet meeting on 3 December 1997. W hen Anwar announced in mid-October 1997 after the first announcement of the 1998 budget that he was considering cutting government spending by 10 percent, Daim Zainuddin, government economic adviser at the time and the person who had been responsible for economic liberalization from the mid-1980s, suggested a 20 percent reduction, ending in a compromise of 18 percent announced in early December 1997. Thus, Anwar began to reassert control over economic policy from early December 1997. After apparently securing full cabinet support, Anwar implemented a series of orthodox policies not unlike those conventionally regarded as IMF solutions.8 The central bank, Bank Negara, raised its threemonth intervention rate from 8.7 percent at the end of 1997 to 11.0 percent in early February 1998. Drastic 18 percent reductions were made in budgeted government expenditure. Loans in arrears were redefined as nonperforming loans after three months, instead of the previous six months. Bank statutory reserve requirements were also raised, and tighter definitions of nonperforming loans were enforced.9 These measures almost certainly exacerbated the recessionary tendencies already setting in throughout the region. Anwar approved the tighter fiscal and monetary policies from December 1997, in line with market expectations as much as with IMF recommendations. Malaysias orthodox measures deepened the impact of the crisis. The massive ringgit devaluation imported inflation into Malaysias very open economy. Overzealous efforts to check inflation exacerbated deflationary tendencies. The stock market collapse (by more than half from its peak in the first quarter of 1997) adversely affected both consumption and investment through a negative wealth effect. Credit restraint policies adopted by the government from December 1997 further dampened economic activity. The depreciated ringgit increased the relative magnitude of the

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mainly privately held foreign debt as well as the external debt servicing burden. Fortunately, prudent central bank regulation and managed consolidation of the banking sector helped avoid financial sector collapse, though much restructuring in the wake of the crisis was not well conceived and was unlikely to serve its intended ends. The authorities push for the rapid merger and consolidation of banks and finance companies was seen as favoring Daim. The consolidation was made all the more difficult by the uncertainties due to the turbulence but was facilitated by the financial sectors reliance on the authorities for debt restructuring and bank recapitalization. Early official responses seemed to smack of denial and of bailing out politically connected corporate interests, which inadvertently served to aggravate the growing problems, including declining confidence in official policy. W hile the orthodox policies from late 1997 onward may have served to signal some checks on cronyism, they also exacerbated the deflationary consequences of declining domestic and regional demand. Thus, what began as a currency crisis soon generated a financial crisis, which in turn led to a recession. In the second quarter of 1998, Finance Minister Anwar Ibrahim dramatically changed course again, turning away from contractionary measures and instead reflating the economy through spending policies designed to stem the downturn. By this stage, however, a political drama had begun to unfold as Prime Minister Mahathir and his supporters came increasingly into conflict with Anwar and his supporters. In May 1998, Anwar announced various policies to reflate the economy through countercyclical budgetary means. Some analysts suggest that this second policy reversal began even earlier, from late March 1998, when the central banks annual report for 1997 was announced. Politics soon intervened, however. Mahathir, shocked by the surprise resignation of Indonesian president Suharto in May 1998, began to worry about the foreign medias calls for Anwar to replace him and about the increasingly independent and critical stance of the Anwar camp. Mahathir began to portray Anwar as a stooge of the W est, especially of the IMF, and the finance minister was finally sacked from the cabinet on 2 September 1998. The Introduction of Capital Controls On 1 September 1998, the Malaysian authorities introduced capital and other currency controls. The ringgit exchange rate was fixed at RM3.8 to the US dollar, compared to the precrisis rate of around RM2.5. The prime minister then dismissed the deputy prime minister and finance minister, Anwar Ibrahim. The imposition of capital controls on outflows was clearly an important challenge to the prevailing orthodoxy, especially as promoted by the IMF. W hile the contribution of the controls to the subsequent V-shaped recovery is moot, it is nevertheless clear that they did not cause the significant permanent damage that most critics had predicted. Capital controls did not slow Malaysias recovery. The 1998 collapse was less pronounced in Malaysia than in Thailand and Indonesia, while the recovery in Malaysia was faster in 1999 and 2000. Of course, the precrisis problems in Malaysia were less serious, owing to strengthened prudential regulations after the banking crisis of the late 1980s. Strict controls on Malaysian private borrowing from abroad generally required borrowers to demonstrate likely foreign exchange earnings from the proposed investments to be financed with foreign credit. Hence, although Malaysia had the most open economy in the region after Hong Kong and Singapore, with the total value of its international trade around double its annual national income, its foreign borrowing and the share of short-term loans in total borrowing were far less than in the more closed economies of South Korea, Indonesia, and Thailand. The Malaysian authorities had limited exposure to foreign bank borrowing, while their neighbors in East Asia allowed, facilitated, and even encouraged such capital inflows from the late 1980s.

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The vulnerability of East Asian economies to such borrowing was not due merely to financial interests seeking arbitrage and other related opportunities, or to corporate interests seeking cheaper and easier credit. Bank for International Settlements (BIS) regulations greatly encouraged short-term lending. Meanwhile, even European and Japanese banks generally preferred dollar-denominated lending to lending in the borrower countrys currency. Criticism of bad lending to East Asia before the crisis should therefore focus not only on the borrowers and domestic regulations, but also on lenders and the rules regulating international lending. The Malaysian experience also challenges the widespread claim that the East Asian crisis was due solely to foreign bank borrowing, which could have been avoided by greater reliance on the capital market, especially stock markets. W hile the implications of capital flows to stock markets undoubtedly differ from those of foreign bank lending, such portfolio capital flows are even more easily reversible than short-term foreign loans. Malaysian bank vulnerability during the crisis was due not so much to foreign borrowing as to extensive lending for stock market investments and property purchases and to their reliance on shares and real assets for loan collateral. Considering the high savings rates in the region, there is no evidence that portfolio capital inflows significantly contributed to productive investments or economic growth. However, the reversal of such flows proved to be very disruptive, exacerbating volatility. Their impact has been due largely to the wealth effect and its consequences for consumption and, eventually, investment. W hen such capital flow reversals were large and sustained, they contributed to significant disruption. W orse still, while portfolio capital inflows built up slowly, outflows were much larger and more sudden. Such outflows from late 1993 had resulted in a massive collapse of the Malaysian stock market. The early 1994 introduction of controls on inflows sought to discourage yet another buildup of such potentially disruptive inflows. However, these were withdrawn after half a year, following successful lobbying by interests desiring renewed foreign portfolio capital inflows to enhance stock market recovery. If the early 1994 controls had not been withdrawn, the massive buildup in 19951996 would not have occurred, and Malaysia would consequently have been far less vulnerable to the sudden and massive capital flight in the year from July 1997. E. Kaplan and D. Rodrik argue that the September 1998 controls sought to avert yet another crisis in the making. They suggest that the Singapore based overseas ringgit market was putting increasingly unbearable pressure on the Malaysian monetary authorities, reflected in the very high overnight interest rate for ringgit in Singapore. The September 1998 currency control measures undoubtedly sought to defuse this pressure and were successful in doing so. The efficacy of the Malaysian controls was due largely to their appropriate and effective design. At the time, many market skeptics did not consider the Malaysian authorities capable of designing and implementing such controls, but some later conceded that they had been proven wrong. The controls addressed the problem identified by Kaplan and Rodrik12 and were subsequently revised in February 1999 and lifted after a year. The authorities reviewed their assessment of the situation and demonstrated their flexibility, responsiveness, and, thus, commitment to being market and investor friendly. Most important, they emphasized from the outset that the measures were directed at currency speculation, and not at foreign direct investment (FDI). Although GreenfieldFDI to Malaysia declined after 1996, a global decline from 2000 also affected the Southeast Asian region as a whole (including Singapore), with China and a few others being the only exceptions. S. Johnson and T. Mitton have argued that the Malaysian capital controls provided a screen behind favoredfirms could be supported. which

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If true, the analysis would have to shift to the other measures introduced to provide such support, since the controls only provided a protective screen. However, their evidence points to significantly greater appreciation of the prices of shares associated with the surviving political leadership in the month right after the introduction of controls that is, before other support could have been provided except in a small minority of cases. Hence, an alternative interpretation more consistent with their evidence is that portfolio investors expected the September 1998 measures to benefit primarily crony companies, causing their share prices to appreciate much more than others in other words, that it was a self-fulfilling prophecy. The government emphasized efforts to bolster the stock market, for which many blame the government-controlled Employees Provident Fund (EPF) of over RM10 billion in 1998. The EPF and other Malaysian government controlled institutions are believed to have bought about RM2 billion of Malaysian stock through Singapore- and Hong Kongbased brokers to give the impression of renewed foreign investor interest in the Malaysian market. A deliberate prepolls effort to improve investor sentiment and raise funds through stock market operations for the ruling Barisan Nasional coalitions 1999 electoral war chest has also been widely suspected. W ith political support from the middle and propertied classes desperately needed by the regime and with its credibility significantly eroded by the political crisis since mid-1998, efforts to boost the stock market were considered crucial for electoral success. In May 1999, for example, the first finance minister, Daim, urged government officers to spend government allocations more speedily, while the second finance minister announced the suspension of tender procedures, ostensibly to accelerate government spending. This effectively reduced transparency and accountability, and facilitated corrupt tender awards. Opponents of the capital controls introduced in September 1998 exaggerated their possible adverse effects, which were generally averted. Proponents of the control measures have also not been able to demonstrate that the controls were responsible for the delayed, but strong, recovery. The three worst affected economies all registered positive growth from early 1999, whereas Malaysia did not come out of the recession until the second quarter. And while the recovery in Malaysia was stronger than in Thailand and Indonesia, South Korea performed even better. There is little proof that Malaysias recovery was due to the capital controls, which were soon amended and dropped in 1999. The dollar peg and related currency controls were abandoned when China did so in mid-2005. Confidence in the Malaysian governments policy consistency and credibility was nonetheless temporarily seriously undermined by the apparent reversals of policy from July 1997 until September 1998, after years of successful investment promotion efforts. The controls regime was thus seen as the culmination of an extended period of inconsistency of government policy, and this perception probably had some adverse medium-term, indeed long-term, consequences.14 The problem may have been exacerbated by then prime minister Mahathirs declared intention to retain the regime until the international financial system was reformed, which hardly seemed imminent. This was not helped by unnecessarily hostile and sometimes ill-informedofficial rhetoric,15 though the Mahathir administration sought to improve its international image through various initiatives, especially after September 11, 2001. Hence, the government phased out the September 1998 and subsequent capital and currency control measures in light of their ambiguous contribution to economic recovery, changing conditions, and the adverse consequences of retaining the measures. The National Economic Action Councils later efforts to revise the 1 September 1998 measures thus undermining their main original intent (to deter panic-driven capital flight)reflected the pragmatism and flexibility of the Mahathir regime despite his rhetoric, and probably limited damage to foreign investor sentiment. His successor, Abdullah Ahmad Badawi, has gone much further in becoming more conformist on the international economic policy stage, quickly distancing his leadership from his predecessors.

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(source:sundaram pathways Malaysia ) Policies: A series of policy measures were adopted to deal with the financial crisis and stabilize the economy. The 1998 Budget and the 5 December package of policies contained measures to reduce current account deficit, strengthen balance of payments and fiscal account, improve competitiveness, and increase monetary and financial stability. The 1998 Budget announced in 17 October 1997 encompassed the following measures: 1. Reduction of Federal Government expenditure by 2 per cent, deferment of mega projects, and review of public agencies purchases of foreign goods. 2. On the financial aspect, the prudential standards were strengthened with the classification of non-performing loans in arrears from six to three months, greater financial disclosure by banking institutions, and increasing general provision to 1.5 per cent. 3. The Credit Plan was introduced to limit overall credit growth to 25 per cent by the end1997 and 15 per cent by end-1998. In providing loans, banking institutions were to give priority to productive and export-oriented activities. On 5 December 1997, the Government announced an additional package of policies when the regional instability proved to be more protracted than earlier anticipated. These policy measures were aimed at strengthening economic stability and instilling confidence in the financial system. There were concerns about the large current account deficit and high private sector debt amounting to 169 per cent of GDP in 1997. Hence, there was the need to prudently manage public sector finances while curbing excesses in the private sector. The policies are as follows: 1. Reduce the current account deficit to 3 per cent of GNP in 1998. 2. Trim Federal Government expenditure by 18 per cent in 1998. 3. Stricter criteria for approvals of new reverse investment, and defer the implementation of non-strategic and non-essential projects. 4. More emphasis placed on good corporate governance. 5. Enhanced disclosure of information of corporations and closer scrutiny for corporate restructuring. In February 1998, the following measures were announced: 1. Bank Negara Malaysias three-month intervention rate was raised from 10 per cent to 11 per cent. 2. The statutory reserve requirement (SRR) reduced by 3.5 per cent of eligible liabilities to 10 per cent.

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The National Economic Action Council (NEAC) was established on 7 January 1998 as a consultative body to the Cabinet to deal with the economic problems. The purpose of the NEAC is to make recommendations to the Government on how to restore the economy and prevent it from going into a recession. In 24-25 March 1998, the Government adopted pre-emptive measures to counter emerging financial problems by making it necessary for banks to shore up their capital-adequacy positions at the first sign of trouble. The structural reform in the financial sector includes more transparency and disclosure for banks and companies. Although government expenditure was reduced by 18 per cent, Malaysia would accept a RM$1 billion loan from the W orld Bank for social and poverty-related projects. The main measures adopted are as follows: 1. Bring loan classification standards (including 3 months for non-performing loans) to best practice. 2. Require 20 per cent provisioning against the uncollateralized portion of substandard loans. 3. Increase minimum risk-weighted capital ratio (RW CR) of finance companies from 8 per cent to 10 per cent with interim compliance of 9 per cent. 4. Increase minimum capital funds of finance companies from RM5 million to RM300 million and subsequently to RM600 million. 5. Expand capital adequacy framework to incorporate market risk. 6. Reduce single customer limit from 30 per cent to 25 per cent of capital funds. 7. More intensive and rigorous supervision including conducting monthly stress tests on individual banking institutions. 8. Aggregate statistics on non-performing loans (NPL), provisions and capital position of commercial banks, finance companies and merchant banks. Financial institutions are to report and publish key indicators of financial soundness, such as NPL, capital adequacy etc., both at bank level and on consolidated basis. (Source:www.mir.com ) Conclusion During the 19971998 East Asian financial crisis, Malaysia was less vulnerable than its neighbors, because the authorities had limited foreign borrowing and introduced prudential regulations and supervision following a banking crisis in the late 1980s when nonperforming loans rose to 30 percent of total commercial bank loans. Hence, Malaysia never had to go to the IMF for emergency credit facilities to cope with the crisis.

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However, Malaysia was nonetheless vulnerable to contagion from the crisis unfolding elsewhere in the region because of the massive, easily reversible portfolio investments in its stock market after successful government promotion of such inflows except for capital controls on inflows lasting half a year from early 1994, after a sudden exodus of portfolio investments from late 1993. Earlier in this article, I detailed the changing policy responses of the Malaysian authorities from July 1997, reflecting the complex and changing relations between high politics and crisis management; four phases of these changing policy responses were distinguished. In the second half of 1997, Mahathir was clearly in charge, resorting to various unsuccessful measures to try to contain the crisis. However, in early December 1997, with considerable support and encouragement from others, Anwar switched to more procyclical policies, apparently recommended by the IMF, which exacerbated the downturn. By the second quarter of 1998, however, Anwar turned to reflationary spending policies to stem the downturn, albeit belatedly. Finally, as Anwar was purged in September 1998, Mahathir introduced currency and capital controls to help reflate the economy. Although this account acknowledges the different policy preferences of Mahathir and Anwar, it is argued here that Anwar was eliminated by Mahathir because the latter prime minister suspected his heir apparent of plotting to replace and embarrass him. W hile the apparent policy differences were real, they were also changing, on both sides, and were greatly exaggerated in most other accounts of the politics of the period. W hile economic analysis suggests that the contribution of controls to the subsequent economic recovery in 1999 and 2000 may actually have been quite modest, they certainly did not cause the disaster predicted by market fundamentalist prophets of doom.24 And while the timing of the imposition of the controls helped contain the possible economic fallout from Anwars firing, it would be wrong to attribute the controls solely to this political motive.

Inflation
A general increase in price level of goods and services. It is often triggered when demand for goods is greater than the available supply or when unemployment is low and workers can command higher salaries. As, inflation rises every dollar will buy a smaller percentage of a good. For example, if inflation rate is 2%, a $1 pack of gum will cost $1.02 in a year. Most countries, central banks try to sustain an inflation rate of 2% to 3%. However, most of the empirical evidence for industrialized economies suggests that the relationship between stock returns and inflation is negative. One explanation is the negative correlation between inflation and real output growth. CONSUMER PRICE INDEX: A measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food , and medical care. The CPI is considered a primary tool in determining how people are experiencing inflation. CHANGES IN INFLATION RATE OF MALAYSIA:

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Maintaining a low and stable inflation rate has become one of the challenges in the macroeconomic management of most countries. The objective of this study is to identify important factors that contribute significantly to inflation in Malaysia. This study also aimed to examine the possible existence of international and intra-ASEAN inflation transmission to Malaysia. The empirical results of this study show that external factors such as exchange rate and the rest of ASEANs inflation are relatively more important than domestic factors in explaining Malaysian inflation.

This graph explains that, inflation rate is varying from 1.5% to 3% in the years 1999 to 2004. Gradually, it started increasing from 2005-08 and suddenly decreased in the year 2009. The Inflation; consumer prices (annual %) in Malaysia was reported at 5.44 in 2008, according to the World Bank Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. Malaysia is a rapidly developing economy in Asia. Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy. Malaysia's central bank said Friday [25 Jul 2008] it will hold its interest rates at 3.5%, bucking expectations of a rise to counter a 7.7% surge in June 2008 inflation figures. It almost doubled in a period, of 7.7% in June 2008,compared to 3.8% in may 2008. Malaysias inflation rate hit a 27-year high mostly due to increase in petrol price. This is generally speaking, bad news for most Malaysians as a high inflation rate can compound itself over the next few months and cause other side effects like increase in interest rates.

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With this announcement, Malaysia has now officially joined the global inflation race. One big bang adjustment to fuel prices and they have caught up and even surpassed Singapore's 7.5% inflation rate. Now that their petrol and diesel prices have been brought closer to market rates, the next thing for them to worry about, same as us over in Singapore is stagflation. The inflation rate in Malaysia was last reported at 3.1 percent in July of 2011.

The inflation rate in Malaysia was last reported at 3.1 percent in July of 2011. From 2005 until 2010, the average inflation rate in Malaysia was 2.77 percent reaching an historical high of 8.50 percent in July of 2008 and a record low of -2.40 percent in July of 2009. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. The Inflation end-of-period in Malaysia was reported at 1.21 percent change in 2009, according to the International Monetary Fund (IMF). In 2015, Malaysia's Inflation end-of-period is expected to be 2.50 percent change. Data for inflation are end of the period; not annual average data. In 2009, Malaysia's economy share of world total GDP, adjusted by Purchasing Power Parity, was 0.54 percent. In 2015, Malaysia's share of world total GDP is forecasted to be 0.57 percent.

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UNEM PLOYM ENT


Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment This is the number of unemployed persons divided rate. by the number of people in the labor force. A high unemployment rate generally indicates an economy in with few job opportunities, while recession a low unemployment rate points to an economy running at or near full throttle. A low unemployment rate has itsdownsidefor stock prices, however: it may be a harbinger of higher interest rates that will slow both an overheated economy and the rise in values. (www.investor glossary.com). equity

Unemployment in M alaysia:

As we can see in the graph above, unemployment in Malaysia increased steeply from 1982 to 1886.There was a steep decline after 1987 till 1996. Since then its has been pretty stable. Causes for the fluctuations: 1980: In the early 1980s Malaysia began to suffer from the international recession and the Collapse of the commodity prices. The manufacturing industries showed a poor Performance due mainly to a recession in the global semiconductor industry and partly To Malaysias relatively weak competitiveness in technology. The performance of the

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Manufacturing sector was particularly poor in 1985. Apart from the increase in the unemployment rate, this short-run recession brought about a significant change in the labor market affecting various dimensions of workers security. There was an increase in casual or temporary labor and contract labor. Responding to the fluctuating market, companies replaced regular-full time workers already existed in the wood products industry, they became prevalent in all industries. By so doing, they could by-pass regulations about regular workers imposed on employers and other institutional rigidities. Contract labor was spreading for the same reason. Although these contracted workers were in a less precarious position than casual or temporary workers in terms of income, they were in the same position in terms of employment security loss. The absence of clauses to protect the rights of such workers as temporary or part time workers and the insufficient number of labor laws enforcing officers contributed to further spreading of this kind of employment pattern (Standing 1996: 66). This change in employment patterns meant more than job loss to workers, since basic welfare benefits were tied to employment, that is, regular full-time employment. Under this circumstance, unemployment meant the loss of employmentrelated welfare benefits as well as income. Employers felt less pressure to adapt to technological change, since most production work was fragmented into contract labor. This also consequently resulted in the loss of skills which would be the basis of their trade security. 1998: Unemployment increased from 2.4 % to 3.2 % in 1998, which implies that the impact of the Financial Crisis on the employment was less severe than that of the recession of the mid-1980s, resulting in an unemployment rate of almost 8%. One Malaysia-specific factor may explain this low unemployment just after the Financial Crisis. The rural areas were not severely affected by the financial crisis. In fact some areas such as Sarawak and Sabah producing primary commodities such as palm oil priced in US dollars, benefited from the financial crisis (Embong 2000: 137). These rural areas played a buffer role in absorbing the returned workers from the urban area1 3. Although the figure was not especially high, however, it may be wrong to take the unemployment rate at face value because it does not reflect dropouts or discouraged worker from the labor force (ADB 2000: 18). This is the case for Malaysia, which is a country with an agricultural sector large enough to absorb these discouraged workers. The unemployment in the construction sector, of which the governments public works project accounted for the majority, was particularly severe, together with the manufacturing sector. The Malaysian government policy response to the unemployment was composed of two contradicting policies. The government tightened the monetary and fiscal policy and postponed large scale infrastructure projects totaling more than RM 60 billion; the Baku hydro-electric dam, the Northern Region International Airport, the Highland Highway and the Kuala Lumpur Linear City were all postponed under government austerity measures. Civil servants pay was cut as the public Expenditure was curtailed. This led to the reduction of some allowances to employees and unemployment. Policy Responses to unemployment:

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In 1985, policies were aimed at restructuring the labor market in order to increase the representation of Malays in the non-agricultural sector were established .Facing the urgent need to recover the economy Dr Mahathirs government responded to this with a new approach composed of both old and new policies. The policy to increase Malay ownership continued. Policy emphasis on the increase in Malay employment was not changed. However the approach taken shows a significant difference from the predecessors in the field of employment policy and industrialization strategy. Based on the policy called Look East Policy which emphasized the developmental models of Japan and South Korea the Malaysian government set forth heavy Industrialization and urbanization with an emphasis on the change of values and attitudes of the Malays. The government vigorously pursued such projects as the establishment of a hot briquetted iron and steel billet plant, cement plants, the national car project and small engine plants through the Heavy Industries Corporation of Malaysia (HICOM), the governmental commanding headquarter of the heavy industrialization project. However these heavy industrialization projects faced stiff international competition due to the excessive global production capacity and protective measures. Consequently the overcapacity of these projects had a negative effect on the Malaysian economy. It raised the production costs and consumer prices. Since investment in the heavy industrialization project was mostly financed from external Foreign borrowing, the burden of the external debt of the Federal government increased. The federal governments external debt grew from 10 percent of the GDP in 1980 to 38 percent in 1986 (Ministry of Finance, Economic Report 1981, 1989). Urbanization strategy encouraged the migration of the rural Malays and their participation in the government work projects in urban areas .The government projects were not big enough to accommodate the migrant rural Malays, and the pulling effect of this urbanization strategy consequently contributed to an increase in unemployment in urban areas. The Look East Policy contained the intention of the government to withdraw from the provision of finance to education and vocational training to Bumiputera. In line with this, on-the-job training rather than the government job training provision was emphasized. Although the government established many educational courses in business, commerce, science and technical and related fields, it gradually relied on overseas funding, mainly from Japan. The government also made transfer of technology a condition of contract or joint ventures by foreign companies. One of the main changes in the vocational training field was the establishment of training programmes paid for by foreign companies doing business in Malaysia (Mocha do 1987: 6523). The intention to reduce the current account deficit was another reason for this regulation. Foreign funded exchange programmes, a precondition of contracts or joint ventures, no doubt contributed to the reduction of the current account deficit of Malaysia which had the largest number of government-funded students seeking degrees abroad. Another major component of the Look East Policy was to privatize government owned companies. Although the privatization initiative under the marketoriented reform was implemented without encroaching on Bumiputeras economic interests, the benefits were not for the poor or the unemployed but for newly emerging Malays Capitalists and politicians and bureaucrats who received kick-backs from those who benefited from the privatization initiatives.

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From 1988 the Malaysian economy gradually recovered from the recession. The annual GDP growth reached 9.8% and unemployment was relatively low, at 6% in 1990. The twenty-year-old NEP came to an end in 1991 and its successor, the ten-year New Development Policy (NDP) was launched. This was, in a sense, a turning point in economic management, since it downplayed the question of racial quota in employment. It meant that the government would not play a direct role in improving the living standard of Malays. The privatization initiative continued, as Proton (the state-owned automobile company) was partly privatized and the governments sponsorship of the Malays privileges was gradually reduced The recovering economy resulted in a shortage of workers.unemployment rate stood at about 3 % during The the first half of the 1990s and the shortage of labor force in low-waged and unskilled jobs, such as labourers in theconstruction in dustry, was met by the influx of migrant workers from neighboring countries such as Indonesia. number of foreign workers increased from 0.5 million workers in 1984 The to over 1.2 million in 1991 and 2.4 million in 1998. 1997: The Mahatir governments policy response to unemployment was not fundamentally changed from the previous years. The Policy focus on job security was maintained at the expense of the migrant workers. The government pursued the policy focusing on Malaysian job security by getting rid of the job security of migrant workers. The Malaysian economy quickly bounced back from the financial crisis in the region with a surging growth of 8.3 % in 2000 and the Malaysian job security oriented policy reduced the pressure of unemployment. Through exploitation of the ethnically divided labor market at the expense of the migrant workers job security, the Malays ian government was able to manathe unemployment ge problems caused by the financial crisis. The future of the unemployed in Malaysia, however, does not look promising. The governments effort to secure job security through general macro-economic management is in conflict with the relaxation of employment rules and regulations which consequently makes the market more flexible. The labor increase in casual and temporary workers leads to their exposure to a higher risk of job loss. Despite the increase of jobs in construction under governmentsrecently resumed large scale works projects, the the increasing migrant workers will reduce job opportunities for Malaysians and contribute to the lowering of real wages. The competition with migrant workers will result in a significant degree of income loss without government policy efforts to set the minimum wage. Since 2000 the government has begun to shift its focus to information technology and has established various government funded vocational training schemes, such as the Revolving Fund for Skill Development in which high school graduates can study information technology, at an estimated cost of 500 million ringgit (131.58 million dollars) (Xinhua News Agency, 5th of October, 2000). The intention was also reflected in the K-Economy Plan in September 2002. According to the plan the Malaysian government is to shift its economy from production-based (the so called P-Economy) to knowledge-based (the so called K-Economy), an economy dependent on brain rather than brawn, driven by mental rather than manual labor, more propelled by knowledge than by physical production (Sopiee

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2002). Despite the governments pledge not to dismantle or neglect the old industry, this high-skill and information-technology oriented job training is not readily available to those marginalized workers who are mostly low-skilled and uneducated Malays. Specific policy measures are urgently needed to guarantee their job and income security. The recent welfare reform trend is another factor to make the future of the unemployed seem bleak. As the government began to concentrate on non-inflationary financial resources for economic growth as well as social protection, (YB Datuk Dr Fong Chan Onn 2000), the contribution rate of both employers and employees to the provident fund has increased to 12 % and 11% of employees monthly wage respectively. The governments intention privatize public health care by making the employees reliant on the to provident fund is more likely to increase the contribution rate of the provident fund, which will lead to income loss in the short term and increased unemployment in the long term. W ithout comprehensive policies to guarantee both income and job security, next time Malaysia may not have the luck which they had in the Asian financial crisis.
(source: National Paper on unemployment by Malaysian Government)

Phillips Curve
The Phillips curve represents the relationship between the rate of and theUNEM PLOYM ENT INFLATION rate. Although he had precursors, A. W . H. Phillipss study of wage inflation and unemployment in the United Kingdom from 1861 to 1957 is a milestone in the development of macroeconomics. Phillips found a consistent inverse relationship: when unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly. Phillips conjectured that the lower the unemployment rate, the tighter the labor market and, therefore, the faster firms must raise wages to attract scarce labor. At higher rates of unemployment, the pressure abated. Phillipss curve represented the average relationship between unemployment and wage behavior over the business cycle. It showed the rate of wage inflation that would result if a particular level of unemployment persisted for some time. (source:http://www.econlib.org)

From the graph we can infer that at two points Malaysian economy witnessed Phillips curve i.e. from 1983 to 1988 and 1998 to 2003.

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Poverty
In Malaysia, the incidence absolute poverty of has traditionally been determined by reference to a threshold poverty line income (PLI). This PLI is based on what is considered to be the minimum consumption requirements of a household for food, clothing, and other non-food items, such as rent, fuel, and power There is no separate PLI for urban and rural households. The proportion of all households . living below this threshold is the proportion living in povertythat is the rate Poverty rates are poverty . available for household categories only: they are not available for individuals separately. The concept of hard-core poverty first used by the Malaysian government in 1989 to help identify and target poor was households whose income is less than half of the PLI. It is one indication of the severity of poverty. The term hard-core poverty in Malaysia does not, however, indicate the duration of time spent living below the poverty line. Poverty is multidimensional. It is, of course, more than a lack of income. Poverty is also associated with lack of access to basic education, health (including reproductive health) services and information, shelter, clean water, and sanitation. Economic growth increases the income of the population and tends to reduce the number of poor people. Economic growth also increases the governments revenue, which can be used to provide basic social services and infrastructure. But economic growth alone is rarely a sufficient condition for poverty reduction. Investing in increasing access to, and provision of, basic social services not only helps to provide opportunities for the poor, but also contributes to sustainable economic growth. Poverty eradication is the super goal among the MDGs, and Malaysias story in this regard is remarkable. Just below half of all households were poor in 1970. This proportion was halved in about 15 years, and more than halved again in the next 15 years. By 2002, just 5.1 per cent of households were poor. This success is not merely a statistical one based on setting the poverty line very low. Malaysia sets its poverty line at a higher

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standard of living than the US$1 PPP standard poverty line used by many countries and, in comparison with these countries, overestimates rather than underestimates the incidence of poverty.

Indicators of Poverty:
Proportion of population below $1 (PPP) per day Poverty headcount ratio (% of population below the national poverty line) Poverty gap ratio (incidence x depth of poverty) Share of poorest quintile in national consumption Prevalence of underweight children under five years of age Proportion of population below minimum level of dietary energy consumption

Trends :
Urban Rural differentials Malaysias poverty has been a predominantly rural phenomenon. In 1970, poverty rates were markedly higher in rural areas, where the bulk of the population lived. Subsequently, the poverty rate has declined for both rural and urban areas, but more conspicuously in rural areas, such that the urban-rural poverty gap is much reduced in absolute terms, but not in relative terms. The rural poverty rate in 1970 was twothirds of its 1980 level; it more than halved in the next 10 years and was halved again from 1990 to 2000. The urban poverty rate was halved every 10 years from 1970 to 1990. By 2002, just 2 per cent and 11.4 per cent respectively of urban and rural households were living in poverty. Although the urban poverty rate is very low, rapid urbanization that has occurred over the decades means that the number of the urban poor is now considered significant. Ethnic Disparities: Malaysias three main ethnic communities areBumiputera(Malays and other indigenous groups), the Chinese, and Indians. Historically, they were separated both geographically and occupationally, reflecting their differing settlement patterns. In 1970, when just 27 per cent of Malaysias 10.4 million persons were living in urban areas, Bumiputera(55 per cent of the population) were predominantly the rural. They were engaged mainly in rice cultivation, fishing, and rubber tapping, far away from the growing urban economy. The Chinese (36 per cent of the population) were a more urban community, dominating trade and commerce, as well as tin mining and commercial agriculture, while some Indians (approximately 10 per cent of the population) had settled in towns and were mainly concentrated in the rubber estates and plantations. Not unexpectedly, given the above, in 1970, poverty was markedly higher among the Bumiputerathan the other communities. Approximately two-thirds of Bumiputerahouseholds were living below the poverty linepoverty rates among Chinese and Indian households were 26.0 per cent and 39.2 per cent respectively

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As a result of policies adopted by Malaysia, there have been tremendous absolute declines among each of the ethnic groups, such that by 2002 the poverty rates were 7.3 per cent, 1.5 per cent, and 1.9 per cent for the Bumiputera Chinese, and Indians respectively. , Spatial Distribution of Poverty : The spatial distribution of poverty maps is closely related to Malaysias pattern of development. This, in turn, is closely linked to ethnic settlement patterns and industrial structures. Historically, the Bumiputera community lived in settlements along the coasts and riverbanks. Chinese and Indian migrants settled along the western coastal plains around the tin mines, agricultural estates, and urban Relatively centers . few of these communities settled in the east coast states, especially in Kelantan and Terengganu, which were sparsely populated in 1970. The big states of East Malaysia, Sabah and Sarawak, were also sparsely populated and undeveloped. At that time, the most populated states were Selangor, Perak, and Johor: only these states had more than one million persons. In 1970, there were wide disparities in poverty levels between the states. Poverty levels were lowest in the west coast states of Melaka, Selangor, and Johor and highest in Sabah, Kelantan, and Terengganu. There have been significant reductions in poverty rates for all of Malaysias 13 states and the Federal Territory of Kuala Lumpur over the three decades since 1970 . However, there are still sharp state differentials. Geographical and historical factors continue to matter. The west coast states of Peninsular Malaysia are more developed and have tended to attract more foreign direct investment (FDI). The railway and road system started in these states which are more accessible to the seaports facing the Straits of Malacca, a key maritime highway for international trade in South-East Asia. By contrast, Kelantan and Terengganu, until the discovery of offshore oil in the east coast, were less accessible and have attracted much less FDI. Currently, Malaysias poor are mainly concentrated in the states of Kelantan, Terengganu, Kedah, Perlis, and Sabah, and in particular in the rural areas of those states. Food Poverty The decline in the incidence of poverty in Malaysia is revealed by trends in other direct measures of welfare, especially nutrition. Improvements in the average levels of nutrition are likely to reflect improvements in the nutrition of low-income groups, since nutritional levels do not change substantially at higher income levels. Chronic hunger has never been a serious problem in Malaysia. Nutritional status, a crucial component of most poverty indicators, can be measured in various ways. One is the number of calories consumed by an individual during a given time period. The W orld Health Organization (W HO) defines this as the consumption of fewer than 1,960 calories a day. Other measures include the intake of protein and nutrients, while child nutrition may be measured by the weight by age and height. In Malaysia, to improve the nutritional levels of the poor, nutrition programmes were incorporated as an integral component of rural development programmes. Overall, the nutritional level of the population is satisfactory and improving, as seen in the trend of the amount of daily per capita intake of calories and protein .Government focus is currently on addressing moderate malnutrition among children below 5 years and iron deficiency among pregnant mothers. anemia

Reduction Of Poverty:

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Reductions in poverty level can be attributed to two reasons. Firstly, to a meanin rise incomes will always reduce the absolute poverty rate if the distribution of relative incomes is unchanged. If economic growth raises the incomes of all householdsthat is, shifts the entire income distribution to the right then the proportion of households below an absolute poverty line will inevitably fall. Secondly, poverty rates will fall if there favorablechange in relative household income distribution, is a even if the mean income level is unchanged. Since there is growing international evidence that economic growth has little discernible effect on relative income distribution, economic growth can confidently be expected to reduce poverty. But public policy can also work to strengthen the effects of favorable economic growth. In the Malaysian case, it is clear that both factors (economic growth and public policy) made important contributions to the impressive reduction in the incidence of poverty. The Malaysian economy experienced rapid economic growth over the last quarter of the twentieth century. Between 1971 and 2000, real GDP per capita grew at an impressive 4.2 per cent per annum, on average, as a result of effective public policy which played a direct and key role in alleviating poverty over the same period. International experience suggests that, as a simple rule of thumb, a 1 per cent increase in mean income will reduce the incidence of poverty by 2 per cent (W orld Bank, 2001). This is often referred to as the growth elasticity of poverty reduction. The Malaysian case provides a good example. Over the period 19702000, the average percentage reduction in poverty was around 7.5 per cent per year; over the same period, real GDP per capita grew on average at a rate of 4.2 per cent, giving a growth elasticity of 1.8. This indicates that for every 1 per cent growth in GDP per capita, poverty is reduced by 1.8 per cent. Over the post-1990 period, the elasticity was even higher at 2.7. However, these averages mask substantial business-cycle variations in Malaysias economic growth. Malaysia experienced three major recessions during the last quarter of the twentieth century: in 1975, real GDP per capita fell by 1.5 per cent due to the world oil crisis (real GDP rose modestly by 0.8 per cent that year); in 1985-6, due to weak external demand, real per capita GDP fell on average by 2.8 per cent per year; and in 1998, following the Asian financial crisis of 1997, real GDP fell by over 7 per cent and real GDP per capita by nearly 10 per cent. This last recession was particularly severe and it threatened to destroy the efforts of more than two decades and reverse the significant progress achieved in reducing poverty. These three periods of negative growth inevitably, but temporarily, slowed progress in poverty alleviation. The 1998 recession had a particularly pronounced impact on poverty: the poverty rate rose temporarily to 7 per cent from 6.1 per cent a year earlier. The impact of the crisis would have been greater if not cushioned by the presence of a migrant workforce that bore the brunt of the slowdown in economic activities, particularly in the construction sector. Open economies like Malaysia cannot avoid the impact of external shocks. One role for public policy is the macroeconomic management of crises arising from such shocks and, in the Malaysian case, due to policy interventions, the setbacks were relatively short lived in each case: real GDP per capita grew at 8.6 per cent in 1976, by 6.4 per cent in 1988, and by 5.5 per cent in the year 2000. The post-1998 recovery was particularly problematic, given the severity of the recession.

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After initially adopting tight monetary and fiscal policies, the government acted swiftly on the advice of the National Economic Action Council (NEAC) in mid-1998 by relaxing fiscal and monetary policies, imposing capital controls, and pegging the Ringgit at RM3.80 to the US dollar. Malaysia was alone among the Asian countries affected by the crisis in adopting these policies. The measures taken were largely successful, as evidenced by the countrys relatively rapid return to growth favorable Despite these temporary setbacks, Malaysia is a good example of the growth elasticity concept in practice. Economic growth was undoubtedly the linchpin of Malaysias successful poverty-eradication programme. But, in addition to ensuring a stable macroeconomic environment, public policy had additional vital roles to play. Economic growth on its own may not be sufficient to reduce poverty to socially acceptable levels. Growth that fails to deliver employment opportunities to poorer individuals will obviously have little impact on the incidence of poverty. The role of public policy in achieving poverty reductiona role that can be broadly covered under three objectives: firstly, the need to promote poverty-alleviating growth, sometimes referred to as a pro-poor growth strategy; secondly, the need to provide the social and physical infrastructure required for a growing economy; and finally, the need to execute public policy that directly assists specific target groups amongst whom poverty incidence is highest.

M alaysias Development Plans


Malaysia is a resource-rich country and these resources have provided the foundation for much of the economys growth. Moreover, successive governments have provided an appropriate legal framework and stable democratic political setting for the economy to take full advantage of its rich natural and human resources. Medium-term economic planning in Malaysia has been effected through a series of five-year plans, and the countrys relatively high-quality public administration has allowed for effective implementation of its development policies and programmes Three strategic poverty-reducing approaches were employed. The first was a strong emphasis on agricultural and rural development to raise the income of poor farmers and agricultural workers by raising their productivity. The third was channelingof public investment into education, health, and the basic infrastructure, especially in rural areas, to raise the living levels of the poor. The governments steady revenue growth and continued political stability have enabled these policies to be pursued uninterruptedly. At the start of the 1970s, Malaysias economy was agriculture-based and heavily dependent on a few major primary products that were susceptible to volatility in world commodity prices. Government policy aimed to move the economy away from overdependence on a narrow range of sectors and it began to embark on rapid industrialization and diversification programmes. These included several phases of industrialization, from import substitution to export-led growth and the encouragement of foreign direct investment. They also included employment-creation programmes to combat high levels of unemployment, particularly of youths, caused by rapid growth labor force. of the Openness Malaysia is an open economy and total external trade accounts for more than 200 per cent of its GDP. External factors have a large impact on trade and, through trade, on growth. In 1970, growth was mainly

Malaysia

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dependent on primary agricultural commodities, especially rubber. Year to year volatility in the price of rubber and palm oil eroded the incomes of smallholders. Between 1971 and 1985, a combination of export-promotion and import substitution policies formed the trade strategy in Malaysia. As a result of Malaysias export-oriented strategy, manufactured exports now account for about 80 per cent of total exports compared with 12 per cent in 1970. The more outward-oriented phases of trade helped to keep labor markets tight and to improve income distribution. Nevertheless, while openness ensured that Malaysia remained keenly aware of its global competitiveness, with trade contributing significantly to growth, it also made the country vulnerable to external developments. In particular, global economic slowdowns in the industrialized countries, where Malaysias major markets are located, have led to slowdowns in the economy. Rural Development Agriculture and rural development were given strong emphasis in the early years of development in Malaysia. The land development scheme led by the Federal Land Development Authority (FELDA) to resettle the landless operated under the Rural Economic Development (RED) book programme which included establishing development institutions in the First and Second Malaysia Plans to support the agricultural sector. For example, in 1969, the Federal Land Consolidation and Rehabilitation Authority (FELCRA) was established to provide the technical management inputs of the overall operation of the land resettlement scheme. Other established development institutions include the Malaysian Agricultural Research and Development Institute (MARDI) in 1969, Pertanian Malaysia Bank (1969), and the Malaysian Rubber Development Corporation (MARDEC) in 1966. The expansion and support of the rubber industry was overseen by the Rubber Industry Smallholders Development Authority (RISDA), established in 1973 while the modernization of the fishery sector brought about the existence of the Development Fishery Authority of Malaysia or Lembaga Kemajuan Ikan Malaysia (LKIM) in 1971. These programmes all played a pivotal role in reducing poverty in Malaysia.

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FOREIGN DIRECT INVESTM ENT


Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. More specifically, foreign direct investment is a cross-border corporate governance mechanism through which a company obtains productive assets in another country .Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. Foreign Direct Investment (FDI) in Malaysia is set up following the holding of at least 10% of the total equity in a resident company by a non-resident investor. Consequent transactions in financial assets and liabilities between resident companies and non-resident direct investors linked by a foreign direct investment relationship (FDIR) can also be known as FDI. The transactions could be between Malaysian companies and with its immediate or ultimate parent or fellow companies. Malaysia has been one of the most successful Southeast Asian countries in attracting Foreign Direct Investment (FDI). It has always endeavored to maintain the competitiveness of FDI determinants like legal infrastructure. Many policy instruments have been set up. The Malaysian government has improved the value of the present determinants and is considering new strategies to attract FDI. Since gaining independence in 1957, Malaysia has taken advantage of tangible assets like natural resources, abundant labor as well as intangible assets like trade status under Generalized System of Preferences (GSP), macroeconomic stability, liberal trade regime, and a resourceful legal infrastructure to bring in FDI. The Government of Malaysias (GOM) main policy is to bind FDI as a part of the economic development strategy to acquire foreign technology, capital, and skills. Malaysia has been an encouraging economy to foreign investors. The reinvestment and the new capital injection among the present foreign companies specified their assurance in Malaysian investment. The FDI movement is derived from financial institutions and non transaction factors like foreign exchanges, price changes, and other changes during the reference period. Put in the other way, the movement is derived from the differences between the closing and opening positions of the year. Investment income of FDI has three parts; reinvested earnings, dividends, and interests. Interests are income on loans and debt securities. Dividends are distributed earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises, public corporations, and cooperatives.

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(http://www.tradechakra.com/economy/malaysia/fdi-in-malaysia-198.php)

Foreign Direct Investment and Economic Growth in Malaysia


M alaysia is a growing and relatively open economy. In 2007, the economy of M alaysia was the 29th largest economy in the world by purchasing power parity with gross domestic product for 2007 was estimated to be $357.9 billion (World Bank, 2007). Malaysia has a consistent record of economic growth in GDP over the period 19702005, averaging an annual rate of about 7 per cent. Because of its open economy, externalities have had a major impact from time to time including the oil crises of the 1970s, the downturn in the electronics industry in the m id 1980s, and especially the Asian financial crisis of 1997. The impact of this crisis was still being felt early in the twenty-first century. Standards of living of the majority of the population were transformed over the 30-year period with the level of GDP per capita in 2000 being about four times that of 1970. The boom in the economy went uninterrupted from 1988 to 1996 when the economy grew by between 7 and 10 percent per annum. The main source of growth was the manufacturing sector whose share of GDP increased to 31.4 percent in 2005 (Ministry of Finance, 2006). Foreign direct investment (FDI) has been seen as a key driver underlying the strong growth performance experienced by the Malaysian economy. Policy reforms, including the introduction of the Investment Incentives Act 1968, the establishment of free trade zones in the early 1970s, and the provision of export incentives alongside the acceleration of open policy in the 1980s, led to a surge of FDI in the late 1980s. To attract a larger inflow of FDI, the government introduced more liberal incentives including allowing a larger percentage of foreign equity ownership in enterprise under the Promotion of Investm ent Act (PIA), 1986. This effort resulted in a large inflow of FDI after 1987(the inflow of FDI grew at an annual average rate of 38.7 percent between 1986 and 1996). Apart from these policy factors, it is generally believed that sound macroeconomic managem ent, sustained economic growth, and the presence of a well functioning financial system have made M alaysia an attractive prospect for FDI. (Ministry of Finance, 2001). The major areas of investment by foreign companies are in sectors such as electronics and electrical products, chemicals and chemical products, basic metal products, nonmetallic mineral products, food manufacturing, plastic products, and scientific and measuring equipment. (M inistry of Finance, 2001).

FDI and the Crisis


Foreign direct investment was a key factor in the rapid economic growth and structural transformation of East Asian countries in the lead-up to the crisis, enabling them to maintain investment levels well above

Malaysia

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their domestic saving capacity. FDI played an even more important role in their industrial transformation through transfer of technology, management practices, and marketing know-how, while improving the overall quality of investment. The crisis revealed structural weaknesses in the financial and corporate sectors of the affected countries, sparking fears that FDI flows to them would decline permanently, thus delaying the recovery and undermining the long-term growth potential of these countries. The crisis can be said to have generated positive as well as negative impacts on FDI. On the negative side, domestic demand contraction caused by output collapse and lowered immediate growth prospects discouraged domestic market-oriented foreign investment. Policy uncertainty, particularly during the initial adjustment phase, hampered all types of foreign investment. But there are at least two ways in which the crisis could have had an indirect positive impact on FDI. First, large currency depreciations reduced domestic production costs and asset values, making foreign investment more profitable. Since depreciation of host country currencies makes foreign firms wealthier in terms of their purchasing power, investment can increase. Second, revisions to FDI laws that were included among crisis management and corporate restructuring packages in affected countries opened up new opportunities.

POLICIES:
Malaysia has continued to promote FDI aggressively, despite its radical policy shift in September 1998. Capital controls were confined to short-term capital flows and aimed at making it harder for short-term portfolio investors to speculate, and for offshore hedge funds to drive down the currency. No new direct controls were imposed on import and export trade, and profit remittances and repatriation of capital by foreign investors remained free. Immediately following the imposition of capital controls, BNM experimented with new regulatory procedures in this area. But these were swiftly removed in response to protests from firms. Moreover, measures were introduced to further encourage FDI participation in the economy. These included allowing 100 percent foreign ownership of manufacturing regardless of the degree of export orientation; increasing the foreign ownership share limit in telecommunication projects, stock broking, and insurance companies; and relaxing curbs on foreign investment in land property. (source http://aric.adb.org/pdf/aem/mar01/Mar_ARR_special.pdf) :

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Balance Of Payments
BOP: An account of all receipts and payments is termed as balance of payments. Most of exports and imports involve finance i.e. receipts and payments in money. According to Kindle berger, the balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time". The balance of payment record is maintained in a standard double-entry book-keeping method. International transactions enter in to the record as credit or debit. The payments received from foreign countries enter as credit and payments made to other countries as debit. Balance of Payment is a record pertaining to a period of time; usually it is all annual statement. All the transactions entering the balance of payments can be grouped under three broad accounts; (1) Current Account, (2) Capital Account, and (3) Official International Reserve Account. Structure of Balance of Payment (BOP)

Trade account balance: It is the difference between exports and imports of goods, usually referred as visible or tangible items. Trade account balance tells as whether a country enjoys a surplus or deficit on that account.

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Current account balance: It is difference between the receipts and payments on account of current account which includes trade balance. The current account includes export of services, interests, profits, dividends. Capital account balance: It is difference between the receipts and payments on account of capital account. The capital account involves inflows and outflows relating to investments, short tern borrowings/lending, There can be surplus or deficit in capital account.

POSITIVE BOP: If a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. NEGATIVE BOP: A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. EXPLORATORY POINTS OF BOP ON MALAYSIA: Malaysias balance of payments estimates is to provide information on its economic performance and rest of the world in terms of magnitude and types of transactions in current, financial and capital accounts. These estimates also indicate as to whether Malaysia has net claims or liabilities to the rest of the world. The net FDI of RM27.7 billion recorded in 2010 is equivalent to 3.6 percent of GDP. The increase in 2010 has returned net FDI to a level comparable to the 200608 average of RM25.3 billion (or 3.9 percent of GDP). These economies include Malaysia, Indonesia, Thailand, Brazil, Columbia, Mexico, India and Poland. Malaysia is the only country within this group in which the risk of economy is relatively low and the local currency value is still lower than what medium-term fundamentals suggest.

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TABLES
Table 1. DP : G
GDP constant prices GDP current Prices Sno in billion ringgit in billion ringgit 1980 100.198 54.285 1981 107.154 58.669 1982 113.519 63.726 1983 120.615 70.841 1984 129.977 81.009 1985 128.39 78.89 1986 130.323 72.907 1987 137.346 81.085 1988 150.995 92.37 1989 164.675 105.223 1990 179.508 119.082 1991 196.646 137.163 1992 214.225 152.959 1993 235.419 174.793 1994 257.068 198.414 1995 282.456 225.83 1996 310.79 257.567 1997 333.526 286.051 1998 309.217 287.521 1999 327.815 305.307 2000 356.4 356.4 2001 358.246 352.58 2002 377.558 383.212 2003 399.413 418.769 2004 426.506 474.047 2005 449.25 522.445 2006 475.526 574.442 2007 506.341 642.049 2008 530.683 742.47 2009 522.001 679.938 2010 559.554 765.966

(source:imf.com)

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Table 2.Per Capita Nominal and Real Values

sno per capita constant per capita current 1980 7281.823 3945.164 1981 7599.545 4160.95 1982 7850.588 4407.086 1983 8138.647 4780.065 1984 8556.734 5333.024 1985 8216.747 5031.281 1986 8089.6 4525.558 1987 8308.901 4905.323 1988 8913.531 5452.774 1989 9491.342 6064.726 1990 9916.246 6578.244 1991 10699.13 7462.749 1992 11417.89 8152.496 1993 12033.47 8936.538 1994 12782.08 9865.653 1995 13652.3 10915.3 1996 14681.37 12167.19 1997 15394.32 13203.06 1998 13941.57 12963.36 1999 14433.63 13442.62 2000 15312.77 15312.77 2001 14918.9 14918.9 2002 15269 15497.65 2003 15774.61 16539.61 2004 16464.17 18299.37 2005 16967.62 19732.11 2006 17722.68 21409.24 2007 18625.06 23616.9 2008 19269.19 26959.21 2009 18712.87 24374.64 2010 19806.87 27113.36

(source:imf.com)

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Table 3.Purchasing Power Parity : GDP and Per capita Income


ppp valuation of country in billion ringgit ppp per capita gdp 32.335 2349.955 37.821 2682.321 42.512 2939.957 46.955 3168.359 52.5 3456.245 53.616 3419.388 55.433 3440.89 60.115 3636.748 68.36 4035.411 77.368 4459.27 87.592 4838.691 99.355 5405.721 110.803 5905.688 124.456 6361.59 138.76 6899.72 155.646 7523.004 174.52 8244.144 190.593 8797.096 178.698 8056.917 192.234 8464.024 213.52 9173.915 219.476 9139.917 235.052 9505.861 253.888 10027.157 277.647 10717.858 301.306 11379.963 329.306 12270.452 360.741 13269.383 386.469 14032.763 384.158 13771.426 416.535 14744.356

sno 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(source:imf.com)

Table 4.Unemployment :

Malaysia Unemployment Year of labor force) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 rate (% Percent Change 3.4 3.8 5 5.6 7.4 7.3 7.2 5.7 4.5 4.345 3.7 4.1 2.947 3.143 2.516 2.445 3.197 3.428 3.002 3.53 3.475 3.611 3.544 3.534 3.327 3.2 3.3 3.6 3.3

Global Business Project

0 10.52631579 24 10.71428571 19.85% -0.65% -1.56% -16.88% -24.72% -14.05% -14.43% -18.61% -2.61% 6.65% -19.95% -2.82% 30.76% 7.23% -12.43% 17.59% -1.56% 3.91% -1.86% -0.28% -5.86% -3.82% 3.12% 9.09% -8.33%

Table 5.Inflation:
Year Inflation, average consumer prices

Malaysia 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Global Business Project 5.834 3.704 3.904 2.587 0.35 0.737 0.29 2.557 3.043 4.328 4.778 3.547 3.687 3.468 3.479 2.655 5.293 2.731 1.551 1.427 1.793 1.074 1.42 3.049 3.609 2.027 5.4 0.6 1.7

(source:indexmundi.com)

Table 6.Poverty

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Table 7.Foreign Direct Investments

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Table 8. BOP

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Table 9.BALANCE OF PAYMENTS OF GOODS FROM 2004-2010:


2004 2005 2006 2007 2008 2009 2010

Export ($) 126.8 Import$ 99.2 142.5 108.5 160.8 124.1 176.3 139.1 196.5 148.6 170.8 135.3 171.4 141.1

BIBLIOGRAPHY

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Global Business Project

www.tradingeconomics.com www.worldbank.org www.indexmundi.com www.imf.org www.googlescholar.com www.ebscohost.com www.mir.com www.econlib.com www.statictics.gov.my www.tradechakra.com www.fdi.net www.nationmaster.com