TOPIC: An outline of the Malaysian

Economy and world ratings

Table of Content:
No
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Title
Introduction
Description of Situation/Problem Statement
Solutions/Views to offer
Conclusion/General Remarks
References
Appendices

Page
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1.1: INTRODUCTION
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,
liquified natural gas, etc.
Malaysia is rich in natural resources and its traditional economic strength lay in
commodities. The old ethnic division of labor (Malays in agriculture, Indians in the
professions and plantations, and Chinese in mining and commerce) has steadily
eroded. In its place, the Malaysian workforce is increasingly divided by class and
citizenship. Educated urban professionals fill the offices of large companies in a
multi-ethnic blend. Those without educational qualifications work in factories, petty
trade, and agricultural small holdings. As much as 20 percent of the workforce is
foreign, many from Indonesia and the Philippines, and dominate sectors such as
construction work and domestic service. However, as time changes these ethnic
division of labor also changes as everyone contribute to devolution of the economy.
Malaysia has a long history of internationally valued exports, being known from the
early centuries A.D. as a source of gold, tin and exotics such as birds feathers,
edible birds nests, aromatic woods, tree resins etc. The commercial importance of
the area was enhanced by its strategic position athwart the seaborne trade routes
from the Indian Ocean to East Asia. Merchants from both these regions, Arabs,
Indians and Chinese regularly visited. Some became domiciled in ports such as
Melaka (formerly Malacca), the location of one of the earliest local sultanates
(c.1402 A.D.) and a focal point for both local and international trade.
Malaysia has long been integrated into the global economy. Through the early
decades of the twentieth century, the Malay Peninsula was a world leader in the
production of tin (sparked by the Western demand for canned food) and natural
rubber

(needed

to

make

automobile

tires).

The

expansion

of

Malaysia's

industrialization heightened its dependence on imports for food and other

necessities. The boom and bust in primary commodities such as rubber and tin have
given Malaysian society a cyclical rhythm tied to fickle external demand. In the
1970s the government began to diversify the economy (helped by an increase in oil

exports) and Malaysia is now well on its way to becoming an industrial country. The
country has a growing automotive industry, a substantial light-manufacturing sector
(textiles, air conditioners, televisions, and VCRs), and an expanding high technology
capacity (especially semi-conductors).
The driving force came from the Industrial Revolution in the West which saw the
innovation of large scale factory production of manufactured goods made possible
by technological advances, accompanied by more efficient communications (e.g.,
railways, cars, trucks, steamships, international canals (Suez 1869, Panama 1914),
telegraphs) which speeded up and greatly lowered the cost of long distance trade.
Industrializing countries required ever-larger supplies of raw materials as well as
foodstuffs for their growing populations. Regions such as Malaysia with ample
supplies of virgin land and relative proximity to trade routes were well placed to
respond to this demand. What was lacking was an adequate supply of capital and
wage labor. In both aspects, the deficiency was supplied largely from foreign
sources.
During the 1980s and 1990s, however, the character of the economy changed
radically as it developed into a predominantly manufacturing country focusing on
export-oriented electronic and electrical equipment (manufacturing contributed
24.2 per cent of GDP in 2012) but also cars, and a wide range of goods for the
domestic market. Manufacturing output grew by more than nine per cent p.a. during
the two decades 19802000 and 3.4 per cent p.a. 200010. Latterly, the services
sector, too, has been growing rapidly.
Malaysia has one of the highest standards of living in SE Asia, largely because of its
expanding industrial sector, which propelled the country to an 8%9% yearly growth
rate from 1987 to 1997. Growth contracted during the 199798 Asian financial
crisis, and the government was forced to cut spending and defer several large
infrastructure projects. Unemployment and interest rates rose, and thousands of
foreign workers, many of them from Indonesia, were forced to leave the country.
The economy began recovering in 1999, and growth continued into the early 21st
cent. Despite long-term efforts of the government to improve the economic status
of Malays through preferences, the Chinese have generally continued their longstanding dominance of the economy. The economic status of Malays, however, has

significantly improved, leading to resentment among South Asians who, though

largely poor, are not eligible for the opportunities open to Malays.
Malaysia is a large producer of rubber and tin; palm oil, crude petroleum and
petroleum products, electronics, textiles, and timber are also important. Since the
late 1980s, the government has moved to privatize large industries that had been
under state control, and foreign investment in manufacturing has increased
significantly. Pinang city is the chief port. Subsistence agriculture remains the basis
of livelihood for about 13% of Malaysians and agriculture provides about 8% of GDP.
Rice is the staple food, while fish supply most of the protein. Cocoa, coconuts, and
pepper are also important agricultural products. Industry is largely concentrated in
West Malaysia. The major cities on the Malay Peninsula are connected by railroads
with Singapore, and an extensive road network covers the west coast. Malaysia's
exports include electronic equipment, petroleum and liquefied natural gas, wood
and wood products, palm oil, rubber, chemicals, and textiles. The main imports are
electronics, machinery, petroleum products, plastics, vehicles, iron and steel, and
chemicals. The major trading partners are the United States, Singapore, Japan, and
China.
Malaysia maintained its top 20 position among 61 global economies in the World
Competitiveness Yearbook (WCY) 2016 published by the World Competitiveness
Centre of the Institute for Management Development in Lausanne, Switzerland.
However, the country fell five spots to 19th from 14th last year, due to the fall in
commodity prices, a strong dollar and the deterioration of balance sheet in both the
private and public sectors. The rankings were assessed for 61 countries this year as
compared to 60 last year. The top five countries are Hong Kong, Switzerland, the
United States, Singapore and Sweden.
Malaysia owes its successful historical economic record to a number of factors.
Geographically it lies close to major world trade routes bringing early exposure to
the international economy. The sparse indigenous population and labor force has
been supplemented by immigrants, mainly from neighboring Asian countries with
many

becoming

permanently

domiciled.

The

economy

has

always

been

exceptionally open to external influences such as globalization. Foreign capital has

played a major role throughout. Governments, colonial and national, have aimed at

managing the structure of the economy while maintaining inter-ethnic stability.

Since about 1960 the economy has benefited from extensive restructuring with
sustained growth of exports from both the primary and secondary sectors, thus
gaining a double impetus.

1.2: DESCIPTION OF SITUASION/PROBLEM STATEMENT

Agriculture employs around 12% of Malaysians and contributes less than 9% of the
GDP. Malaysia ranks amongst the world's main producers of palm oil, cocoa and
rubber. The country is also one of the main exporters of tropical wood. Malaysia has
successfully developed its economy based on raw materials (the export of rubber
and tin, significant reserves of oil and gas, copper and bauxite).
Industry contributes 40% of the GDP and employs over 27% of the population.
Malaysia is one of the world's largest exporters of semi-conductor devices, electrical
goods and appliances, and the Government has ambitious plans to make the
country a key producer and developer of high-tech products, including software.
Malaysia is a major outsourcing destination for components manufacturing, after
China and India. The country has attracted significant foreign investment, which has
played a major role in the transformation of its economy.
The tertiary sector employs the majority of the population (more than 60%) and
accounts for more than half of the GDP, which is due mainly to the tourism sector.
Malaysia has become one of Southeast Asia's major tourist destinations.
In the opening of the year, there was an excitement of hopeful and cheerful
sentiments for better global economic performance. However, as the year progress,
the prospects somewhat dwindles. The first quarter results for some economic
indicators, particularly on external trade, are not very promising. Total gross exports
continued to grow slowly for the first five months of this year registering an average
growth of 1.0%, as compared to the average growth of 1.9% in 2015 and 6.3% in
2014. The first quarter balance on the current account of the balance of payments
recorded a lower surplus of RM5.0 billion as compared to a surplus of RM11.3 billion
at the same quarter of last year.

Malaysias growth remains resilient. Malaysia grew 5% in 2015 and is expected to

grow 4.4% in 2016. Private investment growth is expected to moderate given a less
optimistic business sentiment and as commodity prices and global economic growth
remain subdued. Malaysia's GDP is expected to grow at 4.5% in 2017 and 4.7% in
2018 as commodity prices recover and global economic growth improves. Besides,
fiscal consolidation remains on track despite lower oil-related revenues achieved
through

reduction

in

the

governments

operating

expenditures

and

the

implementation of the GST in April 2015.

The issue of lower crude oil prices seems to be adapted by many after two years of
creating havoc in the global economy. Oil prices were hovering around USD45-49
per barrel in the second quarter, almost touching the psychological level of USD50.
Prices have shown sign of improvement despite OPEC countries fail to reach any
consensus due to differences in national interest among member countries. Thanks
to unexpectedly lower oil production, to a certain extent, from some non-OPEC
countries. Total oilrig counts have decreased tremendously for the past two years,
implying lower world oil production. The world total of oilrigs for the second quarter
of 2016 was 35.1% lower than the same quarter of last year, which in turn, was
36.0% lower than the second quarter of 2014. Meanwhile, total oilrig counts in the
Middle East for the second quarter of this year declined by only 3.7% from the
second quarter of last year. Therefore, OPEC policy of maintaining its market share
seems not very effective to push prices up, pointing to the weak demand conditions
that could be the probable reason.
On the domestic front, domestic demand is expected to continue to be the engine of
growth for the Malaysian economy for this year. Global economic growth fails to
gain momentum as recoveries for some economies are still fragile. Weakened global
trade and capital flows persist. Lower commodity prices remain a stumbling block
for the growth of developing economies, which in turn, slows down the developed
economies. Meanwhile, political upheavals in some countries influenced business
sentiments around the world.
Malaysia's real GDP growth for 2016 is maintained at 4.2%, although global
prospects are not encouraging. The shortcoming is expected to be compensated by
better domestic demand as a result of an expansionary monetary policy. Growth will

be driven largely by private sector expenditures as liquidity condition improves. The

2016 domestic demand growth have been revised upward by 0.1 percentage points
from our April 2016 projection of 4.5%, as a result of an improvement in private
consumption.

Meanwhile,

private

investment

growth

is

revised

marginally

downward by 0.1 percentage points from our April 2016 projection. Public
investment is expected to pick up the shortcoming by growing at 1.4%, a
turnaround from a negative growth of 1.0% last year. Public infrastructure
development is expected to continue as planned.
Meanwhile, net exports are expected to moderate further as external demand
remains sluggish. As such, we have revised downward Malaysia's net exports annual
growth from our April projection of 1.2% to a contraction of 0.5% on account of a
slower growth of exports with the rate of 2.5%, down from the April projection of
2.7%. Meanwhile, imports are expected to grow stronger at 2.9% (2015: 1.3%),
mostly anticipated for intermediate and capital goods, which is good for future
production and exports.
Malaysias near-term economic outlook remains broadly favorable, reflecting a welldiversified economy, despite some risks. Recent increases in the minimum wage
and public sector salaries to support households income may prove challenging to
sustain as fiscal consolidation continues, which raises the importance of boosting
labor productivity and increasing the efficiency of the social protection.. Other risks
are related to the volatility in capital flows from the normalization of US monetary
policy. The long-term sustainability of this favorable outlook hinges on structural
reforms to strengthen medium-term fiscal planning, and to boost capabilities
and competition within the economy.
Accelerated implementation of productivity-enhancing reforms to increase the
quality of human capital and create more competition in the economy will be key for
Malaysia to secure a lasting place among the ranks of high-income economies.
Malaysia has been working to address these challenges.
Crucial to Malaysias economic development is the continued transformation of its
industrial base into one predicated on high value-added products and driven by
innovation, automation and increased productivity. Such a shift is important to
ensure the country is well-placed to compete in an increasingly competitive and

open global market, a trend exemplified by the commencement of the ASEAN

Economic Community in 2015 and the signing of the Trans-Pacific Partnership
agreement in February 2016. While hypermarkets, convenience stores, and
traditional markets and stores all jostle for position in the countrys cities, towns and
villages, online retail is also developing apace. Despite short-term challenges, the
sector continues to offer great potential, as more innovative retail experiences and
the rollout of modern shopping centres continue to characterise the market.