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 Chapter 1

Overview of Malaysian
Economy
Rajah Rasiah

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 1.0 Introduction
A brief economic history of Malaysia
 Located in one of the busiest sea trading routes in the world – the
waterways of the straits of Malacca and the South China Sea.
(Geographically – strategic location midway the trade routes between China and
India. Its port hidden from south-west and north-west monsoon wind, natural deep
port.)
 The early minor commodity production with exchange of spices
by river mouth ports was eventually replaced by large scale
mining and plantation agriculture activities during colonial rule.
 Tin mining had already started in the state of Perak before direct
British intervention in peninsular Malaysia began in 1874. It took the
country more than two decades of independence before mining and
agriculture to manufacturing as the leading generator of gross
domestic product (GDP).
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 1.0 Introduction

 GDP is one of the primary indicators used to measure

the health of a country’s economy. It represents Ringgit
Malaysia value of all goods and services produced over
specific time period.
 In other words, GDP is the monetary value of all finished
goods and services produced within a country’s borders
in a specific time period (normally in a year). It is usually
calculated on an annual basis.
 GDP includes all private and public consumption, government
expenditure, investments and export minus imports. GDP is a broad
measurement of a nation’s overall economic activity.
GDP = C + G + I + NX
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 INTRODUCTION

 Malaya achieved independence from Britain on 31

August 1957 and on 16 September 1963 joined
Sabah, Sarawak and Singapore to form Malaysia.
Singapore left the formation in 1965 to become
independent country.
 Malaysia managed to enjoy structural transformation
from specialization in the primary sectors until the
early 1980s to specialize in the secondary sectors
thereafter.
 Manufacturing became the leading sector in 1984
and from 1988.
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 GROWTH AND STRUCTURAL
CHANGE
 The Malaysian economy has undergone
considerable structural change since independence.
The primary sectors of agriculture and mining
dominated the economy in the 1960s and the
1970s. Rapid industrialization transformed the
economic structure so that manufacturing became
the leading contributor to GDP in 1984 and from
1988 until 2009.

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 ECONOMIC GROWTH
 Malaysia has recorded impressive economic growth
rates since independence . Unlike most economies
that started with heavy dependence on primary
commodity exports, Malaysia has successfully
diversified its export structure and promoted
industrialization to reduce its susceptibility to the
trade fluctuations.
 Malaysia has recorded its highest annual GDP
growth rates exceeding 11% in 1973 and 1976 (Fig.
1.1). Over a longer period, Malaysia enjoyed its
highest annual GDP growth rates of 9% or more
over the period 1988 to 1996.
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 Figure 1.1 GDP and GDP per capita growth rates in Malaysia, 1961–2009 (%)

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

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 ECONOMIC GROWTH

 A combination of a massive inflow of foreign direct

investment (FDI) from Japan, Korea, Taiwan and
Singapore precipitated by the Plaza Accord of 1985
and the withdrawal of the Generalized System of
Preferences (GSP) from Korea, Taiwan, Hong Kong,
and Singapore in February 1988, and depreciation
in the Ringgit and the introduction of generous
activities in 1986 played a critical role in driving rapid
GDP growth rates dipped over these years.

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 ECONOMIC GROWTH
 The only years when GDP growth rates dipped into negative
figures arose as a consequence of external events.
 Falling commodity prices, rising yen – denominated debt
service that was initiated to stimulate heavy industrialization
and a cyclical bust in the electric-electronics industry caused a
fall in GDP by 1.1% in 1985.
 Volatile destabilization from a currency crisis that started with
a crash in the baht in 1997 and subsequently led to runs in
both currency and capital markets drove GDP down by 9.8%
in 1988.
 GDP fell again by 1.7% in 2009 following a contraction in
exports caused by the global financial crisis of 2008-2009.
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 ECONOMIC GROWTH

 However, since 1995 there has been slowing down

of GDP growth rates. Average annual GDP growth
rates fell to 4.8, 4.7 and 3,7% per annum,
respectively, over the periods 1995-2000, 2000 –
2005 and 2005 – 2009.
 GDP only grew by 0.5% in 2001. This slowdown has
raised serious concerns to which the Malaysian
government has responded by launching the New
Economic Model (NEM) and the Economic
Transformation Programme (ETP) to revive
economic growth and structural change into higher
value-added activities.
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 ECONOMIC GROWTH
 High GDP growth rates amounting to our exceeding 9% a
year over the period 1988 – 1995 lowered unemployment
rates and caused labor shortages particularly in the
western corridor of Malaysia. The government took
advantage of the situation to lauch several initiatives to
stimulate upgrading toward higher value-added activities.
 Several meso-organizations were started to realize the
goals of the Action Plan for Industrial Technology
Development (APITD), which was formulated in 1990. the
late 1990 also saw the government embark on the vision
2020 programme to make Malaysia a high-income country
by 2020.

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 GROSS DOMESTIC PRODUCT BY ECONOMIC
ACTIVITIES

 The Malayan economy was dominated by exports of minerals and

agriculture (especially rubber and tin) at independence. The
Malaysian government chose to target agriculture and most
importantly manufacturing to support its ethnic restructuring
objective.
 Agriculture still dominated until the early 1980s when the
government pursued industrialization more vigorously through
the Look East Policy to emulate the experience s of Japan and
Korea.
 Whereas, NEP identified foreign direct investment as a major
instrument to generate jobs and manufacturing as the engine of
growth, government forays dominated attempts to promote the
integration of the rural Bumiputera economy with industry, trade
and commerce.
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 GROSS DOMESTIC PRODUCT BY ECONOMIC ACTIVITIES

 Following government initiatives foreign direct investment led the

early expansion of manufacturing in the 1970.
 Whereas export –oriented industrialization targeted the Western
corridor of Malaysia, the government introduced land tenure
schemes, evolved infrastructure and brought education and
healthcare, and connected to the rural Bumiputera aggressively in
its ethnic restructuring efforts.
 The contribution of mining to GDP has fluctuated with global
prices and supply capacities. Agriculture fell dramatically.
Manufacturing grew strongly from 1985 to reach its peak of 30.9%
in 2000 before falling gradually to 26.6% in 2009. the contribution
of services jumped from 44.3% in 1990 to 47.8% in 1995 and rose
further to 48.3% in 2009.

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

1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

Agriculture 31.5 29.0 27.7 22.9 20.8 15.2 12.9 8.6 8.4 9.5

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

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

Services 43.9 38.8 45.5 41.4 42.4 44.3 47.8 46.2 44.0 48.3

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 GROSS DOMESTIC PRODUCT
BY EXPENDITURE
 Consumption share in GDP showed a trend fall from 1970 till
2000 before rising again in 2005 and 2009. the rise in the 2009
figure is also a consequence of the RM67 billion stimulus that
was introduced in two packages.
 The first package amounting to RM60 billion was launched in
March 2009. Both government and private consumption rose
as a consequence.
 the share of government consumption fell gradually over the
period 1970 – 2000 before rising again.
 Thus, with the NEM and the 10th Malaysia Plan targeting the
private sector, private consumption is expected to increase its
share in GDP over the period 2011 – 2015.
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 GROSS DOMESTIC PRODUCT BY
EXPENDITURE
 Exports and imports as a share of GDP continued to
rise in trend terms over the period 1965 – 2009.
 Export exceeded imports over this period except for
1995. hence, Malaysia had largely enjoyed positive
balance of payments over this period.

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

1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

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

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

Imports 37.6 37.3 42.5 54.3 49.1 72.4 98.0 100.6 94.6 106.3

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

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 INFLATION AND UNEMPLOYMENT
INFLATION
A continuous increase in the general price level of
goods and services in the economy.
UNEMPLOYMENT
Defined as labour force participants being available and
willing to work but unable to find jobs.
UNEMPLOYMENT RATE
The percentage of the labour force that is
unemployed and actively seeking jobs.

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 INFLATION AND UNEMPLOYMENT
 Inflation and unemployment of Malaysia have largely
remained low since 1960.
 The government has since managed inflation well
despite facing further explosions in oil prices in 1979 and
2008.
 The opening of large oil wells off Terengganu since the
late 1970s has helped make Malaysia a net oil exporter
and as a consequence avoid the oil price-induced
inflationary pressure of 1974.
 Price control on oil and food helped keep inflation low for
long periods, the reduction of subsidies on these items
since 2007 raised inflation again in 2006 and 2008.
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 INFLATION AND UNEMPLOYMENT
 In the mid 1980s, employment growth arising primarily
from expansion in manufacturing and services helped
keep unemployment levels low.
 Unemployment rose in the 1960s because of a gradual
stagnation in the first round of import substitution caused
by the small domestic market.
 Unemployment rose again sharply in the mid-1980s
because of an economic crisis caused by a combination
of macroeconomic problems rising from falling
commodity prices and rising value of the yen-
denominated deb service and a bust in prices in the
critical export-oriented industry of electric electronics.
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 INFLATION AND UNEMPLOYMENT
 Unemployment rose again, though by smaller levels
in 1998 and 2008 following the Asian financial and
global financial crisis, respectively.
 Whereas volatile exchange rates and stock prices
caused by runs in the currency and capital markets
drove GDP down in 1998, sharply falling exports to
the developed economies caused the recession in
2008-2009.
 A combination of fiscal packages and a revival of
exports have helped lower the unemployment levels
again since 2010.
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 Figure 1.2 Inflation and unemployment in Malaysia, 1961–2010 (%)

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

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 MAIN ARGUMENTS

 Economic growth and structural change in the

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

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 MAIN ARGUMENTS

 Successful economic catch up has entailed the

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

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 END

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