Economy and Trade
Malaysia is part of south-eastern Asia, and comprises the Malay peninsula bordering Thailand, plus the northern one-third of the island of Borneo, bordering Indonesia, Brunei, and the South China Sea. In 1826, the British settlements of Malacca, Penang, and Singapore were combined to form the Colony of the Straits Settlements. From these strongholds, in the 19th and early 20th centuries, the British established protectorates over the Malay sultanates on the peninsula. During their rule, the British developed large-scale rubber and tin production, and established a system of public administration. British control was interrupted by World War II, and the Japanese occupation from 1941 to 1945. After the war, the territories of peninsular Malaysia joined together to form the Federation of Malaya in 1948, and eventually negotiated independence from the British in 1957. In 1963, the British colonies of Singapore, Sarawak, and Sabah joined the Federation, which was renamed Malaysia. Singapore’s membership, however, ended when it left in 1965, and became an independent republic. Since independence, the economy has diversified away from a near-complete dependence on the export of raw materials such as rubber and tin, with the development of a thriving manufacturing base, and a strong tourism industry.
Economic Policy over 12 Months
Malaysia is a middle-income country, and is now a fully fledged multi-sector economy. Much of the current economy owes its origins to the initiatives Malaysia undertook after 1970. In 1971, it launched The New Economic Policy, designed to benefit Malays and certain indigenous groups, and the government prioritized intercommunal harmony as one of its chief goals. Dr Mahathir Mohamad, prime minister between 1981 and 2003, attributed the success of the Asian tiger economies to the “Asian values” of its people, which he believed were superior to those of the West. Mahathir sharply criticized the International Monetary Fund (IMF), international financiers such as George Soros, and Western governments during the sharp economic and financial crisis that affected Asia in 1997–1998, and denied that the downturn was due to the failures of corruption and “crony capitalism.”
Since coming to office in 2003, Prime Minister Abdullah Ahmad Badawi has tried to move the economy farther up the value-added production chain by attracting investments in high technology industries, medical technology, and pharmaceuticals. 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. As an oil and gas exporter, Malaysia has profited from higher world energy prices, although the rising cost of domestic gasoline and diesel fuel forced Kuala Lumpur to reduce government subsidies.
Malaysia unpegged the ringgit from the US dollar in 2005, and the currency appreciated 6% per year against the dollar in 2006–2008. Although this helped to hold down the price of imports, inflationary pressures began to build in 2007. By 2008, inflation stood at nearly 6% year on year. The government presented its five-year national development agenda, in April 2006, through the Ninth Malaysia Plan, a comprehensive blueprint for the allocation of the national budget from 2006–2010. Prime Minister Abdullah has unveiled a series of ambitious development schemes for several regions that have had trouble attracting business investment.
Real GDP growth has averaged about 6% per year under the present administration, but regions outside Kuala Lumpur and the manufacturing hub, Penang, have not fared as well. The central bank maintains healthy foreign-exchange reserves, and the regulatory regime has limited Malaysia’s exposure to riskier financial instruments, and the global financial crisis. Decreasing worldwide demand for consumer goods is expected to hurt economic growth, however. Abdulla stepped down in March 2009, handing the prime minister’s role to the then deputy prime minister, Najib Tun Razak.
Economic Performance over 12 Months
Since it became independent, 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 to the mid-1990s, as the economy experienced sustained rapid growth averaging almost 8% annually. High levels of foreign and domestic 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, and information and communication technology (ICT) products.
The government continues actively to manage the economy. Malaysia’s New Economic Policy (NEP), first established in 1971, was a 10-year plan that sought to rectify a situation whereby ethnic Malays and indigenous peoples (bumiputera), who comprised nearly 60% of the population, held less than 3% of the nation’s wealth. Policy-makers implemented a complex network of racial preferences intended to promote the acquisition of economic assets by bumiputera. In 1981, when the racial preferences were set to expire, the government extended the NEP for another 10 years, stating that its goals had not been achieved. The policies were extended again in 1991, and in 2001.
The Malaysian economy went into sharp recession in 1997–1998 during the Asian financial crisis, which affected countries throughout the region, including South Korea, Indonesia, and Thailand. Malaysia’s GDP contracted by more than 7% in 1998. Malaysia narrowly avoided a return to recession in 2001, when its economy was negatively affected by the bursting of the dotcom bubble (which hurt the ICT sector), and slow growth or recession in many of its important export markets.
In July 2005, the government removed the seven-year-old peg linking the ringgit’s value to the US dollar at an exchange rate of RM3.8/US$1. The dollar peg was replaced by a managed float against an undisclosed basket of currencies. The new exchange rate policy was designed to keep the ringgit more stable, and to avoid uncertain currency swings, which could harm exports.
The Malaysian financial system has exhibited noteworthy resilience to the 2008 global financial crisis. Malaysian banks are well capitalized, and have no measurable exposure to the US subprime market. The central bank maintains high levels of foreign-exchange reserves, and a conservative regulatory environment, having prohibited some of the riskier assets in vogue elsewhere. However, decreasing demand in the United States and elsewhere is taking a toll on Malaysian exports, resulting in slower economic growth going forward.
Support for Inward Investment and Imports
The Malaysian Industrial Development Authority (MIDA) is the first point of contact for investors who wish to set up projects in the manufacturing and services sector of Malaysia. Headquartered in Kuala Lumpur, MIDA has a global network of 19 overseas offices, covering Asia, Europe, the United States, and Australia to assist investors.
Tax Exemptions
Malaysia reduced corporation tax for the 2009 assessment year to 25%, and brought down the rate of individual taxation from 28% to 27%. The Promotion of Investments Act 1986 offers a range of tax incentives. More information can be obtained from MIDA.
Statistics
GDP growth: 5.5%
GDP per capita: US$15,700
CPI: 5.8%
Key interest rate: 6.41%
Exchange rate versus dollar: ringgits per US dollar—3.33 (2008)
Unemployment: 3.7%
FDI: US$92.76 billion
Current account deficit/surplus: US$27.44 billion
Population: 25,715,819 (July 2008, est.)
Source: CIA World Factbook except where stated
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