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Malaysia's leaders are keen to be able to achieve the 2020 vision, ( Reuters photos) |
Malaysia is a small country, but it has some big achievements in the field of economic development.
Starting as a low-income country in 1957, it has long climbed up the ladder into the upper middle grouping in the World Development Reports.
Its per capita income at constant prices rose from $306 in 1965 to $5490 in 2007, and its economy with GDP worth $357.9 billion occupied the 29th position of the world, with its per capita income ranking at 57.
A strategic geographic location, an abundance of natural resources — especially in agriculture, forestry, and minerals— a small population with low density, a work-friendly climate, and a plural social order have all been the initial advantages the country has enjoyed.
However, there was a lack of capital and a shortage of both skilled and unskilled manpower, and the size of Malaysia's domestic market was too small to warrant industrialization.
Expediency demanded that the country evolve a policy design that could cash in on its strengths and convert its deficiencies into advantages, keeping at the same time options flexible.
This is a brief look at the contours of Malaysia economic transformation and the light houses of its major policy that guided merrily its sail over half a century.
Policy Framework
| The country ensured an efficient coordination of major sectors and kept the economy operating almost friction-free. |
Direction planning has been a major factor in shaping Malaysia's economic destiny as it has been instrumental in achieving social goals, like the redistribution of wealth, and the provision of vital public utilities.
Malaysia's transformation process adopted an open-economy model, choosing trade as its engine of growth.
The country provided infrastructural facilities, tax concessions, and unrestricted remittance options to attract foreign capital.
It rapidly expanded education and training facilities for human resource development; Malaysia has already been past the United Nations Development Program's (UNDP) threshold for high human development index, ranked 63 at 0.811 in 2005 as in Human Development Report in 2008.
In addition, the country brought in a large number of foreign workers and professionals to fill the critical gaps, even as their presence in large numbers caused some socio-cultural problems.
The country ensured an efficient coordination of major sectors and kept the economy
operating almost friction-free.
The hurdles and crises that came along occasionally were managed well.
Malaysia's leadership has had a long-run view for development from the very start which eventually culminated in what is known as Vision 2020 which aimed at achieving a per capita income of $ 10,000 by 2020.
With an average growth rate of 7 percent, it was well on the course until late 1990s, when it suffered a setback during the 1997 Asian Financial Crisis. Thereby, it had to devalue its currency by about a third, making the task difficult.
The Transformation
| Foreign assistance from Japan and the West eased and hastened the process of transformation. |
Malaysia has depended on rubber, tin, and oil palm to build its economy.
These three commodities, along with other raw materials, had already set Malaysia's economic tempo prior to independence.
During the 1997s, Malaysia decided on shifting from the primary sector (agriculture and mining) to a state-sponsored manufacturing system.
Foreign assistance from Japan and the West eased and hastened the process of transformation as exports of manufactured goods were soon fuelling Malaysia's growth.
The share of Kuala Lumpur's primary sector declined progressively from 42.7 percent in 1970 to a mere 16.7 percent in 2006 while both the industrial and services sectors expanded, but the share of the services grew much faster.
However, the declining share of agriculture in the Gross Domestic Products (GDP) should not be misunderstood as neglecting its significance to Malaysia's economy.
Rising food prices, dependence on imports even for feeding poultry, and the increasing demand for palm oil and natural rubber abroad have led to a renewed interest in the agricultural sector, so a special fund for the development of agriculture has been established at the federal level.
The country is now in the third phase of its National Agricultural Policy heading towards the agro-year of 2010.
Crisis Management
| Currency speculators played a leading role in the 1997-1998 crises. |
The 1997 Asian Financial Crisis gripped Malaysia with an abrupt fall in the Kuala Lumpur Composite Index (KLCI) on July 29, 1997 accompanied by the depreciation of the Ringgit — Malaysia's national currency.
During 63 weeks starting from July 1997 to September 1998, the stock market fell by over 68 percent, and the domestic currency lost no less than 37 percent in terms of US dollar.
The nexus between the foreign and local markets was to sell stocks at KLSE — the Malaysia's stock market, and with Ringgits so released, to buy dollars in the foreign exchange market (forex market) to take out.
This hastened the melt down both the Malaysia's stock market and the foreign exchange one.
As a consequence, short-term foreign capital worth $ 33 billion left Malaysia in a short span of time, and its economy suffered a negative rate of growth (-7.5 percent) in 1998.
Most of the literature on the subject does not deny the stated market nexus, but there have been some differences of opinions on two vital issues. The first was about whether internal economic weaknesses or external forces had been responsible for the crisis.
And, the second issue was whether the imposition of credit controls pegging the domestic currency to the US dollar, or receiving bailouts from the International Monetary Fund (IMF), like other countries in the region, was the better remedy.
Most Malaysian economists were critical of the government for solely blaming the outsiders for the crisis and choosing capital controls as the cure.
However, a crisis by definition is an unforeseeable short-term shock, so no one could have been able to foresee the crisis as in the current global financial one.
The perceptions of the two crises have abruptly overtaken rationality in a crisis situation.
In 1997, the economy grew at 7.8 percent, inflation stayed as low as 2.7 percent, trade-GDP ratio was 1.86, and exports exceeded imports by 12 percent.
The debt service ratio to export earnings too did not cross 6.7 percent during that period.
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| Table two: Key comparative variables for Malaysia, South Korea and Thailand ( Click to enlarge) |
Indeed, there is a well-researched conclusion that currency speculators played a leading role in the 1997-1998 crises. Even the IMF admitted in 2001 that Malaysia was essentially the victim of currency speculation.
Malaysia maintained its self-esteem and came out of the crisis unscathed and faster than Thailand and South Korea that had asked for the IMF bail-out programs.
For example, it was not until July 31, 2003 that Thailand could fully clear the IMF loans of $ 14.5 billion which the country received as a part of its reform package.
Thailand's Prime Minister vowed on television that Thailand would never request the bail-out support from the US-based financial institutions again.
It would be a mistaken view that Malaysia gained nothing by taking a different route to meet the crisis.
Malaysia just faced fewer bankruptcies and normal limits of unemployment, and indeed, the country eventually won praise from the IMF itself for its reforms including capital controls.
Malaysia, being a wide-open economy with the United States as its major trade partner, cannot remain — like other countries in the world — unaffected by the current global meltdown though its growth rate is still not in critical stage. Yet, the country is in a relatively better position to face the crisis' impact.
It has a steady domestic demand, labour market is stable, and it has a huge external reserve of around $110 billion which is sufficient to finance nine-months-imports.
Furthermore, there is a declining trend of non-performing loans in the financial sector while adequate liquidity exists in the system.
Also, the development of Islamic banking and insurance lends a measure of stability to the financial sector, which makes the country be in a strong position to face the current economic challenges.
Social Equalization
| The Malaysia's Gini coefficient is on the decline, and stood at 49.2. |
The social equalization program of Malaysia — now known as the New Economic Policy (NEP) — has been one of its kind in the world; it is based on a social contract in which the haves have voluntarily agreed to grant economic concessions to the have-nots to increase their share in the national cake.
This is intended to reduce poverty and improve equal income distribution, and although NEP's impact is slow for a variety of reasons, statistics indicate remarkable improvement in many social and economic fields.
The population below the poverty line is now reported to be as no more than 13 percent, albeit the rise in urban poverty, due to rural-urban migration, is disquieting.
The Malaysia's Gini coefficient is on the decline, and stood at 49.2 in 1997, the latest year of survey.
The narrowing of the gap is attributed to the fall in the share of top 20 percent in the GNP combined with an improvement in the share of 40 percent in the middle and lower-income groups.
Conclusion
Malaysia has done remarkably well in economic development. Natural endowments, sound policies, socio-cultural ethos, and political stability have hastened its pace on the road to economic prosperity.
The country has made great strides in facing economic challenges it faced on various fronts.
Malaysia is a unique case, but what others can learn from its national unity, accommodation, patience, consultation, management styles, and self confidence that have all been among the factors making its sail smooth and fast through turbulent global environment.
References
1. Hasan, Zubair (2007) Fifty Years of Malaysian Economic Development: Policies and Achievements, Review of Islamic Economic. UK (14, 2)
2. Hasan, Zubair (2003): The 1997-98 Financial Crisis in Malaysia: Causes, Response, and Results – A Rejoinder, Islamic Economic Studies, (10, No. 2) IRTI Jeddah (pp. 45-53)
3. Hasan, Zubair (2001-2002): Recent Financial Crisis in Malaysia: Response, Results, Challenges, The Indian Economic Journal, (49, 1) pp.28-49.
4. Hasan, Zubair (2002): The 1997-1998 Financial Crisis in Malaysia: Causes, Response, and Results Islamic Economic Studies, (9, 2) IRTI, Jeddah (PP. 1-16).
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