Malaysia - iuj.ac.jp

Country Profile 2004

MalaysiaThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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Malaysia 1

© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

Malaysia

3 Basic data

4 Politics4 Political background4 Recent political developments9 Constitution, institutions and administration10 Political forces12 International relations and defence

14 Resources and infrastructure14 Population16 Education16 Health17 Natural resources and the environment18 Transport, communications and the Internet19 Energy provision

20 The economy20 Economic structure21 Economic policy25 Economic performance27 Regional trends

28 Economic sectors28 Agriculture29 Mining and semi-processing30 Manufacturing31 Construction32 Financial services33 Other services

34 The external sector34 Trade in goods36 Invisibles and the current account37 Capital flows and foreign debt38 Foreign reserves and the exchange rate

40 Regional overview40 Membership of organisations

43 Appendices43 Sources of information44 Reference tables44 Population45 Labour force46 Transport statistics46 Energy production

2 Malaysia


46 Federal government finances47 Consolidated public-sector finances47 Money supply47 Interest rates48 Gross domestic product48 Gross domestic product by expenditure49 Gross domestic product by sector49 Consumer price index49 Agricultural and forestry production50 Minerals production50 Manufacturing production50 Construction statistics51 Banking statistics51 Stockmarket indicators51 Exports52 Imports52 Main traditional exports52 Imports by end use53 Main trading partners54 Balance of payments, IMF series54 Balance of payments, national series55 External debt, World Bank series55 Official development assistance55 Foreign reserves56 Exchange rates

Malaysia 3


Malaysia

Basic data

330,113 sq km

25.6m (mid-2004 estimate)

Population in �000 (2002)

Kuala Lumpur (capital) 1,367Johor Baharu 724Ipoh 601Klang 503Petaling Jaya 460

Tropical

Hottest months, April and May, 23-33°C (average daily minimum andmaximum); coldest month, December, 22-32°C; driest month, July, 99 mmaverage rainfall; wettest month, April, 292 mm average rainfall

Malay (the official language); main other languages: Chinese dialects (includingMandarin), English, Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 139living languages altogether

The metric system has gradually replaced the UK (imperial) system. Localmeasures include:

1 pikul=25 gantang=100 katis=60.48 kg1 koyan=40 pikul=2.419 tonnes

Malaysian dollar or ringgit (M$, or RM)=100 sen (cents). Average exchange ratesin 2003: 3.80:US$1 (pegged at this rate since September 2nd 1998); M$6.20:£1.Exchange rates on September 24th 2004: M$3.80:US$1; M$6.85:£1

Peninsula: 7 hours ahead of GMT; Sabah and Sarawak: 8 hours ahead of GMT

January 23rd-24th (Chinese New Year); February 2nd (Hari Raya Haji); February22nd (Islamic New Year); May 1st (Labour Day); May 2nd (the ProphetMohammed�s birthday); June 2nd (Vesak day); June 5th (the king�s birthday);August 31st (National Day); November 12th (Deepavali); November 14th (HariRaya Puasa, the end of Ramadan); December 25th (Christmas Day)

Total area

Climate

Weather in Kuala Lumpur(altitude 39 metres)

Languages

Measures

Currency

Time

Public holidays (2004)

Population

Main towns

4 Malaysia


Politics

Political background

Fundamental to the understanding of Malaysia�s political development is anappreciation of its geographical, ethnic and cultural diversity. Political partiesare largely based on ethnicity, locality or religion. Basic themes of post-warpolitical history are the maintenance of racial harmony, positive discriminationin favour of the bumiputera (�sons of the soil�!ethnic Malays and otherindigenous peoples) and friction between Islamic parties and the government.Since independence in 1957, Malaysia has been ruled by coalition governmentsdominated by the principal Malay party, the United Malays NationalOrganisation (UMNO).

Recent political developments

British colonial policy was the major formative influence on Malaysia. Fromthe late 18th century, British influence was gradually extended across the Malaypeninsula and North Borneo. The colonial administration encouraged (andsponsored) the arrival of immigrants from southern China and southern Indiato work in tin mines and on rubber plantations. As the region developed into acommodity exporter, it remained administratively fragmented, with internalgovernment largely under local control. By the 1930s, �Malaysia� consisted ofthe Straits Settlements (Malacca, Penang and Singapore), the Federated MalayStates (Selangor, Perak, Negeri Sembilan and Pahang) and the unfederated states(Kedah, Perlis, Kelantan, Terengganu and Johor), as well as North Borneo(Sabah) and Sarawak.

After the second world war, the restored British colonial system sought to createa more integrated territory, a more cohesive society and a stronger centralgovernment. The ethnic Chinese were in the majority on the Malayanpeninsula, including Singapore. The new Malayan Union (1946-48) sooncollapsed as a result of opposition from the Malay rulers to a loss ofsovereignty and proposed citizenship for non-Malays. Relations between thedifferent ethnic groups, especially between the Malays and the Chinese, haveremained a highly sensitive issue in Malaysian political life.

After the second world war, many of the ethnic Chinese sympathised with thecommunist revolution in China. A guerrilla war was started by the largelyethnic-Chinese Malayan Communist Party, leading to the declaration of a Stateof Emergency in 1948, which did not officially come to an end until 1960. Oneof the measures used by the colonial regime to suppress the insurrection wasdetention without trial, a practice that successive Malaysian governments havecontinued to employ. The Emergency was to cast a long shadow overMalaysian politics.

Malaya under British influence

A delicate ethnic balance

Malaysia 5


Rapid progress towards full independence!which was proclaimed in 1957!andthe establishment of democracy in a pluralist society formed part of theanti-insurgency strategy. The successor of the Malayan Union, the Federation ofMalaya (1948-63), passed some powers back to the states. Singapore, with itslargely Chinese population, was excluded from both arrangements. Thepolitical framework that emerged at this time reflected Malaysia�s ethnicvariety. UMNO was formed in 1946, and the Malaysian Chinese Associationand the Malayan Indian Congress were founded in 1949. These three partiesformed the Alliance in 1952 and have remained the core of post-independencegovernments.

British decolonisation policy continued to shape the country afterindependence. Sarawak, Sabah and Singapore were added to the peninsula-based federation in 1963 to form a new Federation of Malaysia, with the NorthBorneo territories offsetting the preponderance of ethnic-Chinese citizensresulting from Singapore�s membership. Brunei refused to join the federationbecause of a disagreement over the position of the sultan and the control of oilresources. When Singapore withdrew from the federation in 1965, there was adecisive switch in political power towards the ethnic Malays and the centralgovernment in Kuala Lumpur.

Losses for UMNO in the 1969 general election stirred up anti-Chinese sentimentand provoked serious race riots, in which many Chinese were killed. The riotswere a political and an economic turning point. In the crisis that followed,parliamentary government was suspended for 21 months. The Alliance thathad ruled since independence was replaced by a broader-based coalition, theBarisan Nasional (BN, National Front). With minor changes in its composition,the BN has ruled Malaysia ever since. After the riots, the BN governmentinstituted a 20-year New Economic Policy (NEP), a programme of positivediscrimination aimed at reducing interracial tensions by improving the incomesand economic weight of the bumiputera (�sons of the soil�!ethnic Malays andother indigenous peoples, accounting for 63% of the population). The NationalDevelopment Policy (NDP), which followed the NEP after 1990, relaxed someof the positive discrimination measures that favoured the bumiputera. Anextended period of strong economic growth until 1998 made it possible to raisethe status of the bumiputera and avoid serious intercommunal conflict.

A decisive shift towards more authoritarian government occurred in 1987, whenthere was a serious split in UMNO in which Mahathir Mohamad, who hadbeen party president and prime minister since 1981, nearly lost power. After hisvictory, Dr Mahathir consolidated his power within UMNO, making it difficultto challenge an incumbent leader. The judiciary was stripped of much of itsindependence and power, and the constitution was changed after thegovernment lost a number of cases in the High Court. The following year, thegovernment intimidated the judiciary by sacking the chief justice, suspendingfive Supreme Court judges and increasing the powers of the attorney-general,leaving little check on the government�s exercise of power.

Independence was proclaimedin 1957

The Federation of Malaysiawas formed in 1963

The 1969 race riots were apolitical watershed

A shift towardsauthoritarianism in 1987

6 Malaysia


The 1997-98 Asian financial crisis plunged Malaysia into a severe economicdownturn, but also exposed corruption within UMNO. Calls for politicalreform and a change in leadership intensified, especially among youngerUMNO politicians. The deputy prime minister, Anwar Ibrahim, who becamethe focal point of the reformasi movement, was dismissed from the governmentin September 1998, expelled from UMNO and later jailed for a total of 15 yearson charges of obstruction of justice, sodomy and corruption. The dubioustreatment of Dr Mahathir�s long-standing heir apparent and his controversialtrials upset UMNO�s traditional supporters and revitalised the opposition. Inthe November 1999 general election, UMNO lost its Malay majority. The mainbeneficiary was the Malay-based Islamist opposition party, the Parti Islamsa-Malaysia (PAS), which gained control in Terengganu while retaining theneighbouring state of Kelantan, and made strong inroads in other northernMalay-belt states. The BN nonetheless retained its two-thirds majority inparliament owing to the continued allegiance of a majority of the Chineseelectorate.

UMNO�s appeal received a boost from the discrediting of Islamic funda-mentalism after the September 11th 2001 terrorist attacks on the US. During thepast two decades the government has actively promoted and favoured Islam,which is the country�s official religion. There has been little public opposition toIslamisation, despite the fact that on independence Malaysia was declared to bea secular nation and that some 40% of the population is non-Muslim. Tocounter the pledge made by PAS that it would set up an Islamic state should itwin the next general election, Dr Mahathir declared in September 2001 thatMalaysia was already an Islamic state, and promised further Islamisation. Byassociating PAS with Islamist extremism and economic backwardness, UMNOhoped to rally the moderate Malays, while cracking down on Islamistextremists.

Dr Mahathir retired in October 2003, after 22 years of strong leadership as primeminister and UMNO president. His successor, Abdullah Badawi, has provedbetter able to defend UMNO�s moderate, progressive version of Islam againstPAS. On March 21st 2004 the BN gained a spectacular election victory, winningnine-tenths of the available 219 parliamentary seats, the coalition�s best-everresult. UMNO recovered the majority support of Malay voters. In simultaneousstate elections, PAS lost control of Terengganu. Mr Badawi, who is an Islamicscholar and is not linked to any known scandals, campaigned with his ownagenda of moderate Islam. The polls had been preceded by carefullyorchestrated anti-corruption measures that attracted strong public approval.

Political stability had to some extent been the result of Dr Mahathir�sauthoritarian influence. Malaysia�s political culture reflects the country�s racialand geographical diversity but also the way in which Dr Mahathir shaped andaltered its political institutions. His successor, Mr Badawi, lacks Dr Mahathir�scharisma, but has rapidly strengthened his power base and has shown astronger than expected determination to implant his own brand of ethicalgovernment. The retirement of Dr Mahathir has been followed by a generationalchange in many political parties, power struggles between senior politicians,

The 1997-98 Asian crisis leadsto calls for political reform

Progressive Islam wins the2004 election for UMNO

The fundamentalist oppositionis discredited

Leadership change ispotentially destabilising

Malaysia 7


the emergence of younger politicians and shifts in policy. The removal ofDr Mahathir�s influence has led to calls for greater democratic freedom!withuncertain consequences for political stability. Divisions within the Malaymajority are potentially destabilising, with possible negative implications forrelations between the races and, more broadly, for the economic outlook. Inorder firmly to establish his authority, Mr Badawi needs to fight the endemiccorruption within the government and UMNO, reform bumiputera privilegesand deal effectively with conservative Islam. The BN is unlikely to lose power:incumbency gives considerable advantages. Government control of the ElectionCommission, which supervises elections and checks electoral rolls, theredrawing of constituency boundaries, and rock-solid support for the BN inSarawak and Sabah make it appear highly likely that the next general election(due by April 2009) will see another BN victory.

Parliamentary forces(no. of seats)

1995 1999 2004Barisan Nasional (BN, National Front) 162 148 198 United Malays National Organisation (UMNO) 88 71 109 Malaysian Chinese Association (MCA) 30 29 31 Malaysian Indian Congress (MIC) 6 7 9 Gerakan Rakyat Malaysia (GRM) 7 6 10 People�s Progressive Party (PPP) 0 0 1 Parti Pesaka Bumiputera Bersatu (PBB) 13 10 11 Sarawak United Peoples� Party (SUPP) 6 8 6 Parti Bansa Dayak Sarawak (PBDS) 4 6 6 Sabah Progressive Party (SAPP) 0 2 2 Parti Bersatu Sabah (PBS)a � � 4 Liberal Democratic Party (LDP) 0 1 � Parti Bersatu Rakyat Sabah (PBRS)b 1 Sarawak National Party (SNAP)c 4 4 � United Pasokmomogun Kadazandusan Murut Organisation (UPKO)b 4 3 4 Sarawak Progressive Democratic Party (SPDP)d 4 BN Direct 0 1 0Oppositione � 42 20 Parti Islam sa-Malaysia (PAS) 7 27 7 Keadilan PRMf � 5 1 Democratic Action Party (DAP) 9 10 12 Parti Bersatu Sabah (PBS)a 8 3 � Parti Melayu Semangat �46 (S46)g 6 � �Independent 0 0 1

Total 192 193 219

a PBS rejoined the BN in 2001. b UPKO and PBRS are splinter parties of PBS, which left the BN in1990. c SNAP was forced to leave the BN in 2002. d SPDP was formed by former SNAP members. e PAS,DAP and Keadilan contested the 1999 as a coalition, the Barisan Alternatif (BA); DAP left the BA inSeptember 2001. f The Parti Keadilan Nasional merged in December 2002 with Gerakan RakyatMalaysia (GRM). g Reunited with UMNO in 1996.

The March 2004 election defeat had a devastating effect on the oppositionalliance, the Barisan Alternatif (BA, Alternative Front), which consists of PASand the Parti Keadilan Rakyat (Keadilan), the party led by Wan Azizah, the wifeof the former deputy prime minister, Anwar Ibrahim. The mainly ethnic-Chinese left-wing Democratic Action Party!which left the BA in September

The release of Mr Anwarraises the opposition�s hopes

8 Malaysia


2001, protesting at the intention of PAS to found an Islamic state!became thelargest opposition party. The release of Mr Anwar in September 2004 afternearly six years in jail gave new hope to a demoralised opposition to whomthe inspiring former deputy prime minister may be a natural leader.

Important recent events

September 1998

Anwar Ibrahim, deputy prime minister and deputy president of the United MalaysNational Organisation (UMNO), is sacked from government and expelled by the party.After leading rallies against the prime minister, Mahathir Mohamad, he is arrested,beaten in custody and indicted on charges of obstructing justice and of sodomy.

April 1999

Following a five-month trial, Mr Anwar is controversially convicted of obstruction ofjustice and sentenced to six years in jail for corruption; the following year, Mr Anwaris sentenced to a further nine years in jail for sodomy, to be served consecutively.

November 1999

The ruling Barisan Nasional (BN, National Front) wins the general election, but itsshare of the vote drops sharply, especially that of Dr Mahathir�s United MalaysNational Organisation (UMNO). The government nonetheless retains more than two-thirds of the seats in the national parliament. The BN loses control of a second stateassembly!that of Terengganu!to the opposition Parti Islam sa-Malaysia (PAS).

September 2001

Following the September 11th 2001 attacks on the US, the government tightens thealready stringent security regulations. UMNO gains support among Malay moderatesby associating PAS with Islamist extremism. Responding to the intention of PAS toset up an Islamic state, Dr Mahathir declares that Malaysia is already an Islamic stateand announces further Islamisation measures, raising fears among the ethnicminorities that the secular constitution may be changed. The opposition coalitionBarisan Alternatif (BA) splits, as the largely ethnic-Chinese Democratic Action Party(DAP) leaves over PAS�s Islamic agenda.

June 2002

Dr Mahathir announces to the UMNO annual congress that he intends to retire, butis persuaded to stay on until October 2003.

October 2003

Dr Mahathir retires from all his functions and is succeeded by his deputy, AbdullahBadawi, who states his intention to fight corruption. Shortly afterwards, Mr Badawicancels several of Dr Mahathir�s �mega-projects�.

January 2004

Mr Badawi appoints the defence minister, Najib Tun Razak, as his deputy primeminister. Mr Najib is Dr Mahathir�s preferred choice and Mr Badawi�s rival.

Malaysia 9


March 2004

The BN wins its largest-ever election victory, thrashing PAS, which loses control ofTerengganu, and reducing Keadilan to a single seat. The election outcome strengthensMr Badawi�s authority.

September 2004

Mr Anwar has his conviction for sodomy overturned by the High Court and isreleased from prison, after serving nearly six years for corruption.

Constitution, institutions and administration

Malaysia is a federal, constitutional monarchy within the Commonwealth. Theposition of king (yang di-pertuan agung, meaning �supreme ruler�) is rotatedevery five years. The nine-strong Conference of Rulers of the states of thepeninsula, excluding Malacca and Penang (the sultans of Kedah, Perak, Johor,Selangor, Pahang, Terengganu and Kelantan; the yang di-pertuan besar, orsupreme minister, of Negeri Sembilan; and the raja of Perlis) elects one of itsnumber to serve as king.

The king�s powers have been cut back under Dr Mahathir. After a constitutionalcrisis in 1983, the powers granted to the traditional rulers on independence werereduced. Although the constitution does not say so explicitly, the king must inpractice accept the government�s advice and must not withhold royal assentfrom parliamentary bills. In 1992 UMNO drew up a code of conduct for rulers,after the rulers and their families were accused of abusing their power forprivate gain and exceeding their constitutional authority. In February 1993constitutional amendments were passed that limited rulers� personal legalimmunity.

The federal parliament consists of an upper chamber, the Senate or DewanNegara (Council of the Nation), of 69 members, of whom 43 are appointed bythe king and 13 pairs are elected by the state legislatures, and a lower chamber,the House of Representatives or Dewan Rakyat (Council of the People), directlyelected by universal suffrage, with 219 seats. The lower house has long been arubber stamp for the BN, and little real debate on draft legislation or issuestakes place there, but Mr Badawi has introduced measures to stimulateparliamentary discussion and initiative.

Each of the 13 states in the Federation has an Executive Council dealing withnon-federal matters under a menteri besar (chief minister), who is answerable toelected state assemblies. The constitutional head of each state government iseither one of the traditional rulers or (in Penang, Malacca, Sabah and Sarawak)a state governor appointed by the king on the advice of the federal government.

The Malaysian judicial system still resembles the UK system inherited from thecolonial period, but also borrows from the US system. The constitution gives anindependent judiciary the powers to pronounce on the constitutionality andlegality of executive acts. The independence of the judiciary was effectivelycurbed by Dr Mahathir in 1987-88 in response to a court ruling on the April 1987UMNO leadership contest, which declared the elections invalid. Dr Mahathir

A federal constitutionalmonarchy

The federal parliament

The states� executive councils

Changes to the judicial system

10 Malaysia


pushed through amendments to the constitution, stripping the High Courts ofthe power of judicial review and terminating the separation of executive andjudicial power. The government established a code of conduct for judges, thebreaching of which could result in dismissal. In the years that followed thepower of the executive increased further. The legal framework leaves little roomfor the judiciary to reassert its independence, and dubious appointments ofofficials with a controversial past have further reduced the likelihood of judicialreforms. The acquittal by the High Court of Mr Anwar in September 2004 iswidely viewed as a sign that the prime minister, Mr Badawi, will allow thejudiciary greater independence, but there has been no sign of judicial reform.

After the May 1969 race riots, the government decided to marginalise Chineseand Indians in the civil and armed services, which they previously joined as anautomatic first choice. The government practises tokenism and has raised a fewnon-Malays to a high rank, but the careers of non-Malays are strictlycircumscribed unless they become Muslim. The government is having secondthoughts about its racial policies, but after 30 years it finds it difficult to changethe attitudes of Malay public servants or to arouse interest among non-Malaysin a career in the civil service or the army.

Political forces

The United Malays National Organisation (UMNO), the party of Malaynationalists in the colonial period, remains the most important of the Malayparties. In the March 2004 election it regained the majority support of theMalay section of the population, which it had lost in the 1999 election. Thepresident of UMNO invariably serves as the prime minister. Elections to leadingparty posts and to the UMNO supreme council determine the leadershipsuccession and can also affect the posts occupied by ministers in the cabinet.An incumbent leader is rarely challenged; when this happened to Dr Mahathirin the internal UMNO election of April 1987 he altered the voting mechanismin favour of the incumbent in future party elections. UMNO is the dominantparty in the multiracial ruling coalition, the Barisan Nasional (BN).

Race is the major defining feature of the political system. The Parti Islamsa-Malaysia (PAS) is the alternative to UMNO for the Malay population, aconservative Islamic party and a haven for Malay protest votes, offering agreater devotion to Islam and possibly also a stronger commitment to Malaynationalism than UMNO. From its inception, PAS has intended to set up anIslamic state and introduce Islamic law. As only 60% of Malaysians areMuslims, PAS!like UMNO!would need to align itself with other parties. Butthe intention of creating an Islamic state presents a major obstacle to thebuilding of a coalition of opposition forces. PAS remains a formidable rival toUMNO for the hearts and minds of Malays. The Malaysian ChineseAssociation (MCA) was the acknowledged political representative of the ethnicChinese at independence in 1957. It quickly became an apologist for thegovernment coalition in which it served, and was identified with the richerChinese and business interests. It is the second-largest party in the BN after

Racial discrimination inadministration

UMNO is the dominantMalay party

PAS commitments causestresses in other parties

Malaysia 11


UMNO, but it suffers from internal divisions, and the leadership has beenaccused of links with Chinese criminal secret societies. Gerakan Rakyat (PartiGerakan Rakyat Malaysia, or PGRM, Malaysian People�s Movement Party) wasfounded as a left-of-centre multiracial party, and has an awkward relationshipwith the MCA in the BN. The left-of-centre, largely ethnic-Chinese DemocraticAction Party (DAP) became the largest opposition party after the March 2004election. In September 2001 DAP left the opposition alliance Barisan Alternatif(BA) over the PAS commitment to transform Malaysia into an Islamic state. TheParti Keadilan Rakyat (PKR, Keadilan) remains in the BA, representing thepolitical reform programme of Mr Anwar. Gerakan, DAP and Keadilan are intheory multiracial parties, but Gerakan and DAP attract mainly ethnic-Chinesevoters, while Keadilan relies largely on Malay support.

One of the features of political activity in the past was the open and directparticipation by coalition parties in entrepreneurial activities and companyownership as a means of obtaining party funds. UMNO, the biggest party(open since 1992 to other bumiputera besides Malays, and with a totalmembership of more than 2m), had the biggest portfolio of businesses. Theseactivities were criticised for putting temptation in the way of both businessmenand politicians, creating �money politics�. They have been officially wounddown since the 1997-98 Asian financial crisis, but company shares weretransferred to �safe hands�!in practice, groups or individuals with close links toinfluential party members. UMNO�s major business interest is the heavilyindebted conglomerate, UEM-Renong, which the government took over in July2001. Patronage politics and links with business interests have become lessblatant but continue to exert a powerful political influence.

The MCA was also engaged in business activities grouped under holdingcompanies, Multi-Purpose Holding and Huaren Holdings. It has been lesssuccessful than UMNO in retaining influence over management after thefailures of MCA businesses in the late 1980s. Huaren Holdings, which owns anEnglish-language daily newspaper, The Star, was used to extend the MCA�sinfluence over the Chinese-language press in 2002.

Key political figures

Abdullah Ahmad Badawi

Malaysia�s prime minister and president of the United Malays National Organisation(UMNO) since November 1st 2003. Mr Badawi, an Islamic studies graduate whosename has not been linked to any scandals, surprised by his determination to fightcorruption. Lacking Dr Mahathir�s charisma and strong power base, it remainsdoubtful to what extent he will be able!or wish!to change Malaysia�s political life.

Najib Tun Razak

Deputy prime minister and UMNO�s deputy president, defence minister and son ofa former prime minister, Tun Razak. A rival to Mr Badawi, he is expected tochallenge the prime minister in the future.

The BN�s corporate links

12 Malaysia


Mahathir Mohamad

Dr Mahathir was the prime minister and president of UMNO from July 1981 untilNovember 2003. He is the principal architect of the economic advance of the Malaycommunity and the rapid industrial growth of Malaysia. Dr Mahathir dominatedpolitical life for two decades, and is likely to remain influential in Malaysian politics.

Anwar Ibrahim

Dr Mahathir�s former deputy in UMNO and the former deputy prime minister, jailedin 1999 for six years for abuse of power and in 2000 to another nine years forsodomy, to run consecutively. Mr Anwar was released in September 2004 after hissodomy conviction was overturned by the High Court. Mr Anwar has charisma anda strong personality; as an advocate of political reform and a possible bridgebetween UMNO and fundamentalist Islam, he remains a possible future primeminister.

Abdul Hadi Awang

The president of the opposition Parti Islam sa-Malaysia (PAS), who lost his positionas chief minister of Terengganu in the March 2004 election. Unlike many senior PASleaders, Mr Abdul has a pragmatic attitude to political strategy, which PAS will needif it is to rebuild its power base.

International relations and defence

Under Dr Mahathir, Malaysia followed a policy of non-alignment, and becamea champion of the interests of the developing world and, with little success, adefender of the interests of the Islamic world. Mr Badawi shares the sameambitions, but not Dr Mahathir�s urge to upset Western audiences with frequentlycontroversial opinions. Under Mr Badawi, Malaysia�s diplomatic relations havebegun to reflect economic interests more closely than in the past.

Malaysia, aware of its limited influence as a small country acting on its own, isan active member of numerous international bodies, especially Asian regionalorganisations (see Regional overview: Membership of organisations). TheAssociation of South-East Asian Nations (ASEAN) remains important toMalaysia�s foreign policy objectives.

Relations with the US have in the past been complicated by Dr Mahathir�scomments, for example his outspoken criticism of US behaviour over the Iraqwar. In July 2004 Mr Badawi was received in the US capital, Washington, as amoderate Muslim leader of an Islamic country with whom the US could dobusiness. Malaysia has continued to co-operate closely with the US in the fightagainst terrorism. An even more striking change in foreign policy has been thestrengthening of ties with Australia, which was boycotted under Dr Mahathiras an alien, white invader in the region.

Relations with Indonesia are generally good, despite the latter country�sapparent failure to deal with terrorist threats within its borders, illegalimmigration and air pollution from forest fires. Relations with Singapore havebecome less edgy since Mr Badawi became prime minister, co-operation is

After Dr Mahathir, diplomaticpriorities have changed

Relations with the US haveimproved

Co-operation with Singaporehas grown

The role of ASEAN remainsimportant

Malaysia 13


increasing, and many outstanding quarrels about minor issues are likely to besolved. Regional co-operation to suppress and prevent terrorist activity hasincreased. Malaysia has border disagreements with Indonesia, Singapore, thePhilippines and China.

In 2002 Malaysia restarted the modernisation of the armed forces that wasderailed by the Asian economic crisis. The intention is to develop an all-roundmodern conventional capability, with enhanced maritime security, from whatwas originally a counter-insurgency force. Malaysia, together with Singapore,the UK, Australia and New Zealand, is a member of the Five Power DefenceArrangement, which provides for co-operation and consultation in case ofattack. Malaysia co-operates on border security with its neighbours. Accordingto the defence minister, Najib Razak, Malaysia�s primary security threat isinternal; counter-terrorism and urban warfare capabilities are being developedto deal with violent extremism. In 2004 Malaysia started a limited obligatorynational service, although mainly as a nation-building exercise.

Security risk in Malaysia

The security risk to foreign companies operating in Malaysia is real but moderate.There have been no terror attacks on Malaysian soil. The most spectacular regionalattacks have taken place in neighbouring Indonesia: the bombings in Bali in October2002, of the Jakarta Marriott hotel in August 2003 and of the Australian embassy inJakarta in September 2004. A militant Islamist group, Jemaah Islamiah (JI), which islinked to the al-Qaida international terror network, has been blamed for the attacks.JI acts as a central co-ordinator for radical groups across the South-east Asian region,as it works towards its goal of establishing an Islamist state embracing Malaysia,Indonesia, Singapore, Brunei and the southern Philippines. In September 2002Singapore foiled a series of planned terrorist attacks on foreign targets, privatecompanies and embassies; the terrorists intended to destabilise the governments ofSingapore and Malaysia and foment ethnic strife between the Chinese and Malays.During 2004 there were security scares involving the US and Australian embassies inthe capital, Kuala Lumpur.

The Malaysian government has blamed Indonesians for inspiring Islamic militancyin Malaysia. However, international investigations of Islamist terrorism have made itclear that for many years Malaysia was considered a safe haven by Islamicextremists. The Malaysian branch of JI is Kumpulan Mujahidin Malaysia (KMM,Malaysian Mujahideen Group). By September 2004 around 90 Islamic militants werebeing held under the Internal Security Act, which allows for a two-year detentionperiod that can be renewed indefinitely. In July 2004 the prime minister, AbdullahBadawi, declared that South-east Asia was slowly winning the war against terrorism.

To fight terrorism effectively, the countries of the region have begun to co-operateclosely, involving the US and Australia. In 2003 a co-ordinating regional counter-terrorism centre was opened in Kuala Lumpur. A major concern is the vulnerabilityto piracy and terrorist attacks of shipping in the Malacca Strait, through which one-third of global trade and one-half of the world�s oil supplies pass each year. In July2004 Singapore, Indonesia and Malaysia started co-ordinated patrols.

Defence spending is toremain high

14 Malaysia


Social unrest

The major long-term risk to business comes from a return of economic and politicalconditions that could lead to an outbreak of racial violence. Tensions persist belowthe surface between the majority Malays on one hand and the minority ethnicChinese and Indian populations on the other. In the most serious post-war racialconflict, in 1969, divisions within the Malay majority led to the scapegoating of theethnic Chinese, hundreds of whom were killed in riots. The government�s desire toreduce the privileges of the bumiputera (�sons of the soil�!ethnic Malays and otherindigenous peoples) could stoke Malay resentment. However, the short-term risk oflarge-scale racial violence appears low.

Large-scale demonstrations against the government and the ruling United MalaysNational Organisation (UMNO) were last held in 1998, when the deposed deputyprime minister, Anwar Ibrahim, led reformasi (reform) demonstrations. AlthoughMr Anwar was released from prison in September 2004, a revival of large-scalepublic protests looks unlikely under the reform-minded Mr Badawi, even thoughmost traditional means of protest remain blocked. There is widespread awarenesswithin Malaysia that it is heavily dependent on foreign direct investment, and theopposition is unlikely specifically to target foreign businesses.

Armed conflict

The risk of armed conflict affecting business is low. Sporadic Islamist violence hasoccurred during the past few years. In 2001 KMM members were arrested andaccused of involvement in bank robberies, the murder of a state assemblyrepresentative, and the bombing of a church and a temple. There are no �no-goareas� in Malaysia, and the government remains very much in control of thecountry. It is unlikely that Islamist extremists could develop the ability to stage anarmed conflict. The revival of Islamic militancy in southern Thailand, where thepopulation is mainly of Malay origin, poses no direct threat to Malaysian securitybut strains relations with Thailand.

Organised crime

Malaysia is, in general, a fairly safe country. Violent crime, kidnapping and extortionare rare, although they have attracted more publicity in recent years. Organisedcrime is seldom a threat to foreign business. Foreigners are, however, often thetarget of pickpockets, burglars, car break-ins and purse-snatching. Credit-card fraud isa growing problem.

Resources and infrastructure

Population

The Malaysian population is estimated to have reached 25.6m by mid-2004.The Mid-Term Review of the Eighth Malaysia Plan forecasts an annual averageincrease of 2.2% in 2001-05; the annual average rate of growth was 2.4% in1996-2000. Around 80% of the population lives in peninsular Malaysia. Therate of growth will continue to be fastest in Malaysia�s more developedstates. The dependency ratio (those under the age of 15 and over the age of 64divided by the rest of the population) is expected to continue to decline, from

The dependency ratio willcontinue to fall

Malaysia 15


61.4% in 2000 to 58.6% in 2005, as the median age rises from 23.4 years in 2000to 24.2 years.

Population, 2001(mid-year estimates)

�000 %Total 23,795 100.0 Malaysian 22,529 94.7 Bumiputera 14,886 62.6 Malay 12,341 51.9 Other bumiputera 2,545 10.7 Chinese 5,720 24.0 Indian 1,671 7.0 Others 252 1.1 Non-Malaysian 1,266 5.3

Age structure0-14 7,881 33.115-64 14,956 62.965+ 958 4.0Median age (years) 23.9 -

Source: Department of Statistics, Monthly Bulletin of Statistics.

In the 2000 census, 94.1% of the total population of Malaysia were Malaysiancitizens. Bumiputera made up 65.1% of Malaysian citizens, ethnic-Chinese 26%and Indians 7.7%, compared with an ethnic composition of 60.6%, 28.1% and7.9% respectively in 1991. Non-Malaysian citizens numbered 1.4m or 5.9% of thepopulation. In Sarawak the predominant ethnic group was the Ibans,accounting for 30.1% of the state�s total of Malaysian citizens, followed byChinese (26.7%) and Malays (23%). In Sabah the predominant ethnic group wasthe Kadazan Dusun (18.4%), followed by Bajau (17.3%) and Malays (15.3%).

The average population density, at 73 persons per sq km in 2001, is relativelylow. However, there are wide disparities between the peninsula and thesparsely populated Borneo states. The proportion of the population living inurban areas stood at 62.5% in 2003, up from 55.1% in 1995.

Rates of population growth vary considerably between the main ethnic groups,probably owing to differences in geographical location, income levels andcultural factors. In 2001-03 the annual average rates of growth of thebumiputera (�sons of the soil�, ethnic Malays and other indigenous peoples),Chinese and Indian communities were 2.3%, 1.4% and 1.6% respectively. TheChinese, long urbanised and enjoying higher average incomes, now havesmaller families; the Malay urban population is growing, but most familiesremain in rural areas.

Mean monthly gross household income increased from M$2,472 (US$650) in1999 to M$3,011 in 2002, an average growth rate of 6.8% a year, according toofficial data. The proportion of lower-income households, defined as thoseearning less than M$1,200, decreased from 33.1% in 1999 to 25.9% in 2002.Growth rates varied by ethnic group. The mean monthly income of Malayhouseholds expanded by 6.2% annually during this period to reach M$2,376 in2002, while that of Chinese households rose by 7.4% a year to M$4,279 and that

Growth rates vary betweenthe main ethnic groups

The bumiputera share of thepopulation continues to grow

16 Malaysia


of Indian households increased by 4.1% a year to M$3,044. The mean monthlyincome of urban households rose by 5.6% annually to M$3,652 in 2002, andthat of rural households grew by 0.2% to M$1,729.

Education

The government places great emphasis on education, which is the largest itemon the federal budget. The aim is to provide a �world-class quality educationsystem�. Primary education is compulsory for all Malaysian children. Primaryand secondary education is free for students aged 7-17 in the public schoolsystem (which includes national-type schools teaching in Mandarin and Tamil).Malaysia has a literacy rate of 93%. Over 97% of seven-year-olds are enrolled inthe public school system. The private fee-paying sector plays an important roleonly in higher education. There are public examinations at the end of theprimary level (at age 12), the lower secondary level (usually at 17) and thehigher secondary level (at 19). Malay and English are compulsory subjects. Thematriculation exam at the end of the higher secondary level gives access toMalaysian public universities. The main split in students happens at 17, whenmany students opt for private colleges and universities.

Currently around 271,000 students, including 15,000 international students, areenrolled at 690 private colleges, 14 private universities and four foreignuniversity branch campuses, which teach in English; this compares with 80,000students at the 16 public universities, which use Malay as a medium ofinstruction. Sending pupils abroad was especially popular before the Asianfinancial crisis, but the need to do so has been reduced by twinningarrangements with foreign universities. There is also a large number of privateand public colleges offering vocational and skill-based education and training.State assistance mostly takes the form of soft loans, repayable when studentsgraduate and take paid employment. University entrance is in theory based onmerit but is in practice biased towards the children of bumiputera. Employersfrequently complain about the low quality of Malay graduates. From 2003science and mathematics have been taught in English, starting at primary level,with the aim of boosting Malaysia�s international competitiveness. Afterindependence in 1957 the role of English was systematically reduced for Malay-nationalist reasons.

Health

Malaysia�s public healthcare system, with its emphasis on community-based,preventative care, provides high-quality services at little or no cost toconsumers and compares favourably with provision in most other Asiancountries. There is an extensive network of primary healthcare services, whichis supported by more than 3,000 health clinics and 2,900 dental units as wellas 124 public hospitals with more than 34,000 beds. Clean water, safe food andsanitary disposal of waste are generally available. But there are widegeographical variations: health indicators for Sabah, Sarawak and some pre-dominantly rural states on the Malayan peninsula are well below average. The225 private hospitals are generally smaller and better equipped, providing

Education is given ahigh priority

A model system, albeit withgeographical disparities

Malaysia 17


around one-quarter of total beds. But there is an acute shortage of manpower,and partly in response to this the government is developing electronic medicalservices and paperless hospitals.

Government spending on the health sector fell from 3% of GDP in 1990 to 2.4%in 1998, reflecting the authorities� desire gradually to reduce their role as ahealthcare provider. However, the Eighth Malaysia Plan, which covers the2001-05 period, targeted an increase of nearly 50% in government spending onhealth compared with the Seventh Malaysia Plan (1996-2000), at M$5.5bn(US$1.4bn). In October 2003 the revision of the Eighth Malaysia Plan raised thetotal to M$9.5bn, with the additional funds to be spent largely on constructionand renovation of hospitals.

Whereas the Seventh Malaysia Plan focused on an expansionary developmentprogramme that saw a large increase in the numbers of new private hospitalsand clinics, the Eighth Malaysia Plan aims for an overall improvement in thequality of public health services, with greater emphasis on the use ofinformation technology, improvements in the quality of health personnel andan upgrade of rural facilities. Under the revised plan, a total of M$898m(US$236m) has been allocated for rural and environmental health.

Natural resources and the environment

Malaysia has a tropical climate. Its economic development was dominated bythe cultivation of plantation crops, such as natural rubber and palm oil, as wellas by tin mining. Malaysia lost its dominant position as the world�s largestproducer of tin concentrates after depletion of the richest, lowest-cost tindeposits. However, it is still one of the world�s main centres of tin refining,although it must supplement declining domestic mine output with importedconcentrates. Malaysia is also no longer the world�s biggest producer of naturalrubber, its declining output having been overtaken in 1993 by rising productionin Thailand and Indonesia. Plantation companies have for many years beenswitching to the more profitable cultivation of palm oil. The country is theworld�s largest producer of palm oil.

Malaysia is one of the world�s leading producers of tropical saw logs. Controlson tree-felling by loggers continue to be flouted, but output is graduallydeclining. Bans on log exports were originally imposed as much to encouragemore downstream processing as to preserve the Malaysian rainforest. Controlsare now linked to replanting.

Crude oil and natural gas are now far more important primary products forMalaysia. Both oil and natural gas are extracted from two main areas in theSouth China Sea, off Terengganu and Sabah. Malaysia is, by internationalstandards, a small producer of crude oil but a large exporter of natural gas. Ithas been the aim of successive Malaysian governments to raise earnings fromall primary products by increasing the degree of domestic processing. Thecountry now has large commodity-based industries, which continue to expand,especially the chemical industries based on oil and gas, but also themanufacture of rubber goods and wooden furniture.

Plantation crops still have animportant economic role

Domestic processing is beingstepped up

18 Malaysia


Transport, communications and the Internet

Malaysia�s physical infrastructure compares favourably with that of most othercountries in the region. Substantial investment during the boom years by theprivate and public sector was interrupted by the 1997-98 financial crisis, butinvestment has since been resumed, albeit at a slower pace. By 2003, thenational road network stood at 75,160 km. Malaysia has made considerableprogress in the creation of a more integrated, efficient and reliable urbantransport system. An express railway links Kuala Lumpur to Kuala LumpurInternational Airport (KLIA), connecting to an urban rail system and monorailnetwork, which also serves the administrative capital, Putrajaya. Publictransport is being promoted.

KLIA was opened in June 1998, with a capacity of 25m passengers a year. Newregional airports have been added since; the upgrading of others is beingplanned. Malaysia is determined to become the regional hub for air transport.In 2001 the government concluded �open sky� policy agreements with severaldeveloped countries, obtained additional international landing rights, increasedflight frequencies and added new destinations. In the same year the nationalcarrier, Malaysia Airlines (MAS), was restructured. In September 2003 landingand parking fees at all airports were waived for international flights for aperiod of five years. Air travel was hit by the impact of Severe AcuteRespiratory Syndrome (SARS) early in 2003. A low-fare airline, Air Asia, starteddomestic flights in December 2001.

Malaysia�s ports handled 339m tonnes in 2003, up from 234m tonnes threeyears earlier, an average increase of 13.2% per year. Growth was the result of arise in containerised and liquid bulk cargo, but also of diversion of traffic fromthe Port of Singapore (POS). A huge expansion is continuing on the central westcoast at Port Klang, as well as at the Port of Tanjung Pelepas (PTP) in Johor, indirect competition with POS. Planned port capacity by 2005 is 481m tonnes, a50% rise compared with 2000. Malaysia is determined to become the preferredregional transshipment point.

State-owned Telekom Malaysia is the dominant provider of fixed-line servicesand an important operator of cellular services; five companies compete in eachmarket section. In 2003 the market for fixed-line telephones was stagnating,with 19 telephones for every 100 people. Telekom is the central provider of thefibre-optic communications infrastructure. Cellular services have continued togrow rapidly. Tariff liberalisation boosted the number of mobile phone usersfrom 5.1m in 2000 to 9.2m in 2002. Telekom continues to be favoured by thegovernment: in July 2002 Malaysia awarded third-generation (3G) spectrumlicences to Telekom Malaysia and a local private-sector firm, MaxisCommunications, shutting out other bidders.

The government wants to position Malaysia as a regional and even a globalhub for information and communications technology (ICT) and multimedia.ICT is considered to be crucial to achieve a competitive knowledge-basedeconomy. The further development of the Multimedia Super Corridor (MSC;

Large investments ininfrastructure

Kuala Lumpur InternationalAirport attracts more traffic

Aggressive expansion of portcapacity continues

Telecommunications

ICT is considered crucial forknowledge-based economy

Malaysia 19


see Economic sectors: Manufacturing) will play an essential role in the fosteringof local capabilities. But ICT usage remains relatively low by internationalcomparison, with 4m personal computers estimated to have been installed by2003. The number of Internet subscribers increased from 1.7m in 2000 to 3.2mby September 2003. The government estimated in 2003 that there were 8.2mInternet users, which would give a penetration rate of 32%, compared with40-50% in Singapore, Japan, South Korea and Taiwan. Malaysia has six Internetservice providers, but the government keeps a wary eye on the Internet, fearinguncensored criticism. The government has set a target of 50% broadbandpenetration by 2007.

Energy provision

Malaysia is well endowed with energy resources. It is a net exporter of oil andgas, which are extracted from beneath the South China Sea. Receptioninstallations in Terengganu handle the oil and gas extracted from fields east ofthe peninsula; other fields are located north of Sarawak and around the coastof Sabah. Proven oil reserves have declined in recent years owing to a lack ofnew discoveries. Large coal reserves are found in Sarawak and Sabah, but theirlow grade and difficulty of access have discouraged development. The highrainfall and rugged topography of peninsular Malaysia and also Sabah andSarawak provide extensive scope for hydroelectric power. The biggest hydro-electric project is the 2,400-mw Bakun dam under construction in Sarawak.

Rapid industrial development significantly boosted demand for electricity inthe 1980s, and the resulting supply shortfall led the government in the early1990s to award contracts to private consortia, known as independent powerproviders (IPPs), to build and operate thermal generating plants to supply thenational grid. The IPPs produced 37% of peninsular Malaysia�s electricity in2000; state-owned Tenaga Nasional (TNB) provided 63%.

Fuel used for electricity generation is mostly natural gas, followed by coal,hydroelectricity and oil; renewable energy (especially biomass, from palm oiland wood waste) will soon overtake oil. The reliance on oil continues to bereduced; coal will cover the bulk of the expanding demand for power, but gaswill remain the major fuel for power generation.

Malaysia�s reserve margin!the difference between installed capacity and peakdemand!remains large: by end-2003 the reserve margin stood at 47%, althoughit was expected to drop to 40% by 2005. However, by 2005 installed capacitywill reach 20,267 mw, an increase of 42% compared with 2000, in order to keepup with demand. The bulk of installed capacity is in peninsular Malaysia. Thegovernment has revived the giant 2,400-mw Bakun hydroelectric project inSarawak, but it is highly doubtful whether it will be able to find customers forthe electricity when Bakun is commissioned in 2006.

There are substantial energyresources

Coal will be used for the bulkof new power demand

20 Malaysia


The economy

Economic structureMain economic indicators, 2003GDP growth (%) 5.3Consumer price inflation (av; %) 1.1Gross national savings (% of GDP) 16.0

Current-account balance (US$ bn) 13.4Total external debt (year-end estimate; US$ bn) 50.5

Exchange rate (av; M$:US$) 3.8Population (m; mid-year estimate) 25.1

Sources: Bank Negara Malaysia; official and Economist Intelligence Unit estimates.

For 30 years Malaysia has industrialised rapidly, transforming itself from aneconomy whose livelihood relied primarily on the production of mineral andagricultural export commodities!palm oil, natural rubber, tropical timber andother minor mineral and agricultural products!into one dominated by manu-facturing and services. In 2003 manufacturing accounted for 31.1% of nominalGDP, up from 30.5% in 2002, whereas the share of services fell to 49.5%, from51.6%. Output of services was hit by the outbreak of Severe Acute RespiratorySyndrome (SARS) in 2003. Malaysia aims to become a fully developednation by 2020.

Malaysia still plays a leading role in world markets for some of its commodities.It is still an important source of rubber, and is the dominant world producer ofpalm oil. Palm oil output reached a record 13.4m tonnes in 2003. Manufacturesaccount on average for 85% of gross export earnings. Electronic goods make upthe single most important category, and have increased their output by over10% year on year for most of the past 25 years, declining only in 1985 and in2001. Electronic goods production is heavily dependent on imported parts. It isgovernment policy to raise the domestic content of exports and the valueadded in production. The strong export orientation of the electronics industrymakes it vulnerable to fluctuations in global demand. In 2003 Malaysia�s totalexports of goods and services were equivalent to 114% of nominal GDP, a highfigure by international standards.

A major change in economic structure in Malaysia during the past decade hasbeen the decline in capital investment. Two economic downturns in the pastsix years have severely dented gross fixed investment, which fell from 43.1% ofnominal GDP in 1997 to a low of 21.9% in 1999 (and was just 22.1% of GDP in2003). The reduction has been caused by lower foreign direct investment (FDI)together with lower private domestic investment. A modest recovery in privateinvestment started in 2003, but the government�s desire to cut back bloatedpublic investment will restrain growth in total capital investment in theyears ahead.

Manufacturing is the largestindustrial sector

Electronics productiondominates manufacturing

Private investment beginsto recover

Malaysia 21


Comparative economic indicators, 2002Malaysia Thailand Singapore Indonesia US

GDP (US$ bn) 103 143 91 243 11,004GDP per head (US$) 4,130 2,237 21,790 1,130 37,900

Consumer price inflation (av; %) 1.1 1.8 0.5 6.6 2.3Current-account balance (US$ bn) 13.4 8.0 26.3 8.2 -531.0

Current-account balance (% of GDP) 13.0 8.0 26.3 3.4 -4.8Exports of goods fob (US$ bn) 105.0 78.4 148.2 64.1 713.0Imports of goods fob (US$ bn) -79.3 66.8 123.7 34.4 -1,261.0

External debt (US$ bn) 50.5 55.1 15.1 136.7 n/aDebt-service ratio, paid (%) 6.1 15.6 2.0 16.2 n/a

Source: Economist Intelligence Unit, CountryData.

Economic policy

After the 1997-98 regional financial crisis the government pursued a stimulatoryfiscal policy, initially to aid economic recovery from the regional financial crisisand later to help narrow the wide, persistent gap between actual and potentialoutput. Previously fiscal policy tended to be prudent, with revenue during theboom years outstripping current outlays and, for much of the 1990s, develop-ment spending as well. The budget went into deficit in 1998. The governmenthas introduced a series of domestic demand-boosting packages, the latest ofwhich, in May 2003, had a value of M$7.3bn (US1.9bn).

The 2004 budget marked a turning point, starting the necessary process of fiscalconsolidation with large cuts in government development spending. However,the government had second thoughts during 2004 about the speed of deficitreduction, allocating an extra M$10bn of expenditure. The 2005 budgetcontinues the process of fiscal consolidation at a leisurely pace, forecasting adecline in the fiscal deficit to 3.8% of GDP from an estimated 4.5% in 2004. Thegovernment admitted that it had given up on its target of balancing the budgetby 2006. Development spending continues to fall, on the assumption thatprivate capital investment will revive: gross development spending drops by9.1% in 2005, after a 20.9% plunge in 2004. There is a small 2.6% cut in operatingexpenditure in 2005, after a large 21.7% rise in 2004. Assuming that the 2005budget will be carried out as planned, the government�s finances in the firsttwo years (2004-05) of Abdullah Badawi�s tenure as prime minister show someworrying trends. Large cuts in government investment are matched bysubstantial increases in government consumption. Revenue growth is sur-prisingly slow, given the strength of the economy. The amount by which thegovernment aims to reduce the budget deficit in 2005 is disappointingly small.However, the planned introduction of a value-added tax by 2007 could lead tostronger and more stable revenue growth.

In May 2003 the Bank Negara Malaysia (BNM, the central bank) strengthenedthe impact of the M$7.3bn fiscal package by cutting its key intervention rate by50 basis points to 4.5%. There is no indication that, with inflation expected toremain low, the BNM intends to raise interest rates in the near future, althoughincreases are possible by the second half of 2005. The central bank alsocontinues actively to promote the structural reform of the financial sector.

The government begins totighten fiscal policy

Monetary policy remainsaccommodative

22 Malaysia


Federal government finances, 2003M$ bn % change, year on year

Revenue 92.8 11.1 Tax revenue 64.9 -3.0 Direct taxes 43.0 -3.2 Indirect taxes 21.9 -2.7 Non-tax revenue 23.3 47.5

Expenditure 113.7 9.5 Operating 75.2 9.5 Development (net)b 38.5 6.9

Balance -20.9 n/a

a Estimated outcome. b Net of loan recoveries.

Source: Ministry of Finance, Economic Report 2003.

The Malaysian ringgit has been pegged to the US dollar at the rate ofM$3.80:US$1 since September 1998. The weakness of the US dollar in 2002 andan export-led recovery in 2003 eased concerns about a loss of Malaysiancompetitiveness. There was speculation that the peg might be abandoned afterthe retirement of the previous prime minister, Mahathir Mohamad, in October2003. But Mr Badawi�s government is taking a pragmatic attitude, and sees noreason to change a currency regime that is working well.

Mr Badawi�s first budget

The 2005 budget is Abdullah Badawi�s first as prime minister, after his predecessor,Mahathir Mohamad, had presented the budget for 22 years. Following sevenconsecutive years of fiscal deficits, Dr Mahathir left the unpopular task of budgetconsolidation to his successor. The 2005 budget continues the gradual deficitreduction with a small cut to 3.8% of GDP in 2005, from an expected outturn of 4.5%in 2004. The budget surprises by an apparent inability, despite a forecast of 6% GDPgrowth, to increase government revenue, which rises by only 2.2% despite large risesin excise on alcohol and cigarettes; corporation tax revenue drops by 3.6%. Theannouncement that a goods and services tax (GST)!a comprehensive value-addedtax!will be introduced by 2007 raises the expectation that the long-planned shiftfrom direct to indirect taxation may finally take place during the current decade. TheGST would improve tax collection and provide a more stable source of revenue; thegovernment has stated that it will cut corporate and individual income tax rates atthe same time as introducing the GST. Malaysia�s 28% corporate tax rate may then bereduced to a level closer to Singapore�s 20%.

The government announced further measures to boost investment in agriculture, topromote the sector�s new role as the third engine of economic growth aftermanufacturing and services. The aim is to reduce the food import bill, whichamounted to M$13.9bn (US$3.7bn) in 2003. Another favoured area was small- andmedium-sized industries (SMEs), which received M$2.1bn in additional funds tostimulate growth. Measures to liberalise the capital market were surprisinglygenerous: up to five major foreign stockbrokers and five leading global fundmanagers will be allowed to operate in Malaysia; 100% foreign ownership of futuresbroking and venture capital companies will be allowed.

Malaysia 23


A negative point in the 2005 budget is the extension of preferential treatment givento entrepreneurs classified as bumiputera (Malay and other indigenous peoples):long-term contracts for a period of five years, currently available only in the defenceindustry, will be extended to other industries involved in technology transfer,including mechanical and engineering equipment industries as well as healthservices.

The government avoided increasing the retail price of petrol in the budget, althoughMr Badawi made it clear that rises were likely in future. The prime minister statedthat the government had foregone M$10.7bn annually in revenue, M$6.8bn of thistotal being as a result of taxes foregone and M$3.9bn owing to the subsidies.

Official development strategies have been based on a series of five-year plans,backed by ten-year �masterplans�. The current plan is the Eighth Malaysia Plan(EMP), which aims for 7.5% annual growth in 2001-05, with the objective of thecountry becoming a fully developed nation by 2020; it was revised in October2003, when the growth target was marked down to 4.2%. The structural shifttowards high-end manufacturing is expected to continue. The new growthtarget depends on the achievement of a 6% annual average rise in GDP in2004-05. The EMP will fall well short of its original expectation, as did theSeventh Malaysia Plan (1996-2000), when annual average growth reached only4.7%, well below the plan�s original target of 8%.

Malaysia�s five-year plansSeventh plan (1996-2000) Eighth plan (2001-05)

Target Outturn TargetReal GDP growth (annual av; %) 8.0 4.7 7.5Inflation (av; %) 2.7 3.4 2.7

GNP per head (M$; end-period) 14,788 13,359 17,779Unemployment (%) 2.8 3.1 2.7

General government balance (% of GNP) 1.5 1.5 1.5Current-account balance (% of GNP) 0.5 6.5 3.9

Source: Economic Planning Unit, Eighth Malaysia Five-Year Plan (2001-2005).

Under the EMP, economic expansion was expected to be driven by an upturnin private investment. The revised plan assumes nearly 12% growth in 2004-05,but owing to a steep fall at the beginning of the 2001-05 period the expectedresult for the full period is a 2.3% decline. The EMP aimed for an average 19%annual rise in private investment, following an average annual contraction of11.6% under the Seventh Malaysia Plan. In the revision, public investment isforecast to fall by an average 4.2% per year in 2004-05. Foreign investment willremain important, but its share of total investment is expected to decline, inpart because of expected global competition for foreign funds. A revival ofprivate-sector investment is essential to achieve faster economic growth.

The EMP, together with the Second Industrial Masterplan (1996-2005),emphasises the importance of strengthening the links between industries andproviding them with appropriate support, in particular through thedevelopment of human resources, physical infrastructure and other services.The growth targets can only be achieved by boosting productivity. The EMPhoped to obtain nearly 40% of the targeted GDP growth from an increase in

Five-year plans guidedevelopment

A crucial role for productivitygrowth

Recovery of private investmentis crucial

24 Malaysia


total factor productivity; the revised plan aims for a share of just over one-quarter. In either case, higher productivity is considered to be crucial. A moreefficient use of labour and capital will hinge on improving the quality andskills of the workforce, which the government may find difficult to achieve.

After taking office, Mr Badawi started a broad-based policy review. Dr Mahathirhad, during the preceding 25 years, been the main director of economic policy.His personal interests, such as privatisation, a preference for large projects andvisionary schemes such as the Multimedia Super Corridor (MSC; see Economicsectors: Manufacturing), characterised Malaysia�s economic course. Followingthe departure of the finance minister and economic adviser, Daim Zainuddin,in June 2001, Dr Mahathir also occupied this position. In conducting economicpolicy, the government is assisted by the Economic Planning Unit (EPU), whichis part of the Prime Minister�s Department. In addition to the prime minister,the ministers of finance and of trade and industry determine policy. Onbecoming prime minister, Mr Badawi took over Dr Mahathir�s finance portfoliobut also retained his position as home affairs minister. One of his early moveswas to cancel several of Dr Mahathir�s �mega-projects�, an indication of hiscommitment to a tighter fiscal policy, although Mr Badawi does not shareDr Mahathir�s close interest in economic affairs. More important is the reviewof the government�s extensive assets and investments, especially thegovernment-linked corporations, with the aim of boosting their efficiency andthe government�s return on investment. Reducing corruption is also acontinuing theme of policy under Mr Badawi.

The review of government investments is likely to result in another wave ofprivatisations in the future. Earlier privatisations have frequently led to abuse. Ahigh-profile campaign of privatising government assets was launched in the1980s with the explicit intention of promoting Malay interests by increasing theshare of the nation�s corporate assets in the hands of bumiputera (ethnic Malaysand other indigenous peoples). Critics have said that many lucrative projectswent to political favourites with little industry knowledge or expertise. The1997-98 economic downturn exposed the weaknesses and the lack ofmanagerial skills in many well-connected companies, many of which had to bebailed out. The resolution of the bad-debt problem was difficult and slow. Thegovernment is keen to avoid past mistakes, and is placing more professionalmanagers in the companies that it controls. But the commitment toprivatisation cannot be separated from bumiputera advancement; although thebumiputera policy now has a lower priority, the government will find it difficultwholly to abandon it without seriously damaging the political interests of themain government party, the United Malays National Organisation (UMNO).

Economic performance

In line with other countries in South-east Asia, Malaysia has suffered tworecessions during the past six years. The country had enjoyed a decade ofconsistently fast growth, with economic expansion driven by manufacturinginvestment and exports, until the Asian financial crisis of 1997-98. Malaysia

The commitment toprivatisation is unchanged

Mr Badawi has some differentobjectives from Dr Mahathir

Strong growth returns in 2004

Malaysia 25


benefited from the surge in global demand for information and communicationtechnology goods, which pulled the economy out of recession in 1999. But by2001 it was hit by a downturn in global demand, which resulted in a plunge inexports and a sharp fall in GDP growth to only 0.3%. Renewed weakness wasevident in the second half of 2002, but growth resumed in 2003, reaching 5.3%for the year as a whole, and continued to accelerate into 2004. Malaysia�sdependence on exports, particularly electronics and electrical goods, whichmade up 56% of exports in 2003, means that economic growth is vulnerable toglobal fluctuations in the demand for these products. This dependence cannotbe reduced quickly, and a shift to other sources of economic growth, which thegovernment is now promoting, could take a long time.

Gross domestic product(1987 prices; % real change year on year)

Annual average2003 1999-2003

Private consumption 6.7 5.8

Government consumption 10.2 10.4Gross fixed investment 2.8 3.3

GDP 5.3 4.8

Sources: Bank Negara Malaysia; Ministry of Finance; Economist Intelligence Unit; official estimates.

Malaysia�s rapid growth over the past 20 years has been financed andsustained by high domestic savings and by large inflows of FDI, attracted byMalaysia�s well-developed infrastructure, capable administration and well-educated workforce. These inflows reached a peak of 8.7% of GDP in 1992-93.However, they never fully recovered after the Asian financial crisis: FDI inflowsstood at 4.2% of GDP in 2000, were barely positive in 2001, recovered to ahistorically low level of 3.4% of GDP in 2002, but fell back to 2.4% in 2003. Mostof the �inflows� are not really inflows at all but earnings reinvested by existingmultinationals. Nevertheless, Malaysia continues to benefit from the trendamong companies in developed countries to relocate some of their operationsto lower-cost centres. A large part of FDI inflows is channelled intomanufacturing, but a growing share is going into the services sector. Malaysia ishaving to do battle with its regional neighbours, most notably China, in vyingfor foreign investment. It has in effect abandoned the official policy of reservingpart of corporate equity for bumiputera, which scared off some foreigninvestment in the past. Malaysia is hoping to attract investment in higher-knowledge-content industries, in line with its ambition to become aknowledge-based economy, and in higher value added manufacturing.

Ever since the Asian financial crisis, the Malaysian economy has been unable toclose the gap between actual production and the production that could beachieved with full utilisation of capital and labour. The �output gap� hardlyexisted during the helter-skelter growth years of the early 1990s, when outputfollowed potential closely. When the crisis hit, an output gap equivalent to11.4% of GDP opened up in 1998. Although the gap narrowed to 4.3% in 2000, itwidened again to 6.9% in 2001, but dropped back to 3.1% by 2003, according tothe Bank Negara Malaysia (BNM, the central bank). As capital investmentremains very low, the potential rate of output growth continues to slow;

The approach to foreigninvestment is changing

Malaysia�s growth potential

26 Malaysia


Malaysia�s best hope of raising the economic growth rate is to boost capital andlabour productivity. The BNM thinks that capital is being used more efficiently,which it attributed in part to past infrastructure investments (which have a longgestation period). The evidence on labour productivity is mixed: there areregular complaints about the low quality of the (largely unskilled) foreignlabour force and of Malay graduates. But the authorities have high hopes thatthe implementation of the Knowledge-based Economy Master Plan, whichincludes large investments in education and training, will raise potential outputgrowth.

The government seeks to control inflation by means of fiscal, monetary andindustrial policies, and also intervenes directly to monitor and control prices.For most of the 1980s and 1990s it succeeded in keeping consumer priceinflation at low levels, certainly compared with other developing countries.When inflationary pressures built up, during periods when the governmentwas driving the economy too hard or foreign demand for Malaysia�s exportsgrew strongly, monetary tightening, direct price controls and mediation in wagebargaining kept price rises in check. A low inflation climate was also aided by afairly tight fiscal position.

The inflationary environment changed following the financial crisis in 1997-98.After a brief price surge caused by the plunging Malaysian ringgit, the economyhas continued to operate well below its full potential, despite sustained fiscalexpansion. Inflationary risks will remain low as long as spare capacity andexcess labour in the economy persist. Some upward pressure on consumerprices will result from government efforts to reduce subsidies (in particular onfuel), to raise officially administered prices and introduce a goods and servicestax by 2007; however, these are unlikely to alter the low-inflation climate.Producer prices will remain far more volatile, reflecting global commodityprices and cyclical conditions, with a limited impact on consumer prices. In2003 annual inflation stood at only 1.1%, and average inflation seems unlikelyto rise above 3% until 2005 or even 2006.

Inflation(% change)


Consumer price index (2000=100) 1.1 1.7

Source: Bank Negara Malaysia.

Malaysia has traditionally had a tight labour market. The unemployment rateaveraged 3.6% in 2003, up from 3.5% in 2002, close to the rate of 4% or lesswhich the Malaysian authorities consider a full employment level. Malaysiaattracts large numbers of foreign workers, especially from Indonesia, whom thegovernment repatriates from time to time for economic or security reasons. Inmid-2004 there were 1.3m legal foreign workers and a similar number ofillegals; another expulsion of illegal workers is planned for late 2004.Construction, the plantation sector and parts of the service sector would grindto a halt without the!mainly unskilled!foreign workers. Over the past decadeMalaysia has also experienced persistent shortages of skilled labour. As the

Policy on inflation ismultifaceted

Inflation will remain low

Some shortages ofskilled labour

Malaysia 27


country moves to become a knowledge-based economy, one of its greatestchallenges is the need to equip workers with new skills. Many governmentschemes and incentives set up to train or retrain workers and upgrade skillsare in place; the 2005 budget added further incentives.

Manufacturing sector real wages(% change)


Wages 2.6 3.1

Source: Bank Negara Malaysia.

Wage growth has been moderate in recent years. The manufacturing sectortended to pay the highest wages in the past, a reflection of strong growth inlabour productivity. Two manufacturing downturns in the past seven yearshave depressed annual real wage growth to only 3.1% on average, according todata published by BNM. During the economic downturn in 1998, real wagesdeclined by 2.4% in the manufacturing sector; they bounced back by 5% in2000, when the electronics industry boomed. Real manufacturing wagesincreased by 2.6% in 2003. Since 2001 wage growth in the private non-manufacturing sector has exceeded that in manufacturing.

Regional trends

Economic development is concentrated in the western states of the peninsula.Tin mining and plantation development began in the 19th century in Selangor,Perak and Johor!the areas that, together with Penang, still have the largestconcentrations of manufacturing industry. Penang and the Klang Valley (incentral Selangor, between the capital, Kuala Lumpur, and the coast) are themain locations of export-oriented manufacturing. Penang�s customs-freeindustrial zones have been the focus of investment by international electronicscompanies, whereas the Klang Valley has the largest and longest-establishedconcentration of general manufacturing operations.

Successive five-year plans have fostered the location of industrial projects innew areas, still mainly in states on the west of the peninsula (Kedah, NegeriSembilan and Malacca). In the predominantly rural states on the eastern coastof the peninsula (Kelantan, Terengganu and Pahang) and the two Borneo states(Sabah and Sarawak), industrial activity is mainly related to the processing oflocal raw materials. Timber processing has developed in all of these states.

Primary oil and gas installations are necessarily located close to offshoresources. Terengganu and Sabah have reception units. Manufacturing operationsusing oil and gas have grown up around these primary industries, includingpetrochemical facilities in Terengganu and Pahang. Other primary industrieshave generated similarly related manufacturing units: for instance, a tinplateproduction line in the southern state of Johor serves Malaysia�s main fruit-canning industry. Production of plantation crops is widely dispersed among allstates of the federation.

Imbalances in development

28 Malaysia


Kelantan is still dominated by agriculture. Rice and natural rubber account fortwo-thirds of the cultivated area. The state also produces 90% of domesticallygrown tobacco. There is substantial logging activity, but little local sawing andprocessing capacity. Income per head in Kelantan is the lowest and slowest-growing in Malaysia.

Economic sectors

Agriculture

In recent years the output of agriculture, forestry and fisheries taken togetherhas expanded fairly quickly, although the relative importance of these rural-based sectors within the economy has continued to decline because of thefaster growth of the industrial and services sectors, shortages of labour andsuitable land, and trade liberalisation. The most important agricultural activitiesare production of food commodities (fisheries and the cultivation of rice beingthe most important subsectors) and plantation crops for international markets,led by palm oil, rubber, cocoa and timber. The government has committed itselfto revitalising the agriculture sector and making it the third engine of economicgrowth and rising rural incomes. It intends to develop the unused potentialin output of fruit, aquaculture and livestock. Labour-saving techniques,innovation and more efficient farm management are being promoted with agrowing number of incentives, subsidies and training schemes.

Agriculture and forestry production, 2003(�000 tonnes unless otherwise indicated)

Crude palm oil 13,400

Rubber 1,000Saw logs (�000 cu metres) 21,376

Cocoa 36

Source: Bank Negara Malaysia, Annual Report.

Production of rice, once the dominant subsistence crop of Malay farmers,has been threatened by the general population drift to the towns, competingwith more profitable uses for land, such as the cultivation of fruit andvegetables, and facing competition for labour from manufacturing industries.As a potent symbol of traditional Malay life, rice growing continues to attractspecial government help, such as schemes for raising yields and productivity.Malaysia is a net importer of rice, but is aiming for a minimum self-sufficiencylevel of 65%.

Natural rubber, Malaysia�s longest-established large-scale agricultural product, isno longer a declining sector. Although refinements in plant breeding andbiological controls have raised yields and enabled growers to manipulateoutput, the availability of cheap or family labour is crucial to productivitylevels. Plantation companies rely heavily on immigrant labour, and havesteadily converted plantings to the more profitable oil palm. The main sourceof output is now the smallholder sector. Rubber output, in decline since the late1980s, reached a low of 769,000 tonnes in 1999 but recovered thereafter, helped

Rice

Natural rubber

Agriculture is still important

Malaysia 29


by higher prices. Production stood at 986,000 tonnes in 2003, the highest levelsince 1996. The government is trying to sustain production of rubber as analternative to oil palm and as a supplier of timber to the furniture industry.

Malaysia is the largest global producer of palm oil. Output of palm oil andassociated products has continued to expand, reaching a record 13.4m tonnes in2003 and accounting for well over one third of total value added in theagricultural sector. Malaysia continually tries to find new uses for palm oil, todevelop new varieties and to boost productivity through labour-savingtechniques. The commodity has benefited from the view of dieticians that it isa healthy alternative to animal fats and oilseed products. Malaysia iscontinually trying to find new markets!it has offered palm oil in part-paymentfor its weapons purchases abroad.

Malaysia is still a major supplier of tropical timber, but supplies are diminishingand logging has gone well beyond the level of sustainability, despite officialpolicy to prevent this. Malaysia is also a source for illegally harvested timberfrom Indonesia. The country has set up a timber certification scheme andpromotes good forest management and reafforestation, but these controls areineffective. Logging permits are often a source of income for politicians. In theinterests of maximising income from forest products, the government hasgradually extended the ban on direct exports of saw logs and promoted highervalue added production of wood products and furniture. Log production hasfallen, affecting both exports of logs and the production of sawn timber.Demand fluctuates with construction activity in Japan and South Korea, thetwo major export markets. The production of saw logs grew by 3.5% in 2003,but stood at less than one-half of the level achieved in the early 1990s.

Mining and semi-processingMinerals production, 2003Crude oil (�000 barrels/day) 738

Natural gas (m standard cu ft) 5,013Tin (�000 tonnes) 3

Source: Bank Negara Malaysia, Monthly Statistical Bulletin.

Some 22% of Malaysia�s industrial output is accounted for by the production ofminerals, mostly petroleum and natural gas (marketed as liquefied natural gas,or LNG). In global terms, Malaysia is a small net exporter of oil but a largeexporter of LNG. Reception installations in Terengganu handle the oil and gasextracted from fields east of the peninsula; other fields are located north ofSarawak and around the coast of Sabah. Proven oil reserves have declined inrecent years owing to a lack of new discoveries; in mid-2004 crude oil reservesstood at 3bn barrels and natural gas reserves at 75trn cu ft, sufficient for 11 and35 years of further production respectively. In recent years 63% of crude oiloutput has come from offshore fields in peninsular Malaysia, 23% from Sarawakand 14% from Sabah. Production has fluctuated within a narrow range over thepast seven years; production in 2003, at 738,000 barrels/day, was at the top ofthe range.

Palm oil

Timber

Crude oil output and refining

30 Malaysia


In contrast with the stability of crude oil output, production of natural gas hascontinued to grow. Between 1992 and 2003 production increased by nearly200%. The heavy reliance on natural gas for electric power generation is quicklybeing reduced. The main customers for LNG exports are Japan, South Korea andTaiwan. A large number of gasfields have been opened up in recent years or arebeing explored. One of the most interesting is a joint development withThailand of fields in the lower part of the Gulf of Thailand. All the gasproduced will initially go to Malaysia. Once the Bintulu LNG complex onSarawak is fully operational, Malaysia will become the world�s second-largestexporter of LNG.

The output of tin!which played a crucial role in Malaysia�s industrial history!went into precipitous decline in the mid-1980s. In 2003 only 3,389 tonnes of tinconcentrate were produced, a new post-war low and 20% down from thepreceding year. Malaysia still has large but mostly low-grade reserves of tin.Large coal reserves are found in Sarawak and Sabah, but their low grade anddifficulty of access have prevented development, except on Sarawak. Malaysiaalso produces barite, bauxite, dolomite, feldspar, gold, ilmenite, iron ore, kaolin,lead, limestone, mica, monazite, sand and gravel, silicon, silver, struverite andzircon concentrate, mostly in relatively small volumes.

Manufacturing

Since the 1970s Malaysia has built up its export-oriented manufacturingcapacity based on inward foreign direct investment. Previously, the country haddeveloped import-substitution industries and industries based on processing ofoutput from the domestic primary sector. Malaysia�s development of export-related production has been highly successful: exports of goods and services asa percentage of current-price GDP, which in 1980 stood at 14%, peaked in 2000at 124.6%, and then declining to 114.8% in 2002 and 114.3% in 2003.Manufacturing accounted for 30.5% of GDP in 2002, rising to 31.1% in 2003.

The export-oriented industries are the biggest component of manufacturing,accounting for around three-quarters of the total. Manufacturing has a 70%share of the industrial production index (1993 base). The domestic-orientedsector accounts for around one-quarter of manufacturing, its main componentsbeing the fabrication of metal products, non-metallic mineral products, foodproducts and transport equipment.

The main locations of export-oriented manufacturing were until not long agothe island of Penang and also the Klang Valley, the central industrial beltto the west of the capital, Kuala Lumpur. Government policy to dispersemanufacturing has resulted in over 200 industrial estates and 14 free industrialzones (FIZs) throughout the country. The FIZs are export-processing zones,where companies are allowed duty-free imports of raw materials, components,parts and equipment. There are also a number of special industrial parks forhigh-technology industries. The development of a centre of high-tech industryin the so-called Multimedia Super Corridor (MSC), a 750-sq km information-technology zone near Kuala Lumpur, has been slow. The MSC was one of thepet projects of the former prime minister, Mahathir Mohamad, and has been

Gas

Tin and other minerals

An emphasis on export-oriented industries

Malaysia 31


hit by two economic downturns. In September 2004 there were 1,106companies with MSC status, employing some 23,000 workers. A second phaseof development started in 2004, with a considerable enlargement of the areaand a target to add biotechnology to information and communicationstechnology activities over the next seven years.

Although the government aims to stimulate inward investment, all industrialprojects are subject to an approval system, operated through the MalaysianIndustrial Development Agency (MIDA). This involves vetting equity stakes,financing, technology transfer, local content and, increasingly, the products andprocesses concerned. In the past the government seemed ready to welcome anyinvestment promising industrial employment. As skilled and semi-skilledworkers became increasingly scarce, MIDA stopped granting approvals to low-productivity industries, and the government encouraged existing low-productivity industries to relocate elsewhere. In recent years, competition fromChina has made it difficult to attract foreign manufacturing investment toMalaysia, stronger incentives and reduced restrictions notwithstanding.

A long period of strong growth ended in 1998, when manufacturing productionfell by 10.2%, undermined by the regional downturn. Fluctuations in overseasdemand for products from the electronics sector continue to be the majordetermining influence on manufacturing production. However, the electronicssector is losing some of its dynamism as regional competition increases and theeconomic structure switches towards services. Manufacturing is becoming morediversified, with higher value added products and new emerging industries.Future growth in manufacturing will be more moderate than before the Asianeconomic crisis, more focused on domestic and regional demand than in recentdecades, and less heavily dependent on electronics production.

Construction

The 1997-98 regional financial crisis was a turning point for the constructionindustry. Construction had been an important contributor to GDP growth,expanding rapidly in the years preceding the 1997-98 recession, driven bystrong private- and public-sector demand, the expectation of continuing higheconomic growth and attractive capital gains from property, and the easyavailability of funds from the local banking system and stockmarket. The goodtimes are unlikely to return soon. Activity in the construction sector, which hadregularly expanded at a double-digit rate, plunged by 24% year on year whenthe crisis hit in 1998, major projects were cancelled or abandoned and plannedinfrastructure developments dropped. Another decline, of 4.4%, in 1999 wasfollowed by three years of low growth, as government spending and specialincentives brought a measure of stability. In 2003 residential housing, especiallyaffordable houses, was the most active market segment, after the governmentput in place incentives for first-time buyers and construction of affordablehouses, and introduced mortgage interest tax-deductibility. By 2004 the con-struction sector was being hit by a reduction in government investment,undertaken to reduce the budget deficit. Although corporate investment hadpicked up again, it could not make up for the drop in public-sector spending. A

An approval system for foreigninvestment

More subdued growth inmanufacturing

The construction sectorcontinues to stagnate

32 Malaysia


further decline in government investment is targeted in the 2005 budget,although spending on transport and public housing will increase again. Theconstruction sector is likely to remain in the doldrums in the next couple ofyears, despite a gradual recovery in private-sector spending.

Financial services

Malaysia has a well-developed financial sector. Banks (Bank Negara Malaysia,the central bank; commercial banks; finance companies; merchant banks anddiscount houses) account for two-thirds of the sector in terms of assets, andnon-bank financial intermediaries (provident, pension and insurance funds;development finance institutions; savings institutions; and other financialintermediaries, such as unit trusts, building societies, leasing, factoring, andventure-capital companies) for one-third. Since the 1997-98 financial crisis theauthorities have reorganised the financial system, tightened supervision and setlong-term targets for the development of financial institutions and capitalmarkets.

An unusual feature of the Malaysian financial sector is that financialinstitutions are required to provide loans �at reasonable cost� to prioritysectors!all bumiputera organisations (those owned by ethnic Malays or otherindigenous peoples), low-cost housing and small-scale enterprises. Lending tosmall and medium-sized enterprises (SMEs) is receiving particular attention, asthe government is promoting the development of SMEs across all sectors toboost domestic investment and growth and to reduce dependence on largecompanies and global demand. A microfinancing scheme for micro-enterpriseswas established in 2003.

The 1997-98 financial crisis was a watershed for the financial sector, which wasoverextended and undermined by imprudent lending. During the decadebefore the crisis credit had expanded by an annual average of almost 30%,largely for property development and stockmarket investments. When the crisishit and the economy turned downwards, non-performing loans (NPLs) soared,precipitating a serious banking crisis. The government played a more active rolethan in most other crisis-hit Asian countries in solving the bad-debt problemand restructuring the financial sector. This was virtually completed during2003, with a small part of the total of recoverable NPLs still outstanding.

The government also used the financial crisis as an opportunity to pushthrough the restructuring of the financial sector, the first stage of which wascompleted in June 2002. A major consolidation of the financial sector wasconsidered necessary to ensure the emergence of strong, well-capitalisedinstitutions capable of competing effectively in a globalised, deregulated en-vironment. From 71 institutions before the Asian crisis, the merger programmeresulted in ten domestic banking groups with 30 banking institutions. Under aten-year Financial Sector Master Plan (FSMP), published in March 2001, the firstphase of development focuses on the building of domestic banking capacity,which is closely monitored by the central bank. Further banking consolidation,

The financial sector iswell developed

A master plan for thefinancial sector

Priority sectors receivecheap loans

Banking sector is strengthenedafter the 1997-98 crisis

Malaysia 33


to eight or fewer groups from the current ten, is expected. The aim is to create acore of strong domestic players able to compete with foreign banks.

Malaysia has a sizeable, fast-growing Islamic banking sector, which at end-2003accounted for 9.7% of banking system assets and 10.3% of deposits. Rapidexpansion has been fostered by the introduction of new Islamic financialinstruments, as well as by official promotion of Islamic banking and of KualaLumpur as a regional Islamic financial centre. The FSMP has set a target forIslamic banking to account for 20% of banking assets by 2010.

The capital market, comprising the equity and bond markets, is gainingrenewed importance as a source of financing, especially for the private sector.The equity market in particular was badly hurt during the 1997-98 financialcrisis by the government�s imposition of currency and capital controls, and bybail-outs of politically well-connected entrepreneurs to the detriment ofminority shareholders. Undaunted, in February 2001 the governmentpublished a ten-year Capital Market Master Plan (CMP), to establish aninternationally competitive capital market. The major objectives of the first,foundation-building phase were to strengthen corporate governance andsurveillance, to develop a broad corporate bond market, to make fundraisingmore efficient and reduce transaction costs, to unite the existing exchanges andto boost the liquidity of the stockmarket. The second phase of the CMP startedin 2004 and involves liberalisation of stockbroking and investment manage-ment, removal of structural impediments to market access, deregulation,enhancing secondary-market liquidity and allowing greater internationalparticipation in the domestic capital market. The changes in part reflect the factthat, since the Asian financial crisis, Malaysia has had excess savings that itneeds to invest abroad.

Other services

Services (including financial services) are the largest part of national output,accounting for 57.6% of constant-price GDP in 2003. The share of services inGDP has continued to increase steadily, although it tends to decline whenmanufacturing grows strongly, usually during export-led recoveries. The sectoris usually divided into intermediate services (22.7%) and final services (33.9%).Intermediate services include transport, storage and communications, andfinance, insurance, property and business services. Final services consist ofutilities; wholesale and retail trade, hotels and restaurants; government services;and other services.

The growth of intermediate services has fluctuated strongly in recent years,largely because of the fluctuating fortunes of the finance and property sectors.During the past three years, intermediate services have expanded rapidly. Thesector has benefited from the fast growth of mobile phone and Internetservices and strong demand for financial services, as well as increasingtransshipment activities in local ports, which have been promoted as analternative to the Port of Singapore; all three factors are likely to persist in thenear future.

Islamic banking continues togrow strongly

A capital market master plan

A large services sector

34 Malaysia


The growth of final services has generally been fairly stable in recent years, inpart because of the government�s expansionary economic policies. Finalservices grew in real terms by 4.2% in 2002 and 3.7% in 2003. The strongexpansion of production by the utilities (gas, water and electricity) is continuingas household and manufacturing industry demand grows. The �wholesale andretail trade, hotel and restaurants� category suffered from temporary weaknessin the first half of 2003 (see below). Final services will be affected by slowergrowth in government services in the years ahead as a result of governmentspending restraint.

The trade, restaurants and hotels subsector accounts for 43% of total finalservices. Tourism has become Malaysia�s most successful services sector, andcontinues to increase in importance as a source of economic growth. Thegovernment considers the tourist industry a means of diversifying andbroadening the economic structure. Tourism has been affected in recent yearsby the impact of Islamist terrorist activity in South-east Asia and in early 2003by the outbreak of Severe Acute Respiratory Syndrome (SARS) in the region. Apowerful recovery in tourist arrivals has taken place during 2004, and itappears likely that a new record in travel receipts will be set this year. Malaysiais benefiting from the strong growth in disposable incomes in the Asia region,while it also increasingly appeals to tourists from Islamic countries. In addition,the government is increasingly promoting tourism by hosting internationalconventions and major sporting events. The Eighth Malaysia Plan set a target of9.5% annual average growth in tourism receipts, but this is likely to be easilyexceeded.

The external sector

Trade in goods

International trade has played a crucial role in Malaysia�s economicdevelopment, starting with the export of raw materials in the 19th century.During the 1970s industrial development was mainly based on export-orientedmanufacturing and on imported inputs. Many of the fastest-growing productionlines, particularly in the electronics sector, were set up on the basis of low localcontent, with the result that the bill for imported manufactures rose in line withrevenue from exports. Malaysia�s merchandise trade account has usually beenin surplus; the surplus soared during the 1997-98 recession, and has remainedhigh in its aftermath.

In 2003 the trade surplus (customs basis) rose to a record M$81.1bn (US$21.3bn)from M$54.3bn in 2002, as intra-regional trade was hit early in 2003 by anoutbreak of Severe Acute Respiratory Syndrome (SARS) while commodityexport earnings were boosted by high commodity prices. The extraordinarilyhigh trade surplus began to decline during 2004 as domestic demandstrengthened and imports soared. The continued high merchandise andcurrent-account surpluses reflect the fact that Malaysia�s economy has failed torecover fully after the Asian financial crisis: in particular, demand for imported

Export growth is matched byrising imports

Tourism boom returns

A persistent trade surplussince the 1997-98 crisis

Malaysia 35


capital goods has not returned to its pre-crisis level, as private investmentremains at a low level.

High global commodity prices have in recent years pushed up the share of theprimary commodity sector in total exports to 14.6% in 2003, from 12.3% in 2002and 11.4% in 2001. Agricultural commodities and minerals each accounted for7.3%. The government�s intention to make agriculture the third engine ofeconomic growth will, if successful, be felt mainly in a reduction of the foodimport bill, rather than changing the composition of agricultural exports. Withthe exception of palm oil, Malaysia�s economy continues to move away fromplantation and forestry products, which form the bulk of agricultural exports.Exports of minerals consist almost entirely of crude oil and liquefied naturalgas. The main determinant of primary export earnings is global oil prices;fluctuations in export volumes are of less importance.

Exports of manufactured goods accounted for 82% of Malaysia�s total exports in2003. The share of manufactured goods in total exports soared during the 1980sand 1990s from 20% in the late 1970s. Exports of electronic and electrical goodsaccounted for 68.4% of manufactured goods exports in 2003, a share that stoodat around 30% in the late 1970s. The heavy dependence on electronic andelectrical goods means that total exports rise and fall as global demand for theproducts of those two sectors fluctuates. The Malaysian government isencouraging manufacturers and exporters to move up the value chain andimprove product quality in order to maintain international competitiveness,especially in relation to China. The government promotes export trade throughthe Malaysian External Trade Development Corporation (Matrade).

Malaysia�s international trade has generally benefited from the relativeexchange-rate stability created by the ringgit:US-dollar exchange-rate peg sinceSeptember 1998. Before this Malaysia was vulnerable to fluctuations in thecurrencies of its main trading partners, particularly Japan, which was its mainsupplier, especially of parts and components. Although this dependence hasbeen reduced, it has not disappeared altogether. The vulnerability to movementsin the US dollar and the yen may increase as trade is increasingly liberalised,particularly with the implementation of regional free-trade agreements.

The US remains Malaysia�s largest export market and its most important tradingpartner in aggregate, with a trade value of M$126.8bn and a share of 17.7% oftotal trade in 2003. Japan remains Malaysia�s principal source of imports, andcompetes with Singapore for the position of Malaysia�s second-largest tradingpartner; in 2003 Singapore�s aggregate trade value of M$100.1bn and its 14%share of Malaysia�s total trade just exceeded Japan�s M$96.9bn and 13.5% shareof trade. The importance of Japan is gradually declining as Malaysia diversifiesits trade and regional trading links intensify. The expansion of port facilities inMalaysia may also take away entrepôt trade from Singapore. Total tradewith the EU reached M$85.5bn in 2003, remaining stable as a share of thetotal at 11.9%.

The global market determinesprimary export earnings

Manufactured goods form thebulk of exports

The importance of the peggedexchange rate

Malaysia�s maintrading partners

36 Malaysia


Main trading partners, 2003Exports to: % of total Imports from: % of totalUS 19.6 Japan 17.1Singapore 15.7 US 15.3Japan 10.7 Singapore 11.7

Hong Kong 6.5 China 8.7China 6.5 South Korea 5.4Netherlands 3.3 Thailand 4.6


The Association of South-East Asian Nations (ASEAN) economies are much lessintegrated than EU economies, but internal trade continues to grow rapidly. In2003 Malaysia�s trade with other ASEAN countries was worth M$174.6bn, or24.4% of Malaysia�s total trade. Intra-regional trade tends to reflect fluctuationsin global demand for manufactured products, but the region is graduallybecoming a source of trade growth in its own right.

The biggest change in trade patterns continues to come from the rapid rise ofChina, which was Malaysia�s fourth-largest single trading partner in 2003 witha 7.5% share of total trade. Exports to China grew by 29.6% in 2003; in 2002,following China�s entry into the World Trade Organisation in December 2001,exports to China surged by 36%. Even more remarkably, Malaysia�s importsfrom China doubled during 2002-03. Trade with Greater China (comprisingmainland China, Taiwan and Hong Kong) reached M$118bn in 2003 andseemed likely to overtake trade with the US in the next couple of years.

Trade liberalisation and regional economic integration will be highly significantfor economic growth in next decade. China and ASEAN have opened talksabout a free-trade agreement (FTA), which may include Australia and NewZealand. Malaysia is likely to conclude an FTA with the US in the next coupleof years. The Malaysian prime minister, Abdullah Badawi, has called for thesetting up of an Asian inter-regional trading group similar to the EU, to includeASEAN, China, Japan and South Korea.

Invisibles and the current accountCurrent account, 2003(M$ bn)

Goods: exports of goods 399.0Goods: imports of goods -301.3Trade balance 97.7Invisibles: credits 64.7Invisibles: debits -102.3

Invisibles balance -37.6Net transfers -9.3

Current-account balance 50.8

Source: Bank of Malaysia, Monthly Statistical Bulletin

Trade with Greater China willovertake that with US

Trade liberalisation will be amajor influence

Malaysia 37


Malaysia has a persistently large deficit on invisibles trade. The two largestcategories of net payments are both by-products of the country�s successfulindustrialisation drive: a deficit on investment income, mainly as a result ofpast foreign direct investment (FDI), and a shortfall on services associated withmerchandise trade, such as insurance and freight.

The deficit on the income account, which consists mainly of investment incomeflows, declined from M$25.1bn in 2002 to M$22.5bn in 2003. There was anincrease in outflows of profits and dividends accruing to foreign directinvestors, particularly in the export-oriented electronics and electrical goodsindustries. But they were offset by a larger increase in inflows from otherMalaysian-owned investments overseas. Bank Negara Malaysia (the centralbank) treats all profits on the overseas equity of Malaysian FDI ventures as ifthey are payments across the exchanges, even if they are retained andreinvested. When they are reinvested, such payments are then treated as capitalinflows.

A continued large outflow of profits to overseas equity holders is aconsequence of past FDI-financed industrialisation. Rising remittances fromoverseas investment by Malaysian companies are beginning to reduce the netsize of the deficit, but they are still relatively small, only around one-third ofgross profits due to non-residents.

The deficit in Malaysia�s trade-related services is of long standing, and tends tobe highlighted when goods exports rise quickly during export-led economicrecoveries. Exports grew by 11.3% in 2003, and the services deficit widened toM$15bn, from M$6bn in 2002. The government has had some success inreducing the outflows connected with trade-related services. The main reasonwhy the services deficit widened in 2003 was a drop in tourism receipts, owingto travel restrictions during the SARS outbreak, which caused a fall in the travelaccount surplus from M$17.1bn in 2002 to M$11.6bn in 2003. A surge in touristarrivals made it appear likely that 2004 would be a record year for tourismbusiness.

Capital flows and foreign debt

Malaysia has long had a low rate of international indebtedness on both theofficial and private accounts, although external indebtedness rose sharplyduring the Asian financial crisis. At its peak in 1997 the ratio of external debt toGDP stood at close to 60%; it declined in the three following years, reaching46.4% of GDP in 2000, but rose again in subsequent years, largely because ofhigher federal government debt. In 2003 the ratio stood at 47.3%, down from51.3% at the end of 2002.

Malaysia has been careful to avoid becoming dependent on external debt, andthis determination has intensified since the Asian financial crisis. Thegovernment�s external debt management strategy requires that corporationsseeking external funds for operations in Malaysia must assure the authoritiesthat they will have the foreign-exchange income to repay the debt. The govern-

The invisibles balanceis in the red

The investment income deficitis substantial

Travel income compensates fortrade costs

Most external debt islonger--term

38 Malaysia


ment encourages companies to raise medium- and long-term loans and avoidshort-term debt. In 2003 about two-thirds of outstanding medium- and long-term debt had remaining maturities of more than three years. Short-term debtis matched against international reserves. National sources indicate that by mid-2004 short-term debt was equivalent to 20.3% of international reserves andrepresented only 21.5% of total external debt. The bulk (77%) of Malaysia�smedium- and long-term external debt is denominated in US dollars; 13% wasdenominated in yen at end-2003.

The share of government external borrowing increased rapidly after the 1997-98crisis to finance the expansionary fiscal programme; at end-2003 it hadstabilised at 20% of total external debt, up only slightly from 19.6% at end-2002,as the government began to pursue a tighter fiscal policy. Federal governmentexternal debt outstanding reached M$37.3bn at end-2003, up from M$36.3bn atend-2002, according to government sources. The main funding source for thegovernment�s financing requirement has been the domestic capital market.

Foreign perceptions of Malaysian government policy are coloured by theauthorities� reaction to the balance-of-payments crisis in 1997-98, the mostserious economic crisis Malaysia has experienced in recent history. As the Asianfinancial crisis deepened, a sell-off in the currency and equities marketsresulted in huge short-term capital outflows, officially estimated at M$12.9bn in1997 and M$20.6bn in 1998. The prime minister, Mahathir Mohamad, resistedadopting the widely accepted response of raising interest rates and cuttingpublic expenditure. Instead, Dr Mahathir imposed a range of capital controls inSeptember 1998, and fixed the exchange rate to the US dollar at M$3.80:US$1.This deviation from economic orthodoxy earned Malaysia widespread inter-national condemnation, not least from portfolio managers whose Malaysianinvestments were frozen. The government lowered interest rates and boostedpublic expenditure, protected by its tightly monitored controls, which werelargely abolished during the following two years. Foreign portfolio capital hasbeen reluctant to return to Malaysia. However, the retirement of Dr Mahathirand the improvement in Malaysia�s economic performance resulted in a netinflow during 2003 for the first time since the Asian crisis.

Foreign reserves and the exchange rate

Malaysia has carefully preserved its foreign reserves during the past five years.During the 1997-98 balance-of-payments crisis, large outflows of non-residentshort-term capital and intervention to support the exchange rate of the ringgitreduced foreign-exchange reserves from M$70bn at end-1996 to M$59.1bn atend-1997, but capital controls quickly led to the rebuilding of reserves toM$99.4bn at the end of 1998. A second, minor fall occurred early in 2001, whendoubts about the sustainability of the ringgit peg and speculation about achange in the political leadership both intensified. Since June 2001 reserveshave continued to grow steadily, to stand at M$207.2bn by August 2004. Theincrease in reserves during the preceding 12 months reflected the repatriation ofexport earnings, and foreign direct investment as well as inflows of portfolio

Foreign reserves aresubstantial

Foreign trust has slowlyreturned

Malaysia 39


funds; together, the inflows more than offset payments for services andexternal loan repayments.

Before September 1998 the international value of the ringgit was managed bythe central bank in relation to an international basket of currencies; until mid-1997 allowance was made for some appreciation to reflect the underlyingstrength of the currency owing to Malaysia�s buoyant export performance andhigh rate of capital inflows. The ringgit tumbled from mid-1997 as investorconfidence in the region�s economies was undermined, triggered by the floatingof the Thai baht. Since September 1998 the ringgit has been pegged atM$3.80:US$1. Initially, large capital inflows resulting from huge current-accountsurpluses and FDI inflows meant that the ringgit was undervalued at this rate.Later on, ringgit undervaluation turned into overvaluation as the US dollarremained strong against most global currencies, causing many regionalcurrencies to fall against the ringgit in line with South-east Asia�s worseningeconomic and political outlook. The situation changed again in early 2002,when the US dollar began to weaken, easing pressure for a change in the rateor the abandonment of the ringgit peg. The retirement of Dr Mahathir, who is afirm advocate of the pegged ringgit, has made it easier to change the exchange-rate regime. Mr Badawi is taking a pragmatic approach, and is unlikely tochange the regime unless there is a substantial shift in the value of theUS dollar against other Asian currencies.

40 Malaysia


Regional overview

Membership of organisations

The Association of South-East Asian Nations was established in 1967. The fiveoriginal members were Indonesia, Malaysia, the Philippines, Singapore andThailand. Brunei joined in 1984, as did Vietnam in 1995, Laos and Myanmar in1997 and, most recently, Cambodia in 1999.

ASEAN summit meetings, which bring together the heads of government ofmember states, must now be held every three years. The most recent was inIndonesia in 2003. Informal summits of heads of governments are also held. Inaddition, the foreign and economic affairs ministers of member countries meetannually. Joint meetings of foreign and economic affairs ministers are held beforeeach ASEAN summit. There is also a standing committee (consisting of themembers� accredited ambassadors to the host country), which usually meetsevery two months. There is a permanent secretariat, based in the Indonesiancapital, Jakarta, and a number of committees.

The organisation started with some grand objectives, but has generally failed todeliver. Early hopes that ASEAN could engineer a regional economicdevelopment strategy!with particular countries concentrating on particularindustries!were soon dashed. In 1977 the Basic Agreement on theEstablishment of ASEAN Preferential Tariffs was concluded, but a decade lateronly about 5% of trade between members was covered by this system.(Members had been permitted to exclude �sensitive� sectors, a let-out clausethat a subsequent agreement in 1987 only slightly curtailed.)

Plans for a proper ASEAN free-trade area (AFTA) were unveiled in 1992, with theaim of achieving this by 2008. A common effective preferential tariff (CEPT)scheme was applied in 1993, providing for the gradual reduction of tariffs on intra-ASEAN trade in certain goods over a number of years. Again, however, memberstates could exclude �sensitive� items, limiting progress. A new AFTA programme,covering a wider spread of products, was launched in 1994. During the mid-1990sthe timescale for implementing the programme was steadily tightened, with theaim being to reduce tariffs on most goods to below 5% by 2000. A limited AFTA,between the original six members of ASEAN and involving a reduction on tariffson intra-ASEAN trade to between 0% and 5%, came into operation on January 1st2002. (Countries joining recently have been allowed more time.)

The 1997-98 regional financial crisis exposed ASEAN�s failings in a brutalfashion. The organisation was unable to stop the regional currencydevaluations or alleviate the subsequent economic hardship. A Statement onBold Measures, released at end-1998, was exactly the opposite of what the titleimplied. Unfolding events in Indonesia then moved the focus on to theorganisation�s security plans. ASEAN members� commitment to the principle ofnon-interference in the internal affairs of other members complicated theresponse to the crisis in East Timor. (Some members did eventually participatein the multinational force that intervened in East Timor, but not under ASEANauspices.)

Association of South-EastAsian Nations (ASEAN)

Malaysia 41


On the economic front, ASEAN�s slow progress towards AFTA has encouragedsome of its members, notably Singapore, to opt instead for bilateral trade pacts.Singapore�s free-trade agreement (FTA) with New Zealand in 2000 promptedprotests from other ASEAN members, but the island state has since reachedbilateral trade agreements with the US, Australia and other countries. (It isunlikely that this approach will prove universally applicable, as the absence ofan agricultural sector in Singapore makes it much easier for it to negotiate withtrading partners with heavily protected primary sectors.) A decision in 2001 byvarious ASEAN members to set up bilateral currency-swap arrangements toprotect against currency volatility is limited in scope, and does not presagefurther ASEAN economic collaboration.

The organisation�s political hopes could be severely tested in the next fewyears. Changing governments in member countries could undermine anyremaining pretence of political consensus in the region. On the security front,the ASEAN Regional Forums (ARFs, which bring together the ASEAN ministersof foreign affairs with those of other countries, notably China) are likely toremain little more than talking shops, with negligible impact on changinggeopolitical trends.

APEC started life as a forum for informal discussion between six members ofthe Association of South-East Asian Nations (ASEAN), Brunei, Indonesia,Malaysia, the Philippines, Thailand and Singapore, and their six dialoguepartners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea andthe US. In 1991 China, Hong Kong and Taiwan became members, followed byMexico and Papua New Guinea in 1993, and Chile in 1994. Peru, Russia andVietnam joined in 1998. APEC describes itself as �the primary vehicle forpromoting open trade and practical economic co-operation� in the region, withthe goal of advancing �Asia-Pacific economic dynamism and sense ofcommunity�.

APEC has had a permanent secretariat since 1992, and also runs fourpermanent committees!on budget and managerial issues, on trade andinvestment, on economic trends generally, and on economic and technical co-operation. In addition, there are 11 working groups!on agricultural technical co-operation, energy, fisheries, human resources, industrial science and technology,marine resource co-operation, small and medium-sized enterprises,telecommunications, tourism, trade promotion and transport. There is also anAPEC business advisory council (ABAC), which includes up to three seniorprivate-sector representatives from each member country. APEC as a whole hasits headquarters in Singapore, while ABAC is based in the Philippines. APEC�smain business is done at annual meetings of member states� ministers offoreign affairs and economic affairs, which are followed by informal gatheringsof members� heads of state. Every other ministerial meeting is held in a South-east Asian country. The chairmanship of APEC rotates on a yearly basis.

During the 1990s APEC�s star first waxed brighter and then started to wane. Thehigh point was probably reached in 1994, when members agreed a timetablefor the liberalisation of trade across the region: the ambitious aim was toeliminate all trade barriers by 2020, and then to extend reciprocal concessions

Asia-Pacific EconomicCo-operation (APEC) forum

42 Malaysia


to non-members. In 1995 and 1996 APEC debated how best to achieve thistarget, but discussions in 1997 and 1998 were driven off course by the regionalfinancial crisis. APEC�s response to the crisis!generally worded exhortations tomember states to develop financial and capital markets, and so on!was farfrom convincing and signalled the inherent weaknesses of the organisation.Subsequent meetings also provided other distractions from the trade liberali-sation theme: East Timor in 1999, information technology in 2000 and security(following the September 11th terrorist attacks on the US) in 2001. Discussionreturned to trade relations in 2002, but was only very general in nature. The2003 meeting in Bangkok made little further progress, concluding with broadcommitments to multilateral trade and investment liberalisation, and toimproving regional security arrangements. Thus APEC has in effect gone backto its roots and become an informal talking shop, giving up all aspirations to bea serious regional reformer.

Malaysia 43


Appendices

Sources of information

Bank Negara Malaysia, Annual Report

Bank Negara Malaysia, Monthly Statistical Bulletin

Department of Statistics, External Trade Summary

Department of Statistics, Survey of Manufacturing Industries

Department of Statistics, Yearbook of Statistics

Economic Planning Unit, Eighth Malaysia Five-Year Plan (2001-2005)

Economic Planning Unit, Mid-Term Review of the Eighth Malaysia Plan(2001-2005)

Malaysian Industrial Development Agency (MIDA), Statistics on theManufacturing Sector

Ministry of Finance, Economic Report (annual)

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, Military Balance (annual)

OECD, Financial Statistics (monthly)

OECD, Geographical Distribution of Financial Flows to Developing Countries(annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, World Debt Tables (annual)

World Bank, World Development Report (annual)

Anwar Ibrahim, The Asian Renaissance, Singapore, 1996

H Crouch, Government and Society in Malaysia, Cornell University Press,Singapore, 1996

J H Drabble, An Economic History of Malaysia, c. 1800-1990, Palgrave Macmillan,Canberra, 2000

E T Gomez (ed.), The State of Malaysia: Ethnicity, Equity and Reform, RoutledgeCurzon, London, 2004

E T Gomez, Chinese Business in Malaysia: Accumulation, Accommodation andAscendance, Curzon Press, London, 1999

National statistical sources

International statistical sources

Select bibliography andwebsites

44 Malaysia


E T Gomez, Political Business: Corporate Involvement of Malaysian PoliticalParties, James Cook University, Queensland, 1994

E T Gomez and K S Jomo, Malaysia�s Political Economy: Politics, Patronage andProfits, Cambridge University Press, Cambridge, 1999

T N Harper, The End of Empire and the Making of Malaya, Cambridge, 1999

J Hilley, Malaysia: Mahathirism, Hegemony and the New Opposition, Zed Books,London 2001

Ho Khai Leong and James Chin (eds), Mahathir�s Administration: Performanceand Crisis in Government, Times Academic Press, Singapore, 2001

Hussin Mutalib, Islam in Malaysia: from Revivalism to Islamic State, SingaporeUniversity Press, Singapore, 1993

K S Jomo, Growth and Structural Change in the Malaysian Economy, Macmillan,London, 1990

K S Jomo (ed.), Malaysian Eclipse: Economic Crisis and Recovery, Zed Books,London, 2001

R Karim, Ceritalah: Malaysia in Transition, Times Books, Kuala Lumpur, 1996

Khoo Boo Teik, Paradoxes of Mahathirism: An Intellectual Biography of MahathirMohamad, Oxford University Press, New York, 1995

F Loh Kok Wah and Khoo Boo Teik (eds), Democracy in Malaysia: Discourses andPractices, Curzon Press, London, 2002

M Mahathir, The Challenge, Pelanduk, Petaling Jaya, 1986

M Mahathir, The Malay Dilemma, Times Books, Singapore, 1970

Bank Negara Malaysia (the central bank): www.bnm.gov.my

Department of Statistics: www.statistics.gov.my

National News Agency, Bernama: www.bernama.com

Economic Planning Agency: www.epu.jpm.my

Malaysian Civil Service Link: mcsl.mampu.gov.my

Malaysia 45


Reference tables

These reference tables provide the most up-to-date statistics available at the date ofpublication.

Population1999 2000 2001 2002 2003

Population (m) 22.7 23.5 24.0 24.5 25.1 Male 11.6 12.0 12.2 n/a n/a Female 11.1 11.5 11.8 n/a n/aPopulation density (per sq km) 69 71 73 n/a n/a% distribution by age: 0-14 33 n/a n/a n/a n/a 15-64 63 n/a n/a n/a n/a 65+ 4 n/a n/a n/a n/aCrude birth rate (per 1,000) 24.5 23.5 22.2 21.9 21.6Crude death rate (per 1,000) 4.4 4.4 4.4 4.5 4.6

Infant mortality (per 1,000 live births) 7.9 7.9 6.3 6.2 5.8Life expectancy Males 79.8 70.2 70.3 70.7 71.0 Females 74.8 75.0 75.2 75.3 75.5

Sources: Ministry of Finance, Economic Reports; Department of Statistics, Monthly Statistical Bulletin.

Labour force(�000)

1999 2000 2001 2002 2003Total employed 8,870 9,271 9,533 9,840 10,181 Agriculture, forestry & fishing 1,427 1,408 1,406 1,403 1,400 Mining 41 41 42 43 43 Manufacturing 2,343 2,558 2,556 2,680 2,858 Finance, insurance & business services 474 509 575 607 652 Transport & communications 442 462 495 509 528 Government services 961 981 980 995 1,026 Other servicesa 2,433 2,558 2,707 2,810 2,880 Construction 749 755 772 782 792

Unemployed 308 302 359 359 385Total labour force 9,178 9,573 9,892 10,199 10,566

a Includes wholesale and retail trade, catering industry and utilities.

Sources: Bank Negara Malaysia, Annual Reports; Ministry of Finance, Economic Reports.

46 Malaysia


Transport statistics1996 1997 1998 1999 2000

RailNo. of passenger journeys (�000) 6,375 5,825 5,340 4,880 4,340Passenger train journeys (bn km) 1.39 1.51 1.41 1.33 1.24Goods traffic (�000 tonnes) 5,425 5,122 3,715 3,864 5,505Goods train journeys (bn km) 1.39 1.34 0.99 0.91 0.92Length of track (km) 1,791 1,791 1,791 1,791 n/aRoadNew vehicle registrations (�000) 750.5 840.2 420.5 565.7 625.9 Passenger cars 318.8 372.3 159.6 296.7 344.8 Motorcycles 322.1 364.2 237.8 236.8 238.7 Goods vehicles 69.2 65.2 11.8 19.9 24.3 Other vehicles 40.3 38.4 11.2 12.2 18.0SeaCargo loaded & discharged (�000 tonnes)a 82,124 96,071 83,611 94,674 101,790 Loaded 28,090 33,724 33,655 39,920 43,480 Discharged 54,034 62,347 49,956 54,754 58,310

a Peninsular Malaysia only.

Source: Department of Statistics, Yearbook of Statistics.

Energy production1999 2000 2001 2002 2003

Crude oil (�000 barrels/day)a 691 681 666 698 738Natural gas (m standard cu ft) 3,952 4,367 4,542 4,676 5,013

Coal (�000 tonnes) 309 383 n/a n/a n/aElectricity (m kwh) 62,546 n/a n/a n/a n/a

a Including condensates.

Sources: Department of Statistics, Yearbook of Statistics; Bank Negara Malaysia, Statistical Bulletin.

Federal government finances(M$ bn unless otherwise indicated)

1999 2000 2001 2002 2003Total revenue 58.7 61.9 79.6 83.5 92.8 Tax revenue 45.3 47.2 61.5 66.9 64.9 Direct taxes 27.2 29.2 42.1 44.4 43.0 Indirect taxes 18.1 18.0 19.4 22.5 21.9 Non-tax revenue 13.3 14.7 18.1 15.8 23.3Total expenditure 68.2 81.6 98.0 103.8 113.7 Operating expenditure 46.7 56.5 63.8 68.7 75.2 Development expenditure (net) 21.5 25.0 34.2 36.0 38.5Balance -9.5 -19.7 -18.4 -20.3 -20.9 % of GDP -3.2 -5.8 -5.5 -5.6 -5.3Memorandum itemGDP at current market prices 300.8 342.6 334.3 361.6 394.2


Malaysia 47


Consolidated public-sector finances(M$ bn unless otherwise indicated)

1999 2000 2001 2002 2003General governmentRevenuea 70.9 76.0 91.6 96.8 107.1Operating expenditure -54.3 -64.4 -72.3 -75.5 84.2Current surplus 16.6 11.6 19.3 21.3 22.9Non-financial public enterprisesRevenue 98.2 112.9 105.1 126.6 155.9Current expenditure -61.6 -71.7 -65.4 -81.0 -99.4Retained income 36.6 41.2 39.7 45.0 56.5Public-sector current surplus 53.3 52.8 59.0 66.3 79.5Development expenditure 46.4 50.4 59.7 69.1 83.3 General government 21.0 27.1 35.7 36.8 43.2 Non-financial public enterprises 25.4 23.4 24.0 32.3 40.1Overall balance 6.8 2.3 -0.9 -2.5 -4.8 % of GDP 2.3 0.7 -0.3 -0.7 -1.2Memorandum itemGDP at current market prices 300.8 342.6 334.3 361.6 394.2

a General government comprises federal government, state governments, statutory authorities and local governments. Excludes transfers withingovernment.


Money supply(M$ m unless otherwise indicated; end-period)

1999 2000 2001 2002 2003M1 72,447 78,216 80,728 89,072 102,081 % change, year on year 33.8 8.0 3.2 10.3 14.6M2 337,138 354,702 362,512 383,542 426,039 % change, year on year 13.7 5.2 2.2 5.8 11.1M3 434,590 456,496 469,519 501,125 549,627 % change, year on year 8.3 5.0 2.9 6.7 9.7


Interest rates(%; av rates at year-end)

1999 2000 2001 2002 20033-month interbank 3.0 3.0 2.8 2.9 2.93-month government securities 2.7 3.0 2.7 2.8 2.8

Retail banking base lending 6.8 6.8 6.4 6.4 6.0Retail banking savings deposits 2.8 2.7 2.3 2.2 1.9

Sources: Bank Negara Malaysia, Annual Reports; Monthly Statistical Bulletin; IMF, International Financial Statistics.

48 Malaysia


Gross domestic product(M$ unless otherwise indicated)

1999 2000 2001 2002 2003Total (bn)At current prices 300.8 342.6 334.3 361.6 394.2 US$ bn 78.9 89.3 88.1 94.9 95.2At constant 1987 prices 193.4 210.6 211.2 220.0 231.7 % change, year on year 6.1 8.6 0.3 4.1 5.3

Per headAt current prices (US$) 3,608 3,848 3,788 3,873 3,793At constant 1987 prices 8,515 8,936 8,775 8,951 9,231 % change, year on year 3.7 4.9 -1.9 2.0 3.1

Sources: Bank Negara Malaysia, Annual Reports; Ministry of Finance, Economic Reports; Economist Intelligence Unit.

Gross domestic product by expenditure(M$ bn unless otherwise indicated; constant 1987 prices)

1999 2000 2001 2002 2003Private consumption 84.4 95.4 97.6 101.9 108.7 % change, year on year 2.9 13.3 2.3 4.4 6.7 % of GDP 43.6 45.4 46.3 46.5 46.9

Government consumption 23.5 23.9 27.9 31.3 34.5 % change, year on year 17.1 1.7 16.7 12.2 10.2 % of GDP 12.1 11.4 13.2 14.3 14.9

Gross fixed investment 51.6 64.8 63.1 63.2 65.0 % change, year on year -6.5 25.7 -2.8 0.3 2.8 % of GDP 26.7 31.0 30.0 28.9 28.1

Stockbuilding 1.2 2.8 -1.8 3.4 -1.3 % of GDP 0.6 1.3 -0.8 1.6 -0.4Exports of goods & services 212.1 246.2 227.7 237.9 253.0 % change, year on year 13.2 16.1 -7.5 3.6 6.3 % of GDP 109.6 117.5 108.2 107.5 109.2

Imports of goods & services 179.3 223.1 203.9 216.8 227.6 % change, year on year 10.6 24.4 -8.6 6.2 5.0 % of GDP 92.7 106.5 96.9 98.7 98.2

GDP 193.4 210.0 210.6 220.0 231.7 % change, year on year 6.1 8.6 0.3 4.1 5.3

Sources: Bank Negara Malaysia, Annual Reports; Ministry of Finance, Economic Reports; Economist Intelligence Unit.

Malaysia 49


Gross domestic product by sector(M$ bn unless otherwise indicated; current prices)

1999 2000 2001 2002 2003Agriculture 32.6 30.2 27.6 33.3 38.2 % of total 10.8 8.8 8.3 9.2 9.7

Mining 23.1 37.5 34.0 34.0 41.0 % of total 7.7 11.0 10.2 9.4 10.4

Manufacturing 93.0 111.9 101.9 110.4 122.4 % of total 30.9 32.7 30.5 30.5 31.1Construction 14.0 13.9 14.2 14.6 14.9 % of total 4.7 4.1 4.2 4.0 3.8Services 153.6 165.8 173.3 186.5 195.2 % of total 51.1 48.4 51.8 51.6 49.5

GDPa 300.8 343.2 334.3 361.6 394.2

a At purchasers� value, less imputed bank service charges plus import duties.


Consumer price index(% change year on year unless otherwise indicated)

% weight 1999 2000 2001 2002 2003Overall index 100.0 2.8 1.5 1.4 1.8 1.1Food 33.8 4.6 1.9 0.7 0.7 1.3

Beverages & tobacco 3.1 7.9 2.8 4.8 4.2 1.7Clothing & footwear 3.4 -2.0 -1.8 -2.6 -2.3 -2.0

Rent, fuel & power 22.4 1.6 1.4 1.4 0.7 0.9Furniture & household items 5.3 1.3 0.0 0.1 -0.4 -0.5Medical care 1.8 3.0 2.0 2.9 2.4 1.7

Transport & communication 18.3 0.5 2.0 3.6 6.6 1.7Recreation & education 5.9 2.6 0.5 -0.1 -0.2 0.6

Miscellaneous goods & services 5.5 1.5 0.9 0.7 1.1 1.3IMF consumer price index (2000=100) � 98.5 100.0 101.4 103.3 104.3 % change � 2.8 1.6 1.4 1.9 0.9

Sources: Bank Negara Malaysia, Annual Report; IMF, International Financial Statistics.

Agricultural and forestry production1999 2000 2001 2002 2003

Palm oil (m tonnes) 10.6 10.8 11.8 11.9 13.4Rubber (m tonnes) 0.8 0.9 0.9 0.9 1.0

Saw logs (�000 cu metres) 21,776 23,074 18,923 20,649 21,376Cocoa (�000 tonnes) 84 70 58 48 36


50 Malaysia


Minerals production1999 2000 2001 2002 2003

Crude oil (�000 barrels/day) 691 681 666 698 738Natural gas (m standard cu ft) 3,952 4,367 4,542 4,674 5,013Bauxite (�000 tonnes) 223 n/a n/a n/a n/a

Copper (�000 tonnes) 21 n/a n/a n/a n/aTin (�000 tonnes) 7 6 5 4 3

Iron ore (�000 tonnes) 337 n/a n/a n/a n/a

Sources: Bank Negara Malaysia, Annual Reports; Monthly Statistical Bulletin; Ministry of Finance, Economic Reports; Department of

Statistics, Yearbook of Statistics.

Manufacturing production(% change, year on year)

1999 2000 2001 2002 2003Chemicals 17.1 15.1 -7.7 2.7 20.8

Electrical products 2.7 28.7 -2.8 -5.1 -7.0Electronic products 21.2 44.8 -20.2 13.4 15.1Off-estate processing 24.7 11.7 7.7 7.1 11.8

Food 5.7 16.2 4.3 8.7 8.8Non-metallic mineral products 2.6 20.5 9.6 5.1 9.7

Wood products -7.3 4.0 1.2 -6.0 0.9Textiles 4.0 8.7 -8.3 -6.2 -2.2Tobacco products -15.5 75.3 -6.0 -10.0 3.9

Transport equipment 53.5 19.1 19.0 6.2 -5.5Basic metals 29.5 16.6 -0.7 2.4 10.8

Rubber products 3.6 4.0 3.3 2.0 18.7Metal products -1.1 33.8 3.9 0.8 7.4

Petroleum products -0.3 19.9 19.3 -4.1 2.3Beverages -2.6 6.0 3.2 -11.9 20.8All manufacturing industries 12.9 25.0 -6.6 4.5 10.5


Construction statisticsa

Office Retail Apartments(sq metres) % occupancy (sq metres) % occupancy (no. of units)

1999 265,645 76.2 89,787 76.6 9,547

2000 1,374,452 76.9 218,562 78.5 5,4662001 138,826 74.7 24,096 79.7 17,0672002 200,195 75.5 141,644 83.0 20,465

2003 (Jan-Sep) 92,800 77.2 190,185 83.3 19,060

a Supply of new property in Kuala Lumpur and Selangor state.


Malaysia 51


Banking statistics(M$ m; end-period)

1999 2000 2001 2002 2003Domestic commercial banksAssets 365,583 388,727 398,156 426,224 470,256Deposits 257,446 279,438 283,167 299,484 328,212Loans & advances 215,223 231,242 244,321 252,263 262,694Foreign commercial banksAssets 109,099 123,988 131,580 137,030 159,634Deposits 75,153 83,554 85,625 88,922 104,772Loans & advances 68,007 72,125 80,654 85,731 92,916


Stockmarket indicators(Kuala Lumpur Stock Exchange)

1999 2000 2001 2002 2003KLSE composite market index

(Apr 4th 1986=100) 812 680 696 646 794Value of shares traded (M$ bn) 185.3 244.1 85.0 117.0 183.9

Volume of shares traded (bn) 85.2 75.4 49.7 55.6 112.2Market capitalisation (M$ bn) 553.0 444.0 465.0 481.6 639.3

No. of companies listed 757 795 812 865 906

Sources: Bank Negara Malaysia, Annual Report; Monthly Statistical Bulletin.

Exports(M$ m; fob)

1999 2000 2001 2002 2003Electronic equipment & parts 79,400 95,680 79,102 84,410 82,436

Electrical machinery & appliances 50,162 63,618 60,675 54,897 55,927Semiconductors 65,485 71,111 60,530 72,991 85,184

Chemicals & chemical products 11,105 15,011 14,879 17,285 21,236Liquefied natural gas 6,349 11,423 11,342 9,888 13,328Crude petroleum 9,306 14,241 11,118 11,600 15,662

Crude palm oil 14,475 9,948 9,876 14,838 20,224Textiles, clothing & footwear 9,467 10,433 9,054 8,570 8,771

Manufactured metals 7,862 8,618 8,692 8,796 11,303Petroleum products 4,513 8,131 8,408 7,620 9,413Scientific equipment 4,834 6,825 7,802 8,152 9,213

Wood products 6,984 6,801 6,017 6,311 6,698Food, beverages & tobacco 5,554 5,717 5,948 6,675 7,820

Rubber products 5,061 4,695 4,466 4,505 5,060Toys & sports goods 3,005 3,447 3,411 3,597 3,836

Transport equipment 5,114 2,903 2,427 2,994 3,208Sawn timber 2,807 3,020 2,273 3,035 3,158Rubber 2,344 2,571 1,886 2,492 3,583

Saw logs 2,663 2,489 1,523 1,832 2,015Total exports incl others 321,560 373,270 334,284 357,430 398,882


52 Malaysia


Imports(M$ m; cif)

1998 1999 2000 2001 2002Semiconductors & electronic

equipment 95,630 107,573 139,313 117,140 132,936Machinery & manufactured goods 58,655 63,208 79,758 72,808 73,844

Chemicals 16,275 18,790 22,372 20,704 21,761Miscellaneous manufactures 11,885 12,873 17,659 15,730 17,187

Mineral fuels 6,992 7,489 14,973 14,705 14,368Food, beverages & tobacco 11,110 11,555 12,102 13,201 13,577Transport equipment 14,599 11,658 9,253 8,959 11,508

Inedible crude materials 5,724 6,225 7,096 6,891 6,822Animal & vegetable fats & oils 1,041 1,056 604 793 1,266

Total imports incl others 228,124 248,477 311,459 280,229 303,090

Sources: Ministry of Finance, Economic Report; Department of Statistics, Monthly Statistical Bulletin.

Main traditional exports(�000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003Palm oil 8,964 8,863 10,467 10,857 12,509

Crude petroleum 17,725 16,672 15,077 16,192 17,913Rubber 984 978 822 928 945

Sawn logs (�000 cu metres) 6,738 6,484 4,834 5,104 5,505Sawn timber (�000 cu metres) 2,818 2,876 2,411 2,753 5,737Tin 24 21 27 27 15


Imports by end use(M$ m)

1999 2000 2001 2002 2003Capital goods 31,874 44,171 41,285 43,199 43,508 Industrial transport equipment 3,490 2,272 2,669 5,050 2,671 Other capital goods 28,385 41,899 38,615 38,149 40,837Intermediate goods 183,619 232,687 203,808 218,848 233,046 Primary industrial supplies 5,472 6,269 6,140 6,125 6,449 Processed industrial supplies 53,364 62,134 55,813 57,820 59,681 Parts & accessories of capital goods (excl transport equipment) 112,320 144,232 120,014 131,344 141,283

Consumption goods 14,828 17,040 16,620 18,951 18,886 Food & beverages 6,057 6,460 7,140 7,172 6,777Dual-use goods 4,934 6,393 5,844 6,214 7,057 Transport equipment 3,304 3,924 3,378 3,580 4,075Re-exports 8,806 6,518 6,891 9,121 8,722Gross imports incl others 248,476 311,459 280,229 303,090 317,746


Malaysia 53


Main trading partners(M$ m)

1999 2000 2001 2002 2003Exports to:US 70,391 76,579 67,618 71,502 78,007Singapore 53,106 68,574 56,643 60,660 62,786Japan 37,289 48,770 44,393 39,778 42,643Hong Kong 13,344 16,854 15,437 20,128 25,788China 8,808 11,507 14,683 19,966 25,878Thailand 10,481 13,485 12,756 15,096 17,538Taiwan 14,600 14,189 12,167 13,224 14,351Netherlands 16,233 15,616 15,438 12,969 13,036South Korea 9,498 12,464 11,108 11,823 11,550UK 12,067 11,566 8,759 8,353 8,872Total incl others 321,560 373,270 334,284 357,430 398,882Imports from:Japan 51,803 65,513 53,750 53,912 54,273US 43,318 51,744 44,881 49,692 48,757Singapore 34,817 44,696 35,352 36,317 37,283China 8,125 12,321 14,473 23,472 27,739South Korea 12,974 13,926 11,249 16,079 17,308Taiwan 13,259 17,511 15,930 13,224 15,698Thailand 9,377 11,987 11,120 12,017 14,549Germany 7,703 9,282 10,452 11,163 14,787Indonesia 6,677 8,623 8,536 9,689 11,168Hong Kong 6,250 8,557 7,064 8,837 8,580Total incl others 248,477 311,459 280,229 303,090 317,746


54 Malaysia


Balance of payments, IMF series(US$ m)

1998 1999 2000 2001 2002Goods: exports fob 71,883 84,098 98,429 87,981 93,383Goods: imports fob -54,378 -61,453 -77,602 -69,597 -75,248

Trade balance 17,505 22,644 20,827 18,383 18,135Services: credit 11,517 11,919 13,941 14,455 14,878

Services: debit -13,127 -14,736 -16,747 -16,657 -16,448Income: credit 1,542 2,003 1,986 1,847 2,139

Income: debit -5,446 -7,499 -9,594 -8,590 -8,734Current transfers: credit 728 801 756 537 661Current transfers: debit -3,190 -2,529 -2,680 -2,689 -3,442

Current-account balance 9,529 12,603 8,488 7,287 7,190Direct investment overseas - -1,422 -2,026 -267 -1,905

Direct investment in Malaysia 2,163 3,895 3,788 554 3,203Inward portfolio investment 283 -1,156 -2,145 -666 -836Other investment assets -5,269 -7,936 -5,565 -2,702 -4,597

Other investment liabilities 272 - - -829 1,868Financial balance -2,550 -6,619 -6,276 -3,892 -3,142Net errors & omissions 3,039 -1,273 -3,221 -2,394 -391Overall balance 10,018 4,711 -1,009 1,000 3,657Financing (- indicates inflow)Movement of reserves -10,018 -4,712 1,009 -1,000 -3,657Use of IMF credit & loans 0 0 0 0 0

Source: IMF, International Financial Statistics.

Balance of payments, national seriesa

(M$ bn)

1999 2000 2001 2002 2003Merchandise exports fob 319.6 374.0 334.3 358.5 399.0Merchandise imports fob -233.5 -294.8 -264.5 -286.4 -301.3

Trade balance 86.0 79.2 69.9 72.1 97.7Services balance -10.7 -11.2 -8.4 -6.0 -15.0

Income balance -20.9 -28.6 -25.6 -25.1 -22.5Net current transfers -6.6 -7.5 -8.2 -10.6 -9.3Current-account balance 47.9 32.0 27.7 30.5 50.8Capital account (net) 0.0 0.0 0.0 0.0 0.0Financial account (net) -25.2 -23.8 -14.8 -11.9 -12.1 Direct investment (net) 9.4 6.7 1.1 4.9 4.2 Portfolio investment -4.4 -9.4 -2.5 -6.5 4.2 Other investment (net) -30.2 -21.1 -13.4 -10.4 -20.5

Net errors & omissions -4.9 -11.8 -9.2 -4.4 0.4Overall balance 17.8 -3.7 3.7 14.2 39.1

a Starting from 1999, the balance of payments is compiled in accordance with IMF guidelines.


Malaysia 55


External debt, World Bank series(US$ m unless otherwise indicated; debt stocks at year-end)

1998 1999 2000 2001 2002Public medium- & long-term 18,155 18,929 19,090 24,140 26,200Private medium- & long-term 15,786 16,961 18,067 14,181 13,988

Total medium- & long-term debt 33,940 35,892 37,300 38,321 40,188 Official creditors 4,508 4,825 4,950 5,861 5,782 Bilateral 3,021 3,387 3,637 4,641 4,637 Multilateral 1,487 1,438 1,314 1,219 1,145 Private creditors 29,432 31,067 32,206 32,460 34,406

Short-term debt 8,469 6,012 4,640 6,291 8,369 Interest arrears 0 0 0 0 0Use of IMF credit 0 0 0 0 0

Total external debt 42,409 41,903 41,941 44,612 48,557Principal repayments 3,806 2,853 4,146 4,088 6,117

Interest payments 2,268 1,922 2,299 2,140 1,965 Short-term debt 656 319 266 195 235Total debt service 6,074 4,775 6,445 6,229 8,082Ratios (%)Total external debt/GDP 58.8 52.9 46.4 50.6 51.0Debt-service ratio, paida 7.2 4.9 5.6 6.0 7.3

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Official development assistance(US$ m)

1998 1999 2000 2001 2002Bilateral -1,071.5 1,482.2 -217.9 413.6 2965.5 Japan 164.1 264.5 -247.4 1,220.3 609.9 UK -546.0 693.4 -1,127.0 -201.4 344.2 US -345.0 654.0 88.5 -975.5 2266.2Multilateral 219.2 -78.5 -70.6 -39.4 -91.4Total (incl others) -831.7 1,378.8 -307.2 383.2 2872.6 Grants 100.9 101.7 90.7 75.7 78.3

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients.

Foreign reserves(US$ m; end-period unless otherwise indicated)

1999 2000 2001 2002 2003Foreign exchange 29,670 28,625 29,585 33,280 43,466

SDRs 83 105 125 151 178Reserve position at the IMF 835 792 764 790 871

Total reserves excl gold 30,588 29,523 30,474 34,222 44,515Gold (national valuation) 57 53 51 56 61Total reserves incl gold 30,645 29,576 30,525 34,278 44,576Memorandum itemGold (m troy oz) 1.18 1.17 1.17 1.17 1.17

Source: IMF, International Financial Statistics.

56 Malaysia


Exchange rates(M$ per unit of currency unless otherwise indicated; period averages)

1999 2000 2001 2002 2003US$ 3.8000 3.8000 3.8000 3.8000 3.8000¥100 3.3513 3.5272 3.1296 3.0386 3.2778

S$ 2.2424 2.2046 2.1217 2.1228 2.1811£ 6.1498 5.7637 5.4741 5.7097 6.2107

" 4.0538 3.5112 3.4033 3.5887 4.2970Swfr 2.5348 2.2538 2.2547 2.4488 2.8217

SDR 5.1967 5.0125 4.8375 4.9249 5.3132Nominal effective exchange-rate index

(2000=100) 97.6 100.0 105.5 105.6 97.2

Sources: Bank Negara Malaysia, Monthly Statistical Bulletin; IMF, International Financial Statistics.

Editors: Graham Richardson (editor); Kilbinder Dosanjh (consulting editor)Editorial closing date: September 24th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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