Download - Ch 1 Understanding Malaysian Economy

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Chapter OneUNDERSTANDING

MALAYSIAN ECONOMY

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AGENDA FOR TODAY

• TEXTBOOK • TUTORIAL QUESTIONS

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Chapter Overview

• Chapter 1 explained the economic status and the historical evolution of the Malaysian economy since independent.

• Evolution of Malaysian economy consisted of four stages:– 1957 to 1960s: Agriculture based activity– 1970s to 1980s: Manufacturing and industrialization– 1990s: Financial crisis in 1997/98– 2000: Information & Communication Technology-

driven economic growth

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Objectives

• After studying this chapter, you should be able to understand:– The background of the Malaysian economy.– The main features of the Malaysian economy

during independence.– The economic status in 1960s.– The economic status during the 1970s & 1980s– The rationale behind the policy of labor-intensive

industries– The financial crisis of 1997/ 98

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Introduction

• Upon independence, our country was known as Malaya.

• The formation of Malaysia in 1963 happened after Sabah, Sarawak, and Singapore joined the new federation.

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Introduction

• Malaysia is a visionary nation. The vision depend on good leadership and the Malaysian people.

• The early economic transformation from agriculture to manufacturing and diversification was the work of vision. Its transform Malaysia into a new developing countries.

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The Economic Status During Independence

• Prior to independence, Malaysian economy was based on primary sector and on international trade.

• Example of primary sector of Malaysia in 1957 were agriculture and mining.

• In 1957, primary sector was a major contributor to GDP (45.7%) as well as employment (61.3%).

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• Agriculture activities contributed 39.3% to GDP and 58.3% to employment in 1957.

• Primary agriculture activity was rubber cultivation.

• Supporting agriculture activities were:– Palm oil plantation– Rice cultivation– Fishery, and– Forestry activities

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• Mining was a minor contributor to GDP. It contributed 6.4% to GDP and 2.8% to employment in 1957.

• The secondary sector was very small contributor to GDP(11.1%) and employment(9.6%) in 1957.

• Examples of secondary sector activities in 1957 were light manufacturing, building and construction.

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• Manufacturing sector was minor contributor to GDP and employment because in 1957 it had natural diseconomies of scale.

• For examples:– Repair of plantation and mining equipment– Processing of agriculture product– Product with transportation cost.

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The Economic Status During Independence (cont.)

• Tertiary sector contributed a significant 43.2% to GDP in 1957.

• In 1957, Malaysia was very dependence on international trade. Export amounted to about 50% of GDP.

• The need to provide services such as financial and banking to support the export activities boosted the tertiary sector.

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• The service sector consisting of private and public services such as health and education contributed 11.1% to GDP in 1957.

• The Malaysian economy as at 1957 can safely be said to be based on:– Primary industries, and– Highly trade-oriented production.

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• In 1957, the population was growing at 3.4%, one of the highest recorded rates of natural increased in the world.

• Unemployment rate started to increase because less of employment opportunity at that time.

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• Actively unemployed means those who are not gainfully at work but actively seeking employment and capable of taking a job if offered.

• Passively unemployed means those who are not actively looking for work because of despondency or ignorance but will accept work if offered.

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• Another features of Malaysian economy in 1957:– Uneven distribution of income– Wide disparities between rural and urban

sectors– Wide disparities between inhabitants of

Peninsular Malaysia and the Borneo states.

– Wide disparities between races in term of profession and income.

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• In 1957,– The average annual income per head of the

Malays was RM367– The average Malay employee earned about

RM1,770 whereas the non-Malay counterparts earned as much as RM3,200.

– Government established the Rural and Industrial Development Authority (RIDA) to develop Malays competitiveness in commerce and industries.

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• Final feature of the economy in 1957,– Low level of human resources development, which

resulted in a shortage of many skills required for development to take place.

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The Economic Status During Independence -Conclusion

• The strength of the Malaysian economy in its early years of independence was characterized by:– Exports of primary products of tin and rubber– Resource-based industries– High degree of inequality– High unemployment– High population growth

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The Economic Status During 1960s – 1980s

• During 1960s to 1980s, the Malaysian economy gradually transformed to secondary sector.

• The economy became heavily dependent on manufacturing activities.

• The process of manufacturing has evolved with two fundamental strategies:– 1. Import Substitution.– 2. Export-Oriented Strategy.

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• Import substitution means the economy deliberately producing goods or services locally to replace those imported items.

• Malaysia tried to substitute imported items with locally produced goods and services to save cost and to reduce its dependency on foreign products.

• Import substitution was actively pursued in the First Malaysia Plan (RMK-1, 1966-1970).

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• Export-Oriented Strategy means the economy deliberately producing goods and services at efficient scale for local use as well as exporting to other countries.

• The activities could generate more income in term of foreign exchange to Malaysia.

• The export-oriented strategy has been implemented since the Second Malaysia Plan (RMK-2, 1971-75)

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• In the early 1960s, the Malaysian economy was still heavily dependent on development of agriculture sector – the main foreign exchange earner and source of employment.

• Despite high productivity in the agriculture sector, most of the population were either unemployed or engaged in low-income employment.

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• The government realized agriculture sector didn’t provide enough growth impetus for the overall economy.

• In the early 1970s, the government started to emphasize on the structural change of economy.

• The change in the emphasis from agriculture to manufacturing sector has led to the implementation of import substitution and export-oriented strategy.

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• The early structural changes (1970s) resulted in a better balance between the agriculture, manufacturing, and services sectors.

• As a result, modernization and diversification of the Malaysian economy started during 1970s.

• The range of activities and products as well as sources of growth became more diversified and enlarged.

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• In 1970s, the following features were very apparent in Malaysian economy:– Increasing degree of sectoral interlinkages– Greater integration among the sectors.– Strengthening of linkages within the economy.

• Example: Vegetables were exported to Singapore.

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• In 1970s, manufacturing sector experienced rapid expansion with its average growth rate at 10.3% per annum between 1970 and 1990.

• The agriculture sector which was traditionally very important continued to decline in its growth rate from 5% per annum in 1970 to 0.8% in the 1980s.

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• Since 1970s, the primary manufacturing activities took place in primary and export-oriented industries.

• The growth leaders were:– Wood processing– Palm oil processing– Tobacco products– Textile and clothing– Footwear– Rubber products (especially tires and tubes)– Plastic goods industries.

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• The manufacturing sector experienced tremendous growth and underwent structural changes due to domestic and external conditions.

• The structural changes in the 1970s and 1980s were necessary as the changes prepared the manufacturing sector to be more resilient in the 1990s.

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• In mid-1980s, however, some of the early leading industries in manufacturing sector were experiencing cyclical decline because of:– Diversifying, or– Responding to comparative advantage changes.

• For example, the severe deceleration in world trade and increased protectionism caused the textiles and clothing industry, and rubber products to experience negative growth.

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• In term of employment, the performance of the manufacturing sector was also impressive

• The share of employment contributed by the manufacturing sector increased from 9.1% (1968) to 15.8% (1980).

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• In the 1980s, the sub-sectors which contributed significantly to employment creation in manufacturing sector were:– Electrical and electronics– Machinery and appliances– Transport equipment– Non-electrical machinery– Rubber– Plastic– Apparel– Paper and wood industries.

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• The rapid growth and structural change in Malaysia’s quest for industrialization have affected the country’s external trade pattern, in particular, the composition of export.

• For example, inedible crude materials accounted for 68% of Malaysia’s total gross export in 1960 was reduced to 32% in 1980.

• (Inedible crude material and exports comprise mainly of rubber, tin, sawn logs and timber).

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• During 1970 to 1980, exports of manufactured goods grew from RM814 million to RM7,158 million, an increase of 24.3%

• Overall shares of manufactured products totaled less than 17% in 1960 but has increased to more than 27% of total export in 1980.

• (Example of manufactured products: manufactured goods, machinery and transport equipment, and miscellaneous articles).

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• There were four industries which were very important to Malaysian economy in the 1980s.

• The four industries responsible to the manufactured product export growth were:– a) Electronic components and assembly– b) Textiles and clothing– c) Rubber products– d) Wood products.

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• The four industries above had two things in common:– a) Labor-intensive industries: In the 1980s,

Malaysia urgently required greater job opportunities for its expanding labor force.

– b) Non-resource-based industries: As comparison to traditional Malaysian exports, which are generally resource-based.

• Rapid growth in the four industries has changes the composition of Malaysian exports from resource to non-resource-based.

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The Economic Status During 1960s – 1980s- Conclusion

• Structural changes of Malaysian economy started during the 1970s until today.

• Two important strategies implemented by the government during this time were import substitution and export-oriented strategy.

• Manufacturing became increasingly important compared to agriculture.

• The 4 prime industries – electronics components and assembly, textiles and clothing, rubber products, and wood product contributed to the changed in export composition of Malaysian products (from resource to non-resource-based)

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The Economic Status During 1960s – 1980s- Conclusion

• Employment opportunity increased via manufacturing activities.

• The initial vision of developing country was realized with the help of industrial strategy of import-substitution and export-oriented industrialization.

• The shift from agriculture based economic activities to manufacturing was a necessary and an integral step to attaining success in developing Malaysian economy.

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The Economic Status During 1990s

• In the 1990s, the principles for industrial development were guided by:– i. The manufacturing sector, and– ii. The focus on cluster-based development.

• Manufacturing sector led the industrial development via the adoption of the First Industrial Master Plan (1985) and the Second Industrial Master Plan (1996).

• Cluster is an agglomeration of interlinked or related activities comprising industries, suppliers, critical business services, requisite infrastructure, and institution.

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• In the 1990s, manufacturing was the primary contributor for Malaysia’s GDP and employment.

• The manufacturing sector was the largest contributor to employment creation in the economy, accounting for about 44% of new jobs created between 1990 and 1998.

• The rapid expansion of the manufacturing sector has however led to a tight labor market in the 1990s.

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• Labor shortages were more apparent among the “labor-intensive” technical and production industries especially textiles, wood-based, and electronics.

• This led to the subsequent recruitment of foreign workers specifically from Indonesia, the Philippines, and Bangladesh.

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• The progress of the 1990s was overshadowed by the effect of the financial crisis in 1997/98.

• The 1990s would always be remembered as the worst financial crisis in Malaysia’s economic development.

• Financial crisis in 1997/98 not only led to a contraction in all sectors of the economy but also affected the value of RM against other currency.

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• The growth momentum of 1960s, 70s, and 80s continued to dominate most years of the 1990s.

• Between 1991 and 1997, real GDP grew by 8.9% per annum.

• Real GDP is the value of final goods and services produced in a given year when valued at constant prices.

• Nominal GDP is the value of the final goods and services produced in a given year valued at the prices that prevailed in that same year.

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• The rapid expansion of real GDP in 1990s was due to the investment in the following 4 factors during 70s and 80s:– Physical infrastructure– Research and development (R&D)– Education and skill training, and– Large inflow of foreign direct investment (FDI)

• The above factors led to the shift of industrial focus from an investment-driven economy which dominated the 70s and 80s to a productivity-driven economy of the 90s.

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• Although Malaysia emphasize on productivity-driven economy in the 1990s, the economic management of 1997-98 focused on reducing risks in the economy to ensure: – macroeconomic stability – standard of living, cost of

living (inflation or deflation), and economic growth (positive employment, business cycle etc.)

– Restoring confidence (among local and international investors as well as consumers), and

– Promoting stronger financial system (bank, finance, insurance etc.)

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• The impact of the financial crisis on economic growth during recession period became evident when real GDP contracted by 2.8% in 1st. quarter, 6.8% in 2nd. quarter, 9.0% in 3rd. quarter, and 8.1% in 4th. quarter of 1998.

• The real GDP for the whole of 1998 registered a reduction in growth to 6.8% (compared to 8.9% in 1991 to 1997).

• As a result, the per capita income decline by 1.8 per cent or RM11, 835.

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• The effects of financial crisis in 1997-98:– On export-oriented industries: production of

electrical machinery, apparatus, appliances and supplies declined by 7.7% because of weak demand from Asia-Pacific region and depressed global market for semiconductors.

– On domestic-oriented industries: construction-related products declined by 27.7%; fabricated metal products 17.2%; transport equipment 52.2%; and petroleum products 11.5%. This reduction was due to the impact of the crisis, which led to massive unemployment and reduction in income.

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• The effects of financial crisis in 1997-98 (cont.):– On agriculture sector: Output decline by 4% in 1998

as a result of lower production of all major commodities due to lower external demand that was aggravated by inclement weather, labor shortages, unfavorable prices, reduced cultivated area and lower use of land.

– On mining sector: Output rose by 0.8% due to higher output of crude petroleum and gas as well as the turn around in tin production, in response to favorable price in the commodity.

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• The effects of financial crisis in 1997-98 (cont.):– On service sector: The finance, insurance, real

estate, and other business services moderated grew at 4.4% on account of:

• the decline in credit extended by financial institutions,

• sharp decline in prices and volume of shares traded in Kuala Lumpur Stock Exchange (KLSE), and

• slower growth in the insurance industry.

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• The effects of financial crisis in 1997-98 (cont.):– On price: inflation pressures from the depreciation

of RM became apparent towards the end of 1997.

• The Consumer Price Index (CPI) peaked at 6.2%.

• The Producer Price Index (PPI) increased to 10.7% in 1998 compared to 2.7% in 1997.

• Weak RM also led to substantial increase in the prices of machinery and transport equipment, manufactured goods, and miscellaneous manaufactured articles, and chemical products.

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• The effects of financial crisis in 1997-98 (cont.):– On employment: the employment opportunity

declined by 3% in 1998 compared to a positive growth of 4.9% (1996) and 4.6% (1997).

– On unemployment: the rate increased from 2.6% in 1997 to 3.9% in 1998. The total retrenchment was 19,000 workers in 1997, and 83,865 in 1998. Out of this total number,

• 54% was from the manufacturing sector, • 28% from the service sector, and • 11% from the construction sector.• 7% from other sectors.

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• The effects of financial crisis in 1997-98 (cont.):– On the demand side: Real aggregate demand

declined by 25.9% in 1998 from a growth of 6.5% in 1997.

– On the consumption side: The consumption was badly affected, in which real aggregate consumption decline by 10.3%

• Public consumption declined by 3.5%.• Private consumption declined by 12.4%. The sharp

decline in private consumption reflected the negative wealth effect arising from depressed equity prices and erosion of purchasing power.

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• The effects of financial crisis in 1997-98 (cont.):– On public investment: the government continued

with the counter-cyclical policies adopted in the early 1988 in sustaining public investment.

– On gross national saving (GNS): it rose by 5.1% in 1998 increasing its share to 41.2% of Gross National Product (GNP).

– On the nation’s total external debt: the situation remained manageable in 1998 despite the prolonged regional financial crisis due to the reduction in short-term debt by 34% to RM28.5 billion.

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The Economic Status During 1990s- Conclusion

• The 1990s have witnessed the most turbulent times in Malaysia’s economic history.

• The period of rapid growth had been disrupted abruptly due to external forces, in particular speculative attacks on the stock markets and currency trading.

• The government had played an important role and taken the initiative in restoring economic growth and maintaining the standard of living already achieved for its population.

• If the government had not intervened, the country would have loss all that it had achieved in the last four decades.

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The Economic Status in 2000s

• After financial crisis in 1997-98, the government of Malaysia realized that the country should venture into information and communication technologies (ICT) at a faster rate in order to have sustainable economic growth.

• Multimedia Super Corridor (MSC) was introduced in 1998 to facilitate Vision 2020

• The government also realized that agriculture plays important roles to the country’s economic well being specifically in food production.

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• The government encouraged reforms in agriculture sector through bio-technology.

• To generate healthy economic activities, the Malaysian government introduced micro-loan or small-loan scheme for entrepreneurs.

• Loan payment are made via Bank Pertanian Malaysia (BPM) and Bank Simpanan Nasional (BSN)

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• To meet the challenges from other developing countries, specifically China (which has cheap labor cost and large consumer market), the government start emphasizing on capital-intensive economy.

• Capital-intensive means the economic activities required large amount of capital investment to produce efficient quantity of goods or services.

• New sources of income are introduced such as sport-tourism industry i.e. Sepang F1 Circuit, Pangkor Duty-Free Island, Malaysia Open House, etc.

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The Economic Status in 2000s- Conclusion

• ICT became growth engine of Malaysia. MSC was introduced to help the nation achieved developed country status in the year 2020.

• The economic growth occurred via expansionary policy through public consumption and government investment.

• Eco-tourism and sport-tourism become one of the latest foreign exchange earner to Malaysia.