MALASYIA

Country Report 3/7/2013

By: Zara Khurram

Economic Analysis of Malaysia

Malaysia is a multi-cultural Southeast Asian country with a federal constitutional monarchy. Malaysia originated from the Malay Kingdoms which were subject to the British Empire for a long time. Malaysia gained independence in August 1957. Today, Due to Malaysias natural resources, it has an average GDP growth rate of 6.5% for around 50 years. Malaysia has a very attractive GDP growth, due to its various strengths in its economy, healthcare, abundance of natural resources and literacy. Malaysian economic strength is due to various factors including strong trading partners, controlled inflation, and positive balance of trade. Malaysia has the best facilities in healthcare. The government spends a lot on subsidizing infant industries, social security and education. Although the Malaysian government promotes privatization and market economy, the economy is to some extent regulated by the government. The global financial crisis hit Malaysia in 200809. Hence, the Central bank of Malaysia, Bank Negara Malaysia (BNM), reduced the discount rate by 150 basis points and also let the currency depreciate due to capital outflow. This countercyclical move softened the impact of the crisis and saved the economy from a 2.9 percent contraction in GDP growth. The inflation and unemployment is also controlled by the monetary policies of BNM (Figure A). All these factors result in a strong economy of Malaysia with high GDP growth. Furthermore, Malaysia has strong trade partnerships as shown in figure B. These lead to a positive balance of trade for Malaysia. Malaysia is also members with many trade organizations such as ASEAN Free Trade Area. Malaysias strength also lies in its high Literacy rate (around 96%). Another fact that needs mentioning is that Malaysia is the world leader in Islamic-finance. Over one fifth of Malaysian banking system is sharia-compliant. Also, Malaysia is dominant in global market for sukuk1. This is one of the reason why Malaysian economy was not severely affected by the global financial crisis. Furthermore, Malaysia is endowed with abundance of natural resources and human capital. Therefore, the main export products in Malaysia are liquefied natural gas, petroleum products and palm oil. Moreover, Malaysia is today a manufacturing-based economy with high technology, knowledge-based and capital-intensive industries. Furthermore, it has low corporate taxes and trade tarrif. Hence, Malaysia provides an attractive investment environment. Malaysia scored a 66.1 on the index of economic freedom and a B+ on the happiness Index. This is because Malaysia faces a few drastic issues nowadays. First, Malaysia has a serious corruption problem.
1

Islamic Bond

Malaysian Inequality is getting worst, the public debt is piling up and innovation is lacking in the economy. In Malaysia, based on the wealth there is a lot of income inequality. There is a heavy concentration of wealth in the hands of 5% of the households. Malaysias Gini coefficient is 46.21, among the highest in Asia. A state intervention and redistribution of income is called for but is unsupported by the elite, who have influence on the government. To aggravate matters further, the government launched an affirmative action program favoring Malays which is highly resented among non-Malays. This coupled with the religious tensions is leading to an ethical dispute within Malaysia. Corruption and nepotism is one of very critical weakness of Malaysia. According to Transparency International 2012 Bribe Payers Survey, Malaysia scored worst (Figure C). Due to this lack of transparency in businesses, the foreign investment is discouraged. Furthermore, judiciary can be politically influenced. Even though, in 2012, the government took steps to reduce corruption, corruption continues to be a growing concern. As mentioned earlier, Malaysia is a constitutional monarchy whereby the monarch acts as the head of state but his powers are legally bounded by the constitution. The income tax rate in Malaysia ranges from 3% to 30% based on the income bracket. Furthermore, there is no value added tax and the corporate tax rate is 25%. This indicate that tax burden in individuals is very low. However, the large government spending is recent years have led to a budget deficit and a public debt which is 53% of GDP. Malaysian Government has to improve its budget planning otherwise it will be in deep trouble in the future. Additionally, although the literacy rate is high, the innovation is missing from the society. According to Charles Santiago, Malaysia needs to improve innovation, otherwise the economy would be paralyzed. Malaysia also needs to promote the export of value added products rather than primary products. Therefore, Malaysians should focus on changing the curriculum in educational institutions in order to encourage creativity and boost technological innovation. Malaysia has a tremendous potential to grow due to its resources and the attractive and stable financial environment. However, it also has a lot of challenges to overcome before it is able to become a stable economically strong country. The government needs to control the corruption in the country by encouraging transparency; it needs to manage its spending, revise the education system of the country, and put more efforts into social welfare to reduce inequality and nepotism. Only after these efforts could Malaysia move towards prosperity.

Citations
Malaysia Highlights Its Strength in Healthcare, ICT and Green Technologies among Other Service Clusters. AMEinfo.com. N.p., 15 Apr. 2010. Web. 07 Mar. 2013. <http://www.ameinfo.com/229698.html>. Bahru, Johor. "Islamic Finance: Banking on the Ummah." The Economist. The Economist, 5 Jan. 2013. Web. 7 Mar. 2013. <http://www.economist.com/news/finance-and-economics/21569050-malaysialeads-charge-islamic-finance-banking-ummah?zid=306&ah=1b164dbd43b0cb27ba0d4c3b12a5e227>. "Economy Watch." Malaysia Economic Forecast. N.p., n.d. Web. 07 Mar. 2013. <http://www.economywatch.com/world_economy/malaysia/economic-forecast.html>. "Malaysia." 2013 Index of Economic Freedom. N.p., n.d. Web. 07 Mar. 2013. <http://www.heritage.org/index/country/malaysia>. Santiago, Charles. Lecture. Charles Santiago: What Went Wrong With The Malaysian Economy? Youtube. 23 July 2012. Web. 7 Mar. 2013. <https://www.youtube.com/watch?v=sY1OZEdVqQg>. Malaysia External Trade Statistics. Rep. Putrajaya: Department of Statistics Malaysia, 2012. Print. Why Malaysia? : Advantages of Malaysia. Rep. Iskandar Malaysia, n.d. Web. 07 Mar. 2013. <http://www.iskandarmalaysia.com.my/why-malaysia-advantages-of-malaysia>. "International Human Development Indicators - United Nations Development Programme." International Human Development Indicators. United Nations Development Programme, n.d. Web. 07 Mar. 2013. <http://hdrstats.undp.org/en/countries/profiles/mys.html>. "Malaysia." UNICEF. UNICEF, n.d. Web. 07 Mar. 2013. <http://www.unicef.org/infobycountry/malaysia_statistics.html>. "Malaysia Demographics Profile 2012." Malaysia Demographics Profile 2012. Indexmundi, n.d. Web. 07 Mar. 2013. <http://www.indexmundi.com/malaysia/demographics_profile.html>. "Malaysia." World Bank Data. World Bank, n.d. Web. 07 Mar. 2013. <http://data.worldbank.org/country/malaysia>. "Malaysia Inflation Rate." Malaysia Inflation Rate. Trading Economics, 20 Feb. 2013. Web. 07 Mar. 2013. <http://www.tradingeconomics.com/malaysia/inflation-cpi>. "HEALTH PROFILE : Malaysia." World Life Expectancy. World Health Rankings, n.d. Web. 07 Mar. 2013. <http://www.worldlifeexpectancy.com/country-health-profile/malaysia>.

Appendix A General Information

Location on map Capital Largest City Currency Population 2011 Population 2012 Dominant Religion Dominant Language Form of government Current leader Southeast Asia Kuala Lumpur Kuala Lumpur Malaysian Ringgit 28.86 Million2 29.63 Million3 Islam Malaysian federal constitutional monarchy Yang di-Pertuan Agong

Economic Indicators
GDP US $ GDP per Capita US$ GDP growth GDP growth Literacy rate Life expectancy Inflation Unemployment rate Index of economic freedom Rating Happiness Index Human Development Index 2011 2011 1st Quarter of 2013 2012 2005 2010 2012 December 2012 2012 2012 287.9 million 9977 6.4% 5.6% 96% 74 years 1.8% 3.40% 66.4 7.55 0.7424

World Bank Statistics Department of Statistics Malaysia International Human Development Indicators

Trade
Balance of goods (billions RM) 2012 Gini Coeficient 2009 8.2 46.21 Electronics Machinery Petroleum products Plastics Vehicles Iron and steel products Electrical &electronic products Liquefied Natural Gas Petroleum Products Palm oil & palm oil-based Products China Singapore Japan USA Thailand Association of Southeast Asian Nations East Asia Summit Organisation of Islamic Cooperation Asia-Pacific Economic Coorperation Commonwealth of Nations

Dominant Imports

Dominant Exports

Largest trading partners

Membership in economic Organizations/ Alliances

Appendix B
Graphs Figure A: Inflation trend

Figure B: Trading Partners

Figure C: Bribery survey by Transparency International