Introduction
Malaysia is a great country located to the south of Asia. It is separated by south Asia into two regions; the West and East Malaysia (Peninsular Malaysia and Malaysian Borneo respectively). It borders countries like Indonesia, Brunei, and Thailand, has a population of about 28 million people, and has a landmass totaling to 329,847 square kilometers.
Malaysia is a monarchy headed by an elected king. The legislative powers divided into two chambers; the senate (upper house) and the House of Representatives (lower house). The country is divided into 13 states and 3 territories. The prime minster is the leader of government and head of cabinet.
Malaysia has maintained a robust economy since independence over 50 years ago. It has withstood economic turmoil that literally brought down giant economies over the years. Her economic prowess comes round as a result of favorable equatorial climate that has allowed flourishing forest cover, rubber production, palm oil and other natural resources.
he economic strength is seen in the high gloss national savings, low unemployment rate, net exports, educated workforce, stable financial markets, and government’s strong commitment to industrialization and promotion of free trade.
Malaysia is a key to international trade by its geographical location; which makes it a prime shipping route. The government has maintained a steadfast process of privatizing inefficient government organizations. It has also entered into business agreements with major world markets and is an active member of the Association of South East Asian nations (ASEAN) which has greatly increased trading frontiers.
Malaysia’s currency (Ringgit) has remained weaker than the American dollar with the government withdrawing it from the currency trading market and imposing strict surveillance which makes it hard to transfer more than 1,000 ringgits without approval from the government.
This has reduced the standing of her National bank (Negara Malaysia Bank) as an international financier. The government has continued to regulate key market operations such as the pricing of gasoline, rice, bread etc. a move meant to reduce the cost of living but weakening the economy as it denies competitive pricing and hence little profits.
Malaysia is has a unique blend of cultural and ethnic values with a vast majority of her people being the Malay who make 60 percent, Chinese who add up to 25 percent, and Indians who make 10 percent of the total Malaysian people. The elite Malays dominate the political spheres; however, Malaysia has huge gender discrimination.
The women are less empowered thus the economy is mostly male dominated. The education system is good; however, statistics indicate that Malaysians travel outside the country to pursue career in different fields; a phenomenon requiring some attention before hitting the ceiling. The health system has been maintained all time with most births occurring in hospitals and babies receiving great care; factors that have reduced child mortality rates.
There are however social downsides which are stemming up from the fast changing youth lifestyles; drug abuse cases being on the rise, poverty and now with unemployment quietly sneaking in, anguish and despair seems apparent among some Malaysians..
In her present economic state, and if it endeavors to attain and sustain a growth of 10% over the next 10 years, create a just and united society with equal access to development opportunities, secure and clean environment, and a democratic political system, Malaysia will attain a fully developed economy by the year 2020 as stipulated in her vision 2020. The crucial pillars to build a robust economy are divided into three; economic, social and political pillars.
The economic vision
To attain and maintain an economic growth of at least 10% percent starting from 2012 through 2020 while endeavoring to double the gross per capita income and enhancing full development of the ICT Industry.
Comparative advantage
The neo-classical economists state that a country has a comparative advantage when it engages in production of goods which use relatively large amount of input that are available in abundance in the country.
A developing country should create a sufficient domestic market to boost the production before it gains enough momentum to expand into the export sector. The key sector that would help Malaysia achieve greater comparative advantage is the economic sector which can be enhanced through value-addition by knowledge empowered people with highly advanced ICT industry.
Malaysia has maintained fairly impressive rates of unemployment and inflation at average 3.4 percent and 2.3 percent respectively over the last decade, figures that even well-to-do economies have so far struggled to attain.
On the other hand the economy has suffered quite a number of setbacks including constant deficits in the current account, unstable commodity prices and overdependence on electrical and electronic goods. Furthermore, it has remained susceptible to the negative global financial market effects due to over exposure through active trading in across the globe.
In addition the geographical location (middle south-east Asia) gives it absolute comparative advantage in that, it is a major shipping route and thus an important spot for international trade. Also the fact that it experiences the equatorial climate has greatly favored the production of rubber and palm oil.
By export, Malaysia is a leading exporter of electric and electronic goods. Higher comparative advantage can also be attained through trade engagement with countries such as the United States, Australia, Chile, European Union and India. This trade relationship is desirable because it will allow Malaysia to export goods that it posses high comparative advantage and import the goods that it boasts high comparative disadvantage.
Trade Barriers
Trade barriers are regulations by the government that aim at protecting and supporting infant economies from the global markets. Trade barriers can equally be detrimental to the economy because they limit trade within international markets. These trade restrictions would force people to increase consumption of locally produced goods, a fact if not moderated would eventually lead to increase in the cost of living. Malaysia imposes lower tariffs on raw material imports while increasing tariffs on value added goods.
These trade barriers can generally be classified into two categories; tariffs and non-tariffs. The former refers to direct taxation imposed on imports and the latter refers to subsidies, loans and aids, customs, quotas etc. The government has consistently remained alert to protect import sensitive sectors such as the construction, mining, automotive and agricultural industries through application of administrative strategies such as licensing designs.
Automotive industry trade barriers
Malaysia has for a long imposed protective tariffs to protect its automobile industry. Over the time, these trade barriers have declined in pursuit of fostering a free trade economy. The move to lift the trade barriers came as a result of forces from the world trade organization (WTO) and ASEAN with whom Malaysia had signed free trade agreements. The trend of lifting the protective tariffs in the motor industry declined from 40 percent to 20 percent in 2005 and further to 5 percent in 2008.
The government has however remained keen on regulating automotive imports. For instance, the ministry of international trade developed a system of approved permits to allow foreign automotive imports. This quota stands currently at 10 percent. Further there exist non- trade barriers in the automotive industry. These are standards and traffic regulations which aim at barring import of foreign vehicles that don’t comply with locally set standards.
Furthermore, the Malaysian government established industrial adjustment fund whose primary role is to promote local assembling of vehicles using local available resources. These incentives come in the form of tax deductions; however, this technique has failed to give a full impact as many of the small-scale operations are run by foreigners who cannot source their components locally and therefore do not benefit from this fund.
Standards, testing, labeling and certification
Malaysia has developed requirements that packaged foods sold in the Malaysian market must display the nutrition content information. These regulations are directed at filtering out foods that pose health hazards such as foods with high cholesterol and sodium levels. Compliance to these regulations requires importers to conduct a very labor intensive and costly exercise of testing and labeling packaged foods at the port of entry. Further, the government maintains tight regulations on imports of meat products, and poultry products.
The ministry of Agriculture, the department of veterinary services is mandated to carry inspections and approve the organizations that can be allowed to export such goods to Malaysia. In addition the production of these products must meet the Islamic regulations, which are reinforced through the department of Islam development (JAKIM). The two organizations jointly upon visiting the site of operation issue certification to allow export of meat and poultry products.
Government procurement
Malaysia is not a signatory to the world trade organization’s government procurement agreement (GPA). It therefore has openly pursued policies that are explicitly discriminatory and geared to promote Malaysia’s public policy objectives.
These policies include, empowering local Malays, revamping the ICT in local industries, reducing outflow of foreign exchange, creating development opportunities for the domestic companies, and enhance the country’s export power. Therefore, foreign companies do not have a level playing field when competing for contract awards. The government has also received criticism more so from the U.S who claims that the contract awarding process for government projects and procurement lacks transparency.
Export subsidies
Malaysian government established a financing scheme, the export credit-refinancing scheme, which is operated by the central bank in collaboration with commercial banks and other financing agencies to promote export. In addition the government offers other incentives which include double deductions of expenses incurred in promotion activities such as advertisement, free product samples, travel, marinating sales offices, and research in the export markets.
Intellectual property and rights
Malaysia is a member of world intellectual property organization (WIPO). It is also a party to Berne convention for the protection of literally and artistic works. This has bestowed obligations under the WTO TRIP’s agreement to protect intellectual property. Efforts to deliver under these obligations have suffered several downsides which include optical medial piracy, pharmaceutical and trademarked consumer products.
The challenges inherent are high circulation of pirated materials such CDs, counterfeit medicine, unregistered generic medicine producers, and pirated consumer products. These are both pirated in Malaysia or smuggled from foreign markets such as china, Thailand and India. The government has not succeeded in curbing the vice of piracy due to lack of trained capacity in the country.
Service barriers
Malaysia disregarded the provisions in the WTO basic communication agreement and instead pursued discriminatory policies in to safeguard public interests.
In the communication sector, it partially adopted WTO guidelines but imposed restrictions that foreign companies cannot own more than 30 percent equity stake. These restrictions are to benefit the government controlled Telekom Malaysia. Other barriers exist in the distribution of services. Locally incorporated direct selling organizations must allow 30 percent Bumiputera equity.
Further, the licensing practice levy local distributers lowly as compared to foreign companies. There’s also express requirement that all departmental stores and supermarkets to reserve 30 percent of the shelf- space for local produced products. The service industry is further restricted to bar participation of foreigners in fields such as, banking accounting and taxation, architectural, engineering and legal services. On the other hand, sectors such as insurance, security and broadcasting have allowed penetration of foreign participants.
Investment barriers
Malaysia encourages direct investment in export oriented and ICT industries; however restrictions remain high for the other sectors. For instance, the ownership of local companies by foreigners is set at 30 percent and foreign companies can be allowed to operate through joint ventures with local companies. The major challenge being experienced by Malaysia is acute shortage of trained and skilled technical employees for the electronic sector. On the other hand, there exist no barriers in the electronic commerce.
Balance of payments and exchange rate system
Malaysia has for a long time sustained a favorable surplus of balance of payments. This trend started in the 1960 through 1970s but was disrupted in 1981 when it first recorded deficits in BOP due to weakening of world prices of tin, crude oil, rubber, palm oil, and other major exports.
Later after the recession, the economy picked recording surpluses once again due to increased exports. According to the International Monetary Fund (IMF), “Malaysia is currently using a managed floating exchange rate regime with no predetermined path for the exchange rate”.
The central bank of Malaysia (Bank Negara Malaysia) administers the exchange control system. It’s often seen making market interventions through open market operations. In my view this exchange rate should be adjusted because Malaysia is fast developing and a fully developed and stable finance market would benefit more in a floating regime.
The way forward
To achieve the stipulated economic goals, the following strategies should be implemented and continuously evaluated through a five year span beginning in 2012. The first phase should be to change of the trade policies to foster macroeconomic stability for a long term economic developments.
The policies should also encourage free trade and reduce government barriers. For instance, the government has continuously regulated pricing of fuel and food; a strategy that has hindered competitive pricing and thus limited profits. The public sectors have for long failed to utilize resources in an efficient manner to offer value added services to the public. This can be reversed through enhancing the education system to ensure a motivated and trained staff in the government organizations.
The second strategy involves initiations by the government to stimulate innovation and sustainability. The government should structure policies to encourage investments in research and developments. Research and development can be directly initiated by government through grants, incentives and rewards for inventions and creativity.
In addition the government should support innovations of new manufacturing technologies and revamping of the education curriculum to train ICT and other relevant skills to drive various sectors in the economy. To achieve these major developments in the economy and to enable Malaysia to participate competitively in the global arena, all parties need to unite and pursue this goal as one entity.
Neo-classical theories hold that, for a country to gain comparative advantage over the rest with similar resource endowment, it should employ technology; a vehicle that will catapult it to the finishing line. Technology cannot occur naturally; therefore, there is need to pursue it with a strong commitment, hard work and political will. The training institutions should aggressively pursue science and encourage research and development to nurture the technological pillar as one of the economical strengths.
Trade barriers have increasingly denied Malaysia opportunities to attain her full potential in comparative advantage. Malaysia’s trade policies compel the locals to consume locally manufactured goods has made the counterfeit products to gain popularity. Therefore, the measures that would boost the growth of the economy would include outsourcing trained personnel to run the key sectors which are export oriented.
Balance of payment is admirable when it is a surplus. Malaysia needs to maintain a surplus balance of payments to continue strengthening her currency. This can be attained if the government pursues to gain competitive advantage through concentrating on production of goods that it are more favored. In addition, the country should endeavor to consume less of foreign products and services.
It should also be noted that the country’s economy will thrive better with advancement in and use of technological methods for manufacturing and production.
This will further foster and nurture innovation and research. The implementation of the afore-highlighted strategies will involve several government ministries and the private sectors to fully leap the fruits of a health and developed economy. Monitoring and evaluation processes will range between six months and one year for short-term strategies and five years for long term projects.
Conclusion
The findings of the paper posit several strengths and weaknesses in Malaysia’s economy. The robust economy that Malaysia had attained and maintained for over 50 years since it attained independence is attributable to several factors. The factors revolve around three pillars of development. Firstly, the cohesive society composed of the ethnical diversity of Malays, Chinese, Indians form a great population of the Malaysian people. Secondly, political will and democracy has nurtured a favorable ground for the economy to thrive in.
Similarly, the political system has created setbacks because it seemingly promotes social policies and objectives more than complying with international trade and economical agreements for example the WTO and the ESEAN, organizations which Malaysia holds membership. Finally, the geographical locations bestow on Malaysia major privileges. The benefits include favorable climatic conditions for agriculture, it’s a key shipping route hence a major player in international trade.
The setbacks and strong points are elucidated through the paper beginning with analysis of the trade barriers, comparative advantage, balance of payments and the exchange rate system. Further, the study presents an elaborate strategic improvement plan for the Malaysian economy over the next 10 years and it has been tailored to fit into the economic vision 2020 whose implementation is underway. If the proposed measures are implemented, Malaysia will be on its way to economic prosperity.
Works Cited
IMF. De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks, 2008. Web.