Question

Discuss the consequences to the economy of Malaysia Good or bad?

Answer 1

Let's understand in details:-

Since gaining independence in 1957, Malaysia has successfully diversified its economy from one that was initially agriculture and commodity-based, to one that now plays host to robust manufacturing and services sectors, which have propelled it to become a leading exporter of electrical appliances, electronic parts and components. Malaysia is one of the most open economies in the world, with a trade to GDP ratio averaging over 130 percent since 2010. Openness to trade and investment have been instrumental in employment creation and income growth, with about 40 percent of jobs in Malaysia linked to export activities. After the Asian financial crisis of 1997-1998, Malaysia’s economy has been on an upward trajectory, averaging growth of 5.4 percent since 2010, and is expected to achieve its transition from an upper middle-income economy to a high-income economy by 2024.

With less than 1 percent of Malaysian households living in extreme poverty, and the government’s focus has shifted toward addressing the well-being of the poorest 40 percent of the population (“the bottom 40”). This low-income group remains particularly vulnerable to economic shocks as well as increases in the cost of living and mounting financial obligations. Income inequality in Malaysia remains high relative to other East Asian countries but is gradually declining. For example, from 2009 to 2014 the real average household incomes of the bottom 40 grew at 11.9 percent per year, compared to 7.9 percent for the total population of Malaysia, thus narrowing income disparities. Following the removal of broad-based subsidies, the government has gradually moved toward more targeted measures to support the poor and vulnerable, mainly in the form of cash transfers to low-income households.

Malaysia’s near-term economic outlook will be more dependent on government measures to sustain private sector activity as an increasingly challenging external environment reduces opportunity for export-led growth, and reduced fiscal space limits the scope for public investment-led expansion. Over the longer term, as Malaysia converges with high-income economies, incremental growth will depend less on factor accumulation, and more on raising the level of productivity to sustain higher potential growth. While significant, Malaysia’s productivity growth over the past 25 years has been below those of several global and regional comparators. Ongoing reform efforts to tackle key structural constraints will be vital to support and sustain Malaysia’s development path.

According to the World Bank’s Human Capital Index, Malaysia ranks 55th out of 157 countries. To fully realize its human potential and fulfill the country’s aspiration of achieving high-income and developed country status, Malaysia will need to make further advances in education, health and nutrition, and social protection outcomes. Key priority areas include enhancing the quality of schooling to improve learning outcomes, rethinking nutritional interventions to reduce childhood stunting, and providing adequate social welfare protection to enable households to invest in human capital formation.

Country’s Strategy:-

The World Bank Group Knowledge and Research Hub in Malaysia serve as a partner to the country and its people, in developing and implementing global development solutions.

The hub draws global knowledge to further unlock Malaysia’s potential, catalyze knowledge, research and application for impact, and shares Malaysia’s development experience for the global development agenda.

Policy makers improve development outcomes by learning from each other about successes and lessons learnt. Such collaboration leads to better decisions and accelerates the development process.

Malaysia, as an upper-middle income country, is both a contributor to the development of low and middle income countries, and also a receiver from others in her journey towards high-income status.

This work of the Hub is guided by three pillars:

Pillar 1: Sharing the Malaysia Experience with the World. The ‘Malaysia Experience’ is relevant for developing countries in Asia and across regions that are transitioning out of poverty.

Pillar 2: Supporting Malaysia’s Goal of Becoming a High-Income Economy. The World Bank Group’s international experience will provide Malaysia with a wide array of development solutions and expertise, customized to specific challenges.

Pillar 3: Learning Together for Global Solutions. The new hub carries out cutting-edge development policy research in partnership with local and international research institutions.

The World Bank Group and Global Knowledge and Research Hub in Malaysia is committed in supporting the new Government and her people to implement reforms and achieving her aspirations towards an inclusive, developed nation status.

Key highlights over the past six months (July to December 2018):

We engaged government and private sector in policy reforms

Reforms especially in competition, pricing and speeds via the Digital Economy report focused on (i) digital adoption; (ii) connectivity, (iii) entrepreneurship, and (iv) taxing the digital economy,

Conducted a number of workshops and briefing sessions for PEMUDAH committees on Doing Business topics in the last 2 years on top reforming countries and deep dive for Malaysia

We helped build the capacities and capabilities of the government, public agencies, private sector and academia:  

For all Development Finance Institutions (DFIs), organized fore on Monitoring & Evaluation framework and Performance Measurement for 500 participants, in September 2018

Conducted workshop on Implementing Value-Based Impact Assessment Framework - Learning from Practitioners with BNM and SBN, in October 2018 for 100 credit-risk officers from banking institutions in Malaysia

Conducted week-long courses in Impact Evaluation Methods, in November 2018 for 70 participants, including 35 local academicians

We acted as a global and regional convener for Malaysia on economic and development topics

Convened 50 government officials from 8 South East Asian countries for a technical workshop for the Planning Community of Practice in national economic planning. The workshop focused on Operational zing Planning

Supported ASEAN Capital Markets Framework by promoting the ASEAN green bonds standard and issuance; and building the pipeline for green and sustainable finance in Malaysia and the region

Organized various platforms for policy makers to deploy Warf model to address developmental challenges and discuss Islamic Finance solutions to support SDGs.

Consequences of Economy:-

Malaysia’s economic freedom score is 74.7, making its economy the 24th freest in the 2020 Index. Its overall score has increased by 0.7 point due primarily to an increase in the judicial effectiveness score. Malaysia is ranked 6th among 42 countries in the Asia–Pacific region, and its overall score is well above the regional and world averages.

The Malaysian economy has been climbing the ranks of the mostly free for the past six years. Economic expansion during that time has been impressive as well.

The government means to keep its promises to implement an anticorruption plan and consolidate public debt, both of which would enhance economic freedom, and its prosecution of former Prime Minister Najib Razak on charges of orchestrating a multibillion-dollar fraud involving a government fund is a step in the right direction. Other steps are needed to strengthen government integrity by ending such practices as bribery, extortion, nepotism, cronyism, patronage, embezzlement, and graft.

In 2018 elections, the opposition Alliance for Hope defeated the long-ruling National Front, bringing 94-year-old Prime Minister Mahathir Bin Mohammad back to office for a second time. During his 1981–2003 tenure, Mahathir diversified the economy away from dependence on exports of raw materials and expanded manufacturing, services, and tourism. Running on his economic record, he crafted a winning political coalition in the wake of a massive scandal involving the state-run development board. Mahathir has announced that he intends to transfer power to Anwar Ibrahim, a previously imprisoned former deputy prime minister and opposition leader, but has yet to affect such a transfer. Malaysia’s leading exports include consumer electronics, petroleum, chemicals, and palm oil.

Malaysian law affords strong protections to owners of real property. Real property titles are recorded in public records, and attorneys review transfer documentation to ensure the efficacy of title transfers. Malaysia’s legal system generally reflects English common law. The independence of the judiciary has been strengthened in recent years. High-level corruption under the last government contributed to its defeat. Demands for bribes are commonplace.

The top individual income and corporate tax rates are 25 percent. Other taxes include a capital gains tax. The overall tax burden equals 13.6 percent of total domestic income. Government spending has amounted to 22.6 percent of the country’s output (GDP) over the past three years, and budget deficits have averaged 2.9 percent of GDP. Public debt is equivalent to 56.2 percent of GDP.

Processes for starting a business, construction permitting, obtaining electricity, registering property, trading across borders, and resolving insolvency have been improved. A chronic shortage of skilled labor has impeded economic growth. The new government is amending labor laws in an effort to boost competitiveness and combat forced labor. A new directly targeted fuel subsidy program utilizes direct cash handouts.

The total value of exports and imports of goods and services equals 132.3 percent of GDP. The average applied tariff rate is 4.0 percent, and 62 nontariff measures are in force. Foreign investment is officially welcome, and efforts to attract more flows have been made, but a lack of transparency may deter dynamic growth in new investment. The banking sector remains stable.

Good or Bad:-

Malaysia has a newly industrialized market economy, which is relatively open and state-oriented. The Malaysian economy is highly robust and diversified with the export value of high-tech products in 2015 standing at US$57.258 billion, the second highest after Singapore in ASEAN.

Malaysia's economy is showing resilience and is performing strongly. On the domestic front, Malaysia's strong employment is boosting private consumption, and investment is also helping to drive growth. Malaysia's economy is on its way to achieve high-income status.

In a strong economy, nearly all businesses enjoy greater prosperity. Disposable income is high, unemployment is low and consumer confidence prompts people to pump their money back into the economy through the purchase of essential and nonessential goods and services.

Fast growth can create negative externalities e.g. noise pollution and lower air quality arising from air pollution and road congestion. Increased consumption of de-merit goods which damage social welfare.