Malaysias Economy Exports

Malaysias Economy Exports Malaysia Economy Exports Introduction Malaysia, the place called ‘Truly Asia’. It lies on the Southeastern Asian peninsula bordering Indonesia, Brunei, and the South China Sea. It’s filled with different Asian cultures from Malay, Chinese, Borneo and other indigenous groups. Having no or little issues about societal upheavals, corruptions and such being published in international media, Malaysia continues to be a puzzling country known for its present natural splendor as it continues to flourish as one of Asia’s leading countries. However, knowing its experiences that led to its present growth is what’s really interesting about this country. After gaining independence from Britain in 1957, it was noted that the Chinese was the chief force in Malaysia’s economy. In the 1960’s, Malaysia’s economy was dependent on exports of agricultural goods. During this period annual Gross Domestic Product increases on an average rate of 6 percent per year. Then in the late 1960’s racial pressure started and caused the creation of the New Economic Policy which aimed to ensure that by 1990’s at least 20% of the economy must be controlled by ethnic Malays. In the 1970’s, high deflation and mismanagement of government enterprise caused its economy to experience severe economic downturn. By 1985, recession having negative 1.2 percent GDP growth was experienced. As solution to the downfall of the economy, the government shifted its focus from the agriculture sector to the manufacturing sector. It liberalized foreign equity ownership from 10 to 20 percent in order to attract foreign investments. These efforts resulted to a success by achieving a positive GDP growth of 13.4 percent from 1986 to 1990. Although the country’s internal economic factors continued to be strong, its external economic factors affected it in a negative way. Huge capital outflows from the Malaysian economy and other South East Asian economies were hurt by the Asian crisis. From positive 7.7 percent Malaysia’s real growth rate in declined to negative 7.5 percent in 1998. Interest rate also increased from five percent to nine percent. Furthermore, inflation and the increase in unemployment from 2.4 percent to 3.2 percent caused poverty to boost from 6.1 percent in 1997 to 7 percent in 1998. In addition, the health sector was also affected due to the increase in the price of imported drugs which in turn also made it harder for the poor to afford medication. Despite its condition, Malaysia rejected IMF assistance and stabilized its money with the help of Bank Negara Malaysia, its Central Bank, through lowering exchange rates, interest rates, and government spending. Also, the government increased capital controls by halting, several mega projects and established the National Economic Action Council (NEAC). With all these efforts, the country achieved a positive annual growth rate of 5.4 per cent in 1999. Malaysias economy continued to surge despite all terrorist threats and health diseases such as the SARS. The Package of New Strategies was established in 2003 to generalize domestic sources of growth, promote private investment and strengthen the countrys competitiveness. In 2006, The Ninth Malaysia Plan was issued. This plan reiterates the target of lifting Malaysia’s economy to developed nation by 2020. After knowing all these facts, this paper will now discuss about the economic condition of Malaysia starting from the year 2002 to 2006. It will tackle the GDP’s contribution to growth and growth by sector, lending and inflation rate, money supply, trade and economic indicators and some movements of selected exports. Gross Domestic Product Contributions to Growth (Figure 2.24.1) Malaysia’s Gross Domestic Product was highest during the year 2004 with 7.2 percent. To further analyze the changes, the factors affecting the Gross Domestic Product would be discussed. First, consumption was analyzed in two separate types: Private Consumption and Public Consumption. From the figure, it could be seen that consumption is an unstable factor in their economy. Private consumption in 2002 was 2.0 percent and rose until it reached 4.9 percent in 2004. However it started to decrease in 2005 and by 2006 private consumption was only 3.5 percent. Private consumption in the last five years grew by an average of 3.58 percent. When in comes to Public consumption, 1.4 percent growth was attained in 2002. It grew by 0.2 percent by 2003 then started to fall and reached 0.8 percent in 2005. It picked up its pace and increased to 1.2 percent in 2006. The average Public consumption growth is 1.18 percent. It could be noted that private consumption became the largest GDP contributor in the years 2003 to 2006. The increased consumption is caused by the low interest which encouraged business investments and higher income for the household to dispose. This in turn generated income for the businesses which could eventually lead to expansionary means that would produce employment. Next, investments were also presented as two types namely Private and Public investments. Private investment started at a negative growth of 1.9 percent in 2002 then increased to positive 2.9 percent by 2004 and decreased to 1.3 percent in 2006. On the other hand, Public investments kept on fluctuating from positive 4.1 percent in 2002 it decreased to a negative growth in 2003 and 2005 until it sustained a positive 0.3 percent in 2006. As could be seen from the figures, public investments started as the largest GDP contributor in 2002 but kept on decreasing while Private investments tried to maintain its positive growth. The increase in private investments was due to a healthy business relationship achieved through the trust established in the economic plans such as the Ninth Malaysian Plan. With regards to the country’s net exports was negative during 2002, 2004 and 2006 with negative 1.3, 2.5 and 0.4 percent growth. In 2003 and 2005, positive 2.0 and 1.3 percent were obtained. Overall, Malaysia had the lowest GDP in 2002 with 4.4 percent growth and as said earlier, it achieved 7.2 percent growth in 2004 and ended with 5.9 percent growth by 2006. The highest contributor in the years 2002 to 2006 were public investments for 2002 and private consumption for the following years. From all these, it could be deduced that Malaysia’s GDP growth was reliant on private consumption. The problem is that as people consume more, they might not have enough to consume in the future therefore increasing the other factors in the GDP should also be done. Growth by Sectors (Figure 2.24.2) The growth it’s Agriculture, Industry and Services sectors, no one sector dominated the others by having a consistent increase per year. This might be caused by the shifts in the strength of production in such sectors. For instance in 2002, Services had the greatest contribution to their economy. However, by the Industrial sector increased by almost 70% in 2003 and continued to rise by 8.22% in 2004, causing it to contribute more to the GDP of the country. By 2005 and 2006, Industry decreased and as finance and trade businesses rose, Services became the largest contributor again. With these, total employment increased in 2006 by 2.5%. As could be noted Agriculture was the least competitive sector. This sector which has been very important to rural incomes and exports might have still been affected by the 1985 act of shifting focus away from the Agriculture sector. It only attained a 6.4% GDP contribution due to the increased prices of foreign crops. Inflation Rate and Money Supply There are 3 types of money monitored by the Central Bank in Malaysia namely M1, M2 and M3. M1 is narrow money, and M2 and M3 considered broad money. M1 is composed of private sector currency and demand deposits. M2 is M1 plus financial assets while M3 is M2 plus: fixed deposits of the private sector; net issues of NCD to the private sector and transactions effected by finance companies, merchant banks, discount houses, and Bank Islam. The adoption of the managed float enabled the central bank to gain flexibility with the money control in monetary policy. Through it they were no longer stalled with always having to off-set the increase in money supply with a substantial increase in money demand in order to keep the Ringgit fixed. In the past 5 years (Table A9), money supply has changed positively. This might have been through their imposed decrease in interest rate. In fact it reached its peak in 2004 by having a 25.4% increase in money supply. With regards to inflation, the Malaysian economy has been experiencing a low inflation (Table A8). Inflation has been under an increasing and decreasing trend per year. However, their rate is not worrisome since it’s still managed in low single digits. From 1.8 in 2002 it reached an inflation of 3.6 in 2006. This price increase has been mainly caused by the increase in fuel prices and electricity cost. In addition, the positive growth in money supply was also a factor in this inflation. It should be noted that despite the inflation consumption still increased because the actual increase in the prices did not hurt the consumers knowing that it was off-set by the strengthening economy or national income. Unemployment Rate The country’s unemployment was unstable. The rate did not increase to more than 3.0 figures (Table A6). In fact, from 3.5 in 2002, it decreased to 3.4 in 2006. This might have been greatly influenced by the sectors especially industry or manufacturing and the services sectors. This is one accomplishment of the macroeconomic objective of reducing unemployment. Further it could aid to an increase in national income through the reduction of the poverty situation in the country. Exchange Rate, Imports and Exports Due to the 1997/98, Bank Negara Malaysia decided to have a â€Å"currency peg† thus fixing the Ringgit exchange rate. As can be seen (Table A19) until 2005, the Ringgit was valued RM 3.8 to one U.S. dollar. Fixing the rate caused damages to the economy since their currency did not increase in value in response to the weakening economy of other countries such as the U.S. Also, although foreign investors might feel comfort in knowing that the exchange rate wouldn’t change most were also hindered from investing. This was because investors know that in time they would lose since the Ringgit does not have a chance to increase its value thus they would look for other profitable investments in other countries. It was a good thing that the Central Bank decided to shift to a managed float system. In 2006, Malaysian Ringgit appreciated to 3.6 per U.S Dollar. The managed float is more favorable for foreign investments since more profit would be attained by investors. It would be the Bank of Negara’s role to ensure control over short term variability and let the demand and supply factors to affect the long-run trends. The exports and imports of the country were not severely affected by the exchange rate knowing that it was still fixed during 2002-2005. Other factors affected the trade of the country. In 2002, 2004 and 2005 the growth in imports was more than that of the exports (Figure 2.24.5). Although the percentage growth of exports was less, surplus was still attained because the total amount of exports was more than the imports. This was attributable to the industrial sector’s contribution in electronics and the rising oil, gas and crops to be exported. Imports grew through the increased consumption of foreign goods. Government Revenues and Expenditures Government revenues were in a declining trend (Table A22). From 23.1 in 2002 it decreased to 22.1 in 2004 and ended at 21.7 in 2006.Likewise, government spending was also declining (Table A21). From 28.7 in 2002 it reached 26.4 in 2004 and 24.3 in 2006. This decrease in earnings might be bad for the government because they would have little funds to finance government programs. It was good that as the earnings decreased, the expenditures also decreased. This direct proportional trend would enable the country to not experience a great loss unlike those countries that tend to spend more although they have the knowledge that they are not earning much. The decrease in government expenditure could be attributed to the decrease in government borrowing as a result of the fiscal policy. The contractionary fiscal policy enabled the country to lower government spending to achieve a long term economic growth. In addition, increasing prices of exports was used as a compensating factor for expenditure’s effect on revenue. Revenue from these exports represents 37% of government revenue. Conclusions Malaysia could be an interesting topic for a lot of economic enthusiasts because of the cycle that it has gone through. Malaysia’s economy has undergone many changes. It started as a well-off economy until it experienced a lot of crises including the Asian crisis. This country is among the lucky ones who have been able to get back on its feet and improve its condition. The increased growth in the pattern of its GDP signifies the strength of their economy. It shows how their national income increases as being affected by the said factors. However, it should still continuously work on improving the condition of its net exports and investments because increasing consumption now could result to less consumable goods in the future. When it comes to the sectors, the performance has been good. The increased electronic productions, crop harvesting and service providing could boost their economy further. In addition, employment is greatly increased by these factors. Moreover, they have a fine control of their money supply. The positive increase in their money supply enables the increased consumption and decreased interest rates but higher inflation. Their inflation is not worrisome being stable at a low inflation figure. With their exchange rate, it has been a right move to shift to a managed rate instead of the pegged rate since more investments and profits would be generated from this. Factors other than the exchange rate have had more influence on imports and exports. Since their exports are still more than their imports its positive contribution to the national income could still be anticipated. Lastly, with regards to their government revenue and expenditure they should find ways in generating more revenue but increasing the spending at the same time because government spending is one of the main factors of national income. With all of these, it could be deduced that Malaysia has a chance of achieving more economic growth. However, the possibility of achieving the Ninth Malaysia Plan is still unfeasible. Although their economy is rising they should still consider more expansionary means of creating a long-run growth and produce realistic goals. This will enable them to catch up and become one of the developed countries. Sources http://www.adb.org/Documents/Books/ADO/2007/MAL.asp www.econ.upm.edu.my/~azali/FN.pdf www.mier.org.my/mierscan/archives/pdf/drariff1_8_2005.pdf http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-OVERVIEW-OF-ECONOMY.html http://www.pbs.org/nbr/site/research/educators/060106_10d/ http://0-proquest.umi.com.lib1000.dlsu.edu.ph/pqdweb?index=7did=1169443391SrchMode=1sid =1Fmt=3VInst=PRODVType=PQDRQT=309VName=PQDTS=1193566062clientId=47883 Appendix 2.24.1 Contributions to growth (demand) Sources: Bank Negara Malaysia, available: www.bnm.gov.my, downloaded 28 February 2007; staff estimates. 2.24.2 GDP growth by sector Source: Bank Negara Malaysia, available: www.bnm.gov.my, downloaded 28 February 2007. 2.24.5 Trade indicators Sources: Bank Negara Malaysia, available: www.bnm.gov.my, downloaded 28 February 2007; staff estimates.