An Analysis Of Malaysian Economic Development From 1993 To 2002 Essay Example

previous reputation for producing rubber and tin.

Between 1993 and 2002, the manufacturing sector played a critical role in Malaysia's economic growth, contributing to GDP by increasing from 26% to 30%. These industries alongside agriculture, mining, and construction were essential for driving development while simultaneously emphasizing the importance of the service sector. In order to attain developed nation status by 2020, then Prime Minister Dato Seri Dr. Mahatir Mohamad introduced an initiative in 1990.

Located within the Prime Minister's Department, the Economic Planning Unit (EPU) is a Malaysian government agency established to achieve the country's vision and future economic growth. With a goal of achieving annual economic growth of 7% through exports under Vision 2020, the EPU formulates policies and strategies for the nation in line with the five-year Malaysia Plan. In April 2001, they released their latest plan - the Eighth Malaysia Plan (2001-2005) - to maintain competitiveness amidst globalisation and liberalisation.

The Malaysian government has actively participated in developing and industrializing the economy of the country through various methods such as state sector investment, a close collaboration between government and private business sector, privatization of government enterprises, and implementation of policies and programs to promote economic growth. While the initiation of the privatization program in 1986 led to a reduced role of the government, it still maintains equity stake in several companies.

During the economic crisis of 1997-98, the government introduced the National Economy Recovery Plan (NERP) to support struggling corporations. The NERP was guided by three principles: national interest, strategic interest and equity consideration as outlined in the new Economy Policy (NEP) and National Development Policy (NDP). Prior to this downturn, Malaysia had enjoyed rapid economic

growth from the late 1980s until just before the Asian Financial Crisis. Between 1993 and 1996, its GDP grew at an average annual rate of 9.5%, peaking at 10% in 1996.

According to [Figure 1, pp.7], there was a nine-year period of strong economic growth that lasted until 1996. This was the longest phase of sustained sturdy growth, and during this time, per capita Gross Net Product (GNP) increased from RM 8,381 to RM 11,428 between 1993 and 1996. Despite the significant growth, inflation remained below 4% for the entire period.

The economy's purchasing power increased due to the low inflation rate, and there were no accompanying cost hikes. Manufacturing, construction, mining, and services were the primary drivers of economic growth while agriculture experienced a steady decline. Over the past decade, manufacturing has become more important than agriculture and is now considered the cornerstone of the economy. Since 1993, it has contributed almost one-third of GDP and over three-quarters of merchandise exports. Its contribution to GDP increased from 26% in 1993 to 29% in 1996.

During the period of 1993-1996, there was a simultaneous increase in both the export of physical commodities and private sector involvement in driving growth. The private sector contributed significantly to growth with a total nominal value investment of RM 265.4 billion, experiencing an annual increase of 16.6%.

The rapid economic expansion of Malaysia was driven by the acceleration of its privatisation initiative and an upsurge in Foreign Direct Investment, resulting in higher productivity, efficiency, and private investments. The nation witnessed a boost in external trade by 22.4% during 1995, which further rose to RM375 billion with a growth rate of 3.9% in 1996.

The slower

growth observed in 1996 was mainly caused by a considerable decline in both export and import growth. Nevertheless, external trade showed an improvement resulting in a higher surplus of RM 8.6 billion for the balance of payments merchandise account. Consequently, the current account deficit reduced from RM 8.7 billion recorded in 1995 to RM 4.4 billion achieved in 1996.

Long-term capital, particularly corporate investments, primarily financed the current account deficit. Meanwhile, international reserves increased from RM 63.8 billion to RM 70 billion between 1995 and the end of 1996. The government paid off approximately RM 9 billion in external debt and reduced its total debt from RM 96 billion in 1993 to RM 89 billion in 1996. About 85% of this debt was domestic.

The objective of attaining and preserving macroeconomic stability was accompanied by policy reforms that embraced market-oriented approaches. The Sixth (1991-1995) and Seventh (1996-2000) Malaysia Plans curtailed government expenses, diverted funds towards infrastructure projects, and endeavored to boost the development of private enterprise. Additionally, ambitious privatization initiatives were undertaken. Alongside the Malaysia Plan, November 1996 saw the launch of the Industrial Master Plan which aimed at fostering growth and sustainability in the manufacturing sector. In the 1990s, maintaining budgetary restrictions on operating expenditure formed a crucial element of fiscal policy.

Before 1997, the government implemented strict fiscal measures during a time of rapid economic growth. As a result, surpluses were achieved in fiscal budgets from 1993 to 1996 with the aim of managing growth and reducing external balance pressures. The operating account surplus was largely due to an increase in revenue from RM 41.6 billion in 1993 to RM 58.

Various factors contributed to an increase

in government revenue in 1996. One of these was the reduction of personal tax rates from 32% to 30%, aligning them with corporate income tax rates. Efficiency improvements were also made to collection processes and the tax base was broadened. To balance economic growth with inflation regulation, the Central Bank enforced a strict monetary policy that involved increasing interest rates to prevent credit expansion.

In the period from 1997 to 2002, Malaysia encountered an economic growth phase after facing the Asian Financial Crisis. Prior to this crisis, Malaysia had undergone more than a decade of consistent economic expansion and was one of the rapidly developing economies in Southeast Asia (as indicated in Table). However, due to the crisis, Malaysia's growth rate declined to 7.5% in 1997. The situation deteriorated further during 1998 and led to an unparalleled recession as part of a larger regional financial and economic chaos that caused a real GDP drop of 7%. Following that time, Malaysia has been witnessing four consecutive years of economic growth.

In 1998, the economy experienced a decrease of 5%, but it regained its strength in the following year with a growth of 6%. The upward trend continued in 2000 with an increase of 8.6%; however, growth slowed down again in 2001 resulting in a technical recession of -0.3%. Despite this setback, the economy rebounded once more in 2002 and achieved a growth rate of four percent.

Unstable economic growth has been impacted by various factors over the years. The aftermath of the 1997 Asian Financial Crisis resulted in a decline in 1998, while a surge in electronics led to an increase in the global economy in 2000. However, external

crises caused another decrease in 2001. Over the past five years, government investment and consumption spending, along with other external factors, have significantly contributed to maintaining growth. Despite these efforts, the manufacturing industry experienced a sharp drop of 13% due to reduced worldwide economic activity and contraction of demand for electronic products and components.

Between 1997 and 2002, manufacturing made up around 30% of GDP. Although there was a decrease of 7% in 1998, the sector recovered with a growth rate of 13.5% in the following year. Meanwhile, during this same time period, the services industry grew annually by around 5%, partially due to advancements in government services and sub-services. Additionally, privatization of infrastructure projects, fiscal stimulus measures and housing developments contributed to growth in the construction sector which reached a rate of 2.3% in 2002.

The agriculture sector experienced a growth in value added by 3%, driven by an increase in palm oil production. Despite the global economic slowdown, Malaysia's external trade position remained robust. The balance of payment position improved, recording surplus since 1998, with reduced outflow of funds in the financial account contributing to this growth. Consequently, Malaysia's international reserves strengthened to RM117 billion at the end of 2002.

In 2001, the reserve level reached RM 114 billion, which is enough to cover 5.2 months of retained imports. However, the total external debt increased from RM 90 billion in 1997 to RM 165 billion by 2002. Most of this debt (around 80%) was acquired domestically due to the federal government's borrowing for budget deficits and fiscal stimulus packages.

During 1996 and 1997, there was a consistent economic policy in place until the Asia Financial Crisis

caused notable modifications. To address this issue, the government created the National Economic Action Council (NEAC) in early 1989.

Established in response to the financial crisis, the council aimed to tackle related issues. To revitalise the economy, the government unveiled a National Economic Recovery Plan with six objectives in July 1998: stabilising the Ringgit, restoring market confidence and stability, strengthening economic fundamentals, furthering socio-economic goals and reviving affected sectors. The government has taken policy measures aligned with these objectives including selective capital controls and pegging the Ringgit at RM3 in September 1998.

The purpose of the measures was to thwart offshore Ringgit trading and safeguard the domestic economy and monetary policy against currency speculators by implementing a fixed exchange rate of 80 Ringgit to 1 US dollar. It is now prohibited to send or receive Ringgit from overseas, and trade transactions must be conducted using foreign currency.

In September 1999, Malaysia made some adjustments to their capital controls by simplifying the exit tax plan with a flat 10% profit tax on withdrawals from the country. The government declared that they would only lift restrictions if stricter limitations were in place for currency trading to prevent speculation. Additionally, in mid-1998, Malaysia hastened the relaxation of monetary and fiscal policies aimed at stabilizing the Ringgit and improving macroeconomic discipline. Over time, Bank Negara gradually decreased the Statutory Reserve Requirement (SRR) from 10% to 4%, which is the percentage of reserves banks must deposit with the central bank.

From 1998 to 2002, the base lending rate (BLR) experienced a significant decrease, dropping from its highest point of 12.27% to 6.4%. There were also attempts made to lower finance charges on

consumer credit cards and reduce rates for hire purchase and housing loans while simultaneously increasing funding for small and medium-sized enterprises. In pursuit of stimulating domestic demand, the federal government implemented countercyclical fiscal expansionary policies.

Despite a surplus forecasted in October 1997, the federal government budget deficit exceeded expectations and amounted to 1.5% of GDP in 1998. The excess spending was targeted towards sectors that had a positive impact on household incomes and manufacturing activity, leading to a significant decrease in inflation as evidenced by the drop in the Consumer Price Index (CPI) to 2.

The inflation rate fell by 9% in 1999 after increasing by 5.3% the previous year, but it has stayed below the 2% limit. To maintain a low interest rate strategy, the Central Bank needs to keep loan demands at a minimum and handle inflationary pressures. During the economic crisis, the financial sector displayed several vulnerabilities such as speedy credit expansion, substantial reliance on property and stock markets, excessive corporate leverage, and a significant rise in non-performing loans that endangered its stability.

The government took action in June 1998 to restructure and strengthen the financial system of the country. As part of this, Danaharta (the National Asset Management Company) was established to acquire, manage, and dispose of non-performing loans (NPLs). By May 2000, Danaharta had acquired NPLs worth RM 37 billion (approximately 42% of all NPLs in the banking system). These efforts led to a decrease in the three-month basis for NPLs across all loan systems from its peak at 14.9% in November 1998 to 10.8% by April 2000.

Overall, the management of NPLs demonstrated progress as Danaharta ceased acquiring them after 2001 and focused

on optimizing recovery from its current portfolio. Additionally, Danamodal, a special vehicle established in August 1998 to recapitalize struggling financial institutions, invested RM 7.

The banking institution received RM 6 billion, and currently, seven financial institutions have fully repaid RM 5.5 billion, while three financial institutions still owe RM 2.1 billion. Danamodal plans to end operations by the end of 2003. Additionally, the government created the Corporate Debt Restructuring Committee (CDRC) to aid voluntary corporate debt restructuring between creditors and feasible debtors.

In August 2002, CDRC stopped its operations having resolved 48 cases involving a debt of RM52.6 billion. Furthermore, the government concentrated on consolidating the financial sector. The consolidation of the banks has been a long term policy objective to ready Malaysia's financial sector for the challenges of stronger competition and globalization.

In February 2000, Bank Negara Malaysia (BNM) approved the consolidation of Malaysia's 54 domestic banks under ten "anchor" banks. Initially, the government proposed six "anchor" banks but increased it to ten after appeal from financial institutions. The government also planned to merge domestic brokerage houses into 15 "universal brokers" to improve Malaysia's capital markets. The Securities Commission is responsible for creating the framework for the capital market Master Plan. In March 2001, the government launched the Financial Sector Master Plan (FSMP) as part of a larger effort to enhance the strength and efficiency of Malaysia's financial system.

The Financial Sector Master Plan (FSMP) aims to enhance Malaysia's financial sector in the medium and long term by introducing innovation, flexibility, and dynamism. It is implemented over three phases from 2001 to 2010 with the objective of adapting to changing customer demands and globalization challenges. The

plan establishes a more competitive economy beyond the manufacturing sector, given recent financial crises and external slowdowns while maintaining strength and resilience.

The government chose to have a diversified and balanced economy, which entails a fully developed industrial sector, a modern agriculture sector, and an efficient services sector.