Malaysia: A model for economic growth

Export diversification and investment in infrastructure and services have boosted Malaysia’s goal of being a fully industrialised country by the year 2020. The Middle East could learn a lot from this Asian tiger

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By  Massoud Derhally Published  March 30, 2003

|~||~||~|There is something captivating about Malaysia. Whether you visit the bustling capital Kuala Lumpur, a resort in Lumut, or the Cameron highlands you can't help but walk away with a feeling of awe and admiration for all this country has managed to achieve in the past 35 years. The promise of better living standards, good job opportunities and a politically stable country has drawn foreigner workers, businessmen, merchants and tourists to this peninsula.

Malaysia's booming economy has drawn two million migrants from Indonesia, the Philippines and Bangladesh, amongst others, in search of jobs. If economic and job growth continue at current rates, and the government projects economic growth of 7% per year to 2020 --- Malaysia will need even more workers.

The country has managed to overcome many obstacles developing countries face in the race to attain wealth and prosperity. There are certainly lessons that the Arab world can draw from the Malaysian experience, especially when it comes to diversification of exports.
Malaysia is not yet an industrialised country, but it's certainly on its way to becoming one. Its medium-sized, export-oriented economy has developed rapidly from an agriculture-based economy to one that is sustained by manufacturing over the past twenty years. When it gained independence in 1957, three-quarters of the country's earnings came from rubber and tin.

Over time, the country diversified, becoming a net importer of tin, an exporter of crude oil and the world’s largest exporter of palm oil, which contributes US $4.5 billion a year to its economy. Malaysia is the 17th largest exporter in the world and in 2002 alone its exports stood at US $100 billion. Its ability to capitalise on its rich natural resources has been proven.

Malaysia has benefited most from technological advancement. The growth of the computer industry gave the country the opportunity to become a major exporter of microchips and computer components, which, the Economist Intelligence Unit says, now account for 70% of manufactured exports, thereby lessening its dependence on commodity exports.

Numerous multinational companies have set up on the island of Penang, known as the Silicon Valley of Asia. The Malaysian IT market is set to grow by 6% in 2003 from 2002 to reach US $2.3 billion, according to IDC. Ben Chan, head of product and research for HSBC in Singapore and Malaysia, says 70% of exports are still electronics based. “That is still very much an intermediate export business where we take parts in, process them, and send them off to somewhere else for assembly,” he says. The other 30% of exports is made up of palm oil and crude oil.

Change did not happen overnight. When you speak to a tour guide, a taxi driver, a waiter, or an airplane hostess they all say the country has advanced, that it is what it is today because of the leadership of one man, Prime Minister Mahathir Mohamad, who heads the United Malays National Organisation (UMNO) that has been in power since independence in 1957. “Our country is strong today, and our economy is strong, Malaysian people have jobs all because of our Prime Minister. He is a good man, he works hard,” says Jaffar, a Malaysian taxi driver.

Mahathir has a vision. It’s called the ‘2020 Vision’ and to a large extent it has underpinned the country’s economic aspirations. It set as a target an eightfold increase in GDP and achievement of industrialised country status by the year 2020. This, according to Mahathir, requires an annual economic growth of 7%. “Our confidence and determination to achieve this vision is based on our record of development since independence,” said Mahathir in a speech about Malaysia being on track for his 2020 Vision plan.

“In the 10 years before the economic turmoil of 1997-1998, Malaysia was growing at 8% plus, higher than our 7% growth target needed to double our per capita income every 10 years for 30 years,” added Mahathir. Sophie Lewisohn of the EIU believes, “The economic development the country achieved so far has brought Malaysia closer to its target of being a developed country by 2020.”
Pundits point to Mahathir’s handling of the Asian financial crisis. It was his prudent thinking, they say, that saved the country from near economic collapse. A month after the Thai bhat came under attack, the Malaysian ringgit began to depreciate, dropping from RM 2.5 to US $1, to RM5 to US $1. Mahathir reacted quickly, but carefully. Rather than accept International Monetary Fund (IMF) recommendations and appear as acquiescing to an institution most third world countries despise, he recalled foreign holdings of the ringgit and pegged the currency at 3.8 to the US dollar.

The Prime minister then put in place legislation that put a ceiling on the outflow of capital and limited the repatriation of profits of foreign entities in Malaysia for up to one year. “Malaysia said no to the IMF and pegging the ringgit was very controversial,” says Shafri Mohamad, a Malaysian businessmen. “It saved us, but not our neighbours, who became the slave of the IMF.”

The currency crisis abated and Malaysia’s overall health has improved. “In the last year we recorded 4.2% economic growth and we anticipate that the coming year we will be recording 4.9% and over,” said Mohammed Mustafa Abdul Aziz, Malaysia’s Consul General and Trade Commissioner in Dubai. The actual economic growth is short of the 7% target, but Mahathir did say in his speech about the 2020 vision, “Even if growth for the next 10 years averages slightly less than 7%, we would still be on target. We think we can grow at that rate barring a major catastrophe.” The Asian financial crisis has also led to a shift in strategy, which includes reviewing existing trading relationships, finding new markets and nurturing existing domestic industries.

Almost four years after the Asian financial crisis, Malaysia finds itself today with more fiscal leeway, says Chan. The country has a relatively low unemployment rate of 3.2% compared to the Philippines’ 11.4, Indonesia’s 8.4, Hong Kong’s 7.2 and Singapore’s 4.4%. “The key thing that drove us out of recession was a weak currency, which made exports very competitive and timed well with the technology boom in the US,” says Chan.

“We exported our way out of recession in a sense. The government was determined to recapitalise banks that were carrying bad debt and this was sold to asset management firms in record time. We didn’t see a big unemployment problem going into the crisis until the tech bubble burst in 2001 and that affected employment to a certain extent. But by now, employment figures have recovered and domestic demand has been strong due to services, education and a low unemployment rate of 3.2%.”

Since the currency crisis, “the IMF has conceded that the government’s way of dealing with the financial crisis in Malaysia had some advantages and the currency peg, in particular, has provided the economy with stability,” says the EIU.

A salient factor to the country’s recovery, as Chen mentioned above, has been the growth in domestic demand. It helps when you have a population of 24 million and when there is strong consumer demand that complements public sector expenditure. “To a certain extent, because of a weak dollar, which the ringgit is pegged to, Malaysians are finding overseas travel a bit more expensive, plus because of the potential war scenario people don’t want to travel too far. So we are benefiting from an increase in domestic travel and intra-regional travel in Asia,” says Chan.

Domestic demand is propping up economic growth amid the uncertain global economic outlook. Domestic demand makes up to half the economy, says Chan. “It acts as an insulating factor. The fact that they [the government] have been able to bring domestic demand up and at the same time maintain a low unemployment rate has meant that people are willing to consume, and they can afford to spend,” explains Chan.
The EIU’s Sophie Lewisohn agrees. In her latest EIU forecast report, Lewisohn says, “After stagnating in 2001, domestic demand growth bounced back in 2002 by an estimated 6.7%.” The EIU expects domestic demand to remain healthy over the forecast period, as private sector investment picks up. “The pick up in growth was created by an expansionary fiscal policy, firmer consumption, restocking and stronger exports,” says Lewisohn.

Malaysia is considered an economic success story, but concerns continue. Malaysian exports have been sustained primarily by electronics products and petroleum and as a result of the global economic slowdown they suffered in 2001, dropping 10.3% from 2000 to reach US $88 billion. Demand for electronic products decreased and trade with Malaysia’s biggest trading partner, the US, declined.

“Demand for electronics is closely linked to the US investment cycle; once the US economy begins to strengthen, the volume of electronic exports should pick up,” says the EIU. Another issue Malaysian tech firms have to worry about is the shift in production to China, making it harder for it to compete in low margin, high volume manufacturing. “Malaysia could well suffer from competition from China, as they are competing in similar product areas,” says Lewisohn of the EIU. “Malaysia needs to move up the value chain in terms of the products it exports. It also needs to expand upstream so as to reduce its dependence on intermediate goods imports,” she adds.

Malaysia has recognised its vulnerability and to some extent there is a move to diversify exports and create different revenue streams. “They are trying to encourage value added exports, but that requires FDI, which at the moment is down worldwide and the only place that is sucking FDI is China,” adds Chan.

Rather than merely be a tourist destination, which contributes US $11 billion annually to the country’s economy, Malaysia also wants to establish itself as a centre for computer science, education, and healthcare services. Be it financial IT solutions, internet systems, web-based software, tele-medicine, or IT education systems, there has been significant activity among the IT companies.

There are even examples of the country’s ambition translating into acquiring companies for the purpose of technology transfer. The national carmaker, Proton, which accounts for 60% of the domestic market, bought Lotus, the British luxury sports car company in 1996. Some observers say the acquisition helped Proton to engineer its Proton Arena car, which was launched in November 2002.

Real estate is another way the country has tried to reinvent itself and gain an alternative revenue base. The country plans to capitalise on its ‘Malaysia your second home’ promotion. The country has ratified new legislation that allows foreigners to retire and buy property in Malaysia, while gaining residency in the process. The scheme was launched in the summer of 2002 in a bid to boost economic growth and woo foreign investment. The minimum purchase price for any property is Dhs150,000 and there are other criteria, such as a minimum yearly income or net worth, in order to qualify. To date, it has proven successful with the Indian expatriate community of the Middle East.

Malaysia is also heavily promoting itself as an alternative destination for those who wish to get a higher education. Shafri Mohamad, whose ancestors emigrated from the Middle East to Malaysia, was in Dubai after the September 11 attacks and noticed fewer and fewer Arabs were looking west for their education. So he set up an education placement firm called EdAsia. “I realised that a lot of students found difficulty in going back to the US or Europe, and Malaysia has a lot of world class universities,” he says. “Students don’t have to go all the way to London, New York or Australia, they can do their degree over here in Malaysia. You won’t be harassed here or compromise the quality of education,” adds Mohamad.

Although Malaysia faces great challenges from global economic uncertainty, the government has a good track record. It has shown it can undertake various initiatives that improve productivity and facilitate economic growth-initiatives that do not require natural resources but a bit of substance, infrastructure, services, industry and a good work ethic. Arab countries have a lot to learn from this Asian tiger. ||**||

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