The Economy of Malaysia - Example

The Economy of Malaysia (Name) (Course) (Lecturer) (Date) Introduction Economic slowdown is a situation where the GDP growth mainly slows down but does not decline. Indeed, such situations have been noticed in different countries that have continued to experience economic crises. One of the main characteristic of economic slowdown is the increase of unemployment and decrease of productivity. In the early 1980s and late 1990s, developing countries found themselves in a deep financial crisis (Farland & Rais 2003, UNCTAD 2001).The first generation of this crisis was the inability to pay external debt as a result of various combination factors such as increase in the cost for oil, depression in the prices of commodity export, inappropriate use of loans and increase in the foreign loans (Masih 2005). Several East Asian countries including Malaysia began to experience deeper financial problems by 1997 (World Bank 1998, Khor 1998). This is attributed to improper design and implementation of the capital account liberalization and financial deregulation as they had obtained inflows of capital including portfolio capital and bank loans that were in foreign currencies denomination. As compared to other East Asian countries, Malaysia situation on debt was somehow manageable; however, the situation was still fragile (Barir 2002). It is important to note that Malaysia has indeed recorded approximately 29 cycles of contractions and expansion since early 1980s (Mahani 2000; Khor 2001)). Most of the negative contractions were mainly recorded in the 1985, 1997 and 2008. In theses years (1985 and 1997) the country is said to have been hit by financial crisis and recession (Mahathir 2003). It was one of the countries that were badly hit within the East Asia region. However, the country remained resilient (Malaysia Government, 2001; Masih 2005). The Global Financial Year (2008) The 2008 financial crisis that Malaysia experienced was totally different from the one highlighted above. The 1998 financial crisis began in Thailand and Malaysia is seen to have suffered a contraction in GDP growth. The 2008 crisis, by comparison began in the United States as a result of it weakness in the financial industry that escalated to become a harsh international financial crisis and slump in the global recession and global trade by the end of 2008. Indeed, the world’s primary economies, to be specific Japan, the European countries and the US experienced the most severe economic reduction since the 1930s Great Depression (Nambiar 2012). Given that Malaysia is a small country and that its economy mainly relies on export, it was not spared from the external shock experience in the world. Indeed, this negative shock was transferred to Malaysia economy during fourth quarter, 2008. Industrial and export output while the investment decreased. In addition, consumer response was greatly affected. This resulted to the drop of GDP growth in this period. The GDP growth was lower at 0.1 per cent which was disturbing when compared to the mean of 5.9 per cent in the beginning of the year. However, it was noted that the banks in the country had less insignificant exposure to the securities linked to the United States loans; therefore, they were in better shape as compared to the financial crisis that was experienced in the 1990s. However, most economists argued that as much as the 2008 global financial has less impact as compared to the 1998 one, the country was still prone to economy slowdown as the 2008 financial crisis was to be a longer one. The global financial crisis had an impact on the capital flow. Similar to other Asian countries, the second quarter of 2008 marked the beginning of capital flight in Malaysia. This is attributed to the fact that the financial institution and banks in the Western countries and the United States reduced their international activities in order to focus on their markets at home. This led to a drop of funds that was being channeled to Malaysia. In addition, the country was affected by the outflows of portfolio investment in 2008. This affected the stock market as the foreign participated more in the stock market than the residents. This led to the Composite Index to fall from 1393 points in the beginning of the month to 876 points at the end of the month of 2008. It is important that there is a correlation between the stock prices and the portfolio equity flows in the country. Therefore, the fluctuation of one leads changes in the other (World Bank 2009). The crisis had a great impact on trade. This is attributed to the fact the country mostly relied on the export system in order for the economy to grow. It is quite obvious then that then global financial crisis greatly exposes the vulnerability of its export industry. As noted, there was a drop of exports at 28 per cent. This was biggest dropped experienced in the country since 1982. The most disturbing fall was in the manufactured exports especially electrical appliance and machinery and electronics that accounts for 41 per cent of the country exports. Natural resources and agricultural exports also dropped significantly as well as crude oil and palm oil exports. Of importance to note is the fact that the exports contain component of middle goods. As such, the dropped in export also resulted to a drop in the import, in fact the drop was greater than the export. Therefore, Malaysia was able to maintain a trade balance during the financial crisis. On the real economy, the financial crisis resulted to the loss of trade, jobs and output. This mainly resulted from the drop of industrial production index fell from 19.8 per cent at the beginning of the year to 4.0 per cent at the end of 2008. The contraction at the beginning of 2008 was attribute to the drop of three indices; mining, manufacturing and electricity. The contraction observed in the manufacturing output was as a result of the decline in some sub-sectors for instance electrical products, plastic products, rubber and chemical (Bank, Malaysia 2005). Under employment and labor, the crisis did not a tremendous impact as seen in other countries. The rate of unemployment was low and somehow stable during the financial crisis. The decrease observed was just an insignificant margin. However, the economic slowdown affected foreign employees in the country as they are usually vulnerable and unprotected. Indeed, most of them were sent home when the rate of unemployment rose. In addition, the government froze the hiring of foreign employees in order to create employment opportunities for the residents (World Bank 2008). Strategies and programs to revive the economy (2012-2013) Amidst the international climate of uncertainty in the economy, the government of Malaysia has continued to lay strategies and programmes that will lead to the growth of the country. Government investment, robust domestic demand, regional resilience and greater diversification have continued to play a major role in laying the strategies. It is important to note that the growth is expected to hit 5 per cent before the end of 2013. One of the strategy that the government has laid is to continue to push ahead with the Economic Transformation Programm. This programme seeks to upgrade the country in achieving excellent middle income status before 2020. The programme entails large scale investment in health, education, and infrastructure and to reduce the reliance of the country on raw material for their industries from other countries. Under infrastructure, the country has continued to link up with neighboring countries in order improve transportation in the region. For instance, together with Singapore, they have decided to construct a mass transit railway system that will increase bilateral trade between the two countries (Nur 2012). Another strategy that has been introduced by the government aims at increasing labor productivity. The country is aiming at increasing Gross National Income per person to $15, 000 before 2020. If the country is able to meet this goal, it will then be able to achieve the middle income trap (Parker 2012). The government is also laying down strategies that will result to an increase in private investments. These strategies include introducing monetary policy that support and attract more private investor in the country. This will assist the country to rank high and be able to compete effectively in the business world (Athukorala 2001). The government has pledged to implement initiatives that mainly encourage and support innovation, for instance the creation of National Innovation Center and Technology Acquisition Fund. The government aims to do this with a focus on introducing a suitable environment that is conducive for the SMEs to continue participating in innovative and R&D activities (Fintan 2012). The government has confirmed that it has been a challenged to the SMEs to access financial support. The government, therefore, has allowed the SMEs to use their intellectual property as collateral to get financial assistance in order to expand their businesses. In addition, the government has set aside funds to be channeled to the higher learning institutions in order to fund high impact research on automotive, biotechnology, aerospace and nanotechnology (Mahani 2012). Essentially, despite the financial uncertainty facing the economy in most countries at the moment, Malaysia continue to lays strategies and programs that will assist the country to grow in all aspect of the economy. Essentially, Malaysia economy is said to be one of the hardest hit in the region. However, the government has was able to lay down strategies that would help the country to grow again. Indeed, as highlighted in the above analysis, the manufacturing industry was one of the worst hit sector as a result of the economic slowdown. These resulted to slashing investment, running inventories down and cutting production. Notably, given the importance of the manufacturing industry in the country, the impact on the GDP was highly pronounced. However, it is important to note that the turmoil in this industry did not result to broad based recession. At the moment, the uptown in the economy is still expected to rise in order to get back to a sustainable recover. This is despite the continuing economic instability that has continued to be observed in the developed countries. References Athukorala, P. 2001, Crisis and Recovery in Malaysia. New York: Edward Elgar Publishing. Bank, W. 1998, East Asia: the road to recovery. Washington: The World Bank. Bank, W. 2008, Knowledge deepening and industrial change in Malaysia. Bank, W. 2009, Malaysia economic monitor: repositioning for growth. Bank, W. 2005,Malaysia: firm competitiveness, investmentclimate and growth. Barir, A. 2002, Cabinet principle in Malaysia: the law and practice. Kuala Lumpur: The Other Press. Farland, J., & Rais, S. 2003,Growth and ethnic inequality: Malaysia's new economicpolicy. Kuala Lumpur: Utusan Press. Fintan, N. 2012, August 12, The star online. Malaysia's economy up 5.4% in Q2, manufacturing, demand support growth , p. 1. Government, M. 2001,The third outline perspective plan, 1991-2000. Kuala Lumpur: Percetakan Nasional Malaysia berhad. Khor, M. 2001, Globalisatio and the south. Penang: Third world Network. Khor, M. 1998, The economic crisis in East Asia. Kuala Lumpur: Prentice Hall. Mahani, A. 2012, January 11, Malaysia’s progress in a gloomy global economy and contested political environment. East Aian Forum , p. 1. Mahani, A. 2000, Malaysian Economic Recovery Measures: A Response to Crisis Management and for Long-term Economic Sustainability. ASEAN University Network’s Conference on Economic Crisis in Southeast Asia (p. 12). Bangkok: University of Malaya. Mahani, A. 2002, Rewriting the rules: teh Malaysian crisis management model. Kuala Lumpur: Prentice Hall. Mahathir, M. 2003, Globalisation and the new realities. Kuala Lumpur: Pelanduk Publications. Masih, A. 2005, Macroeconomic policy trilemma in open economies:which policy option is ideally suited to the Malaysian context? Journal Pengurusan , 24:3-26. Nambiar, S. 2012, September 21, The Trans-Pacific Partnership: what is Malaysia’s rationale? East Asia Forum , p. 1. Nur, A. 2012, October 31, 2013 Budget to Boost Innovation in Malaysia. In Asia , p. 1. Parker, J. 2012, November 24, Malaysia's economy:still chugging along. The Diplomat , p. 1. UNCTAD. 2001, Trade and development report 2000 and various other years. Geneva: United Nations. Read More