Concerns over the Future of the Malaysian Economy

Between the Strait of Malacca and the South China Sea lies a small potato-shaped strip of land called Peninsula Malaysia. With a rather small population of 28 million people, this little parcel of land isba place where most Malaysians and I call home. On the surface, Malaysia is a place where everyone would like to live. Barring the occasional political happenings and some minor quarrels among the three major races, most Malaysians live in a rather nirvana-like environment, free from natural disasters like volcano eruptions and earthquakes.

In terms of its economy, Malaysia seemed to be doing well too. After the Asian Financial Crisis in 1998, policy makers in Malaysia opted for medium degree protectionist policies in order to provide a safe incubator for local businesses. This brought into being capital controls and the local currency called the Malaysian ringgit was no longer traded internationally. The result of these actions was a rather highly insulated economy that would no longer be exposed to attacks from ‘evil’ speculators and their like.

The Malaysian policy makers also went one step ahead in order to rebuild the Malaysian economy from the ashes of the 1997 crisis. In order to promote local exports, policy makers consistently kept the Malaysia ringgit undervalued so that Malaysian exports would be relatively cheaper than exports from other countries. Foreign low-skilled workers were also encouraged to work in Malaysia to create a business environment where the cost of doing business would be low. Besides that, the Malaysian government also introduced a series of subsidies on key essential items to maintain a low level of inflation.

This was of course all well and good skin deep. Many policy makers considered it a success when the Malaysian economy looked more vibrant than ever with a huge buffer of international foreign reserves and a high level of export surpluses over the years. However, looks can be deceiving. In the midst of economic growth was also a high degree of change in income inequality. For the majority of Malaysians, their real income have not grown for the last 10 years. Coupled together with that, is the fact that Malaysia has persistent budget deficit over the last decade! While Malaysian exports were a healthy surplus, a deeper look into our economic data reveals that we are still highly dependent on the export of natural resources like crude palm oil and crude oil.

Malaysia’s problems do not stop there. Subsidies and price controls mean that the local economy lacks flexibility. The protectionist policies implemented have also fostered complacent local industries that have lost their competitiveness over the last decade because they were never pressured to move up the value chain. More detailed analysis on Malaysia’s economic data also reveals that the country’s gross domestic product (GDP) have not been able to exceed pre-1997 levels despite the ability of other regional economies to do so. The end of the line is the increasing intensity of highly educated individuals leaving the country in search for better paying jobs.

In my opinion, Malaysians need to rethink their present condition of the Malaysian economy. While it is right to say that Malaysia was not  as badly affected by the U.S. sub-prime mortgage crisis, the slowdown in the U.S. economy has also affected Malaysian exports. Globalisation, whether we like it or not, is a force to be reckoned with and Malaysia cannot be totally insulated from the global economy. Evidence of this can be seen clearly during the food and fuel inflation we experienced in 2008. Despite how we tried to protect local institutions, Malaysia is still a net importer of food!

There is however, a light at the end of the tunnel. Countries like Holland and Singapore are good examples of economies that are highly successful despite their small population. One of the reasons for their success is their willingness to liberalise more sectors of their economies and focus consistently on economic fundamentals. Among these are the importance of good basic infrastructures like telecommunications and public transportation systems that would help bring a higher level of economic activity. At present, these two areas of found to be particularly lacking in Malaysia. In my opinion, policy makers should look to these two areas as a source of future economic developments.

Ee Suen Zheng

(A very concerned Malaysian)

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