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Since achieving independence from Britain in 1957, Malaysia has industrialised rapidly. Initially it relied on its primary commodities (eg. rubber, palm oil, timber and tin) and, up until the 1970s and early 1980s, these contributed significantly to economic growth. Since the late 1980s, much of the growth has come from the expansion in the manufacturing sector, encouraged by the Government’s export-oriented approach to industrial transformation.
Part of this approach involved the promotion of heavy industries through direct government involvement. The Heavy Industries Corporation of Malaysia, a public-sector holding company, was formed in 1980 to form partnerships with foreign companies and set up industries such as petrochemicals, iron and steel, cement, paper and paper products, and machinery. Tariffs on a wide range of manufactured goods were increased in the first half of the 1980s as part of this industrialisation move.
The economic crisis during 1985-87, which originated in a combination of budget deficits and lower prices for Malaysia’s major export products, put an end to the state-led heavy industrialisation push. The Government addressed the crisis by placing greater emphasis on the role of the private sector and strengthening the conditions for export-oriented industrialisation through foreign direct investment (FDI).
This approach was highly successful and since the 1980s economic growth has been driven by expansion in the manufacturing industries. The share of manufacturing in GDP increased from about 20 percent in 1987 to more than 34 percent in 1997, and contributed to more than half the increase in GDP. The share of agriculture in GDP declined from more than 20 percent in the mid-1980s to less than 10 percent in 2003.
Fig.4.1: Malaysia’s Economic Growth Real GDP (constant price)
Source: Bank Negara, Malaysia.
Based
on the strength of the manufacturing sector, strong export growth
and solid foreign direct investment, the Malaysian economy grew
strongly in the decade leading up to the Asian financial crisis
of 1997 (Figure
4.1). The advent of the crisis swiftly halted and
this growth, with the Malaysian economy contracting by 7.4 percent in 1998. With
a view to halting the economic slide, the Government initially tightened
fiscal and monetary policy. As the crisis worsened the Government reversed
its stance by boosting spending and dropping interest rates. In addition,
the Government fixed the Ringgit at RM 3.8 = US$ 1. Subsequently
the economy began to recover, recording economic growth of 6.1 percent and
8.9 percent in 1999 and 2000 respectively.
Then the Malaysian economy was hit again, this time by the global economic downturn and the slump in the Information Technology (IT) sector. GDP in 2001 grew only 0.3 percent due to an 11 percent contraction in exports, but a substantial fiscal stimulus package mitigated the worst of the recession and the economy rebounded in 2002 with growth of 4.1 percent. This improvement continued in 2003 with economic growth of 5.3 percent.
Since the early 1970s Malaysia has transformed itself from a producer of primarily raw materials into a multi-sector economy, driven by its large manufacturing and service sectors. The manufacturing sector is one of the main engines for export-led economic growth. In 1980 exports of goods and services were 14 percent of GDP but by 2003 this had risen to 114 percent. Manufactured products, mainly electronics, account for 85 percent of all exports. Around three-quarters of the manufacturing industry is involved in the external sector, which leaves this industry – and by implication the economy – exposed to fluctuations in global demand for electronics. The manufacturing sector accounted for 31 percent of GDP in 2003.
The service sector is the largest sector in the economy, accounting for 50 percent of nominal GDP in 2003. Within this sector are the finance, insurance, and property and business services industries, whose performances over recent years have encountered some setbacks. The first of these was linked to the fall in asset prices associated with the Asian financial crisis and the second to low economic growth in 2001. The strong expansion of the production of utilities (gas, water and electricity) is continuing as household and manufacturing demand grows. The hospitality industry (retail trade and hotels and restaurants) suffered from temporary weakness in early 2003 due to SARS and the war in Iraq.
As Malaysia has pushed towards industrialisation, the relative importance of the agricultural sector has diminished because of stronger growth in the manufacturing and service sectors. Demand in these areas has constrained the supply of suitable farming land and labour. The agriculture sector continues to grow, but not at the pace of the manufacturing or service sectors. The Malaysian Government is giving priority to increasing agricultural productivity.
In 2003 the Malaysian economy grew by 5.3 percent. Even stronger growth of 6.9 percent was recorded in the year to June 2004, driven primarily by strong growth in private consumption. The Malaysian Treasury confirms that the economy is on track to achieve 7 percent growth in 2004 and expects growth to remain strong at 6 percent in 2005.2 Private consumption is expected to remain strong over the rest of 2004 and early 2005, due to low interest rates and the availability of credit. Private investment is expected to pick up in 2004 and 2005, following low and negative growth in recent years. Exports will also increase, but will be largely offset by a similar increase in imports.
Of particular importance to Malaysia’s economic outlook is increasing private sector investment. Under the Government’s Eighth Malaysia Plan (EMP) private investment is positioned as playing a pivotal role in expanding Malaysia’s economic output3 However, private sector investment actually contracted by 32 percent in the first two years of the plan. In 2003 private investment staged a modest recovery, growing by 0.4 percent. The Government’s 2005 Budget showed some encouraging signs for increasing private investment, particularly foreign direct investment (FDI). 4
The Government has also scaled back its development spending in an attempt to rein in the budget deficit. Lower public investment will partially offset the expected increase in private sector investment, meaning overall investment growth will remain low over coming years.
Following the depression of the 1930s, successive governments assumed control over a large proportion of economic activity through the state ownership of industry and resources, and by regulating what firms could and could not do. The main objective was to promote full employment and self-sufficiency in the domestic production of a wide range of goods, even if New Zealand did not have a comparative advantage in the production of some of them (eg. the re-assembly of motor vehicles). Under this import-substitution regime, a programme of import licensing greatly restricted or prohibited the importation of a range of consumption goods, thus protecting domestic producers from international competition. During most of the 1950s and 1960s New Zealand’s economy grew well as a result of strong agricultural commodity prices. However, by the early 1970s weaknesses were beginning to emerge. Britain’s entry into the European Economic Community (EEC) brought to an end 40 years of very open access to British agricultural markets. The oil shocks of the 1970s and the resulting world recession also seriously dented New Zealand’s exports. These events, combined with high levels of protection and government borrowing, dampened productivity growth, reduced competitiveness, led to balance of payment problems, and increased both inflation and unemployment.
Following the change of government in 1984 the New Zealand economy underwent a substantial transformation. In 1985 the Government floated the dollar, reduced assistance to industries, identified price stability as the sole objective of monetary policy, introduced a goods and services tax, and passed the State-Owned Enterprises Act.
On a macroeconomic level, these policies were aimed at achieving low inflation and a sound fiscal position while opening the economy up to world prices and competitive pressures.
Fig.4.2: New Zealand’s Economic Growth Real GDP (constant price)
Economic growth remained muted during the late 1980s and early 1990s. A trough in economic growth came in 1991 when the economy contracted by 1.7 percent, but in the six years to 1997 the economy rebounded, recording strong annual average growth of 3.6 percent per annum. By the end of 1998 economic growth had contracted marginally by 0.1 percent as a result of drought in some areas and the Asian financial crisis (Figure 4.2). This was only a moderate downturn in the economy, which picked up again in 1999. Since then its performance has been impressive. Annual average economic growth of 3.6 percent per annum between 1998 and 2003 has put New Zealand amongst the top performers in the OECD.
New Zealand has sizeable manufacturing and service sectors complementing a highly efficient agricultural sector. The economy is strongly trade-oriented, with exports of goods and services accounting for around 33 percent of total output. The agricultural, horticultural, forestry, mining, energy and fishing industries play an important role in New Zealand’s economy, particularly in the export sector and in employment. Whilst the primary sector only accounted for 8 percent of real GDP in 2003, the sector accounts for more than 50 percent of New Zealand’s total export earnings and makes significant contributions to downstream activities such as transportation, rural financing, and retailing.
The manufacturing sector makes an important contribution to the national economy. It is approximately double the size of the primary sector, accounting for 15 percent of real GDP in 2003. Up until the mid-1980s the manufacturing industry was focused on production for the small domestic market and was aided by import protection. Since the opening up of the economy in the mid-1980s, it has had to gear itself increasingly towards international markets, and the industry today is now more competitive and innovative. Throughout the 1990s, the manufacturing sector experienced output growth of 1.1 percent per annum, lower than overall growth in GDP of 2.4 percent per annum. This was in part due to the adverse effects of a high New Zealand dollar in the mid-1990s. The flow-on effects of the Asian financial crisis and drought conditions also hit the sector in 1997/98. Since then conditions have improved and the manufacturing industry grew by 2.5 percent per annum in the three years to 2003. Increased trade has been the primary driver of growth, with annual growth in manufactured exports of 8 percent. Food and beverage processing is the largest manufacturing industry, accounting for 5 percent of GDP in 2003. Other important industries include machinery manufacturing, wood and paper manufacturing and metal product manufacturing.
The service industries are collectively the largest sector in the economy, accounting for 67 percent of GDP in 2003. The finance, insurance, property and business services group is the largest of these. Financial services is dominated by commercial banks, which have significant interest in the New Zealand property market. In 2002 mortgages accounted for nearly half of total lending and around one-third of total banking sector assets. Recently the strength of the property market has been one of the factors driving growth in these sub-sectors. Export-related activities, such as primary sector services, tourism and education services, also play an important part in this sector and have been responsible for robust growth in some sub-sectors. These include wholesale and retail trade, (including accommodation, cafes and restaurants); transport, storage and communications; and education and health.
In 2003 the New Zealand economy grew by 3.4 percent and recorded even stronger growth of 4.4 percent in the year to June 2004. High net migration inflows over 2003, historically low interest rates, increases in house prices and a strong New Zealand dollar have fuelled growth in consumption and residential investment. Business investment has also increased recently as firms have sought ways to overcome their capacity constraints, particularly the acute shortage of labour.
The New Zealand Treasury expects robust economic growth of 4.7 percent in the year to March 2005 as high house prices, a strong dollar and a tight labour market continue to drive consumption and business and residential investment. Economic growth is expected to slip to 2.7 percent in the year to March 2006 as net migration inflows continue to fall, and recent interest rate increases are likely to slow the expansion in residential investment.5
Looking to the future, the New Zealand Government has formulated a set of growth-oriented policies designed to deliver the long-term sustainable growth necessary to improve the living standards of all New Zealanders. The Growth and Innovation Framework (GIF) identifies innovation and knowledge as key drivers of growth and has set a goal of returning New Zealand’s per capita GDP to the top half of the OECD.
Table 4.1: Comparative Economic Indicators6| 2003 Calendar year | Malaysia | New Zealand |
|---|---|---|
| GDP (US$, billions) | 103.2 | 78.2 |
Primary industries - % |
17.9 | 7.8 |
Goods Producing industries - % |
38.1 | 22.7 |
Service industries - % |
46.2 | 69.5 |
| GDP per capita (US$, PPP)a | 9,600 | 21,000 |
| Real GDP growth per annum, 93-03b | 5.3 | 3.4 |
| Current account (US$, billions) | 13.4 | -3.5 |
| Goods exports (US$, billions) | 105.1 | 16.8 |
| Goods imports (US$, billions) | 79.3 | 17.2 |
| Inflationc | 1.1 | 1.8 |
| Unemployment rate | 3.6 | 4.7 |
| Exchange rate (US$1)d | 3.8 | 1.7 |
a. World Bank’s Purchasing Power Parity (PPP) GDP estimates divided by respective populations
b. Annual average % change
c.
d. Average for the year
[2] Economic report 2004/2005, Malaysian Treasury.
[3] The EMP is a five-year plan, which was originally aimed at achieving economic growth of 7.5 percent between 2001 and 2005; this target was revised down to 4.2 percent in 2003. The EMP is part of the government's development strategy and is backed by a 10-year master plan, which is driven by the objective of Malaysia becoming a developed nation by 2020.
[4] The 2005 Budget took steps towards liberalising the capital market . Up to five major foreign stockbrokers and five leading global fund managers will be allowed to operate in Malaysia, and 100 percent ownership of futures broking and venture capital companies will be allowed.
[5] December Economic and Fiscal Update 2004, New Zealand Treasury.
[6] Table 1 aggregates industries into three groups: the Primary sector, the Goods Producing sector, and the Service sector. These three sectors are defined as follows: Primary sector Agriculture; and forestry, fishing and mining. Goods Producing sector: Manufacturing; construction; and utilities (electricity, gas and water). Service sector: Wholesale trade; retail trade, accommodation, cafes and restaurants; transport, storage and communications; finance, insurance, property and business services; government administration and defence; and education and health.
