The growth in manufacturing, agriculture, and services are significantly bringing Malaysia forwards. The Malaysian electronic export is equivalent to nearly 47 per cents and agricultural commodities such palm oil and rubber contributing 8.6 per cents which leads to a surplus of USD 310 million. Given to its rapid economic growth during the past five years, Malaysian Prime Minister Badawi was satisfied with the achievements and the progress of its halfway in its vision 2020.
Despite a rapid economic growth, it is concerned that this plan might face the risks of getting stuck in the middle in term of great challenges and even more perilous and demanding in the global environments. The main issue in Malaysia Halfway to 2020 plan is a low investment rate. Therefore, this case paper intends to analyze this key issue and provide some new alternative options for the government to achieve the objectives of its vision 2020 plan.
Despite a positive economic growth, Malaysia has a negative investment rate due to its restrictions on openness to trade and investment in terms of government regulations. Comparing to the Asian countries such as China, India, Singapore, and Hong Kong, Malaysia has a lower rate of economic growth. For instance, China receives a huge amount of foreign direct investment which leads to an increase in growth rate in excess of 9 per cents in the past two decades. India became the fastest growing centre of information technology and outsourcing contributing to a growth of 8 per cents annually for the past six years. Exhibit 3 and 4 indicate a huge negative investment of Malaysia which is USD 14.5 billion leading to a decrease in the account surplus (pp. 12-13). According to Figure 1 and 2, Malaysia is similar to the Asian countries in terms of starting a business but considerably worse in terms of excessive regulation which leads to a decrease in investment (p. 9). Therefore, Malaysia might face economic slowdown if this problem is ignored.
To overcome the above issue, two alternative options are recommended to boost the economic growth: ongoing increase in savings and investment rates, and ongoing technological change and human capital accumulation to ensure the stability and enhancement of its economic growth. These options will strengthen the Malaysian economic growth fundamentals.
First, the Malaysian government should continue to increase a level of investment and reduce restrictions on openness to trade to boost an inflow of foreign direct investment. It is significant to keep ongoing increase in savings and investment which lead to an increase in capital stock and income per capita. The high level of inward foreign direct investment leads to an increase in the capital stock and formation which contributes more to the Malaysian economic growth. Additionally, the transparency and consistency of the government policies should be treated for the openness to trade and competitiveness. Thus, it will boost the industrialized sector and enhance an increase in manufacturing, construction and services. For instance, the government’s surplus savings and capital should be used to channel into investments.
Second, ongoing technological change and human capital accumulation significantly boost the productivity and total productivity leading to an economic growth (Helpman 1994, p. 55). Although, the growth of output increases to 6.3 per cents in 2007, it is expected that the growth will decrease at 5.5 per cents in 2008 due to a global turndown. Notably, the Malaysian total factor productivity of more than 2 per cents annually is significant for boosting its economy apart from the growth of labor and capital inputs. For this reason, by continuing the technological change and human capital accumulation will enhance the total factor productivity and could sustain the economic growth.
Although, both two alternative options above are significant to take into accounts, it is preferably suggested that the most significant option to deal with the above issue is option one: Malaysia should increase the level of investment and reduce restrictions on openness to trade to boost an inflow of foreign direct investment. Exhibit 3 and 4 indicate the Malaysian investment was hugely negative USD 14.5 billion which leads to a decrease in their account surplus. Therefore, the government should take into account to further step their investment rates. However, increasing the level of investment alone does not exert an independent positive effect on growth, the openness to trade and human capital development in particular is needed to be tied to investment (Ventura 1997, p. 58). For this reason, the government needs to challenge more with the Asian Countries such as China and India. If they do not improve the weakness of its investment, it would clearly decline as China and India will take more foreign direct investment. At the same time, education and training should be enhanced and government regulation on trade and investment should be simplified to provide for both domestic and foreign investors an opportunity for further investment. As a result, Malaysia would be able to sustain and enhance its economic growth, and even actively compete with the global markets.
Finally, Malaysia has a remarkable economic growth. They could continue to forge ahead with their economic policy towards the achievement of vision 2020 plan. Given to its current account surplus and strong economic growth, Malaysia has clearly stayed on the course of growth. Although, it is concerned that the plan might get stuck in the middle, their economic trend indicates positive growth. However, they need to challenge more on investment, which is suggested in option one above, in order to sustain and boost the economic growth, and seize the opportunities in the next decade.
(Author: Bong Angkeara)
