New model needed in Malaysia
By Chee Yoke Heong
Jun 26, 2009
KUALA LUMPUR - Malaysia, one of Asia's most open economies with exports accounting for over 120% of gross domestic product (GDP), has been particularly hard hit by the collapse in global trade. With no clear sign that external demand will pick up any time soon, some suggest the export-geared economy needs a new model to sustain medium term economic growth.
Slowdowns in Malaysia's major trading partners, including the United States and Europe, drove gross exports down by over 20% quarter-on-quarter in the first three months of this year, the sharpest contraction ever recorded. The fall was most precipitous in manufacturing exports, which usually account for about 35%-40% of total exports. Commodity exports, including petroleum, palm oil and rubber, also sharply dipped.
Those declines have contributed to a bearish employment outlook, raising concerns about social stability and a rising crime rate. The official unemployment rate is expected this year to rise to 4.5%, up from 3.8% last year. An estimated 33,000 jobs were lost in 2008, the bulk of which were shed in the last few months of the year as key export markets slipped into recession.
Local employers project even slacker times ahead: the Malaysian Employers' Federation projects job losses will peak at 200,000, surpassing by a wide margin the 85,000 jobs lost during the course of the 1997-98 Asian financial crisis. For much of 2008, the Malaysian government was in denial that the global economic and financial meltdown would severely impact the economy.
Officials maintained that the economy's underlying fundamentals were strong and that the country was well positioned to absorb any external shocks. This may have been true during the early stages of the crisis, which began in the US and Europe in 2007 and intensified in the first half of 2008 with scant statistical pass through to Malaysian growth.
The transmission effect was finally felt in the second half of last year, when the global crisis started to pinch big Western economies' spending and income. The Malaysian economy grew a mere 0.1% in the last quarter of 2008 compared to the same period in 2007. When then prime minister Abdullah Badawi finally launched a US$2 billion stimulus package to offset the losses, many analysts believed it was too little, too late, to significantly curb the downturn.
The bad news has since continued to pour in. In March, the government revised down sharply its previous 2009 GDP growth forecast from positive 3.5% growth to a 1% contraction. Bank Negara, Malaysia's central bank, later announced that the economy contracted a faster-than-expected 6.2% year-on-year in the first quarter, prompting the government to revise down again its forecast a 4%-5% contraction for this year.
That figure is closer to the World Bank's projected 4.4% contraction, a gloomy forecast it said in a recent report was motivated by the economy's high and undiversified dependence on exports of electronics, oil and crude palm oil coupled with a relatively small domestic market. With the prospect of negative growth for at least the next two quarters, Malaysia will technically be in recession by the second quarter of this year.
Pumping the pedal
To be sure, the government has taken steps to temporarily boost domestic demand, including options given to employees to reduce their mandatory contributions to the country's pension fund. But rising unemployment and weak job security have dampened private consumption, reflected in the sharp falls in passenger car sales, goods and services imports and local food and drink receipts.
A second and larger US$17 billion stimulus package was introduced in March and is scheduled to be disbursed over the next two years. The plan will include real economy fiscal injections, tax incentives and assistance for industry and equity investment, and specifically aims to create jobs, assist the private sector, ease the burden of day-to-day living and build capacities for future growth.
At the same time, the fiscal program has been criticized for its emphasis on bailouts for politically connected private companies. Nearly half of the committed funds are scheduled to assist the private sector, while only 17% has been earmarked for easing the general population's high and rising cost of living.
The government has in response launched a special new website that allows the public to monitor how funds under the government's two economic stimulus packages are spent. The initiative aims to break new ground in official transparency and is a reaction to the growing pressure for greater accountability over a government often viewed as mired in corruption and political patronage.
However, there are other sources of policy controversy. With mounting job losses and expectations of more lay-offs, the government has commenced a review of its foreign worker policy. With an estimated 2 million foreign workers for a total population of 26 million, immigrants have in more buoyant economic times provided a low-cost lifeline to several business sectors, but now are seen as a potential source of instability as more Malaysians lose their jobs.
The government has already called on employers who need to downsize their workforces to lay off foreign workers before retrenching locals. The government has also banned the hiring of new foreign workers in the manufacturing and service sectors and reportedly slashed its work permit approvals by over 70% this year compared to last year. It has also approved a new proposal to double the foreign workers' levy imposed on employers, a move aimed to discourage the hiring of foreign workers.
Some economists point to Malaysia's comparatively strong economic fundamentals and deft handling of the 1997-98 Asian financial crisis as indication that it will weather the crisis better than others. The government contends that the overall financial system is sound, largely because of regulatory measures taken in the wake of the previous crisis. It has also said it is satisfied with the results of periodic stress tests conducted by Bank Negara to monitor the health of the overall banking sector.
While the banking sector may be steady now, it will eventually be affected as businesses face declining revenues and hence more difficulty in repaying loans. Systemic non-performing loans are for now considered manageable, but that could rapidly change, as did the government's recent economic growth forecasts, if the recession is more prolonged than expected.
To spark more domestic growth, the government has liberalized a number of service sub-sectors, including health and social services, tourism, transport, business and computer-related services. Foreigners have also been allowed to take a greater equity share in the country's Islamic banks, investment banks and insurance companies, while the government has also issued a number of new banking and insurance licenses to foreign investors.
Whether that's enough structural change to offset the dramatic fall in exports seems unlikely. New Prime Minister Razak Najib has recently formed a national economic council, comprised of economists, sociologists and others, tasked with charting a new economic model for the country. While clearly a state rather than private-led initiative, it's an academic exercise many in Malaysia feel is long overdue - if not too late.
Chee Yoke Heong is a freelance journalist and researcher based in Kuala Lumpur, Malaysia.
Malaysia's eonomy malaise has its roots in politic, not economy principle per se.
Its economy is not fully integrated into the world's economies because its resource is not optimized. That is why it did not feel the full force of the global recession.
As much as it did not fully integrated into the world's economies to feel the blunt of the recession, so will it not fully enjoy the fruit of growth when the world's economies poise for a recovery.
Originally posted by 4sg:Malaysia's eonomy malaise has its roots in politic, not economy principle per se.
Its economy is not fully integrated into the world's economies because its resource is not optimized. That is why it did not feel the full force of the global recession.
As much as it did not fully integrated into the world's economies to feel the blunt of the recession, so will it not fully enjoy the fruit of growth when the world's economies poise for a recovery.