The purpose of this section is to give an overview of the Malaysian economic trends from 1966 to 2007 as shown in figure 2.3 below. The Malaysian economy had enjoyed high economic growth rate for more than four decades with its strong growth momentum at an average of 6.71 % per
annum even though facing several crises during this period.
Four major crises have been identified during the observed period: oil crisis of 1973-74, commodity/electronic crisis of 1985-86, Asian currency crisis of 1997-98, and US financial crisis in 2000. The oil crisis was originated from the Organization of Petroleum Exporting Countries (OPEC) which had reduced the production of oil and placed the embargo on the nations that support for Israel such as America and Western countries. OPEC raised the price of crude oil and led to global recession including Malaysia. However, Malaysia was not seriously affected since crude oil
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constituted about 4% of total exports. Although the volume of crude oil exports declined, earnings from oil exports recorded increase of 22.7% compared to 1972. This was supported by the increased earnings boosted from the mining sector, which contributed to 16.4% of total gross exports in 1973. In addition, demand for Malaysia’s agricultural commodities rose by 73.3% compared to 1972. The strong performance from other sectors of economy and also strong private consumption and investment in 1973, had contributed to increase in real GDP by 11.7% while it was 9.4% in 1972 (Chio, 2005; Okposin and Cheng, 2000). Generally, this oil crisis benefited Malaysia in terms of strong demand for its commodity exports. Thus, Malaysia cushioned the impact of inflation of oil prices and became one of the lowest inflation rate countries in the world.
Secondly, the commodity/electronic crisis lasted between1985 and 1986 with economic decline of 1.7 % in 1985. It was considered as the first recession experience for Malaysia since its independence. Malaysia’s manufacturing sector is dominant on electronic and electrical-based products and contributed to the nation’s growth.
The global recession in 1986 had led to a weak demand for electronic and other commodity products and affected the related industries severely, particularly in the semiconductor industry, and the overall Malaysia’s GDP growth (Okposin and Cheng, 2000). The manufacturing sector recorded the decline of 3.8% while national unemployment rate increased by 3.6% in 1985 national government had taken initiatives to utilize the foreign borrowings to investment programs, major structural adjustments in domestic expenditures and embarked on privatization program on services
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and projects; overall GNP successfully at the average deficit of 9.8% against to 14% during 1980-84 (Okposin and Cheng, 2000).
Figure 2.4: Malaysian Economic Growth 1966 to 2007
Sources: Economic Planning Unit, Malaysia, World Bank Indicator 2006, Asian Development Bank Database
Thirdly, the Asian financial/currency crises10 of 1997-98 plunged
10 According to the Asian Development Bank (ADB) report 1999, there were two economic views on
the real causes of this crisis; it was caused by poor economic fundamentals and policy inconsistencies and Asia victim to a financial panic of negative sentiment prophecy.
“ According to fundamentalists, serious structural problems, regulatory inadequacies and close links between public and private institutions caused the Asian crisis”(Okposin, 2000, p.113)
Specialist in Industry and Trade Economics Division, Dick K. Nanto in CRS Report for Congress, 1998 stated that the cause of this crisis was a shortage of foreign exchange. This caused the value of
Economic Growth 1966 to 2007 -10% -5% 0% 5% 10% 15% 20% 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Year R e a l G D P G ro w th R a te GDP Ele c t r o n ic C r isis Oil C r isis Asian C u r r e n c y
C r isis USFin an c ial C r isis
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Malaysia into a severe economic crisis. The economic growth in 1998 sharply declined to negative 7.4 %. The Asian financial crisis was initiated by two rounds of currency depreciation; an extreme drop in the value of the Thai baht, Malaysian ringgit, Philippine peso, and Indonesia rupiah; and downward pressures on Taiwan dollar, South Korean won, Brazilian real, Singaporean dollar and Hong Kong dollar. The crisis began in May 1997, with the attack of foreign currency speculators on Thailand’s currency, Baht (Charles, 2008; Naurin, 2002; Aghevli, 1999).
However, the Malaysian economy was rapidly recovered through the prudent and immediate structural adjustments and financial sector reform. Malaysia adopted an orthodox approach, such as tightened fiscal and monetary policies, which included the pegging of Malaysian ringgit to the US dollar at US$1= RM3.80 (Jomo, 2001),deferred huge infrastructure projects and cutback in government expenditure in order to curb the increase in the inflation rate. In the mid-1998, the government decided to ease its fiscal and monetary policies to prevent further contraction of the economy by allowing socioeconomic projects as ensuring the living standards, especially the poor and lower income groups not badly affected. One of the efforts to ease monetary policy was by reducing the Central Bank’s intervention rate in the money market. Consequently, in 1999, the real GDP rebounded and grew to 6 %.
Lastly, the US financial crisis began in 2000. Although the Malaysian
currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically.
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economy seemed to be recovered from the financial crisis with GDP growth rate of 8.9 %, the growth was hindered because of the downward trend of
the US economy due to the collapsed of dot-com bubble11in 2000 and the
September 2001 terrorist attacks. The Malaysia’s economic policy over-emphasized exports rather than domestic demand, and made it too dependent on foreign markets. The sharp slowdown in the U.S economy implied sluggish demand for electronic and electrical products. In the middle of 2001, sales value of manufacturing sector dropped by 11.2 %, semi-conductors and other electronic components and communication equipment was shrunk by 27.4 % (The Nautilus Institute, 2001). Then, the growth rate had bounded back to a steady growth at an average of 5 % per annum from 2002 to 2007.
In terms of economic structure, the Malaysia’s economic activities can be categorized into three main sectors: primary, secondary and tertiary sectors as shown in figure 2.4. Primary sector comprises of agricultural,
forestry, fishing, mining and quarrying, while secondary sector comprises
of manufacturing alone. The tertiary sector consists of utilities, construction, wholesales and retails, hotel and restaurants, transportation, storage and communication, finance, insurance, real estate and business services and other services.
11 A group of internet-based companies which referred as dot-coms and speculated their stock prices
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Figure 2.5: Economic Activities by Percentage Share of GDP
Sources: Economic Planning Unit, Malaysia, World Bank Indicator 2006, Asian Development Bank Database
Prior to the independence in 1957, the economic development of Malaysia depended mainly on primary sector. In 1966, primary sector contributed 39.9 % to the national GDP and steadily declined to 14.2 % in 2007. The primary sector has become no longer effective because of the instability of agricultural commodity prices. Furthermore, this sector is unable to absorb the expected increase in labor force due to rapid population growth in the early 1960s. The First Malaysia Plan, 1966-70 was introduced by the national government to diversify the primary sector in order to eliminate its total dependence on rubber and tin. This was done