This section looks at the development experience of Malaysia in managing the saving-investment gap to achieve sustained economic growth. Table 3.12 and Figure 3.13 show how the average rates of saving and investment interacted with the current
account balance over the period 1961-2003. Gross domestic saving (S), gross domestic
investment (/), and current account balance (CA) are expressed as a ratio of GDP (Y), denoted as S/Y, I/Y and CA/Y, respectively. The current account balance equals gross
domestic saving minus gross domestic investment (CA = S -T ).33
Table 3.12: Saving, investment, and current account balance (% o f GDP)
P e rio d S/Y I/Y CA/Y
1 9 6 1 -6 5 20.1 17.1 3.1 1 9 6 6 -7 0 19.5 14.9 4 .6 1 9 7 1 -7 5 2 3 .4 22.1 1.3 1 9 7 6 -8 0 3 2 .2 2 5 .4 6 .7 1 9 8 1 -8 5 3 1 .0 3 3 .6 -2 .7 1 9 8 6 -9 0 3 5 .0 21A 7 .6 1 9 9 1 -9 6 3 8 .3 3 9 .8 -1 .5 1 9 9 7 -0 3 4 4 .9 2 6 .9 17.9 1 9 6 1 -0 3 3 1 .4 2 6 .3 5.1
Sources: compiled from BNM ’s Money and Banking (1994), B N M ’s Monthly Statistical Bulletin (various issues) and Ministry o f Finance Malaysia ’s Economic Reports (various issues).
Figure 3.13: Trends o f saving, investment and current account balance (% o f GDP)
Sources: compiled from BN M ’s Money and Banking (1994), B N M ’s Monthly Statistical Bulletin (various issues), and Ministry o f Finance Malaysia 's Economic Reports (various issues).
It is evident that Malaysia has been very successful in mobilizing saving. The average annual share of gross domestic saving to GDP rose from just 20.1 per cent in 1961-65 to 44.9 per cent in 1997-03. Gross domestic investment was primarily funded by domestic saving (which includes household saving, corporate saving and government saving) and was supplemented by foreign saving. That is, when investment was greater than saving, the resource gap was financed by current account deficits. Its average annual rate increased from 17.1 per cent of GDP in 1961-65 to a record high of 39.8 per cent of GDP in 1991-96, before the onset of the 1997-98 Asian financial crisis.
Although investment increased rapidly during the period 1961-80, Malaysia was able to finance much of the investment projects without significant recourse to external financing. Consequently, there were no large current account deficits recorded in the balance of payments. However, this pattern of development was not continued in the 1980s. During the period 1981-85, a current account deficit averaging 2.7 per cent of GDP was recorded. This historically high level of current account deficit was mainly due to the counter-cyclical pump-priming efforts of the government, following deterioration in the prices of several major export commodities. The government initiated a “big push” program that contributed to a significant rise in investment. As a result, the investment to GDP ratio rose from 14.9 per cent during the period 1966-70 to a high level of 33.6 per cent during the period 1981-85. With increasing commodity prices in the next few years, 1986-90 saw an improvement in the saving-investment gap. This saving-investment gap narrowed further through restraining fiscal spending by government. Following this structural adjustment policy, excessive consumer spending was curbed, resulting in a higher saving rate.
With rapid expansion in investment activities, the resource gap emerged once again during the period 1991-96, when some investment activities were financed by foreign capital. However, gross domestic investment was severely affected in the wake of the Asian financial crisis, and has remained sluggish. Hence, the post-crisis period saw a huge current account surplus.
In sum, it appears that the high saving rate recorded in Malaysia throughout the last four decades has enabled investment activities to be carried out without much reliance on foreign capital, although inflows of FDI have been high in Malaysia. In most periods, domestic saving has been sufficient to fund expansion in investment activities. Thus, the current account has been in surplus most of the time.
A further breakdown of saving and investment rates into public and private components shows that public saving was insufficient to support public investment prior
to the 1990s (see Table 3.13). The public sector became a net-saver from the 1990s onwards due to a significant increase in public saving. At the same time, the government actively promoted the private sector as the main driver of economic development. This was augmented by the introduction of the Promotion of Investment Act 1986 (BNM, 1999). In contrast, the private sector was a net-saver during the period 1961-90. However, this surplus in private saving turned negative during the period 1991-95 when there was a massive increase in private capital formation. Following a fall in private investment from 1996, a surplus in the private sector was again recorded.
Table 3.13: Average savings and investment gap (% o f GDP), 1961-2003
Period Public saving Public investment Surplus/ Deficit Private saving Private investment Surplus/ Deficit 1961-65 0.029 0.076 -0.047 0.132 0.095 0.037 1966-70 0.030 0.058 -0.027 0.133 0.085 0.048 1971-75 0.022 0.071 -0.049 0.167 0.148 0.019 1976-80 0.039 0.092 -0.053 0.239 0.153 0.086 1981-85 0.070 0.160 -0.090 0.184 0.174 0.010 1986-90 0.086 0.104 -0.019 0.202 0.161 0.041 1991-95 0.152 0.128 0.024 0.156 0.264 -0.108 1996-00 0.167 0.116 0.051 0.209 0.204 0.005 2001-03 0.167 0.137 0.030 0.180 0.099 0.082
Sources: compiled from BNM’s Money and Banking (1994), BNM's Annual Report (various issues), BN M ’s Monthly Statistical Bulletin (various issues), and Ministry o f Finance Malaysia’s Economic Reports (various issues)
3.10 Conclusions
Malaysia’s economic performance in the post-independence era was relatively impressive by developing country standards. For the period 1961-96, real GDP growth rate averaged 7.3 per cent. Changes in the economic environment have given rise to different needs for financial products and services. Together with the financial liberalization policies undertaken, these changes have led to the emergence of a much more sophisticated financial system. Today, the financial system plays a more important role in mobilizing and channelling resources effectively to productive sectors rather than merely serving the needs of trade financing. However, due to limited development in the capital markets, the Malaysian financial system is predominantly bank-based.
Rapid economic growth and on-going deepening in the financial sector suggest financial development and economic growth in Malaysia may be strongly related.
Chapter 4: Data, Variable Construction
and
Estimation Methodology
4.1 Introduction
The purpose of this chapter is to discuss the sources of data, the construction of variables, and the estimation methodology. The sources of data used in this study are described in section 4.2. Section 4.3 sets out the details on how to construct the variables used in the regression analyses. Finally, the proposed time series econometric techniques for the empirical tests are described in section 4.4.