the summarize of Malaysia Economy done by sophie~

FE mates, you need to study this and chapter 2 ONLY~i have deleted all those "not important"and i have COMBINED the lecture notes(PPT and 21pages word file) Good LUCK~

ME Lecture Notes

Topic 3: Industrialization [Week-3 to 5 (ISI, EOI & Heavy Industry)]

Import-substituting industrialization (ISI)

Malaysia preferred import-substituting industrialization (ISI) during the early stage of industrialization (1958 – 1968) due to the following reasons:

(i) Malaysian government wanted economic self-sufficient & conservation of foreign exchange.

(ii) Raise in the price of foreign-produced input that Malaysia, as a small country has no control (to reduce the price).

(iii) Technological innovation as Malaysian infant industries experiencing economies of scale.

(iv) Compatible with achieving high employment (low unemployment) target because ISI is labour-intensive.

Problems during the early phrase of import-substitution industrialization (ISI) in Malaysia:

(i) Rent seeking become widespread in Malaysia.

a. Companies prepared to lobby Malaysian politician and offer them directorships on the boards of subsidiary companies in Malaysia.

(ii) No pressure on the companies to seek out exports.

a. This meant that, for industries subject to economies of scale,

b. production was limited to a small domestic market and was therefore high cost.

(iii) The import substitution tended to be limited to final consumer goods, with protection being higher on those goods.

a. This increased the consumer goods prices and results in inflation.

(iv) The majority of the import-substituting industries were set up by foreign-owned companies.

a. No protection on domestic consumers

b. Always try to maximize profit

c. Profits are likely to be remitted out of the countries

(v) There was a regional concentration of industry.

a. Bias - consumer goods and domestic market

b. Bias - large town on west coast of the Peninsula

c. After incorporated into the Federation in 1963, (916) East Malaysia (Sabah and Sarawak)

i. paid higher prices for protected manufactured goods

ii. while getting few of the industrialization benefits.

The problems of export-oriented industrialization (EOI) in Malaysia:

1. A trade and economic policy aiming to speed-up the industrialization process of a country through exporting goods
2. Opposite with import substitution industrialization
3. Export-led growth
4. Developmental aid under the successive Five Year Plans
5. Opening domestic markets to foreign competition
6. Reduced tariff barriers , free trade zones and government regulations,
7. Development of the economies of the Asian Tigers: ……
8. Problems : lack of product diversity , makes the economies potentially unstable
9. There was little net foreign exchange saving.
1. Reason 1: material input averaged 70% of gross sales.
2. Even though sales from Export Processing Zones (EPZs) totaled RM23,057 million over eleven-year-period 1972-82, net export totaled only RM6,853 million after deducting the material inputs (the large majority of which were imported) of RM16,204 million.

3. Reason 2: most companies producing in EPZs were foreign-owned.

i. Most the profit will have been remitted.

ii. Net foreign exchange earnings : Approx. 10% of gross sales.

10. Wages in EPZs have been very low.
1. With increase in low-wage EPZ employment, by 1978 the real wages (after inflation adjustment) in manufacturing sector was below that of 1968.

2. There was little technology transfer or development of skills in the industries established in the EPZs and few linkages with the rest of the economy.

Topic 4: Agricultural policy [Week-6]

Effect of agricultural modernization to Malaysian Industrialization: Positive Effects

1. Provide enough food for the industrial sector population.

2. Increase productivity in agricultural sector release labour surplus to industrial sector.

3. Generate higher income to agricultural sector population. This lead to higher domestic demand and savings that support the industrial sector.

Effect of agricultural modernization to Malaysian Industrialization: Negative Effects

(i) Since prices are mainly determined by the conditions in the world markets, high productivity and output in agriculture may, without offsetting changes in relative prices, may induce the flow of resources into the agricultural sector, thereby squeezing out the manufacturing sector.

(ii) Greater export earnings contribute to increasing foreign reserves, which in turn appreciating the real exchange rates. Real appreciation of Ringgit squeezes manufacturing profits, thus lead to de-industrialization.

Our Golden Crop – Palm Oil

1. Palm Oil Plantation is a sector in which Malaysia is globally competitive
2. world 2nd largest producer
3. strong fundamentals
4. trans-fat regulation in US
5. growing demand from China, India, Pakistan & EU
6. bio-diesel

Trans-fat regulation in US

1. Starting in Jan 2006
2. food producers and manufacturers to label the trans fat content of food
3. Trans fats is a type of “unsaturated fat”
4. Not required and not beneficial for health
5. consuming trans fat could increase the risk of coronary“heart disease”
6. Soybean oil has a relatively high proportion
7. “unsaturated oil” which is an undesirable for our heart

China and India

China

1. B4 2006 : quota system
2. Start 2006 : No longer restricted by any quota
3. 1st Jan 2006 : Administration of Automatic Import License
4. Importers : need license to import CPO, Soybean, rapeseed oil
5. monitoring & to control the high inflow of oil
6. ASEAN + China : Free Trade Agreement

India

1. 70% share of imported vegetable oils in India
2. imbalance import duty : CPO vs Soybean Oil
3. import tax on CPO = 80%
4. Import tax on processed palm oil = 90%
5. crude soybean oil : import tax 45%
6. as part of its commitment to the WTO.

Bio-Diesel

1. Malaysia : pioneer palm biofuel producer
2. Palm based bio-diesel is usable in unmodified diesel engines
3. high crude oil price –catalyst
4. advantage to compete with other feedstock as it is the cheapest vegetable oil available on the world market
5. EU : actively promoted the use of biofuel to reduce its greenhouse gases emission
6. Kyoto Protocol : industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year of 1990

4 strategies of NBP

1. Producing a bio-diesel fuel blend of 5% processed palm oil with 95% petroleum diesel.
2. Encouraging the use of biofuel among the public, which will involve giving out incentives for oil retail companies to provide biodiesel pumps at stations.
3. Establishing an NEW industry standard for biodiesel quality, which will be the responsibility of SIRIM.
4. Setting up of a palm oil biodiesel plant, which is targeted to be built in Labu, Negri Sembilan.

Malaysian Envo Diesel (B5)

1. Malaysia Palm Oil Board (MPOB)
2. Envo Diesel : B5
3. a blend of 95% petroleum diesel and 5% processed palm oil (or cooking oil).
4. Common in Malaysia ????

Summary of Major Differences of Malaysian B5 and European B5
Oil	Malaysian B5	European B5
Based Oil	Palm Oil Based	Rapeseed Oil Based
% of organic oil	Add 5% processed palm oil(smiliar to cooking oil)	Add 5% Methyl ester
% of petroleum diesel	95% petroleum diesel	95% petroleum diesel
Quality	Lower Specification	Higher Specification
Workability	Yet to be proven	Proven Workability
Fulfillment of EU standard	Do not meet EU standard	Meet EU standard

Topic 5: Investment Policy [Week-7]

Foreign direct investments: Positive or negative to economy?

Positive effect of FDI to Malaysia economy development:

(i) Investors introduce modern technology and management, increasing level of technical efficiency as well as promote R&D.

(ii) Investors fill in the gap between domestic saving and investment.

(iii) Foreign exchange reserve increase due to inflow of funds.

(iv) Training by foreign firms help develop Malaysian human capital.

(v) Profit generated from FDI contributes to corporate tax revenue.

(vi) Increase employment opportunity.

(vii) New firms lead to setting up of supporting industries that are required by the set up of factories and bring prosperity to the local population.

Negative effect of FDI to Malaysia economy development:

(i) FDI may harm environmental if foreign firms investing in Malaysia are because of less stringent environmental rules.

(ii) Create fierce competition for workforce to the local industries.

(iii) Global capitalists “imperialism”.

(iv) Cultural friction that may even harm international diplomatic.

(v) Various incentives and infrastructure spending to attract FDI are from public fund (either through government borrowing or tax).

FDI in Early Development Phase

1. British colonial encouraging FDI in primary sector, predominantly in plantation and mining sector and

2. active discrimination in favour of British investors.

3. 70% held by British corporations and agencies with most investment being in rubber and tin industries.

FDI in the Import-Substitution Phase (1966 – 1980)

1. Reduce restriction on foreign capital; despite impose a 30% Bumiputera ownership requirements.

2. The main beneficiaries were still the British firms.

3. Rent Seeking

FDI in Export-Oriented Phase (Pre-Crisis 1997/8)

1. FDI : increase significantly
1. US$959 million (1985) →US$17.6 billion (1990)
2. Manufacturing projects (Electrical and electronics)

2. Investors USA, Japan and Singapore
1. began to overtake British investments.

3. Special efforts and incentives were made to attract foreign multinational to locate their offshore assembly operations in Malaysia.

Special efforts and incentives for FDI

1. Promotion of Investments Act 1986 would grant pioneer status. The incentive given is an abatement of 70% of statutory income for 5 years.
2. Incentives which allowed a tax relief up to 10 years, exemption from Malaysian income tax for 5 years and it is renewable to 10 years.
3. Declaration of electronics products as priority products for the purpose of extension of the tax relief period.
4. Establishment of Free Trade Zone (FTZ) facilities for export oriented industries. The Free Trade Zone Act was gazetted on September 5, 1991.

Incentives for MSC Status Companies

1. MSC-Status : 10-year Pioneer Status Tax Holiday
2. A 100% Investment Tax Allowance: New investments made in cyber cities,
3. Tax exemption on import of multimedia equipment
4. Duty-free: Importations of multimedia and training equipment

Incentives for MSC Status Companies

1. Ensure no internet censorship and provide competitive telecommunications tariffs
2. Freedom to borrow fund globally
3. Unrestricted employment of local and foreign knowledge workers.
4. Exemption from selective exchange control measures.

Investment Region / Corridors:

Iskandar Development Region (IDR) [now known as Iskandar Malaysia]

Background Information

(i) Officially launched on the 4^th Nov. 2006

(ii) Key engines of growth identified under the 9^th Malaysia Plan

(iii) Located in the state of Johor at southern Peninsular Malaysia

(iv) Covers 2217 km² of land area

Plan, Incentives and Expectation

(i) Plan to make IDR a strong and sustainable metropolis of international standing.

(ii) The government has committed more than RM 4 billion towards infrastructure development in the region.

(iii) On March 22, Prime Minister Datuk Abdullah Badawi announced an attractive package of investment incentives (include 10-year examption from corporate tax) for qualifying companies in six target sectors.

(iv) The six target sectors are creative industries, educational services, financial advisory and consulting, healthcare, logistics and tourism-related services.

(v) Foreign workers in IDR would be able to import or purchase a duty-free car for their personal use.

(vi) Companies will be free to employ foreign workers within the IDR.

(vii) IDR expected to draw FDI worth US$40billion in the first seven years.

(viii) IDR projected that 817,500 jobs will be created in the region up to year 2025.

(ix) Despite allow employing foreign workers, Malaysian are expected to make up the majority of the workforce there.

Northern Corridor Economic Region (NCER)

For Agriculture:

(i) Thrust 1: Improve scale and professionalisation.

a. Programs for Thrust 1: Professional land management (Estate concept) and professional marketing company to create regional brand identity.

(ii) Thrust 2: Technology & quality standards.

a. Programs for Thrust 2: Better seeds, Good Agricultural Practices (GAP) and NorthStar Agriculture Scholarships.

For Manufacturing:

(i) Trust 1: Increase E&E value added

(ii) Trust 2: Develop new sub-sectors

a. Programs: Micro-Electronics Centre of Excellence; funded secondment programs; biotechnology, agriculture downstream; oil & gas

For Services

(i) Trust 1: Strengthen tourism

(ii) Trust 2: develop logistics & trading services

a. Programs: Develop 2-3 of Langkawi’s outer islands; 2-3 main tourism clusters on mainland; incentives to encourage flow of raw & semi-finished goods into NCER

Topic 7: Financial Markets [Week-9 & 10]

Role of Financial System

The financial sector provides six major functions that are important both at firm level and at level of economy as a whole.

1. Providing payment services: It is inconvenient, inefficient and risky to carry around enough cash to pay for purchased goods and services. Financial institutions provide an efficient alternative. Examples are personal and commercial checking and check clearing and credit and debit card services.

2. Matching savers and investors: Although many people save, such as for retirement, and many have investment projects, such as building a factory or expanding the inventory carried by a family micro-enterprise, it would be only by wildest of coincidences that each investor saved exactly as much as needed to finance a given project. Therefore, it is important that savers and investors somehow meet and agree on terms for loans or other forms of finance. The presence of banks, venture capitalists or stock markets can greatly facilitate matching in an efficient manner. Small savers simply deposit their savings and let the bank decide where to invest them.

3. Generating and distributing information: One does not always think of this function. Financial system (e.g. stock markets) facilitates price matching and discoveries for stock and bond prices. Banks collect information about the firms that borrow from them, rating agencies evaluate credit worthiness of bond issuers while other financial institutions (e.g. securities firms) have research and data compilation on firms, equities, bond and economic condition.

4. Allocating credit efficiently: Channeling investment funds to uses yielding the highest rate of return allows increases in specialization and the division of labour, which has been recognized since the time of Adam Smith as key to wealth of nation.

5. Pricing, pooling and trading risk: Insurance markets provide protection against risk, but so does the diversification possible in stock markets or in banks’ loan syndications.

6. Increasing asset liquidity: Some investments are very long-lived; for example, investment for a hydroelectric plant may last a century or more. Thus, most investors in such plants would like to sell them at some point. In some cases, it can be quite difficult to find a buyer at the time one wish to sell. Financial development increases liquidity by making it easier to sell, for example in stock market or to a syndicate of banks or insurance companies.

Major objectives of Bank Negara Malaysia:

1. To issue currency and keep reserves safeguarding the value of the currency.

2. To act as a banker and financial adviser to the Government.

3. To promote monetary stability and a sound financial structure.

4. To promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia.

5. To influence the credit situation to the advantage of the country.

Microfinance / Microcredit

1. provision of financial services to low-income clients
2. self-employed,- who traditionally lack access to banking and related services.
3. founder Muhammad Yunus
4. Bangladesh
5. Grameen Bank in the 1970s
6. Based on a separate set of principles,
7. Emphasizes building capacity of a microentrepreneur, employment generation, trust building,and help to the micro-entrepreneur on initiation and during difficult times.
8. A tool for socioeconomic development

The problem of micro-finance in Malaysia:

A. Loss of Direction:

a. Revision of loan ceiling caused the average loan size jumped by 400 percent between 1994 and 1998, and this was accompanied by an increase in portfolio risk (larger loans amount to 'mission drift').

b. An increase in numbers of 'drop outs' from the program, especially among poorer members, was noted from 1994 as loan sizes increased (leakage of loans to the 'not so poor' and the 'non poor'').

c. AIM's expansion from 1994, at which time it had reached some 50 percent of its target group in Peninsular Malaysia appears to have been more in terms of value of loans outstanding than increased outreach to the hardcore poor.

B. Inefficiency of Microfinance in Malaysia:

a. In Sabah state, for example, the Yayasan Usaha Maju microfinance program grew too fast. Last year, the program lent out some $10.7 million in loans to 12,732 borrowers. But interest income on those loans was only $115,000 and operating costs were over $1.2 million. The program is now faced with cutting the number of branch offices by half.

b. AIM’s setback was due to the Single Mother Loan Scheme (SKIT), which contributes to its poor performance of collection of about 36% and also from fisherman Loan Scheme.

c. AIM still depends on the support from the government and related agencies for funding. With a fixed administrative charge of 4%, it does not cover its operating costs and could not be sustainable and self-dependent.

Topic 8: Asian Financial Crisis [Week-11]

Malaysia & Asia Financial Crisis

1. In July1997, Thai Baht was attacked by hedge funds and currency traders
2. After few days : the Malaysian ringgit was "attacked"
3. The overnight rate : 8% →over 40%.
4. Led to sell off on the stock and currency markets
5. KLCI : lost more than 50% : 1,200 →600
6. Ringgit: had lost 50% : 2.50→3.80 to the dollar
7. First recession for many years.
8. Construction sector : contracted 23.5%
9. Manufacturing shrunk 9%
10. Agriculture sector 5.9%.

11. 1998 GDP : -6.2%
12. The Ringgit plunged below 4.7
13. KLSE fell below 270 points.
14. In September 1998, various defensive measures were announced to overcome the crisis.

Malaysia & Asia Financial Crisis

1. Exchange Control : Capital Control (ECM)

2. A drastic step to fix the Ringgit at RM3.80 per dolar.

3. Restricting the Ringgit from trading overseas

4. Expansionary policy can be implemented without fearing depreciation pressure to the currency.

5. Interest rate was lowered

6. Bank Negara lowered the intervention rate from 11% prior to crisis to 5.5% in September 2000.

7. BNM lowered the bank statutory requirement ratio (SRR)from 13.5% on Feb98 to 6%

8. Approx. RM38 billion were released into Malaysian economy system.

9. Government instructed the banks to achieve a minimum 8% annual credit growth to avoid credit crunch, violating the instruction results in fine including revoking of license.

10. Such combination of responses, especially the fixing of currency and capital control, initially draw heavy criticism

The selective exchange control measures

1. The offshore Ringgit market was eliminated and currency speculator no access to Ringgit funds.
2. This was done by “freezing” the external Ringgit accounts of the non-residents in Malaysia.
3. Foreigners were not allowed to sell or lend the Ringgit to another non-resident
4. But could invest their fund freely in Malaysia.
5. Currency traders: unable to short-sell the Ringgit and change its exchange rate.
6. Government fixed the exchange rate at RM3.80 to the $dollar.
7. September 1998
8. A “12-month rule” was imposed
9. Prohibiting the repatriation of portfolio funds for 12 months.
10. To prevail instability of the financial market.
11. When the situation stabilized, “12-month rule” was replaced
12. A levy and subsequently even this levy was diluted further to apply only to dividends repatriated.
13. The “12-month rule” expired in September 1999.

The rationales of Danamodal Nasional Berhad

1. To ensure that the banking sector re-capitalization process is commercially driven and that investment decisions are made according to market-based principles.

2. Delays in addressing re-capitalization and nonperforming loans issues will have a drag effect on the financial system and economic recovery.

3. Direct capital injection by the government into banking institutions is not desirable and would lead to conflict of interest.

The challenges faced by the financial sector

1. Global financial crisis could affect Malaysian banking stability.
2. Competition from Singapore. Example: Development of KLCI futures and CPO futures in Singapore futures exchange.
3. Singapore also compete with Malaysia as the islamic financial centre in South East Asia and Asia.
4. Rapid development of Islamic banking sector could be both helpful and harmful to conventional banking : reduce economies of scale in both banking sector, hence a “lose-lose” situation.
5. Banks need to restructure and re-invest for Islamic banking (including information technology application which is costly).
6. There may be legal loophole in Islamic banking that consumers’took advantage, thus destabilizing overall banking sector.
7. Lacking of expertise in Islamic banking and finance cloud slow down the development of Islamic banking.
8. Transforming equity trading system to electronic trading may cause jobless growth in equity brokering sector. Further, there are several electronic technical problem happened in Bursa Malaysia, which may destabilize confident if problem persist.
9. Liberalization under WTO requirement and ASEAN’s AFAS may bring in strong foreign competitors. Local financial sectors (banks, securities firms, etc) may lose out and collapse.

Topic 10: Other Policies [Week-13]

Multimedia Super Corridor

1. MSC Malaysia or formerly known as Multimedia Super Corridor
2. Government initiative to leapfrog Malaysia into the information and knowledge age.
3. An area of approximately 15x50 km²
1. From the Petronas Twin Towers to the Kuala Lumpur International Airport (KLIA) and also included the towns of Putrajaya and Cyberjaya.
4. It has expanded to include the entire Klang Valley on 7 December 2006
5. Gateway to growing profits in Asia's booming information and communications technology (ICT) markets
6. with the full support of the Malaysian government
7. MSC Malaysia has since grown into an attractive resource centre full of well rounded workers, a bustling and attractive environment to work or invest in which all comes at a cost effective value - 'The Best of All Worlds‘
8. Has achieved excellence in innovation through Seven flagship applications
9. The four flagship applications include:
1. Mykad
2. Smart School
3. Electronic Government
4. Telehealth /Telemedicine

Seven flagship applications

1. R&D Cluster
2. World Wide Manufacturing Webs - remote manufacturing coordination and engineering support hub
3. Borderless Marketing Centers - multimedia customer service hub to provide electronic publishing, contnt localisation, telemarketing and remote customer care

Three phrases of Multimedia Super Corridor (MSC):

(i) Phrase 1: In this phrase, Multimedia Development Corporation (MDC) created the MSC, attract a core group of world-class companies, launch seven flagship applications, establish the framework of cyberlaws and establish Cyberjaya as the world first intelligent city.

(ii) Phrase 2: MDC would link the MSC to other cybercities in Malaysia with the world, create a web of corridors and establish more clusters of harmonize cyberlaws within the global society, and establish more intelligent globally linked cities.

(iii) Phrase 3: In this final phrase, it is expected that Malaysia will be transformed into a knowledge-based society. Being a global test bed for new multimedia and information technology applications of more world-class multimedia companies. It will have a bunch of intelligent cities that linked to the global information super highway and become the platform for the international Cybercourt of Justice in MSC.

(iv) Time frame: Phrase 1 (1996 – 2003), Phrase 2 (2003 – 2010) and Phrase 3 (2010 – 2020).

Multimedia Super Corridor (MSC) strives to offer the following:

(i) A platform for attracting world-class technology-led companies to Malaysia.

(ii) A Multimedia Utopia that offers a productive, intelligent environment within which a multimedia value chain of goods and services will be produced and delivered across the globe.

(iii) An island of excellence with multimedia-specific capabilities, technologies, infrastructure, legislation, policies and systems for competitive advantage.

(iv) A global community living on the leading edge of the Information Society.

(v) A world of Smart Homes, Smart Cities, Smarts Schools, Smart Cards and Smart Partnerships. Examples of Smart Cities are Putrajaya (electronic and paperless government) and Cyberjaya (multimedia industries, Multimedia University, MDC).

The four major objectives of Smart School according to the Malaysian Smart School – A Conceptual Blueprint:

Smart School Project was made one of the seven Flagship Applications of the Multimedia Super Corridor. Minister of Education conceptualized the Smart School in 1997 and seek to covert all public primary and secondary schools in Malaysia to smart school by the year 2010.

(i) Emphasis on maturity of though, application of information technology and the assimilation of noble values.

(ii) Proficiency in science and mathematics.

(iii) Enhance performance according to individual capabilities.

(iv) Contribution to the development of knowledge.

K-economy

1. K-economy : knowledge and the ability to use it to create new value and wealth.
2. K-economy includes all human economic activities of previous eras, such as agriculture and industry, but it introduces new activities that were not prominent or possible before.

Education Reform

Smart School

i. One of the Flagship Applications of the MSC

ii. Minister of Education conceptualized the Smart School in 1997

iii. The Ministry of Education's vision of ‘Making All Schools Smart by 2010’

iv. A learning institution that has been systemically reinvented in terms of teaching and learning as well as the improvement of the school management processes in order to help students cope and leverage on the Information Age.

Smart School Objectives:

1. To produce a thinking and technology-literate workforce
2. To democratise education
3. To increase participation of stakeholders
4. To provide all-round development of the individual
5. To provide opportunities to enhance individual strengths and abilities
6. Emphasis on maturity of though, application of information technology and the assimilation of noble values.
7. Proficiency in science and mathematics.
8. Enhance performance according to individual capabilities.
9. Contribution to the development of knowledge.