Macrooeconomics Analysis of Malaysia Economic Policy 2010

ECO 501 – Economics for Business

Unit Coordinator: Dr James Nayagam

Assignment 2

Due: 20th February 2010

Analysis of Malaysia Economic Policy 1998 to 2007

– with Focus on Fiscal, Monetary and Supply side

Student ID: Mr RALPH YEW (10166320)

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TABLE OF CONTENTS

I. Introduction 3

II. Analysis of Malaysia Gross Domestic Product 1998 to 2007 4

III. Analysis of Malaysia Overall Economy 1998 to 2007 5

IV. Bank Negara Malaysia Statement of Assets and 14

Liabilites 1998 to 2007

V. Seven Malaysia Plan (1996 – 2000 ) 16

VI. Eight Malaysia Plan ( 2001-2005) 17

VII. Nine Malaysia Plan ( 2006-2010 ) 18

VIII. Situational Analysis based on the political , economic,

social and technology ( PEST ) analysis 19

IX. Analysis based on Economic factor 21

X. Recommendation for Strategic Economic Action Plan 23

XI. Conclusion 24

XII. References 27

XIII. Bibliography 29

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Analysis of Malaysia Economic Policy 1998 to 2007

I. Introduction

The two types of demand-side policy are fiscal and monetary. The fiscal policy

involves the government manipulating the level of government expedinture and the

rates of tax so as to affect the aggregate demand ( Sloman, 2007). To increase

aggregate demand will involved government raising the expenditure and reducing

taxes. Thus a multiplied rise in national income and a situation known as

expansionary fiscal policy. However, when government cut expenditure and raise

taxes it will be deflationary fiscal policy.

The two main functions that can be perform by fiscal policy are:

Firstly, to prevent fundamental disequilibrium in the economy. And secondly, to

smooth out fluctuations in the economy due to business cycle – a time when

government reduce its expenditure or raise taxes during a boom phase of cycle.

Hence, preventing an ‘overheating economy’ (Sloman, 2007).

II. Analysis of Malaysia Gross Domestic Product from 1998 to 2007

YEAR GDP YEAR GDP

1998 -4.8% 2003 5.8%

1999 6.5% 2004 6.8%

2000 8.9% 2005 5.3%

2001 0.5% 2006 5.8%

2002 5.3% 2007 6.3%

(Source : Treasury Malaysia, 2008 )

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Malaysia GDP 1998 to 2007

GDP

( Source : Treasury Malaysia, 2008 )

III. Analysis of Malaysia’s Overall Economy from 1998 to 2007

ECONOMIC PERFORMANCE YEAR 1998

In 1998, Malaysia’s economic activity remains weak, and the prospects for sustained

medium-term recovery are more uncertain than the other East Asian countries in

crisis. The 4.8% percent contraction in GDP in 1998 indicate that the policy stimulus

of July 1998 has yet to take effect. Policy is becoming more expansionary in

Malaysia. There was larger fiscal deficit implemented in 1998 and through an easing

in monetary policy. At the same time, some steps were taken to strengthen the

financial and corporate sectors. However the effect of these measures on medium-

term growth prospects was jeopardized by the imposition of capital and exchange

controls and introduction of directed lending. While capital outflows have been

stemmed and external reserves have risen, investor confidence has been damaged by

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the capital controls, and some official sources of external finance has reduced

significantly. Neither source is likely to recover until the overall stance of policies is

modified.


The performance for year 1999,the Malaysian economy sprang back to life by

registering 6.5 percent GDP growth. Due to the strong rise in the country’s lead

indicator, and improvement in consumer confidence. More fundamentally, the vast

bulk of the fiscal and monetary stimulus measures took time to feed through to the

real economy since the aftermath of the 1997 Asian financial crisis. Malaysia, is one

of the main beneficiaries of the turn in the regional trade cycle, as exports represent

roughly 120% of GDP. Relatively high palm oil and rubber prices help the

agricultural sector and boosting the share of investment in GDP.


The performance for year 2000 we observed that the Malaysian economy registered

8.9 percent GDP. The higher growth rate was due to the robust growth in three

consecutive quarters: 11.9 per cent for the first quarter, 8.5 per cent for the second

quarter, and 7.7 per cent for the third quarter. The result is impressive and is attributed

to the expansionary fiscal and monetary policy since 1998. Concurrent with the high

growth, macroeconomic and financial stability has been restored. The growth is

supported by favourable external environment of high savings and low inflation. The

rise in per capita income will exceed the pre-crisis thus improving a standard of living

of the population. High GDP growth is important for its impact on employment as the

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unemployment rate has been falling from 3.4 per cent in 1999 to 3.3 per cent in 2000.

It resulted in stronger social safety net of the country.

From the supply side, the robust growth has been primarily due to the robust

performance of the manufacturing and the services sectors. Contribution by export-

and domestic-oriented industries, the manufacturing sector has turned in 22.6 per cent

output growth for the first three quarters of 2000 compared to 10 per cent growth in

the same corresponding period in 1999. The same year also saw the bank level of

non- performing loans recede with improved asset quality of the banking system.

With improved financial indicators, financial institutions are on a much stronger

footing than during the crisis period. The mergers of banking institutions which will

eventually create 10 large domestic banking groups to strengthen the sector took

place.

As for the domestic environment it continue supported by both the accommodative

monetary policy and the expansionary fiscal policy. Inflation and the balance of

payments remained healthy with accommodative monetary policy, that is

characterised by low interest rates and easy monetary conditions further strengthen

corporate recovery and boost the recovery in private expenditure and investment in

2000.


For 2001, the Malaysian economy which are very dependent of international export

was severely affected by the world economy slowdown particularly USA and Japan.

On September 11, America suffered a severe terrorist attack on its Twin Tower World

Trade Center, leading to further uncertainty. The Malaysia services sector was leading

the growth followed by construction, agriculture since manufacturing suffered a huge

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setback. The growth is led by domestic with public sector investment and

consumption. The economic growth is achieved with low inflation and

unemployment. Government continue pursuing the expansionary fiscal stimulus to

keep the domestic economic activities. The monetary policy remain accommodative

to spur domestic growth and mitigate adverse effect of external global economy

slowdown.


For 2002, Malaysia moderate economic recovery took hold after low growth of only

0.5% in 2001. The 5.3 percent GDP growth represents a notable achievement given

the many uncertainties on the global front both global trade and domestic investor

confidence. Growth was driven by public and private consumption, which in turn was

boosted by a series of fiscal measures. The economy began to show some signs of a

rebound in the first quarter of the year when it grew by 1.1% year on year. The pace

of the recovery accelerated further in the second quarter and third quarter of the year,

when growth averaged over 5% year on year.

On the production side, manufacturing and services played a lead role in

strengthening output growth in 2002. After a sharp decline of 6.2% in 2001,

manufacturing output in 2002, boosted largely by resilience of consumption demand

and a turnaround in manufacturing exports.

Overall, industrial production was still in the process of recovery in 2002. Electronics

outperformed other subsectors and recorded the highest growth, followed by

chemicals and vehicles. Agriculture, which accounted for about 8% of GDP,

continued with low growth of 0.3% in 2002. Palm oil production registered lower

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yields, but good weather conditions led to increases in the production of rubber and

cocoa. The services sector sustained its strong performance, recording robust growth

of 4.5%. Construction maintained its 2001 growth rate of 2.3%. A greater number of

government investment projects and of civil engineering activities contributed to the

subsector's performance. Since the 1997 Asian financial crisis, the Government has

maintained a fiscal pump-priming policy to boost domestic demand, aimed at

preventing recession and keeping unemployment down, in the wake of volatility in

the global economy. For 2002, the Government continued its expansionary fiscal

policies to stimulate investment and production.

Monetary policy was accommodative in 2002. Ample liquidity was available and

interest rates remained low in the financial markets. Bank lending to the business

sector remained strong. Major recipients of loans were manufacturing, wholesale and

retail trade, construction, insurance, and businesses. The focus of fiscal policy in 2002

was on boosting domestic demand in the short term, and also aimed at enhancing

long-term industrial competitiveness and labor productivity through spending on

infrastructure development and education, and training for human resources

development.


For 2003, Malaysia's exports were on a recovery track in line with the higher growth

in the global economy in the second half of 2003. This positive trend further boost

consumer and business confidence in the economy. Malaysia's exports in 2004 are

encouraging, not only based on the positive export trend in the second half of last

year, but also on the recent improved global outlook and the optimism for a sustained

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recovery in world output and world trade. This augur well with Malaysia's gross

domestic product (GDP) achieving 5.8 per cent for 2003. Malaysia export were on a

recovery trend in 2003 from a 10.4 per cent contraction in 2001, due to improved

external demand,especially electronic products. This positive trend is encouraging,

given that exports form more than 110 per cent of Malaysia's GDP. Malaysia retained

its position as the 18th largest exporter in the world in 2002 . Malaysia's ability to

maintain its position as a major trading nation in the world reflects its strong industrial

capacity torespond to global demand. The higher exports generated a substantial

increase in trade surplus for 2003. In 2003. the trade sector had generated RM68.9

billion in trade surplus, exceeding RM51.5 billion for 2002 and it helped the

economy to operate in an environment in which liquidity was ample. The increasing

export trend was contributed by a broad-based recovery from various economic

sectors. with exports of eight major sectors registered

increases exceeding 10 per cent, namely food, beverages and tobacco, crude

materials, mineral fuels and lubricants, animal and vegetable oils and fats, chemicals,

and manufactured goods. Export of electronic and electrical products was recovering.

Such broad-based recovery had a large impact on the overall economic activity and

income in the country because of the extensive linkages between these export

industries and the rest of the economy. Malaysia remains strong in terms of

international competitiveness due to high degree of economic openness, efficient

labour market, large pool of skilled labour force, efficient physical and financial

infrastructure, high commitment to research and development, and efficient

supporting industries. These factors are supported by other favourable conditions such

as low inflation, stable and pro-business macroeconomic policies, strong government

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finance, stable and low interest rate environment plus the competitive and stable

ringgit peg.


For 2004, Malaysia's economic performance registered GDP of 6.8 percent has

exceeded expectations due to stronger domestic and external demand. For the first

nine months of this year, the Malaysian economy has already registered a growth rate

of 7.6 per cent, one of the fastest growth in the region after China (9.5 per

cent),Singapore (9.2 per cent) and Hong Kong (8.8 per cent). The growth was driven

by quality sources as it was solidly backed by the strength of the private sector .

Growth in private consumption, investment and export was stronger than that of 2003.

High economic growth with low inflation in recent years have contributed to a

stronger domestic economy, particularly the private sector with healthier balance

sheet. In 2004, economic growth was well established,helped by the broad-based

growth across economic sectors. In the first nine months of this year, manufacturing

and services sectors have already grown by 11.5 per cent and 6.8 per cent,

respectively. The growth in agriculture and mining sectors was also strong. Malaysia's

economic fundamentals such as inflation, unemployment, current account surplus and

international reserves are at their best compared to their positions after the Asian

financial crisis in 1997/1998.


For 2005, the growth in the Malaysian economy continued to be achieved within a

stable price environment: the consumer price inflation remained under control.

Despite the surge in global oil prices, the consumer price index (CPI) increased

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moderately to 2.4 per cent in the first quarter of 2005. The growth in the first quarter

was within the Government's expectation. For the supply side , the growth in the first

quarter of 2005 was led by the manufacturing and services sectors. The steady growth

in both sectors has helped the economy deepen into a manufacturing-services led

growth. The growth was also in line with the Government's efforts to strengthen

domestic sources of growth. Accounting for about 58 per cent of GDP, the services

sector grew by 6 per cent. In particular, the intermediate services (such as transport,

communication and financial services) expanded by 6.6 per cent and the final services

(such as wholesale and retail trade, hotels and restaurants, electricity etc.) expanded

by 5.6 per cent. The growth in the services sector was boosted by robust private

consumption and stronger tourism and telecommunication activities. Accounting for

about 31 per cent of GDP, the manufacturing sector grew by 5.6 per cent in the first

quarter, buoyed by growth in the resource-based industries such as chemical and

rubber product industries. Growth in the manufacturing sector was constrained by the

slower growth in the export-oriented industries such as the electronics and electrical

industries, textiles and wearing apparels, and wood and wood products.

The primary sector which accounts for about 15 per cent of GDP continued to turn in

robust growth. Led by palm oil, the agriculture sector expanded by 6 per cent. The

mining sector expanded by 3.3 per cent contributed by higher production of natural

gas. The construction sector, however, contracted by 2.4 per cent in the first quarter,

partly due to fewer public sector projects.

Our domestic demand remained resilient in the first quarter of 2005, amid the

consolidation of the Government's fiscal position . Growth in private consumption

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sustained at 10.1 per cent due to higher disposable income, low interest rates and

stable employment conditions.

The health of the public finance strengthened in the first quarter of this year. The

Government registered a fiscal surplus of 2.3 per cent of GDP in the first quarter due

to strong revenue collection and lower development expenditure. Government

revenue increased by 19.2 per cent, while the development expenditure dropped by

almost 43 per cent compared to 2004. The banking sector also remained sound with a

strong capital base, improved profitability, lower non-performing loan (NPL) ratio

and steady loan growth. In the first quarter, the risk-weighted capital ratio of the

banking system was strong at 13.7 per cent and the pre-tax profits of the banking

system improved by 12.2 per cent to RM3 billion due to higher asset quality. The net

NPL ratio of the banking system trended down to 5.4 per cent at end-March this year

Annual loan growth of the banking system increased from 8.5 per cent at end-2004 to

9.1 per cent at end-March.


For 2006, as a leading trading nation trading economy, Malaysia receives greater

support from the external demand. The greater economic activity and growth in the

developed and East Asian economies absorb more than 80 per cent of Malaysian

exports translate into higher industrial activity in Malaysia and also higher Malaysia's

exports to these economies. Malaysia registered GDP of 5.8 per cent. Strong external

demand strengthen Malaysia's external position. Malaysia's international reserves

continue to remain high and strong which in turn provide further support to the ringgit

and also to the liquidity in the economy. High and stable international reserves also

provide higher coverage for Malaysia's short-term external debt.Support from the

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external demand create a virtuous cycle for the domestic economy as it further

stimulates domestic private demand through higher consumer spending and

investment activity. Because of the present high capacity utilisation in the

manufacturing sector of 75 per cent, increased external demand also reinforce the

rising trend of capital expenditure in Malaysia.

On inflation, the increase in domestic demand and activity will not exert significant

pressure on inflation as the economy has no major resource bottlenecks. Aggregate

demand is not expected to outstrip aggregate supply. The monetary and fiscal policies

are to remain prudent.


For 2007, GDP was 6.3 per cent Economic activity will also continue to be supported

by the accommodative monetary policy. Bank Negara Malaysia continues to maintain

its Overnight Policy Rate unchanged at 3.5 per cent since May 2006 in order to

support domestic economic activity. The low and stable interest rates will continue to

support healthy growth in both household and business spending in Malaysia. Despite

the stronger ringgit exchange rates, the overall monetary condition in Malaysia

remains supportive of economic activity and consistent with the long-term objective

of the monetary policy to keep economic growth on a smooth course.

The Government is fully committed to pro-growth and anticyclical economic policy.

In March last year, the Government launched its 9MP, a medium term plan to steer

the economy towards its long-term development objectives. To implement the plan,

the Government has allocated RM220 billion (including RM20 billion for projects

under Private Financial Initiatives) to be spent in the Plan period. In the 9MP, the

Government is committed to spend efficiently to ensure that the expenditure yields

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maximum benefits and high multiplier effects to the economy. The 9MP projects are

expected to have a wider distributional impact on the population and also to reduce

regional disparity. Malaysia’s economic growth has been accompanied by stable and

low inflation, helped by prudent monetary policy. Malaysia’s headline inflation

moderated substantially from its peak of 4.8 per cent in March to 3.1 per cent in

December 2006, after a one-off adjustment arising from the Government’s decision to

reduce fuel subsidy.

Higher private sector's capital spending in the manufacturing and construction sectors

was contributed by high business sentiment and high capacity utilisation. Growth in

domestic demand, in particular private investment, will remain strong, back by the

implementation of projects under the Ninth Malaysia Plan 2006-2010 (9MP).

IV. Bank Negara Malaysia Statement Assets & Liabilities 1998 to 2007

( RM million)

YEAR ASSETS YEAR ASSETS

1998 124,709 mill 2003 201,257 mill

1999 147,047 mill 2004 285,051 mill

2000 148,908 mill 2005 295,869 mill

2001 149,678 mill 2006 323,783 mill

2002 162,400 mill 2007 425,492 mill

Source : Bank Negara Malaysia ( 2008)

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

50,000,000,000

100,000,000,000

150,000,000,000

200,000,000,000

250,000,000,000

300,000,000,000

350,000,000,000

400,000,000,000

450,000,000,000

124,70...

BNM Statement of Assets & Liabilities from 1998 to 2007 ( RM million)

Bank Negara Malaysia International Reserves from 1998 to 2007 ( USD mill )

YEAR Intl Reserve ( USD mill ) YEAR Intl Reserve ( USD mill )

1998 26,196 mill 2003 44,901 mill

1999 30,859 mill 2004 66,712 mill

2000 29,885 mill 2005 70,497 mill

2001 30,848 mill 2006 82,450 mill

2002 34,601 mill 2007 101,349 mill

(Source : Bank Negara Malaysia, 2008)

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1998 1999 2000 2001 2002 2003 2004 2005 2006 20070.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

Bank Negara Malaysia International Reserve ( USD )

for 1998 to 2007

Intl Res. USD

(Source : Bank Negara Malaysia, 2008

V. Seven Malaysia Plan (1996 to 2000) – a Government Policy

In 1996 the Seven Malaysia Plan was launched and some adoption of policies

with sound macroeconomic to couner the rising challenges arise from rapid economy

during the early 90s. To attained the balanced economy envision in New

Development Policy ( NDP). Before this, the Six Malaysia Plan (1990-1995) has

managed to achieved 8.7 per cent growth. It was indeed remarkable considering the

growth was possible in an environment of low inflation. During the period it has

manage to lower the poverty and raise the standard living of all Malaysian. The per

capita income in 1995 has improved to RM 9,786 from a low of only RM 1,106 in

1970. In purchasing power parity its USD 9,470 in 1995. During this stage was a

structural transformation from key exporter of commodity to a modern industrial

economy concentration in manufacturing sector. Private sector was identified as an

engine of growth.

Under the Seven Malaysia Plan some specific policies to address the future

challenges like transforming from investment output driven growth to total factor

productivity (TFP) , the shift towards higher value added activities which are capital

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and technology intensive production processes, managing strong growth and

maintaining price stability, encouraging a global approach towards industrialization,

developing a modern outward oriented services sector, strengthening science and

technology and research and development and continued socio-economic stability

with equal distribution of nation’s wealth.

Here macroeconomic stability will emphasis on maintaining high growth and

maintaining socio-economic objectives.

VI. Eight Malaysia Plan (2001 to 2005) – a Government Policy

The key policy will be pursuing sound macroeconomic management and prudent

fiscal and monetary policy with an effort to develop a knowledgebased society,

ensuring balanced participation between within ethnic and income groups, enhancing

productivity growth in workers’ knowledge and skills, expanding the usage of ICT

within and across all sectors to accelerate the growth process, adopting a holistic

approach in addressing environmental and resources issues to attain sustainable

development. ( BNM, 2005)

Lesson from 1998 economic crisis has underscored the need to have a resilient

economy to faced the unexpected shocks and to recover with minimal adverse effects.

On continuing the macroeconmic stability , Government to encourage more domestic

investment, attract quality FDI, assist the small medium enterprises, maintain healthy

balance of payment with two-prong approach on reducing deficit on services balance

and increasing the merchandise surplus.

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VII. Nine Malaysia Plan (2006 to 2010) – a Government Policy

For the Nine Malaysia Plan is guided with a National Mission to achieve Vision

2020 and become a fully developed nation. The macro economic management will be

on sustaining growth strengthening the economy capacity to cushion against shocks.

The five main thrust are:

Firstly, to move the economic up the value chain by increasing value added in

manufacturing, services, and agriculture. Secondly, to raise capacity for knowledge

and innovation and nurture first class mentality.Thirdly, to address socia-economic

inequalities constructively and productively. Fourthly, improve the standard and

sustainability quality of life. And fifthly, to strengthen the institutional and

implementation capacity.( BNM, 2009)

VIII. Situational Analysis based on political, economy, social and

technology ( PEST )

To analyse further and come up with a strategic economic action plan, I would like to

assess it using the situational analysis consisting of the political, economic, social and

technology ( PEST ) and its influence on the growth of Malaysia beyond 2008. My

recommendation for a strategic economic plan of action among other will focus on

addressing the weaknesses I had observed from my research here. Many macro-

environmental factors are country-specific and a PEST analysis can be applied here to

address the specific issue.

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On political factors include the type of government regulations, the government

stability, rule of law, bureaucracy, Freedom of press, corruption, social or

employment legislation, regulation trends, legal issues and how the company must

operate. Some examples include:

The tax policy

Employment laws

Legal framework for contract enforcement

Intellectual property protection

Trade regulations & tariffs

Favored trading partners

Anti-trust laws

Pricing regulations

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Environmental regulations

Trade restrictions and tariffs

Political stability

On Economic Factors

Economic factors affect the purchasing power of potential customers and the

company's cost of capital. Examples of factors in the macroeconomy include:

Economic growth

Interest rates

Exchange rates

Inflation rate

Type of economic system in countries of operation

Government intervention in the free market

Comparative advantages of host country

Exchange rates & stability of host country currency

Efficiency of financial markets

Infrastructure quality and skill level of workforce

Labor costs

Business cycle stage (e.g. recession, recovery, prosperity)

Economic growth rate

Discretionary income

Unemployment rate

Inflation rate

Interest rates

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On Social factors include the demographic and cultural aspects of the external

macroenvironment. These factors affect customer needs and the size of potential

markets. Some social factors include:

Population growth rate

Age distribution

Career choice

Health consciousness and lifestyle

The emphasis on safety and security

On Technological factors, it can lower barriers to entry, influence outsourcing

decisions, and reduce minimum efficient production levels, Some technological

factors include:

Automation of plant

R&D activity

Technology incentives

The rate of technological change

IX. Analysis based on Economic Factor

On economic analysis of Malaysia policy we can analyse the economy based on its

Stage of business cycle

Current and project economic growth, inflation and interest rates

Unemployment and labor supply

Labor costs

Levels of disposable income and income distribution

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Impact of globalization

Likely impact of technological or other change on the economy

Likely changes in the economic environment

Recent research( Imbs and Wacziarg , 2003)suggested that countries with more

diversified export baskets tend to grow faster because they are less subject to term of

trade and external demand shocks. This positive correlation is however nonlinear.

High-income economies that specialize in producing certain products seem to growth

faster.This tends to reinforce Imbs and Wacziarg (2003)iii conjecture that, as

countries move through economic development process, they tend to experience three

stages of economic diversification. In the first stage, economicactivities (such as

production and exports) will concentrate around primary or resource-based

products. In the second stage, economic activities will become more diversified, as

the primary sector tends to shrink while manufacturing and service sectors start to

grow. In the third stage,countries are likely to specialize in producing

certain types of products or in providing some services, which will be reflected in

more concentrated economic activities

The challenge facing Middle-incomecountries is to fully realize their

diversificationpotential and making the transition to the thirdstage described above,

i.e. specialization in theproduction of a limited number of products orservices.

Countries that miss the transition run therisk of being caught in a “middle-income

trap”.This trap occurs when economic growth is fueleddominantly through capital

accumulation. Overtime, as the marginal productivity of capitaldiminishes, further

economic expansion becomesdifficult. It is arguedthat, for middle-income countries to

avoid themiddle-income trap, achieving economies of scalein production is essential.

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In order to enjoysustainable growth, both export diversificationand scale economies

are vital.

Some mitigating factors like the fiscal stimulus, regional development projects, sound

banking sector and sound macroeconomic policy, potential strength of ringgit, healthy

services sector, especially tourism, comfortable reserves and high savings rate among

the Malaysians. Major Concerns with Malaysia swelling fiscal deficit,

over-dependence on oil revenue, liquidity trap, ringgit weakness and

easing commodity prices.

X. Recommendation for Strategic Economic Plan of Action for Malaysia

for next 10 years

To move up from a middle income country Malaysia has a difficult challenge.

Only a few countries have successfully met this challenge. Malaysia must

immediately address a number of weaknesses. According to the World Bank report

and my own recommendation an integrated strategy with few key elements are needed

for Malaysia to move up the economic ladder, and they are:

Firstly, bolstering public finances. Going forward, fiscal rules could be considered

to stabilize public finances. There must be shifts in expenditure patterns from man on

the street to initiatives in the areas of specialization, skills and inclusiveness. In

addressing investor concern on the rising fiscal deficit the need for fiscal reform and

consolidation, and to lessen the significant role of subsidies as part of expenditures.

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May also include the broadening the narrow revenue base, and to reduce the

crowding-out of private initiative.

Secondly, by making growth more inclusive. Inclusive policies not only help

households cope with poverty, but are also essential in promoting risk-taking and

entrepreneurship. Inclusiveness policies is another building block of a competitive

economy. Well-targeted social safety nets would protect the needy in times of

adversity and reduce fiscal costs. And an effective social insurance programs could

help mitigate unemployment risks and ensure adequate pension coverage. There must

be continuous effort for government to support and encourage creation of new jobs in

new sectors especially among the small medium enterprises ( SME).

Thirdly, through specializing the economy further. Due to scarcity in resources

—both public and private. It is vital to focus on a few high value-added, innovation-

based sectors with strong potential. Improvements to the enabling environment can

facilitate this through the building of an internally-competitive and business-friendly

economy and the provision of appropriate soft and hard infrastructure to support the

knowledge economy i.e. improving the internet broadband connectivity. A more

focused technology, innovation plus urbanization policies can nurture niches of

growth by building on existing strengths in new sectors such as biotechnology,

electrical & electronics, Islamic finance, and resource-based industries.

Finally, the fourth element is by improving the skills of the workforce. Better

specialization will assist in creating demand for skilled labor thereby increasing social

and private returns. The demand can be satisfied with skilled labor which currently

are at very small percent of the labor force. The simultaneous efforts are required to

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improve the quantity and quality of skilled labor. This will need proper incentives,

and better training for teachers and workers, plus leveraging efforts of the private

sector.

XI. Conclusions

The lesson from this macro economics project paper has taught me that the

importance of understanding the equilibrium between aggregate demand and

aggregate supply. For Malaysia to climb up the income ladder among other things,

addressing skill shortages according to World Bank which also include skilled labor

shortage , tax regulations and/or high taxes. The lacking of business support services

and bureaucratic burden must be address immediately.

Also from my analysis and understanding of current global megatrends I can

better address this challenges. There are like global climate change, urbanization,

globalization, demographic change, a move into green sustainable technology. Here,

the country will be able to aligned its new economic strategy and policy to some up

with solution in addressing the constant rising inflation and unemployment problems.

In macroeconomics, to address social unrest and political upheaval the priority is in

job creation and fighting inflation.

A hard lesson learnt from the 1997 Asian financial crisis has taught the local

banks to strengthened its fundamental and its responsive policies in accordance with

Bank Negara Malaysia. With the understanding of the theory learned and analyzed

here I have worked on a strategic new economic policy transformation plan to allow

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Malaysia to take a lept from the middle income countries into a country that is

competitive globally, able to achieved sustainable growth and to move up the value

chain to become a fully developed nation within the next 10 years. Also to work on

improving private investment in Malaysia and same time attracting FDIs.

The aggregate data show a significant over investment in the years leading to

the Asian crisis. The long-term relationship between investment and its

macroeconomic determinants, points to overinvestment for about 4 years prior to

1998 exceeding 10 percent of GDP. The decline in investment following the Asian

crisis in part reflects this overinvestment. In addition, the estimates indicate that the

adjustment process is slow, suggesting that periods of over- and underinvestment are

not short-term phenomena. This may reflect the nature of excess investment, which

appears to have been concentrated in the property sector with a more durable capital

stock, and/or a shift in investor sentiment, including worsening perceptions of the

investment climate.

Another main finding is that profitability has been low in Malaysia across all

sectors studied, and has been lower than the average of emerging market economies in

the region. Furthermore, low market valuation indicators indicate that the market

expects low future profitability, which could further contribute to the sluggishness of

investment. Meanwhile, higher cash flow has a positive impact on investment,

indicating that the availability of internal funds matter for investment decisions.

With some evidence of the effects of corporate financial restructuring on investment.

Regarding firm size, smaller companies’ investment appears to depend relatively

more on cash flow and liquidity, indicating that access to external financing may be

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more constrained for smaller firms. The overall, our findings suggest that addressing

the worsening perceptions’ of the investment climate and enhancing prospects for

profitability at the corporate level are critical for sustaining the ongoing recovery for

private investment.

XII. REFERENCES

1. Sloman and Hinde,( 2007). Economics for Business, Prentice Hall,

2. Jagvev, (30 Jan 2010). Capital Dilemma, Star Biz Week, page 20-21

3. Fintan, (30 Jan 2010). The view from outside, Star Biz Week, page 22

4. Dekrey and Griffin,(2009). Learning from Leaders in Asia, Wiley & Sons.

5. Layton, A Robison, Tucker,(2004). Economics for Today,Thomson

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http://www.klse.com.my/

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