Report No. 4829-MA

MalaysiaStructural Chaige and Stabilization

November 15, 1983

East Asia and Pacific Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY_E_QIVALENTS

As of Augtist 31, 1983

M$1 = US$0.427M$2.338 = US$1

FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLY

ACKNOtILEDGMENT

This report is based on the findings of an economic mission

which visited Malaysia in June 1982. Members of the mission wereMessrs. F. Dhanji (mission leader) and D. Bhattasali. Mr. Bussink con-tributed substantially to the final version as did Mr. Lee Young Tak. The

report was discussed with the Malaysian Government in May 1983, in a

mission led by Mr. P. Hasan.

This document has a restricted distribution and may be used by recipients only in the performance ofiI their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOREWORD

This report was discussed with the Malaysian authorities inMay/June 1983. It highlights some of the longer-term structural challenigesfacing the economy as well as the short-term financial imbalances createdby the precipitous drop in commodity prices and the high level of publicexpenditures.

Since these discussions, the government has acted on a broad frontto address these iumediate financial problems. The budget and balance ofpayments deficits are now being addressed through a medium-term adjustmentprogram designed to bring domcstic spending closer to available resources.In addition, the government has resuscitated the administrative machinery tocontrol and monitor the country's external debt. Structural challenges areto be addressed in the Mid-Term Review of the Fourth Malaysia Plan, which isexpected to be published in March 1984. A National Agricultural Policy hasbeen agreed upon and its publication is expected soon.

These policy adjustments - which are still being worked out indetail - respond to the major themes raised, and should in sum act to restorethe economy to a sustainable and balanced growth path over the medium to longerterm. It was decided not to incorporate a discussion of these measures inthis report as this would have led to a substantial. delay in its finalization.

MALAYSIA - CEM

Table of ContentsPage No.

SUMMARY OF CONCLUSIONiS ...* ......... . , , . . 1-19

1. INTRODUCTION ................... 1-10

The 1970s: Growth and the Macroeconomy 1-3Employment and Labor Force Developments .. 3.........7...... 37Poverty and Restructuring ........................... ,.,. , 8-10

2. STRUCTURAL FACTORS ............................. ,, . 11-31

Structural Change and Consequences 11-14Growth Without Special Factors 14-18Agriculture ...... ,,. 18-21Manufacturing ............. 21-27Skilled and Semiskilled Manpower Shortages ... 27-30Conclusion ................................. 31

3. RECENT ECONOMIC DEVEL4OPMENTS ....................... 32-68

A. Overview ........... * 32-42Terms of Trade Effects on the Balance of Payments ... 33-34Real Incomes, Expenditures and CountercyclicalPolicies ....... .... 34-41

B. Fiscal Policy .......... .. ..*. ,.,*,*, *41-60

Expenditure Expansion . .. 42-43Spending Pattern: Current and DevelopmentExpenditures ........ .......... 44-45

Functional Areas of Expenditure .. 45-46Resource Mobilization ...* ................ .. 0 , ....... 46-48Recession-Related Revenue Declines ..... 49Rise of Oil-Related Taxes .. 49-50Buoyancy, Tax Structure and Development Priorities 50-51Tax Structure ....... .......... ....... 51-52The Overall Deficit .............. ........... 52-53Reducing the Deficit ... ........... *..*.........., 53-56Consequences of Deficit Reduction ..... 56-57The "Size" of Government .. .57-60

C. Money, Deficit Financing, Prices and External Debt ... 60-67Government Deficits & External and Domestic Debt ... 63-67

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Page No.

4. GROWTH AND BALANCE OF PAYMENTS ADJUSTMENT ................... 68-76

Sustainable Borrowing Levels .................. ....... 68-69Outlook for Export Volume Growth and Terms of Trade ....... 69-71Feasibility of Continued Moderate Import Growth .........., 71-74Identification of a viable Scenario ..... ................ 75-76

5. POLICY DIRECTIONS .*................ 77-86

Stabilization Policies . .... *........ ... ., 78-79Trade Policies *.... .C..C.....*e*C..e..eC..*.e..*ee.e.. . 79-80Expenditure Reducing Policies ............................. 81-83Institutional Arrangements for Economic Management ........ 83-86

ANNEXES

Statistical Appendix

SUMMARY AND CONCLUSIONS

1.. Following a hrief introduction, this summary reviews recent economicdevelopments, then considers structural developments in the economy, andconcludes with policy recommendations.

Introduction

2. For Malaysia, the 1970s were a period of generally favorable exter-nal circumstances and of rapid economic growth, in which the country made goodprogress towards achieving the poverty alleviation and ethnic restructuringgoals it set itself. Since 1980, however, developments have been much lessfavorahle. Export prices and demand deteriorated; GDP growth slowed to 4-5%p.a. from the previously experienced 8% p.a.; very large current accountdeficits followed several years of balance of payments surplus; and strainsemerged in the conduct of fiscal and monetary policy, alongside a rapid buildup of domestic and external debt. Inflation has, however, been kept at low(and recently declining) levels and there have been no difficulties insecuring new external financing at comparably favorable terms, given thecountry's initially very low level of ey-ternal obligations.

3. Several factors contributed to this outcome. With a very openeconomy the country has been badly affected by the international recessionas the terms of trade have declined substantially since 1980, and exportdemand has been weak. At the same time, to protect domestic income andemployment levels, the Government adopted counter-cyclical fiscal and monetarypolicies in 1980-82. The counter-cyclical thrust was based on the assumptionthat the OECD recession would be similar in depth and duration to mostpost-war recessions. As this presumption (shared by most analysts) wasincreasingly belied by events, the rationale for a continuing counter-cyclicalstance was progressively undermined; accordingly in mid-1982 the governmentbegan a program of expenditure retrenchment, which has continued into 1983.

4. While these factors go some way towards explaining the deteriorationin the external and fiscal balances, there is much suggestive evidence ofemergent structural problems in the economy that have a bearing on present aswell as expected future performance. These developments were largelydisguised by the very rapid rise in external earnings between 1976 and l19O;the rise in earnings, ln turn, both initiated as well as accelerated changesalready present in the development process. These include, in particular, adecline in the growth rate of agriculture, major shifts in labor deployment inthe economy, a much reduced real export growth rate, accompanied by a veryrapid growth in imports, a very high investment to GNTP ratio coupled with asubstantial fall in national savings, and a structural shift in the publicsector's role in the economy. The subsequent prolonged international

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recession may be amplifying the underlying difficulties, making them appearlarger than they really are. Nonetheless, this report suggests there havebeen more fundamental forces at work which have promoted these structuralchanges, some of which have less favorable consequences which need to becountered by appropriate policies.

Recent Economic Developments

5. The most striking feature of recent developments has been an ISpercentage point swing in the current account of the balance of payments,from a 5% of GNP surplus in 1979 to a 13% of GNP deficit in 1982. Themagnitude of this change testifies to very major changes in the economy,brought about by the international recession and the Government's counter-cyclical stance. Deficits of the magnitude encountered in 1981-82 (10-13%of GNP) are well above the average deficits of LDC's in the 1980-82 periodof world recession. They are not sustainable for long, if Malaysia's debtservice is to remain within limits acceptable to the Government.

6. Between 1980 and 1982 Malaysia's terms of trade registered a 15%decline, amounting to a loss of about 8% of national income. Comparing thosetwo years, exports remained about the same, in value, volume as well asprices (as petroleum prices increased, offsetting declines for other exportproducts). Import prices continued to increase, however, while the volumegrowth of imports decelerated significantly from earlier years.

7. Export volume performance has undoubtedly been much affected bythe recession, as international demand for many of Malaysia's commoditiesweakened. Long-term factors have also however been at work. Since 1976real exports have grown by 2% p.a. compared with growth of about 6% p.a.between 1970 and 1976. The deceleration is largely associated withlong-term declines In rubber and tin exports and near stationary exports inlogs and timber (together these commodities accounted in 1978 for close tohalf of all export earnings). Reasons are multiple and complex. In thecases of tin and timber, there has been increasing exhaustion of thesenatural resources. The government has introduced a Forest Conservationpolicy to protect the forest resource. Tin production neaked in Malaysia in1972 and has declined since; with rising costs of production, many marginaltin mines have had to be closed. The decline in rubber exports isassociated with long-term shifts in estate acreages to oil palm, lowproductivity (compared to estates) In the smallholder rubber sector, lowreplanting rates in the late sixties and early seventies which, given aseven-year gestation lag, have affected recent production, and with partialabandonment of rubher smallholdings and a loss of young labor in thesmallholder sector. On the other hand palm oil., petroleum and, tntil 1980,manufactured exports, have grown rapidly but in the aggregate they have heenunable to compensate fully for the wveaker performance of the more tradit-ional commodities. Within manufactured exports, electronics and textiles

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and clothing together account for ahout 60%. The former have performed wellthrough the recession, although with their heavy imnport intensity, their netcontribution to the economy has probahly been small. Textile and clothingexports have however declined since 1980, in contrast to the experience inother countries in the region, where similar exports grew despite theinternational recession. The IBRD Manufacturing Sector Report (April 1981)suggested that the textile industry in Malaysia may find it difficult to*.ompete internationally as a result of excessive fragmentation, inadeqtuatescale of production and outdated equipment.

8. Over the 1976-82 period, imports grew by over lO< p.a. in realterms. This rapid growth reversed historical experience prior to 1976 whenexport growth had traditionally been higher than import growth. To anextent, this is a reflection of the very substantial growth in domesticincomes that occurred between 1976 and 1980, when commodity prices virtuallydoubled, the terms of trade improved by 45%, and petroleum productionincreased very rapidly. After 1980 import growth decelerated, as monetaryand fiscal impulses did not fully compensate for the declining real valueof exports. In this context, it is difficult to ascertain the impact of theexchange rate on the relative growth of exports and imports since 1976. Tjseof different price indices to compute real effective movements of theexchange rate since 1976 yields ambiguous and sometimes conflicting results.

9. The share of investment and intermediate goods in Malaysia'simports has grown from 60% in 1965 to 80% in 1982, testifying perhaps to theprogress and success of the first stage of consumer goods import substitutionpolicies. The very rapid rise of imports in recent years, coupled with thebalance of payments deterioration, has now given rise to qutestions as towhether a generalized import substitution policy, or indeed a major "secondround" import substitution thrust, supported by protection measures (atleast in the initial phase) may be advisable. For several reasons, theMission does not believe that the case for such wholesale importsubstitution has been substantiated, although selective, efficient importsubstitution will continue to play a role in Malaysia's development. Aswill be discussed later, a substantial proportion of recent import demandhas been associated with a very high investment demand in the economy;although detailed figures are unavailable, much of this demand in tuirn hasderived from a very large public sector investment program, where importshave been of the lumpy, indivisible variety; in addition, oil and gasinvestments, with a high import content (oil production equipment, the LNXGplant, etc.) ha-also been important. The balance of paymentsdeterioration in this regard may be seen as a reflection of high investrnentsrelative to domestic resources, rather than failures of domestic productioncapacity, and should therefore be treated with policy instruments other thantariffs and quotas. Furthermore, demand for intermediate imports also showsmany special features. About 30% of intermediate imports are oil andassociated products, and about 60t are inputs to manufacturing activity.

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The scope for oil substitution is limited to replacing imports by Malaysia'shigh quality crude. Most irtermediate imports for manufacturing either feeddomestic import substituting industries or are destined ultimately forexport (e.g. electronics components). For the rest, important importcategories are fertilizers and building and construction materials, whereMalaysia already has plans for domestic Industries. The Mission"sassessment is therefore that there is little in Malaysia's (or othercountries') recent experience that would Justify a generalized erection oftariff barriers to promote domestic industry, although potential forselective import substitution continues to exist.

10. A salient feature of post-1979 developments has been the comnpre-hensive counter-cyclical (both fiscal and monetary) response to mitigate thelosses of real income in the economy. This response, albeit undertaken forcogent reasons at the time it was initiated, has by 1983 generated a set ofdomestic macroeconomic imbalances, which are mirrored in the large currentaccount deficits in the halance of payments. Thus the 13%4 of GNP currentaccount deficit of 1982 reflects a 36% investment to GNP ratio and 1national savings rate of 23% of GNP. Both these latter ratios arehistorically unusual for Malaysia, and the investment ratio particularlyhigh in an international context. The national savings rate in 1976-79 wasapproximately 30% of GNP, of which about 5 percentage points was contributedby the public sector. These high savings (about five points higher than1973-75) were associated with the very high export earnings of the period.Since then, with the cyclical impact of the recession being an importantcontributing factor, savings have dropped to their lowest levels in adecade. Moreover, it appears that in the aggregate, since 1q80, privateinvestment has outstripped private national savings, with the result that,in contrast to the past, the private sector has been running resourcedeficits alongside the normal resource deficits of the public sector.

L1. Accompanying the drop in savings, there has been a very highinvestment growth, as investment climbed to nearly 36% of GNP in 1982, from28% in 1979. Public investment rose from 10%T of GNP in 1979 to t5% in 1982,whilst private investment (including changes in stocks) rose from 18% to21%. Special features, not all quantifiable, attach to the privateinvestment program. In the first place, about a quarter of privateinvestments in 1981/82 were related to oil and gas investments; second therehas been a rapid growth in quasi public enterprises in the economy (e.g.Petronas) and the investments of these entities are counted as private inthe official accounts. Subtracting (to the extent possible) theseinvestments suggests that private investment, more narrowly defined, has inthe last two years been somewhat muted, and in all probability registerednegative real growth in 1982. Indeed, removing the special factor of oiland gas investments alone in 1981-82 is sufficient to restore a positiveresource balance to the private sector in these years. These adjustmentswould, conversely, indicate a higher level of public investments in the

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economy (through the quasi pLblic enterprises now counted as private) andhigher resource deficits in the public sector; thus they woul,l increasinglyplace the locus of the present savings/investment imbalance in the publicsector (more widely defined).

12. Public expenditures (traditionally defined) increased in realterms hy about 80% hetween 1979 and 1982 /1 in contrast to real GNP growthof less than 20%. Various measures indicate that the public sectorincreased its expenditure share in the economy by 10 to 20 percentage pointsof GNP between 1979 and 1982. Roth etrrent and development expendituresincreased rapidly in this period. Although the civil service enjoyed asubstantial upward salary revision in 1980, wages were not the fastestgrowing component of current expenditures; rather interest payments on thedebt grew three times as fast and transfers and subsidies four times.Although insuffLcient details exist on subsidies, two components wereimportant. SuEsidies to the agricultural sector increased rapidly, hutlarger than th- ie were consumption suhsidies on diesel and kerosene; in l982these amounted to 1-1/2% of GNP. Initially introduced for reasons ofpoverty impact, it now appears important to attempt a more precisequantification of leakages of these subsidies outside the poverty groups,and thereby to assess whether these subsidies serve the poverty alleviationobjective efficiently (in other countries they have been found not to do so).

13. Development expenditures between 1979 and 1982 grew even morerapidly than current expenditures (28% p.a. and 11% p.a. in real terms,respectively). These increases were across the board and evident in allfunctional areas of spending. Expenditures on defense, and commerce andindustry (mostly for restructuring purposes) accounted for about 30Z of thetotal expenditure increase. The very rapid expansion in capital expendi-tures was facilitated by the build up of implementation capacities in theThird Plan period. At the same time the public investment deflator accel-erated sharply to 1.2% p.a. in 1980 and 1981, from a previous three yearsaverage of 7-1/2% p.a., indicating a much higher money cost of implementingthe public investment program. Increasing the scope of many Fourth Planprojects may also have contributed to the expenditure expansion as well asintroduction of several projects not previously planned.

14. On the revenue side, both the cyclical impact of reduced levels ofexport prices and taxes (a loss of 3-4% of GNP) as well as some tax cuttingled to a weaker performance in most categories of revenue in 1980-82 fromthat experienced in earlier years. In fact there appears to have been anerosion (in 1981-82) of the buoyancy of the tax system, even after allowingfor the losses of revenue from commodity price declines. System buoyancyhas dropped to 1.1 recently compared with 1.4 for most of the seventies -

/I This and following figures are derived from the fiscal accounts andtherefore somewhat higher than national income account figures whichexclude transfers outside government and net lending.

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and if oil revenues are excluded, systen bouyancy has declined to about0.8./i Oil-related revenues have come to play an increasingly importantrole in financing the federal government both by way of ordinary revenues aswell as deficit financing; in 1982 this probably entailed a drawdown ofPetronas reserves held abroad, and in sum, oil-related revenues supported aquarter of Federal expenditures in 1982. The full commitment of oilrevenues to the budget, at the same time that large deficits have emerged,may signify that the ftuture budget constraint will be tighter thananticipated, particularly in view of the recent softening of oil priceswhich will have a negative impact upon the government's resource position.

15. The expenditure expansion coupled with the slower growth ofrevenues have opened up very large overall public sector deficits. Thedeficit increased from 8% of GNP in 1980 to 19% of GNP in 1981. As noted,by mid-1982 it became clear that the recession would be longer and deeperthan previous ones and that the confidence that world economic conditionsmight return to the relatively favorable situation of the late seventieswould probably be misplaced; the government thus began a process ofexpenditure retrenchment, substantially cutting back on budgetaryallocations to Ministries and Agencies. The overall deficit did,nonetheless, increase marginally in 1982, to 21% of GNP. With a policy ofcontinued restraint in 1983, but falling petroleum revenues, the fiscaldeficit is expected to come down somewhat but still remain at very highlevels.

16. Financing these large deficits has inevitably entailed substantialincreases in foreign and domestic debt. Public and publicly guaranteedexternal debt has more than doubled in the last three years fromUS$2.8 billion in 1979 to an estimated US$6.8 billion at end-1982, orexpressed differently, external debt to export ratios have doubled from 25%in 1979 to 49% in 1982. To place this in perspective, in 1981 (the lastyear for which full figures are available), within the East Asia region,Korea, the Philippines, Thailand and Indonesia had debt to export ratiosbetween 57 and 83%. While Malaysia's ratio is still lower, it is thusrapidly approaching the relative level of indebtedness of these countries.In making these comparisons, it should also be recognized that Malaysia hasexceptionally high exports as compared to GNP so that, in relation to GNP,Malaysia's debt is already quite substantial by international comparison.With the very rapid rise in foreign borrowing, Malaysia's external debtservice ratio (amortization and interest in relation to exports) has alsorisen. Over the 1976-80 period the country's debt service on public andPublicly guaranteed debt was an average 5.55 of exports. Because ofprepayments in earlier years it was only 2% of exports in 1980, but theexternal debt service rose to 7% of exports at end 1982 (about 3-1/2%of GNP). Market borrowing has become the preponderant source of externalfinance and concomitantly, variable interest loans have assumed the greater

/I This feature was also noted by the 1982 I1F tax mission to Malaysia.

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proportion of the debt profile. To an extent, the rise vlt debt service isonly a partial account as average grace periods on recently contracted debthave been about 4 years; principal repayments will become due in 1985-87 andowing to the bunching of repayment maturitie., substantial rises in thelevels of debt service on already contracted debt may be expected. Animportant point is also that during most of the seventies, rapid worldwideinflation progressively reduced the real debt burdens of borrowers,particularly on fixed interest borrowings. The recent sharp reduction inOECD inflation, expected high real interest spreads in years ahead and thegeneral move to variable interest b,orrowings are together likely to make thereal burdens of existing and prospective debt much higher in the eightiesthan in the previous decade.

17. The large deficits have also entailed substantial recourse todomestic financing, and levels of domestic holdings of public debt haveincreased by 66% since 1979, while the domestic debt to GNP ratio has risenfrom 37% in 1979 to about 48% in 1982. (The combined external and domesticdebt to GNP ratio in Malaysia in 1982 was about 75%, which places Malaysiaamongst countries with the highest stock of government debt relative toincome.) To an extent the high stock of domestic debt in Malaysia is aresult of the conscious decision taken in the last decade hy the governmentto play a malor role in stimulating development; thus, through the seventies,public sector deficits of 7-8% of GNP p.a. were largely financed fromdomestic sources and particularly from social security contributions to theEmployees Provident Fund. The more recent very rapid growth in borrowingdoes, however, present the potential of increasing financial strain in theeconomy. In 1982 government borrowing absorbed 50% of private savings; thusit could, if continued, exert a substantial crowding out effect on privateactivity as the world economy recovers. Monetary developments have now alsobecome more closely linked to the public sector deficits. In 1980 and 1981,monetary expansion does not appear to have been strongly associated withdeficit financing; in 1982, however, a very large absorption of credit bythe government in the first few months of the year led to a more accommo-datory monetary stance in the fourth quarter and monetary growth acceleratedsharply. In Malaysia, such expansion is closely correlated with higherdemand, particularly for imports, and, at a stable exchange rate, this wouldhave adverse effects on the balance of payments.

18. The implications of this build-up of debt cannot all be quantified.It is clear however that already an important effect is being felt on thegovernment's resource position. In 1975-77, total debt service consumed 12.5%of Federal revenue; in 1983 this ratio is expected to climb to 23%, and itwill increase even further in future years. The government's ability tofinance its recurrent and development budgets is thus becoming increasinglyconstrained as current revenue becomes increasingly appropriated by debtservice and other growing fixed charges (pensions and wages and salaries). Tobe sure, potential for an improved revenue effort may exist, particularly

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given the loss in buoyancy in the tax system, but improvements in thisdirection are finite and limited, in view of the already high taxation of theeconomy. Recourse to substantial deficit financing would moreover, as will beappreciated, only compound the difficulty as debt service charges would thencontinue to mount. Thus apart from the real macro-economic disequilibriumstimulated by high expenditures relative to income and reflected in thebalance of payments deterioration, there has appeared the potential for astructural financial squeeze in the public sector-s activity. The chiefinstrument to limit this would he to reduce substantially the relative size offuture deficits, and thus limit the growth of future debt.

Structural Developments

19. Before considering the policies that may be advised in Malaysia'scurrent economic circumstances, it is important to put the recent develop-ments in the context of the structural changes that have occurred in theeconomy. Firstly, it needs to be recognized that the rapid rise in incomes in1976-80 resulted to a large extent from the export "boom", with its expen-diture and multiplier effects upon the domestic economy. This raised theoverall rate of domestic growth higher than it would otherwise have been; inother words, the underlying trend growth in the economy was lower than thatactually achieved. The high growth was accompanied by important shifts inMalaysia's structure of production and foreign trade. As the volume ofdomestic expenditures rose at an annual rate of 11% over the years 1977-1980,the production pattern shifted markedly towards production of nontraded goods(service, construction, public utilities) with high excess demand fortradeables spilling over into imports (particularly for intermediate andinvestment goods). Export growth decelerated in part because of shifts oflabor resources out of agriculture hut also because of the longer termstructural factors noted above (para. 7). The complexity of this phenomenoubecomes clear however when one notes that oil palm and manufactured exportsdid quite well in this period; oil palm because of long term supply decisions,a buoyant international price and productivity improvements; in manufacturing,electroTiics were the most important contributor to gross manufactured exportearnings and here also, productivity improvements were important. The natternof manufacturing development continued, as is now generally agreed, to besomewhat lopsided however, as much of it occurred in the Free Trade Zones(where value added is commonly perceived to be quite low), asd thisdevelopment fostered only modest linkages within the sector and between thesector and the rest of the economy.

20. A further consequence of the resource boom was a majo.r shift in thedisposition of the labor force. Between 1976 and 1980 about 70% ci the totalincrease in employment in the economy was in the service and constructionsectors and only 30% in mining, manufacturing and in agriculture. Government(which was the recipient of sizeable revenues from export taxes and oilrelated taxes), and commerce, were the two largest absorbers of labor in theservice economy. Moreover, the relative labor intensity of production in thenontraded sectors led to a generalized high demand for labor in the late

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seventies and to substantial tightening in the labor markets, "Shortages" oflabor were commonly heard complaints, particularly for unskilled workers inagriculture and construction. Skilled and semiskilled manpower "shortages"also developed as exemplified by very high occupational wage differentials,and by high rates of return to Investment in skill acquisition. Althoughthere is partial evidence that real wage increases accelerated after 1978,unfortunately, little is known about wage costs in the non-traded sector inrelation to manufacturing and agriculture; it is not possible therefore toanalyze the extent to which wage increases in the service and constructionsubsectors may have exercised an upward pressure on wages elsewhere in theeconomy.

21. A primary feature of developments over the last decade is adecline in the trend growth of agriculture, from 6% p.a. between 1970-1976to 4t p.a. thereafter, with the entire growth after 1976 attributable topalm oil. Part of the reason for the decline may he found in increasinglabor constraints in the sector as young people migrated out of agricultureto occupations with prospects of higher lifetime earnings wages elsewhere;the "boom" may thus be seen to have accelerated an underlying process.Other reasons were however more long term, including the specific factorsaffecting rubber and timber production, the completion of major doublecropped rice schemes, and substantial rigidities in the land market whichprevented adaptation to the labor loss. A most important question, to whichthere can as yet he no answer, is whether the declining labor force inagriculture marks the passage of a permanent turning point, or whether inthe less buoyant growth climate of the 1980s, greater labor retention willoccur in the sector.

22. Finally, not related directly to the 1976-80 boom, but rather tosubsequent events, there have been structural developments concerning thepublic sector. The public sector appears since 1979 to have substantially,and perhaps permanently, enlarged its role in the economy. As noted earlierthe public sector investment program has expanded sharply (especially ifquasi public enterprises are included), the growth of external and domesticdebt service is beginning to limit maneuverability in the budget, andconcerns have been expressed about the decline in tax system buoyancy.

23. Accompanying therefore the many successes of the past decade hasbeen an unfolding of important and challenging structural concerns - intrade, in labor markets, in agriculture, in manufacturing and in public.'inances. The Government has indeed recognized the many dimensions of thischallenge and numerous initiatives are now afoot Lo develop appropriateresponses. These may be considered alongside policies to address theexternal and fiscal disequilibria which have developed since 1980.

Policy Directions

Macro-economic Stahilization

24. In view of the fact that continued large external deficits could

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have damaging consequences for the development of the economy over the mediumterm, and that it is no longer realistic to expect that these deficits willlargely be corrected by a major improvement in external economic conditions,the government is according the highest priority to domestic policy measuresaimed at reducing the deficits. Given the limited room for maneuver on realexport growth in the short term the burden of adjustment would need to fall onimports. Instruments to achieve this may be categorized (roughly) into thosedirectly and indirectly affecting the trade account, and the complementarypolicies to obtain an improved internal balance, largely through expenditurereduction. Potentially the most important direct action to lower absorptionof imports is to reduce further the public sector investment program andespecially those items in it which are heavily inport intensive. Asdiscussed, there are indications that recent im?,ort bills have contained largeonce for all imports by the public or "quasi pulic" sector (e.g. the LNGplant), which if not replaced by !urt.er large imports will act to reduce thefuture import bill. This approach does raise substantive administrative andinstitutional issues concerning the programming of public investments and theincorporation of the "quasi public" sector into overall fiscal planning; theseissues are being addressed by the government and are discussed further below.Additional instruments to reduce import absorption are more indirect andinvolve reductions in: the target growth rate of the economy or greaterrecourse to import substitution. Of the two, higher import substitution,if efficient, would be preferable because of its positive effects onproduction and incomes; if inefficient however, it may only aggravate existingbalance of payments problems. To avoid repetition, discussion of policyincentives to achieve efficient import substitution and improved exportpromotion are deferred to the sections concerning structural adjustments inmanufacturing and agriculture.

25. Translating the above general discussion into more concrete terms,1983 is expected to be another unfavorable year for Malaysia's external termsof trade, as real price increases for some of Malaysia's exports are morethan compensated by the recent downturn in petroleum prices. After a declineby 2% in 1983, Malaysia's terms of trade are however expected to improve byabout 1% per year during the rest of the 1980s, as the world economy graduallyrecovers from its present slump./1 This implies that by 1990 the terms oftrade will be about 5% more favorable than in 1982; while not unimportant,the positive effect on the balance of payments of less than 3% of GNP ismodest in relation to the 13% of GNP deficit in 1982.

26. Recovering from recent low growth, export volumes are prolected toincrease by about 7-1/2% p.a. in 1983 and 1984, for the most part because ofthe advent of LNG exports, but also because, for manufactures, some recoveryin export volumes from recent recession levels is assumed. Supply

/I These projections are based on the IBRD commodity price forecasts of June1983; at the same time it should be recognized that price forecasting isopen to wide margins of error, which are compounded by the greaterthan normal uncertainties concerning the evolution of the world economy.

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constraints, however, particularly on rubber, tin, log and timber exports,combine with 8% growth in manufactured exports to reduce the tread growth ofexports to about 5% p.a. thereafter. For the years immediately ahead, it willbe difficult to improve on this performance. Policies to increase exportgrowth over the medium and longer term have a close identification withstructural concerns. First it appears imperative to redress the decline inagriculture, and in the context of a suitable crop mix, encourage the sector'scontinuing contribution to export growth. Considerable potential exists, forinstance, for export diversification into high-valued food crops such asfruits, vegetables and poultry with excellent markets within the region.Initiatives in these areas may perhaps be pursued in the context of the newNational Agricultural Policy. Second, petroleum exports may provide a degreeof freedom if these can be raised in the medium term to offset weaker prices;this does need, however, to be tied into conservation concerns and anappropriate trade off between extraction and conservation. Third, much of theburden for export volume growth, rests with manufactured exports, discussedfurther below. Finally, from a macroeconomic perspective it will beimportant, if an export thrust is not to falter, that the Government reduceits absorptive pressure on the financial and skilled manpower resources of theeconomy and devise a macro-strategy which avoids strong upward pressures onreal wages over the medium term.

27. On the basis of the above projections for export volumes and termsof trade, (and some further assumptions for factor payments and transfers) thesize of the current account deficit will be determined by import volumes andinterest payments (with the latter dependent on the former, with a time lag).If it is assumed that the target GNP growth rate is 6% p.a., and that importsgrow at the same rate (in contrast to the recent past, when they increasedsignificantly faster), then there will be only a small moderation in thebalance of payments deficit (as a proportion of GNP) in 1986, followed byincreased deficits thereafter. The debt service ratio, as a proportion ofexports, would then continue to rise rapidly, surpass 20% well before the endof this decade, and climb much higher afterwards. Clearly such a developmentwould not be acceptable to the Government. The room for maneuver is howeverlimited in view of the fact that recent borrowing will inevitably lead to afurther steep increase of the debt service ratio in the next several years.If that ratio is not to surpass 20%, the balance of payments deficit willtherefore have to be reduced sharply, to 5-6% of GNP by 1986.1/ This impliesabout 3% p.a. import volume growth between 1982 and 1986. After 1986, agradual further reduction in the balance of payments deficit would be calledfor since, on the basis of the various assumptions enumerated above, theaverage balance of payments deficit which could be sustained over the longerterm would be only 2-4% of GNP. Consistent with this scenario is an importvolume growth of 5% p.a. after 1986, and a comparable GDP growth rate,unless the import intensity of the economy can be reduced.

/1 This target would cause the debt service to peak at slightly over19% in 1989 (leaving a small safety margin in case external circumstancesare less favorable than assumed here), and would, on the assumptions made,allow a gradual decline afterwards.

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?.8. The main policy question then is how to limit the growth in imports.Of the various options discussed in para. 24 above, the import sutbstitutionalternative, even if economically feasible, would take significant time toimplement. Limiting GNP growth as an instrument to reduce imports would notbe an attractive option; the resultant low economic growth might alsojeopardize the NEP objectives. The policy alternative which warrants the no8tserious consideraL;ion is therefore to reduce import absorption directly byreducing public and quasi-public expenditures on items which are heavilyimport intensive. Such a policy thrust is also indicated by the fact that anecessary corollary of the narrowing of the balance of pay aents gap is areduction in the gap between investment and savings. In principle, of course,a reduction in investments may over the medium term, reduce the growthpotential of the economy from the supply side. However, given the recent veryrapid increase in public expenditures, it may well be possible to identifyexpenditures which can be reduced without substantial growth repercussions.

29. Looking at the gap between sav'rngs and investment, the need foradjustment is also sizeable. To recapitulate briefly, in 1982 nationaLsavings were 23% of GNP whilst investment stood at 36Y of GNP (in nominalterms). If a target 5-6% current account deficit of GNP is posited for 1986,this translates into a similar level of savings-investment deficit in thatyear. On plausible assumptions concerning private and public savings behavior(requiring continued efforts to restrain public consumption) it is estimatedthat national savings could rise to 25% of GNP by 1986; thus investment willneed to be reduced by 5-6 percentage points, to 30-31% of GNP. Thilst thedistribution of adjustment between private and public sectors would need to bedetermined, there can be little doubt but that the public sector would need tocontinue to severely constrain its investment program. Illustrativecalculations indicate that for the whole economy, investment would register nogrowth in real terms from the very high levels of 1982 to achieve a 30-31%investment ratio by 1986. Moreover if the public sector were to reduce itsinvestments by 5 percentage points of GNP,this would broadly entail a 20X dropin real public investment over the next three years. On this scenario privateinvestment would grow by 4-5% p.a. in real terms. These figures are indeedillustrative and sensitive to the assumptions used (especially assumptionsconcerning inflation, the real growth of GNP and the expected levels ofprivate and public savings). But they are suggestive of a sizeable underlyingadjustment problem.

30. An adjustment of this nature will not, of course, be easy toaccomplish, particularly in view of the many current projects which, as theycontinue to be implemented, leave less room for additions to the pipeline.It should be recognized however that the economy has, over the last fewyears, been subject to very major external and internal impulses; expendituregrowth, particularly investment expenditure growth in the last two years,has been extraordinarily rapid and the level of investments has climbed toan abnormally high proportion of GNP. Without very major increases insavings (which seem unlikely in view of more constrained income growth),

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investment activity will simply have to be reduced to more sustainable levels,if continuing large external deficits are to be avoided. To the extent thatthese reductions are undertaken by the public sector it will, of course,reduce the public sector deficits and hence the requirements for newborrowing, with a highly desirable positive impact upon future debt service.

31. These suggested prescriptions do take into account the importanceof achieving the nation's NEP objectives. While it is true that they mayentail slower economic growth than was experienced in the past, it is notclear that other options exist which will allow more rapid growth. No precisequantification can be attempted of the impact of a slowdown in overall growthupon achievement of the equity and employment restructuring, and povertyalleviation, targets. It is indeed possible that the pace of restructuringmay slow. At the same time, the government has in the last two years mademajor equity purchases, particularly in foreign owned companies. Only whendata on these purchases become available will the extent of the substantialequity restructuring of the past years become known. Moreover the expectedincreases in rubber prices should have an important ameliorating effect on thepoverty of rubber smallholders - the largest single poverty group in thecountry. The more fundamenr-al point is however that a lack of adjustmentover the next few years would entail the risk of a serious growth inter-ruption later, with inca.lculable consequences for the attainment of theNEP objectives.

Structural Adjustment

32. In a sense two parellel but connected agendas of policy reform havedeveloped. The first is the need for short term stabilization. The secondagenda is more deep seated and would address the emerging structuraldevelopments - which span agriculture, manufacturing, trade, labor marketsand public finance - in an Integrated and cohesive manner. The domesticpolicy responses to structural needs will, in a fundamental sense, determinethe pace of achievement of the country s long-term social and economicgoals. There is thus much merit for the Government to consider whetherexplicit adoption of a structural adjustment program may not now be desir-able. Such an effort will bring under one umbrella the many initiatives andefforts now underway in different public agencies. It would take stock ofexisting knowledge, of present and proposed policies and set timetables foraccomplishment of an agenda of reform. Not the least advantage of thiseffort, as has been the experience of many countries, is the substantivelinking of complementarities, and repercussions that policies addressed toone field of attention have upon performance in other fields. Although thesiting of such an initiative would be for government decision, institutionalcoordinating mechanisms in the form of the "DPC and the EPPU already exist,which could explicitly demarcate the areas of most pressing concern,organize analyses and statements of proposed policies to address knownproblems and needs, (or where this cannot be done, commission the sttidiesthat are required to establish the bases for policy), and submit the contentsand sequencing of proposed institutional and policy reforms for government

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attention. Some of the elements of such a program of action are suggestedbelow. Much work on these topics is already being undertaken by concernedagencies of the government. The adoption of a structural adjustment programis then to provide a coordinating framework and implementation schedule forthese initiatives to flourish.

33. In the area of public finance there are several potential areas ofactivity. Considering first the public expenditure program, consensusshould be achieved on a wider definition of the "public sector" thanpresently exists and accounting and statistical mechanisms established toencompass public activity on a broader base. This is a vital step for theefficient conduct of macro-economic policy. As noted in the report therehbs been a very rapid growth of "off budget" agencies, which althoughdefined as private are, in large measure, quasi public. These includePetronas, the LNG corporation, HICOM, NEB, MAS, MISC, numerous majority-owned subsidiaries of PNB and PERNAS, and so on. To be sure, many of theseagencies already enter the budget process, but in limited ways; a consider-able proportion of their activities, in terms of investment programs and theraising of external loans to finance expansion, are not so counted. Theproposed programs of some of these agencies are very large and, in anenvironment of fiscal restraint, contain the potential to frustrate attemptsto match public expenditures to resource availability, and particularly,because of high import intensity of investments and large foreign exchangerequirements, to have deleterious effects on the balance of payments.

34. A second suggestion in this regard is that a broadly definedpublic investment budget should be developed. Traditionally, publicinvestment budgets in Malaysia are articulated in the Development Plan, butin the last two Plans, development allocations have largely been spent inthe first three years of Plan operation; moreover there inevitably occurmany changes in the proposed investment program by way of addition, deletionor postponement of projects. The budget does not, by its very nature,address the multi-year dimensions of an investment program and the implicitgeneration of future calls upon resources. The development of an annualpublic investment program which includes all the public and quasi publicagencies, would serve as an essential tool for policymakers in reviewingmulti-year proposed expenditure levels, in assessing the domestic credit andexternal debt implications of the program and in evaluating the likelyimpact upon imports. It would, moreover, allow the government to directresources to areas of high priority in a period of resource stringency. Inthis effort it is especially recommended that the investment program of thequasi public sector not be given privileged status, but rather considered onmerit against the claims of agriculture, education, health and so on, in thecompetition for scarce resources. To develop an overall public investmentprogram will require strengthening of coordinatton between agencies to ensureagency compliance in presentation of investment budgets on a timely basis.

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35. Although the need is urgent, these initiatives will no doubt taketime to accomplish. In the mean time, a major effort to review the publicand quasi-public investment program, and its phasing, is being undertakenby the EPU. Recently, also, the External Resources Committee under thechairmanship of the Secretary General of the Treasury has been resuscitated.It largely acts to "queue" public sector external borrowing so as to avoidan excessive Malaysian presence in the market in any period. The work ofthis Committee couLd be enlarged to assess the external debt and balance ofpayments implications of large ongoing and proposed public sector invest-ments. Summation of foreign exchange demands, import requirements, andprospective debt service burdens will provide policy makers with a quickcontrol mechanism for restricting the size of the program and phasing itscomponents in a way commensurate with macro-economic and financialstability. To accomplish this the Committee would need to be supported by astrong Secretariat, most logically perhaps from Bank Negara, which isresponsible for foreign exchange management. It is believed the authoritiesare initiating action along the lines of this suggestion.

36. Another potential item on the agenda for medium term structuraladjustment is reform of the tax system. Much work has been done on thesubject recently in Malaysia and the government has been the recipient of anIMF report. Concern has arisen about the long term buoyancy of the taxsystem as presently constituted, about the high degree of dependence upontrade taxes, and low dependence on income and sales taxes, and about thenumerous exemptions and allowances granted in several categories ofrevenues. Over the medium term it will become increasingly important forMalaysia to address this issue. This report does recommend, in concert withthe Government's objectives to alleviate poverty, that the rubber export taxnow be abolished. Although some of the regressivity of this tax wascommendably removed in recent budgets, there can be little doubt that therubber subsector, in which most of Malaysia's poor reside, has more thanborne its proportionate share in financing the nation's development. In1982 the rubber export tax is estimated to have brought the Treasury 150millon ringgit, or one percent of revenues; elimination from a fiscalstandpoint thus appears feasible. In the broader consideration of reform,it is clear that the issue of exemptions and allowances has degrees ofoverlap with industrial policy by way of incentives given to manufacturingand thus provides an example of complernentarity between policy reforms thatcould benefit from increased coordination in an integrated program.

37. A further area of interest that extends beyond public finances,though it is intimately related, is the question of data for efficientmanagement of the economy. This report, as other IBRD submissions to theMalaysian government, often remains silent on points of analysis andpossible policy suggestions because the statistical base is too weak tosupport these. In some areas the deficiency is glaring, as for instance inthe fields of income data, labor data and wage statistics - areas of muchconcern to government. In others, statistical information is inadequate toallow well formed judgment on urgent matters of policy; this would, forinstance, apply to an integrated interpretation of recent and current

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macroeconomic conditions. The need for better statistics is widelyappreciated at the technical levels of government. It is strongly to behoped that the Government will act to achieve desirable reforms in thisfield./t

38. On the agenda for further development of policy would also bepolicies towards the manufacturing sector. Little can be said by way ofrecommendation on specific policies towards industry beyond the IBRTsuggestions in the Manufacturing Sector Report of April 1981; this appliesto the general policy framework as well as to identification of subsectorswith promising growth potential (either for exports or for importsubstitution). The manufacturing sector report suggested that in view ofthe paucity of information and analysis of factors contributing to growth inthe manufacturing sector, a series of studies be performed to assist thegovernment define policy. These analyses include a study of thecontribution of Free Trade Zones in terms of value added, links with thedomestic economy, economic costs and foreign exchange contribution; anassessment of the effectiveness of export promotion incentives; anevaluation of investment incentives; and an updating of the estimates ofeffective protection and domestic resource costs of presently importsubstituting production to provide a basis for rationalising tariffpolicies. A second set of proposed studies, following a separate IBRDreport on the subject, was to improve and strengthen the provision of dataon industry. In view of the importance of these analyses for thegovernment, it is recommended that they be initiated as soon aspracticable./2

39. One initiative that the Government has recently embarked upon inthe industrial field is to propel the development of heavy industries inthe country. The size of this program is unknown, and the details of manyprojects have not yet been unveiled, but investment figures in the order ofM$6-8 billion, to be spent over 1981-86 are cited. Projects under executionor proposed include cement plants, sponge iron plants, a steel cold rollingmill, a motorcycle project, a pulp and paper mill, building of industrialsites, development of a Malaysian car and development of an associated

/I The Government has invited the IBRD to advise on improvements to thestatistical system; the report of the mission, which is expected inSeptember 1982, could serve as one input to government decision making.

/2 The IMF tax mission to Malaysia also did not feel it possible to enterthis area of policy advice, sayinR only of the proposed studies - "the(IMF) mission simply cannot underscore the importance of these studiesenough."

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engineering complex. In addition the government has plans to make extensiveuse of the country's oil and gas reserves through building refineries,petrochemical complexes, the ASEAN urea-ammonia plant and other associateddownstream developments. Because so few details are available it would beinappropriate to make extensive comment on this program. However, the pro-gram will clearly call for major investments, and have a sizeable impactupon the country's industrial base and growth prospects. In this regardcertain broad objectives and perhaps constraints merit emphasis. First,given the macrostabilization concerns discussed above, it will be importantto ensure that the projects are consistent with the public sector budget(widely defined) and tolerable increases in the national debt serviceburden. Close attention to timing could avoid marked short term impacts onthe public sector (widely defined) deficit and on the balance of payments.As noted, these impacts could be diagnosed and addressed through thedevelopment of an overall public sector investment program. Second, in viewof the size of the program and the long term strategic decisions involved inindividual projects, the long term economic effects merit close scrutiny, inorder to minimize downside risks. In particular if these industries requiresubstantial protection (through tariffs, quotas, outright import bans, etc.)or subsidization, they could add considerably to the costs of intermediatesand investment Roods in the domestic economy and thus erode Malaysia's longterm competitiveness and dampen the long term rate of economic growth. Asis widely appreciated, there is now substantial excess capacity in the worldsteel, refinery and petrochemical industries; there is potential in theprogram for the Malaysian car to significantly displace (through highprotection) cheaper alternatives. To be sure, the financial returns tothese projects may be high; it is here suggested that the economic benefitsand costs of industrial projects, and of the program as a whole, be keptunder continuous review and that major decisions be based on these analyses.

40. To list these issues is not to cast doubt upon the fundamentalimportance for Malaysia to pursue industrialization; indeed, a sustainedindustrial thrust, overcoming the multiple constraints of the moment, will becrucial to Malaysia's prospects in the eighties (and beyond). Rather it is tosuggest that rapid industrialization, based partly on new gas and petroleumresources, and the pressing short term macro-economic difficulties, pose newconditions which deserve to be addressed in the context of an integrated andcohesive industrial strategy. A case can therefore be made to consolidatethe many initiatives afoot to provide a greater degree of coherence than hashitherto existed. The above suggestions could provide elements of a workprogram that would lead to placing the industrial sector on a hase fromwhich it can sustain its highly important contribution to development.

41. A further area for attention is the agricultural sector. Pluch workhas been done in Malaysia on ways to revitalize agriculture and it is expectedthat the Government will soon announce a new National Agricultural Policy.The importance of the sector to the country s long term goals - in terms ofgrowth, equity, poverty alleviation, and foreign exchange earnings - requires

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no emphasis; indeed even in the medium term, with the more constrainedinternal and external environments facing the non-agricultural sectors, and alower overall growth rate of the economy, it may be that the decline in thelabor force in agriculture will be arrested and greater employment will needto be generated in the rural areas if greater urban unemployment and urbanpoverty are to be avoided. The IBRD's submission on this point was, brieflyput, that the key to revitalization in the agricultural sector is to avoidwidening the disparities between agricultural and non-agrictlLural earnings,such that reasonable prospects for much enhanced living standards exist forMalaysia' farmers. To achieve this several constraints and bottlenecks needto be addressed. In the first place the long term comparative advantage inthe sector should be continuously reviewed; certain crops and crop patternsmay over the long term simply prove uneconomic, (even at high levels ofphysical productivity), in the sense that they cannot be expected to providenet incomes to households comparable to alternative occupations in theeconomy. There would be little merit in promoting these crops/crop patternsas it is unlikely they would stem land abandonment or accelerated migrationfrom the sector (unless there wcee to he heavy subsidization). Secondly themost formidable constraint on achieving higher levels of income in agricultureis the small size of smallholdings. Mechanisms should be sought to increaselandholdings; these might include (i) continued emphasis on FELDA style newland settlement; (ii) linking FELDA's operations with FF.LCRA's such thatFELCRA can consolidate landholdings in areas vacated by FELDA settlers; (iii)encouraging out-of-state migration to FELDA schemes from areas or regionswhich are land scarce; (iv) recycling abandoned land through a Land Rank; (v)continued experimentation with mini-estate and joint farming schemes to reapthe scale and managerial economies of large scale farming. Thirdly, reform inthe organization and delivery of government services may be advised,particularly with regard to improved extension for smallholders, forgingstronger links between extension and research, and most important,establishing an interagency planning, policymaking and economic research groupto overcome the excessive fragmentation and dispersion of responsibilitiesamongst the many ministries and agencies involved in agriculture.

42. Apart from bringing under a coordinating institution the agenda ofstructural reforms in public finance, manufacturing and in agriculture thereis a further area that may usefully be considered; this is the field of labormarket functioning and human resource development in general. The events ofthe late 1970s indicated substantial strains in the labor market broughtabout by rapid growth, both in terms of general labor market tightening aswell as skill shortages. Forward projections of skill requirements in theeconomy continue to indicate shortfalls of qualified personnel graduating fromeducational institutions in relation to potential demand. Apart from this,labor data are fragmentary and partial, inhibiting analysis as to the futureevolution of labor markets. This evolution will continue to be of importanceto policymakers not simply for the implications for earnings, unemployment andpoverty but especially because of the macroeconomic consequences of thesectoral shifts in labor and of movements in wage levels as they affect

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Malaysia's external competitiveness. For this reason the statistical effortin this area should be greatly improved. At the same time an agenda of policystudies awaits definition and undertaking; these might include the extent andmotivations of rural/urban migration, the extent of urban unemploment andpoverty, the impact upon growth and the NEP objectives of the public sector,being the largest absorber of skilled manpower in the country, the futuredemand/supply balances for manpower, the mapping of market demands for laborupon the educational system, incentives for in-plant training and theimplications of alternative trajectories of real wage growth upon industrialand macroeconomic policy. The EPIT has indeed commenced work in these areasand it will call for a well coordinated effort in inter-ageniy cooperation.

43. Malaysia has charted a substantial and enviable development record,and in the course of sustained economic progress greatly increased percapita incomes. In the course of development, particularly reflected in thestructural shifts and realignments of sectoral activity, new problems,bottlenecks and constraints have emerged. In view of this, a fresh look atkey growth and development issues and problems of this decade and the devel-opment of an agenda of policy reform and programmatic action would he mostvaluable. Without the establishment and implementation of such an agenda forpolicy reform it may become more difficult to sustain the movement towardsMalaysia's economic and social goals.

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1. INTRODUCTION

1.01 The last Country Economic Memorandum for Malaysia entitled"Malaysia: New Perspective on the Third Malaysia Plan," was issued inOctober 1977. This CEM describes and analyses developments since that date.

1.02 Malaysia turned in an exemplary economic performance for most ofthe decade of the 1970g. Since then the economy has been strongly affectedby the the world economic recession and the usual macro-economic indicatorssuggest difficulties of an order not experienced since Independence (1957).This report, for the most part, is concerned with the genesis and evolutionof these recent difficulties and with the prospects and latitude for policymaneuver as the world economy recovers. At the same time a second order ofquestions suggest themselves. To what extent are Malaysia's current econ-omic problems the result of cyclical events, and to what degree are theyrooted in more fundamental economic developments? This second set of ques-tions is indeed more troubling and certainly more complex, and requires morecomprehensive analysis than can be given here. Nonetheless, there aresufficient signals to suggest that this should be a matter of concern;accordingly, the report takes note of several areas where factors indepen-dent of the cyclical fluctuations of the macro-economy may be constitutingbasic, long-term impediments to growth. The report is organized as follows.This introductory chapter briefly reviews performance in the 1970s. ChapterII outllnes the structural concerns which emerged as the decade closed.Chapter III presents an overview of recent developments and analyzes, insome detail, the domestic fiscal and monetary responses to the difficultexternal environment. Chapter IV develops macro-projections. Finally,Chapter V explores the options availahle to policy makers, returns to thetheme of the long-term challenges facing the economy and rounds off withpolicy conclusions.

The 1970s: Growth and the Macroeconomy

1.03 The Malaysian economy performed very well in the 1970s as GDPgrowth was sustained at about 8% in real terms and GNP per capita at the endof the decade was US$1670 (World Bank Atlas). To be sure there were occa-sional major fluctuations around the overall growth trend. The economy isvery open imports and exports each constitute about 50% of GDP (1971-80) -and large shifts in the terms of trade fairly rapidly transmit their effectsto the domestic economy. Nonetheless, prudent macroeconomic management,coupled with strong production and diversification responses, sustained arapid developmental pace. The current account of the balance of paymentsregistered five years each of surplus and deficit; the highest recordeddeficit was about 5% of GNP and the highest surplus, a similar magnitude.The government, as is traditional in Malaysia, exercised a strong presencein the ecor.umy, and overall public sector deficits averaged 8% of GNP; thesewere, however, largely financed from domestic sources, in an excellentdomestic resource mobilization effort and the debt service ratio on external

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public and publicly guaranteed debt at the end of the decade was a low2.2%./1 Consumer Price inflation was kept to _v:i average 4-5% p.a., althoughagain, there were years when price rises were more ronid.

,.04 The sectoral sources of rapid growth were several. First, agri-culture registered a long term growth of 5% p.a. The most 2mpressive aspectof this performance was the rise of oil palm. In the dualistic division ofMalaysian agriculture into estates and smallholders, the estates took thelead and planted extensively to oil palm, reducing their rubber acreages inthe process. The land development agency, Felda, opened (since 1965) about1.3 million acres of land, of which two thirds were planted to oil palm, andsettled over 70,000 families on plots varying between six and ten acres. Asa result, production increased by 20% p.a. In addition, the completion ofthe major irrigation projects of Muda and Kemubu allowed the country a 90%self-sufficiency (in good years) in rice. Second, manufacturing growth wasvery rapid and easily outpaced agriculture, at 11% p.a. In the early partof the decade this growth was propelled by the filling of import substitu-tion potential. After the first stage of import substitution was completed,manufactured exports provided the cutting edge of growth with electronics,textiles and clothing exports expanding rapidly. (In the mid-1970s, exportsof electronic items grew by over 100% p.a. in real terms and textiles andclothing by over 20% p.a. in real terms.) The third major contributor togrowth was the rise of oil in the economy. Major offshore oil finds in theearly 1970s, supplemented by further exploration as the decade proceededestablished petroleum reserves of the order of 2.4 bln barrels. Productionincreased from 6.6 million barrels p.a. in 1970 to about 101 million barrelsin 1980, a real growth of over 30% p.a. (At present rates of extraction, thecountry is expected to become a net oil importer by the early to mid-1990s).The development of oil and the increase in its price enormously enhancedforeign exchange earnings and contributed to a substantial rise in govern-ment revenues. Fourth, the service sector grew by over 8% p.a.; all servicecategories grew rapidly but especially noteworthy were Transport andCommunications (12.5% growth p.a.) and general government (9.1% p.a.).

1.05 Rapid, but nonetheless different sectoral growth rates, haveinevitably altered the structure of the economy. Agriculture in 1970accounted for 32% of GDP; by 1980 agriculture's share had fallen to 24%.Industry, broadly defined to include in addition to manufacturing, con-struction and utilities, increased its share in value added from under 20%to 26% and the service sectors also increased their share from 43% to 46%.

1 In 1976-79 the debt service ratio averaged 6% of exports: this higherratio was, in the main, due to large prepayments of principal,especialy, in 1978.

Table 1.1: GDP GROWTH AND CONTRIBUTIONS TO GDP GROWTH 1971-82(1970 prices)

Growth (X p.a.) Contributions to growth/a

1971-80 1971-75 1975-80 1980-82 1971-80 1971-75 1975-80

Agriculture 5.2 6.4 4.9 3.6 18.2 21.9 16.4Mining &quarrying 4.3 -2.1 8.1 0.0 2.6 -1.0 4.3

Manufacturing 11.3 12.3 10.9 3.7 22.8 22.8 22.8Construction &utilities 9.2 8.0 12.3 7.4 7.8 5.5 9.0

Services 8.4 8.8 8.9 7.1 48.6 50.8 47.5

GDP 7.8 8.0 8.4 5.4 100.0 100.0 100.0

Source: Statistical Annex Table.

/a Growth rates for 1971-80 and subperiods are log-linear least squaregrowth rates; for 1980-82 compound. For 1971-80 because of method ofestimation, total period growth rates may not appear to be a weightedaverage of subperiod growth rates.

Employment and Labor Force Developments

1.06 One of the major successes of the 1970s was the very rapid absorp-tion of a fast growing labor force. Through the decade population grew byabout 2.6% p.a. Higher birth rates in earlier decades, coupled withimprovements in mortality reduction led to a substantially higher rate ofgrowth of labor force entrants at 3.9% p.a. (this was also aided by a higherparticipation of women in the labor force); nonetheless employment grew evenfaster than the labor force at 4.1%, with the result that open unemploymentlevels declined from 8% to 5% through the decade./1

/1 These figures are from the Fourth Malaysian Plan. The Plan waswritten before the preliminary figures of the 1980 Population Censuswere published. These latter numbers suggest a lower total populationthan in the Plan (13.4 million as opposed to 14.3 million). However,there is now substantial agreement that the preliminary census count wasan underestimate. Improved data are unlikely to change the majorconclusions of this paragraph that labor absorption in Malaysia was veryhigh.

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1.07 An important development concerning the labor force was itssectoral distribution over the course of the decade (see Table 1.2)./1 Themost striking observation is the stationary, if not declining, labor forcein the agricultural sector. Only a few other rapidly modernizing countrieshave passed through the stage where their agricultural labor forces havealready peaked before beginning to decline - Korea is one

Table 1.2: EMPLOYMENT IN PENINSULAR MALAYSIA:GROWTf AND DISTRIBTJTION 1974-80

ContributionDistribu- to labor Growth

Persons employed ('000) tion absorption p.a. /a1974-75 1q76-78 1q79-80 1974 1980 194Q5l97980 94Th0

Agriculture 1,493 1,504 1,456 43.4 33.6 -5.5 -0.3Mining 43 38 43 1.5 1.0 0.0 0.5Manufacturing/b 516 628 756 14.6 18.3 35.9 7.9Construction 159 18.6 230 4.5 5.8 10.6 7.7Services 1,273 1,447 1,668 36.0 41.3 59.0 5.6

Total 3,484 3,803 4,153 100 100 100 3.7

Source: Statistical Appendix Table 1.6 Labor Force Surveys.

/a Log-linear, least squares growth rates.

/b There are very large discrepanzies between the manufacturing employmentfigures reported here and in other surveys. (For further discussion, seethe Manufacturing Sector Report; IBRD 1981.) In general the Industrialand Manufacturing censuses show considerably less employment in manufac-turing than shown here. The various sets of data have not beenreconciled. One hypothesis, which deserves further exploration, is thatthe Labor Force Surveys are picking up self-employed people in a veryloosely defined "informal" manufacturing sector. These people couldbetter be counted in the services sector; if so the service sectorscontribution to labor absorption would be higher than is shown in thistable.

/I An important caveat holds in that the quality of labor force data is notgood and serious inconsistencies exist between surveys.

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of the examples. The change if permanent would be a major structural devel-opment, with many important ramifications, particularly for production,income generation and achievement of above poverty line incomes in agricul-ture, as well as for employment creation in other sectors of the economy.There remains much controversy, however, as to whether the decline inagricultural labor absorption marks a permanent shift. The controversy hastwo phases; first is the interpretation of the historical record as to why,in the late 1970s, absorption of labor in agriculure was so low; second isthe question as to whether the trend will continue and, if so, with whatimplications.

1.08 There can be little doubt that labor absorption into agricultureslackened considerably in the late seventies, and in some years agriculturalemployment growth was negative. The estates sector, which accounted forabout 20% (mid-seventies) of the agricultural labor force consistently lostworkers through the decade /1; surveys conducted in 1978 and 1980 indicated35 to 43% of estates reported labor "shortages" /2. Similar surveys forsmallholders /3 indicated 40% of smallholders claiming to be short of labor.At the same time evidence accumulated of idling or abandonment of marginalagricultural land, particularly padi land, as workers migrated to othersectors. The most conservative estimate suggested the loss of 132,000 acresof padi land - about 14% of Peninsula land under padi - between 1975 and1980 /4. Finally, in response to the perceived labor "shortages," there wasa reported in-migration of Indonesian laborers (estimates vary from 50,000to 100,000 but no firm figures are available); many of the migrants foundwork in the construction sector, but also in the estates and in landclearing operations. In sum, in the late seventies, there was substantialevidence of major changes in the rural labor situation.

1.09 The major cause of the declining labor supply to agriculture is tobe found in the very high demand for labor in the late seventies in othersectors of the economy - where average earnings are higher than in agricul-ture - and in a reputed strong outmigration of Malaysian laborers to

/1 About 25,000 employees or 10% of the 1980 estate labor force left theestates between 1970 and 1980. Total estate acreages remainedthe same at the end as at the beginning of the decade, but there wasa marked reduction in estate rubber acreages, whilst acreages underoil palm grew considerably.

/2 Surveys conducted by Rubber Research Institute, Ministry of Labor andManpower, and the United Planting Association of Malaysia.

/3 Conducted by the Rubber Research Institute.

/4 IBRD NAP submission to government, Annex 1.

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Singapore and to the Middle East. Led by high commodity prices, a demand-driven domestic economic "boom" ensued and the manufacturing, constructionand services sectors commensurately increased their demand for labor. Atthe end of the period this was supplemented by a large increase in publicexpenditures. Wage statistics in Malaysia are poor but partial evidencesuggests that wages did not accelerate until 1978, but did so thereafter.The mechanics of the sectoral redistribution of labor is to be sought inmigration from the rural areas. Although the evidence is cloudy it doesappear that no widescale or large migration occurred. Rather a selectiveoutmigration of young people - aged 15 to 25 - with no permanent stake inthe agricultural labor force, occurred; this, coupled with retirements andmortality in the agricultural labor force, was sufficient to maintain astationary level of the agricultural labor pool. The youth migration has,in turn been related to two causes. First, although starting wages in thetowns may, in many cases, be lower than can be earned in agriculture,lifetime earnings in "modern" sector employment are much higher; foregoneearnings in the short term thus repay the investment, via on-the-jobtraining, in securing higher permanent income; moreover, as noted, youngpeople are not bound to agriculture through having large families or landownership. Second, there have been major improvements, in the last twodecades, in rural education standards and this may have altered preferencesfor urban as opposed to rural jobs.

1.10 The question as to whether the sectoral employment shifts alreadymark the passage of a major turning point is more difficult to answer. Theconsiderable labor market tightening in the late seventies was related toexceptional economic conditions, with high aggregate demand contributing tohigh labor demand in the nonagricultural sectors of the economy. Now, onthe downturn of the commodity price cycle, and with reduced prospects fornon-agricultural economic growth, stemming both from the world recession aswell as from structural factors to be discussed later, it is not clear thata rapid expansion of non-agricultural jobs may be forthcoming. Apart fromthe prospect of reduced non-agricultural labor demand, there is the questionof labor supply. In Malaysia, because of previous fertility and mortalitytrends, the labor force is still expected to grow rapidly. Labor supply isespecially sensitive to female participation rates, and as females receivethe benefits of education in greater numbers, their participation rates canbe expected to increase after the initial decline caused by the extendedschooling period.!1 Thus demand may well slacken in relation to supply andas a result a sharp wage explosion, as transpired in the late 70's in Korea,for instance, is unlikely to occur.

/1 Indeed throughout the seventies, female participation rates in thecrucial 15-19 year group dropped steadily as women acquired secondaryand further education. Many of these wouien will be joining the laborforce in the 1980s thus relaxing the labor supply constraint somewhat.

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In any case an overly rapid medium-term accelleration of wages would prob-ably not be In Nalaysia's interest as it could render much of the capitalstock obsolete, make industrial products less competitive, and acceleratethe migration out of agriculture. Depending on the strength of the urban-pull factors it is also unclear whether open unemployment rates in the urbanareas will rise or whether slower creation of urban jobs will cause adeceleration in urbanization necessitating more rapid job creation inagriculture. Uncertainty thus inevitably frames the formulation of policy.

1.11 Over the longer term, under almost all circumstances, economicgrowth is linked to a declining fraction of output and income generated inagriculture, and a declining fraction of the population where livelihoodsare derived from farming. Malaysia has experienced progressive reductionsin agriculture's contributions to economic activity, as Investment and laborresources have been drawn to higher productivity activities and higherincome occupations elsewhere. This is indeed natural and, at least histor-ically, one of the major ways in which sustained rises in per capita incomesoccur. Indeed there can be little doubt that in the next decade or so theagricultural labor force will begin a process of long-term decline (if ithas not already done so). There is a danger, however, that the pace ofsectoral labor relocation may be so rapid as to strain the adaptability ofthe -declining sector. In a largely tree crop agriculture, possibilitiesfor substituting machines for labor are very limited. A danger would exist,if the instruments of policy fostered an over-rapid labor relocation, of anirretrievable decline in the agricultural resource base, with inevitablefeedback effects on general growth in the economy./l

1.12 One final point needs stating; this is to note where most of thelabor vent. About 70% of the jobs created between 1974/75 and the end ofthe decade were in construction and services; the remaining 30% weredistributed between agriculture, mining and quarrying and manufacturing.The distinction can be drawn in two different ways: most jobs were creatednot in those sectors producing goods, but rather in those providingservices, and most jobs were created in sectors where output is not tradedhut rather is retained in the domestic economy. This supports the earlierimpression that most of the growth of output in the economy in the mid tolate seventies occurred in the sectors producing non-traded output (seeTable 1.1). There are important macro-economic reasons why this occurredand they are intimately associated with the "windfall" gains from highcommodity prices experienced from the mid to late 1970s and with the rise ofoil in the economy. These phenomena are now generally associated withimparting a certain structural bias to the pattern of economic development.For the moment the phenomenon is noted and returned to in a fullerdiscussion later in the next chapter.

/1 See Chapter 2 for further discussion.

Poverty and Restructuring

1.13 In 1971 the Government announced two long-term objectives thatwould guide development policies until the 1990s./I The country started thedecade with a very large poverty problem and a strong identification of racewith economic function. Accordingly an objective was set to reduce theincidence of poverty from 49% of households in 1970 to 17% by 1990. Asecond objective was set to restructure society so as to more broadlyincorporate the majority Bumiputera /2 population in the mainstream ofeconomic life. This covered three principal areas (with targets set foreach); employment by sector, employment by occupation, and ownership of theshare capital of limited companies. By 1990, Bumiputera shares at alllevels and in all types of employment are to reflect the community's sharein population and Bumiputera asset ownership in the economy is to be atleast 30% of the total. A major premise underlying the fulfillment of bothobjectives was that the country would aim for high rates of growth; highgrowth was seen as a major solvent to the poverty problem, and also apositive sum game for societal restructuring, where redistributlon wouldoccur from increments to employment and wealth, and not from existingstocks. In the decade under review the country measurably advanced toachieving the objectives it set ltself.

1.14 According to the Fourth Malaysia Plan the overall incidence ofhousehold poverty was reduced from 49% to 29% in ten years. In the ruralareas, where most of the poor live, there were about 140,000 fewer poorhouseholds in 1980 than in 1970; in the urban areas there was a 10,000household increase in the number of poor households, but witb a large totalincrease in urban households the urban incidence of poverty also decreasedsubstantially. Rubber smallholders, padi farmeTs and estate workers werethe major agricultural groups where the absolute numbers of poor droppedsignificantly. Several reasons lie behind this excellent performance,including the commodity price rises of the late seventies. Major creditmust go to the government. The strategy of high gTowth, as noted, success-fuly channeled the greater part of labor force entrants to high productivityoccupations outside agriculture where they did not become or remain poor,simultaneously reducing the pressure of population on the agriculturalresource base. Direct interventions were also important; these included,new land development and farmer resettlement, major irrigation schemes,

/1 The broad objectives were first established in 1971; the quantitativetargets came later. See Don Snodgrass IneguaLity and EconomicDevelopment in Malaysia, page VIII and pages 58-59.

/2 "Bumiputera" refers to indigenous residents of the country. On thePeninsula the group is almost wholly compTised of Malays; in Borneothere are significant non-Malay groups which come under the term.

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technical and financial support for rubber replanting, development of oilpalm on Felda schemes, extension and marketing assistance and selectivesubsidy programs. The success of many of these interventions is attested toby the fact that smallholder productivity over a range of crops increasedsignificantly during the decade with a positive impact on farm incomes.

1.15 As knowledge of the dimensions and causal determinants of povertyin Malaysia has improved, attention has increasingly turned to groups termedthe "hard core poor."/1 No operational meaning has yet been given to theterm, although experiments with various poverty lines suggest substantialnumbers of people living well below the official poverty level. In general,it is felt there is a greater intractability about the problem of hard corepoverty, and greater resistance to amelioration by traditional policyinterventions. This may arise for instance from the age of particularfarmers many of whom are perhaps too old to participate fully in incomeimproving schemes; it may arise from very large size families locked intosmall parcels of land producing crops of low net value; it may be associatedwith cultural and social factors such as bind fishermen to the sea, eventhough they thus bind themselves to poverty. Whatever the exact dimensionsof the problem there is sufficient anecdotal, and more recently statistical,evidence to suggest the problem is serious./2 The EPU is to be encouragedin its efforts to describe, identify and locate the hard core poor and toengage in the difficult task of suggesting remedies for their condition. Inthe past ten years it remains true that most of the families that crossedthe poverty line were close to it to begin with. The focus now, on thoserelatively even more disadvantaged, has much to recommend it.

1.16 On the restructuring front broad gains were also registered. Dueto its colonial past Malaysia has always had a high share of foreign owner-ship of corporate financial capital. Between 1971 and 1980 Malaysian owner-ship increased from 38% to 53% of total corporate equity. The Bumiputeratrust agencies and individuals registered the most rapid rate of growth ofasset ownership. Even so, the Bumiputera share of total equity in theeconomy in 1980, at 12.4%, was less than had been hoped for at the beginningof the decade (16%), and thus somewhat behind schedule for the achievementof the 1990 target of 30%. By contrast the Chinese community had achievedby 1980, the 40% corporate equity share assigned under the New EconomicPolicy (NEP) ten years ahead of schedule./3 The present government has on

/1 See FMP, p. 170.

/2 Three studies have recently been completed, through a joint effort byEPU, MOA, and IBRD which analyze the data from the Agricultural Censusof 1977.

/3 All figures from FMP, p. 58.

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several occasions reiterated that high economic growth is the cornerstone toultimate achievement of the NEP objectives, and that the private sector hasa major role to play in sustaining growth. In this regard there has been anactive promotion of Bumiputra/Chinese joint venture schemes to sustain thegrowth momentum, to advance a higher Bumiputera private sector participationas well as growing asset share and to avoid dampening private sector devel-opment in the short-term. Indeed, under the arithmetic of the NEP, now thatthe Chinese have achieved their 40% share, the increased Buniputera sharewill be accommodated by a reduction in foreign ownership of the country'scorporate wealth.

1.17 One major innovation has been the development of a scheme toencourage individual Bumiputera ownership of corporate equity. Because thevolume of Bumiputera savings is relatively small, as may be expected withlower average Bumiputera incomes, most of the Bumiputera holdings of corpor-ate equity have been bought in trust for the community by the government.ThUB about two-thirds of the 12.4 Bumiputera share of total corporate assetsin 1980 was held by trust agencies. The major proportion of the "blue chip"trust holdings have been packaged into a unit trust scheme, with numerousincentives for small Bumiputera investors to acquire holdings; this has beensupplemented by a comprehensive marketing effort. The response has beenexcellent /1 and marks the first widescale entry of Bumiputera individualsin acquiring corporate equity.

1.18 The official conclusion on the pace of achievement of the employ-ment restructuring targets is also favorable./2 The Bumiputera comrunityhas substantially enlarged its participation in the industrial and servicesector, whilst marginally reducing its share in agriculture. At the sametime Rumiputera participation in senior occupational and professional rankshas lagged. In large measure this is a 'catch-up' phenomenon; manyBumiputera individuals received advanced professional and managerial train-ing in the 1970s and as they progressively enter the economy, Bumiputeraunder representation in senior occupational ranks should decrease.

/1 As of October 1982 the scheme had attracted over 1 million Bumiputerainvestors.

/2 FMP p. 55 "There has been significant improvement In the distributionof employment in line with the restructuring target.'

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2. STRUCTURAL DEVELOPMENTS

2.01 In the face of the many achievements of the last decade it seemsperplexing that structural factors have emerged which have the potential toinhibit as high an achievement in the rest of the decade ahead. The recentrecessionary conditions may, of course, be amplifying difficulties makingproblems appear larger than they really are. But an analysis of develop-ments in the last decade, combined with a prospective look at the economy'scapacity to generate growth does signal areas for concern. In part thesestructural developments are the result of very rapid growth which hasfostered the development of a very different economy than that whichobtained at the beginning of the 19709. A changio'g economic structure hasunmasked new determinants of growth and correspondingly established differ-ent needs and priorities if the economy's growth poteatial is to befulfilled. In part the comprehensive government response to the recessionhas also contributed to defining areas of structural concern./l Finally, foran economy as open as Malaysia's where export led gr-owth has always been theengine of development, the reduced prospects for trade in the decade aheadposes new challenges to the traditional adaptability and responsiveness ofthe economy. This chapter first takes an overview o.' how macroeconomicdevelopments since 1976 have contributed to a changit;g economic structure,before considering these structural changes in greater detail. The nextchapter reviews macroeconomic developments from the standpoint of demand-management policies and the pressing need for macro economic stabilization.

Structural Change and Consequences

2.02 A major feature that stands out in a retrospective look at theMalaysian economy in the 1976-80 period is the very rapid rise in exportearnings. This rise can be attributed to three factors; first the extraord-inary commodity price boom in which most of Malaysias½ commodities shared,and which led to a near doubling of the export price index between 1976 and1980; second, as noted earlier, the very rapid growth in production of oilfor export, with oil export values trebling in the period and the value ofoil exports climbing to about 24% of merchandise export earnings by 1980;and third, the export diversification into and rapid growth of palm oil,electronics, clothing and textiles, all of which gained from the prevailingclimate of high international prices. As a result export earnings rose fromM$9.5 billion in 1974/75 to M$28 billion in 1980 - a near threefoldincrease. This rise in earnings was equivalent to over 60% of the increasein nominal GDP in the period. Import prices grew much less rapidly than didexport prices and, as a result the terms of trade improved sharply, leadingto higher income and expenditure growth than growth in production. The

/1 See Chapter 3.

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country was able to run comfortable halance of payments surpluses. Exchangerate movements are difficult to surmise. The nominal effective exchangerate, weighted by trade shares of Malaysia's major trade partners showedalmost no change over the period, that is to say in nominal terms theexchange rate neither appreciated nor depreciated. In real terms, differentresults are obtained depending on whether one uses the Malaysian CPI or PPIas a measture of domestic inflation.

2.03 This large increase in external earnings naturally had majorincome and relative price effects upon the domestic economy and upon theeconomy's evolving structure - in part initiating changes and, in part,accelerating changes already present in the development process. Oneanalytical framework drawing upon many recent country experiences has beendeveloped to explain the economics of "resource booms" and in particular toexplore the structural effects upon economies of sudden rapid rises inexternal earnings, usually through the discovery of oil or major terms oftrade effects./l It is suggested in this framework, that the expenditureand exchange rate effects of sudden rises in export earnings set in motionprocesses that lead to comparative disadvantage in the sectors producinggoods for trade, to substantial enlargements in the sectors providingnontraded output, to relatively large increases in the size of the publicsector (often the recipient of oil revenues) to major shifts in labordeployment, and to high savings and investment ratios to GNP. This patternhas now been observed in many countries and although the degree of struc-tural impact upon Malaysia of the export boom has probably not been sosevere as in other cases, nonetheless some of the mechanisms at work can beperceived, and effects observed. One important conclusion is that, as theboom fades, the structure of the economy needs to be readapted to adifferent order of challenges.

2.04 To provide perspective to the discussion xhich follows a summaryof some of the principal structural features of recent development can begiven. (a) The rapid rise in export earnings had important income,expenditure and multiplier effects upon the domestic economy, raising theoverall rate of domestic growth higher than it would otherwise have been; toan extent, therefore the underlying trend growth in the economy was lowerthan that actually achieved, and this feature was perhaps disguised by the

/I See, for instance, Jehangir Amouzevegar "Oil Wealth: A Very MixedBlessing" Foreign Affairs, 1982. A summary paper with an extensivebibliography is provided by M. Corden and P. Neary in the December lq82issue of the Economic Journal.

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very rapid rise in export earnings. (b) The traded goods component of theeconomy underwent marked shifts. Real export growth particularly oftraditional exports decelerated sharply after 1976 whilst real import growthsoared. The decline in real export growth was mostly related to supplyconstraints In the agricultural sector and to the increasing exhaustion oftin as a resource. Import growth was strongly associated with the highgrowth of incomes. An important feature of the rise in imports was agrowing dependence upon imports of investment and intermediate goods which,in structural terms, may be difficult to compress as private activity picksup. (c) There were major shifts in the disposition of labor in theeconomy. As noted in Chapter 1 about 70% of the increase in employmentsince 1976 has been in the sectors providing nontraded output, andparticularly in the government sector. Unfortunately, little is known aboutrelative wage costs in the services sector in relation to manufacturing andagriculture; it is not possible therefore to analyse the extent to whichupward wage pressures in government service may have exercised an upwardpressure on wages elsewhere in the economy. There is, however, muchancillary evidence of substantial labor tightening in the economy after 1978and partial evidence of real wage acceleration after 1978. Apart from ageneral labor market tightening, skill and semiskilled "shortages" developedas exemplified by very high occupational wage differentials, and by highrates of return to investment in skill acquisition. As the government isthe largest absorber of skilled manpower in the country, its liberal expan-sion through this period may have contributed to skill shortages; (d) Aprimary fact about the period is a decline in the trend growth of agricul-ture, from a production growth of 6% p.a. between 1970-1976 to 4% p.a.thereafter, with the entire growth after 1976 attributable to palm oil.Part of the reason for the decline may be found in increasing laborconstraints in the sector as young people migrated out of agriculture tooccupations with prospects of higher lifetime earnings wages elsewhere; the"boom" may thus be seen to have accelerated a nascent process. Otherreasons were however more long term, including the switches in estate plant-ing decisions in the late sixties away from rubber to oil palm, a decline inrubber replanting rates after a major period of replanting between 1960 and1965 with a lagged effect on production growth and substantial rigidities inthe land market which prevented adaptation to the labor loss; (e) Manufac-turing growth was very rapid, propelled by export of electronics (whereproductivity gains were enormous but also where inport intensity is veryhigh, leading to uncertainty as to the net gains), and to a lesser extent byexports of clothing and textiles (which have considerably weakened inperformance after 1980). The pattern of manufacturing development continuedhowever, to be somewhat lopsided, as much of it occurred in the Free TradeZones (where value added is commonly perceived to be quite low), and thisdevelopment fostered only modest linkages within the sector and between thesector and the rest of the economy; (f) There was a growing dependence, foran ambitious public sector investment program on revenues derived from oil;

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(g) Finally, investment ratios to GNP rose very rapidly. With theexception of the last two observations which are dealt with extensively inChapter III, each of these features can be considered in turn.

Growth without Special Factors

2.05 Only a loose interpretation can be made of what the underlyingtrend growth rate of the economy was in the mid to late seventies. Certainelements have to be subtracted as being special or nonrenewable; theseinclude the very high commodity prices and the rise of oil. Thus, it can becalculated that if, in the latter part of the seventies, commodity priceshad advanced at only the level of international inflation and if oil had notregistered the dramatic growth in production and prices it did, the level ofnational income growth,/1 would have been about 3 points p.a. lower thanthe 11-12% p.a. actually experienced. This only counts the direct effectsof these factors. Clearly multiplier impacts are also important as theexpenditure of the primary incomes led to substantial second order effectsvia the demand side. Whilst it is difficult to be categorical about thesesecond order effects, experiments with different multipliers suggest theeffects to have been substantial, and of the order of another 3 points p.a.of income growth. Again, this is not to deny that growth in the period wasexceptional; but it was in some measure due to factors that may not reasonr-ably be expected to be repeated, at least not in the dramatic conjunctionexperienced. As growth represents increments to economic activity andincome, given the Ononrepeatability' of these factors, the prospectiveunderlying growth may be somewhat smaller than usually assumed. Thisbecomes more apparent when examinilg the historical sources of growth-trade,agriculture and manufacturing.

2.06 Two important features which were masked by the commodity priceboom have been a very rapid growth in real imports since 1976 accompanied bya weaker real export performance. Between 1970 and 1976 real export growthfrom Malaysia was 6% p.a., and real import growth was lower at 3% p.a.Between 1976 and 1982 real export growth first continued at its earlier pacebut after 1979 real exports fell for two years, and they have not regainedtheir 1979 level since; over the whole period they grew by only 2% p.a. Onthe other hand real imports grew by 11% p.a. between 1976 and 1982./2 Thedecline in real export growth has undoubtedly been heavily influenced by therecession and as the recession ends, exports may certainly be expected torecuperate. However, examination of underlying performance and prospectsreveals longterm and structural factors which could

/1 GNP adjusted for terms of trade changes.

/2 All growth rates quoted are loglinear, least squares estimates toestablish the trend, and are not end point comparisons.

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Table 2.1: EVOLUTION OF MERCILANDISE TRLADE

A. Volume Indices /a ard Import Dependence

1971 1974 1975 1976 1977 1978 1979 1980 1981 1982

Export Vol. Index 59.6 72.1 72.5 90.6 91.6 100.0 110.3 106.0 98.1 103.4

Import Vol. Index 61.5 81.8 66.8 74.6 83.8 100.0 117.6 135.7 132.4 143.0

Imports as % ofdomesticproduction forhome market /b

(1) 65.6 83.4 82.8 85.9 85.5 93.1 113.4 133.0 122.5 118.9(2) 51.1 88.4 6;.3 66.3 66.8 73.4 97.7 97.7 92.6 n.a.

B. Structure of Trade (% of GNP)

1965 1970 1975 1980

Exports (Proportion of Exports)Rubber 38.0 33.4 21.9 16.4Tin 23.0 19.6 13.1 8.9Logs and timber 9.0 16.5 12.1 14.1Palm oil 3.0 5.1 14.3 9.2Petroleum 2.0 3.9 9.2 23.7Manufactures 8.0 11.9 21.4 21.7Other 17.0 9.6 8.0 6.0

Imports (Proportion of Imports)Consumption goods 42.3 28.5 22.2 18.4Investment goods 21.2 25.2 31.7 30.0Intermediate goods 29.7 35.3 41.3 49.9Imports for re-export 6.8 11.0 4.8 1.7

/a Indices have been weighlted to a 1978 base./b- 'Domestic production for the home market is defined as GDP-minus exports.

Imports in Row (1) are total imports. In Row (2) Total Imports have beenadjusted for re-exports, intermediate imports used in export production,defense imports and selective identifiable capital imports used for exportactivities (e.g., oil rigs).

Source: Treasury Economic Report, Bank Negara, Dept. of Statistics and IBRDestimates.

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potentially inhibit export growth, while the economy's dependence on importsnecessary for growth has increased apace. This changed balance may beexpected to have an impact upon macroeconomic performance and balance ofpayments prospects in future years.

2.07 The weaker export performance in large measure stems from declinesin rubber and tin export volumes and near stationary growth in exports ofsaw logs and timber. For reasons intrinsic to each of these commodities,none can be expected to sustain high long-term growth rates in the futurealthough, in the short term, they may rebound from their present highlydepressed levels. Rubber production entered a period of decline from 1976in part because of the shifts in composition from high yielding estates tolower yielding smallholders, in part because of the labor shifts discussedearlier and also perhaps because of reduced levels of replanting in the latesixties which have changed the maturity structure of trees towards the loweryielding age range. Tin, for reasons of long-term resource depletion,peaked in production in 1972 and production has declined since. Forests inthe Peninsula have reached the limits of sustainable exploitation and theimplementation of the National Forestry Policy should reduce wood exportsfrom the Peninsula substantially in the future. Higher wood exports fromSarawak will compensate for this loss, but wood exports are unlikely torecover the dynamism of earlier yeas. The maturing of these three basic,traditional activities has meant a search for alternatives to maintain themomentum of growth. In this, Malaysia has been very successful as theInewe ' export commodities, petroleum, palm oil and manufactures have grownrapidly since 1976./1 M4oreover LNG has been added as a major export in 1983with the completion of a liquefying plant in Sarawak. But in the aggregatethese newer commodities have been unable to fully compensate for the growthdeclines in traditional commodities, with the result that the overall exportgrowth rate has slowed.

2.08 In 1978-81, rubber, forest products and tin between them accountedfor 40% of exports. Thie expected slower growth of these commodities in thefuture will call for major efforts to spur development of more dynamicexport lines. (Some implications of the lower growth of these commoditieson the medium term aggregate export growth rate are chartered in Chapter 4.)This achievement will have important bearings on the resources available tothe economy and become a substantial conditioning factor on the flexibilityof macro-economic policy. It represents a fundamental and importantchallenge. Petroleum exports have already climbed rapidly and althoughcapacity exists to increase output in the short-term, the government isreasonably concerned about conserving the resource, as petroleum reservesare not large. Palm oil growth has been meteoric and continues its promise

/1 Palm Oil Export volumes have grown by 16% p.a. since 1976, and petroleumvolumes by 9% p.a.

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as output and export forecasts rise each year; currently a doubling ofoutput is expected by 1990. LNG exports will, of course, add substantiallyto gross export earnings by 1985 - although no plans have been released toincrease volumes after 1985; moreover net earnings for the commodity will belower than petroleum as the costs of exporting LNG per 'barrel- are muchhigher than petroleum, leaving a reduced net margin to the economy, much ofwhich in turn will be needed to service the debt on already contractedforeign exchange costs of the liquefying plant and the LNG tankers. Theprospects for manufactures is uncertain and while electronics may continueto experience rapid growth, this may be less true of textiles and clothingexports /1 (the two groupings comprise two-thirds of Malaysia's currentexports of manufactured goods). In sum a more difficult export environmentappears in prospect and a continued emphasis on export promotion anddiversification will certainly be called for.

2.09 A second aspect of trade development in the seventies has been thevery rapid growth in imports which increased by about 90% in real terms overthe period 1976-82. Most of this increase has been in capital and inter-mediate goods, which have accounted for 80% of the value of imports in 1980,compared to 60% at the beginning of the decade. The rapid growth dependencecan be illustrated in a different way, by looking at how, through thedecade, domestic production for the home market has increasingly been pre-empted by imports satisfying domestic consumption and investment needs.This is indicated in Table 2.1 above. On one measure, imports rose from 66%of domestic production for the home market m(DP minus exports) to an average125% in 1980-82; on a second measure, which accounts for the fact that notall imports are used to satisfy domestic demand, the ratio rose from about50% in 1971 to about 100% in 1980. For every two ringgit-s worth of goodsand services domestically produced in the economy in 1971 to satisfy domes-tic demand, an additional one ringgit's worth of goods and services wasimported; by 1980, however only one ringgit's worth of domestic productionwas associated with one ringgit of imports./2 This illustrates the point

/1 Textiles and clothing manufacturers in Malaysia face increasingly stiffcompetition in the more protected markets of the industrial countries;their costs and competitiveness are also likely to be significantlyaffected by wage increases. Recently manufacturers have been requestinggreater protection within Malaysia and this too could affect theirability to compete.

/1 For purposes of comparison the same series has been drawn for Thailand,Korea and Philippines. Korea:s ratio increased from 31% in 1970 to anaverage 50% in the last four years of the seventies; the Philippinesratio rose from 24% in 1970 to 30% in 1980; Thailand's ratio rose from25% in 1970 to about 39% in 1979-81. Although the ratio increased forall countries, the increases were much more dramatic - and sustainedover a longer period - in the case of Malaysia.

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that a distinct bias may exist between the pattern of consumption andimport-use propensities and the structure of production in Malaysia, withimporting probably being in many respects "easier" than import-substitution.Thus a second major challenge in the 1980s will be how to reduce this bias,by securing an improved balance between real exports and imports, andbetween domestic production and imports.

2.10 Suggestions as to how this might be accomplished may best perhapsbe approached through an analysis of the sectoral sources of exportingactivity and import substitution potential, viz. for the most part agricul-ture and manufacturing. (This is done in general terms below; for moredetailed suggestions, see the Bank's reports on agriculture and on manufac-turing.) One important policy implication does, however, deserve emphasis.There is nothing in the above analysis which suggests that a radical shiftin policy towards wholesale import substitution would be beneficial to theeconomy. The rapid rise of imports may, prima facie, suggest a case forgeneralized im;ort substitution; as analyzed later in this report the importgrowth and ensuing balance of payments difficulties, however, has beenstrongly associated with increased investment activity often of the lumpy,indivisible variety (LNG tankers, the liquefaction plant, oil rigs etc.);this does not support a case, on this evidence, for a policy of generalizedimport substitution. Rather, the facts suggest that as great an emphasis inexport performance is needed, as real exports have performed so disappoint-ingly, coupled with selective import substitution. A generalized importsubstitution policy would likely make exporting more difficult, would havedeleterious consequences for the balance of payments, and would lower thelong term growth of the economy. This in particular because Malaysia'snon-defence, non 'specialitem' imports are largely growth augmenting capitaland intermediate goods. To make these imports generally and substantiallymore expensive for the domestic economy would weaken the competitiveincentives for efficiency, would seriously weaken export competitivenessand, after the initial phase of substitution is completed, would likelyprovide little domestic impetus for future economic growth.

Agriculture

2.11 Agriculture has played an extremely important role in IMalaysiasdevelopment, and the growth of 6% p.a. achieved between 1960 and 1976 hasbeen one of the highest rates achieved anywhere in the world. The excellentperformance has in part been the result of entrepreneurial drive on the partof the estates, dynamic smallholder responses to crop and technology possi-bilities, a crucial series of interventions by successive governments toexploit the comparative advantage of agriculture within the economy, and thecomparative advantage of different crop possibilities within the agricul-tural economy itself. The links between agriculture and the rest of the

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economy have been the sustaining factor in economic development for much ofthe last two decades; agriculture in the sixties and early seventies wasabsorbing much of the increase in the labor force; growing agriculturalincomes provided purchasing power for the products and scrvices of industry,sustaining the early import substitution drives in manufacturing; in recentyears about 40% of value added in industry can be attributed to the down-stream processing of agricultural products; and, finally, agriculturalexport earnings, (55% of all merchandize exports earnings since 1960) haveprovided the foreign exchange that allowed a more rapid transformation ofthe productive structures of the domestic economy.

2.12 Inevitably the agricultural economy has undergone transformations.These transformations accelerated in the mid to late seventies, with themost visible manifestation being the stationary size of the agriculturallabor force. They were accompanied from 1976 on by a drop in the sectorgrowth rate from 6% to 4%. Table 2.2 illustrates how much steeper andserious this decline is if oil palm is left out of the picture; in essence,without oil palm, agriculture's growth rate dropped from a near 6% p.a.growth between 1960 and 1976 to a negative 1% thereafter. (In 1978 the fourcommodities in the table constituted about 90% of value added in the sector;rubber, rice and timber alone constituted about 60% of agricultural valueadded).

2.13 Examination of the causes of this decline indicates not justshort-term phenomena, but long-term structural process at work. These havebeen extensively stated in the IBRD's submission to government on the formu-lation of a new National Agricultural Policy (April 1982); for reference theSummary and Conclusions of the IBRD NAP paper are included as an Annex tothis report. Briefly, however, rubber production has suffered from lossesof young labor and as noted, from the switch by estates to growing oil palminstead. Since 1976 there has been a steady abandonment of rice areas - ineffect, there is a long-term retreat to the great rice bowls of the country(the large-scale irrigated schemes of the northern states) as, withoutdouble cropping, potential for mechanization and reasonable-sized plots,rice is an unremunerative crop for farmers to grow. Timber production,again as noted above, has not grown and may not be expected to grow in thefuture as the limits of suitainable exploitation of forest resources on thePeninsula have been reached. More generally, the migration of young peoplefrom agriculture is leaving behind an older and less innovative (becausetheir planning horizons are more limited) group of laborers and farmdecision makers. Social and economic frictions appear to exist in thefunctioning of the land market preventing sharp positive improvements inland/man ratios. The smallholder mode of farm organization, (the dominantform of farm organization in Malaysia), does not reap the economies of scaleof larger operations as measured by yields per person or per acre, with theresult that net returns to farmers are lower than they could be, in turntriggering greater exit from the sector. Government services provisionparticularly in extension, dissemination of research results, replanting

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Table 2.2: AGRICULTURAL OUTPUT VOLUME INDICES(1976- 100)

1960 1970 1975 1976 1977 1978 1979 1980 1981 1982

Rubber 48 57 92 100 100 100 99 96 96 88Oil palm 7 31 91 100 117 129 160 188 188 222Saw logs & timber 22 65 73 100 108 106 104 108 108 111Rice 44 57 91 100 87 69 96 92 92 92

Total Indices/a

With oil palm 38.4 55.1 89.6 100.0 102.5 102.0 113.6 118.6 122.3 123.8Without oil palm 42.7 58.4 88.5 100.0 98.0 93.4 98.6 96.6 96.7 92.0

Growth Rates p.a. - Total Output

1960-76 1976-82 /b

With oil palm 6.2 4.1Without oil palm 5.5 -1.0

Source: Statistical Appendix Table.

/a 1960-76 weighted according to 1971 Value Added of these commodities.1976-82 weighted according to 1976 Value Added of these commodities.

/b Log linear, least squares growth rates.

rubber and support of smallholder oil palm fall short of the optimal. Allthese factors combine to create a serious possibility that the resource basein agriculture may decline in future years.

2.14 This phenomenon, if it is allowed to happen, would bear alarmingimplications, not only for the government's commitments to reduce povertyand sustain employment, but also for economy wide growth, and for exportearnings. This is particularly true as the non-agricultural sectors of theeconomy are faced with more constrained internal and external environmentsand their growth and employment providing potential cannot be taken forgranted. Fortunately, a number of far reaching proposals to revitalize

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agriculture have surfaced recently and consensus is building behind thedeclaration of a new National Agricultural Policy. The InRD submission onthis point started from the premise that high permanent income differentialsbetween other sectors of the economy and agric.;l.ture are major reasons toexpect continuing migration of able, adaptable and innovative young farmersout of agriculture. Though these differentials cannot, and probably shouldnot, in all probability be made to disappear, they can be reduced. Thereare several keys to doing this; first is to redress or avoid any implicitpolicy biases against agriculture (for example high protection of manufac-turing, heavy agricultural export taxation, Sguaranteed- higher paying jobsin government service) which dampen the factoral and commodity terms oftrade on which agriculture trades with the economy and the world, which inturn dampen farm incomes and prospects. A too rapid acceleration in realwages in the non-agricultural economy would also render much padi and rubbercultivation unremunerative leading to wide scale, further abandonment ofagricultural activity./l Within agriculture a further key to revitalizationis to replace the monocrop, production oriented, "export share" objectivesof policy with the slngle objective of maximizing farm and householdincomes. Innocuous as the objective seems, in the context of Malaysia it isfar reaching for it entails a greater flexibility in, or lesser constraintsplated upon, the choice of crops grown, an enhanced drive for the improve-ment of man/land ratios (both through new land development and consolidationefforts for existing subeconomic parcels), a reconsideration of models offarm organization in favor of high productivity large group modes oforganization and considerable strengthening of government planning andservice delivery mechanisms for the sector.

M4anufacturing

2.15 Unlike the developments in trade and agriculture it would not betrue to say that the manufacturing sector exhibited growing structuralweaknesses through the seventies. Malaysia's manufacturing growth in facthas been little short of remarkable./2 Any concern about manufacturingtherefore arises less out of its past performance but rather from how wellpositioned the sector is to cope with the more difficult environment aheadand to the chief question to which this chapter is addressed as to howcontinued rapid growth in the economy is to be achieved.

2.16 Table 2.3 below illustrates a theme alTeady touched upon - thevulnerability of manufacturing sector growth to external recessionaryconditions which stems from the fact that nearly 65% of some areas of

/1 The IBRD NAP submission considers several alternative scenarios ofpossible real wage behavior in the economy with their consequences toagriculture and the economy.

/2 For a recent evaluation of this performance seee IBRD "Malaysia-sManufacturing Sector: Development Issues and Policy Options." April1981.

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Table 2.3: MANUFACTURING SECTOR GROWTh(Percentages)

1971-76 1977-79 1980-82 1979 1980 1981 1982

Manufacturing Output /aAnnual rate of growth 13.8 9.8 6.0 9.5 9.0 5.7 3.4Share of total output 15.9 18.2 18.4 18.4 18.6 18.4 18.2

Manufactured Exports /bAnnual rate of growth 26.1 25.0 15.5 33.8 26.4 5.0 18.7Share of total exports 17.1 19.7 24.5 19.9 21.7 24.9 27.0

/a Measured in 1970 prices.

/b In nominal prices, derived from Treasury Reports and is a broader categorythan the category SITC 5 to 8 (excluding tin) shown in Statistical AnnexTable 4.3.

manufacturing activity is accounted for by exports. After growing at 11%+p.a. real rate through the seventies, manufacturing sector growth dropped to6% p.a. between 1980 and 1982; this was intimately related to a marked dropin manufactured exports from a 25% growth (nominal) /l in the seventies to15% thereafter. The strong relationship between declines in manufacturedexports and declines in manufacturing sector growth follows from a highweight and presence of exporting industries in the manufacturing base.Although the data are inadequate to ascertain accurately the size of themanufacturing export presence in the manufacturing sector, an impres-sionistic view suggests the contribution is sizeable. By one estimate theelectronics, textile and clothing industries - which generate two thirds ofmanufactured exports employ about 40% of all full time paid employees inmanufacturing, and pay about 30% of the wages and salaries in the sector /2

/1 Unfortunately, major inadequacies in the statistical base make it vir-tually impossible to derive meaningful real growth rates. See IBRDpaper on the Industrial Data Base.

/2 Monthly Industrial Statistics (February 1982); the survey on which thesenumbers are based has an incomplete coverage of establishments. Thenumbers in the text should therefore be regarded as upper limit figures.The same survey Identifies the other large industrial subsectors asChemicals and Food; the chemicals subsector employs 12% of the totalemployed in manufacturing and pays 18% of the whole sectors wages andsalary bill. Food industry ratios are 6% of employed and 9% of wages andsalaries. Thus, these four groupings, on this survey evidence, accountfor between 50-60% of employment and wages and salaries generated in themanufacturing sector. Again, these are upper limit figures.

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a loose proxy for value added. Certainly their growth has been extra.-ordinarily rapid; the IBRD sector report suggested that between 1973 and1978 these export industries were probably responsible for half theemployment creation in large and medium scale establishments in the sector.

2.17 This achievement, impressive though it has been, has of coursemade sectoral performance dependent on external events. But it has also hadother side effects. As is well known the rise in export manufactures haslargely occurred from establishments in Free Trade Zones (FTZ's)./l Noadequate study of FTZ's has been performed, but it has been suggested that,although FTZ's have been important for export success, they have fostered asomewhat lopsided development in manufacturing./2 Establishments in thesezones have weak linkages with the rest of the economy, essentially creatingvalue added through direct employment, but not through generating demand forlocal products and thereby assisting In the deepening and widening ofdomestic industrial development./3 In addition, these firms have made onlylimited contributions to skill development and the transfer of technology.The obvious import intensity of these firms, as is true of much of the restof Malaysian manufacturing, is shown in the fact that in recent years(1975-80) intermediate imports for manufacturing industry alone (excludinginvestment goods) have outnumbered manufactured exports by a ringgit valueof over two to one. The view thus emerges, as exemplified in the IBRDsector report, that manufacturing activity in Malaysia is insufficiently-ooted in the domestic productive structure-in the sense that wide comple-mentaries, strong backward and forward linkages and a supportive network ofsupply and demand relationships between manufacturing industries and betweenthe sector and the rest of the economy exist.

2.18 Deepening the industrial structure and creating the complementari-ties and links between industries and between industry and the other sectorsof the economy does of course take time, and in this respect Malaysia

/1 Free Trade Zones afford a variety of incentives to industrialists,including duty free imports of intermediate inputs, -Pioneer Status',preferential export credits, cheap infrastructure and so on.

/2 See IBRD sector report, Summary and Conclusions, P. 10.

/3 A number of partial studies increasingly suggest that FTZ based firmsare, on average, more capital-intensive than non-FTZ manufacturers, andthat they also tend to be highly import-intensive (an import content of80% was the average in Penang, for example). See Dean Spinanger,Regional Industrialization Policies in a Small Developing Country:A Case Study of West Malaysia, Institut fur Weltwirschaft, Kiel, 1980.

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manufacturing activity is of relatively recent vintage. Nonetheless as thegovernment has affirmed it represents a major strategic objective in manu-facturing development. A second strategic objective, again affirmed by thegovernment, is to diversify the manufactured export base and reduce thereliance on essentially two commodity groupings in which investment is fromforeign sources and strongly vulnerable to the total package of incentivesoffered to attract and retain it in Malaysia. A third, and importantchallenge, is to discover the sources of growth that can propel manufac-turing activity towards emulating the achievements of the last decade, andfulfill the key role this sector has been given to assist the nation inreaching its long-term economic and social goals.

2.19 In the short term, manufacturing activity may be expected torecover substantially from its recent slowdown assuming world economicrecovery. In the medium to longer term, however, it would appear that boththe domestic and external environments are likely to be more constrainedthan in the last decade, providing less powerful demand impulses for growth.On the domestic side this follows first, from lower expected agriculturalincome growth stemming from the causes analyzed earlier; second from, assuggested later in this report, a much reduced latitude for fiscal andmonetary policy to sustain internal demand and provide macro-economicstimuli; and from, third, the expectation that the terms of trade will onlygradually improve over the next few years (see Chapter 4) and thus notprovide, as in the 76-80 period, a major fillip to domestic incomes. Theexternal constraints are familiar: world trade is expected to grow muchmore slowly than in the sixties and seventies, protectionist barriers havesteadily been erected, and all existing and nascent exporters ofmanufactures will face increasingly competitive markets.

2.20 An important point remains. Because Malaysia's share of worldmanufactured exports is so small, the external constraints are likely to bemuch less important than for other countries and the more difficult externalconditions should not discourage the country from greater export promotion.As discussed earlier, with the country's heavy dependence on imports, animproved export performance will be important if balance of payments andgrowth problems are to be avoided. The Manufacturing Sector report hasindicated that there is considerable scope for the development of resource-based export industries like wood processing and rubber and palm oilproducts.

2.21 Little may be said by way of recommendations on specific policiestowards industry beyond the Bank suggestions in the Manufacturing SectorReport of April 1981; this applies to the general policy framework as wellas to identification of subsectors with promising growth potential. Themanufacturing sector report suggested that in view of the paucity ofinformation and analysis of factors contributing to growth in the

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the manufacturing sector a series of studies should be performed to assistthe government define policy. These proposed analyses include a 3tudy ofthe contribution of Free Trade Zones in terms of value added, links with thedomestic economy, economic costs and foreign exchange contribution; anassessment of the effectiveness of export promotion incentives; an evalua-tion of investment incentives; and an updating of the estimates of effectiveprotection and domestic resource costs of presently import substitutingproduction to provide a basis for rationalizing tariff policies. A secondset of proposed studies, following a separate IBRD report on the subject,was to improve and strengthen the provision of data on industry. Neither ofthese sets of studies has yet commenced; in their absence, little basisexists for advancing the discussion within Malaysia of the direction, scopeand benefits to be expected from policy reform. It is partly for thisreason that the Mission urges great caution to any rapid redeployment ofpolicy towards, say, wholesale "second round" import substitution. In viewof the importance of these analyses for the governments, it is recommendedthat they be initiated as soon as practicable.

2.22 While reforms in the incentive system will have their primaryimpact on private sector manufacturing activity, the government is alsoactively promoting the concept of industrialization through heavy indus-tries. The motivations are several. First, is to create new engines ofdomestic growth; second, it is hoped that backward and forward linkages willbe strong, in that the industries will provide inputs to domestic indus-tries, make use of the country's extensive energy and gas resources, andeither save or earn foreign exchange; third, government involvement is madenecessary by the very large scale of these investments and perhaps thegreater risk associated with them. The major actor is the Heavy IndustryCorporation (HICOM) but also involved are Petronas and State governments.Projects under execution or proposed include two refineries, cement plants,two sponge iron plants, a cold rolling steel mill, a methanol plant, theAsean urea - ammonia plant, a paper-pulp plant, downstream development ofpetrochemical complexes, the development of a Malaysian car and energy andinfrastructure projects to service these industries. New initiatives mayalso be expected over the next few years. Insufficient information existsas to the financial size of the program,/l but clearly it will call formajor investments and will have a sizeable impact upon the domesticindustrial base.

2.23 Certain broad objectives and constraints merit stressing. Firstconsiderable claims on foreign exchange and public financial resources arelikely to be made by these projects. As the availability of both foreignexchange and public resources, commensurate with macro-economic stabiliz-ation concerns, is likely to become increasingly constrained it will be

/1 Estimates on the HICOM projects alone range from M$6-8 billion.

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important to ensure that the projects are consistent with the public sectorfiscal budget and the ability to service external debt. It is recommendedthat close attention to timing could avoid severe short-term impacts on thefiscal deficit and on the balance of payments. Second, some of theprojects appear to be highly capital intensive and employment generationmay be modest with the resulting capital cost per job created being ratherhigh; in view of the prospective need to continue to create large numbersof jobs for the rapidly growing labor force, the social cost of theseinvestments in relation to this objective merits addressing. Third, albeitthe thrust is a measured response to a perceived slowdown in growth, itwould be extremely harmful to the economy in the long term if the projectdo not enjoy a domestic cost advantage or if they require substantial,permanent protection (through tariffs, quotas, import bans, etc.). Domes-tic producers would then be faced with inflated costs of their purchasesthus eroding their competitiveness, and consumers, in paying prices signi-ficantly aboved international levels would suffer substantial welfare.osses. In short, not only should the financial returns to the projects behigh, but also the economic returns, (which eliminates from the calculus theprotection and subsidy effects), and taking into account least costalternatives, market prospects, economies of scale, and the risks to bothindividual project success as well os to the macro-economy in view of thesize of the investments. Although information is skimpy, precluding adetailed analysis, it would appear that the sponge iron project, steelprojects, petrochemical projects and certainly the Malaysian car projectshould be considered from these standpoints.

2.24 To list these and earlier issues is not to cast doubt about thefundamental importance for Malaysia to pursue industrialization; indeed asustained industrial thrust, overcoming the multiple constraints of themoment will be crucial to Malaysia's prospects in the eighties. Rather it isto suggest that rapid and successful development, the addition of the gasresource, the more difficult medium term internal and external environments,and pressing short term macro-economic difficulties pose new conditionswhich merit addressing, as in the case of agriculture, in the context of anewly considered industrial strategy. Much work is, of course, alreadybeing done on the separate elements of such a strategy by the differentagencies and entities involved. There is perhaps some merit now inconsolidating these efforts to provide a greater degree of coherence thathas hitherto existed. In this respect an agenda of work appears available.Perhaps the first item is to accelerate and complete the proposed set ofstudies on potential areas for policy reform to spur the diversification andgrowth of manufactured exports; these studies also address the need for andpolicy initiatives that would be conducive to further efficient importsubstitution.

2.25 A second item which may be recommended is to enhance the coordina-tion of the heavy industry-LNG-regional development nexus as well as improv-ing the investment programming aspects of these large developments. This in

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particular because the complementarities between projects, the requiredinfrastructure with associated time phasing, the regional and employmentimpacts, the economic costs and consequences, the potential savings orearning of foreign exchange, the impacts on public finance, external debt,and the balance of payments have yet to be added up for the program as awhole. The complexity of the task is formidable, and it cuts across manyagency and public/private entity jurisdictions. But the task appearseminently worth pursuing in view of the many downside risks to the economy.A group, task force or organization would of course need to be appointed andgiven the mandate to exanine these issues and coordinate the development ofa long-term strategy. This agenda could be added to but the general pointremains that a considered look at the sources of growth for manufacturing inthis decade, an accelerated effort to install a policy environment conduciveto continued high export growth and efficient import substitution and anenhanced effort to integrate the multiple initiatives afoot in heavyindustry and downstream gas development are important step to placing theindustrial sector on a base from which it can sustain its highly effectivecontribution to development.

Skilled and Semi-Skilled Manpower Shortages

2.26 Towards the end of the decade it waE noted that there were gener-alized complaints from various sectors of an inadequate supply of labor, atprevailing wage rates, to fulfill demand. Although this was a generalfeature of the labor market which experienced considerable tightening, thecomplaint was often specifically related to "shortages" of skilled and semi-skilled manpower; in agriculture for rubber tappers, foremen, managers,extension agents, irrigation engineers and soon; in construction, forengineers and foremen; in manufacturing for a wide variety of skilled andsemi-skilled occupations and managerial staff.

2.27 Again, information and data are inadequate to attempt a fullaccount. But partial evidence from a variety of sources strongly suggestthat not only does Malaysia suffer from a structural mismatch between theflow of skilled manpower from the educational system and the needs of anevolving economy, but that this could develop as a further constraint upongrowth in the next few years. Limited survey evidence suggests that skilledoccupations presently carry rates of pay that are ten times higher thanrates for laborers (compared to an average of five to one in advancedcountries). The Public Service Department in recent years could onlyannually fill 10 to 40% of its vacancies for skilled workers and techni-cians. Estimates of private economic returns to secondary and tertiaryeducation for Malaysia in the late 1970s ranged between 30 and 35% - among

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the highest in the world./1 Finally, estimates of skilled worker and techni-cian demand through the 1980s, albeit based on assumed manufacturing growthrates from the FMP which now appear too high,, suggested annual requiredadditions to the stock of skilled manpower of about 36,000 skilled workersand 6,000 technicians persons; as of 1980 Malaysia's educational system wasproducing 13,700 skilled (or semi-skilled) workers and 2,300 techniciansgraduates with the qualifications to fill these positions./2

2.28 This is in some measure due to a historical evolution of thxeeducational system that has not kept pace with the economy's needs. TheMalaysian government spends a high proportion of GNP - about 5% - on educa-rtion. Most of this, however, is directed towards the traditional primaryand secondary school and university systems and much less on technical andvocational training. Thus about 16% of the 15-22 year olds are enrolled insecondary education; only 1.7% of the age group are undergoing technical andvocational training. By contrast Korea, at roughly the same level of percapita income, and where incidentally, the government spends less oneducation (3% of GNP), 23% of the relevant 15-22 year olds are enrolled insecondary (and beyond) facilities; half of these - 11.5% of the age groupare receiving technical and vocational training. In Thailand, fewer of thesecondary age group, 11%, receive an education - but the proportion intechnical and vocational schools at 2.8%, again, is higher than in Malaysia.

2.29 There are further concerns. Not only is the educational systemslanted towards traditional' streaming but within that streaming and inthe composition of labor market demand for graduates of the system, thereare issues which impinge upon the achievement of the important NEP targets.There has been a substantial enlargement of the university system in thelast decade, and in line with government objectives, an increasing propor-tion of enrollment has been from the Bumiputera community; at the same time,there has been, according to the FMP, a gradual but important shift awayfrom arts and humanities courses towards science, engineering, architectureand other applied subjects. Much of this shift has, however, occurredamongst nonBumiputera enrollees, with the potential consequence that, in themedium-term, insufficient Bumi.putera graduates with skills potentially inhighest demand in the labor market will be forthcoming, making the task of

/1 See G. Psacharopoulos: "Returns to Education: An updated internationalcomparison." Unfortunately no detailed social returns to education havebeen calculated. A recent IBRD Industrial Training project indicatedthat social returns to polytechnic education would be in excess of 17%.A more recent set of industrial case studies indicated economic andsocial rates of return to individuals and employers, stemming frominplant training, in the 20-30% range.

/2 See IBRD Appraisal Report for the Industrial Training Project(No. 3740-MA, April 15, 1982, p. 4).

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employment restructuring that much more difficult. This is compounded bythe fact that traditionally Bumiputera graduates preferred public sectorservice to private employment - although this preference may be weakening.More specifically, however, the public sector has a higher skill profilethan the rest of the economy. Thus in 1973, in common with many othercountries, over 80% of the economy's professional and technical workers wereestimated to have been employed in the public service; given the growth inpublic sector employment since then, this dominance of the public sector asemployer of technical and professional manpower may only have very modestlydiminished./l Thus the public sector's employment stance in future yearswith respect to skilled category occupations is going to be crucial indetermining the extent of "shortages" and "surpluses" in the private sectorand thus the potential rate of growth in the economy, and also extremelyimportant in determining the pace of restructuring in the private economy.

2.30 Faced with these developments, a set of remedial actions suggestthemselves, and the government is vigorously pursuing a series of initia-tives. At present there are 32 secondary vocational schools in the countryand the long-term intention is to create another 47; sixteen are presentlyeither under construction or in advanced stages of planning. The number ofpolytechnics is to be increased from two to seven by 1990 (with IBRD parti-cipation). A long-term program exists to establish an Industrial TrainingInstitute in each of the country's fourteen states; two are in existence andfive more are planned (again, with assistance from IBRD loans) in the nearfuture, with ten constructed by the end of the decade. As far as can beascertained these initiatives will go a considerable way to meeting thenation's demand for skilled manpower; by 1990 approximately 24-26,000persons will graduate annually from these and other public institutions ascompared with an estimated demand of between 35-40,000. Given the largedegrees of error associated with manpower forecasts (on the demand side),this would appear a reasonable outcome. /2

/1 Admittedly these figures are dominated by teachers, but even looking atindividual categories of occupations, the predominance of the publicsector is, with a few exceptions, quite clear.

/2 Caveats should be applied however. The implicit assumption is thatgraduates will enter occupations for which their training qualifies themand where the eocnomic need has been identified. However, past tracerstudies, albeit of early 70s vintage, indicated that one-third ofsecondary vocational graduates entered white-collar jobs. The extent towhich this occurs in the future will, of course widen the gap between,requirements' and supplies which is already expected to exist, as may.higher than expected demand by the public sector. Is is also evidentthat the ability of formal training institutions to respond to changesin the skill-mix required by industry is quite restricted, so thatmismatches may appear in the labor market unless initiatives are takento increase in-plant training by private industry.

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2.31 These solutions are aimed over the longer term. In the shortterm, even with the recent and expected future slackening of growth, thedisparity between the stock and flow of skilled manpower and demand willpersist. To this end the government is examining a variety of proposals tostimulate, via fiscal incentives, greater private sector participation inin-plant training. Solutions along these lines will not be easy, asexemplified by the disappointing experience with an innovative recentgovernment initiative to encourage the construction industry to participatein the training of its employees. However, the potential or otherwise forsuccess may be demonstrated by further pilot initiatives, and these shouldbe encouraged, as on-the-job training, by and large provides valuable andrelevant skill training, with strong external benefits to the economy as awhole.

2.32 An important area of increasing government concern is the state ofhuman resource planning in Malaysia. This includes not only manpower demandand supply planning, with attendant mapping of the economy's manpower needsupon the educational system, but also the wider questions o.f the ongoingsectoral realignments in the economy, with corresponding labor relocationand their implications for the conduct of policy. Two points perhaps meritstressing. First, analysts are hampered by a substantial lack of relevant,corsistent and comprehensive data, inhibiting, if not paralyzing theirefforts to analyze developments in the labor market. It is thus an import-ant priority to improve the statistical data base to allow good policy to bemade. Second, and accompanying improvements in the data base, it will beimportant to define the mandates and responsibilities of the many agenciesinvolved in human resource planning and outline an agenda of pressing issuesthat need resolution. No comprehensive list can be given here but sugges-tions for study would include; an analysis of labor force movements in theeconomy, particularly developments in agriculture coupled with work oninternal migration; improvements in the labor force data to establishemployment by sector and monitor developments in urban employment; construc-tion of good wage series for major sectors and for the economy as a whole;rate of return analyses for occupational groups accompanied by manpowerdemand analysis to establish where the bulk of present and future"shortages" are occurring or may occur; definition of the public and privatesector's educational roles and capacities in catering for demand; andanalysis of the macro-economic and occupational impacts of public sectordemand for manpower. These areas are receiving government attention,particularly in the EPU; and the importance and urgency of these tasksperhaps bear the repetition implicit here./l

/1 The Bank is assisting this effort in part through components of loansto the education sector and in part through preparing recommendationson labor market statistics.

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Conclusion

2.33 The major conclusion of this chapter is that, although the worldrecession has badly hit the economy, the domestic economic slowdown is alsoassociated with emerging structural factors. These include a maturing' oftraditional export activities, which in sum, have pulled down the rate ofgrowth of real exports. The achievement of newer export commodities hasbeen substantial, but has been offset by a very rapid rise in real imports,mostly of intermediate and investment goods, increasing the economy'sdependence on maintenance imports, and to an extent providing a vent fordemand away from domestic production. These trade developments may best beviewed as a balance between continuing medium-term import needs with theneed to improve real export performance, unfortunately in a more difficultworld environment. Associated in this balance, but with equally importantdomestic repercussions, are the sectoral performances of agriculture andmanufacturing. The former has experienced fundamental structural difficul-ties which determined policy actions can and should address. The prospec-tive sources of growth for manufacturing appear to be weaker than in thepast but again policy actions have an important role, and these will, need torely on an acceleration and prominence given to studies underway, on thedevelopment of an industrial strategy and an improved coordination of themany initiatives afoot. In particular, the program of heavy industriesshould be examined with a view to its affordability and timing in moreconstrained public finance and foreign exchange envirorments (the subject ofthe rest of this report), and in relation to its long-term impacts uponproduction and consumpLion costs in the economy. Finally the prospect ofskilled manpower shortages has emerged which focuses attention not only onthe infrastructural initiatives of the government but also the need forimproved human resource planning.

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3. RECENT ECONOMIC DEVELOPMENTS

A. OVERVIEW

3.01 The most visible manifestation of recent macro-economic difficul-ties has been the appearance since 1980, of rapidly growing current acountdeficits in the balance of payments. These deficits have followed four yearsof surplus (1976-79) which averaged 4.2% of GNP. In 1981 and 1982 thedeficits have been particularly large - 9.9% and 13.4% of GNP respectively -and a further deficit of 10.5T of GNP is projected by the Treasury for 1983.They have been accompanied by a weakened GDP growth from slightly under 8%In 1976-80 to 6.7% in 1981 and an estimated 4.6% in 1982. For 1983 theTreasury has projected a growth rate of 4.9%, but this projection was madebefore the OECD revised its expected growth for 1983 downwards, and beforethe present possibilities of softer oil prices emerged; a downward revisionof expected Malaysian GDP growth in 1983 cannot, therefore, be ruled out.

3.02 The international recession has had a strong impact upon theMalaysian economy. To be sure, as already discussed, structural factorshave been at work too, but the concern of this chapter is to analyze theeffects on the economy of the very large swings in the terms of trade thathave occurred since 1976, and particularly focussing on the impact of thecomprehensive government response, since 1980, In undertaking a variety ofcountercyclical measures. The deterioration in performance is perhaps bestviewed through the entire length of the commodity price cycle as, dutring theupturn of the cycle, there were variable lags in the transmission of externalimpulses, with corresponding differential response rates in various sectorsof the economy; these provided part of the reason for the later large currentaccount deficits as well as pointers as to the future course of the externalaccounts./1

/1 One caveat needs stating: because of the weaknesses of many data series,particularly the National Income Accounts, sp cific analysis has toyield occassionally to the broader viewing of trend. The Governmenthas become increasingly aware of this problem and has invited the IBRDto undertake a review of the statistical system in Malaysia.

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Terms of Trade Effects on the Balance of Payments

3.03 Export prices for most of Malaysia's major export commodities weredepressed in 1975; early in 1976 they recovered and began a sustained upwardrise that did not end for most commodities until the second or third quarterof 1980; rubber, tin, timber and logs, and petroleum prices all more thandoubled in the late 1975 to mid 1980 periods; thereafter certain commodityprices have declined, of which rubber has been the most pronounced,decliningby 35% in two years; tin prices have declined by 15% (since 1980), asapproximately have palm oil prices (since 1979); and petroleum pricessoftened in 1982. Nonetheless the diversity of Malaysian exports and thefact that the (value) composition of exports has shifted to higher volumeperformers as well as to those which have had high unit value increases (inparticular, petroleum)/l has meant that, in the aggregate, export priceshave not fallen much, and then only in 1982 (by about 4 112%). Malaysia-simport prices appear to have risen only gradually between 197511976 and1979, and risen much more sharply thereafter. Most of the import pricerises in 1980-82 have been concentrated in food, petroleum and chemicalimports. Unit prices for Malaysia's manufactured imports have risen moreslowly and virtually in line with the IBRD manufactured goods unit valueindex of exports from the OECD countries. But the overall result has beenthat whilst the economy's terms of trade improved sharply between 1975/76and 1980 (when the TOT rose by 45%), they since have declined by about 15%.Parallelling movements in the terms of trade have been changes in thecurrent account of the balance of payments. Since 1980 import volumes haveincreased more slowly and the major increase in the import bill is thereforelargely a price effect; on the export side, performance is more complicated;in 1981 the lower export earnings (than in 1980) were largely due to reducedvolumes whilst in 1982 reduced prices have been the major influence onrestrained earnings growth. Malaysia has, in 1981 and 1982 been runningmerchandise trade deficits in addition to the traditional large servicedeficits.

/1 The price indices in Table 3.1 are end year weighted (Paasche) indices.

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Table 3.1: THE TERMS OF TRADE AND THE BALANCE OF PAYMENTS

1975 1976 1977 1978 1979 1980 1981 1982

Terms of Trade 79.7 91.1 98.0 100 120.3 123.0 109.6 104.3Export prices 74.6 86.9 95.6 100 128.6 155.7 161.8 155.2Import prices 93.6 95.4 97.6 100 106.9 126.6 147.6 149.1

Current Account Balance(Ringgit min) 1,065 1,642 1,278 319 2,286 -523 -5,477 -7,825Goods 724 3,762 3,871 3,587 6,580 4,776 -234 -1,432Services -1,789 -2,020 -2,515 -3,186 -4,175 -5,299 -5,343 -6,290

Current account balanceas % of GNP 4.9 6.1 4.1 0.9 5.3 -1.0 -9.9 -13.4

Real Incomes, Expenditures and Countercyclical Policies

3.04 As is well appreciated, balance of payments surpluses and deficitthave their counterpart in domestic income and expenditures relationships.Through the 1976-1979 period real incomes in Malaysia rose much more rapidlythan did expenditures, as the favorable terms of trade movements substantiallyenhanced national purchasing power - which was not all spent however ondomestic production or imports and hence resulted in favorable current accountpositions. Savings in the economy rose to record heights, averaging 29.6% ofGNP in 1976-79 and, investme:;- although growing through the period averagedless, at 25.3% of GNP, affording a strong internal resource position. (SeeTable 3.3). In this sequence, 1980 appears as a pivotal year, as the firstyear in which a current deficit appeared. Several factors appear to havecontributed.

3.05 In 1980 the government engaged in a major expenditure expansion,real growth in public expenditures accelerated sharply by 22% compared withan aterage 7% in the previous two years. (See Table 3.2). Three factorscont:'ibuted to this outcome. First, the 1979 Budget Speech signalled theexpectation of an OECD recession in 1980 (in common with most analysts) andit was felt that a counter cyclical impulse would need to be given to theeconomy to maintain growth, and domestic income and employment levels.Second, the civil service salary revision was due for negotiation and giventhe expected need for a countercyclical thrust and a comfortable resourceposition at end 1979, the salary revision was generous. Third, 1980 was thelast year of the Third Malaysia Plan and there were therefore acceleratedattempts to complete or initiate Third Plan projects, a feat made possibleby the steady build up of implementation capacities of public agencies, that

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Table 3.2: PRODUCTION, INCOME AND EXPENDITURES, 1978-1982

1978 1979 1980 t981 1982

Indices (Real Values)Production 1OO 109.3 117.8 125.7 131.5Incomes /a 100 120.6 130.2 130.9 133.2Expenditures lb 100 111.7 125,0 132.3 137.0

National Output and Expenditures(growth)

GDP 6.7 9.3 7.8 6.7 4.6

Consumption 8.9 11.0 11.2 5.6 2.5

Private 9.9 11.7 8.4 4.0 0.8Public 5.8 8.7 20.0 10.5 7.0

Investment 8.1 13.3 22.6 12.7 7.2

Private 12.4 17.1 21.3 6.6 6.4Public 2.1 7.4 24.8 22.6 8.4

Exports 7.0 16.9 3.0 1.3 10.6

Imports 14.5 23,l 13.1 3.7 9.7

/a Real income is the income available to the economy through productionplus the income experienced as a purchasing power gain from export pricesrising much more rapidly than import prices (and the converse when exportprices full relative to import prices). In effect, high export pricesenable the economy to purchase more imports (for the same volume ofexports) and this increase in purchasing power is counted as an increasein real income.

lb Total consumption and investment expenditures in the economy.

Source: Bank Negara: 1983

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Table 3.3: INTERNAL & EXTERNAL BALANCE, 1974-82(% of GNP measured in nominal values)

CurrentNational Domestic Internal Account Resource Factor Trans-Savings - Investment = Balance T)eficit Surplus/c + Payments + fers

1974 25.5 - 29.8 = -4.3 -4.8 = 0.2 -4.6 -0.51975 21.3 - 24.2 = -2.9 -3.3 0.5 -3.4 -0.4l976 29.5 - 22.7 = +6.7 +6.4 10.9 -4.1 -0.41977 28.5 - 24.8 = +3.7 +4.1 = 8.5 -4.1 -0.31978 27.2 - 26.1 +1.1 +0.9 5,6 -4.5 -0.21979 33.3 - 27.7 = +5.6 +5.3 9.8 -4.2 -0.31980 29.5 - 30.3 = -0.8 -1.0 3.1 -3.9 -0.21981 25.0 - 34.7 = -9.7 -10.0 -6.5 -3.2 -0.21982 23.1. - 36.4 = -13.3 -13.4 - -9.3 -4.0 -0.1

Source: Statistical Appendix Table 2.1 and 4.1

/a National savings are estimated as GNP minus consumption. Gross domesticsavings would then be defined as National Savings plus factor servicepayments made abroad plus transfers.

/b Domestic investment is gross investment (without subtracting depreciationfor which there are no estimates) but includes all stock changes.

/c The resource surplus is measured as exports of goods and non factorservices minus imports of goods and non factor services. These estimateswere derived from the balance of payments accounts and there are, therefore,slight differences from the resource surpluses measured by National IncomeAccounting conventions.

had proceeded in previous years. Although the OECD did in fact enter intorecession in 1980, the transmission of the recessionary impact to Malaysia washowever, delayed. Commodity prices for traditional exports continued toincrease through the first half of 1980 (reaching in the cases of rubher, tin,palm oil and timber, post World War highs). Moreover the economy received theadditional bonus of a doubling of the price of oil in late 1979. In effect,it can be seen in retrospect, that the terms of trade continued to improvethrough 1980 and real incomes continued to grow moderately faster than GDP.Allied to the effect of continuing high income growth upon .'ivate sector

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activity can be traced the lagged effect of previous income growth uponprivate sector investment spending, which increased by 21% in real terms in1980 compared to an average 14% in the previous two years. Moreover monetarypolicy which had been restrained in 1979, as it was appropriately directed atsterilizing foreign exchange influences, turned expansionary in 1980 asdomestic credit increased by about 50% through the year. (Monetary policy isdiscussed in Section III below). Thus a cumulation of impulses was given tothe economy as expansionary fiscal and monetary policies were combined withan already buoyant and vigorous private sector activity. Savings in theeconomy declined by about 4 percentage points of GNP (from the 1979 level)and investment increased by 2-1/2 percentage points of GNP; this wassufficient to turn the previous year's 5% of GNP current account surplus intoa 1% of GNP deficit in 1980. The public sector's overall deficit did nothowever show signs of strain at the end of 1980 even though publicexpenditures were 27% higher at year's end than programmed in the 1980 buiget.The continuing high commodity prices meant no shortfall in export taxes,whilst the increases in petroleum prices accompanied by buoyant levels ofdomestic activity and imports allowed a sharp increase in overall revenue.The overall public sector deficit at 8% of GNP, was in effect no higher thanthe deficits experienced in the first half of the seventies. But twoconsequences of the fiscal stance 1980 were that the countercyclica'Lexpansion of 1981 and the first half of 1982 began from an already high base,and that the "safety net" of oil revenues was largely absorbed ir. 1980.

3.06 In 1981, the government continued its countercyclical thrust on thepresumption shared by most observers, that the OECD would soon climb out ofrecession. Public expenditures increased by 15% in real terms. Exportprices, as noted earlier, registered a small increase (4%), entirely due toincreases in unit values of petroleum and manufactures (in 1981, about 45% ofexports). With import prices rising rapidly the terns of trade declined byabout 11%, registering a loss in national purchasing power of about 5% and,for the first time since 1976, real national income stagnated. The Treasuryexperienced strongly declining revenues from commodity export taxes and fromrevenue losses from tax cuts initiated as part of the counatercyclical stance;to an extent these were made up by increased petroleum revenues, including anajor dividend contribution by Petronas, but these were insufficient toprevent the overall public sector deficit from widening to a very high 19% ofGNP. The countercyclical increase in expenditures continued into mid 1982,when however it was recognised that no early end to the recession could beseen and a process of budget retrenchment was initiated. These cuts werelargely instituted across the board but appear to have fallen more heavily oncapital expenditures. As a result the pace of overall expenditure expansionis estimated to have slowed considerably. Total expenditures of the publicsector are now estimated to have increased but only 8% (nominal) in 1982compared with 44% in 1981. Development expenditures are estimated

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to have declined by 3% (nominal). (Despite these cuts the overall deficitsin 1981 widened to 21% of GNP). This philosophy of greater caution has beencarried over to tihe 1983 budget, where Federal expenditure allocationsincrease by only 6% over the estimated 1982 outturn, and anticipatedexpenditures are only 3% greater than the 1982 outturn./l This will almostcertainly be negative in real terms. The brunt of the slowdown is againborne by capital expenditures with major decreases in spending projected forhousing and commerce and industry. The prospects for the public sectordeficit in 1983 are uncertain but it is likely to be above 15% of GNP.

3.07 With private sector expenditures registering slower growth in1981 and 1982 the locus of the large current account deficts can nowincreasingly be placed in excess public expenditures over public income,and indeed to the multiplier effects in maintaining levels of privateexpenditure higher than they would otherwise be. In this context however,two points deserve further exploration by the government in the interpreta-tation of recent experience. First it is not known how import intensive therecent public expenditure program has been and the extent therefore to whichthe public sector may directly have contributed to a worsening balance ofpayments position. Associated with this, the degree to which the investmentprogram has contained large lumpy investments of a once for all nature (andwhich presumably could have been heavily import intensive) is also not known.Both these pieces of information have a salient bearing on the adjustmentpotential of the public sector program. Second, in the last three years(particularly in 1981) there have been major purchases by the government ofshares in companies for the purposes of achieving the restructuring targetsof the NEP. These have not involved spending on currently produced goodsand services, and to this extent the direct and secondary impacts ofgovernment spending in the economy may be somewhat less than thought. Animportant point remains however in that although the preponderant motivationfor the public sector stance has been countercyclical, tlhe very rapid risein public consumption. and investment expenditures have inevitably entailedmajor elements of permanence (i.e. an expenditure pattern and a publicsector savings propensity that cannot easily be modified) - in effectstructurally raising the public sector-s role in the economy. This is atheme that is returned to below.

/1 The Treasury has provided forecasts for estimated expenditure as opposedto budgetary allocations only for the development budget. The figuresquoted above refer therefore to operating budget allocation plusdevelopment budget anticipated expenditures. Judging from previousallocation expenditure outturns for the operating budget, andincorporating the lesser flexibility available on the currentexpenditure slde due to the increslng proportion of fixed charges(particularly interest) in the current budget, this estimate ofexpenditure outturn would appear to be reasonable. In short, thereappears to be no reason to expect any under execution of current budgetallocation.

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3.08 An important dimension of the recent experience merits comment.In 1981 and 1982 the current account deficits were associated with continuedhigh consumption (i.e., low savings) and very high investment. In 1981-82,national savings, at approximately 24% of GNP, experienced sharp declinesfrom preceding years, whilst investment averaged a high 36% of GNP. Thus thedeteriorated performance should no longer be thc>ght,/1 as once viewed, assimply a reflection of high investment relative to a good savings performance;It now appears that savings performance, at least in the most recent periodhas weakened considerably. The private sector's savings performancestabilized, after 1980, at 19-20% of GNP; public savings have however fallenrapidly since 1980.

Table 3.4: PRIVATE AND PUBLIC SECTOR BALANCES (% of GNP)

Private Private Private Public PublicNational. Invest- Sector Public Invest- SectorSavings - ment = Balance Savings - ment = Balance

1974 20.9 - 19.0 + 1.9 4.1 - 7.5 - 3.41975 18.7 - 16.2 = + 2.5 2.2 - 9.8 - - 7.61976 23.7 - 13.7 = +10.0 5.8 - 9.2 - - 3.41977 23.7 - 14.0 - + 9.7 4.6 - 10.1 - - 5.51978 20.2 - 14.7 + 5.5 6.8 - 9.7 - 2.91979 23.0 - 15.7 = + 7.3 10.0 - 9.3 - + 0.71980 19.2 - 18.7 = + 0.5 10.0 - 11.1 - - 1.11981 18.8 - 20.6 - 1.8 6.0 - 14.1 - - 8.11982 19.8 - 21.2 = - 1.4 3.2 - 14.9 - -11.7

Source: Revised estimates provided by Bank Negara

f1 See IBRD Macro Economic Aide Memoire; November 1981.

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3.09 In 1981 the private sector entered a period of spending exceedingincome (see Table 3.4)./1 This is somewhat surprising as, in Malaysia, theprivate sector has always been, on balance, a net saver. The estimatessuggest a sudden decline in private savings in 1980 - consistent with alagged expenditure response to the real income gains of earlier years;private savings have since not fully recovered but private investment hascontinued to rise. Both these features require explanation as it might bethought, with near stationary real incomes in the economy in 1981 and 1982,that private expenditures would have slowed to a greater degree. No easyanswers exist; it may be that the multiplier effects of public sectorspending have been important continuing stimuli to private expenditures; itmay be that private savings have been underestimated; it may be that"private" investment figures are artificially high as the "private" sectorincludes, in Malaysia, a number of quasi public organizations, such asPetronas and Hicoms where recent investment expenditures have been high.Some support for this last view is given in Table 3.5 below where privateinvestment is divided into oil and nonoil investment, the former undertakenby Petronas and the oil companies. It can be seen that, as might beexpected, real non-oil growth rates in investment slowed considerably in1981 and 1982; indeed removing "oil" investments from the private investmentaccounts is sufficient to restore a positive private savings/investmentbalance in each year of the 1980-82 period. Removal of other bulky invest-ments, particularly undertaken by the quasipublic corporations, If they wereidentifiable would in all likelihood improve the private balance pictureeven further. Conversely it would indicate that the puie lc sector'scountercyclical impulses through quasi public corporations have been evenstronger and more import intensive than usually thought.

/1 Table 3.4 measures resource deficits of the public sector of about 9% ofGNP on the average in 1981-82. Earlier in this Chapter it has been men-tioned that overall public sector deficits have averaged 20% in 1981-82.These latter numbers have been drawn from the fiscal accounts and arenaturally higher than the former because oz transfers and lending opera-tions which appear in the fiscal accounts but do not constitute publicinvestment or consumption according to National Incorne accountconventions.

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Table 3. 5: PRIVATE INVESTMENT EXPENDITUPES, 1976-82

1975 197h 1977 1978 lQ7Q 1980 1981 1982

Oil 235 21. 332 435 1,315 2,188 2,901 3,399Non-oil 3,257 3,491 4,004 4t682 5.479 7,160 8.416 A,945

Total (M$ million) 3,492 3,701 4,336 5,117 689 92348 ,37 12344

Annual Growth Rates /a (%)Oil - -14.5 53.2 23.8 182.9 40.5 18.5 16.9Non-oil - 1.4 9.8 11.5 3.5 17.5 3.5 -3.2

Total -19.5 0.4 12.0 12.4 17.1 21.3 6.6 6.4

/a Measured in real terms by using private investment expenditurcs deflatorfrom National Accounts.

Source: Bank Negara

3.10 If this view is correct then it would suggest that correctiveforces have been in force over the course of the economic cycle and haveacted upon the private sector. To begin with ovk the upswing of the cyclehigh income generation led with a lag to high spending; the 'lag ofspending behind income growth was associated with temporary balance ofpayments surpluses. On the downswing of the cycle, private investmentundertaken by nongovernmental or nonoil corporations has deceleratedsubstantially. This should in time be reflected in a lower externaldeficit. That it has not so far done so is a reflection of the powerfulcountercyclical stance adopted by the government. We turn now to analyzethis role in some detail.

B. FISCAL POLICY

3.11 In this and following sections we examine this fiscal response andthe enormous stimulus given to the economy; we conclude, in conjunction withanalysis of earlier sections that the major source now of continuing largeexternal deficits is indeed excess public spending relative to income; weexamine the structural consequences of the possibly permanent enlargementof the government share in the economy, and attendant difficulties Whichhave emerged in managing public finances.

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3.12 A brief summary may provide perspective. Since end-1979 publicexpeaditures in real terms have grown about four times as fast as publicrevenues and more than twice as rapidly as GNP growth. A weaker revenueperformance than experienced in 1977-79 resulted in considerable erosion ofsavings. This, coupled with very large increases in capital expendituresopened up unprecedentedly high overall public sector deficits, which peakedin 1982 at 21% of GNP. Financing these deficits has generally proceeded ina non-inflationary fashion and before 1982 there is little evidence of publicsector borrowing "crowding out" domestic borrowers; in 1982, however,evidence for such "crowding out" is substantial. With the large deficitshave occurred comensurate increases in the levels of domestic and externaldebt.

Ex2enditure Expansion

3.13 For the graater part of the 1970s the growth of public revenueexceeded that of public expenditures (see Table 3.6). This position wasdramatically ch,..nged during and after 1980 when public expenditure growthincreased sharply relative to revenue growth: between 1979 and 1982 publicexpenditures increased by 115% in nominal terms (77% in real terms /1 whilerevenues grew by slightly over 50% in nominal terms (12% real)./l By con-trast, nominal GDP growth in the three year period was 35% and real growthwas under 20%. The measure of the expansion may be guaged by noting that inthe first two years of the Fourth Plan period, development expendituresalready undertaken constitute approximately two thirds of the Plan's M$43bln /2 five-year development allocation; by end 1983, on present expenditureestimates, Plan targets will be 93% fulfilled.

/1 Deflated by a weighted average of the Public Consumption and Investmentdeflators in the National Income Accounts. It should be noted thatafter 1980, the public consumption deflator increases at a more rapidpace than either the private consumption deflator or the CPI.

/2 The Fourth Malaysia Plan contains two figures for developmentexpenditures over the 1981-85 period-M$43 bln and M$33 bln. The textabove uses the higher number. By contrast development expenditures inthe preceding plan period (1976-80) were M$25 bln.

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Table 3.6: PUBLIC SECTOR SUMMARY STATISTICS

1971 1976 1980-76 -79 -82 1979 1980 1981 1982/d 1983/e

Growth (% p.a. in nominalterms)

Revenue 19.3 20.3 15.2 26.2 24.8 16.9 4.8 4.8Total expenditure 17.8 16.0 29.0 10.5 38.4 44.1 7.6 1.7Current expenditure 19.1 14.6 23.0 15.3 19.6 34.3 15.9 8.0Development expenditure

(including net lending) 14.6 19.5 41.4 0.5 83.6 59.5 -3.4 -8.3

As Proportions of GNP (X)Public sector revenue 29.4 34.0 38.5 34.3 37.4 38.9 39.1 35.7Public sector totalexpenditure 37.9 40.4 54.5 37.5 45.3 58.1 60.0 53.9

Current savings 2.3 5.71 6.1 7.9 9.8 6.0 2.5 1.3Overall deficit 8.5 6.4 16.0 3.1 7.9 19.2 20.9 17.8

Domestic borrowing /a ofpublic sector as X of.national savings 18.9 10.6 37.6 0.0 17.9 41.7 53.2 -

Public sector borrowing frombanking system /b as X ofdomestic credit expansion 32.5 14.0 27.2 19.9 14.9 10.7 56.0/c -

/a Including banking system, EPF, SOSCO, TPF, finance companies, insurancefunds and merchant banks.

/b Central Bank and commercial banks.77 January to July.7T Estimate.7-e Treasury Forecast.

Sources: Statistical Annex tables, Bank Negara, IFS.

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Spending Pattern: Current and Development Expenditures

3.14 In the 1979-82 period, current spending of the Federal govern--ient /1 increased in nominal terms by nearly 23% p.a. and in real terms by11% p.a. Contrary to widespread impression, despite the Civil Servicesalary increases, expenditures on wages and salaries were not the fastestgrowing component of current spending. Rather, interest payments on thepublic debt grew almost three times as fast - at 35% p.a., and subsidies andtransfer payments four times as fast. The rapid growth of interest paymentsis self explanatory, given the large rises in domestic and external debt tofinance the public sector's deficits.

3.15 At end 1979, expenditures on transfer and subsidies by the Federalgovernment amounted to M$2.3 billion; by end-1982 they had more thandoubled to an estimated M$5.3 billion (about 9% of GNP). About a quarterof this increase was due to increased transfers for pensions and to thestate governments. A further element represents wage and salary increasesto employees of the statutory corporations. (In 1982 about 800 millionriggitt of transfers were accounted for by this item). No detailedbreakdown exists, unfortunately, of the other components of transfer andsubsidy spending. However, it may he inferred that subsidies have hadpreponderant weight. First subsidies to agriculture increased by M$400 mlnin 1980 and 1981; chief sources of this rise have been increased subsidiestowards the purchase of agricultural inputs (particularly fertilizers), theIncreased rubber replanting grants announced in 1979, and the increase, in1980, of the production subsidy given to padi farmers. Other subsidy pro-grams such as scholarships, the text book loan program, the milk and foodfeeding program, accounted for about M$1.5 bln expenditure in 1982.

3.16 The fastest growing subsidies have been those given to theconsumption of kerosene and diesel products which rose from about M$40 mlnin 1978, to an estimated M$750 mln in 1q82, a sum equivalent to about 1-1/2%of 1982 GNP. With the exception of Indonesia, Malaysian diesel and keroseneprices range between 30% to 40% lower than prices for these products inother Asean countries. The petroleum subsidies were ostensibly introducedto protect low income households and traditional small-scale industries, forwhom diesel and kerosene are basic fuels. No impact analysis of thesubsidies has been performed however, and the leakages outside the intendedbenificiary groups remains unquantified. There is partial evidence that thesubsidy on diesel has had a distorting effect on consumption, first, byswitching vehicle usage towards diesel powered cars and trucks (and forwhich the benefits to the poor is probably negligible) and by switches in

/I No detailed breakdown exists for the components of current spending forthe public sector as a whole. Such a breakdown does exist however forthe current spending of the Federal government.

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manufacturing and industrial use from fuel oil (which is in more abundantsupply than diesel)./l With the very large sums of money now being spent tosupport this proper social objective, it does appear advisable that a seriouslook be given to the degree to which the subsidy reaches the poor and avoidseconomically undesirable repercussions and consequences.

Functional Areas of Expenditure

3.17 In 1979-82, development expenditures increased in much morerapidly than increases in current spending - in nominal terms by 41% p.a.and in real terms by 28% p.a. These increases were across the board andevident in all functional fields of spending, but particularly heavilyconcentrated in defence and commerce and industry. The clearest picture ofthe full disposition of federal expenditures in this period /2 is howevergiven by viewing the operating and development expenditures in combination;this is done in Table 3.7 below. Defense and Internal Security expendituresare traditionally the largest spending item for the federal government,accounting for over 20% of all expenditures and net lending in 1979. Verylarge increases in Defense and Internal Security spending in 1980-82 of the

/ In the 1983 budget the government introduced much higher road tax ratesfor diesel cars. Industry sources suggest this is already having animpact upon purchases of diesel powered cars.

/2 Unfortunately, again, the rest of the public sector cannot be includedin this exercise for want of detailed accounts of public authorityactivities. In the sum analysis of fiscal impact of government activitythis is not a serious drawback as the operating and overall deficits ofthe Public authorities are largely financed by grants and loans for theFederal government; federal government activity thus does give a broadpicture of the level of overall public sector activity. More specifi-cally however it can be noted that the major public authorities did,in the 80-82 period, undertake large investment programs. The NEBundertook investments of the order of M$2.4 bln, largely in newhydroschemes investment plans for the years 1983-87 are huge and amountto M$8.3 bln, two thirds of which will be financed by loans, mostlyfrom abroad. The size of the program is in some measure due to aswitch to more capital intensive coal fired schemes. The Telecom'sagency undertook providing "cable" facilities of the order of M$1.3 bln.These two agencies account for the bulk of public authority developmentexpenditures. In addition substantial improvements to the ports ofKlang, Penang and Kuantan were undertaken.

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order of 100% in nominal terms made this category the single largest con-tributor to increase in total federal expenditures. The second largestcontributor to the total federal expansion was spending on "commerce andindustry." To a large, although not complete extent, the motivation forexpenditures in the commerce and industrial fields is to achieve therestructuring objectives of increasing the equity participation ofBumiputeras in the economy as well as opening opportunities for Bumiputerasin modern commercial and industrial life. Significant recipients of thesetransfers (either in the form of grants or loans) include the State EconomicDevelopment Corporations and the Urban Development Authority (which group-ings purchase equity, buy business ventures and construct industrial estatesand commerical properties); MARA; Pernas (the largest single purchaser ofequities on behalf of the Bumiputera community); PNB (which in turn hasbought shares from Pernas for later resale to individual Bumpiputerainvestors; in 1981, the National Equity Corporation, a subsidiary of PNBreceived M$2.2 bln); and the Bumiputera Investment Fund. In addition thegovernment bought equity in Bank Bumiputera, Bank Pertanian and other Banks.Major investments (at least M$230 mln) in HICOMS ventures have includedequity in a Cold Roll Steel Mill, a sheet metal foundry, a sponge iron andbillets plants and a cement plant; numerous other small direct investmentsin companies were undertaken in the 1980-82 period. In 1980-82, spending onCommerce of Industry accounted for 14% of the increase in total FederalexpenditureB. A stepped up program of investment in highways, rural roads,telecoms investment, airports, port facilities and purchase of LNG tankersmade Transport and Communication expenditure the third largest contributerto the Federal expenditure expansion. For the rest, worthy of note, are thegovernments' major efforts to improve the housing of the nation though anaccellerated home building program, expenditures on which increased 185%(nominal) in 80-82, and as noted, the very large increase in interest costsassociated with financing the deficits these many activities haveengendered.

Resource Mobilization

3.18 Malaysia has received deserved commendation for the excellence ofher efforts to raise fiscal revenues. In 1971-1972, for instance taxrevenues averaged 17% of GNP; by 1979-1980; these had risen to 23% of GNP,a ratio maintained through 1982. In addition the Federal government has,in the last three years, raised an additional average 4% of GNP (p.a.) innon-tax revenue. No country in the region matches this effort. Moreover,the recent accomplishment should be viewed against the backgrop of thelargest tax cuts in Malaysian history not to mention a precipitous decllnein commodity export tax receipts. Thus estimated initial revenue lossesfrom tax reductions in the 1980 and 1982 budgets - countercyclical impulsesin addition to the expenditure increases - were about M$660 mln; theseestimates, of course, if summed as a loss of a perpetual stream of futuretax receipts would be much greater.

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Table 3.7: DISPOSITION OF FEDERAL EXPENDITURES, 1980-82

Propor-tional 1983contri- budget

% bution increaseincrease to (%) /b

End 1979 in increase over 19-82actual expendi- in govt. estimatedexpendi- tures, spending expendi-tures 1980-82 (%) tures

General Services 7,472 99 48 1Administration/pensions 1,151 129 10 -2Defense & laternal security 2,547 95 16 10Education 2,257 68 10 12Health 666 58 2 -1Housing, community & social

services 851 186 9 -30

Economic Services 3,117 141 34 4Agriculture, forestry, rural

development 1,082 91 6 4Transport & communications 1,147 144 11 4Commerce & industry /a 493 425 14 -27Public utilities 395 128 3 63

Interest 1,271 120 10 41Grants to state governments 178 223 3 -1Other 157 453 5 15

Total 12,051 121 100 6

/a Commerce and industry expenditures declined substantially in 1982. Endpoint comparisons (end 1979 to end 1982) would thus give an incorrect viewof the contribution of commerce and industry expenditures to the totalexpenditure expansion. Accordingly an average of the expenditures for1981/82 has been used as the latter end point.

/b Based on budgetary allocation. Based on anticipated expenditures, the totalexpenditure increase is only 3%.

Sources: Statistical Appendix tables.

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3.19 Matching the revenue performance has been an equally impressivesavings performance. /I Current savings of the Federal government rosefrom 3.3% of GNP in 1977-79 to 4.8% of GNP in lQ80-82, peaking in 1980 at8.6% of GNP. As the public authorities and State governments are alsosavers (on a basis net of grants from the Federal government), the entirepublic sector's savings have been somewhat higher than that of the Federalgovernment alone (See Table 3.7).

3.20 This comfortable view of revenue effort and savings does howevermask important emerging problems; the period averages conceal the trends, andthe trends over the last two years have not been promising. Federal revenues(both tax and non tax), after growing at 26% p.a. in 1979-lQ80, declined to a14% growth in 1981, and are not expected to grow by more than 5% p.a. in 1982and 1983. Three factors account for this decline; first the cyclical factorsassociated with the decline in commodity prices; second the above-mentionedrounds of tax cutting between 1980 and 1982; and third a lower capacity ofthe tax system to generate revenue, stemming from the present structure ofthe tax system.

/1 This fact, is perhaps less well known, as indeed it does not appear inthe official estimates; nonetheless it is most important for any inter-pretation of recent developments. The point hinges on the treatment oftransfers to the Development Fund - the account through which "develop-ment" monies, both receipts and expenditures, ate channelled. For manyyears this fund has been undercapitalized, and in 1977 the governmentbegan transferring funds from the General Revenue fund to the Develop-ment Fund - with total transfers over the 1977-81 period amounting toabout M$8.9 bln. These transfers have been used to finance developmentexpenditures. The fiscal accounts have treated these transfers as"current expenditures" without any off set 'below the line' for what isessentially an intra-government transfer; thus total expenditures of theFederal government have been overstated. The appropriate treatement ofthese transfers is to treat them as one would savings i.e., monies avail-able and used to finance development expenditures. Two consequencesfollow: (a) removing the transfers from "current expenditures"increases, dramatically, the level of current savings; and (b) the levelof the overall deficits are reduced by extension, the levels of borrow-ing. This interpretation renders far more consistent the reconciliationbetween the government-s overall deficits and the borrowing actuallyundertaken. It is consistent with GFS principles and is also consistentwith the IYF treatment, which raised the issue on its 1982 consultationmission.

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Recession-Related Revenue Declines

3.21 Taxes on trade have traditionally been a very large component offiscal revenues in Malaysia; through most of the 1970s they comprised abouttwo-fifths of all federal tax revenues. In the period of the commodityprice boom (1976-80), as may be expected, revenues from trade taxes,particularly export taxes, rose considerably, only to decline again asprices fell. Thus in 1982 receipts from the export taxes on rubber, palmoil and tin alone were M$1.5 bln lower than in the peak collection year of1979; expressed differently, tax receipts in 1982 would have been aboutthree percentage points of GNP higher, if prices on these commodities hadmaintained their 1979 levels. Following the successive reductions (in the80, 81 and 82 budgets) in tariffs, particularly on consumer items, importtax revenues are estimated to have experienced very modest growth in 1981and 1982. Also subject to the downturn in commodity prices have been incometax collections from corporations (excluding oil), many of which areproducers of agricultural commodities; thus corporate income taxes slowed toa 9% p.a. growth in 1980-82 from a 25% p.a. growth in the 1978-80 period.Selective cutting of excises on consumer goods reduced the rate of growth ofrevenue from this source in 1980-82. Major downward revisions in theindividual income tax, introduced in 1980, allowed this category of revenueto increase by only 3.5% p.a. in 1980-82, after an absolute decline incollections in 1980.

Rise of Oil-Related Taxes

3.22 A much higher government offtake of revenue generated in the oilsector substantially compensated for this disappointing outturn of so manyrevenue sources as oil-related revenues increased more than fivefold overthe period. Correspondingly, the share of oil revenues in total Federalrevenues increased from less than 10% in 1976/77 to more than a third in1982. For the first time, in 1981, Petronas directly remitted dividends onits earnings to the government. Moreover, in addition to this, Petronasalso emerged in 1981 as a major financer of the governments deficit, throughpurchases of government debt. An indication of the growing dependence onoil-related revenue may be provided by noting that, in sum, oil relatedfinancing provided to the government, amounted to more than a quarter of allFederal expenditures in 1982; or expressed differently, this financingsupported over 90% of federal capital spending.

3.23 To be sure, there is nothing untoward or necessarily alarming aboutthis growing reliance on oil-related revenues. Indeed for some years nowinternational economists have maintained that the country's absorptivecapacity has been higher than offical thinking allowed, and that moreextensive use of petroleum revenues could accellerate the provision ofinfrastructure, enhance, in a shorter time period, productive capacity andallow for increased spending on poverty programs. In this regard it isentirely appropriate and proper that the governmenit should make greater

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domestic use of the revenues generated by oil. The element of concern doesenter, however, in that the fiscal position has deteriorated despite themuch larger use of oil revenues. The implicit assumption of a 'safety net'provided by oil revenues to secure a more rapid developmental pace,consistent with fiscal balance, has thus been eroded. Moreover, the use ofoil revenues by the government in the last year has probably been greaterthan the current flow of income, contractually and fiscally due to thegovernment from this export, entailing some drawdown of previouslyaccumulated reserves./I Again, there is nothing inherently negative aboutthis as it has long been stated intention to use accumulated reserves fordevelopmental purposes. The more important point is that oil resources arenow fully committed. Any presumption that future expenditure can be financedfrom 'oil revenues' will need to be carefully examined (assuming that is,that the present pattern of full committment continues in the future); suchexpenditures can only be financed by the increment in oil related revenuesover current levels, or through continued drawdown of accumulated reserves(a finite process) or through reducing present uses of oil revenues, to alLowother uses instead. The future 'budget constraint' may, in short, be muchtighter than anticipated. Needless to say it remains extremely important toattempt a tore precise quantification of this trend.

3.24 Two further reflections are pertinent. First the very largereliance on oil related revenues, at a time of high overall deficits, renderthe governments' programs very vulnerable to charges in the price of thispotentially volatile commodity. Second the availability of oil revenues haspermitted an expansion of government activity much greater than wouldotherwise have been the case. Some of the implications of this growth ofgovernment activity are treated in the section on the size of governmentbelow.

Buoyancy, Tax Structure and Development Priorities

3.25 We can now turn to considerations of the revenue generatingcapacity of the tax system. For many years particularly from the earlyto late seventies, Malaysia enjoyed (through, it should be said, consideredgovernment policy) the advantages of a tax system so designed that taxrevenues considerably outpaced the growth in general economic activity; thisis captured by noting that the bouyancy of the tax system through the decadeof the 1970s was 1.4. Excluding oil revenues (to ensure comparability) andallowing for notional losses of revenue from commodity price declines, the81/82 period buoyancy was of the order of 0.8, a third lower than obtained

/1 In 1982 government oil-related revenues (through oil company taxes,export taxes, royalties, Petronas dividends etc.) were 97% of the valueof oil exports. This would certainly imply a draw down of Petronasreserves in 1982.

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in the seventies. Including oil revenues, the system buoyancy dropped to1.1. By contrast recent estimates of the average bouyancy of the taxsystems of the OECD countries put this at 1.2./I

3.26 With some qualifications, this decline in revenue-generatingcapacity is a matter for concern. On the one hand the availability of oilrevenues has allowed the government to substitute revenues from this sourcefor revenues from other sources; the reduction of more traditional taxesespecially if they had a heavy incidence on the poor, may in this sense beregarded as a quite legitimate use of oil money. On the other hand this hasoccurred at a time of historically high deficits and the loss of revenuefrom any source may be regarded as unwelcome, as horrowing, with itsattendent claims on future resouces, has had to substitute for presentresource mobilization. This must he halanced however, against the fact,already noted, the despite the historic deficits, Malaysia remains one ofthe most highly taxed countries in the region. Thuls further taxation ontraditional sources would need to justified by the pressing need for addi-tional public revenue (no easy argument at a time of economic recession) sndweighed against considerations of further increasing the governments' claimon total economic resources as well as possible incentive and allocationeffects.

3.27 One consequence of this discussion is indeed that the presentdeficitary problem appears less an effect of low overall revenue inobilization,which, despite recent reduction in buoyancy in Maiaysia still remains high,but rather to be ascribed to high expenditures. Atid an important pointremains in that the recent decline in buoyancy - both iverall but particularlyfrom traditional, non-oil, revenue generating sources, - is not anirrerevsible process; apart from cyclical impacts, the government has in thelast three years, as a matter of policy, reduced the levels of taxation.

Tax Structure

3.28 The question does remain as to whether the structure of the taxsystem as currently constituted best promotes the production and welfareconcerns of the government and nation. The government is indeed consideringrestructuring the tax system and certain points bear emphasis. Mostimportant perhaps is to reconsider the desirability of high taxes on trade(excluding oil, of course). Malaysia, as noted, has traditionally reliedheavily on export taxes for revenue generation and the effective rates oftaxation on exports Is much higher than in neighboring countries. Not onlyare these taxes fiscally capricious, with receipts ranging widely accordingto the vagaries of international commodity markets (thus importing fiscal

/I See "Public Expenditure Trends" OECD 1978.

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instability to the government), they dampen producer incentives and arelargely borne by the agricultural sector which is the locus of most of1alaysia's poverty. In the case of the rubber tax in particular, despitecommendable recent efforts to reduce regressivity, there is little doubtthat poor rubber smallholders have been disproportionately financing thedevelopment of the country./l In view of the serious concerns about theplight of agriculture in the country, it is highly to be recommended thatexport taxes be gradually but severly reduced. In 1982 the rubber exporttax brought a mere M$150 mln ringgit to the Treasury (c, M$1.1 bln in 1979),approximately 1% of total tax revenue. Elimination of the tax now appearseminently feasible from a revenue standpoint and will certainly, byaffecting expectations of future revenue retention by producers, have apositive impact upon production.

3.29 Compared to other countries at similar levels of developmentMalaysia collects little by way of personal income taxes and generalizedsales taxes. The gap introduced by the proposed reduction in export taxesmay well be taken up by these two categories of revenue. In the case of theindividual income tax it has been suggested /2 that although marginal ratesare quite high the comprehensiveness of the tax has been seriously eroded bywidespread exemptions and allowances, whilst taxes on wealth are of limitedsignificance. Closing loopholes, reducing exemptions and broadening thebase of the tax in general are to be recommended. Present consumption taxesin Malaysia produce limited revenue and have little equity impact. Inrecognition of the potential revenue contribution the government has raisedthe rate of sales taxation from 5% to 10% in the 1983 budget, and also theservice taxes from 5% to 10%. These moves are appropriate and welcome,though to discourage the generalized move of factors of production to theservices sector, a policy consonant with earlier analyses in this report,higher relative rates of service taxation should be considered.

The Overall Deficit

3.30 In the past three years the Federal government's overall deficithas climbed from an average 6% of GNP in 1976-79, to an average of almost14%. In 1983, despite the expenditure slowdown, the Federal deficit isexpected to be 15% of GNP. Since the rest of the public sector also spendsmore than it generates by way of revenues, the net consolidated public sectordeficits are somewhat higher than this (see Table 3.7) - peaking in 1982 atnearly 21% of GNP, and expected to decline, modestly, to 18% of GNP in 1983.It goes, perhaps, almost without saying that deficits of this magnitude are

/1 See the Bank's report on Rural Poverty.

/2 "Malaysia: Restructuring the Tax System for Growth, Exports andEquity," IMF June 1982: p. 51, p. 21 and pps. 82-98.

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not only high from a Malaysian perspective but also very high ininternational perspective.

3.31 There can be little doubt that the excess expenditures overincomes generated in the public sector in the last three years haveprevented a deep adjustment to terms-of-trade imposed losses of real incomein the economy. To be sure, not all of the huge widening in the overalldeficits of the public sector can be attributed to positive countercyclicalpolicies; the automatic reduction in tax revenues consequent upon the fallin commodity prices (estimated at about 3-4% of GNP), accompanied by trendgrowth in public expenditures would, in any event, have widened the overalldeficits had no countercyclical action been taken. Be that as it may, anexceptional positive countercyclical impulse was given and through itsdirect and indirect inpacts upon private spending and imports has been amotive force in stimulating large external deficits. The cumulativedeterioration in both internal and external balances have been exacerbatedby repeated, and unexpected, postponements of an OECD recovery. To financethese imbalances the government has had to have substantial recourse todomestic and external sources (see Section III below); in recent monthsevidence of public deficits' crowding out private financing has begun toappear and the rapid rise in foreign obligations has signalled a conditionfor concern. With these indications, the government's decision in mid-1982to end the countercyclical stance and begin a process of adjustment wasentirely proper. The burden of adjustment now should fall on the fiscalside, as representing the major source of present disequilibrium.

Reducing the Deficit

3.32 Perhaps the most important question to be addressed is theflexibility available in reducing the growth if not the absolute level ofexpenditures. As noted earlier, concern about the overall deficit arisesless on the revenue side as Malaysia's tax ratios to GNP remain high despitethe recession;/l the concern arises more from any permanence associated withexpenditure shifts. Here, it is necessary to distinguish between currentand capital spending on the assumption that increases in current spendingare often of a more permanent nature.

3.33 The presumption that the increase in current Federal Governmentcurrent expenditures is permanent appears realistic with one important

/1 To be sure, revenue recovery will not be instantaneous as tin and rubberprices are not expected to reach their previous high points, in current$, until 1984 and 1985 respectively; and more appropriately in constant$, until 1985 and 1990 respectively; the restructured rubber export taxwill not yield the same tax revenue until higher prices than the record1980 prices are achieved; and, most important, the government mayconsider, as discussed earlier, a tax restructuring, shifting taxrevenue generation away from heavy reliance upon export taxes.

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exception (see below). In the 1983 budget for instance the Government hasmade major efforts to control Federal Government current expenditures.Nonetheless these are expected to increase by 8-9% in nominal terms over1982 levels, In the budgetary allocation (which appears a realistic base,in 1983, for expected expenditure outcome), wages and salaries and purchasesof goods and services are contained to virtually zero nominal growth; thesecond largest category of expenditures - transfers and subsidies - arecontained to less than 4% nominal growth; however, the remaining item,interest payments, is expected to increase by 41%. Since this is anobligatory item, which may be expected to grow in the future, latitude foroverall containment in future years of current expenditures, appears small,particularly since negative real growth in wages and salaries (the largestsingle component of current expenditures) cannot, in all probability, becontinued indefinitely. The important exception however is thatconsiderabtle flexibility may exist in reducing transfer and subsidy items.This will require a careful examination of the various programs,particularly the diesel and kerosene subsidies, with policies devised toreduce their claim on Federal resources.

3.34 Attention must therefore on the expenditure side, turn to capitalexpenditures in attempting to determine the 'permanence' of the deficit.Here it must first be noted that the government has made major efforts inthe last two years to reduce expenditures. Federal Capital expenditures(including net lending) in nominal terms are expected to be 12% lower in1983 than the peak year of 1981, and in real terms of the order of 20%lower./l Despite this major effort, the weakening revenue performance hasundercut attempts to reduce substantially the deficit. While the originalexpenditure cuts were "across the board," it appears that more recentefforts to contain expenditures have been more selective in focus.

3.35 The attempt to assess the ease with which capital expendituresmay be compressed does require a comprehensive effort by the government toanalyze elements of the recent fiscal experience which bear on this issueas well as development of a comprehensive investment program that can befitted to expected resource availabilities. In the absence of a detailedinvestment program /1, only broad criteria and directions may be suggested:

/1 Deflated by GDP Public Investment deflator.

/2 The Plan is indeed the only official document that contains a comprehen-sive investment program and as noted earlier, by end-1983, the alloca-tion for the Fourth Malaysia Plan will be over 90% spent. Moreover, itappears that many extra "Plan" items entered in the last two years andpresumably some original investment items have been postponed or havedropped out of the Plan investment program. At present, therefore,there exists no detail on the government's planned public expendituresover a medium-term horizon; this may be remedied in the publication ofthe Mid-Term Review in March 1984.

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(a) The recent, very rapid, expansion of government expendituresincluded many "once for all" items that will automatically dropout of the future investment program: examples would includethe building of a liquefaction plant in Bintulu, purchase ofLNG tankers, of port facilities in Labuan, purchases offoreign-held plantation companies and so on. Unfortunately,it is not known how large a component of recent investmentsthere once for all" items have been. Analysis of this pointwould be most useful to the government in establishing the"base level" of the future investment program. (Such anexercise requires a detailed inventory of the time phasing ofprojects under implementation.)

(b) At the same time a highly informal judgment would suggest thatthere is no shortage of planned public sector investments totake up the slack. This, especially, in view of the ambitiousinvestment program in the energy sector - where, for instance,planned NEB investments in the next five years amount to M$8.3billion, in the downstream utilization of gas reserves, and thethrust towards building a heavy industry base (where estimatessuggest planned investments in excess of M$6 billion). It isimportant to attempt a financial quantification of these programsand match those with macroeconomic availability of resources,consistent with fiscal, financial and balance of paymentsstabilization. The presence of these potential large investmentitems removes any presumption that there are automatic self-corrective mechanisms that will reduce the level of publicsector investment expenditures in the future; indeed positivedecisions will be required to establish priorities, withsubstantial deferral or scrapping of proposed investments thatcannot be fitted into the scheme of available resources.

(c) In this regard, it will be important to adopt an all inclusivedefinition, of the "public sector" and include such entities asHICOMS and Petronas in the public sector accounting net. Thefiscal system of Malaysia, for reasons of historical evolution,concentrates attention on the Federal government program andactivities. However, the very rapid growth of an "off budget"public sector, coupled with the severity of the macroeconomicdifficulties, suggests the need to develop a comprehensivepublic sector" investment program;/l for obvious reasons a

/i Of course, many of these agencies enter the budget but only in restrictedways, e.g., through Federal government loan provision which is afraction of their required investment needs; additional investmenttinance is then independently obtained by the enterprise. The entireinvestment programs of these agencies should be counted in the publicsector investment program.

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large, autonomous, "public sector" which escapes accounting in theoverall fiscal limits exercised by government, can seriouslyundermine the conduct of fiscal policy. There is a furtherimplication that the investment programs of these agencies be thenconsidered in terms of merit vis-a-vis the entire investmentprogram of the government and not be given a privileged statusimmune to revision.

(d) An important feature of several major proposed investments isthat they are heavily import-intensive. Again, no informationis available c- this point, as indeed no information isavailable on the extent to which the recent rapid rise in importsmay have been directly due to large public-sector investment goodimports. Nonetheless, as it now appears that Malaysia faces aperiod where foreign exchange will be at a premium, it would beimportant to monitor the degree to which public sector investmentimports are bringing pressure to bear on the balance of payments./IAlthough in addition, many projects may indeed successfully passeconomic rate of return tests (after their import content has beensuitably priced and after protection and subsidy elements havebeen removed from the calculation) considerations of timing mayallow a phasing of projects that minimizes excessive public sectordemand for foreign exchange. It would, naturally, also beimportant to consider the implications of servicing the externaldebt associated with these imports particularly with the gestationlag associated in these projects either earning or saving foreignexchange.

3.36 This discussion, although admittedly inconclusive, does nonethe-less point in the direction that there is nothing peculiarly permanent'about Malaysia's large overall deficits; on the current expenditure side,flexibilitv for reducing spending on subsidies and transfers may, onexamination, exist, and likewise detailed examination of the country'slong-term capital budget may allow for selective reductions as well as analtered time profile of projects that is consistent with improved fiscaland external account balances.

Consequences of Deficit Reduction

3.37 The important question to whether overall growth, income andemployment generation will suffer in consequence is probably to be answeredin the affirmative. Against this it needs to be acknowledged that theeconomy likely runs greater dangers of a 'permanent' severe fiscal dis-equilibrium, leading to a potential abrupt halt to growth if gradualist

/1 In a micro-economic sense, this problem may be tackled through use ofan appropriate shadow exchange rate in the economic evaluation of theproject concerned.

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measures to reduce the deficit are not undertaken in the short to mediumterm. It should also be noted that the large recent government expenditureexpansion has not been accompanied by growth rates close to the historicalones of 7-8% p.a., but rather by declines in growth to 4-5% p,a. Thispoints to a different conclusion - that growth in Malaysia is not nowaltogether effectively accelerated or retarded by government expenditures -but rather is effectively constrained by other, more structural factors.

3.38 To this end, the level of government expenditures is perhaps lessan issue in achieving the overall ends of policy as is the 'growth climate'provided by the allocation and efficiency aspects of government expendi-tures, and the incentive framework for growth and employment absorptionimplicit in the tax regime. Thus an important way to minimize the negativeeffects of overall fiscal restraint is indeed to address more substantiallythe issues of the allocative disposition of government expenditures towardsgrowth enchancing activity, the efficiency of the public investment program,the rationalization of subsidy and other expenditure programs to ensure theyare meeting their objectives and to redress any implicit biases in the taxregime against production.

The "Size" of Government

3.39 Malaysian planners in the FMP implicitly argued that the publicsector was, in some sense, in danger of becoming too large in relation tothe economy and that therefore the growth of public sector activity was tobe held in check for the Plan period 1981-86;/1 this was reflected in plansfor a much lower (real) growth in public expenditures, particularly publicinvestment, than historically experienced in the seventies. Events have, ofcourse, overturned official intentions, as although dramatic, it remainstrue to say that the largest expansion of government in Malaysia's postindependence history has occurred in the last three years. To be sure,cogent reasons have been advanced for this expansion but the implicationsand consequences of a much larger government presence in the economy thanplanned, merit the most serious government deliberation.

3.40 Table 3.8 presents a variety of statistical measures on theexpenditure presence of government in the economy./2 All these measureshave deficiencies the most notable of which is undercoverage. Because theyuse a narrow definition of "the public sector" ommitting the large quasi-public sector that has grown in the last few years the measures understatepublic sector activity in the economy. In sum, however, all three measuresshow a large increase in government participation, with estimates rangingbetween 10 and 20 percentage points of GNP increase over the period.

/1 See paragraphs 483 and 516, FM4P.

/2 Government absorption of resources through revenue mobilization has beentreated in the section on Resource mobilization above.

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3.41 Malaysia certainly now has the largest government share in theeconomy of any country at its level of development. Brazil, Mexico, Koreaand Turkey for instance are the countries nearest to Malaysia in terms ofper capita income; their recent government consumption expenditures (NIPAdefinitions) as a proportion of GNP have ranged from 10% to 14% as comparedto Malaysia's 19% (1979-81); central govenment expenditures (fiscal accountdefinition) of these counitries have ranged between 9T and 26% of GNP comparedto Malaysia's recent average of 38%; a similar pattern is evident in govern-ment revenue shares. Indeed the presence of the Malaysian government in theeconomy has recently approached that of the OECD countries, where largegovernment sectors are indeed much more affordable because of much higherincome levels.

Table 3.8: SUMMARY OF GOVERNMENT EXPENDITURE SHARES IN ECONOMY(% of GNP)

1971-76 1977-79 1980-82 1982

Consolidated Public Sector /a 37.9 40.4 54.5 60.0

Federal Government /b

Total Expenditures 29.0 31.0 41.9 45.3

Goods and Services andCapital Expenditures /c 15.7 18.9 25.7 26.4

Transfers, Subsidies, Net Lendingand interest 13.3 12.1 15.3 18.9

NIPA Public Sector /d 24.9 26.2 33.2 36.6

NIPA Public Consumption 17.2 16.4 20.5 21.7NIPA Public Investment 7.7 9.8 12.7 14.9

/a Source: Statistical AppendixTh Source: Statistical Appendix7/ Excludes from Federal Expenditures, Transfers, Subsidies, Interest

and Net Lending/d National Income and Product Accounts; Statistical Appendix

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3.42 With Malaysia's long standing commitment to attainment of socialae well as economic goals, and with the commendable use of the instrumentsof public policy for redistributive purposes, it is realistic to expect thatthe governments's presence in the economy will be large. Certain economicentailments do follow, however, from a rapidly growing government presenceand these do perhaps merit government attention. The rapid enlargement ofpublic sector activity does structurally shift the economy's composition ofoutput away from the goods and services produced by the private sectortowards the goods and services produced by the public sector. The highpresence of government is also in some degree reflective of large transferand subsidy payments and of high taxation, each altering the terms on whichthe private economy operates. There is also, inevitably, an increasingcommand over economy wide resources - human, material and financial. Apartfrom these allocative considerations, there are efficiency considerations.These relate to how much the government earns by way of returns to

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investment as compared to the private sector; the impact of higher taxationupon incentives , and in terms of future growth, the productivity gains to befound in public service as opposed to productivity growth in the privateeconomy. These efficiency and allocative impacts do frame questions whichdeserve continuing attention.

C. MONEY, DEFICIT FINANCING, PRICES AND EXTERNAL DEBT

3.43 There have been close links between the evolution of the commodityprice cycle, the "countercyclical" response of government and monetarydevelopments. Table 3.9 below captures the main features.

Table 3.9: CREDIT AND PRICES /a

1976 1977 1978 1979 1980 1981 1982

% growth p.a.

Total Domestic Credit 13 23 26 11 51 30 21

Credit to Private Sector 24 20 31 26 40 23 16Credit to Public Sector /a

(net) -37 47 -16 -Ilb -lb 316 74

M4t 21 17 18 17 15 13 13FZ 28- 176 f8- 24 28 -17 176

Net foreign assets of thebanking system 63 5 6 43 -3 -13 1

Nominal GNP 25 15 12 25 15 10 6

PricesGNP deflator 13 7 5 14 6 3 2CPI 3 5 5 4 7 10 6PPI 10 9 6 12 10 1 n.a.

/a Refers to Federal and State Governments only.

/b At end 1979 net credit extended to the government was negative.

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In an economy as open as Malaysia's the appropriate item to focus on isdomestic credit created by the authorities rather than measures such as MIand M2 which are substantially affected by movements in internationalreserves. Over the period 1976-1979, increases in credit in the economyroughly kept pace with growth in nominal GNP. In 1979 in particular, thelarge influx of foreign exchange into the monetary system was effectively(and appropriately) sterilized by countervailing action by the monetaryauthorities. In 1980 this stance was reversed and domestic credit expandedby 50% - well above any measure of domestic inflation. A very large mone-tary impulse was thus given to the economy in 1980, in addition to thefiscal impulse already being given. Since 1980 the rate of domestic creditcreation has steadily been brought down, but it has still remained well abovethe growth in nominal GNP - in effect adding substantially to nominal demand.(Thus between 1980 and 1982 domestic credit in the economy increased by 140%whilst nominal GNP expanded by only 34%). The very large disparities betweenthe growth of credit and the growth of nominal GNP have undoubtedly been animportant factor in the deterioration in the balance of payments, as resi-dents have, simply, exchanged money created domestically for imports. Iffurther deterioration is to be avoided a more restrictive credit stance wouldappear advisable, one more consonant with the gorwth of overall nominaldemand.

3.44 To assert this does require an examination of the sources of creditexpansion, in particular the role played by the large fiscal deficits andthe degree to which the monetary authorities have had to adopt accomodatingpolicies in order not to crowd out credit demands to the private sector. In1980 and 1981 there is little evidence of financial crowding out. Monetarypolicy appears to have allowed both an increasing recourse to the monetarysystem by the public sector as well as accomodate private sector demands.In 1982 however the authorities did attempt to reduce the rate of growth ofmoney supply (the policy variable most usually focussed upon); between end1981 and August 1982, M2, rose at an annualized rate of only 7.3%. Withthis degree of tightness however the public sector's absorption of totalcredit created in the economy in the first eight months of 1982 was wellover 50%. In the last four months of the year, M2 rose at an annualizedrate of 33%, and by year's end the share of government in total domesticcredit creation had fallen to less thar 30%. The linkages betweengovernment deficit financing, crowding out of the private sector followed by

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rapid monetary expansion do thus appear to have exercised influence onmonetary developments in 1982./1 There are clearly dangers in this devel-opment as excessive credit restriction to the private sector is likely toImpinge upon levels of activity as well as the formation of productivecapacity. Relaxation of monetary stringency in turn would be strongly asso-ciated (in Malaysia) with increased demand; the government deficit throughthese mechanisms can thus only contribute to a worsened balance of paymentsposition, and ultimately have effects upon the exchange rate and domesticprices.

3.45 There are other effects of the government's magnified entrance todomestic financial markets that deserve note. Between 1976 and 1979 thepublic sector's domestic borrowing (including EPF) averaged leas than t1% ofgross domestic private savings generated in their econo;ny. In 1930-82 domesticborrowing by the public sector averaged near 40X and in 1982 was nearly 50X ofgross domestic private savings. With the private sector now running resourcedeficits there can be little doubt that the rapid growth of the public sector,has led to a growing competition for the economy's savings resource. Theequilibrating mechanism thus far hag, of course been foreign savings, asreflected in the large balance of payments deficits. But the process ofacquiring external liabilities is a process of finite limits. Moreover itshould also be noted that the public sector s access to domestic savings is atpreferential rates through captive institutions (largely the EPF, Petronas andthe Monetary system); seigniorage transfers,/2 on one

/1 This statement cannot be made more categorical by suggesting directinfluence between the government's deficit and expansion of money. Therelationships have been indirect. In the first eight months of 1982, asnoted, domestic credit to the public sector expanded at a very rapidpace. At the same time the net foreign asset level of the monetarysystem was diminishing, and thus M2 growth was subdued. In the lastfour months of 1982 total credit expansion in the economy continued butthe public sector-s net offtake diminished in absolute as well asproportional terms - freeing, in a sense, the banks to lend to theprivate sector. The public sector, in turn, was able to accomplish alower level of credit demand by substituting foreign borrowing fordomestic; the inflow of foreign exchange effectively increased theforeign asset position (net) of the banking system and accelerated thegrowth of M2. As the government comes to spend the domestic depositscreated by foreign borrowing, one may expect a multiple expansion of moneyand credit. The links between deficit financing in Malaysia and monetarypolicy have thus been quite subtle but nonetheless quite strong.

/2 The difference between the interest rate the government would have topay in the market place as opposed to the interest rate it does actuallypay, by virtue of its special role in the economy.

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calculation, may recently have amounted to 10-15% of private savings. Thesetransfers amount to a tax or holders of government debt and are not conduciveto efficiency in the financial system.

Government Deficits and External and Domestic Debt

3.46 The Government's very large deficits have naturally resulted in alarge issuance of domestic debt as well as high levels of external borrowing.Table 3.10 illustrates some of the main trends.

Table 3.10: FINANCING OF THE FEDERAL DEFICIT

1976-79 1980 1981 1982/a

Deficit M$ bln 2.2 3.6 8.6 9.7

Proportions of Total Financing (%)External 27.4 8.5 33.7 41.6(Project) (15.5) ('.2) (3.5) (5.1)(Market) (11.9) (-'.7) (30.2) (36.5)

Domestic 72.6 91.5 66.3 58.4Banking System (-8.7) (56.1) (13.4) (27.7)of which Central Bank (Net) (-15.3) (55.6) (-3.5) (4.1)

Commercial Banks (Net) (6.6) (0.5) (16.9) (23.6)

Nonbanks (81.3) (35.4) (52.9) (30.7)EPP (44.7) (31.2) (20.1) (15.3)Petronas - - (20.3) (15.4)

Domestic debt M$ bln 15.9/b 18.3 22.4 28.5Public and publicly guaranteedexternal debt M$ bln /b 9.2/b 10.8 13.9 18.6

/a 1982 details of financing are IBRD estimates based on Jan-July numbersand the estimated deficit.

/b End 1979. IBRD debtor reporter system: includes undisbursed debt;figures for 1982 are estimates based on net external borrowing of theFederal Government in 1982; this may understate external public debtlevels for 1982 because of the exclusion of guaranteed debt.

Source: Statistical Appendix.

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3.47 Dealing first with the role of external financing it may be notedthat external borrowings have become an increasingly important source ofdeficit finance, rising from 9% in 1980 to over 40% (of a much larger defi-cit) In 1982. External financing for specific projects no longer providedthe major rationale for increasing external indebtedness as market loans,substantially for balance of payments support, assumed much the larger pro-portions of external sources of finance. Concurrent with this trend was anincreasing proportion of external finance obtained at variable interestrates, from 25% of disbursed debt in 1980 to over 50% of disbursed debt in1982. The level of disbursed public and publicly-guaranteed external debtstood at US$6.8 billion at end-1982, up from US$4.6 billion a year earlier.As a share of GNP, shown in Table 3.11 below, such debt has risen from 16%in 1977-79, to 27% at the end of 1982. At the same time, the servicing ofthis debt is beginning to pre-commit an increasing proportion of earningsfrom the exports of goods and services, as is shown in the rise of the debtservice ratio from 4.4% in 1979, to an estimated 7.0% at end-1982. However,recent movements in the debt service ratio are an Imperfect indicator ofpotential debt servicing problems for at least two reasons. Because of anaverage grace period of 4-4.5 years on loan repayment, the servicing ofrecently-contracted debt is only partially accounted for during theseperiods when only interest payments are made on debt. Therefore, if netborrowing levels are maintained, a rapid increase may be expected in thelevels of debt service (on already contracted debt) in the near term. Thesecord concern, of course, relates to an acute bunching of repaymentmaturities that is taking place. Nearly 85% to 90% of net external borrowingin 1980-82 was at market terms, with maturities of about 10-11 years, sothat repayment on these loans will begin to operate about 1984-86; the highcontraction of debt in the recent period implies that this burden will bequite high, so that gross new borrowing levels will have to rise greatly toensure a net inflow of resources.

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Table 3.11: EXTERNAL BORROWING DEVELOPMENTS: SUMMARY STATISTICS

1971-76 1977-79 1980-82 1979 1980 1981 1982

Public and publiclyguaranteed borrowingNominal rate of 20.2 21.0 32.7 14.4 9.0 49.1 43.1growth (%)

Debt service ratio 3.0 7.0/a 3.1 4.4 2.2 3.1 7.0Debt/GNP ratio 12.8 15.6 19.9 14.5 13.7 19.2 26.7

Net foreign assets ofCentral Bank/GNP 19.1 21.5 18.2 21.4 20.9 17.7 16.1

Net foreign assets ofcommercial banks/GNP -0.7 -0.9 -2.2 0.7 -1.9 -2.9 -1.8

/a The high average devt service ratio for 1977-79 is mostly due to prepay-ment of principal in 1978.

Source: Statistical Appendix.

3.48 In comparison to neighboring countries, Malaysia continues to enjoyrelatively easy access to international financial markets because of its lowerdebt servicing burden and traditionally prudent macro-management. This isseen not only in the terms of which the country has been able to borrow ininternational market (e.g. at spreads of 3/8% above LIBOR and 1/8% over the USprime rate on its "jumbo" syndicated loan of US$1.1 billion in August 1982)but also in the diversity of borrowing instruments (syndicated loans, floatingrate notes, international and yen bonds) that could be employed in a period inwhich most less-developed countries found the external borrowing environmentincreasingly difficult. The operative question at this juncture is, however,whether such favored access can be expected to continue over the medium-term,especially if external sector deficits persist for a longer-than-expectedperiod. Whilst no categorical answer can be given to this question, areasonable expectation would be that terms would, in time, begin to harden.As this depends upon the future evolution of the balance of payments, a fullerdiscussion is deferred until the next chapter.

3.49 Turning to domestic financing, certain trends are again visible(abstracting from 1980, whichl in some ways was an anomalous year). First theEmployees Provident Fund, which has traditionally provided the bulk of nonbankfinancing to the government has progressively reduced its proportionate sharein financing the deficit; this is likely to continue as hitherto, payroll

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contributions to the EPF have been a 'captive' source of public sector finan-cing; recently, however, contributors to the fund were allowed to use theircontributions to finance house purchases and thus there is likely to be adiversion of credit from the EPF away from the public towards the privatesector. Second nonbank financing of the deficlt would have been even lowerin the recent period had the goverrment not been able to tap Petronas funds;Petronas emerged as a major purchaser of government debt in 1981 and 1982and this is, again, likely to continue in the future. This speaks both tothe increasing reliance on oil revenues as well as to the near completecommitment of oil revenues to government programs, mentioned earlier in thisreport. Third, Bank system financing (again abstracting from 1980) hascorrespondingly increased with the preponderant source of credit being thecommercial banks. Some dangers of excessive recourse to this mechanism havebeen pointed out earlier, in terms of eventual accomodation of commercialbank demands for reserve creation to meet private credit demand.

3.50 Together, outstanding domestic and external debt will have risenby over 80% in 1980-82. In an unpublished review by the IMF in 1980,/1 itwas noted that already by the mid-70s, Malaysia had one of the highest debtto GNP ratios in the world. In a sample of 64 countries, Malaysia-s debt toGNP ratio (in 1975-79), at 51% of GNP, was exceeded only by eight countries;(in descending order, Israel, Zambia, Zaire, Sri Lanka, Ireland, Pakistan,Singapore and the United Kingdom; these countries' debt to GNP ratios rangedfrom 51.6% to 89.4%). This indeed was much more a reflection of a highdomestic debt to GNP ratio, than of external debt to GNP; in short, areflection of Malaysia's high domestic resource mobilization effort with amuch lesser reliance on external borrowing. (In the same country sampleMalaysia was in twenty fifth place in terms of external debt to GNP). Byend 1982, however, it is estimated that Malaysia's total debt to CNP ratiowill have risen to almost 75% of GNP (48% domestic debt to GNP and 27%external debt to GNP). This must surely place it amongst the countries withthe highest stock of government debt relative to income. Domestic debt isdebt owed by a nation to itself creating little cause for alarm but nonethe-less engendering substantial precommitment of future revenues, and otherwiserequiring higher taxes to service obligations. More worrying however is therapid growth of the external debt. In the above wentiorted 64 countrysample, Malaysia with external debt equivalent to 27% of CNP would haveplaced sixth after Israel (76%), Zaire (49%), Netherlands Antilles (49%),Pakistan (34%) and Botswana (34%). Debt to GNP ratios do figure intraditional analyses of creditworthiness, although they are not the soleperformance indicator. The more usual debt service ratios however mayappear more favorable to Malaysia because of Malaysia's high exports/GNPratio and because of the grace period referred to above. The very rapid

/1 "Domestic Debt Management" IMF 1980.

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rise in the ratio should give pause for consideratio;r as to the range oftolerable future increases to preserve Malaysia's well deserved reputationfor creditworthiness. In particular, debt rises of this magnitude give riseto high debt serving obligations; thus in 1975-77 interest payments alone,,by the Federal government alone, consumed 12.5% of Federal revenue; in 1983this ratio is expected to climb to 23%. The flexibility for financinggovernment expenditures out of general revenues is commensurately reducedand this speaks eloquently to the need to bring expenditures into greaterbalance with revenues.

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4 GROWTH AND BALANCE OF PAYMENTS ADJUSTMENT

4.01 It is clear that Malaysia has in recent years been running balanceof payments current account deficits that are very high in a historical andinternational perspective. Substantial amounts of borrowing are being under-taken to cover these deficits. Because of Malaysia's excellent credit rat-ing and very low initial debt service obligations, these borrowings arebeing incurred at relatively favorable terms. Still, interest payments arestarting to build up rapidly, and, after initial grace periods run out,amortization will increase even more quickly. The fact that present debtservice is still low should therefore give no reson for complacency. Indeed,as argued in more detail below, on any set of reasonably realistic assump-tions, the current account deficit needs to be reduced sharply if Malaysiais to avoid serious debt servicing problems in the second half of this decade.

4.02 The first section of this chapter briefly discusses the concept ofsustainable current account deficits, given maximum tolerable debt serviceobligations. It identifies the main factors which determine the size ofcurrent account deficits (in % of GDP) which can be incurred indefinitelywithout surpassing a certain debt service ratio. This first (theoretical)approach indicates that the present level of deficits is much beyond thelevel that Malaysia can prudently sustain over the medium to longer term.The next step is then to consider various scenarios for the concrete presentcircumstances of Malaysia. Although these scenarios have been explored withthe help of a macroeconomic model, the emphasis in this discussion is primrarily on the balance of payments. Given the large problems in that area,and the uncertainty with regard to their solution, the implications for therest of the economy are only briefly brought into focus.

4.03 Since a number of Malaysia's major exports are largely constrainedon the supply side, at least over the medium term, the approach followed isto estimate a base case for export growth. Export and import price trendsare derived from the World Bank's latest estimates in this area. The balanc-ing item then becomes the volume growth of imports, and the various scenarioswhich are explored therefore mainly concentrate on that variable. This shouldhowever not be taken to imply that the policy emphasis should be fully onimports; to the contrary, for Malaysia's longer-term development a healthygrowth in exports is a very important requirement.

Sustainable Borrowing Levels and Current Account Deficits

4.04 If it is postulated that the debt service should not exceed acertain percentage of exports, that the economy is stationary, and thatborrowing conditions are given and constant, then the maximum account thatcan be borrowed each year can be calculated in a straightforward manner.Introducing growth in the economy only adds minor complications to thecalculations. Any combination of assumptions can be made, but if it isassumed here that the nominal growth rate of exports and GDP are 12% p.a.,

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that the nominal interest rate is 10% p.a., that borrowing is undertaken onaverage maturity of eight years (including three years grace) /1, and thatthe allowable debt service ratio is 20% of exports, then annual borrowingcould be about 11% of exports or 5-6% of GDP. Translating this into anannual sustainable current account deficit requires another set ofassumptions, but on the basis of past experience it would probably not beprudent to assume that short-term borrowing, private investment and errorsand omissions would together show a consistent surplus. On the other hand,building up international reserves so as to cover three month's imports atall times will require resources to the tune of 3% of exports or 1.5% of GDP.Under all these assumptions which can be varied but which as a package appearreasonably close to the realities of Malaysia's situation, the allowableaverage current account would then be of the order of magnitude of 5.5 -1.5 = 4% of GDP. This purely conceptual approach indicates the order ofmagnitude of the correction which will need to be made in the balance ofpayments, from the recent deficits of about 13% of GDP.

Outlook for Export Volume Growth and Terms of Trade

4.05 Apart from short-term fluctuations, the medium-term prospects fora number of Malaysia's major exports - rubber, palm oil, tin, saw logs andtimber - are largely determined by developments on the supply side. Exportvolume projections for these commodities are therefore not too heavily be-set with uncertainties. In the case of petroleum, short-term supplyvariations to meet the need for foreign exchange earnings are feasible, butin tlhe first instance, given the finite character of this resource, conser-vation considerations are assumed to limit actual production increases overthe longer term. On the other hand, LNG exports will increase very rapidlyover the next few years. The growth of manufactured exports will be themost susceptible to external conditions and internal policy change; in thefirst instance it is assumed that, after a substantial cyclical recovery in1983 and 1984, manufacturing exports will grow at 8% p.a. during the restof the 1980s, and somewhat slower afterwards. Table 4.1 summarizes theseestimates. They result in overall export volume growth of close to 8% p.a.,in 1983 and 1984 (when there is recovery from the recession and rapidgrowth in LNG exports) but a deceleration to 5% p.a. by 1987.

4.06 With regard to export prices, the World Bank regularly evaluatesthe medium- and longer-term price outlook for the major commodities. To

/1 At present, the average maturities are considerably more favorable,but it is prudent to assume that conditions will harden if and whenMdlaysia's indebtedness increases. Also, a debt service ratio of 20%of exports would be rather high for Malaysia.

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Table 4.1: ESTIMATES OF REAL EXPORT GROWTH(% change per annum)

1983 1984 1985 1986 1987 1988 1989 1990

Rubber 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Palm oil 8.0 8.0 8.0 8.0 /.0 1.O /.0 /.0

Tin -8.0 -2.0 0.0 0.0 0.0 0.0 0.0 0.0

Petroleum 5.0 5.0 5.0 5.0 5.0 5.0 4.0 4.0

Saw logs 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Timber 2.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

LNiG /a 1,000 2,000 2,500 3,000 3,000 3,000 3.OaO 3,000

Manufac-tures /b 10.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0

Totalgoods 8.5 7.8 6.2 6.2 4.8 4.8 4.7 4.7

Totalgoods &nonfactorservices 8.1 7.5 6.1 6.0 4.9 4.9 4.8 4.9

la LNG projections denominated in M$ million in 1980 prices.

/b SITC categories 5 to 8.

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reflect Malaysia's specific circumstances, some adjustments have been madein these worldwide Bank estimates. The results are summarized in Table 2.A similar exercise has been done for imports, using more general commodityprice indicators which as closely as possible reflect the structure ofMalaysia's imports (Table 3). While the level of prices for Malaysia'sforeign trade over the next decade is of course subject to considerableuncertainty, the relationship between import and export prices will probablybe more stable, apart from cyclical fluctuations which the Bank's approachesare not attempting to predict. It appears from those estimates thatMalaysia's external terms of trade, after declining by about 18% in 1981 and10% in 1982, will continue to deteriorate in 1983, by nearly 2% (withunfavorable petroleum price developments more than compensating for morefavorable trends elsewhere, especially in rubber). After 1983, theseestimates show a very gradual recovery by an average of close to one percenta year. This implies that, under the present outlook for the world economy,no quick rebound to more favorable terms of trade is foreseea. Rather, itwill take to the end of the decade for the terms of trade to reach their1981 level again. While, according to these estimates, the gradual termsof trade improvement would continue into the 1990s, it is not for:eseen thatthe very favorable situation of the exceptional year 1980 will recur.

Feasibility of Continued Moderate Import Growth

4.07 Given, at least in the first instance, the above estimates fcrexports and the terms of trade, the first question which arises is whetherMalaysia can follow a strategy of somewhat moderating its growth and therebyits import requirements, but continuing the same general approach to devel-opment as in the past. If, again in the first instance, it is assumed thatimports will have to grow as rapidly as GDP (in percentage terms), and thata GDP growth rate of 6% p.a. is required to sustain the creation of thenecessary employment opportunities (which in turn is a cornerstone of theNEP), then room needs to be available for a 6% p.a., import growth. Atfirst sight this appears to be a reasonable target, as exports are expectedto grow significantly faster over the next few years, and later in thedecade export volume growth plus terms of trade improvement will come to6% p.a. Thus, if a significant improvement in the balance of paymentsposition could be secured in the first few years, the situation afterwardscould be sustainable.

4.08 A further assessment of the various factors involved shows,however, that such an optimistic view is not warranted. In the first place,the order of magnitude of the "additional" (above 5% p.a.) export growth inthe early years is too small to reduce the annual resource deficits signif-icantly. In the second place, the buildup of interest payments on therapidly increasing debt has an adverse effect on the current account. Thus,if imports and GDP would increase at a 6% annual rate from 1982 on, therewould be only a very small reduction in the current account deficit (in x ofGDP) in the first few years, and after 1986 the relative size of the

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Table 4.2: ESTIMATES OF CHANGES IN EXPORT PRICE INDEX(% change per annum)

1983 1984 1985 1986 1987 1988 1989 1990

Rubber 20.9 10.7 17.0 8.6 8.6 8.6 8.6 8.6

Palm oil -3.3 24.0 23.1 8.0 8.0 8.0 8.0 8.0

Tin b.3 11.1 13.4 7.9 7.9 7.9 7.9 7.9

Petroleum -12.6 3.4 10.0 9.5 9.5 9.5 9.5 9.5

Saw logs 5.5 11.1 11.7 7.5 7.5 7.5 7.5 7.5

Timber 7,6 13.8 10.8 6.5 6.5 6.5 6.5 6.5

LNG - 3.4 10.0 9.5 9.5 9.5 9.5 9.5

Manufac-tures 3.2 9.5 9.5 8.1 6.0 6.0 6.0 6.0

Totalgoods -0.6 9.7 12.3 8.3 7.7 7.7 7.7 7.7

Totalgoods &nonfactorservices 1.4 9.4 11.6 8.0 7.5 7.5 7.5 7.5

Source: Commodity Price Forecasts and Quarterly Review of CommodityMarkets, World Bank, June 1983

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Table 4.3: ESTIMATES OF CHANGES IN IMPORT PRICE INDEXnND IN TERMS OF TRADE(% change per annum)

1983 1984 1985 1986 1987 1988 1989 1990

Food 7.6 16.5 15.5 9.5 9.5 9.5 9.5 9.5

Nonfood /.5 10.5 10.5 7.7 6.7 6.7 6.7 6.7

Capital goods 3.2 9.5 9.5 8.0 6.0 6.0 6.0 6.0

Intermediate goods 3.2 9.5 9.5 8.0 6.0 6.0 6.0 6.0

Petroleum -12.6 3.4 10.0 9.5 9.5 9.5 9.5 9.5

Total goods 2.1 9.4 10.1 8.2 6.7 6.7 6.7 6 6.7

Total goods andnonfactory services 3.4 8.6 9.0 7.7 6.6 6.6 6.b 6.6

Changes in exportprice index, GNFS 1.4 9.4 11.6 8.0 7.5 7.5 7.5 7.5

Changes in termsof trade -1.9 0.7 2.4 0.3 0.9 0.9 0.8 0.8

Source: Commodity Price Forecasts and Quarterly Review of CommodityMarkets, World Bank, June 1983

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deficit would st-art to grow slowly again. The uebt service ratio would thensurpass 20X by 1987, and, in the theoretical case that this policy would becontinued, 30% by the end of the decade./1 Given that the Government isaiming at a debt service ratio of no more than 15%, (except perhaps for abrief interlude of adjustment) this scenario therefore appears unacceptable.

4.09 Of course, the above conclusion is very dependent, among otherthings, on the assumptions made about export volumes and prices. Given thatit would be highly desirable to continue Malaysia's rapid development, andthat the possibility exists that export volumes and/or prices might turn outbetter than forecast (perhaps because of conscious Government decisions,e.g., on petroleum production and exports) the question may be asked whetherhigh export growth might not invalidate the above conclusion. Thus ascenario has been explored where exports, from 1983 onwards, are 5% higherthan has been assumed initially, either because of higher export prices, orvolumes, or a combination of the two. For the sake of simplicity thisscanario assumes that the higher export incomes do not affect imports andthat the balance of payments would improve to the full extent of theadditional export growth./2 The calculations for this alternative show thatin this case an appreciable decline in the initial balance of paymentsdeficit does indeed occur. Still, however, the deficit is reduced only toroughly 10% of GDP in 1986, and thereafter it starts to edge up slowly again.A debt service ratio of 20% is surpassed in 1988, and it continues to r1seby 1-2 percentage points per annum thereafter. It therefore appears that apossible underestimate of exports would have to be very large, for the con-clusions of the previous paragraph to be invalidated.

4.10 In order to test the conclusions of para. 4.08 further, scen.rioswere also run with an international rate of inflation which differed sig-nificantly from the one initially assumed. A higher rate of inflation willreduce the real value of already incurred debt; on the other hand it willincrease the interest on current borrowing and, to the extent that variableinterest rates apply, also on past borrowing. Since these influences go inopposite directions, the initial results are not materially changed under afairly wide range of assumptions. Thus the conclusions of para. 4.08 appearto be rather robust, and it seems therefore, at least for the time being,unwise to assume that an import growth rate of 6% p.a. will be sustainable.

/1 This assumes roughly the same borrowing conditions as those indicatedin para. 4.04 above.

/2 If the additional export incomes would accrue to the private sector,additional imports would certainly result, and this scenario must thenbe interpreted to result from a gross export increase of 10-15%,partly compensated by additional imports of 5-10%. To the extent thatthe additional export incomes accrued to the Government (e.g. in theform of petroleum revenues), no compensating imports would necessarilyoccur.

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Identification of a viable Scenario

4.11 In view of the Government's preference not to exceed a debtservice ratio of 15% at any time, the mission has attempted to identify ascenario that satisfied this constraint. It became apparent, however, thatthis would imply a very severe cut in imports in the short run. Thus thecriterion has been interpreted somewhat more liberally in that the debtservice ratio would not surpass 20%, and would start to fall before the endof this decade. The fact that fairly pessimistic assumptions have been madeon average maturities would then moreover provide some cushion.

4.12 A scenario that would satisfy this criterion is presented inTable 4.4. In order to decelerate the accumulation of debt - and consequentinterest payments - rapidly, import growth would have to be restrainedvigorously in the short term. The particular time path assumed for theviable scenario is 2-2.5% growth per annum in 1983 and 1984, 4-5% p.a. during1985-87, and 5% p.a. afterwards. The low growth in the early years could berealized through an absolute cut in the imports of investment goods, leavingroom for growth in other categories at the rate of 4-5% per annum. Assuminga unit elasticity between the growth of GDP and these categories of imports,the economy could then in the next few years grow at a rate of 4-5% p.a.,and slightly accelerate afterwards. With the proposed severe earlyrestraint on imports, the current account deficit would decline to 6% ofGDP by 1986, and to 3% by 1990. The debt service ratio would reach a peakof about 19% in 1989, before starting to decline, reaching 15% by 1995.While not ideal from a debt servicing point of view, such a scenario mightprovide a reasonable compromise between growth and debt concerns. Afurther exploration and combination of various scenarios shows that, if theinitial import restraints were implemented in 1983 and 1984, as proposedabove, and (net) exports then appeared to have been underestimated by 5%(see para. 4.09 above), imports could then be allowed to grow at a rate of6% p.a. from 1985 onwards without increasing the debt service to much above15%.

4.13 The conclusions of the above considerations are, that a fairlysevere restraint on imports over the next several years appears inevitable,and that even after that it is unlikely that imports can be allowed to growfaster than 5-6% per year, unless ways can be found to increase exportssignificantly more rapidly. If imports are indeed so restrained, the onlyway to achieve rapid economic growth is to reduce the import intensity ofsuch growth. Attempting to force such a result through direct importcontrols would however soon prove to be inefficient and counterproductive.To serve the dual goals of external stability and rapid economic develop-ment, the policy emphasis therefore needs to be on the continued develop-ment of exports, and on efficient ways to make the economy less import-dependent.

Table 4.4: MAIN ELEMENTS OF A VIABLE BALANCE OF PAYMENTS SCENARIO

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

GDP growth (%) 7.8 6.7 4.6 4.1 4.2 4.3 4.5 4.5 4.9 .4.9 4.9

Export growth (7) /a 19.1 .- 6.6 2.6 8.1 7.5 6.1 6.0 4.9 4.9 4.8 4.9

Import growth (%) lb 34.9 10.1 7.2 2.2 2.3 4.0 4.2 4.8 5.1 5.1 5.1

Changes in termsof trade (Z) -8.1 -18.2 -10.0 -1.9 0.7 2.4 0.9 0.9 0.9 0.8 0.8

Current balance ($m) -240 -2,381 -3,316 -3,434 -3,067 -2,571 -2,216 -2,106 -1,991 -1,866 -1,678

Direct investment ($m) 977 1,232 1,311 1,200 1,236 1,273 1,311 1,351 1,391 1,433 1,476

Net mediun- and long-term loans Ic (Sm) 78 1,311 2,009 3,595 3,335 2,984 2,567 2,522 2,516 2,494 2,423 as

Net short-term capital,errors and omissions ($m) -321 -384 -200 -899 -934 -971 -959 -1,000 -1,042 -1,087 -1,134

Changes in net reserves($m) Id -494 222 196 -462 -570 -715 -703 -767 -873 -974 -1,087

Current balance/CDP (1) -1.0 -9.6 -12.9 -12.0 -9.9 -7.6 -6.0 -5.1 -4.4 -3.7 -3.0

Debt service ratio (x) 2.2 5.1 9.0 10.3 11.6 14.2 16.0 17.4 18.6 19.1 17.9

/a Export of total goods and nonfactor services/b Import of total goods and nonfactor services7E Including official grant aidTd - indicates increase

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S. POLICY DIRECTIONS

5.01 It is now appropriate to bring together certain strands of theanalysis and recommendations of this report. In particular, withoutrepeating many of the specific recommendations made in the text, it appearsuseful to collate the general themes which have emerged.

5,02 The recent evolution of the Malaysian economy has, in a sense,created two parallel but connected agendas for policy attention. The firstis a need for short-term stabilization. The operations of the publicsector, though Lhe conscious adoption of a countercyclical stance, have beenthe instrument to counteract the (unexpectedly prolonged) internationalrecession and the unexpectedly steep decline in the economy's terms oftrade. Now, however, no full recovery to earlier international conditionsis expected. This implies that the rise and duration of the countercyclicalImpulse and therewith the level of expenditures, the direction of spending,the structure of taxation and government financing should, as the governmenthas recognized, be reassessed. The second agenda is more deep seated.Several areas of structural concern have emerged which, in combination,appear to contain the potential to reduce the long-term growth of theeconomy and thwart the pace of fulfillment of the country's importantobjectives. It is to these structural developments, which span agriculture,manufacturing, trade, labour markets and public finances - that a coherentand cohesive agenda of structural reform deserves articulation. To be sure,in both the areas of macro adjustment and structural reform, action andanalytical work are proceeding. There is merit however in consideringwhether the explicit adoption of a structural adjustment program may notgive a desirable impetus to the seperate efforts now underway. Collectingthese initiatives together in one policy declaration, as experience inseveral countries has shown, has many advantages. To begin with, itfocusses minds on the issues and it identifies the sectors in which specialaction programs are needed and where the government proposes to focus itsattention. Next it encourages stock-taking in each area of

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structural concern - about what is known of the problems, what actions arepresently belng undertaken, what is not known and what needs to be done byway of policy changes or further study. Third, It promotes, through thisprocess of issue identification and policy proposal, the development ofplans of action. Finally, and most important, timetables are set forimplementation of reforms. In the absence of a-x explicit and managedcommitment of this nature, efforts often remain diffuse and lose, because oftheir isolation, a sense of urgency. Moreover, policies ptoposed for onearea of concern miss interconnections and repercussions for other areas ofconcern (e.g., what would the impact of substantially increased manufacturingprotection be on the agricultural sector?). There can be little doubt thatan integrated effort of this nature would hold important benefits for theeconomy and country.

5.03 We turn to more specific policy directions. In the last few monthsthe government has taken commendable steps to confront the serious deterio-ration in the external accounts. These steps mark the beginning of a processthat may well extend into the next few years, of bringing the government'srevenues and expenditures into greater balance, as well as bringing the publicand private spheres of activity into a balance disrupted by the very rapidincrease in government expenditures in the recent past. The change In direc-tion would appear to hold good irrespective of external developments; if theworld economy stages a sharp and long recovery then the less difficult willsuch adjustment be; if not, theia the further postponing of adjustment wouldremain inadvisable. The government deserves credit for recognition of theneed for a change in direction.

Trade Policies

5.04 In considering policies to achieve the outcomes outlined in theprevious chapter, we can broadly distinguish policies that have a moredirect impact upon the trade account from those that restore a greaterbalance between domestic expenditures and incomes. The distinctiou is farfrom clean as there are numerous overlaps in these sets of policies butnonetheless the distinction serves a useful schematization purpose. Themost direct adjustment can be obtained by way of Teduced absorption ofimports. The first suggestion that might be made in this regard is acareful examination of the recent and expected import intensity of thepublic sector investment program. Although paucity of information precludesdetailed analysis there are indeed indications that recent import bills nayhave contained large once for all imports by the public or "quasi public"sector (e.g. the Bintula LNG plant, the PETRONAS refinery) which if theYaenot replaced by further large import items wilL act to reduce the futureimport bill. (The issue of improved planning for public sector investmentis further discussed below.) Also associated in this equation are theprobable recent high imports by the oil' companies for oil and gas productionand exploration purposes (see the oil investment table in Section 1 ofChapter III); more detailed information on expected investments by oilcompanies would be a useful datum for planning purposes. Some proposed

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projects particularly those of the HICOM corporation have been proposed ongrounds of import substitution or export potential; a detailed scrutiny ofimport tariffs or subsidies required for their establishment and continuedoperation, will indicate the social affordability of the projects as well asassessing the long-term impacts upon Malaysian competitiveness of(presumably) higher cost intermediate and consumption goods. Moreover, it isnot inevitable, in this period of expected fiscal and foreign exchangescarcity, that all the proposed projects of the public and quasi publicsectors be implemented in a short time frame. Careful attention to timingIn the investment program would in effect indicate a phasing of publicinvestments with their associated infrastructure, in a manner consistentwith stabilization concerns, and a reduced import bill.

5.05 The earlier discussion of the structure of imports indicated avery high proportion of imported intermediate and capital goods. Thisnaturally raises the questions of the scope for future import substitutionpolicies. Whilst selective import substitution may be practicable, the fulltreatment of this issue awaits the results of detailed studies on the pro-tective content and incentive mechanisms of present policies. One importantlink between imports and overall trade performance deserves mention. Someproportion of the increased imports of intermediate and capital goods isassociated with production for export, particularly from enterprises in theFree Trade Zones. The net contribution to the economy from these enter-prises is widely perceived to be small. Policies addressed over themedium-term to the reform of incentives should indeed promote exportincentives where the potential for imports rising in tandem with exports,with little value added left for the economy, is less problematic.

5.06 Policies to directly improve export export performance are ofcourse more difficult to find, absent specific identification of subsectorswith export potential and government promotion of the same. Specificpolicies can however be addressed (as many already do) to medium andlong-term growth of exports. These policies have a close identificationwith structural concerns. First it appears imperative to redress thesecular decline of rubber exports. The prime focus would appear to be onaccelerated replanting and consolidation of smallholdings into larger sizedunits along with improved extension and delivery of government services.Moreover within agriculture considerable potential exists for exportdiversification into high-valued food crops such as fruits, vegetables,poultry and swine, with excellent markets within the region. Initiatives inthese areas should be vigorously pursued in the context of the new NationalAgricultural Policy. Second petroleum exports may provide a degree offreedom if these can be raised in the medium term to offset weaker prices;this does indeed need however to be tied into conservation concerns and aprogram developed to ascertain the optlmal extraction rate. Third, much ofthe burden for export volume growth, as identified in the projections, restswith manafactured exports. Here diversification and higher domesticresource contents are important objectives and mechanisms to pursue theseshould be a focus of the policy studies it is hoped the government will

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initiate. Finally, from a macroeconomic perspective, it will be importantif an export thrust is not to falter that the government reduce itsabsorptive pressure on the financial and skilled manpower resources of theeconomy. In addition the government should avoid upward pressure on wages inthe economy which could harm export competiveness.

Expenditure Reducing Policies

5.07 We turn to policies directed towards reducing the growth ofdomestic expenditures and achieving a more sustainable internal balance inthe economy. To recapitulate briefly, the current account deficit in1982 was of the order of 13% of GNP, corresponding to national savings atthe level of 23% of GNP and investment at 36% of GNP. To close this gapwill require a major adjustment and it is not suggested this can beimmediately acomplished; rather it is recommended that a target 6% currentaccount deficit be achieved by 1986.

5.08 The translation of this target to the domestic balance requiresthat the savings-investment gap be closed to approximately 6% by 1986.Considering savings performance first, it must be admitted that this is avariable not altogether amenable to policy influence or precise forecasting.Public savings were 2.5% in 1982 and it may be assumed (with strong costcontainme .t measures) that performance will remain at this level;improvements would of course obtain from a better revenue performance as maymaterialize with the expected improvement in commodity prices, but thiswould need, in the government s calculations to be offset by lower petroleumrevenues. The other lever on public savings is, of course, currentexpenditures and here, provided expenditures can be contained below thegrowth of nominal GN4P, that is real growth be negative, the public savingsbalance could again improve. As interest and other fixed charges areconsuming a growing proportion of resources, reduced real growth of currentexpenditures would mean compression of real wages and little to no growth inpublic aployment. Given the rather natural difficulties with this stance,maintaining public savings at 2 1/2% of GNP would appear a reasonable targetfor the public sector to aim at.

5.09 Projecting private savings behavior is intrinsically more diffi-cult, and only a judgement can be made as to eventual outcome. However at20% of GNP in 1982, private national savings were abnormally low byhistorical standards. Some investigation of this phenomenon may be advisedas it is not apparent whether it is a statistical quirk, or whether ifplausible, reduced savings have occurred from reduced surpluses in theente-prise sector or reduced household savings. With some expected recoveryin commodity prices and growth in real income in the economy, we might placeprivate national savings in the economy at 23% of GNP by 1985. This coupledwith expected public savings, and savings used to make factor paymentsabroad would yield a gross domestic savings performance in 1985 of about 30%of GNP, which would, If it materialized, be a creditable performance;

81 -

national savings (excluding factor payments abroad) would of course be lowerat 25-26% of GNP.

5.10 This does speak to the need for continuing restraint in growth ofconsumption expenditures - both public and private. It also provides thebasis for estimated adjustment needed by investment in the economy. If weassume the lower figure for national savings at 26% of GNP, a savings-investment deficit of 6% implies an investment ratio in 1988 of no higherthan 31% of GNP - a drop of seven percentage points from its present highlevels. This would need to be accommodated in both the private and publicsectors. (Private investments in 1982 were 21% of GNP whilst publicinvestments approximately 15% of GNP). There is accumulating evidence ofslowing down in investment activity, because of very high private investmentgrowth in 1979-81, and the revised fiscal stance; processes are thus alreadyin train for diminished investment activity. Nonetheless strict disciplinewill need to be exercised by the public sector if the investment-savingsbalance is to be improved and the large balance of payments deficitsreduced, particularly as the level of private investment is not a parameterthat is easily controlled.

5.11 Of the five point reduction in investment it may be hypothesizedthat the sum will fall to the public sector which would then need toreduce its investments from 15% of GNP in 1982 to 10% of GNP by 1986. Hereit is necessary to distinguish between the public sector as currentlydefined and the "quasi public" sector that is rapidly emerging (see para.5.18 below). The official estimates of public investment exclude the"'quasi-public" sector, which are contained in the private sector estimates.Some thought will need to be given to the distribution of the burden ofadjustment between these two configurations. Clearly however the adjustmentrequired will require a considerable scaling down of investment activityfrom present levels and, if the programs of the quasi-public sector are tobe accommodated these will need to be at the expense of other activities.

5.12 Translating this discussion into national levels of developmeatexpenditures is inherently difficult as no easy match exists betweeninvestment of the public sector as defined in the National Income accountsand development expenditures measured by the Treasury. It is strongly to berecommended that such an exercise be conducted by the concerned agencies, inthe context of a broadly developed financial program such that the fiscalstance be made consistent with domestic credit and foreign borrowingtargets./l Very rough illustrative calculations would however indicate thatthe needed scaling down of development expenditures in the 1983-86 period issizeable. This if the entire public sector, consistent with the abovediscussion, were to reduce its investment ratio from 15% of GNP in 1982, to10X in 1985, this would allow a total public investment program in that year,

Ll The IBRD is assisting the Treasury to develop a financial programmingmodel.

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in nominal terms of about M$9 billion (assuming a nominal GNP of aboutM$90 billion in 1986). This, compared to nominal public investments ofabout M$9 billion in 1982, would represent a significant reduction in realterms (about 20%). To translate this into a development expenditure figurerequires an assumption concerning the relationship between public investmentand development expenditure. In the past the Treasury has informally usedthe rule that development expenditures (as measured in the fiscal accounts)are about 40% higher than public investment (measured in the National IncomeAccounts). This would allow therefore total public development expendituresin 1986 of about M$13.5 billion compared with recently experienced levels ofM$15.0 billion. This may be taken a step further by computing the level ofFederal development expenditures by 1986 (as contrasted to that of theentire public sector). Recently (1980-82) Federal development expenditureshave comprised 65% of total public development expenditures. If this ratiowere to be maintained, then a federal development expenditure level of M$8.8billion in 1986 (cf. M$10.4 billion in 1982) would be consistent with anoverall development expenditure level of M$13.5 billion. It is to beemphasized that this is an illustrative case only and different scenariosshould be explored by policymakers in part to secure better measures of thefinancing required to support expenditures at these levels. The abovediscussion is consistent with an assumed public savings of 2.5% of GNP in1986 (about M$2 1/2 billion) - with a public sector overall deficit of 12%of GNP. Even this may be Judged too high when consideration is given to theinternal and external debt obligations that would flow from financing ofdeficits of this relative magnitude.

5.13 Nonetheless despite the uncertainties, the most direct conclusionof these observations is in fact that the room for public sector maneuverhas drastically shortened. The current deflationary stance, in this view iscorrect and will need to be continued for some years. Policymakers willneed to strongly resist a resumption of the past pattern of fiscal expansion.

Institutional Arrangements for Economic Management

5.14 Suggestions may be made ae to how the government may secure theleast costly medium-term adjustment path for the economy. These pertain tothe institutional and analytical mechanisms available for translatingintentions into practice.

5.15 The suggestion has been made in this report that greater attentionto the direction of spending, such that government expenditure is realignedtowards growth enhancing activities, could serve to relieve somewhat theeffects of ongoing fiscal restraint. Although this prescription refers toall expenditures, here we are especially concerned with investment expendi-tureas, as these have borne, and will continue to bear, the brunt of theexpenditure slowdown. Several recommendations may be submitted forgovernment attention.

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5.16 The first two are simple, virtually accounting steps, though insum quite important. To begin with, consensus should be achieved as to whatconstitutes the public sector investment program. As an informal rule thisis usually taken to mean the development program of the Budget (minus cer-tain transfers). However there has been a rapid growth of a large "off-budget" public sector which includes such entitiea as Petronas, the LNGauthority, HICOM, NEB, HAS, MISC and so on. L These agencies are ineffect part of the public sector, their investment expenditures have import-ant consequences for the balance of payments and external indebtedness and(in certain instances) their large future investment programs have thepotential for undermining overall fiscal restraint. While this is an overalmacro-concern there is also a point about allocation. In decisions about hopublic investment monies should be spent, it would be important to includethese (and other identifiable) agencies in the summation so that investmentpriorities can be determined over the entire spectrum of planned spending annot just a fraction thereof. In effect, the investment programs of HICOM,the NEB, etc. should be counted in a unified public sector investmentprogram and subject to the same fiscal discipline as expenditures on health,education, agriculture and so on, and weighed against the competing claimsfor increasingly scarce public money.

5.17 A second "accounting" step is to develop an aggregate multi yearpublic sector investment program that is regularly updated. For the presentthe government's comprehensive investment program is contained in its five-year plans. The investment levels proposed in the last two plans have,somewhat early in each Plan's life, been reached; moreover numerous itemshave been added to these programs in the years after plan publication. Thebudget does not, by its very nature, address the multi year dimension of aninvestment program, concerned as it is with financing an annual developmentbill. Thus, numerous questions about the overall size of the investmentprogram, the timing of major investments, the complementarities betweeninfrastructure development and other initiatives, and the committment interms of future expenditures that present budgetary allocation are enteringinto, cannot be answered. This task of adding up a public sector investmentprogram, though it sounds formidable is in fact, not. Judging from IBRDmission experience in a number of countries it is near universal that thebulk of multi year development expenditures can be located in the centralgovernment and in a few major agencies. Provision of this perspective, on aregular basis, would serve as an important datum in the government's effortsto improve the allocation of expenditures.

/1 To be sure these entities 'enter' the budget in limited ways when thegovernment extends 'loans' (i.e., provides investment funds) forparticular expenditures. But the full investment programs of theseagencies fail to be reflected in the budget, and the guarantees thegovernment extends on borrowing undertaken by these agencies also failto be reflected in the budget.

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5.18 Even as these key sources of information become available it willbe appreciated that there is no easy formula to decide whick investments toretain and which to defer. The overall level of the investment program willhave to be set by global macro-economic considerations. More generallyhowever, which investments to promote, within the investment levels agreed,is a matter of development priorities and government objectives. Here thelink is indeed closed with respect to the structural concerns cited earlierin this report. For it can be reuommended that It is particularly in regardto addressing these structural concerns that the investment program isdirected. And this only fortifies the suggestion that it is important todevelop a coordinated action program for areas of structural concern, so asto give direction and rationale to the government's expenditures.

5A19 These recommendations are, it will be appreciated, largely direc-ted to the EPU, to whom the mandate of investment planning has fallen. Asin the planning agencies of many countries, there has historically evolvedin EPU a separattion of functions and work programs between the macro-economic sections and the investment planning arm of the agency. The chiefloss in this arrangement has been perhaps in the area of sector work. Thefilling of this gap has now become extremely important. It has been sugges-ted in earlier passages in this report, that with the very rapid evolutionof the Malaysian economy, sector strategies are now urgently required foragriculture, for manufacturing, for industry in general, and for humanresource development. This is not to deny that work on these subjects isbeing done. It is rather to suggest that the institutional arrangements maybe altered to strengthen the relationship between sector thinking and theways decisions are made to allocate public monies. This may entail, forinstance, a redrawing of EPU' s organizational map such that policy special-ists are incorporated in each investment division (which are largely drawnup on sector lines). These individuals would be less concerned withspecific investments or with the process of approving agency expenditureproposals. Rather, they would serve to coordinate the efforts of the manyunits of government involved in drawing up sector strategies and would beresponsible iar seeing that the broad direction and pattern of investmentsin a sector reflected sector policy.

5.20 These initiatives are likely to take time. It is thereforefurther suggested that the External Resources Committee be strengthened tomonitor external debt consequences of large public sector investments. TheExternal Resources Committee presently acts to queue government orstatutory corporation borrowing so as to avoid an excessive Malaysianpresence in the foreign exchange markets at any time. It is presently beingcontemplated to enlarge the work of this group to encompass short andmedium term foreign exchange budgeting. This proposal should indeed beimplemented. Procedures would need to be instituted to ensure success inthis effort. First the committee would need to agree on a timetable toreceive proposals from all public sector agencies and institutions forinvestments which use foreign exchange. The summation of these demands canthen be compared to the balance of payments, external borrowing and debt

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service targets set by the authorlties and procedures for establishing thesetargets would also need to be institutionalized. Proposals can also bereviewed with respect to the economic soundness of projects, and theinvestment program then adjusted to conform to resource availabilities andto development priorities.

5.21 In terms of other policy directions, less need be said about theareas of structural concern as many of the problems and some of the possiblesolutions have been extensively covered in the text, particularly in ChapterII. These cover the areas of trade, industry, agriculture, public financesand Labor Markets. In each area strategies merit readdressing and policiesdeveloped to ensure a sustainable growth path for the economy. In thisregard one suggestion bears repeating. The many separate initiatives afootin di.fferent agencies of government would gain substantially by explicitestablishment of timetables for study and reform.

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MALAYSIA

CEM

I Statistical Appendix

1. Population and Employment1.1 Malaysia: Population by State; 1921-801.2 Peninsular Malaysia: Population by Ethnic Origin1.3 Peninsular Malaysia: Selected Demographie Indicators1.4 Malaysia: Population Size and Rates of Change1.5 Malaysia: Population. Size and Age Structure1.6 Malaysiz: Summary Labor Before and Employment Statistics1.7 zxF2rienced Labor Force Agec 10 and Over by Sector1.8 Peninsular Malaysia: Employment by Sector, 1974-80

2. Natioral Accounts and Production2.1 National Accounts by Expenditures 1971-822.2 National Accounts by Industrial Origin 1971-822.3 Index of Industrial Production2.4 Production of Major Crops

3. Public Finance.1 Summary of Consolidated Public Sector3.2 Summary of Federal Government Operation3.3 Federal Government Revenue3.4 Federal Government Expenditures (Economic Classification)3.5 Federal Government Expenditures (Functional Classification)3.6 Public Authorities Consolidated Account3.7 State Government Consolidated Account3.8 Expenditures and Allocation for Subsidies

4. External Sector4.1 Balance of Payments 1971-814.2 Current Account 1971-814.3 Exports of Selected Commodities4.4 Gross Imports by Commodity Section 1971-814.5 Terms of Trade 1971-814.6 Exchange Rate and External Reserves4.7 External Debt; Summary Statistics

5. Money and Banking5.1 Money Supply and its Determinants

6. Prices6.1 Consumer Price Index6.2 Producer Price Index

7. Other7.1 Incidence of Poverty7.2 Ownership and Control of the Corporate Sector

8. Standard Tables8.1 National Accounts Summary (T)8.2 National Accounts Summary (II)8.3 Balance of Payments

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Table 1.1: MALAYSIA: POPULATION BY STATE; 1921-1980('000)

1921 1931 1947 1957/a 1970/a,/b 1980/a 1980/b/c

Johor 282 505 738 927 1,277 1,580 1,638Kedah 339 430 554 702 955 1,078 1,116Kelantan 309 362 449 506 685 859 894Melaka 154 187 239 291 404 447 465Negri Sembilan 179 234 268 365 482 551 574Pahang 146 180 250 313 505 769 799Penang 292 340 446 572 776 901 955Perak 611 786 954 1,221 1,569 1,744 1,805Perlis 40 49 70 91 121 145 148Selangor 401 533 711 1,013 1,630 2,346 2,493Trengannu 154 180 226 278 406 525 541

Total PeninsularMalaysia 2,907 3,786 4,908 6,279 8,810 10,945 11,427

Sabah n.a. n.a. 321 411 654 956 1,011Sarawak n.a. n.a. 546 693 976 1,236 1,308

Total Malaysia n.a. n.a. 5,776 7,383 10,439 13,136 13,745

/a Unadjusted for underenumeration.

/b Revised state estimates taking into account undernimeration are not avail-able for 1970. Total Peninsular Malaysia Population in 1970 (adjusted) was9,182 million persons.

/c Adjusted.

Sources: General Report, 1970 Population Census of Malaysia Vol. 1. (DOSMalaysia, 1977); U.S. Bureau of the Census, Revised Inter-CensalPopulation Estimates, (DOS 1974), Bank Staff estimates. GeneralReport of the Population Census, Vol. 1 (DOS, Malaysia, 1983).

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Table 1.2: PENINSULAR MALAYSIA: POPULATION BY ETHNIC ORIGIN(000)

1921 1931 1947 1957 '.970 1980/a 1980/b

Malay 1,569 1,864 2,428 3,126 4,841 6,132 6,316 (55.3)Chinese 856 1,285 1,885 2,334 3,286 3,6511 3,865 (33.8)Indian 439 571 531 696 981 1,093 1,171 (10.2)Other 43 68 65 123 74 69 75 ( 0.7)

Total 2,907 3,788 4,908 6,279 9,182 10,945 11,427 (100.0)

/a Unadjusted for underenumeration.

/b Adjusted.

Source: Monthly Statistical Bulletin, Peninsular Malaysia,March 1981 (DOS). Fourth Malaysia Plan.General Report of the Population Census, Vol. 1 (DOS, Malaysia, 1983).

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Table 1.3: PENINSULAR MALAYSIA: SELECTED DEMOGRAPHIC INDICATORS

Crude Crude Infant TotalBirth Death Mortality FertilityRate Rate Rate Rate

1947 43.0 19.4 n.a. n.a.1950 42.3 15.9 95 n.a.1955 44.0 11.7 78 6.81960 40.9 9.5 69 6.21965 36.7 7.9 50 5.61970 33.9 7.3 41 4.81975 31.4 6.4 33 4.2

Source: Malaysia, Report of the Register General onPopulation Birth and Death 1947-62; VitalStatistics - West Malaysia (1963-77) DOS;Unnamed manuscript.

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Table 1.4s MALAYSIA: POPULATION SIZE AND RATES OF CHANGE

Year Malaysla Malaysia Sabah Sarawak

Population size (1,000)

1947 5,775.0 4,908.1 320.5 546.41957 7,382.5 6,278.8 410.5 693.21960 8,035.6 6,836.7 454.4 744.51970 10,439.4 8,809.5 653.6 976.31980 13,136.1 10,944.8 955.7 1,235.61980 (Revised) 13,745.2 11,426.6 1,011.0 1,307.6

Average Annual Growth Rate (percen~t)

1947-57 2.5 2.5 2.5 2.41957-60 2.8 2.8 3.4 2.41960-70 2.6 2.5 3.6 2.71970-80 2.3 2.2 3.8 2.4

Source: General Report of the Population Census, Vol. 1 (DOS,Malaysia, 1983).

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Table 1.5: MALAYSIA: POPULATION SIZE AIND AGE STRUCTlRE

1970/a 198 0/a

0-14 4,685 5,19615-64 5,433 7,46565+ 321 475

Total 10, 439 13,136

/a Unadjusted for underenumiLration.

Source: General Report of the Population Census,Vol. 1 (DOS, Malaysia, 1983).

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Table L.6: MALAYSIA: POPULATION SIZE AID AGE STRUCTURE

1970/a 1980/a

Population 10,439 13,136Population age 15-64 3,364 7,408In labor force 3,430 4,636Labor force participation rates (percent) (64) (63)Employed 4,351Unemployment rates (percent) (6)

Source: General Report of the Population Census, Vol. 1 (DOS,Malaysia, 1983).

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Table 1.7: EXPERIENCED lABOUR PORCE AGED 10 AND OVER BY SECTOR

1970-801970 1980 Average annual

Number Percent INumber Percent growth rate(thousand) (thousand) (percent)

Agriculture, forestryhunting and fishing 910.5 28 978.5 21 0.7

Agricultural productsrequiring processing 803.4 24 909.2 20 1.2

Total 1,713.9 52 1,887.7 41 1.0

Mining and quarrying 57.3 2 47.6 1 -1.9

manufacturing 276.0 8 614.4 13 8.0

Construction 71.4 2 213.0 5 10.9

Electricity, gas, waterand sanitary services 22.6 1 27.4 1 1.9

Comaerce 303.7 9 523.1 11 5.4

Transport, storagecommunication 111.0 3 165.2 4 4.0

Services 543.3 17 1,007.7 22 6.2

Unknown 187.4 6 107.1 2 -5.6

Total 3,286.6 100 4,593.2 100 3.3

Source: General Report of the Population Census, Vol. 1 (DOS, Malaysia, 1983)

Table 1.8: PENINSULAR MALAYSIA: EMPLOYMENT BY SBECTOR, 1974-60

1974 1975 1976 1977 1978 1979 1980

Agriculture, forestryhumting and fishing 615,550 640,093 583,130 587,086 606,120 535,072 502,790

Agricultural productsrequiring processing 859,667 871,678 881,869 907,615 947,703 969,543 904,233

Miniug and quarrying 49,423 37,137 34,751 36,640 43,283 44,551 41,917

Manufacturing 498,111 533,469 584,346 621,989 682,968 747,363 765,102

Constructiou 152,961 164,078 180,356 178,632 203,578 216,480 243,562

Electricity, gas, waterand sanitary services 38,832 37,141 44,721 59,140 54,670 64,767 62,539

Commerce 462,272 492,774 526,723 5259987 578,619 593,884 627,738

Transport, storagecommunication 131,363 146,929 151,499 152,989 162,956 185,430 184,104

Services 592,399 643,253 665,231 664,041 751,560 766,368 849,137

Unknown 127 667 808 820 543 532 954

Total 3,400,505 3,567,246 '3,653,434 3,734,239 4,031,640 4,123,990 4,182,076

Source: Labor Force Surveys

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Table 2.1L NATIONAL ACCOUNTSs CDP atND GNP, 1971-82(H$ million)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 19BI/P 1982/e

CURRENT PRICESConsumption 10 081 11 351 13 242 16 292 17 010 19,016 22.200 25 252 28 881 35 194 41 267 44 745PubTlic2;170 2,738 2,934 31 39 4,301 5,388 57 64 sei 11,161

; , Private 7.911 8,613 10.308 12,776 13,086 14,715 16,812 19,466 22,406 26,383 30,106 32,110

Gross investment 2 703 3 032 4 425 6 615 5 581 6 342 7 512 9 n48 12 000 15 09o 19 I1R 21 209Gross fixed caFital formation ht ttffl t4;21 t7 3 5 t2 1798 tt t63 276R7 10! 8t;T1

Public 811 1,162 1,235 1,644 2,110 2,505 3,129 3,360 4,047 5,549 7,741 8,666Private 1,890 2,049 2,984 4,154 3,492 3,701 4,336 5,117 6 789 9,348 11,317 12,344

Change in stocks 2 -179 206 817 -21 136 47 571 1 164 193 5n 199

"xports of goods and N.P.S. 5,208 5,083 7,738 11,005 10,150 14,497 16,243 18,491 25,902 30,419 30,253 31,847Lese imports of goods and N.F.S. 5,037 5,246 6,682 11,054 10,409 11,770 13,615 14,519 21,770 28,4R2 33,843 37,231

Gross Domestic Product 12,95 14,220 18,723 22,858 22,332 28,085 34,340 36,272 4i,083 51,83R 56.7R5 60,570

Net fector incomes Erom abroad -363 -378 -659 -997 -726 -985 -1,272 -1,571 -1,797 -1,954 -1,7R2 -2,338

Gross National Product 12,592 13,842 18,064 21,861 21,606 27,100 31,068 34,701 43,286 49,884 55,n53 58,232

* i CONSTANT (1970) PRICESConsumption 9,809 10,561 11,458 12,641 12,748 13,686 14997 16,329 18,126 20,153 21,291 21,R14

, u-Ulic- 17§t 2,429 2,40 1 15 I 9T 3,382 i 47 4,273 -2:- 5,tois 1ZkPrivate 7,731 8,132 8,918 9,722 9,631 10,304 11,283 12,398 13,854 15,022 15,623 15,748

Gross investment 2,660 2,779 3,556 4,778 3,895 4.213 4,897 5,468 6,192 7,182 8.107 8.919Gross fixed capital fcrmation 2,609 2,995 3,489 4,252 3,936 4,133 4,736 5,119 5,798 7,107 8,009 8,587

Public 783 1,084 1,021 1,205 1,482 1,668 1,976 2,018 2,168 2,705 3,315 3,592Private 1,826 1,911 2,468 3,047 2,454 2,465 2,763 3,101 3,630 4,402 4,694 4,995

Change in stocks 51 -216 67 526 -41 80 161 349 394 75 100 332

Exports of goods and N.P.S. 5,386 5,549 6,358 7,375 7,163 8,365 8,761 9,377 10,966 11,293 11,438 12,648Less imports of goods and N.F.S. 4,839 4,651 5,468 7,567 6,441 6,891 7,780 0,910 10,960 12,400 12,858 14,103

Gross Domestic Product 13,016 14,238 15,904 17,227 17,365 19,373 20,875 22,264 24,324 26,228 27.980 29,278

Net factor incomes from abroad -349 -335 -S39 -682 -449 -577 -727 -847 -908 -831 -677 -886

Gross National Product 12,667 13.903 15.365 16,545 16,916 18,796 20,146 21,417 23,416 25,397 27,303 2R.392

/P Preliminary./e Estimate, Ministry of Tinance.

Source: Department of Statistics, National Account Statistics (1971-75, 1',73-78, 1975-79), Ratk Negara, 0-3arterly EconomicBulletin (various issues) and Ministry of Pinance, Economic Report 1982/83,

£-filpv AVAILABLE

Table 2.2: GCP BY INDUSTRIAL ORIGIN, 1971-t982(M$ million in 1970 constant prices)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 19811P 1982/e

Agriculture, livestock,forestry and fishing 3,852 4,146 4,634 4,954 4,804 5,392 5,519 5,610 6,C68 6,255 6,474 6,875

Mining and quarrying 834 889 852 796 792 955 967 1,054 1,197 1,171 1,134 1,201

Manufacturing 1,858 2,047 2,508 2,768 2,850 3,377 3,735 4,081 4,470 4,874 5,152 :,,327

Construction 541 571 651 729 654 713 800 919 1,027 1,209 1,366 1,475

Electricity and water 238 275 304 337 365 400 442 499 557 605 643 669

Transport and communications 632 720 827 947 1,071 1,153 1,290 1,415 1,549 1,803 1,947 2,070

Wholesale and retail trade 1,717 1,840 2,038 2,213 2,219 2,405 2,592 2,824 3,1f1 3,530 3,876 4,050

Banking, insurance, real estateand business services, andownership of dwellings 1,126 1,213 1,311 1,394 1,468 1,552 1,675 1,823 1,946 2,041 2,149 2,245

Government services 1,466 1,718 1,810 2,062 2,210 2,420 2,719 2,831 3,055 3,202 3,554 3,689

Other services /a 752 819 969 1,027 932 1,006 1,136 1,208 1,294 1,538 1,658 1,677

GDP at Market Prices 13,016 14L238 15,904 17,227 17,365 19,373 20,875 22.264 24,324 26,228 27,980 2

/a Includes community, social and personal services, private nony.:ofit services to households and domestic services of house-holds. Also includes import duties less imputed bank service charges.

IP Preliminary.Te Estimate, Ministry of Finance.

Source: Economic Report, Ministry of Finance, Governirent of Malaysia, issues 1973/76, 1982/83.

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Table 2.3: INDEX OF INDUSTRIAL PRODUCTION, 1971-82(1968 - 100)

Of which: Food, Paper &Min- Electri- Manufac- Agriculture tobacco 6 Tex- Wood paper

Total igx Ia city /b turing tc processing /d beverages tiles products products

Weights: 100.0 31,4 9,2 59.4 7.3 16.8 1.3 7.1 0.5

1971 120.0 85.3 123.1 137.8 144.5 117.7 122.0 140.4 155.21972 132.2 85.0 138.8 156.1 164.8 122.6 156.1 183.7 175.01973 150,6 80.6 153.5 187.1 182.2 142.8 196.8 203.3 218.41974 167,6 75.4 170.0 215.8 210.4 149.2 141.0 185.9 214.21975 167.6 70.7 185.0 216.0 235.5 151.8 213.9 190.2 203.81976 193.4 69.6 206.0 256.9 254.1 170.2 302.5 265.2 276.11977 210.1 64.6 229.0 284.2 307.4 182.6 313.9 286.4 285.01978 230.3 68.9 253.4 311.9 349.7 196.1 366.8 274.1. 328.61979 250.4 69.6 279.3 341.5 423.8 212.5 366.1 280.4 387.21980/f 270.0 67.7 307.4 371.0 508.6 222.2 375.7 287.3 435.919817? 276.3 66.5 326.9 374.6 489.9 216,6 382.1 303.4 493.219827? 281.3 57.7 339.2 387.3 622.1 216.1 363.9 273.3 467.4

Basic Elec- Trans-Chemicals Cement metal trical port Other

Rubber & chemical Petroleum & cement t metal machin- equip- pio-products products refining products products ery ment neers /e

Weights: 3.8 5.7 3.0 4.5 4.0 1.2 1.4 2.7

1971 131.9 121.5 92.0 119.3 150.8 188.9 281,9 239.41972 139.8 144.2 96.6 129.2 179.4 192.4 268.3 313.61973 166.5 165.6 99.1 147.0 236.3 200.6 393.0 474.51974 161.7 175.1 101.5 154.6 256.3 247.0 531.4 906.01975 164.1 154.7 117.9 161.3 201.6 287.0 412.1 915.31976 185.4 176.3 150.3 189.5 220.8 338.4 416.6 1,179.41977 196.0 180.4 169.1 196.0 252.2 432.4 481.4 1,311.91978 193.1 203.7 188.9 245.6 301,3 466.4 572.6 1,438.41979 196.0 234.9 197.8 260.0 303.4 484.0 613.5 1,620.71980 203.6 250.7 193.7 278.5 336.4 487.4 852.6 1,705.81981/f 222.4 259.7 187,7 322.6 373.7 510.3 855.1 1,635.61982f 194.5 223.9 249.3 321.5 379.0 744.2 780.3 1,622.0

.a Covers production of tin and iron ore which contributed 97% of the value added in mining in1968.

/b Covered 97% of total electricity output in 1968./c Covered 76% of total value added in manufacturing in 1968. 145 items classified under 55

individual industries and falling under 16 major groups are included./d Rubber, palm oil and coconut oil processing.Le Refer to establishments granted pioneer status not falling within the industries covered by

the Survey./f Preliminary estimates in Economic Report, 1982/83, Ministry of Finance.

Source: Department of Statistics.Quarterly Economic Bullitin, BNM, December 1982.

Table 2.4: AGRICULTURAL PRODUCTION - MAJOR CROPS( '000 tons)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Rubber 1,324.5 1,324.9 1,567.2 1,549.4 1,477.5 1,612.1 1,613.3 1,606.6 1,599.8 1,552.2 1,529.4 1,410.0Pal oil /a 715.2 877.8 978.2 1,256.2 1,513.3 1,670.3 1,947.5 2,153.0 2,663.4 3,132.6 3,409.3 3,700.0Savlogs & timber /b 20,909.0 24,214.4 23,061.4 25,426.0 22,935.2 31,487.6 34,137.1 33,440.5 32,845.2 34,140.5 35,543.2 35,000.0Rice 1,160.2 1,181.0 1,268.6 1,352.9 1,289.4 1,421.8 1,237.6 980.1 1,358.3 1,302.5 1,311.1 1,320.0

la Includes pals kerwels.

/b Cubic meters.

Sources: Bank Negara, Treasury, IBRD estimates for 1982. W

Table 3.1: SWMQARY OF THE CONISOLIDATED PtIRLIC SFCTOR 1970-83(N$ million)

1970 1971 1972 1973 1974 1975 1976 1977 1971 1979 1980 1981/a 1982(a 1983/a

Total revenue lb 3,384 3,508 4,090 4,792 6,370 6,916 8,494 10,500 11,723 14,798 18.461 21,589 22,627 23,716Current expenditures fc 2,697 3,157 4,181 4,453 5,636 6,482 7,568 9,301 9,873 11,388 13,615 18,280 21,19S 22,882Current surplusldeficit 687 351 -91 339 734 434 926 1,199 1,850 3,410 4,846 3,309 1,432 834

Development expenditure and netlendidg: 999 1,413 1,543 1,552 2,060 2,784 2,790 3,520 4,740 4,766 8,74R 13,956 13,417 12,373

Development expenditures Id 904 1,183 1,180 1,202 1,717 2,198 2,213 2,682 3,n01 3,778 7,530 13,299 12,272 12,A83Net lending )e 95 230 363 350 503 673 534 9ns 1,286 1,132 1,211 657 1,215 290Adjustment for accounts payable - - - - -160 -87 43 -70 -64 -144 n.a- n.a. n-a. n.a.

Overall deficit -312 -1,062 -1,634 -1,213 -1,326 -Z,350 -1,864 -2,321 -2,890 -1,355 3,902 -10,647 -12,055 -11,539

FinancingExternal borrowing (net) 3 345 313 118 295 1,012 419 642 606 986 -1,590 1,356 4,531 -

Domestic Borrowing: 345 329 939 671 921 971 517 1,345 1,511 -71 2,495 5,476 6,669 -

Central Bank (net) 126 -96 78 108 94 -71 -1,252 -43 325 -1,326 1,825 32 400 -

Commercial banks (net) -126 215 236 -6 299 426 762 432 -520 -432 -608 1,784 4,560 -

Employees' provident fund If 231 322 351 382 354 478 638 840 942 1,081 1,132 1,733 1,769 -

Pension schemes and lifeinsurances /g 63 79 117 120 148 76 165 186 169 207 174 122 n.a. -

Others /h 51 47 157 67 26 62 204 -70 595 399 -28 1,805 n.a. -Special receipts /i 17 40 66 13 8 7 273 -255 3 2 1 510 n.a. -Other (including asset changes) -53 348 316 411 102 360 655 ¶89 770 439 -184 1,305 855. - S

11F = drawdown)

Newo itemsFederal government

current surplus 233 19 -314 -42 302 181 80 523 1,205 2,050 3,7n5 2,514 6Q9State government current

surplus /j 244 229 146 273 386 253 611 527 672 1,390 1,300 914 823Public authorities current

surplus / 264 149 139 177 149 102 316 364 213 369 320 730 581

Gross external borrowing 108 387. 349 171 350 1,165 676 1,173 1,935 863 494 3,108 4,553

/a 1981 prellinary; 1982 and 1983 are estimate and forecast, respectively./b Total revenue is the ordinary revenue of the federal and state governments and the public authorities and are exclusive of all Rrants between

the separate branches of the public sector. Where inconsistent estimates exist in different accounts the transfers reported by the receivinRbranch have been used.

/c Exclusive of statutory grants to the State Governments.Id Exclusive of "Other" grants to states and grants to public authorities.Ie Loans by the federal government to the states and public authorities have been netted out.7F Increase in holding of federal debt.

Includes the teacher's provident fund, the National Savings Bank and ilsurance companies; represents increases in holdings of governmentdebt.

lb Finance companies; merchant banks and cooperative societies; 1981 includes an M11.8 billion purchase of government debt by Petronas.7T The larger entries for 1976-77 and 1981 represent receipts from or payments to the IS compensatorv Financing Facility./I Inclusive of all grants from the federal government.

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Table 3.2: SUMMARY OF FEDERAL GOVERNMENT OPERAXIONS (19/U-53)(M$ million)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981/a 1982/a 1983/a

Current revenue 2,394 2,417 2,920 3,357 4,748 5,125 6,064 7,775 8,815 10,382 13,922 15,800 16,434 17,266Current expenditure 2,161 2,398 3,234 3,399 4,446 4,944 5,984 7,252 7,610 8,332 10,217 13,286 15,735 17,079

Current surplus/deficit 233 19 -314 -42 302 181 80 523 1,205 2,050 3,705 2514 699 187

Capital expenditure 567 754 602 650 903 1,134 1,334 1,812 2,012 2,106 5,280 8,863 7,630 6,930Net lending 147 316 473 423 827 925 753 1,207 1,606 1,573 2,051 2,272 2,804 2,970Adjustment for accounts payable &discrepancy - - -18 -24 -6 10 92 -35 -138 40 n.a. n.a. n.a. n.a.

Overall surplus/deficit -481 -1,051 -_I_, -1,091 -1,422 -1,888 -2 099 -2.461 -2 2/) -1,669 -3,626 -8,621 -9,735 -9,713

FinancingExternal - 344 306 69 223 912 369 535 541 679 310 2,909 4,050 -Project loans 83 96 154 95 196 270 243 381 357 254 334 303 500 -Market loans -83 248 152 -27 27 642 126 154 184 425 -24 2,906 3,550 -

DomesticBanking system 1/ 120 29 207 387 171 -2b3 721 -124 -1,158 2,034 1,151 5,913/e -Central Bank 94 -85 26 19/ 83 -190 -993 218 147 -1,344 2,015 -299 - -commercial banks -77 205 3 10 304 361 730 509 -271 186 19 1,450 - -

0Nonbanks 345 448 625 569 528 616 1,005 956 1,706 1,647 1,278 3,660 - -Employees' Provident Fund 231 322 351 382 354 478 638 840 942 1,081 1,132 1,733 - -National Savings Bank 21 32 60 76 100 48 66 115 48 31 83 -65 - -Teachers' Provident Fund & Social

Security Organization 21 18 12 15 17 6 53 22 66 101 22 80 - -Insurance companies 15 29 45 29 31 22 44 49 55 75 69 107 - -Others /b 51 47 157 67 26 62 204 -70 595 399 -28 1,805 - -

Special receipts /c 17 40 66 13 8 7 273 -255 3 2 1 510 - -

Others & discrepancy /d 102 99 345 233 276 182 715 -12 149 499 3 391 -228 -

/a 1981 is preliminary; 1982 and 1983 are estimate and forecast, respectively.

/b Pinance companies, discount houses and cooperative societies. In 1981 M$1.8 billion is purchase of governament securities by Petronas.

/c Major items in 1976 and 1981 are disbursements from IMF Compensatory Financing Facility.

1d Includes changes in Government's asset position.

/e Estimate included in Treasury Economic Report, 1982/83; includes borrowing from banking as well as nonbanking sources.

Sources: Treasury Economic Reports, Bank Negara, IBRD estimates.

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ALAYS_A

Table 3.3: FEDERAL GOVERNMENT REVENUE, 1971-83($ million)

Source of Revenue 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

I. Direct Taxes 713 801 889.5 1,384.3 2,021.3 2.167.1 2,945.9 3 322.7 3 888.3 5 664 6,328 6 584 6 766(C growth) (1:7 (12.) (11.1) (55.6)1 (7.2) (36.) -iT.8Y (17.0 ( (11.7) (-4. 0 2Income tax 689 741 829.9 1,299.0 1,923.8 2,167.1 2,790.8 3,164.3 3,674.3 5,240 5,819 6,071 6,134(I growth) (4.9) (7.6) (12.0) (56.5) (48.1) (12.6) (28.8) (13.4) (16.1) (42.6) (11.0) (4.3) (1.0)

Conpany - - - - - 1,170 1,336 1,620 1,717 2,521 2,754 2,634 2,775Individual - - - - - 567 679 774 1,128 983 1,087 1,362 1.452Petroleum - - - - - 322 776 770 829 1,736 1,978 2,075 1,907

Petrolem cash payeent - - 25.1 46.2 78.4 83.9 110.8 116.2 166.2 345 417 425 458Gas casb paynent - - 68Other direct taxes 24 60 34.5 39.1 19.1 24.4 44.3 42.3 48 79 92 88 105

II. Indirect tare 1,368 1,593 2,127.9 2,927.4 2,554.8 3,323.4 4.124.3 4,684.3

5,620.7 7,131 7,091 6,875 8 610(1 growth) (16.4) (16.4) (33.6) (37.5) (-12.7) (30.1) (24.1) 13.6) (20.0) (26.9) (-0.6) (2.8) (25.0)

Export duties 231 232 436.9 943.0 625.4 1,010 1,390.8 1,462.6 1,939.0 2,567 2,225 1,762 1,602(X growth) (-10.5) (0.5) (88.3) (115.8) (-33.7) (61.4) (37.7) (5.2) (32.6) (32.4) (-13.3) (-20.8) (9.1)

Rubber 50 49 233 3843.3 120.7 519 557.2 715.8 1,117.9 1,098 514 110. 185Petroleum - - - - - - - - - 677 1,241 1,389 1,271

Tln 127 127 (130) (270.5) 195.3 291.1 441.2 499.6 545.1 575 298 159 49Palm Oil 28 32 (49.9) (227.7) 281.9 165.5 346.2 207.4 236.1 1661 148 73 65Others 27 24 (24) (60.5) 27.5 34.40 46.2 39.8 39.9 31 24 31 32

lIport duties and snrtax 889 955 746.3 893.3 800.8 977.7 1,139.6 1,324.6 1,512.6 2,061 2,245 2,286 2,769Excise duties - - 406.7 442.5 449.9 549.8 694.8 848.7 956.6 973 967 1,024 1,147Sales tax - 101 220.4 297.3 272.0 322.5 383.2 458.5 544.1 696 730 793 1,716Gaubling tax - - 68.4 79.3 94.6 118.1 123.3 150.2 178.7 231 272 294 364Road tax 176 194 185.4 211.5 240.6 262.1 298.3 324.5 346.4 390 408 460 704Other indirect tax 72 - 63.8 60.5 63.3 88.2 94.3 114.9 143.3 213 244 256 308

ll. Non-tax revenue 337 526 384.9 417.6 476.7 454.5 580.3 664.6 664.6 940 1 079 1 183 1 281IV. Petrolem dividend - - - - - - - - - - 'f 1,4 50 RV. Non-revenue receipts - - - 58.9 64.6 110.8 109.0 155.8 148.6 191 385 562 425

Total 2 418 2,920 3 402.3 4 788.2 5,117.2 6,156.9 7,759.5 8,872.1 10,505 13,926 15 806 16,654 18 032rthiowtl (0.8) (20.8) t16.5) t40.7) (7.0) (20.3) (26.0) (14.0) (19.0) (32.6) (5.1)

Elasticity of income taxIncme tax (i) GNP growth rate 2.8 9.1 27.9 21.7 -1.2 25.4 14.6 11.7 26.7 15.2 13.4 7.5 9.6

(ii) Individual incometax elasticity - - - - - - - - - 1.05 1.05

Petrolem (1) Production (bpd) n.a. n.a. n.a. n.S. n.a. n.s. u.a. n.s. 283,000 275,000 258,100 303,100 360,000(ii) Exoort (bpd) u.a. n.a. n.a. n.S. n.a. n.a. n.a. n.a. - - 247,780 289,000

(iii) Price (US$/barrel) n.a. n.a. n.a. n.a. n.a. u.s. n.a. n.a. 20.9 3,640 32.24 36.32 30.00

Rubber (i) Export ('000) ton) 1,390 1,365 1,635 1,570 1,460 1,260 1,654 1,614 1,620 1,526 1,848 1,378 1,480(iL) BSS I price (ctslkg) 105 95 153 179 137 199 203 230 279 312 258 201 230

TIN (i) Net export (000 ton) 87 90 82 85 77.9 81.53 66.52 70.18 72.0 70.0 66.5 42,600 40,000(ii) Average price 10.4 10.3 10.9 18.8 15.94 18.96 26.28 28.81 32.38 35.64 32.24 30.35 30.50

Palm oil (i) Export volume 573 697 798 901.2 1,163 1,346 1,424 1,519 1,128 2,350 2,350 2,699 3,088(ii) Average shipsent 663 520 916 1,574 1,002 1,025 1,316 1,415 1,309 1,172 1,777 916 828

price of crude (fob)

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Table 3.4: FFDERAL GOVERNMENT EXPENDITURE AND NET LENDING, 19/0-83 (ECONOMIC CLASSIFICATION)(W$ million))

1970/a 1971/a 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981/b 1982/b 1983/b

Total Current & Capital Expenditure _2728 3,152 3,836 4,049 5,349 6,078 7,318 9,064 9,622 10,438 15,497 22,149 23.365 24,009

Current Expenditure Z,lb1 Z*398 3,234 3,399 4,446 4.944 5,984 7,252 7,610 8,33 2 10,217 13,286 17 7099

Expenditure on Goods & Services 1,087 1,244 1,654 1,757 2,318 2,647 3,943 4,610 4,900 4,774 5,777 6 837 7,6Z 7 6/2Wages & salaries 684 813 992 1,038 1,272 1,409 2,625 3,350 3,577 3,665 4,292 4,908 5,269 5,619Other purchases of goods &services 403 431 662 719 1,046 1,238 1,315 1,260 1,423 1,109 1,485 1,929 Z,353 2,053

Interest papuents 238 282 324 414 493 619 83/ 960 1,134 1,271 1,547 2,046 2,795 3,930

Subsidies & Other CurrentTransfers Ic 83b 8/2 1,256 1,ZZ8 1,635 1678 1204 1.682 1,576 2,287 2,893 4,403 5,318 5,477Transfers to state governments 170 153 169 170 258 240 25U 2/4 321 118 355 40/ 5/5 569Pensions 9U ol 125 119 111 169 2U2 185 342 34/ b16 5/3 646 /23Others 5/6 63Z 90Z 939 1,2f9 1,239 752 1,223 913 1,762 2,022 3,423 4,097 4,185

Capital Expenditure 567 754 602 650 903 1,134 1,334 1,812 2.01L 2,106 5,280 8 863 7,630 6,930Acquisition of fixed assets n.a. nI.a. 498 502 753 908 990 1,169 1,229 1,374 n.a. n.a. n.a. n.a. I

Capital transfers n.a. n.a. 104 148 226 226 344 643 783 732 n.a. n.a. n.a. n.a. c

Net lending 147 316 473 423 82/ 925 753 1,207 1,606 1,573 2,051 2,272 2,804 2,970

Adjustment for accounts payable &discrepancy - - -18 -24 -6 -10 92 -35 -138 -40 n.a. n.a. - -

Total Expenditure & NetLending (IncludingAt j stmene) 2,8/5 3,468 4,291 4,448 6,170 7,013 8.163 10,236 11.090 12,051 17.5 24,421 26,169 2b,919

/a Figures for 1970 and 1971 are not strictly comparable to rest of series because capital expenditure in 1970/71 was accounted for on a differentbasis; also, starting in 19/3 certain expenditures in defense development expenditures were counted as current expenditures, appearing in expendi-tures in other purchases of goods and services.

/b 1981 is preliminary; 1982 is estimate and forecast, respectively.

Ic Derived as a residual.

Sources: Treasury, Bank Negara, Government Finance Statistics (IMP), IMP Consultation Reports, IBRD.

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Table 3.5! FEDERAL COVERNHENT EXPENDITURE AND NET LENDING (1970-83) (FUNCTIONAL CLASSIFICATION)(M$ million)

1970 19(1 19/2 1913 1914 19/) 19/6 191/ 19/8 1919 1980 19811a 1982/b 1983/b

General Services 1.801 2,0// 2,659 2,885 3,697 4,264 4,562 6,246 6,333 7,472 9,684 i3,455 14,882 15,067

General Public Services 521 520 575 732 871 1,067 1,142 1,572 1,438 1,647 2,436 3,026 3,364 3,462Administration 290 257 297 442 481 579 606 909 661 804 1,302 1,666 1,989 1,871Internal security 231 263 278 290 390 488 536 663 7i/ 843 1,134 1,3ht 1,3/5 1,591

Defense 431 546 1U8 11z 95b 1,055 1,118 1,510 1,406 1,704 2,255 3,333 3,603 3,888Education 521 622 897 927 1,216 1,364 1,487 2,125 2,044 2,257 2,786 3,517 3,789 4.226Health 175 232 261 291 355 418 434 576 611 666 778 973 1,050 1,059Social security (pensions) 90 87 125 119 177 169 202 185 342 347 516 573 646 723Housing of community amenities /c 11 27 24 13 30 4/ 29 122 Z94 419 295 1,Z03 1,481 62JOther community & social services 46 43 69 78 84 144 1S0 96 198 432 618 830 949 1,082

Economic Services 604 888 919 929 1.735 1,756 1,996 2,621 3,147 3,117 5,44/ 8,011 7,5UU 7,788Agriculture, forestry & rural

development 250 288 370 381 597 618 685 771 975 1,082 1,286 2,004 2,062 2,140Transport & communications 230 295 309 302 592 769 847 1,135 1,177 1,147 1,746 1,820 2,799 2,909Couerce & industry 103 264 189 197 491 251 331 465 656 493 1,750 3,439/d 1,737 1,265Public utilities (mostly

electricity h water supply) 21 41 51 49 55 118 133 250 339 395 665 748 902 1,474

Unallocable 483 518 713 634 898 1,080 1.562 1.439 1.674 1,606 2.417 2,955 4 ' 5494 '

Public debt interest 238 S2 324 414 493 Sl9 837 960 1,134 1,271 1,547 2,046 2,795 3,930 °Grants to state governments 170 153 169 170 258 272 250 274 321 178 355 407 575 569Otber 75 83 210 50 153 189 475 205 219 157 515 502 867 995

Adiustment for accounts paYable - - - - -16U -8/ 43 -70 -64 -144 n.a. n.a. n.a. n.a.

Total Expenditure & NetLending fe 2i875 3,468 4.291 4,448 6,17U 7.013 8,163 10,236 11.090 12,051 17.548 24,421 26,619 28,349

/a Estimate.

/b Projections; 1983 represents budget allocation; estimated total expenditure in 1983 is M*26,979 million.

/c Rousing expenditures are derived from the development expenditure entry of the Treasury Economic Reports. There is a large difference between thesenumbers and those reported by the CPS, in turn derived from the Financial Statements of the Government prepared by the Accountant General.

/d Includes M$2.2 billion transfer to the National Equity Corporation.

Ie For years 1977-81, total expenditures are less than those reported by the Treasury or Bank Negara; apart from minor reconciliation aspects thepresent table excludes from current expenditures transfers to the development fund.

Sources: Treasury Economic Reports; Government Finance Statistics; Bank Negara Quarterly Bulletins; IMF; IBRD.

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Table 3.6: PUBLIC AUTHORITIES CONSOLIDATED ACCOUNT 1970-83(MS million)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1962ta 1983/a

Revenue & ExpenditureRevenue & Grants 532 569 634 733 858 986 1,239 1,504 1,553 1 S73 2,312 3,743 3,780 4,141

Revenue 3 529 569 634 733 857 979 1.227 1,371 1,408 1,703 2,094 3,286 3,580 3,750

Federal and stategovernment grants 3 - - - 1 7 12 133 145 170 218 457 200 391

Expenditure 409 624 740 822 1,116 1.443 1,398 1 654 1,940 2 606 3 366 5 482 6 037 6,901

Current expenditure 268 420 495 556 709 884 923 1,140 1,340 1,504 1,992 3,013 3,199 3,410Development expenditure 141 204 245 266 407 559 475 514 600 1,102 1,374 2,469 2,838 3,491

Overall Deficit 123 -55 106 -89 -258 -457 -159 -150 -387 --733 -1,054 -1,739 -2,257 -2,760

Financinst (Net) -123 55 106 89 258 457 159 150 387 733 1,054 1,739 2,257 2,760Foreign borrowing 5 3 J5 49 72 100 1/0 94 130 141 Z94 Z16 481 669

Federal and stategovernment loans lb 4/ 32 21 b1 94 1O/ 124 19b 28/ 6/u 1,139 1,008 2,030

Change in assets -144 5 - 19 125 263 -118 -68 61 305 90 384 768 41(- increase)

/a Estimates published in Treasury Economic Reports.

Source: IBRD, Treasury & IlMF

.Table 3.7: STATE GOVERNMENTS' CONSOLIDATED ACCOUNTS,1970-83(M$ million)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980/a 19811a 1982Vb 19 8 3 Jc

Revenue & ExpenditureRevenue & Grants 687 734 793 988 1 125 1,247 1.549 1,825 2 005 3 264 3,27 3,531 3,880 4,070

Revenue 461 52Z 536 702 765 81Z 1,203 1,354 1,500 2,713 2,445 2,503 2,613 2,700

Statutory grants 175 166 195 217 Z58 340 277 389 410 372 551 636 796 870

Other federal government grants 51 46 62 69 102 95 69 82 95 179 301 39Z 471 500

Expenditure 693 776 1,042 1,U1U 1,249 1,601 1,423 1,869 1,979 2,793 3,392 5,433 5,980 5,806

Current expenditure 443 5u5 647 715 739 994 935 1,Z98 1,333 1,U/4 1,99/ Z,fO/ 3,u57 3,Z53

Development expenditure 250 271 395 355 510 607 485 571 646 919 1,395 2,816 2,923 2,553

Overall Deficit -6 -42 -249 -82 -124 354 -136 44 26 471 95 -1,902 -2,10U -1,736

Pinancing (Net) 6 42 249 82 124 354 126 44 -26 -471 95 1,902 2.100 2.300

Poreign governmentloans 36 39 18 52 263 158 112 1 i 124 154 1b3 4/6 W1 650

Change in assets -3U 3 11 30 -139 196 -238 -131 -150 -625 -68 1,426 1,519 1,650

( increase)

(a Estimates.

fb Budget estlmate.

le Treasury and IBRD forecast.

Source: Treasury Economic Reports.

- 106 -

Table 3.8: EXPENDITURES AND ALLOCATION FOR. SUBSIDIES 1976-81(M$ million)

1976 1977 1978 1979 1980 1981/a

Agriculture 61.6 62.9 97.5 119.1 438.8 518.3Agricultural inp,uts - - - 1.2 125.7 140.0Rubber replantirg 28.6 21.5 2Y95 48.8 93.6 /8.3Livestock 10./ 13.3 14.2 12.3 48.0 -Padi - - - - 110.6 235.0Fishing C./ 2.0 13.8 14.5 21.1 17.2Other 21.6 2b.1 40.0 42.3 39.8 47.8

Petroleum 16.6 25.1 37.0 129.2 575.5 722.7

Textbooks 18.0 14.8 36.6 3b./ 14.2 16.b

Other /b 4.5 4.8 6.4 8.3 16.8 20.0

Total 100.7 107.6 177.5 293.3 Ij453 121/

/a Allocation; 19J7b-80 are actual expenditures.

lb For the most part to the LLN (Electricity Board).

Source: Treasury.

RtT PMDV AVAIIIARIIr

- 107 -

Table 4.1: MALAYSIA: BALANCE OF PAYWENTS, 1971-82-K(M$ ilion)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 P/ 1982

Trade balance /a 686 365 1.594 672 724 3,762 3.871 3.587 6 580 4_76 *29 -1,4328xports (f.o.b.) 4,884 4,36 10,022 9, 13,330 14,861 16,925 23,977 2,060 26,64 8,5Icports (f.o.b.) 4,198 4,371 5,669 9,350 8,333 9,568 10,990 13,338 17,397 23,284 26.993 29,486

Nonfactor servicees -515 -528 -538 -722 -983 -1 035 -1 243 -1 61S -2.378 -3 222 -3_561 -3 952umco±pts 324 347 47S 982 1,093 1,16 1,382 1,6 1,925 2,63 3,289 ,3Expenditures 839 875 1,013 1,704 2,076 2,202 2,625 3,181 4,303 5,856 6,850 7,745

Factor services -363 -378 -659 -997 -727 -985 S -1,571 -1,797 -1 954 -1,782 -2.338Receipts 265 2D8 2 6 389 364 501 588 1,159 1,460 1,793 1,616Expenditures 628 586 915 1,386 1,091 1,364 1,773 2,159 2,956 3,414 3,575 3,954

TrLanfers (Net) -137 -157 -151 -104 -79 -100 -78 -82 -119 123 -105 -103

Current Account BaLance -329 -698 246 -1,151 -1.065 1,642 1.278 319 2,286 -523 -5.477 -7.825

Loprterm cavital (let) 686 1.193 582 1,579 1,716 1,404 1.744 1,689 2,247 2,299 5.849 7.836Official capital si3 -700 1I6 -272 872 -493 590 513 712 310 2915 4 ,37fCosmercial loans -15 173 46 -67 -18 154 -20 -82 87 -140 101 362Corporate inveetnent 306 320 420 1,374 862 757 1,174 1.258 1,448 2,129 2,833 3,095

Short-term privage tuonetarvcapital (Wet) 73 -6 254 101 -83 -175 -1 280 -349 -1 579 939 86 933Commercial banl 6 -81-5 i59 -6* ;-1i08 66 197 237 -989 3 6TY -37Other 5 9 -5 36 25 -241 -1,477 -586 -590 -314 -557 1,490

Errors and omiBtBons /b -227 -100 -506 -77 -397 -917 -987 -1,034 -1.16S -1,113 -I.S51 -1.558

Overall Balgnce 203 389 576 452 171 2.054 755 -625 1,789 1.002 -1,093 -614

Allocations of SDRe 61 60 - - - - - - 74 76 73Drawings on lMP - - - - 265 -265 - - - 51U 152

Official reserve changes Le -264 -449 -576 -452 -171 -2,219 -490 -625 -1 863 -1,078 510 462SDRS =6-1 -60 10 -11 I 5 1 16 -35 -25 -52 27IVF reserve poltliozn 35 - -22 1 -21 4 9 -3 -41 -135 25 6Gold and foreign exchange -238 -389 -562 -463 -139 -2,218 -615 -585 -1,682 -918 537 429

-iet Official lieservesLevel [d 2 761 2.897 3,444 3L892 4.069 6.359 6,865 74S88 9.321 10.407 9.885 9.410

/a Includes nononetar7 gold transactions. Differa from datae provided by Department of Statitices by amotnt ofadjustcent made for incoaplete coverage of some lumpy traded items.

/b Errors and omtissions and some unrecorded short-term capital flows.Jc A negative sisn represents an accretion to reserves.

/d Kay not agree with "official reserve changes" because of differences In valuation.

Sources: Bank Negars, Quarterly Economic Bulletin (various issues) and mission estimates.

nroor ^LAufv nf.a..

Tahle 4.2: BALANCE OF PAYMENTS CURRENT ACCOUNT, 1971-62(MS million)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Trade Balance ta 686 365 1,594 672 724 3 762 3,871 3,587 6,580 4,776 -29 -1,432Exports (f.o.b.) 4,84 4,736 7,263 10,022 9,057 13,33 14,861 16,925 23,977 28,060 26,641 28_054utports (f.o.b.) -4,198 -4,371 -5,669 -9,350 -8,333 -9,568 -10,990 -13,338 -17,397 -23,284 -26,993 -29,486

Noniactor Services Balance -515 -528 -538 -722 -983 -1.035 -1.243 -1,615 -2378 -3.222 -3,561 -3,952Receipts 24 347 4 7I5 -i82 1 TT 1,38Z 1,566 ,925 34 289Prelght & insurance 10 35 60 77 69 126 158 224 320 420 603 633Other transportation 79 90 149 283 326 368 449 490 600 746 899 990Travel 37 47 62 345 344 348 405 450 545 714 857 960Government n.i.e. 97 72 90 126 151 155 165 175 190 210 220 230Other services 101 103 114 151 203 170 205 227 270 544 710 990

Payments -839 -875 -1,013 -1,704 -2,076 -1,202 -2 625 -3,181 -4,303 -5,856 -6,850 -7,745Freight & insurance -332 -344 -480 -791 -690 -852 -1,041 -1,296 -1,682 -2,354 -2,643 -2,813Other transportation -113 -125 -100 -201 -228 -274 -291 -380 -530 -757 -91R -1,004Travel -143 -148 -156 -384 -449 -499 -601 -758 -1,000 -1,235 -1,480 -1,631Government n.i.e. -45 -47 -61 -83 -104 -119 -143 -148 -165 -174 -192 -198Other services -206 -211 -216 -245 -605 -458 -549 -599 -926 -1,336 -1.617 -2,099

Factor Services Balance -363 -378 -659 -997 -727 -985 -1,272 -1,571 -1 797 -1,954 -1,78Z -2,338Receipts 265 208 256 389 364 379 501 588 1,159 1,460 1,793 1,616Payments -628 -586 -915 -1,386 -1,091 -1,364 -1,773 -2,159 -2,956 -3,414 -3,575 -3,954

Transfers Balance -137 -157 -151 -104 -79 -100 -78 -82 -119 -123 -105 -103Receipts 107 75 93 . 113 4 T4Y7 1703 1TR 191 '-- 210 16

Private 32 33 35 -7F 1 084 T2 Tf4 TT4 W17 T7140 NA NACovernment 75 42 58 42. 57 45 59 54 54 60 NA NA

PaYments -244 -232 -244 -217 -220 -247 -251 -250 -310 -323 -315 -319Private -220 -209 -220 -196 -199 -223 -227 -227 -280 -295 NA NAGoverment -24 -23 -24 -21 -21 -24 -24 -23 -30 -28 INA NA

Balance on Current Accounr -329 -698 246 -1,151 - 1,065 1,642 1 278 319 2,286 -23 -5, 77 7; 825

/a Includes non-monetary gold transactions.

Sources: Bank Negara, QuNarterly Economic Bulletin (various issues) and mission estimates.

Table 4.3: EMPORTS OF SELECTED COMMODITIES, 1971-82

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 19R1 19821P

ubberVolume ('000 tons) 1,390.4 1,365.0 1,638.8 1,570.1 1,459.6 1,620.1 1,653.4 1,614.3 1,649.6 1,525.7 1,484.2 1,378.0Value (KS ail) 1,460.3 1,298.3 2,507.2 2,887.7 2,025.5 3,097.8 3,379.4 3,601.1 4,482.3 4,617.4 3,712.4 2,654.7Unit value (senlkg) 105.0 95.1 153.0 183.9 13%.8 191.2 2utJ'. 223.1 271.7 302.6 250.1 IQ2.6

inVolume (tons) 87,142.0 89,609.0 82,537.0 85,111.0 77,940.0 81,532.0 66,516.0 70,183.0 72,121.0 69,701.0 66,442.0 4R,576.0Value (Mt nil) 905.8 924.0 896.9 1,515.0 1,206.1 1,524.0 1,703.5 2,021.5 2,315.8 2,506.2 2,138.1 1,483.7Unit value ($Iton) 10,394.7 10,311.2 11,000.6 17,675.4 15,475.1 18,691.5 25,610.4 28,803.1 32,110.0 35,q56.9 32,179.8 30,543.9

aw LogsVolume ('000 cu m) 8,772.2 9,118.5 10,122.4 9,553.1 8,473.2 15,394.0 16,077.8 16,722.3 16,016.7 15,152.1 15,822.1 19,373.0Value (M$ ail) 642.0 592.5 987.0 1,032.8 669.5 1,471.9 1,519.8 1,665.3 2,877.3 2,622.0 2,474.0 3,393.1Unit value ($(cu m) 73.0 65.0 97.5 108.1 79.0 95.6 94.5 99.6 179.6 173.0 156.4 175.1

awn TiaberVolume ('000 cu m) 1,343.7 1,798.6 Z,229.8 1,998.3 1,889.6 3,055.3 3,100.1 3,163.6 3,535.4 3,305.6 3,030.9 3,193.0Value (K* mil) 197.7 287.7 574.4 507.3 441.5 887.3 844.3 878.4 1,336.0 1,352.1 1,120.4 1,183.9Unit value ($/cu m) 147.1 160.0 257.6 253.9 233.7 290.4 272.4 277.7 377.9 409.0 369.7 370.8

alm Oil laVolume ('000 tons) 537.4 697.1 797.8 901.2 1,162.8 1,345.7 1,424.3 1,519.9 1,901.3 2,260.0 2,492.4 2,861.2 wValue (1$ mil) 380.4 362.7 466.5 1,055.6 1,317.5 1,220.2 1,790.0 1,871.8 2,471.0 2,603.5 2,823.6 2,776.2Unit value (0/ton) 663.5 520.7 584.7 1,204.5 1,133.0 906.8 1,256.8 1,232.1 1,299.6 1,152.0 1,132.9 970.3

etroleum /bVolume (00 tons) 7,926.7 4,255.3 3,834.6 3,167.8 3,763.2 7,143.9 7,793.8 9,228.8 12,034.5 11,221.1 10,152.2 11,783.4Value (M$ mil) 389.9 222.9 268.7 678.1 852.8 1,746.5 2,017.4 2,263.1 4,209.8 6,687.2 6,918.2 7,578.4Unit value ($/ton) 49.2 52.4 70.1 214.1 226.6 244.5 258.8 245.2 349.8 596.0 681.4 643.2

Ianufactured Goods /cValue (N$ mil) 604.3 720.2 1,112.0 1,684.1 1,977.9 2,472.3 2,647.6 3,610.1 4,R31,9 6,106.6 6,410.8 7,610.8

)ther Exports /dValue (?4$ mil) 436.4 445.7 559.4 804.0 740.0 1,022.0 1,057.2 1,162.6 1,697.7 1,676.6 1,502.1 1,513.9

lotal Exports (f.o.b.)Value (M$ mil) 5,016.8 4.854.0 7,372.1 10,194.7 9,230.9 13,442.2 14,959.2 17,073.9 24,222.0 28,171.6 27,099.7 28,194.7

la Includes processed palm oil.tb Crude and partly refined. From 1973 to 1977, includes re-exports of crude and partly refined petroleum from Brunei; these were terminated

in June 1977.re SITC 5-6 excluding tin.Fd "Other exports" are estimated as a residual.1F Preliminary.

Source: Bank Negara, Quarterly Economic Bulletin. BEST COPY AVAIBLE

Table 4.4: GROSS IMPORTS BY COMYODITY SECTION, 1971-82 la(M$ million)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 19821P

Food and live animals 735.6 808.8 1,078.2 1,585.0 1,401.5 .1,440.6 1,643.7 1,978.7 2,051.5 2,444.3 2,941.2 2,960.0

leverages and tobacco 108.8 81.7 97.7 114.9 119.4 116.7 145.4 184.6 185.2 221.3 255.1 245.7

Crude *aterials, inedible 267.1 310.3 372.5 543.1 554.9 537.5 637.8 725.8 850.3 1,052.8 1,162.0 1,131.3

Hineral fuels 576.3 368.3 392.9 1,003.5 1,021.1 1,309.8 1,421.7 1,470.3 2,076.7 3,554.4 4,606.9 4,3R9.6

Ani-al/vegetable oils & fats 22.8 22.3 27.2 44.1 26.0 21.1 26.0 25.7 30.2 29.7 35.2 36.6

Cheuicals 341.5 377.2 525.9 879.0 711.8 919.3 1,079.0 1,217.7 1,747.4 2,022.4 2,097.9 2,152.7

Manufactured goods lb 780.6 847.7 1,250.6 1,864.6 1,389.4 1,620.0 1,788.2 2,236.5 2,919.8 3,849.2 4,326.3 4;933.3

Machinery & transport equipment 1,332.6 1,470.8 1,786.6 3,207.0 2,774.1 3,179.9 3,761.0 4,949.7 6,373.6 q,105.3 9,863.9 11,647.0

Biscellaneous manufacturedarticles 194.7 . 199.9 333.0 559.7 465.3 491.9 581.1 722.0 791.0 975.0 1,077.9 1,364.6

Otber Imports 56.2 56.2 69.3 90.3 66.9 76.5 80.8 114.9 135.4 196.6 308.3 267.2

Total 4,416.2 4,543.2 5,933.9 9,891.2 8,530.4 9,713.3 11,164.7 13.645.9 17.161.1 23.451.0 26,674.7 29,128.0

/a Based on the Standard International Trade Classificatiln. Excludes intra-regional trade, military imports and imports for offshoreinstallations in the fuel industry; the last two exclusions explain discrepancy between totals in this table and those in the balanceof payments statistics.

lb Refer to manufactured goods classified chiefly by materials.IF Preliminary.

Source: Bank Negara, Quarterly Economic Bulletin.

Table 4.5: TRADE PRICES /a(1970 - 100)

Weights 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Export Price IndexFood 5.8 105.7 100.5 116.5 147.1 162.0 170.7 192.7 188.4 195.6 206.5 236.9 246.0Beverages and tobacco 1.2 97.1 90.6 81.9 94.6 109.2 119.5 134.3 163.8 168.R 185.4 202.1 201.0Crude materials, inedible 50.0 85.7 80.1 121.6 142.5 113.0 153.0 161.2 172.1 211.2 235.7 203.6 162.9Mineral fuels. etc. 1.3 119.0 110.4 124.4 299.6 246.2 263.9 279.6 279.8 305.8 470.8 720.5 750.2Aual and vegetable oils 6.9 100.1 77.4 91.1 186.9 170.3 134.6 193.5 186.0 203.8 180.3 172.2 148.0Chemicals 1.4 90.6 87.1 85.8 119.7 129.2 123.6 132.7 126.8 128.1 143.6 181.0 192.8Manufactured goods Z8.5 95.9 95.7 102.6 163.1 144.9 172.4 Z32.2 2.55.9 267.3 317.9 291.9 279.1Machinery I transport 2.3 106.5 108.7 114,8 126.1 128.0 146.8 146.5 154.0 176.3 177.0 187.5 194.6Miscellaneous manufactures 2.6 100.5 103.9 112.3 135.7 150.9 168.9 182.4 220.5 232.5 265.4 335.9 309.9

Total 100.0 92.4 88.0 112.9 152.0 132.1 159.2 186.5 199.4 230.7 254.3 238.1 213.0

luport Price IndexFood 19.4 106.9 116.4 146.8 202.1 198.8 180.8 175.6 190.7 190.0 212.3 252.2 240.0Beverages and tobacco 2.0 105.0 100.4 113.2 111.2 134.9 155.4 159.3 184.8 185.3 203.6 232.5 253.2Crude materials, inedible 9.2 95.2 99.2 103.7 144.6 138.9 144.7 170.1 183.9 203.8 227.7 212.0 205.3Mineral fuels, etc. 6.6 126.1 127.1 143.3 378.9 454.8 512.4 539.6 507.6 632.3 1,086.0 1,368.6 366.0Animal and vegetable oils 0.6 106.0 99.1 121.0 183.3 179.2 166.0 182.2 172.4 173.2 185.9 194.R 202.4Chemieals 8.4 105.3 107.0 122.4 207.3 205.0 201.0 184.2 185.8 213.4 239.0 273.7 263.7Manufactured goods 20.2 106.4 110.8 130.1 181.2 177*7 183.6 184.5 188.6 202.5 214.2 237.9 236.8Machinery & transport 28.6 109.1 117.6 130.7 147.9 173.3 175.7 184.3 187.8 187.5 197.9 212.2 215.6Miscellaneous manufactures 5.0 104.0 104.5 109.9 131.5 138.2 149.2 162.4 172.4 176.3 179.6 208.0 234.0

Total 100.0 107.2 112.3 129.9 183.6 194.6 197.9 203.1 208.1 223.2 267.6 306.3 304.9

Terms of trade index - 86.2 78.4 86.9 82.8 67.9 80.4 91.8 95.8 103.4 95.0 77.7 69.9

Annuml change in termgs oftrade (Z) - -13.8 -9.1 10.8 -4.7 -18.0 18.4 14.2 4.4 7.9 -8.1 -18.2 -10.0

/a These are unit value indices for Peninsular Malaysia.

Source: Department of Statistics.

Table 4.6: EXCEmA1IE RATES AND EXTERNAL RESERVES, 1971-82

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 19821e

Exchange RatesNoninal rate (Ma per US5) fa 3.05 2.82 2.44 2.41 2.40 2.54 2.46 2.32 2.19 2.18 2.30 2.36

Nominal rate index 100.0 9Z.4 80.1 78.9 78.7 83.3 80.6 - 75.9 71.7 71.3 75.5 77.5

Effective exchange rate index /b 99.4 99.9 107.0 110.7 109.6 109.5 109.4 102.8 107.0 1ns.7 103.7 107.5

Real effective exchange rateindex /b 97.4 97.2 101.3 103.4 98.9 94.5 91.5 86.7 88.8 83.8 77.1 73.6

External Reserves (in US$ million)Official reserves (inus gold) 755.0 907.0 1,275.0 1,547.0 1,456.0 2,404.0 2,784.0 3,243.0 3,915.0 4,387.0 4,098.0 - 3,768.0

Gold (market valuation) /c 67.7 96.6 161.6 264.4 267.3 207.2 257.0 365.2 653.2 1,410.3 1,071.2 875.6

Comercial banks' foreign assets 125.0 164.0 243.0 250.0 258.0 444.0 436.0 460.0 960.0 876.0 896.0 1,245.0/d

Total reserves 947.7 1,167.6 1,679.6 2,061.4 1,981.3 3,055.2 3,477.0 4,068.2 5,528.2 6,673.3 6,065.2 5,S88.6

Months of import coverage Id 5.3 5.8 5.5 4.2 4.5 6.1 5.9 5.4 4.9 4.7 3.8 3.2

/a Period average rates, line rf in International Financial Statistice IMF.Tb Trade-weighted nominal exchange rate; when adjusted for differences in consoner price increases gives real effective exchange

rate index. First quarter 1971 - 100; depreciation denoted by rise in .ndex.lc Valued at end-of-period London market price for gold from international Financial Statistics, 1MP.Id (Official reserves + gold at market valuation)ltotal imports of goods and services.Ie January-July 1982.

Table 4.7: gXT?R.AL- DEBT DWVEom-4m, 1971-8Z (a

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Total Debt Disbursed and Outstanding lb 533.0 681.6 720.3 866.6 1,338.2 1,605.4 1,99a.5 2,48a.5 2,846.8 3,586.8 5,191.8 7,635.7Of which: Multilateral agencies 156.2 183.6 205.7 255.2 318.6 396.5 491.7 573.2 658.1. 744.9 848.8 982.0

Bilateral credits 116.8 136.0 154.9 213.9 273.3 315.5 458.R 521.4 530.1 603.3 782.8 792.6Financial markets 248.9 351.1 348.4 384.0 714.8 863.2 1,016.3 1,382.R 1,597.8 2,60M.X 3,386.6 5,649.4Suppliers' credits 11.1 10.9 11.3 13.5 31.5 30.3 31.7 11.1 60).5 169.8 173.6 211.7

Debt Servicing Payments 46.0 51.2 86.2 118.0 143.6 263.6 842.3 548.8 367.0 467.0 714.0 n.a.Of vhich: Principal repayments 23.3 44. 63.6 8. 7 I 6978 37. 118.3 170 241.3 n.a.

Interest payments 22.7 30.2 42.2 54.4 59.9 119.8 144.5 176.9 248.7 330.0 472.9 n.a.

Net Flows lc 128.9 181.9 42.2 154.8 504.7 272.7 367.4 416.0 713.1 824.5 2,606.9 n.a.

Net Transfers /d 106.2 151.7 0.0 100.4 444.8 152.9 222.9 239.1 464.4 494.5 2,134.2 n.a.

Average Terms leAverage maturity (total) 15.6 13.1 17,3 16.3 11.3 12.4 12.8 11.0 14.1 14.3 -12.3 11.5

Official creditors 23.5 18.2 22.0 21.7 20.7 T8.8 18.8 17.7 19.8 19.5 T9.7 T1.5'Private creditors 6.5 7.8 9.2 13.7 5.3 7.0 7.5 8.9 9.5 10.9 10.6 9.9

Average interest rate (total) 6.0 7.1 6.6 8.1 7.8 7.6 7.4 8.1 7.3 11.0 12.9 11.9Official creditors 3- T KY 3- T7 I 7 73 6. 48 5I -7:8 -7WPrivate creditors 6.5 7.5 6.0 8.8 8.7 8.1 7.5 8.5 8.7 14.1 14.1 13.0

Principal Ratios

Debt servicelexports of goods & services 2.6 2.7 2.6 2.5 3.3 4.5 12.4 6.7 3.0 3.2 5.1 n.a.Debt outstanding and disbursed/GDP 12.9 13.9 9.7 9.5 14.9 15.0 15.2 15.9 13.8 15.1 21.0 29.5

/a Public and publicly-guaranteed debt only.

/b End-of-period.T7 Disbursements during period less repayments of principal./d Net flows less interest payments.Te Average maturity, in years, represents a weighted average of individual loans maturities. Similarly, average iaterest rates

refer to a weighted average of interest rates on individual loans.

Table 5.1: MONEY SUPPLY AND ITS DETERMINANTS, 1971-82(M$ million)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

NarroW MoneY (MI) 2, 121 ',715 3,785 4,056 4,349 5,257 6127 243 8,487 9,761 11,015 X2,477

Currency 1,061 1,249 1,718 2,030 2,239 2,628 3,112 3,548 4,094 4,758 5,100 5,727

Demand deposit 1,060 1,446 2,017 2,026 2,110 2,129 3,015 3,664 4,393 5,004 5,915 6,750

Quasi Money 2,548 3,042 3,817 4,659 5,633 7,491 8,692 10,224 13,129 17,891 21,356 25,171

Broad Money (MZ) 4,669 5,762 7,552 8,715 9,982 12,749 14,819 17,467 21616 27,652 32,871 37,648

Net foreign Assets 2,171 2.574 2,892 3,292 3,560 5,818 6,116 6,504 9,279 9,035 7,839 7,939

Domestic Credit 27 31452 5,152 6,237 7239C 8,333 10 221 12,861 14,241 21,485 28,010 33,900

Private 2,572 3,015 4,582 5,278 6,077 7,511 9,008 11,844 14,982 20,936 25,718 29,918

Public (net) 150 432 566 959 1,313 822 1,213 1,017 -741 549 2,292 3,982

Other Items -223 -263 -442 -814 -968 -1,403 -1,518 -1,898 -1,904 -2,868 -3,479 -4,191

Source: Bank Negara.

Table 6.1: PENINSULAR MALAYSIA: CONSUMER PRICE INOEX /a

Furniture Bedical Transport Recreation, edu-Beverages Clothing Gross rent, & household care & & commur cational & cuI- Miscel-

Year Total Food & tobacco & footwear fuel & power equipment health nication tural services laneous

(1967 = 100)

Welghts 100.0 46.8 8.9 4.8 9.4 6.6 2.0 10.4 5.6 5.5

1971 102.9 100.6 103.5 103.0 102.0 108.2 102.6 103.8 111.1 106.11972 106.2 103.8 107.2 105.8 102.8 114.0 103.4 106.5 115.5 112.81973 117.4 120.3 108.6 129.0 104.3 128.6 107,8 109.4 119.8 122.51974 137.8 151.7 110.7 144.1 111.5 150.5 116.4 119.7 126.9 140.41975 144.0 i57.4 121.2 143.3 118.9 157.8 122.4 127.1 129.5 147.91976 147.7 160.5 122.8 146.9 125.6 161.7 135.2 133.4 130.3 151.31977 154.8 169.3 127.3 152.6 133.2 167.3 140.9 138.1 132.7 159.41978 162.4 177.7 133.8 157.9 139.9 174.2 146.0 146.3 135.5 170.21979 168.3 181.7 135.6 168.1 149.1 181.0 155.3 151.5 138.8 191.71980 179.5 188.3 144.5 179.5 163.4 194.2 167.0 161.8 144.1 246.0

(1980 100)

Weights 100.0 36.2 4.9 4.6 18.1 5.9 1.3 16,6 6,9 5.5

1981 109.7 111.4 113.9 109.5 109.9 106.4 109.0 107.9 105.5 109.11982 (Nar) 114.3 118.3 115.2 112.8 115.4 108.6 111.9 110.5 107.8 110.6 n

(Jun) 115.4 120.7 117.8 113.5 115.4 109.2 113.1 110.8 108.2 110.5 1(Sep) 116.8 122.2 118.8 114.5 118.3 109.8 113.9 111.3 108.5 111.8(Dec) 117.8 112.2 134.1 115.8. 118.3 110.6 118.6 113.3 108.0 113.8

1983 (mar) 119.2 120.5 143.1 117.3 121.3 111.9 129.0 114.6 107.5 118.4

/a The Consumer Price Index has recently been rebased to 1980 using weights estimated from the Rousehold Expenditure Surveyof November 1980. The number of items in the index has been reduced to 430 from 700 in the previous index.

Source: Department of Statistics.

BEST COPY AVAILABLE

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Table 6.2: PENINSULAR MALAYSIA: PRODUCER PIIICE INDEX (BY SITC GROUP)

Food a live Beverages Crude Oils & Chemi- Manufac- Kachlnery 6 MiscellaneousYear Total animals & tobacco materials Fuels fats cal tures transport manufactures

Local ProductionWeights 100.0 25.8 4.2 35.7 5.1 3.8 2.8 15.8 4.1 2.7

1973 126.2 116.7 102.6 149.2 102:5 133.2 110.5 113.1 104.7 115.1''1 +' 974 158.7 136.4 106-7 175-0 163-0 262.4 155.2 162.8 119.0 135.8

1975 146.7 141.9 114.8 149.4 174.8 182.3 163.7 145.8 126.5 131.51976 165.2 141.2 113.7 189.5 190.6 175.6 147.5 164.4 138.6 139.51977 182.6 148.0 118.6 206.2 197.9 243.9 147.4 205.8 150.7 145.81978 195.4 154.4 124.9 227.2 202.8 232.5 154.6 223.5 166.0 149.41979 220.7 155.9 126.6 268.6 269.8 268.4 169.8 250.5 174.6 161.01980 240.1 165.7 138.3 293.2 359.1 216.5 189.1 275.7 179.1 175.91981 236.2 178.6 160.4 258.2 464.3 209.6 201.3 264.1 }88.7 186.91982 (Mar) 229.2 182.8 162.4 232.9 470.1 196.7 196.9 269.2 192.7 192.8

(Jun) 226.6 182.3 165.3 235.0 466.7 193.4 191.4 250.8 192.7 192.4

Imported GoodsWeights 100.0 18.8 5.9 5.8 8.3 0.5 8.2 20.1 26.9 5.5

1973 111.1 124.0 106.1 108.9 109.4 128.2 104.5 111.2 107.1 104.91974 138.9 150.7 113.6 149.4 235.3 190.1 144.6 132.5 111.2 114i.31975 148.8 154.1 130.7 156.5 255.4 192.4 160.7 135.8 125.7 120.71976 155.7 154.7 136.0 170.2 280.2 177.6 153.5 142.0 134.7 129.71977 160.2 159.6 144.6 183.9 281.8 184.4 155.1 144.5 141.6 125.11978 167.7 168.9 154.2 195.2 279.6 153.0 155.6 150.6 153.0 131.21979 182.5 164.8 158.4 205.5 350.6 200.5 174.5 163.0 167.0 147.71980 205.7 181.6 161.5 230.2 497.2 206.6 196.2 176.0 172.4 154.51981 223.2 203.0 180.4 232.7 580.4 208.5 210.5 186.8 178.8 160.21982 (Mar) 220.4 186.2 179.5 236.9 583.6 209.3 205.3 189.1 178.4 159.4

(Jun) 218.8 185.7 181.1 226.1 576.5 207.2 203.6 189.2 178.0 158.2

Total SupplyWeght6 10s.0 23.9 4.6 27.7 6-0 2.9 4.3 16.9 10.2 3.5

1973 122.2 118.3 103.8 147.0 105.1 133.0 107.4 112.5 100.4 110,81974 153.4 139.5 109.0 173.5 189.9 258.9 149.7 153.2 113.5 126.71975 147.3 144.5 120.1 149.8 204.8 182.8 162.1 142.6 125.9 126.91976 162.6 144.1 121.2 188.4 224.0 175.4 150.6 157.4 135.8 135.51977 176.6 150.4 127.4 204.9 229.1 242.0 151.4 186.4 144.3 137.11978 188.0 157.4 134.8 225.4 231.3 230.1 155.1 200.5 156.9 141,71979 210.5 157.8 138.7 265.0 299.9 265.1 172.2 222.9 169.3 155.41980 230.9 169.0 146.1 289.7 410.5 216.0 192.7 244.3 174.4 166.91981 232.8 183.8 167.1 256.8 507.5 209.5 206.1 239.7 181.8 175.71982 (Mar) 226.8 183.5 168.2 233.1 512.3 .197.3 201.2 243.9 182.6 178.7

(Jun) 224.5 183.0 170.7 234.5 507.6 194.1 197.7 231.3 182.3 178.0

Source: Department of Statistics.

Table 7.1? PENINSULAR MALAYSIA: INCIDENCE OF POVERTY

1970 1975 1980TotTot a TotaIcci- Per- Total Total Inci- Per-house- poor dence centage house- poor dence centage house- poor deuce centageholds house- of among holds house- of among holds house- of among

holds poverty poor holds poverty poor holds poverty poor-- (000) - - (Z) -- - (000) (I) -- (000) - (1(Z)

RuralAgriculture 852.9 582.4 68.3 73.6 915.1 576.5 63.0 69.0 963.2 443.7 46.1 66.6

Rubber smallholders 350.0 226.4 64.7 28.6 396.3 233.8 59.0 28.0 425.9 175.9 41.3 26.4Oil Palm smallholders 6.6 2.0 30.3 0.3 9.9 0.9 9.1 0.1 24.6 1.9 7.7 0.3Coconut sallholders 32.0 16.9 52.8 2.1 34.4 17.5 50.9 2.1 34.2 13.3 38.9 2.0Padi farmers 140.0 123.4 88.1 15.6 148.5 114.3 77.0 13.7 151.0 83.2 55.1 12.5other agriculture 137.5 126.2 91.8 16.0 157.4 124.1 78.8 14.9 172.2 110.5 64.1 16.6 1Fishermen 38.4 28.1 73.2 3.5 41.6 26.2 63.0 3.1 42.8 19.4 45.3 2.9Estate workers 148.4 59.4 40.0 7.5 127.0 59.7 47.0 7.1 112.5 39.5 35.1 5.9 4

other industries 350.5 123.5 35.2 15.6 433.3 153.4 35.4 18.4 546.4 22.8 22.8 18.7

Subtotal 1,203.4 705.9 58.7 89.2 1,348.4 729.9 54.1 87.4 1,509.6 568.5 37.7 85.3

UrbanMining 5.4 1.8 33.3 0.2 5.3 2.0 37.7 0.2 5.4 1.8 33.0 0.3Hanu$acturing 84.0 19.7 23.5 2.5 120.4 21.0 17.4 2.5 182.3 24.4 13.4 3.7Construction 19.5 5.9 30.2 0.7 25.5 6.1 23.9 0.7 34.0 5.9 17.4 0.9Transport and utilities 42.4 13.1 30.9 1.7 64.4 13.8 21.4 1.7 85.0 16.3 19.2 2.4Trade and services 251.3 45.4 18.1 5.7 337.4 62.3 18.5 7.5 467.7 49.2 10.5 7.4

Subtotal 402.6 85.9 21.3 10.8 553.0 105.2 19.0 12.6 774.4 97.6 12.6 14.7

Total 1,606.0 791.8 49.3 100.0 1,901.4 835.1 43.9 100.0 2,284.0 66.1 29.2 100.0

Table 7.2: MALAYSIA: OWNERSHIP AND CONTROL OF THE CORPORATE SECTOR, 1971-80($million)

Annualgrowth rate

1971 x 1975 Z 1980 % 1972-80(X)

Malaysian residents 2,51Z.6 36.3 7,047.2 46.7 13,817.8 52.5 20.9Bumiputera Individuals and trust agencies 279.6 4.3 1,394.0 9.2 3,273.7 12.4 31.4

Buniputera individuals 168.7 2.6 549.8 3.6 1,128.9 4.3 23.5Bumiputera trust agencies 110.9 1.7 844.2 5.6 29144.8 8.1 39.0

Other Malaysian residents 2,233.2 34.0 5,653.2 37.5 10,544.1 40.1 18.8

Foreign residents 4,051.3 61.7 8,037.2 53.3 12,505.2 47.5 13.3Share in Malaysian companies 2,159.3 32.9 4,722.8 31.3 7,128.0 27.1 14.2Net assets of local branches 1,892.0 28.8 3,314.4 22.0 5,377.2 20.4 12.3

Total 6,564.1 100.0 15,084.4 100.0 26,323.0 100.0 16.7

Source: FMP, Table 3.14.

Table 8.1: NAITIONAL ACCOUNTS SUNSARY (I), 1971-82(CM million at current prices)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981kp 1982/.

CDXP 12,955 14,220 18 721 22,8S8 22,332 28 9085 32,3640 36,272 45,083 51,838 56 785 60,570

kaonree Cap (1-!) -171 163 -1 056 49 259 -2,727 -2 628 -1,972 -4 132 -1 937 3,Soo 5,384Imports le 4 uf,) 5 ff7 5,246 6 ii,5- 10oo 11,770 13,61-5 16,519 281,702t 33,843 31iImports (a 4 ofe) 5,208 5,083 7,718 11,005 10,150 14,497 16,243 18,491 25,902 30,419 30,253 31,847

Total _ _ _e_ ditures 12,784 14,383 17,667 22,907 22,591 25,358 29,712 34,300 40,951 49,901 9 07 6

ConmUtion 10,081 11351 13 242 16 292 17 010 19,016 22,200 25 252 228,81 35196 41 267 44 745Pablic 2,170 2,738 23 3 4,301 5,388 5,78 6,473 8,811 11,161 12,635Private 7,911 8,613 10,308 12,776 13,086 14,715 16,812 19,466 22,406 26,383 30,106 32,110

Investment 2 703 3 032 4 425 6 615 5 581 6 342 7 512 9 048 12,000 15 090 19108 21,209 Fied vestment 3i 579 56 6,265 7 10,836 195 1,010canges ia stock 2 -179 206 817 -21 136 47 571 1,164 193 50 199

omestic SaVigtjs Z,874 2,869 5,481 6,566 5,322 9.069 1010 1 02 1A9 20 1 44 1558 1 2I!let factot uncome - -547 -194 - -2,338Current transfer -137 -157 -151 -104 -79 -100 -78 -82 -119 -123 -105 -103

LatoioAI savings Z,374 2,334 471 5465 4,517 4 8.790 9,67 14,26 14,.67 13,631 13J8 4

avwerage Bzcuge RateKQfU3§ 3.05 2.8Z '.44 2.41 2.40 2.54 2.46 2.32 2.19 2.18 2.30 2.34IlWtSPR 3*13 3*.0 2*96 2.83 3*03 2.95 2.87 2.87 2.88 2.83 2.61 2.56

souce,; Dpartmeut of StatisticsNuk of Eesara, quarterly tconoaic Bulletin

Table 8.2! NATIONAL ACCOUNTS SUIOIRY (1I), 1971-82(Nillions of USS at 1978 Constant Prices)

1971 197Z 1973 1974 1975 1976 1977 1978 1979 1980 1981/p 1982/e

Cross Domestic Product 9,140 9,998 11,168 12,097 12,194 13,604 14,659 15,634 17,081 18,448 19,648 20,560Terms of Trade Effect -579 -1,109 -345 -247 -1,068 -324 -3Z - 1,105 984 -541 -1,110

Gross Domestic Income 8,561 8,889 10,823 11,850 11,126 13,280 14,627 15,634 16,186 19,402 19,107 19,450Resoutce Gap -132 109 -689 25 127 -1,279 -1,198 -850 -1,666 -674 1,094 1,629

Itiports (g + nEs) 3,867 3,717 4,370 6,047 5,147 5,507 6,217 7,120 8,758 9,909 10,275 11,270Capacity to Import (g + nfs) 3,999 3,608 5.059 6,022 5,020 6,786 7,415 7,970 10,426 10,583 9,181 9,641[Exports (8 + afs)] 4,578 4,717 5,404 6,269 6,08R 7,110 7,449 7,970 9,321 9,599 9,722 10,751-

Total Expenditures 8,429 8,998 10,134 11,875 11,253 12,001 13,429 14,784 16,518 18,728 20,201 21,079

Consumption 6,538 7,040 7,638 8,426 8,498 9,123 9,997 10,884 12,082 13,433 14,192 14,541 Q

Public 1,318 1,541 1,611 1,852 1,978 2,146 2,356 2,494 2,711 3,255 3,596 3,848Private 5,220 5,499 6,027 6,574 6,520 6,977 7,641 8,390 9,371 10,178 10,596 10,693

Investment , 1,891 1,958 2,496 3,449 2,755 2,678 3,432 3,900 4,436 5,295 6,009 6,361Plied Investment 1,862 2,138 2,490 3,035 2809 2,950 3,361 3,654 4,139 5,013 5,717 6,129Chaeges in Stoeks 29 -180 6 414 -54 -72 51 Z46 297 222 292 232

Douestic Savings 2,023 1,849 3,185 3,424 2,628 4,157 4,630 4,750 6,104 5,969 4,915 4,909get Fatter Ineome -279 -268 -b31 -545 -359 -461 -581 -677 -726 -664 -541 ^708Current Transfers -112 -126 -102 -58 -43 -48 -36 -35 -45 -41 -33 -33

National 8aviugu 1,632 1,455 2,652 2,821 2,226 3,648 4,013 4,035 5,333 5,264 4,341 4,168

Sources: Department of StatisticsBank of Negara, Quarterly Economic Bulletin

Table 8.3; BALANCE OF PAYMENTS, 1971-82(US$ million at curent prices)

1971 1972 1973 1974 1975 1976 1977 1979 1979 1990 1991J 1982/e

Exports (g t ifa) 1,706 1,803 3,167 4,572 4,226 5,704 6,599 7,9A4 11,836 14,100 13,130 13,637Merchandise (FOB) 1,600 1,690 2,973 4,164 3,771 5,245 6,038 7,30a 10,956 12,890 11,703 129013Nnfactor aervicas 106 122 194 40D 455 459 561 676 880 1,210 1,427 19624

Ilports (g 4- nfs) 1,650 1,860 2,735 4,592 4,334 4,631 5,532 7,132 9,916 13,386 14,688 15,942Herchandise (FOR) 1,375 1,550 2,320 3,884 3,470 3,765 4,465 5,759 7,950 10s696 11,715 12,626Nonfactor services 275 310 415 708 864 866 1,067 19373 1,966 2,690 2,973 3,316

Resource balance 56 -57 432 -20 -108 1,073 1,067 852 1,920 714 -1,558 -2,305

Net factor income -119 -134 -269 -414 -30Z -368 -516 -678 -821 -897 -774 -1,001Factor receipts 87 74 105 162 152 149 204 254 530 671 771 692Factor payments 206 208 374 576 454 537 720 932 1,351 1,568 1,552 1,693

Net Current Transfers -45 -56 -62 -43 -33 -39 -32 -35 '54 -57 -46 -44

Gurreut balance -lO8 -247 101 -477 -443 646 519 19 1,04 -240 -2,378 -1,150

Direct iuvestment 100 113 172 571 359 298 477 543 662 978 1,229 1,325

Nediu= and long-term borrowing(net) 124 310 66 85 356 255 232 186 365 78 1,309 z2030

Short-term borroving (net) 24 -2 104 42 -35 -69 -520 -151 -722 431 37 399Other short-term borrowing

(net) la 20 21 - - - 104 -108 - 34 35 253 65

Errors and omissions -74 -36 -207 -32 -165 -361 -401 -446 -532 -787 -673 -667

Official reserve changes -86 -159 -236 -188 -71 -873 -199 -270 -851 -495 221 198

Net Official Reserves Level 905 1,027 1,410 1,617 1,694 2,502 2,789 3,233 4,259 4,781 4 290 4,029

(a Drawings on INF and allocations of SDRs.

Sources: Department of StatisticsBank Nigara, Quarterly Economic Bulletin