Economy of Malaysia

Economy of Malaysia
Economy of Malaysia
KL Outing 022b.jpg
Fixed exchange rates 1 Ringgit = 100 sen
Fiscal year Calendar year
Trade organisations APEC, ASEAN, IOR-ARC, WTO
GDP $414.4 billion (2010 est.)[1]
Rank: 30
GDP growth 7.2%
GDP per capita $14,700 (2010 est.)[2]
GDP by sector agriculture: 10.5% industry: 41.4% services: 48.2% (2010 est.)
Inflation (CPI) 1.7% (2010 est.)
below poverty line
3.6% (2007 est.)
Gini index 46.2 (2009 est.)
Labour force
by occupation
agriculture: (13%), industry: (36%), services: (51%) (2010 est.)
Unemployment 3.4% (2010 est.)
Main industries Peninsular Malaysia - rubber and palm oil processing and manufacturing, light manufacturing industry, electronics, tin mining and smelting, logging and processing timber, tourism, petroleum production and refining, logging
Ease of Doing Business Rank 21st[3]
Exports $210.3 billion (2010 est.)[4]
Export goods electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles, chemicals
Main export partners Singapore 13.4%, China 12.6%, Japan 10.4%, United States 9.5%, Thailand 5.3%, Hong Kong 5.1% (2010 est.)
Imports $ 156.6billion (2010 est.)[5]
Import goods electronics, machinery, petroleum products, plastics, vehicles, iron and steel products, chemicals
Main import partners China 12.6%, Japan 12.6%, Singapore 11.4%, United States 10.7%, Thailand 6.2%, Indonesia 5.6% (2010 est.)
FDI stock $77.4 billion (31 December 2010 est.)
Gross external debt $72.6 billion (31 December 2010 est.)
Public finances
Revenues $49.56 billion (2010 est.)
Expenses $63 billion (2010 est.)
Economic aid $31.6 million (2005 est.)
Credit rating
Foreign reserves US$130.128 billion (March 2011)[8]
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars

The Economy of Malaysia is a growing and relatively open state-oriented and newly industrialised market economy.[9][10] The state plays a significant but declining role in guiding economic activity through macroeconomic plans. In 2007, the economy of Malaysia was the 3rd largest economy in South East Asia and 28th largest economy in the world by purchasing power parity with gross domestic product for 2008 of $222 billion[11] with a growth rate of 5% to 7% since 2007[12] In 2010, GDP per capita (PPP) of Malaysia stands at US$14,700.[13] In 2009, the nominal GDP was US$383.6 billion, and the nominal per capital GDP was US$8,100.[14]

The Southeast Asian nation experienced an economic boom and underwent rapid development during the late 20th century and has a GDP per capita of $14,800, being considered a newly industrialized country.[15][16] On the income distribution, there are 5.8 million households in 2007. Of that, 8.6% have a monthly income below RM1,000, 29.4% had between RM1,000 and RM2,000, while 19.8% earned between RM2,001 and RM3,000; 12.9% of the households earned between RM3,001 and RM4,000 and 8.6% between RM4,001 and RM5,000. Finally, around 15.8% of the households have an income of between RM5,001 and RM10,000 and 4.9% have an income of RM10,000 and above.[17]

As one of three countries that control the Strait of Malacca, international trade plays a large role in its economy.[18] At one time, it was the largest producer of tin, rubber and palm oil in the world.[19] Manufacturing has a large influence in the country's economy.[20] Malaysia is the world's largest Islamic banking and financial centre.

Since it became independent in 1957, Malaysia's economic record has been one of Asia's best. Real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005. Performance peaked in the early 1980s through the mid-1990s, as the economy experienced sustained rapid growth averaging almost 8% annually. High levels of foreign and domestic private investment played a significant role as the economy diversified and modernized. Once heavily dependent on primary products such as rubber and tin, Malaysia today is a middle-income country with a multi-sector economy based on services and manufacturing. Malaysia is one of the world's largest exporters of semiconductor components and devices, electrical goods, solar panels, and information and communication technology (ICT) products.[21]

Malaysia's capital market crossed the RM2 trillion threshold for the first time ever as at end-2010. The capital market had achieved an annual compounded growth rate of 11% from RM717bil in 2000 due to rapid industry expansion and strong regulatory oversight that underpinned investor confidence in the Malaysian capital market.[22]



Early and colonial history

The Malay Peninsula and indeed Southeast Asia has been a center for trade for centuries. Various items such as porcelain and spice were actively traded even before Malacca and Singapore rose to prominence. The Malacca Sultanate controlled the Straits of Malacca from its founding in 1402 to the 1511 invasion by Portugal. All the trade in the Straits, and especially the spices from the Celebes and the Moluccas, moved under its protection and through its markets.[23]

In the 17th century, porcelain and spices were found in several Malay states and were actively traded. Large deposits of tin were found in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were introduced for commercial purposes. Instead of relying on the local Malays as a source of labour, the British brought in Chinese and Indians to work in the mines and plantations and provide professional expertise. Although many of them returned to their respective home countries after their agreed tenure ended, some remained in Malaysia and settled permanently. Over time, Malaya became the world's largest producer of tin, rubber, and palm oil.[citation needed] These three commodities along with other raw materials firmly set Malaysia's economic tempo well into the mid-20th century. As Malaya moved towards independence, the government began implementing economic five-year plans, beginning with the First Malayan Five Year Plan in 1955. Upon the establishment of Malaysia, the plans were re-titled and renumbered, beginning with the First Malaysia Plan in 1965.


In the 1970s, Malaysia began to imitate the four Asian Tiger economies (Republic of Korea (South Korea), Republic of China (Taiwan), then British Crown Colony of Hong Kong and the Republic of Singapore) and committed itself to a transition from being reliant on mining and agriculture to an economy that depends more on manufacturing. In the 1970s, the predominantly mining and agricultural based Malaysian economy began a transition towards a more multi-sector economy. Since the 1980s the industrial sector has led Malaysia's growth.[24] High levels of investment played a significant role in this.[21] With Japanese investment, heavy industries flourished and in a matter of years, Malaysian exports became the country's primary growth engine[citation needed]. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s.[25]

Central planning has been a major factor in the Malaysian economy, as government expenditure was often used to stimulate the economy. Since 1955, with the commencement of the First Malayan Five Year Plan, the government has used these plans to intervene in the economy to achieve such goals as redistribution of wealth and investment in, for instance, infrastructure projects.[26]

A legacy of the British colonial system was the division of Malaysians into three groups according to ethnicity. The Malays were concentrated in their traditional villages, focusing mainly on agricultural activities, while the Chinese dominated Malaysian commerce. Educated Indians took up professional roles such as those of doctors or lawyers, while the less better-off worked the plantations.[27][28] The Reid Commission which drafted the Malaysian Constitution made a provision for limited affirmative action through Article 153, which gave the Malays special privileges, such as 60% of university entrance (quota). However, after the May 13 incident of racial rioting in the federal capital of Kuala Lumpur, the government initiated more aggressive programmes aimed at actively establishing a Malay entrepreneurial class through direct intervention in the economy, aimed at alleviating poverty. This was done with the controversial New Economic Policy (NEP).[29] Its main objective was the elimination of the association of race with economic function, and the first five-year plan to begin implementing the NEP was the Second Malaysia Plan. The success or failure of the NEP is the subject of much debate, although it was officially retired in 1990 and replaced by the National Development Policy (NDP). Recently much debate has surfaced once again concerning the results and relevance of the NEP. Some have argued that the NEP has indeed successfully created a Middle/Upper Class of Malay businesspeople and professionals.

Despite some improvement in the economic power of Malays in general, the Malaysian government maintains a policy of discrimination that favours ethnic Malays over other races—including preferential treatment in employment, education, scholarships, business, access to cheaper housing and assisted savings. This special treatment has sparked envy and resentment amongst non-Malays.[30] The ethnic Chinese control of the locally owned sector of the country's economy has been ceded largely in favour of the bumiputra/Malays in many essential or strategic industries such as petroleum retailing, transportation, agriculture and automobile manufacturing.

Current GDP per capita grew 31% in the Sixties and 358% in the Seventies, but this proved unsustainable and growth scaled back sharply to 36% in the Eighties. It rose again to 59% in the Nineties led primarily by export-oriented industries.[31] This increase in GDP was brought about due to a shift from the traditional agricultural and resource based economy to one based of manufactured goods. From 1988 to 1996, Malaysia's economy expanded at 8 per cent, the second fastest after China, resulting in manufactured goods such as microchips and semiconductors making up 80 per cent of exports. Per capita income doubled from 1990 to 1996. Infrastructure projects were greatly increased in this time. Other countries looked to Malaysia at the time as an example for economic reform.[32]

The rate of poverty in Malaysia also fell dramatically over the years. However, its precipitous drop has been questioned by critics who suggest that the poverty line has been drawn at an unreasonably low level.[33] The rapid economic boom led to a variety of supply problems. Labour shortages soon resulted in an influx of millions of foreign workers, many illegal. Cash-rich PLCs and consortia of banks eager to benefit from increased and rapid development began large infrastructure projects.

As of 2006, the most recent five year plan is the Ninth Malaysia Plan. The five year plans have been criticised for resembling the central planning of Soviet communism; the five-year time frame has been attacked for being insufficient in dealing with short-term crises and long-term trends.[34] The effectiveness of the plans has also been disputed; at the beginning of 2005, the last year of the Eighth Malaysia Plan, almost 80% of the funds allocated under the plan had not been disbursed.[35]

Tiger economy

Macro-economic trend

This is a chart of trend of gross domestic product of Malaysia at market prices[36] estimated by the International Monetary Fund with figures in millions of Malaysian Ringgit.

Year GDP
(in millions)
(1 USD to MYR)
Inflation Index
Nominal Per Capita GDP
(as % of USA)
PPP Per Capita GDP
(as % of USA)
1980 54,285 2.17 47 14.78 19.19
1985 78,890 2.48 60 11.44 19.33
1990 119,082 2.70 65 10.47 20.87
1995 222,473 2.50 79 15.69 27.02
2000 343,216 3.80 92 11.47 26.01
2005 494,544 3.78 100 12.67 26.67
2010 765,966 3.04 113 17.81 31.03

For purchasing power parity comparisons, the US Dollar is exchanged at 1.70 Ringgit only. Mean wages were $6.95 per manhour in 2009.

From 1988 to 1997, the economy experienced a period of broad diversification and sustained rapid growth averaging 9% annually.

By 1999, nominal per capita GDP had reached $3,238. New foreign and domestic investment played a significant role in the transformation of Malaysia's economy. Manufacturing grew from 13.9% of GDP in 1970 to 30% in 1999, while agriculture and mining which together had accounted for 42.7% of GDP in 1970, dropped to 9.3% and 7.3%, respectively, in 1999. Manufacturing accounted for 30% of GDP (1999). Major products include electronic components – Malaysia is one of the world's largest exporters of semiconductor devices – electrical goods and appliances.

During the same period, the government tried to eradicate poverty with a controversial race-conscious positive program called New Economic Policy (NEP). First established in 1971 following race riots, commonly known in Malaysia as the May 13 Incident, it sought to eradicate poverty and end the identification of economic function with ethnicity. In particular, it was designed to improve the distribution of wealth among the country's population.. The NEP ostensibly ended in 1991, however the policies persist in the form of other programmes such as the National Development Policy. The policies are enforced overtly through race-based quotas for low-cost housing units, university placement, business equity ownership, etc.

Rapid growth was achieved partly through privatisation of inefficient state owned enterprises, thus subjecting them to commercial pressures and forcing them to better utilise their resources. Many deals were done behind closed doors and put through rather quickly. In one example Khazanah Nasional alienated shares in DRB Hicom to Mega Consolidated. This led to such deals being labelled mega projects.

Foreign funds were attracted to invest making the local money market and bourse liquid. This created opportunity for local businesses to raise capital on the KLSE, and carry out infrastructure development in areas like telecommunications, highways and power generation to meet bottlenecks caused by rapid industrialisation. An intense labor shortage created employment for millions of foreign workers. Subsequent events show that more than 50% were illegal.

The influx of foreign investment led to the KLSE Composite index trading above 1,300 in 1994 and the Ringgit trading above 2.5 in 1997. At various times the KLSE was the most active exchange in the world, with trading volume exceeding even the NYSE. The stock market capitalisation of listed companies in Malaysia was valued at $181,236 million in 2005 by the World Bank.[37]

Some of the more visible projects from that period are Putrajaya, a new international airport (Kuala Lumpur International Airport), a hydroelectric dam (Bakun dam), the Petronas Towers and the Multimedia Super Corridor. Proposals that were eventually canceled include the 95 km Sumatra–Malaysia bridge (would have been world's longest), the Mega International Sea and Air port on reclaimed land in Kedah (would have been world's biggest) and the KL Linear City (would have been the world's longest mall and the world's first city built over a river).

Concerns were raised during the time about the sustainability of the rapid growth and the ballooning current account. The mainstream opinion prevalent at that time was that the deficit was temporary and would reverse once imported equipment started producing for export. In spite of that, measures were taken to moderate growth especially when it threatened to overheat into the double digits. The main target was asset prices, and restrictions were further tightened on foreign ownership of local assets. Exposure of local banks to real estate loans were also capped at 20%.

As was widely expected, the current account deficit did narrow steadily, year to year, from 9% to 5% of GDP.

Malaysia has the largest operational stock of industrial robots in the Muslim world.[38]

Asian financial crisis and recovery

The year 1997 saw drastic changes in Malaysia. There was speculative short-selling of the Malaysian currency, the ringgit. Foreign direct investment fell at an alarming rate and, as capital flowed out of the country, the value of the ringgit dropped from MYR 2.50 per USD to, at one point, MYR 4.80 per USD.The Kuala Lumpur Stock Exchange's composite index fell from approximately 1300 to nearly merely 400 points in a few short weeks. After the controversial sacking of finance minister Anwar Ibrahim, a National Economic Action Council was formed to deal with the monetary crisis. Bank Negara imposed capital controls and pegged the Malaysian ringgit at 3.80 to the US dollar. Malaysia refused economic aid packages from the International Monetary Fund (IMF) and the World Bank, surprising many analysts. By refusing aid and thus the conditions attached thereof from the IMF, Malaysia was not affected to the same degree in the Asian Financial Crisis as Indonesia, Thailand and the Philippines.

Regardless, the GDP suffered a sharp 7.5% contraction in 1998. It however rebounded to grow by 5.6% in 1999. The Government of Malaysia predicted 5.8% real GDP growth in the year 2000, but most analysts predicted growth will exceed 8% for the year.

In order to rejuvenate the economy, massive government spending was made and Malaysia continuously recorded budget deficits in the years that followed. Economic recovery has been led by strong growth in exports, particularly of electronics and electrical products, to the United States, Malaysia's principal trade and investment partner. Inflationary pressures remained benign, and, as a result, Bank Negara Malaysia, the central bank, had been able to follow a low interest rate policy. The Malaysian economy recovered from the 1997 Asian Financial Crisis sooner than neighbouring countries, and has since recovered to the levels of the pre-crisis era with a GDP per capita of $14,800.[15][16]

The post Y2K slump of 2001 did not affect Malaysia as much as other countries. This may have been clearer evidence that there are other causes and effects that can be more properly attributable for recovery. One possibility is that the currency speculators had run out of finance after failing in their attack on the Hong Kong dollar in August 1998 and after the Russian ruble collapsed. (See George Soros)

The fixed exchange rate was abandoned on July 21, 2005 in favour of a managed floating system within an hour of China announcing the same move.[39] In the same week, the ringgit strengthened a percent against various major currencies and was expected to appreciate further. As of December 2005, however, expectations of further appreciation were muted as capital flight exceeded USD 10 billion.[39] According to Bank Negara's published figures, Malaysia's foreign exchange reserves increased steadily since the initial capital flight, from USD75.2 billion as at 15 July 2005 (just before the peg was removed) to peak at USD125.7 billion as at 31 July 2008, a few months before the global credit crisis that started in September 2008. As at 29 May 2009, the reserves stood at USD88.3 billion. In spite of the large positive current account surplus, foreign reserves have started to fall at a rapid rate. Official statistics released in March 2006, confirmed capital flight of more than US$10 billion. However, as of the 4th fiscal year, a surge of FDI has pushed the KLSE above 1200 points, and is expected to strengthen to pre 1997 levels.

In March 2005, the United Nations Conference on Trade and Development (UNCTAD) published a paper on the sources and pace of Malaysia's recovery, written by Jomo K.S. of the applied economics department, University of Malaya, Kuala Lumpur. The paper concluded that the controls imposed by Malaysia's government neither hurt nor helped recovery. The chief factor was an increase in electronics components exports, which was caused by a large increase in the demand for components in the United States, which was caused, in turn, by a fear of the effects of the arrival of the year 2000 (Y2K) upon older computers and other digital devices.

In September 2005, Sir Howard J. Davies, director of the London School of Economics, at a meeting in Kuala Lumpur, cautioned Malaysian officials that if they want a flexible capital market, they will have to lift the ban on short-selling put into effect during the crisis. In March 2006, Malaysia removed the ban on short selling.[40] It is interesting to note that some of the measures taken by the Malaysian government in response to the Asian crisis, such as the ban on short selling, were swiftly adopted by the very countries that had previously been critical of the Malaysian response.

Regardless of cause and effect claims, rejuvenation of the economy also coincided with massive government spending and budget deficits in the years that followed the crisis. Later, Malaysia enjoyed faster economic recovery compared to its neighbours. The country has recovered to the levels of the pre-crisis era – as an example, the KLCI Composite Index hit an all time high of 1,386 on 20 June 2007 which is approximately 100 points higher than the pre-crisis record of 1,275 in 1993. While the pace of development today is not as rapid, it is seen to be more sustainable. Although the controls and economic housekeeping may or may not have been the principal reasons for recovery, there is no doubt that the banking sector has become more resilient to external shocks. The current account has also settled into a structural surplus, providing a cushion to capital flight. Asset prices are generally back to their pre-crisis heights, despite the effects of the global financial crisis. As of 21 May 2007, the Ringgit touched a nine-year high record at 3.39 against the US dollar. Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz says the Ringgit moves up on its own merit and in line with the Malaysian economy and not in tandem with the Chinese Yuan. Malaysia has shown the ability to absorb the crude oil price increases and most economies have shown high resilience in absorbing higher energy prices. Malaysia is the world's largest Islamic banking and financial centre.

Economic policies

Like many other independent nations, Malaysia's economic policies were shaped by various events in the nation's history since independence.

Monetary policy

Prior to the 1997 Asian Financial Crisis, the Malaysian ringgit was an internationalized currency, which was freely traded around the world. Just before the crisis, the Ringgit was traded RM2.50 at the dollar. Due to speculative activities, the Ringgit fell as much as RM4.10 to the dollar in matter of weeks. Bank Negara Malaysia, the nation's central banks decided to impose capital controls to prevent the outflow of the Ringgit in the open market. The Ringgit is not traded internationally, a traveler needs to declare to the central bank if taking out more than RM10,000 out of the country and the Ringgit itself was pegged at RM3.80 to the US dollar.

The fixed change rate was abandoned to floating exchange rate in July 2005, hours after People's Republic of China announced the same move.[41] At this point, the Ringgit is still not internationalized. The Ringgit continue to strengthen to 3.18 to the dollar in March 2008. Meanwhile, many aspect of the capital control has been slowly relaxed by Bank Negara Malaysia. However, the government continues to not internalized the Ringgit. The government stated that the Ringgit will be internationalized once it is ready.[42]

Bank Negara Malaysia for the time being, uses interest rate targeting. The OPR (Overnight Policy Rate) is their policy instrument, and is used to guide the short term interbank rates which will hopefully influence inflation and economic growth.

Affirmative action

Tun Abdul Razak, who was then the Prime Minister, implemented the affirmative action policy named as New Economic Policy soon after May 13 Incident in 1969.[43] Prior to the incident, the poverty rates among Malays were extremely high (at 65%) as was discontent between races, particularly towards the Chinese, who controlled 34% of the economy at the time.[44][45] The Chinese minority still accounts for 70 percent of the country's market capitalization.[46]

Through NEP, Bumiputera quotas are placed in housing developments, scholarship admission and also for ownership of publicly listed companies. The quota system has been relaxed recently since the March 8, 2008 General election. Bumiputera equity requirement for publicly listed companies has been relaxed since 12 November 2008 by allowing those companies to remove the quota once after IPO has been done.[47] Further liberalization in the retail sector is expected to remove the present 30% Bumiputera listing requirements. According to the Secretary-General of Ministry of Domestic Trade and Consumer Affairs Datuk Mohd Zain Mohd Dom said, the amendments is reflective of Malaysia "moving towards progressive liberalisation"[48]

The Malaysian New Economic Policy was created in 1971 with the aim of bringing Malays a 30% share of the economy of Malaysia and eradicating poverty amongst Malays, primarily through encouraging enterprise ownership by Bumiputeras. After 30 years of the program, the NEP had somewhat met some of its goals. Bumiputera ownership increased to 18.9% in 2004 against 2.4% in 1970 and poverty decreased to 8.3% in 2004 against 64.8% in the 1970s.[44][49][50]

The NEP is accused of creating an oligarchy, and creating a 'subsidy mentality'.[51] Political parties such as Parti Keadilan Rakyat and Democratic Action Party have proposed a new policy which will be equal for every Malaysian, regardless of race.[52] When the Democratic Action Party was elected in the state of Penang in 2008, it announced that it will do away with the NEP, claiming that it "... breeds nepotism, corruption and systemic inefficiency".[53]

On April 21, 2009, the prime minister Najib Tun Razak has announce liberalisation of 27 services sub-sector by abolishing the 30% bumiputera requirement. The move is seen as the government efforts to increase investment the service sector of the economy. According to the premier, many more sectors of the economy will be liberalized.[54] On June 30, 2009, the premier announces further liberation moves including the dismantling of the Bumiputera equity quotas and repealing the guidelines of the Foreign Investment Committee, which was responsible to monitor foreign shareholding in Malaysian companies. However, any Malaysian companies that wishes to list in Malaysia would still need to offer 50 percent of public shareholding spread to Bumiputera investors.[55]

Subsidies and price controls

See also Gas subsidies

The Malaysian government subsidizes and controls prices on a lot of essential items to keep the prices low. Prices of items such as palm oil cooking oil, petrol, flour, bread, rice and other essentials have been kept under market prices to keep cost of living low. In 2008, the government announced that it has spent RM40.1 billion in 2007 in subsidies to keep prices leveled.[56] As of 2009, 22 per cent of government expenditures were subsidies, with petrol subsidies alone taking up 12 per cent.[57]

Smuggling and hoarding, which leads to shortages, is a prominent problem in Malaysia due to the subsidies. For example, cooking oil is subsidised for domestic use only. This situation creates an environment where industrial players hoard domestic cooking oil for industrial use. During shortage time, such as the January 2008 cooking oil crisis, the government imposed a 5 kg limit for each purchase to relief domestic demand. However, the limited purchase has created more panic buying, which prompt the Government to negotiate with cooking oil manufacturers to increase their production capacity, and the situation reverted to normal within one week.[58] Another example is when vehicles in Thailand come to Malaysia to smuggle cheap petrol and diesel out of the country. The government also looking into restructuring the fuel subsidy so that the selected needy group will get the subsidy. The government is considering removing subsidies on diesel for general consumers while maintaining subsidies for suitable groups, such as those involved in public transport.[59]

On January 2010, the government announce dual price structure for fuel, based on citizenship. Foreigners are expected to pay market price for fuel while citizens will have subsidy allocations based to engine capacity. The dual pricing structure is expected to begin on May 1, 2010.[60]

The government has considered to remove the subsidies but a formal plan had yet to materialized as of 2007.[61] In 2008, the government is considering to remove price controls on construction materials such as cement and steel bars while banning exports to ensure steady supply.[62] The government is experimenting with the idea through allowing Sabah and Sarawak construction players to import steel and cement since February 2008.[63] The government then, on May 12, 2008 removed ceiling prices on steel bars and billets and removed import duties on selected items under HS Code 7214.10 110 and 7214.20 910, which do not fully cover steel bars use by the construction industry.[64] The government then further liberalized the cement industry by abolishing ceiling prices on June 5, 2008.[65]

Another strategic item which is heavily subsidized but moving towards a market based approach is Natural Gas which is used in the industrial sector. Beginning July 1, 2008, the government is expected to reduce the gas subsidy 5% to 10% per annum over 11 years, in which the gas price will reflect market price.[66]

Sovereign wealth funds

The government owns and operates several sovereign wealth funds that invests in local companies and also foreign companies. One such funds are Khazanah Nasional Berhad which was established in 1993.[67] Its objective is to help shape selected strategic industries in Malaysia and develop those investment for the benefit of Malaysia.[68] The fund invest in major companies in Malaysia such as Proton Holdings in the automotive sector, CIMB in the banking sector, Pharmaniaga in the medical sector, UEM Group in the construction sector, Telekom Malaysia in the communications industry and many other companies in many other industries.[69] It is estimated that the fund size of Khazanah Nasional stands at around US$19 billion.[67]

Another fund that is owned by the Malaysian government is the Employees Provident Fund which is claimed to be the fourth largest state run pension fund in Asia.[70] Like Khazanah Nasional, the EPF invests and sometimes owns several major companies in Malaysia such as RHB Bank.[70] EPF investment is diversified over a number of sectors but almost 40% of their investment are in the services sector.[71] Fund size in 2007 is estimated at US$100 billion.[72]

Permodalan Nasional Berhad is a major fund manager controlled by the Malaysian Government. It offers capital guaranteed mutual funds such as Amanah Saham Bumiputera and Amanah Saham Wawasan 2020 which are open only to Malaysian and in some cases, Bumiputeras.[73] As of April 2008, it manages MYR120 billion of funds (36 billion USD), of which MYR76 million is unit trust funds.[74] The fund manager is a sizable investor in strategic companies such as MMC Corporation Berhad,[75] Maxis Communications Berhad[76] and TM International Berhad[77] among others.

Other than federal government funds, some states have created their own investment authority to manage state-owned sovereign wealth funds. First of such funds are launched by the state of Terengganu through the establishment of Terengganu Investment Authority in December 2008. It initial fund size will be around USD 3 billion and derived from its oil royalties.[78]

Government influence

Although the federal government promotes private enterprise and ownership in the economy, the economic direction of the country is heavily influenced by the government though five years development plans since independence. The economy is also influenced by the government through agencies such as the Economic Planning Unit and government-linked wealth funds such as Khazanah Nasional Berhad, Employees Provident Fund and Pemodalan Nasional Berhad.

The government's development plans, called the Malaysian Plan, currently the Ninth Malaysia Plan, started in 1950 during the British colonial rule.[79] The plans were largely centered around accelerating the growth of the economy by selectively investing in selective sectors of the economy and building infrastructure to support said sectors.[79] For example, in the current national plan, three sectors - agriculture, manufacturing and services, will receive special attention to promote the transition to high value-added activities in the respective areas.[80] Other than the generalized plans like the Ninth Malaysia Plan, the government also have a development plan that are targeted to improve the manufacturing sector which is called the Industrial Master Plan. Currently, the plan is called the Third Industrial Master Plan (IMP3) which covers a period from 2006 to 2020. The industrial plans aim to make Malaysia a major trading nation and build up the country's economy and human capital.[81]

Economic Planning Unit (Malay: Unit Perancang Ekonomi), established in 1961[82] was instrumental in steering Malaysia to recovery from the 1997 Asian Financial Crisis. The unit is an agency under the Prime Minister's Department responsible for steering Malaysia's socio-economic development towards achieving a developed-nation status by the year 2020 through various measures such as preparing policies and strategies for socio-economic development, prepare medium and long term plans for the government and most importantly, advise the government on economic issues.[83]

Government-linked investment vehicles such as Khazanah Nasional Berhad, Employees Provident Fund and Pemodalan Nasional Berhad invest and sometimes own major companies in major sectors of the Malaysian economy. For example, Khanazah Nasional is a major shareholder in Proton Holdings, an automaker and CIMB banking group in the financial sector.[84] The government, however, is keen to sell stakes in their companies such as Malaysia Airlines to let the companies remain globally competitive[85]


The only legal tender in Malaysia is the Malaysian Ringgit. As of 20 March 2008, the Ringgit is traded at MYR 3.18 at the US dollar.[86] The Ringgit has not been internationalised since September 1998, an effect due to the 1997 Asian Financial Crisis in which the central bank impose capital controls on the currency.[87] As a part of series of capital controls, the currency was pegged between September 1998 to 21 July 2005 at MYR 3.80 to the dollar.[88] In recent years, Bank Negara Malaysia beginning to relax certain rules to the capital controls although the currency itself is still not traded internationally yet. According to the Bank Governor, the Ringgit will be internationalised when it's ready.[89]

On September 2010, in an interview with CNBC, Dato' Seri Najib Tun Razak, which is the Prime Minister of Malaysia and also the Finance Minister said that the government is open to open up the Ringgit to off shore trading if the move will help the economy. He further added that before such a move to be made, it will ensure that rules and regulation will be in place so the currency will not be abused.[90]

Natural resources

Picture depicting a few palm oil trees in a plantation.
Palm oil estate in Malaysia.

Malaysia is well-endowed with natural resources in areas such as agriculture, forestry and minerals. It is an exporter of natural and agricultural resources, the most valuable exported resource being petroleum.[21] At one time, it was the largest producer of tin, rubber and palm oil in the world.[91] In terms of agriculture, Malaysia is one of the top exporters of natural rubber and palm oil, which together with sawn logs and sawn timber, cocoa, pepper, pineapple and tobacco dominate the growth of the sector. Palm oil is also a major generator of foreign exchange.

Regarding forestry resources, it is noted that logging only began to make a substantial contribution to the economy during the nineteenth century. Today, an estimated 59% of Malaysia remains forested. The rapid expansion of the timber industry, particularly after the 1960s, has brought about a serious erosion problem in the country's forest resources. However, in line with the Government's commitment to protect the environment and the ecological system, forestry resources are being managed on a sustainable basis and accordingly the rate of tree felling has been on the decline.

In addition, substantial areas are being silviculturally treated and reforestation of degraded forest land is also being carried out. The Malaysian government provide plans for the enrichment of some 312.30 square kilometres (120.5 sq mi) of land with rattan under natural forest conditions and in rubber plantations as an inter crop. To further enrich forest resources, fast-growing timber species such as meranti tembaga, merawan and sesenduk are also being planted. At the same time, the cultivation of high-value trees like teak and other trees for pulp and paper are also encouraged. Rubber, once the mainstay of the Malaysian economy, has been largely replaced by oil palm as Malaysia's leading agricultural export.

Tin and petroleum are the two main mineral resources that are of major significance in the Malaysian economy. Malaysia was once the world's largest producer of tin until the collapse of the tin market in the early 1980s. In the 19th and 20th century, tin played a predominant role in the Malaysian economy. It was only in 1972 that petroleum and natural gas took over from tin as the mainstay of the mineral extraction sector. Meanwhile, the contribution by tin has declined. Petroleum and natural gas discoveries in oil fields off Sabah, Sarawak and Terengganu have contributed much to the Malaysian economy. Oil and gas resources are managed by Petronas, the state controlled oil company which forms production sharing contracts with other players like Exxon-Mobil and Royal Dutch Shell to explore oil fields in Malaysia. Other minerals of some importance or significance include copper, bauxite, iron-ore and coal together with industrial minerals like clay, kaolin, silica, limestone, barite, phosphates and dimension stones such as granite as well as marble blocks and slabs. Small quantities of gold are produced.

Malaysia's broad and shallow continental shelf consists of several deep water prospective areas. Malaysia has 500,000 km2 available for oil and gas exploration. 51 of the 70 producing fields in Malaysia are oil fields. In January 2004, Malaysia's oil reserves were estimated to be 4.84 billion barrels (769,000,000 m3), while natural gas reserves stood at 87 trillion standard cubic feet (2,460 km3). The country produces about 0.00075 billion barrels (119,000 m3) barrels of crude oil every day and 2.20 trillion standard cubic feet (60 km3) of natural gas condensates per year.[92] In 2004, Minister in the Prime Minister's Department, Mustapa Mohamed, revealed that Malaysia's oil reserves stood at 4.84 billion barrels (769,000,000 m3) while natural gas reserves increased to 89 trillion cubic feet (2,500 km³). This was an increase of 7.2%.[citation needed] As of January 1, 2007, Petronas reported that oil and gas reserve in Malaysia amounted to 20.18 billion barrels (3.208×109 m3) equivalent.[93] In January 2008, the Malaysian natural gas reserves holds up to 14,670,000,000 barrels (2.332×109 m3) of oil equivalent.[94] As of January 2009, Malaysia has proven oil reserves of up to 4 billion barrels (640×10^6 m3).[95]

The government estimates that at current production rates Malaysia will be able to produce oil up to 18 years and gas for 35 years. In 2004, Malaysia is ranked 24th in terms of world oil reserves and 13th for gas. 56% of the oil reserves exist in the Peninsula while 19% exist in East Malaysia. The government collects oil royalties of which 5% are passed to the states and the rest retained by the federal government.[96]

Other minerals of some importance or significance include copper, bauxite, iron-ore and coal together with industrial minerals like clay, kaolin, silica, limestone, barite, phosphates and dimension stones such as granite as well as marble blocks and slabs. Small quantities of gold are produced.

Business environment

According to World Bank, Malaysia ranks 24th in Ease of doing business. Malaysia's strengths in the rank includes getting credit (rank 3rd), protecting investor (ranked 4th) and doing trade across borders (ranked 21st). Weaknesses include dealing with licenses (ranked 105th). The study ranks 178 countries in all aspect of doing business.[97] In the investor protection category of the survey, Malaysia had scored a perfect 10 for the extent of disclosure, nine for director liability and seven for shareholder suits. Malaysia is behind Singapore, Hong Kong and New Zealand in investor protection category of the survey.[98]

The government is moving towards a more business friendly environment by setting up a special task force to facilitate business called PEMUDAH, which means "simplifier" in Malay.[99] Highlights includes easing restrictions and requirement to hire expatriates, shorten time to do land transfers and increasing the limit of sugar storage (a controlled item in Malaysia) for companies.[100] The Government aims to be in the top 10 in the Ease of doing business survey before 2010 in order to attract even more foreign investors.[101]

The efforts of PEMUDAH is beginning to show fruits as their ranking improved to number 20 in 2009, with marked improvement in four areas: getting credit; dealing with construction permits; paying taxes; and enforcing contracts.[102]

External trade

Malaysian exports in 2006

Malaysia is an important trading partner for the United States. In 1999, two-way bilateral trade between the U.S. and Malaysia totaled U.S. $30.5 billion, with U.S. exports to Malaysia totaling U.S.$9.1 billion and U.S. imports from Malaysia increasing to U.S.$21.4 billion. Malaysia was the United States' 10th-largest trading partner and its 12th-largest export market. During the first half of 2000, U.S. exports totaled U.S.$5 billion, while U.S. imports from Malaysia reached U.S.$11.6 billion.

The Malaysian Government encourages Foreign Direct Investment (FDI). According to Malaysian statistics, in 1999, the U.S. ranked first among all countries in approved FDI in Malaysia's manufacturing sector with approved new manufacturing investments totaling RM5.2 billion (US$1.37 billion). Principal U.S. investment approved by the Malaysian Investment Development Authority (MIDA) was concentrated in the chemicals, electronics, and electrical sectors. The cumulative value of U.S. private investment in Malaysia exceeded $10 billion, 60% of which is in the oil and gas and petrochemical sectors with the rest in manufacturing, especially semiconductors and other electronic products.

In the first six months of 2007, Malaysia's total trade increased by 2.2% to RM522.38 billion, compared with RM511.11 billion in the same period of 2006.

Free trade efforts

Malaysia is a member of the ASEAN Free Trade Area which was established in 1992 to promote trade among ASEAN members. Most tariffs among the first generation member states were scrapped in 2007. ASEAN itself is increasingly playing a large role in free trade negotiation on behalf of its members. ASEAN as a group hopes to establish a free trade agreement with the European Union by 2009.[103]

The Malaysian Government is negotiating free trade deals with Australia, Chile and India,[104] but has suspended negotiation of free trade deal with United States indefinitely after eight rounds of negotiation. Malaysia is seeking membership into the Trans Pacific Partnership, a regional trade pact between the United States and countries in the Pacific Rim.[105] As of October 2010, TPP members has agree to allow Malaysia to join as a full negotiation member of the group. Malaysia will join the third round of negotiations in Brunei.[106]

Officials have expressed desire for free trade agreements their ASEAN members Singapore and Thailand. The Malaysian Trade Ministry released a statement in Vietnam saying that the FTA "has the potential to increase trade, investment cross flows and economic cooperation between the two countries. The agreement would also serve to make Chile a gateway for Malaysia's exports to the Latin American market."[107]

Malaysia signed a Japan-Malaysia Economic Partnership Agreement with Japan on 13 December 2005.[108] This leads to a Free trade agreement which was in effect from 13 July 2006 and expected to be fully realized in 2016.[109] The agreement itself is an extension of an FTA between ASEAN and Japan, which is called Asean-Japan Comprehensive Economic Partnership.[110]

On 8 November 2007, Malaysian and Pakistan signed a bilateral Free Trade Agreement which will come in force on 1 January 2008. Malaysia will cut tariffs on 140 lines while Pakistan will cut 124 lines. Most tariffs and duty is expected to be eliminated by 2012.[111]

On 26 October 2009, Malaysia and New Zealand signed a bilateral Free Trade Agreement. New Zealand will cut tariffs on 99.5 percent of goods sent to Malaysia beginning 2010. This agreement itself is an extension of the ASEAN-Australia-New Zealand Free Trade Agreement.[112]

Other 'economic areas' showing an interest in establishing free-trade agreements with Malaysia are the European Union and Hong Kong. However, before any talks can be initiated regarding new FTAs, Joint Economic Co-operation deals need to be concluded. International Trade and Industry Minister, Tan Sri Muhyiddin Yassin has expressed the hope that talks will be concluded by the end of 2008.[113]

Foreign direct investment

Malaysia received RM46.1 billion foreign direct investment (FDI), which was all time high, for the whole of 2008. The foreign investments accounted for 73.4 percent of the total investments of RM62.8 billion approved for 2008.

The Minister of International Trade and Industry, Datuk Mustapa Mohamed announced that there was a sharp reduction in FDI and Malaysia only received RM4.2 billion FDI, about 78% reduction, for the first five months of 2009.[114]

On the other hand, FDI in other Asean countries has grown rapidly. Malaysia was very much ahead of Vietnam on attracting FDI. Now it has to compete with the latter for the FDI.



Malaysia industrial sector accounts for 48.1 percent of total GDP or 63.4 billion US dollars. The industrial output is ranked 32nd in the world.[115] The industrial sector is regulated and promoted by Malaysia Industrial Development Authority.[116] International trade, facilitated by the adjacent Strait of Malacca shipping route and manufacturing are both key sectors of the country's economy.[117][118][119] Manufacturing has a large influence in the country's economy,[120] although Malaysia’s economic structure is moving away from it.[121]

Malaysia has 18 companies that rank in the Forbes Global 2000 ranking for 2009.[122]

World Rank Company Industry Revenue
(billion $)
(billion $)
(billion $)
Market Value
(billion $)
493 CIMB Group Holdings Banking 4.24 0.82 70.14 14.05
599 Sime Darby Conglomerates 8.82 0.65 9.92 15.27
642 Public Bank Banking 2.75 0.74 63.27 11.52
706 Maybank Banking 4.63 0.20 87.98 14.70
709 Tenaga Nasional Utilities 8.17 0.26 20.26 10.21
904 Axiata Group Telecommunications Services 3.83 0.48 10.80 9.71
907 MISC Transportation 4.33 0.39 10.08 10.66
1179 Genting Hotels, Restaurants & Leisure 2.60 0.31 12.68 6.81
1192 RHB Capital Banking 1.57 0.35 33.49 3.49
1205 Maxis Telecommunications Services 2.22 0.46 5.17 12.08
1224 IOI Group Food, Drink & Tobacco 4.15 0.28 4.53 10.78
1292 AMMB Holdings Banking 1.45 0.24 24.56 4.42
1485 PPB Group Food, Drink & Tobacco 0.57 0.46 3.82 5.60
1501 YTL Utilities 2.53 0.24 12.92 4.16
1613 Hong Leong Financial Group Banking 1.08 0.18 24.54 2.39
1643 PLUS Expressways Transportation 0.93 0.35 5.36 5.11
1755 Petronas Gas Oil & Gas Operations 0.94 0.25 2.76 5.70
1987 Petronas Dagangan Oil & Gas Operations 60.69 11 1.81 2.63

Finance and banking

Finance and Banking sector in Malaysia is regulated by Bank Negara Malaysia. The central bank limits foreign participation through licensing limits. The central bank launched a Financial Sector Master plan in 2001 to revamp the finance sector following the Asian Financial Crisis. The master plan calls for emphasis on Islamic Banking,[123] of which Malaysia has become a centre of. Malaysia has the highest number of female workers in Islamic banking.[124]

Maybank is Asia-Pacific's largest Islamic banking service provider with US$6.4 billion (RM22.48 billion) Syariah-compliant assets.[125] Malaysia also accounts for two thirds of global $82.2 billion sukuk market in 2007.[126] Khazanah Nasional owns the largest retakaful company in the world, ACR Retakaful Holdings Limited, with capital base amounting to 300 million US Dollars.[127]

A quarterly report prepared by the Economist Intelligence Unit on behalf of Barclays Wealth in 2007 estimated that there were 48,000 dollar millionaires in Malaysia (over twice that of China).[128]

In April 2009, the government announce new licenses will be issued for investment banking Islamic banking, takaful and insurance business between 2009 to 2011. It also announced that the threshold foreign equity ownership has been raised from 49% to 70% and allowed foreign banks to open up new branches and micro-credit facilities. This move was done as an attempt to put Malaysia in as center for Islamic banking and also to liberalize the financial sector.[129]

Oil and gas

Malaysia has a vibrant oil and gas industry. The national oil company, Petronas, provides 32% of the federal budget in taxes, dividends and royalties.[130] The oil company ranked 121 in Fortune Global 500 list of companies in 2007. It also ranked 18 in the industry of the same list.[131] The company has ove up to the rank by being 95th in 2008 in terms of revenue and 8th most profitable company in the world and the most profitable in Asia.[132][133] Since inception in 1974, Petronas have paid the government RM 403.3 billion, with RM 67.6 billion in 2008. The payment represents a 44% of the 2008 federal government revenue.[134]

Petronas is also the custodian of oil and gas reserves for Malaysia. Hence, all oil and gas activities are regulated by Petronas. Malaysia encourages foreign oil company participation through production sharing contracts, in which significant amount of oil will be given away to the foreign oil company until it reaches a production milestone. Currently, many major oil companies such as ExxonMobil, Royal Dutch Shell, Nippon Oil, and Murphy Oil are involved in such contracts.[135] As a result, 40% of oil fields in Malaysia are developed.[136]

Malaysia and Thailand has a wedge shaped area 150 km from Kota Bharu, Kelantan and 260 km from the shores of Songkhla, Thailand which is jointly developed by Petronas and its Thailand counterpart. The area, which is called Malaysia-Thailand Joint Development Area, has 4.5 trillion cubic feet (130 km3) of proven reserves.[137]


Shoreline of a beach in Pulau Tioman(Tioman Island) with large boulders at the water edge and a mangrove.
Beach scenery of Pulau Tioman.

In an effort to diversify the economy and make Malaysia’s economy less dependent on exported goods, the government has pushed to increase tourism in Malaysia. As a result tourism has become Malaysia’s third largest source of income from foreign exchange, although it is threatened by the negative effects of the growing industrial economy, with large amounts of air and water pollution along with deforestation affecting tourism.[138] The majority of Malaysia's tourists come from its bordering country, Singapore. In 1999, Malaysia launched a worldwide marketing campaign called “Malaysia, Truly Asia” which was largely successful in bringing in over 7.4 million tourists.[139] In recent years tourism has been threatened by the negative effects of the growing industrial economy, with large amounts of air and water pollution along with deforestation affecting tourism.[140]

The Ministry of Culture, Arts and Tourism (MOCAT) was established in 1987 under which the TDC was incorporated. TDC existed from 1972 to 1992, when it became the Malaysia Tourism Promotion Board (MTPB), through the Malaysia Tourism Promotion Board Act, 1992.[141] Tourism Malaysia aims to market Malaysia as a premier destination of excellence in the region.[citation needed]

Science and technology

Malaysian astronaut Sheikh Muszaphar Shukor responding to a query form the media in a pre-flight press conference.
Sheikh Muszaphar Shukor, the first Malaysian in space

Science Policy in Malaysia is regulated by the Ministry of Science, Technology, and Environment. Other ministries, such as the Ministry of Agriculture and the Ministry of Health also have science departments. Training in scientific areas was promoted during the 1970s and 1980s. From 1987-1997 research and development used 0.24% of GNP, and in 1998 high-tech exports made up 54% of Malaysia's manufactured exports.[142] The country is one of the world's largest exporters of semiconductor devices, electrical goods, and information and communication technology products.[21]

In 2002 the Malaysian National Space Agency (Angkasa) was formed to deal with all of Malaysia's activities in space, and to promote space education and space experiments. It is focused on developing the "RazakSAT" satellite, which is a remote sensing satellite with CCD cameras.[143] In early 2006, Sheikh Muszaphar Shukor and three other finalists were selected for the Angkasawan spaceflight programme. This programme came about when Russia agreed to transport one Malaysian to the International Space Station as part of a multi-billion dollar purchase of 18 Russian Sukhoi Su-30MKM fighter jets by the Royal Malaysian Air Force.[144]

In an effort to create a self-reliant defensive ability and support national development Malaysia privatised some of its military facilities in the 1970s. This has created a defence industry, which in 1999 was brought under the Malaysia Defence Industry Council. The government continues to try and promote this sector and its competitiveness, actively marketing the defence industry. One way it does this is through the Langkawi International Maritime and Aerospace Exhibition, one of the largest defence and civil showcases in the Asia Pacific, regularly attended by over 500 companies.[145] The Malaysian Armed Forces relies heavily on local military technology and high-tech weapons systems designed and manufactured by foreign countries.


Knowledge-based services are expanding in Malaysia.[121] Malaysia is being promoted as a destination for Medical tourism, regionally and internationally.[146]

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