Malaysian Macroeconomic Analysis

Malaysia has a middle-income economy. The nation has seen strong development, which has been followed by successful use of the country’s capital. However, it has seen difficult economic times as a result of volatile oil prices. The country’s central government has relied heavily on oil exports for revenue and household income generation. The country’s GDP plummeted for the first time in five years after oil prices dropped in 2015. Malaysia’s GDP was projected by the World Bank to be $ 299 billion in 2011. In 2012, it was 316, 324 in 2013, and 340 in 2014. Despite the sharp decline in Malaysia’s GDP in 2015 and 2016, the country’s per capita income has been relatively stable. The country’s economic growth has been estimated at around 5.0 over the past five years. Variation in annual consumption has ranged between 6.0 and 8.4, with the highest being in 2013 then declining to 6.0 in 2015.

Figure 1: Percentage change in some of the key economic indicators (The World Bank n.p)

From the graph in Figure 1, the recent trends in Malaysia’s GDP are not good. The country experienced a rapid growth from 2011 to 2014. In 2015, the rate of growth of Malaysia’s GDP bounced back to what it was five years before. The rapid growth in 2011 and 2012 was beginning to draw a lot of investors into the economy. By 2015, lesser investors were being attracted into Malaysia. The relative slower increase in investment compared to the population attaining employable age is what could have led to the rise in the rate of unemployment. From 2011 to 2014, Malaysia’s unemployment rate remained constant at 3.0% despite the growth in population. This means that new job opportunities were being created to match with the growing labour force. This changed in 2015 when less investment was attracted compared to the years before. As a result, unemployment rate rose to 3.0%.

Malaysia’s GDP per capita stood at $9765.3. This figure is relatively low compared to most developed countries. According to the World Bank (2017), the GDP per capita of the US was $3007.1. Distribution of this GDP in Malaysia is more uneven compared to that of the US. In 2011, Malaysia’s GDP per capita grew by 5.5%. This growth remained constant until 2015 when it dropped by almost 7%. A similar drop was also experienced in 2016. This has various implications on the lives of the individual Malaysians. The growth experienced in the four years was almost cancelled by the plunge in the 2016 and 2015 (The World Bank n.p). However, the changes came with some valid lessons for the government, investors and households.

The country has shown an unpredictable trend in inflation over the last five years. Malaysia’s inflation rate went down in 2012 then rose in 2013 and 2014. It again plunged in 2015 despite the decline in GDP and GDP per capita. In 2016, this rate grew rapidly from around 3.0 to over four (The World Bank n.p). Inflation rate is one of the economic factors under full control of the government through the central banks. Despite the unpredictable nature of these shifts, Malaysia’s inflation rate is one of the lowest in the region. This has been as a result of the efforts of the government to keep prices constant for the working population. With the current trend, the country’s prices require more than three decades to double.

Malaysia’s unemployment rate had been kept constant for almost a decade until 2015 when it rose by 0.3%. In 2016, unemployment rose by 0.2% to 3.5 (The World Bank n.p). This increase is a worrying trend. Stakeholders must put up strategies to prevent the population from the effects of this shift. Being a developing economy, Malaysia has a good number of people who are employed in the primary sectors such as mining and agriculture. According to data by the Department of Statistics Malaysia, there are positive movements from the Agriculture and industry to the service sector. Economies that rely on service sectors are more stable compared to those that mainly rely on the industrial sector which are in turn more stable than those that are based on agriculture. This explains why many developing countries are keen on enhancing their industrial and service sectors. In 2004, 16.6% of Malaysia’s workforce was employed in the agricultural sector, 30.1% in the industrial sector while 55.3% was in the service sector. Policies have been enacted over the years to encourage the growth of the service sector. In 2015, 12% of the workforce was in the agricultural sector, 27.4% in the industrial sector while 60% was in the service sector. In the US, 80% of the workforce is employed in the service sector, those directly employed in agriculture account for less than 2% of the population while industry accounts for the remaining 18% with the largest being construction (US Department of Labor n.p). Therefore, Malaysia should continue focusing on increasing employment in the service sector to realise faster economic growth.

According to the World Bank, Malaysia’s population in 2015 stood at 30,331,007 in 2015. Majority of Malaysia’s population lives in the Urban areas. Only four states have a dominant rural population: Kelantan, Pahang, Perlis and Sabah. The other 12 states have a major percentage of their population in the urban areas. Those below the age of 15 account for 30% of the population. Those between 15 and 65 years account for 65% of the population while the older adults above 65 only make up 5% of the total population as per the estimates made by the World bank in 2013. Male life expectancy stands at 71 years while that of females is estimated at 77 years. Therefore, the population is mainly made up of individuals within the productive age.

Malaysia was experiencing growing entrepreneurship when it plunged in 2015 due to the fall in the global oil prices. Despite this fall, the World Bank still ranks the country as one of the best environments for business. Malaysia is ranked at number 23 in the world on the ease of doing business. It is one of the best countries when it comes to protection of minority investors. This means that the government has been giving more attention to the SMEs which are at threat from competition by the larger entities. However, legal obligations have been termed as the worst obstacle to individuals wishing to start a business. This aspect in combination with others makes the country be ranked 112 globally on the ease of setting up a business (The World Bank Group n.p).

The number of patents from Malaysia has been on constant growth. In 2008, the country had 181 patents. The number kept growing and the country produced 267 patents in 2015. This is average performance considering that each of the US states produced between 0 and 638000 patents. Kuala Lumpur stock exchange started operations in the 1930s (US Patent and Trademark Monitoring Office, n.p). It has metamorphosed over the years to what is referred to as Bursa Malaysia today. It has a total market capitalization of $ 189 billion. Any citizen from across the world can have access to this market. However, the growing middle class in the country is yet to fully venture into the sector.

Malaysia’s corporate tax standard rate stands at 24%. There are no differences between resident and non-resident owned entities in the country. SMEs are levied fewer taxes (19%) in an effort to protect them from frustration by the large entities. The government takes up a total of 40.05 of all the profits made in the country. This percentage is lower compared to developed countries. In the world, Germany has a record of 48.8% while the US total share of taxes is 43.9 (Deloitte n.p). Common taxes include corporate income tax, sales tax, transfer pricing taxes, import taxes and value added tax. However, the government widely applies tax incentives to encourage investment, reinvestment, infrastructure development and protection of the environment.

Though many Asian economies are founded on socialistic ideologies, changes in the business environment and globalization of the economy has made them move towards capitalism. According to The Heritage Foundation (n.p) Malaysia’s economic freedom interest stood at 74% in 2015. Labour freedom was at 73.1, business freedom at 90.8 while monetary freedom stood at 85.3. These statistics have implications that Malaysia is a capitalist country because there are limited government interventions on important economic activities. The government embraces a market approach and only intervenes where inefficiencies occur. Malaysia’s government expenditure for 2016 was about $50.5 billion in 2016. That of the US was about 3.8 trillion in the same year. The US budget has a higher average per capita compared to that of the Malaysian government due to limitations in funding. Malaysia has an expansionary fiscal policy and contractionary monetary policy. These have been developed to protect the citizenry from the effects of the plunging oil prices.

In 2016, the Governor of the Central Bank of Malaysia cut interest rates to protect liquidity. This means that businesses and households can easily borrow to fund capital investments. Currently, one US Dollar is bought using 4.43 Malaysian Ringgits. The US dollar has been constantly appreciating against the Ringgit over the years. One year ago, 1 US dollar was equivalent to 4.16 MYR. Therefore, the trade balance of Malaysia against the US is expected to shift in favour of the US. However, there are countries whose currencies depreciate at a faster rate and Malaysia is expected to experience a positive shift in BOP against them. Malaysia’s major imports are from the mining and agricultural sectors. They include petroleum, wood, electronics, palm oil and rubber. Major imports include electronic products, chemicals and petroleum products. These are mainly capital goods rather than consumer goods. The final products from these goods are exported leading to a trade surplus. Since the great economic recession of 2007/2008, Malaysia has been experiencing a reducing budget deficit each year. This percentage hits a record low of 3.2 in 2016. A similar budget deficit had been experienced in 2007 before the global economic crisis. Malaysia’s national debt has been extremely high over the years. In 1990, it hit a record of 80% of national GDP. The government has been making efforts to reduce this and in 2016, the debt was at 53% of the national GDP.

Malaysia has one of the most productive labour forces. The workers apply high technology on a medium scale due to the relative balance between agricultural, industrial and service sectors. Computers are widely used in production in the service sector. Their application in industry is relatively low. Malaysia has been experiencing growth in its PISA scores due to the efforts of the government. Results released by Organization for Economic Cooperation and Development in 2016 showed that the country scored 666 marks in Mathematics, 431 in reading and 443 in science (Menon, n.p). This was an improvement from 2016 where the scores were 421, 398 and 420 respectively. Primary education is compulsory in Malaysia and is provided free of charge in public institutions. Secondary, post-secondary and tertiary education is also available on merit. Statistics by ENESCO (n.p) show that male literacy in the country is higher than that of females, estimated at 96 and 92% respectively. The oil industry has fueled rapid development in infrastructure in Malaysia. According to MIDA (2017) the government has come up with strategies to promote infrastructural development. They include massive allocations and research towards infrastructure and bringing in of the private sector where tax incentives are given for entities committed to developing infrastructure (Deloitte n.p). Clean water and air, energy and roads are available for investors and households. However, the legal system has acted as a hindrance to business because of the many formalities required. This has been in an effort to minimize corruption which hinders development in many countries. The government has applied various steps that show preference for Keynesian and classical approaches to economics. In 2016, the central bank lowered interest rates to increase investments (The World Bank Group n.p). The government has also increased its spending on infrastructure in a bid to boost investments. It has also focused on narrowing the gap between the classes by encouraging employment creation. These are some of the key pro-Keynesian steps taken by the Malaysian government. The government has also leaned towards the market approach by relegating many decisions to the people and investors. The economic freedom indicator is a key exhibit that the government has left market forces to determine important economic decisions.

Conclusion

The past five years have not been so good for the Malaysia’s economy. However, they have produced lessons that have been taken up by stakeholders and there is hope that the trend will reverse soon. The recent dramatic fall in oil prices has been a key challenge to OECD countries. However, there is hope that oil prices will stabilize in the near future. Exhaustion of these resources is one of the long-term problems facing the country. In addition, de-globalization is also affecting Malaysia with major economies like the US and Britain keen to delink from certain bilateral and multilateral trade links. This creates uncertainties in regard to foreign markets and international trade links. The country should diversify the economy to ensure that future plunges in oil prices do not have a heavy impact on growth. It should also form trade links with developing countries, like in the case of China. These countries have a growing middle class that can act as a market for its goods. Malaysia has great economic potential, the move from agriculture and industry to service sectors offers hope that GDP per capita will continue rising while unemployment falls in the future. Therefore, it is expected that today’s children will have a brighter future than their parents.

Works Cited

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Malaysian Investment Development Authority. Infrastructure Support. MIDA, 2017. Web. 2 April 2017.

Menon, Sandhya. Malaysia sees improvement in Pisa scores. The star Online, 6 December 2016. Web. 2 April 2017.

The Heritage Foundation. 2014 Index of Economic Freedom. The Heritage Foundation, 2015. Web. 2 April 2017.

The World Bank Group. Ease of Doing Business. The world Bank Group, 2017. Web. 2 April 2017.

The World Bank. GDP per capita (current US$). World Bank national accounts data, and OECD National Accounts data files. The World Bank, 2017. Web. 2 April 2017.

The World Bank. Overview of Malaysia’s Economy. The World Bank, 2017. Web. 2 April 2017.

UNESCO. Education for All 2015 Review: Malaysia. UNESCO, 2016. Web. 2 April 2017.

United States Department of Labor. Employment by major industry sector. US Department of Labor, n.d. Web. 2 April 2017.

US Patent and Trademark Monitoring Office. Patent Counts by Country, State, and Year - All Patent Types (December 2015). US Patent and Trademark Monitoring Office, 2015. Web. 2 April 2017.