Malaysia Economic Growth Forecast: the Rise of the Globalist Influence

Malaysia wants economic growth. It wants to catapult itself from a middle-income country to a high-income country.

A huge part of Malaysia’s plan involves attracting capital. By 2020, it wants to attract $444 billion worth of investments. The majority (about $410 billion) of it will come from the private sector and a bulk of it needs to come from foreign sources.

Malaysia has a long history of attracting private capital and integrating into the global economy, starting from just years after its independence in 1957.

This globalist influence is characterized by favorable treatment (even incentives) for foreign investors and businesses, which has attracted massive inflows of investments, spurred the rapid development of Malaysia’s export-oriented sectors and effected general economic posterity.

However, a protectionist influence also competes with this global capitalistic streak. This influence is characterized by high tariffs and redistributionist policies that favor ethnic Malays over Chinese and Indian Malaysians.

These two competing influences have existed simultaneously for much of Malaysia’s modern history, resulting in a dual economy of efficient export-oriented sectors and inefficient protected domestic sectors.

Still, periods dominated by the globalist influence generally saw faster economic growth than periods dominated by the protectionist influence.

In the early and middle part of the 1990s, the globalist influence largely prevailed and economic growth hovered around 9 percent per year.

Then, the Malaysian economy tanked during the Asian financial crisis (partially because of policies that were too liberal towards foreign investments).

In the 2000s decade that followed, Malaysia’s annual growth rate slow to an average of just 5 percent and private sector investment to GDP plunged to 10 percent (compared to 30 percent in the mid 1990s), according to the Asian Development Bank.

One problem is emerging competition for investments from countries like China. The more severe problems, however, stem from Malaysia’s protectionist influence.

Malaysia’s protected domestic sectors remain inefficient and a hindrance to the overall economy.

The redistributionist policy of favoring ethnic Malays over Chinese and Indian Malaysians has also become a bigger problem.

Professor Wing Thye Woo of UC Davis pegged this discriminatory policy as the major reason that private sector investments collapsed in the 2000s.

In previous decades, Malaysia's key competitive advantage was cheap labor. However, after its average income rose, it lost this advantage needed to transition into a high-income knowledge-based economy.

This type of economy requires human and financial capital.

However, Malaysia’s institutionalized racism extends to bank loans, business licenses, business ownership and government contracts. These restrictions severely limit the power and flow of human and financial capital.

Starting from 2010, the globalist influence strengthened in Malaysia and its government began to show more commitment to reform.

It has promised to “remove structural barriers and outdated regulations” and attract “first-world talent,” in the words of the Tenth Malaysia Plan from the country’s Economic Planning Unit.

Malaysian Prime Minister Najib Razak has also “raised possible revisions to the special economic and social preferences accorded to ethnic Malays under the New Economic Policy of 1970,” according to the CIA World Factbook.

Malaysia’s hunger for private and foreign capital in itself is a positive sign; capital generally equates growth in countries that have a robust financial and banking system, a relatively open economy, and a long-term strategic view. For Malaysia, this desire also confirms the rise of the globalist influence.

There are some initial signs that it will succeed in attracting capital.

Its plan to attract $410 billion in investments from the private sector by 2020 was conceived jointly with major private sector players like Exxon Mobil and Tesco, according to Bloomberg.

Malaysia also recently entered into an agreement with Asian Development Bank to receive funding for the first time since 1998.

Part of this agreement will boost the Export Import Bank of Malaysia to “step up long-term export financing for private enterprises,” stated the Asian Development Bank.

Despite Malaysia’s relatively subpar economic performance in the 2000s, it has a long history of economic success as an independent state and has been one of the best performing economies in the post-WWII era.

It has a strong banking system and healthy public finances. It retains its advantage in natural resources and geography.

It is not mired in hopeless corruption like many emerging market countries. It is not trapped by the heavy burden of debt and deleveraging like many developed countries. Malaysia is not infected with any “difficult” economic problem.

If it just rids the protectionist influence, it has the potential to boom and achieve its goal of becoming a high-income country.

Follow Hao Li on Twitter @hao_li_ibt