topic 2 the malaysian economy - growth & structural changes (1).ppt

8/10/2019 Topic 2 The Malaysian Economy - Growth & Structural Changes (1).ppt

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Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Chapter2

The Malaysian Economy:Growth & structural

changes


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Learning Objectives

Tracking the changes in agriculture in Malaysia.

Tracking the changes in Petroleum industry inMalaysia.

Tracking the changes in manufacturing in Malaysia.


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Before independent, Malaysian economyhad heavy reliance on tin mining andrubber plantation.

In the nineteenth century (1800s), worlddemand for producing tinplate tin rose dueto the discovery of a more efficient

method (for canned food).

Growth & structural changes


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Tin mining industry was dominated byEuropean capital,especially colonial British.

Malaysian ownership in Malaysian-incorporated

56.3%Malaysian ownership in United Kingdom-

incorporated tin dredging companies 20.0%.

Total Malaysian ownership in both Malaysian-incorporated and United Kingdom-incorporatedtin dredging companies in Malaysia is 35.1%.



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Malaysias tin reserves of tin were exhaustedin the 1980s and prior to which the governmentlay emphasis on alternative source of

economic growth.



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Agricultural sectorespecially rubberproductionwas a very important sourceof growth in Malaysian colonial era

Rubber expansion in Malaysia began onestates, being stimulated by:

1) Very high prices.

2) Capital and management from Europe.



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3. Suitable local weather, investment fromthe British.

4. New technologyof extracting the rubberlatex from the trees (called tapping) byan incision with a special knife expeditethe rise of rubber production.

5. Labor from South India



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Parallel developmenton independentrubber shareholdings took root, as bothMalay farmers and immigrant Chinese

workers perceived the high income to beearned from the new crop.



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Malaysia replaced rubberwith palm oil andmanufacturingas source of growth due to:

1. Manufacturing sector has higher value-added,

2. Rise in rubber production cost. (there wasgrowing labour shortage and consequent rise inreal price of labour in rubber plantation sectoras rubber is a labour intensive crop)

3. Increased in substitution competition fromsynthetic rubber.


: Decline of rubber


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Agriculture

Economists agree that agricultureis a keycontributorto overall economic growthandmodernization.

Self reliance in food production in case of war,

embargoes, other forms of conflict is important fornational stability.

Its seen that a strong agricultural sector is importantfor the development of other sectors e.g.manufacturing, services, knowledge economyunless for middle east countries that are endowed withoil deposits and unfavorable climatic conditions.


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Agriculture

Initially the agricultural sector included theproduction of livestock, fisheriesand othermiscellaneous crops.

There was transition to valuable cash crops such aspalm oil, rubberand food commodities; owing tothe

increase in earnings from the major commodities.


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Sector 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

Agriculture 31.5 29.0 27.7 22.9 20.8 15.2 12.9 8.6 8.4 9.5

Mining 9.0 13.7 4.6 10.1 10.5 11.8 6.2 10.6 14.4 12.9

Manufacturing 10.4 13.9 16.4 19.6 19.7 24.2 26.4 30.9 29.6 26.6

Construction 4.1 3.5 3.8 4.6 4.8 3.9 6.2 3.9 3.0 3.3

Electricity, gas

and water

1.1 1.1 2.0 1.4 1.8 2.2 2.6 3.0 2.7 2.6

Services 43.9 38.8 45.5 41.4 42.4 44.3 47.8 46.2 44.0 48.3

Table 4.2Composition of GDP by sector, Malaysia, 1965-2009 (%)


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Sector 1970 1975 1980 1985 1990 1995 2000 2005 2008 2009

Agriculture 53.5 49.3 39.7 35.7 26.0 19.0 16.0 12.9 12.0 12.0

Mining and

quarrying2.6 2.2 1.7 1.1 0.6 0.5 0.5 0.4 0.4 0.4

Manufacturing 8.7 10.1 15.7 15.1 19.9 25.7 27.1 28.7 28.8 28.4

Construction 2.7 2.9 5.6 6.9 6.3 8.9 9.2 7.0 6.6 6.6

Services 20.5 22.5 23.6 26.2 34.5 35.1 37.2 51.0 52.5 52.6

Government

Services12.0 13.0 13.7 15.0 12.7 10.8 10.0 9.7 10.9 11.0

Total

Employment

(000)

3,340 3,928 4,817 5,625 6,686 8,024 8,547 10,895 11,577 11,585

Primary 56.1 51.5 41.4 36.8 26.6 19.5 16.5 13.3 12.4 12.4

Secondary 11.4 13.0 21.3 22.0 26.2 34.6 36.3 35.7 35.4 35.0

Tertiary 32.5 35.5 37.3 41.2 47.2 45.9 47.2 51.0 52.2 52.6

Table 4.3 Distribution of employment by sector, Malaysia, 19702009 (%)


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Ch. 1: #Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Figure 4.2 Agricultural growth versus manufacturing growth, Malaysia, 19702005


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Lack of technical change

Greater promotion of manufacturing saw manufacturingovertaking agriculture as the main contributor to MalaysiasGDP and employment in the second half of the 1980s and

the mid-1990s, respectively.

No competitiveness: Old agricultural technology in foodproduction could not sustain the sectors competitivenessand hence this sub-sector began to face growing trade

deficits from the 1980s

The Old Agriculture


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Agriculture

Agricultural products

1 Palm oil Produces more than ten million tonnes of oil per year, over half ofthe world's supply.

Steadily improved at all levels, including the quality of planting

material, cultural practices, processing methods and marketingstrategies

.

2 Rubber, Malaysia is also the world's leading supplier of natural rubber,80% of which is produced by smallholders in both eastern and

western parts of the country.

Prices and export volume for rubber have both fallen in recent

years owing to huge stocks in the regionand slower demand

from consumers.

Hence government supportfor the smallholder sector with grantsfor planting materials, fertilizers and pesticides


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Agriculture

Agricultural

products

3 Cocoa, Cocoa has been commercially planted in Malaysia since

the 1950s while cocoa processing began in the 1970s.

Most of the planting areas are situated in Sabah, but

most of the grinding and manufacturing are based in

the Peninsula.

Malaysia is the fifth largest cocoa processor in theworld.

4 Rice, Vietnam still dominates rice imports, with Thailand in

the second spot

The need to increase self-sufficiency level for rice had

prompt the GOM to take few initiatives such as the

Ninth Malaysia Plan (2006-2010).

The Ninth Malaysia Plan supposed to increase self-

sufficiency to 90% by 2010 this however fail tomaterialize .

i l l d


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Agriculture

Agricultural products

5 Fruitbanana,

pineapple

Fruit production in Malaysia is rising despite land issues and the

lack of foreign Investment

The government is focusing on a selection of fruit to increase salesoverseas: giving emphasis to star fruit, papaya, mango,

watermelon and pineapple.

The focus for Europe is on star fruit and papaya, and Papaya and

pineapples for Middle East

6 Fish Plays a significant role in the national economy. Apart fromcontributing to the national Gross Domestic Product (GDP), it is

also a source of employment, foreign exchange and a source ofprotein supply for the rural population in the country.

The fisheries sector has 3 main subsectors, namely marine

capture fisheries, aquaculture, & inland fisheries.


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The New Agriculture

Biotechnology. The new agriculture has extensive focus onthe use of biotechnology,

Development in genetics (both GMOs and non-GMOs),microbiology and diagnostics, and nanotechnology have

revolutionized and pushed out agricultural productionand profit frontiers.

Modern marketing

Use of ICT & modern marketing emphasizes connecting with

supermarket-driven value chains and sustainabledevelopment

New agriculture sought to raise unit productivity byincreasing the utilization of knowledge-based-farming.


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The New Agriculture

Output and productivity of a number of commoditieshave risen since 2005..

Fishing overtook forestry and logging in 2009

Oil palm has been the dominant crop to enjoy localdownstream processingover the period 19902010.


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Figure 4.1 Agricultural policies, Malaysia, 19502010


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Effect of agricultural modernization to MalaysianIndustrialization: Positive Effects

Provide enough foodfor the industrial sector

population. Increase productivity in agriculturalsector

releaseS labour surplusto industrial sector.

Generate higher incometo agricultural sectorpopulation. This lead to higher domestic demandand savings that support the industrial sector.

Agriculture


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Effect of agricultural modernization to Malaysian

Industrialization: Negative Effects

Greater export earnings contribute to increasing

foreign reserves, which in turn appreciating thereal exchange rates. Real appreciation ofRinggit squeezes manufacturing profits, thuslead to de-industrialization.

Agriculture


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Effect of agricultural modernization toMalaysian Industrialization: NegativeEffects

Since prices are mainly determined by theconditions in the world markets, highproductivity and output in agriculture may,

without offsetting changes in relative prices,may induce the flow of resources into theagricultural sector, thereby squeezing outthe manufacturing sector.

Agriculture


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Petroleum and Malaysian

Development


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Development

Key extractive industries in Malaysian development:Petroleum and Gas

Major export expansion in 1970s

Gasproduction started in early 1980s Petroleum from both East Malaysia and from off East

coast of Peninsular Malaysia

2008 nearly half of countrys crude oil productionwas from Peninsular Malaysia


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Petroleum

Policies

Petroleum Development Act 1974, setting upPETRONAS to oversee countrys petroleumdevelopment: Production sharing with foreign

investors

Renegotiation of contracts after 1974, leading totemporary problems for foreign investment

Local content requirements on foreign investors


Development (cont.)


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By 2008 Malaysia as the 3rdlargest exporter ofnatural gas.

Malaysia has remained outside OPEC, but hasconsulted with OPEC members on limitingproduction.


Development (cont.)

Contribution to export

earnings

Observation

1980 24% Double that of tin

2008 17% >rubber, palm oil & timber

products


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The co-existence of imports and exports ofcrude is explained by the export of high qualityMalaysian low sulphur oil and import of lower-quality crude.


Development (cont.)

Domestic

consumption of

domestic

production

Export imports

2004 52% 37% 17%


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Petroleum has limited impact on development viaemployment and final demand linkage fromworkforce.

High capital intensive.

It contributes only large amounts of short termemployment in construction sector.

Taxation plus other forms of sharing revenue are

important in securing gain for the economy.


Development (cont.)

2000 2006 - 2008

Contribution to Government

revenue %

25% 40%


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Development (cont.)

Forward Linkage

1. Growth of petroleum

products

Driven by growth in

domestic market

2. Growth in

Petrochemical sub-

sector

Driven by the growth in

the capital intensive,

Heavy industry sector.


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Development (cont.)

Back ward Linkage

1. Malaysian companies are capable of building oil rigs and

drilling platforms.

2. PETRONAS has diversified its operations internationally in

oil and gas related activities.

Other value adding investments.PETRONAS has developed shipping interest with a view to

transport LNG.


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National depletion policy

US Geological Survey estimated

reserves in 2006 asOil: 21 years andGas: 34 years

Malaysia limits production in order to

conserve its oil and gas reserves.


Development (cont.)


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Dutch disease/resource curse?

The Dutch disease refers to situation where a countryskey export hinders the growth of other industries forexport.

Neither tin nor petroleum dominated Malaysias exportearnings (e.g. Nigerias 90%+ from oil in exportearnings)

Even in late 19thcentury, tin does not seem to havediscouraged other exports (encouraged

Rubber and other activities flourished via railway

development and labour supply , (although much rubberlabour was imported too)

Petroleum does not seem to have discouragedmanufacturing exports


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Manufacturing


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Manufacturing

Since 1970, Malaysia has based its economicdevelopment strategy on three longterm policies:.

Growth with equity continues to be the guidingdevelopment strategy.

Year Policy

197090 New Economic Policy (NEP) - To eradicate poverty,

To restructure Malaysian society

19902000 National Development Policy (NDP),Balance between economic growth and equity

200110. National Vision Policy (NVP), Building a Resilient

Nation, Unity and Spirit of Patriotism

Building Economic Resilience


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Manufacturing

As a dependent colonial economy, Malaysiaconcentrated on the exports of primary rawmaterials and imported manufactured products.

1947 Employed %

Agriculture 68%

Tertiary sector, 22.5%

Mining 2.5%

Manufacturing 6.7%


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Manufacturing

The proportions remained largely unchanged untilindependence.

During the colonial period, agricultural processingwas the main manufacturing activity,

But in the 1960s and 1970s newer industriesdeveloped, namely:

1. Beverages,

2. Textiles,3. Chemicals and chemical products,

4. Transport equipment.


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Manufacturing

The 1970s ushered in a new phase of economicgrowth, marked by the rapid rise of constructionand manufacturing and a strong strategicemphasis on equitable or fair distribution,

specifically through affirmative action policies.

By 1990, the economy was more industrialized,despite being buffeted by massive shocks

1. The oil crises of 1973

74& 1978

792. The global slowdown in demand for electronics and

primary commodities in 198586.


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Manufacturing

Under such conditions, the industries that grew werethose that had some natural protection due tolocation advantages. (labor & natural resources)

The manufacturing industries that enjoyed such

advantages were the primary processing industries,

including the processing of agricultural,

mining,

forestry products,


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Manufacturing

domestic marketoriented industries such as food

products, printed materials, furniture, rubberproducts, and

building supplies (for example, cement, bricks, and

light engineering goods).


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Manufacturing

The country had developed comparative advantagein resourcebased manufacturing industries, and so:

i. Imports were more capital intensive.

ii. Exports more labor intensive. The estimates indicate that growth, led by

Malaysias laborintensive manufactured exports,was underway by the early 1970s

F t f th th f


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Factors for the growth of

Manufacturing industry

Low-wage model: In the 1980s the low-wagemodel worked well for Malaysias manufacturingsector making the country a haven for the electricaland electronic (E&E) companies.


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F t f th th f


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Malaysian Economy


Challenges of Manufacturing

industry

1. Low wages-modeldoes not bare efficiency.2. Malaysia did not enter new growth segments

with the advent of new technologiesin the late1990s and early 2000s, making the future look

pretty challenging for the sector as smartphonesand then tablet computers made great strides indenting demand first for PCs and now even forlaptops and notebooks.

Ch ll f M f t i


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industry

Products higher up the value chain like solar-powered and light-emitting diode industries are inand low-technology E&E goods graduallydiminishing.

More than 40% of exports are still derived from E&Esegments such as hard disk drives and consumerelectrical products, and this does pose a problem foroverall economic growth.

3. Rising labor costs makes the country to lose itsshine as a destination of foreign investments untilrecently.

Ch ll f M f t i


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industry

4. South-East Asian economies are highly relianton foreign multinationals and there is somedelay where technology transfer is concerned ascompanies will not transfer high technology know-

how readily.

This was part of the middle-income trap faced byemerging economies as they confronted thechallenge of trying to sustain the manufacturing

sector by relying on foreign multinationals throughthe low-wage model, tax breaksand othersubsidies.

Ch ll f M f t i


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industry

Low-wage model in manufacturing is a disincentivefor foreign companies to transfer technology and forfirms to move up the value chain

5. Brain drain problem, Malaysia does produce talentbut there is a problem in retaining the talent.

Low wages was one factor why there was a braindrain.

Government response


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Malaysian Economy


Government response


1. Educated workforce. As the manufacturing sectormoves into high-technology non-E&Eoperations, there will be a need for an educatedworkforce and so wages are bound to rise.

2. Capital-intensive investment.Governmentfocuses on higher value-added downstreammanufacturing activities, which is reflected in theincreasingly capital-intensive investment pattern in

the manufacturing sector.

Government response


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Government response


3. Grow the non-E&E sector. Malaysia had in thepast decade emerged as a major exporter of keynon-E&E products such as chemicals andchemical-related products, refined petroleum

products and rubber productssupported by thedomestic availability of raw materials. (central bankannual report)

topic 2 the malaysian economy - growth & structural changes (1).ppt

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