Pakistan Economy

Section B
BBA (h)

Submitted To
Ms Afia Mushtaq

Submitted By
Sheikh Saad Ahmad 073605-065
Syed Faisal Adil 073605-069
Syed Hassan Askari 073605-098
Malik Allah Razi 073605-087
Case Study on
Malaysia
 Case Study
Economy of
Malaysia
Currency 1 Ringgit = 100 sen

Fiscal year Calendar year

Trade APEC, ASEAN, WTO

organisations

Statistics [1][2]

GDP ranking 40th

GDP $191.4 billion (2009)

GDP growth -1.7% (2009)

GDP per $6,800 (2009)

capita

GDP by agriculture: 10.1%

sector industry: 42.3%
services: 47.6% (2009
est.)

Inflation - 2.4% (Aug 2009)

Pop below 3.5% (2007 est.)

poverty line

Labour force 11.29 million (2009

est.)

Labour force agriculture: (13%),

by industry: (36%),
occupation services: (51%) (2005
est.)

Unemployme 5% (2009 est.)

nt

Main Peninsular Malaysia -

industries rubber and palm oil
industry

Sabah - Palm oil

Malaysia is a farming, tourism,
growing and petroleum production,
logging Sarawak -
agriculture processing,
petroleum production
and refining, logging
Trading Partners [3]
relatively open state-oriented market economy. The state plays a
significant but declining role in guiding economic activity through
macroeconomic plans. In 2007, the economy of Malaysia was the 29th
largest economy in the world by purchasing power parity with gross
domestic product for 2007 estimated to be $357.9 billion with a growth
rate of 5% to 7% since 2007 In 2009, the nominal GDP was US$191.4
billion, and the nominal per capital GDP was US$6,761.
The Southeast Asian nation experienced an economic boom and
underwent rapid development during the late 20th century and has a
GDP per capita of $14,400, being considered a newly industrialized
country. On the income distribution, there are 5.8 million households in
2007. Of that, 8.6% have an 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. As one of three countries that control the Strait of Malacca,
international trade plays a large role in its economy. At one time, it was
the largest producer of tin, rubber and palm oil in the world.
Manufacturing has a large influence in the country's economy.

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.
In the 17th century, 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. Over time, Malaya became the world’s largest producer of
tin, rubber, and palm oil. These three commodities along with other raw
materials firmly set Malaysia's economic tempo well into the mid-20th
century.

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. At this point, the Ringgit is still not internationalized. The Ringgit
continues 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 internalize
the Ringgit. The government stated that the Ringgit will be
internationalized once it is ready.
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.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.
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. 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 liberalization"
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 Bumiputera. 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.
The NEP is accused of creating an oligarchy, and creating a 'subsidy
mentality'. 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. 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".
On April 21, 2009, the prime minister Najib Tun Razak has announced
liberalization 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. 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 wish to list in
Malaysia would still need to offer 50 percent of public shareholding
spread to Bumiputera investors.

Subsidies and price controls

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. As of 2009, 22 per cent of government
expenditures were subsidies, with petrol subsidies alone taking up 12
per cent.
Smuggling and hoarding, which leads to shortages, is a prominent
problem in Malaysia due to the subsidies. For example, cooking oil is
subsidized 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 prompts the Government to negotiate with cooking oil
manufacturers to increase their production capacity, and situation
reverts to normal within one week time. Another example is where
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 could
get the subsidy. The government is considering removing subsidy on
diesel on general consumers while maintaining subsidies for the right
groups, for example those involved in public transport.
On January 2010, the government announces 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 in May 1,
2010.
The government has considered removing the subsidies but a formal
plan had yet to materialize as of 2007. 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.
The government is experimenting with the idea through allowing Sabah
and Sarawak construction players to import steel and cement since
February 2008. 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. The government then
further liberalized the cement industry by abolishing ceiling prices on
June 5, 2008.
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.

Sovereign wealth funds

The government owns and operates several sovereign wealth funds

that invest in local companies and also foreign companies. One such
fund is Khazanah Nasional Berhad which was established in 1993. Its
objective is to help shape selected strategic industries in Malaysia and
develop that investment for the benefit of Malaysia. 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. It is estimated that the fund size of Khazanah Nasional
stands at around 19 billion USD.
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. Like Khazanah Nasional, the EPF invests
and sometimes owns several major companies in Malaysia such as RHB
Bank. EPF investment is diversified over a number of sectors but almost
40% of their investment is in the services sector. Fund size in 2007 is
estimated at 100 billion USD.
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, Bumiputera. As of
April 2008, it manages MYR120 billion of funds (36 billion USD), of
which MYR76 million is unit trust funds. The fund manager is a sizable
investor in strategic companies such as MMC Corporation Berhad, Maxis
Communications Berhad and TM International Berhad 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.

Business Environment

According to World Bank Malaysia ranks 24th in Ease of doing business.

Malaysia's strengths in the rank include 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. 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.
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. 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. 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.
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.

External Trade

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 the founding 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.
The Malaysian Government is negotiating free trade deals with
Australia, Chile and India, but has suspended negotiation of free trade
deal with United States indefinitely after eight rounds of negotiation.
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."
Malaysia signed a Japan-Malaysia Economic Partnership Agreement
with Japan on 13 December 2005. This leads to a Free trade agreement
which was in effect from 13 July 2006 and expected to be fully realized
in 2016. The agreement itself is an extension of an FTA between ASEAN
and Japan, which is called Asean-Japan Comprehensive Economic
Partnership.
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.
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.
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.

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 Mustapha

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.