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Malaysia' success formula is largely attributed to the prudent fiscal and monetary management in an environment of political stability.
At the core of the Malaysian economic system is private enterprise. Nevertheless, the Government also plays an active role in development planning to promote balanced economic growth and social progress. Malaysia's position as one of the relatively more progressive, prosperous and fast-growing economies in Asia can be attributed largely to the utilization and development of the country's natural, mineral and human resources, aided by prudent fiscal and monetary management in an environment of political stability. The growth of the Malaysian economy is also largely attributed to its enterprising population and private investment, including foreign investment, which have contributed both capital and technology towards the country's development.
Since the mid-1980s, the emphasis of public policy has been directed towards downsizing the Government's role in the economy and scaling down import-intensive projects. The promotion of private sector activity as the main engine of growth has instead been emphasised. With this emphasis, bureaucratic red-tape has been liberalised and various tax incentives provided. A close alliance between government and private business community and a variety of policies and programmes to bolster the economic status of the Bumiputera and indigenous communities have also been implemented in which Malaysia's multi-ethnic society has shared the wealth that is generated by economic growth.
Malaysia is essentially a trade-oriented and open economy with exports and imports of goods and services accounting on average for over 176 per cent of the Gross National Product (GNP) in the early 1990s. Exports play a dominant role in the Malaysian economy and are traditionally the most important determinant of the state of economic activity over the short and medium terms. Despite the vulnerability of its exports to the vicissitudes of foreign trade, the economy has managed to achieve consistently high rates of real growth with relatively price stability. Both inflation and unemployment have been relatively stable over the years while the balance of payments position has consistently been in overall surplus, as reflected in Malaysia's high international reserves position, despite the onslaught of the Asian financial crisis in mid-1997. International reserves held by the Central Bank of Malaysia (Bank Nagara MalaysiaBNM) in June 1997 amounted to US$27.4 billion which was sufficient to finance 4.3 months of retained imports, a level considered satisfactory by international standards. As at the end of 1999, international reserves totalled US$30.9 billion (equivalent to 5.9 months of retained imports), which was achieved in the aftermath of radical selective capital control measures undertaken by the nation to combat the negative impact of large short-term capital flows in and out of Malaysia.
Nonetheless, like other Southeast Asia economies, Malaysia has been seriously affected by the Asian financial crisis with GDP shrinking by 7.5 per cent by the end of 1998. The decline in output was mostly observed in the construction, manufacturing and agricultural sectors. The Ringgit depreciated by 56 per cent and the stock market fell by 50 per cent between mid-1997 and January 1998. The financial crisis had cost Malaysia about US$50 billion in terms of purchasing power of imports and US$150 billion in market capitalisation. Several Government-funded mega-projects were put on hold following the implementation of the National Economic Recovery Plan (NERP), drawn up by the National Economic Action Council (NEAC), to counter the negative effects of the Ringgit depreciation and the collapse of the stock market. As a result of these measures, the economy is now stable and registering positive signs. Real GDP turned around from a contraction of 7.5 per cent in 1998 to record a strong positive growth of 5.4 per cent in 1999. The World Bank initially forecasted a GDP growth of zero to 1x per cent for Malaysia for 1999, and 3 per cent for the year 2000. Following Malaysia's upbeat performance in the second quarter of 1999, the World Bank has revised its forecast upwards to 34 per cent for 1999 and 45 per cent for the year 2000.
In tracing the historical evolution of the Malaysian economy since Independence in 1957, it is noted that over the past four decades, the Malaysian economy has undergone profound structural changes, evolving from a dependence on agriculture and primary commodities into an increasingly broad-based and diversified economy with an expanding industrial base. In the early phase of development, agriculture was the main source of growth. Beginning in the 1970s, the manufacturing sector began to assume an increasingly important role in the expansion of the Malaysian economy. Within the sector, the shift from labour-intensive industries to capital-intensive industries took place in the 1980s in line with national objectives. The 1990s witnessed an economy sustained through productivity and industrial upgrading to higher value-added industries with a focus on information technology. At the same time, Government policies favour a thrust for the development of a vibrant small and medium-scale industrial sector as a backbone of industrial activities.
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