Malaysia’s economy performed strongly from 2009-2012 with the country’s pursuit of policies ensuring sustainable and inclusive growth as it girds to become a high-income nation by 2020, according to the recently released trade policy review of the Southeast Asian nation by the World Trade Organization (WTO).
The country’s rapid recovery from contraction in 2009 towards more sustainable and moderate growth rates was largely a result of a marked shift from export-oriented manufacturing to domestic services, said WTO. Robust domestic demand offset external weakness and fuelled growth at an annual average rate of 4.1 percent from 2009-12.
The economy remains strongly outward oriented, with trade in goods and services accounting for 162.4 percent of GDP. Although relatively well diversified, foreign trade is increasingly going intra-Asia-Pacific.
“Despite a slowdown in total factor productivity (TFP) growth during 2008-12, Malaysia remains externally competitive with its comparative advantage seemingly shifting from electrical goods and electronics manufacturing towards processed commodities and natural gas,” the report noted.
Policy of self-reliance, industrialization
Trade policy remains focused on ensuring that Malaysia becomes a self-reliant and industrialized nation six years from now, with emphasis on integrating domestic companies into global value chains and developing commercial ties with new markets.
Malaysia continues to negotiate new regional trade agreements (RTAs) both bilaterally and with its partners in the Association of Southeast Asian Nations (ASEAN). During the period, it entered into seven new RTAs, three of which are ASEAN RTAs with third countries (Australia and New Zealand, India, and Korea), and four being bilateral agreements (with Chile, India, New Zealand, and Australia).
Malaysia has signed and ratified the Trade Preferential System of the Organization of the Islamic Conference and the Developing Eight Preferential Tariff Arrangement. These are expected to enter into force soon.
The country is currently negotiating RTAs with Turkey, the European Union, and the European Free Trade Association. It is a participant in the Trans-Pacific Partnership negotiations as well as in the ASEAN Regional Economic Partnership negotiations.
At the ASEAN level, member-countries’ efforts are focused on achieving economic integration by 2015. Three new ASEAN agreements entered into force over the period are the ASEAN Trade in Goods Agreement, ASEAN Comprehensive Investment Agreement, and ASEAN Agreement on Customs in 2012.
Additionally, there has been further liberalization within ASEAN in trade in services, financial services, and air transport. ASEAN Regional Comprehensive Partnership negotiations are ongoing.
Trade reforms, policies implemented
Reforms undertaken since 2010 to improve the business environment in Malaysia include cutting processing times for dealing with customs permits, eliminating and simplifying licensing requirements, and reducing the approval time for construction permits.
Additionally, a national policy on developing and implementing regulations, issued in 2013, requires federal government entities to follow certain steps in developing regulations affecting business, trade, and investment. A national committee on investments was established in 2010 to assess and approve investment projects in a more swift and streamlined fashion. In the same year the Malaysia corporate identity scheme was introduced to simplify business interactions with multiple government agencies.
The tariff remains one of the main trade policy instruments. Following the adoption of the HS 2012 tariff nomenclature, Malaysia’s customs tariff was streamlined by reducing the number of its tariff lines by 9.3 percent. As a result of unilateral tariff cuts during the period, the average applied MFN tariff rate dropped from 7.4 percent in 2009 to 5.6 percent in 2013.
Trade facilitation was strengthened by further shifting customs clearance from clearance-based controls to post-clearance audit controls, and Malaysia’s ease of trading across orders remains highly ranked in international comparisons.
Import prohibitions are maintained mostly for national security, religious, and environmental reasons. A considerable portion of Malaysia’s tariff lines remain subject to import licensing to regulate the flow of imports and promote selected strategic industries.
Export taxes and restrictions applied to certain goods (e.g., timber, crude palm oil) continue to discourage exports of certain commodities and essential goods and reduce their domestic prices, ensuring adequate domestic supplies and assisting downstream processing of these products.
Industrial support measures
Support via statutory income tax exemption is available for exports of certain fresh and dried fruits, fresh and dried flowers, ornamental plants and ornamental fish, and manufactures. Similar exemption of statutory income tax is available to companies in selected services sectors.
Other support measures remain in place, such as export processing zones involving local content requirements, concessionary credits, insurance, and guarantees, as well as government-sponsored promotion and marketing assistance.
Measures involving grants, tax concessions, and low-interest loans continue to support production and trade of various agricultural and manufactured products, and encourage SMEs, R&D, and environmental-protection activities.
The Malaysian economy remains one of the most highly subsidized in the region and the world. A reform aimed at rationalizing the subsidies regime on gasoline, cooking gas, electricity, and road tolls was launched but has accomplished little so far. Renewed emphasis was placed on these efforts in October 2013, noted the report.
State involvement in the economy persists in numerous areas, including oil, gas, key strategic utilities, and services.
Production and services
Manufacturing’s share of GDP decreased slightly over the period. It ranks third behind construction and services in productivity growth. Except for automotive products, manufacturing remains relatively open to both trade and foreign investment.
The services sector continues to be very dynamic, with annual growth averaging 5.9 percent over 2009-12. In 2012, it accounted for just over 50 percent of GDP and employment, and attracted the biggest share of the economy’s approved investments.
Malaysia is seeking to promote itself as a center for Islamic finance, health care, and education services, as well as a transportation hub for both air transport and shipping.
Sound fundamentals but…
The WTO review, in its assessment of Malaysia’s outlook, says the nation’s economic fundamentals remain generally sound. But despite its impressive rebound from the global financial crisis, it warned that Malaysia’s economy “remains vulnerable to exogenous shocks to global growth or risk aversion through international trade, commodity prices, and financial channels.”
It added that sustainable growth depends on diversification and on structural reforms to improve productivity, especially those that address fiscal consolidation, tax reform and expenditure. “These and related reforms would increase the flexibility of the Malaysian economy and its ability to respond to growing external competition.”