The implementation of new regional trade agreements can help Malaysia undertake key economic reforms—particularly in four major areas—needed to accelerate the country’s transition to high-income status, according to a new analysis from the World Bank.
The “Malaysia Economic Monitor” launched June 30 projects the Southeast Asian economy to grow by 4.4% in 2016 and 4.5% in 2017, down from 4.7% in 2015.
The outlook reflects a gradual deceleration in private consumption in Malaysia due to softening in the labor market and continued adjustment to fiscal consolidation, it said. Private investment is also expected to slow down as commodity prices and global economic growth remain subdued.
The report notes that key risks facing the Malaysian economy stem from commodity price instability and uncertainty over the growth trajectory in the global economy and its impact on Malaysia’s exports.
However, Malaysia is now engaging in a new generation of regional agreements including the Regional Cooperation Economic Partnership, the Trans-Pacific Partnership, and the European Union Free Trade Agreement.
“These agreements can help attract investment, spur innovation and technological upgrading, and further open up market access for Malaysia’s exports of goods and services,” said the report.
They can also bring benefits through reforms in new areas that were not included in past agreements, such as competition policy, government procurement, investment-state disputes, and investment policies.
The report added that Malaysia’s reform agenda in four major areas will get a push from the trade deals.
One of these is services, a sector where Malaysia still trails many countries in East Asia in contribution to GDP and exports. “An efficient services market can enhance Malaysia’s competitiveness,” said the report.
Another is investment, where trade agreements can help improve investment policies so as to attract a new wave of foreign direct investment that can support economic diversification. The new trade agreements provide additional investment safeguards for domestic firms investing abroad.
Malaysia’s competitiveness will also be enhanced. “A more open and level playing field in the domestic economy facilitates the entry of new firms, helps productive companies grow, and promotes innovation and job creation,” said the monitor.
Small and medium enterprises are likewise potential gainers from the trade agreements. Though SMEs in the country represent 97.3% of firms and accounted for 35.9% of GDP in 2015, they are substantially less productive than large firms, accounting for only 17.8% of exports. It will be critical to address the constraints SMEs face in order to raise productivity and reap the benefits of emerging trade opportunities, added the report.
“The new generation of trade agreements can provide the needed impetus to boost Malaysia’s economy to greater heights,” said Dato’ Sri Mustapa Mohamed, Malaysia’s Minister of International Trade and Industry.
“The 11th Malaysia Plan emphasizes competitiveness and productivity as important ingredients to raise the standard of living of Malaysians. These trade agreements can open up market access for goods and services, facilitate new types of foreign direct investment, encourage more competition, provide greater access to skills and technology, and create more and better jobs for Malaysian workers.”
“With new trade agreements, Malaysia can accelerate reforms to support its transition to high-income status,” said Ulrich Zachau, World Bank country director for Malaysia.
“Malaysia has the potential to make great strides towards high-income status by boosting the productivity of SMEs, bolstering competition across sectors, liberalizing services to further support exports, and attracting higher value-added foreign investment,” he added.
