III - Trade Policy Options for Malaysia

Summary

The World Economic and Trading System and the Malaysian Economy

Thanks to favourable raw material prices, Malaysia chalked up an average annual growth rate of 8 per cent (real) over the seventies. This growth was almost entirely financed from domestic savings inflated by the surpluses of the flourishing mineral and plantation sectors. The 1980s, in contrast, have brought forth a different set of circumstances. The collapse of the external sector, cut-backs in government spending, falling domestic and foreign investment, and capital flight, have all contributed to the present economic malaise.

By 1985, the economy had to react to a bewildering array of external and internal pressures: the full onslaught of an across-the-board export commodity price slump, followed by a sharp decline in virtually all domestic aggregate expenditure components. These factors combined to produce the first negative (-1 per cent) real gross domestic product growth recorded since Independence.

In contrast, 1986 may best be described as a period of gradual consolidation and stabilization at the margins. Efforts have intensified to reduce deficits on the public budget, and the current and capital accounts of the balance of payments, in an effort to bridge the resource gaps. Simultaneously, attempts were being made to significantly liberalize economic activity from government control. The annual growth rate estimate for 1986 was 1 per cent, attributed mainly to the higher output of palm oil, rubber, crude petroleum, electronics and textiles. As a result of the severe loss of income over the previous two years, aggregate domestic demand declined by 8.6 per cent in 1986.

Moreover, a plethora of cyclical and structural factors continue to impede the speed of progress towards recovery. Domestic private investment confidence has yet to recover. Real private investment fell by about 18.5 per cent between 1985 and 1986. Key commodity prices show some signs of firming, but gains made to date are still a long way off from the levels needed to increase export revenues significantly.