Tiger economy

Macro-economic trend

This is a chart of trend of gross domestic product of Malaysia at market prices estimated by the International Monetary Fund with figures in millions of Malaysian Ringgit.

Year	GDP (in millions)	Exchange (1 USD to MYR)	Inflation Index (2000=100)
1980	54,285	2.17	51
1985	78,890	2.48	64
1990	119,082	2.70	70
1995	222,473	2.50	85
2000	343,216	3.80	100
2005	494,544	3.78	109

For purchasing power parity comparisons, the US Dollar is exchanged at 1.70 Ringgit only. Average wages in 2007 hover around $30-37 per day.

From 1988 to 1997, the economy experienced a period of broad diversification and sustained rapid growth averaging 9% annually.

By 1999, nominal per capita GDP had reached $3,238. New foreign and domestic investment played a significant role in the transformation of Malaysia's economy. Manufacturing grew from 13.9% of GDP in 1970 to 30% in 1999 , while agriculture and mining which together had accounted for 42.7% of GDP in 1970, dropped to 9.3% and 7.3%, respectively, in 1999. Manufacturing accounted for 30% of GDP (1999). Major products include electronic components -- Malaysia is one of the world's largest exporters of semiconductor devices -- electrical goods and appliances.

During the same period, the government tried to eradicate poverty with a controversial race-conscious positive program called New Economic Policy (NEP). First established in 1971 after race riot known as the May 13 Incident occurred, it sought to eradicate poverty and end the identification of economic function with ethnicity. In particular, it was designed to improve the distribution of wealth among the country's population.. The NEP ostensibly ended in 1991, however the policies persist in the form of other programmes such as the National Developmnent Policy. The policies are enforced overtly through race-based quotas for low-cost housing units, university placement, business equity ownership, etc.

Rapid growth was achieved partly through privatisation of inefficient state owned enterprises, thus subjecting them to commercial pressures and forcing them to better utilise their resources. Mostly deals were done behind closed doors and put through rather quickly. In one example Khazanah Nasional alienated shares in DRB Hicom to Mega Consolidated. This led to such deals being labelled mega projects.

Foreign funds were attracted to invest making the local money market and bourse liquid. This created opportunity for local businesses to raise capital on the KLSE, and carry out infrastructure development in areas like telecommunications, highways and power generation to meet bottlenecks caused by rapid industrialisation. An intense labor shortage created employment for millions of foreign workers. Subsequent events show that more than 50% were illegal.

The influx of foreign investment led to the KLSE Composite index trading above 1,300 in 1994 and the ringgit trading above 2.5 in 1997. At various times the KLSE was the most active exchange in the world, with trading volume exceeding even the NYSE. The stock market capitalisation of listed companies in Malaysia was valued at $181,236 million in 2005 by the World Bank.^[10]

Some of the more visible projects from that period are Putrajaya, a new international airport (Kuala Lumpur International Airport), a hydroelectric dam (Bakun dam), the Petronas Towers and the Multimedia Super Corridor. Proposals that were eventually canceled include the 95 km Sumatra-Malaysia bridge (would have been world's longest), the Mega International Sea and Air port on reclaimed land in Kedah (would have been world's biggest) and the KL Linear City (would have been the world's longest mall and the world's first city built over a river).

Concerns were raised during the time about the sustainability of the rapid growth and the ballooning current account. The mainstream opinion prevalent at that time was that the deficit was temporary and would reverse once imported equipment started producing for export. In spite of that, measures were taken to moderate growth especially when it threatened to overheat into the double digits. The main target was asset prices, and restrictions were further tightened on foreign ownership of local assets. Exposure of local banks to real estate loans were also capped at 20%.

Background

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.

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.

During the 1970s, Malaysia followed the footsteps of the original four Asian Tigers and committed itself to transition from reliance on mining and agriculture to manufacturing. With Japan’s and the West's assistance, heavy industries flourished and in a matter of years, Malaysian exports became the country's primary growth engine. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s.

Current GDP per capita grew 31% in the Sixties and an amazing 358% in the Seventies but this proved unsustainable and growth scaled back sharply to 36% in the Eighties rising again to 59% in the Nineties led primarily by export-oriented industries. The rate of poverty in Malaysia also fell dramatically over the years. However, its precipitous drop has been questioned by critics who suggest that the poverty line has been drawn at an unreasonably low level.

Central planning has been a major factor in the Malaysian economy, as government expenditure was often used to stimulate the economy. Since 1955, with the commencement of the First Malayan Five Year Plan, the government has used these plans to intervene in the economy to achieve such goals as redistribution of wealth and investment in, for instance, infrastructure projects.

A legacy of the British colonial system was the division of Malaysians into three groups according to ethnicity. The Malays were concentrated in their traditional villages, focusing mainly on agricultural activities, while the Chinese dominated Malaysian commerce. Educated Indians took up professional roles such as those of doctors or lawyers, while the less better-off worked the plantations. The Reid Commission which drafted the Malaysian Constitution made a provision for limited affirmative action through Article 153, which gave the Malays special privileges, such as 60% of university entrance (quota). However, after the May 13 incident of racial rioting in the federal capital of Kuala Lumpur, the government initiated more aggressive programmes aimed at actively establishing a Malay entrepreneurial class through direct intervention in the economy. The first five year plan that implemented these goals was the Second Malaysia Plan; its perceived heavy-handedness led to a new emphasis in the Third Malaysia Plan on a growing economic pie, so as to avoid robbing Peter to pay Paul.

As of 2006, the most recent five year plan is the Ninth Malaysia Plan. The five year plans have been criticised for resembling the central planning of Soviet communism; the five-year time frame has been attacked for being insufficient in dealing with short-term crises and long-term trends. The effectiveness of the plans has also been disputed; at the beginning of 2005, the last year of the Eighth Malaysia Plan, almost 80% of the funds allocated under the plan had not been disbursed.

There has also been a trend towards government involvement in the economy through government-linked companies (GLCs). Their purpose was to "[level] the economic playing field" and "serve as the vehicles for Malay entry into the private sector" according to one commentator. However, several GLCs were reportedly taken over by the United Malays National Organisation (UMNO), the ruling party, through nominees, resulting in criticism that they were vehicles for corruption.