MOREPRESS RELEASE
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PRESS/TPRB/180
5 December 2001
(01-6119)
MALAYSIA'S SUSTAINED RECOVERY HELPED BY EXPORT GROWTH BUT
MANY CHALLENGES LOOMING
Rising private consumption, a revival in domes tic investment and a strong export growth
helped Malaysia rebound from the Asian financial crisis of 1997. This rebound has produced low
levels of unemployment and inflation in 2000.  But many challenges are looming in the horizon and a
sustained recovery of the Malaysian economy depends not just on prudent macroeconomic policies
but also on structural reforms,  according to a WTO report on the trade policies and practices of
Malaysia.
The WTO Secretariat  report, along with the policy statement by the Government of
Malaysia, will serve as a basis for the third trade policy  review of Malaysia by the Trade Policy
Review Body of the WTO on 3 and 5 December 2001.
According to the report, during the period under review (1997-2001), Malaysia's economy has
remained relatively open to trade and foreign investment.  This is especially true of the goods sector;
by comparison, the services sector is more closed, although judging from the recently launched Eighth
Malaysia Plan, the Government does envisage opening up the sector gradually.
The report recalls that in the second half of 1997, Malaysia was struck by the Asian financial
crisis, which contributed to a severe deterioration in its economic performance in 1998.  The outcome
was that, after having grown on average by more than 8% annually since the recession of 1985, real
GDP fell by 7.4% in 1998 owing to a large drop in private domestic demand caused by a sharp
decline in investment and, to a lesser extent, by lower consumption.  As a consequence, theunemployment rate rose, inflation doubled and the ringgit fell.
Nonetheless, the economy did rebound, with GDP growing by 6.1% in 1999 and by 8.3% in
2000 so that at the end of 2000, real output in value terms exceeded the pre-crisis level (however, per
capita income was US$3,531 in 2000, around 20% lower than the pre-crisis level).  This rebound can
be attributed to rising private consumption and a revival in domestic investment as well as to strongPRESS/TPRB/180
Page 2
MOREexport growth owing to the fact that Malaysia's trading partners kept their markets open throughout
the crisis.  Unemployment declined to 3.1% in 2000 and inflation slowed from 2.8% in 1999 to 1.6%
in 2000.
The report says that while some trade barriers were raised "temporarily" in the wake of the
Asian financial crisis, certain restrictions on foreign direct investment (FDI) were at the same time
relaxed, also temporarily.  In addition, the Government, by promoting corporate and financialrestructuring, has taken steps to address structural weaknesses that became more evident during the
crisis.  Nonetheless, there are several barriers to trade and investment that still constitute potentially
important distortions to competition and thus potential impediments to Malaysia's long-term
development.
The tariff continues to be the main border measure on imports; it also accounts for 5.8% of
total tax revenues.  As a consequence of "temporary" increases in rates in 1998, the average applied
MFN tariff increased from 8.1% in 1997 to 9.2% in 2001.  This rise in tariff protection was facilitatedby the fact that one third of tariff lines are not bound and, even for those lines that are subject to
bindings, bound rates often considerably exceed applied rates.  This lack of bindings, together with
the gap between bound and applied rates, can impart a degree of unpredictability to Malaysia's tariff.
Furthermore, the multiplicity of applied rates contributes to the complexity of the tariff.  However, the
decline in non-ad valorem tariffs from 4.5% of all tariff lines in 1997 to only to 0.7% in 2001 hasincreased the transparency of the tariff, as such dut ies tend to conceal tariff "peaks".  Tariff peaks
apply, inter alia, to automobiles, beverages, textiles and clothing.  With an increase in the number of
tariffs both below 10% and above 30%, the dispersion in applied MFN rates has risen, thereby
increasing the potential for the tariff to distort the allocation of resources to the detriment of
Malaysia's economy.
Tax measures are among the main instruments of Malaysia's economic development strategy.
They include a wide array of investment incentives that are offered to various manufacturing
activities, including exports thereof, agriculture, tourism, and other approved service sectors, research
and development, training, and environmental protection.  It appears that some of these incentivesmight have been provided as a quid pro quo for local-content requirements that the authorities
sometimes attached to investments;  with the re moval of most of these requirements, the question
arises whether such incentives are still necessary. While tax as well as non-tax incentives for
investment can sometimes be justified on grounds of "market failure", they also run the risk of
subsidizing good investments, which need no such assistance and could well have been undertaken inany event, or turning otherwise dubious investments into profitable ones.  Insofar as incentives have
stimulated investment in the latter, they may well have contributed to over-investment, and to a
distortion in the allocation of resources, thereb y possibly contributing to the fall in total factor
productivity that occurred in Malaysia during the early 1990s.
The Malaysian economy is relatively open to both trade in goods and foreign investment,
although rice and automotive products are notable exceptions.  The electronics sector appears to offer
a striking example of the benefits of an open regime in fostering development.  The sector has drawnsignificant flows of foreign direct investment (FDI), has had fairly little tariff and non-tariff
protection, and has grown to account for approximatel y 2.5% of global electronics production:  it has
been among the main engines of Malaysia's growth, and its strong external competitiveness was an
important element in Malaysia's recovery from Asian financial crisis, with the sector accounting for
more than half of Malaysia's total exports.  By contrast, the domestic automotive sector has beenrelatively sheltered from foreign competition;  it has been protected by high tariffs and supported by
various other incentives;  the sector has been successful in winning a large share of the domestic
market but, contrary to stated objectives, its exports are modest, suggesting perhaps a certain lack of
external competitiveness.PRESS/TPRB/180
Page 3
MOREMalaysia is a trading nation, with exports and foreign direct investment playing an important
role in its economy.  The recent sharp slowdown in  the U.S. economy, and Japan's further weakening,
pose major challenges for Malaysia's trade and investment outlook and thus to Malaysia's short- and
medium-term economic prospects.  Indeed, the Central Bank predicts that growth will fall to between
5% and 6% in 2001, mainly due to the slowdown in exports to the United States (the Asian
Development Bank has forecast growth of 4.9% in 2001), notwithstanding stimulative fiscal measuresadopted in March 2001.  This raises the question of whether Malaysia's economic policy has perhaps
over-emphasised exports at the expense of domestic demand (i.e. national saving is excessive),
making it too dependent on foreign markets (and a narrow range of products, namely electronics).
The Government has made considerable progress in addressing structural weaknesses that
became more evident during the Asian crisis, by promoting corporate and financial restructuring.  A
more liberal trade and investment regime could also contribute greatly not just to a sustained
economic recovery, but also to Malaysia's long-term economic development.
Note to Editors
Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member
countries’ trade and related policies are examined and evaluated at regular intervals. Significant
developments which may have an impact on the global trading system are also monitored. For eachreview, two documents are prepared: a policy stat ement by the government of the member under
review, and a detailed report written independently by the WTO Secretariat. These two documents are
then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These
documents and the proceedings of the TPRB’s meet ings are published shortly afterwards. Since 1995,
when the WTO came into force, services and trade- related aspects of intellectual property rights have
also been covered.
For this review, the WTO’s Secretariat report, together with a policy statement prepared by
the Government of Malaysia, will be discussed by the Trade Policy Review Body on 3 and 5
December 2001. The Secretariat report covers the development of all aspects of Malaysia tradepolicies since the previous review, including domestic laws and regulations, the institutional
framework, trade policies by measure, and developments in selected  sectors.
Attached to this press release is the Overview to the Secretariat report and parts of the
government policy statement. The Secretariat and the government reports are available under thecountry name in the full list of trade policy reviews at
http://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm . These two documents and the minutes of the
TPRB’s discussion and the Chairman’s summing up, will be published in hardback in due course and
will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva
21.PRESS/TPRB/180
Page 4
MORESince December 1989, the following reports have been completed: Argentina (1992 and
1999), Australia (1989, 1994 and 1998), Austria (19 92), Bahrain (2000) Bangladesh (1992 and 2000),
Benin (1997), Bolivia (1993 and 1999), Botswa na (1998), Brazil (1992, 1996 and 2000), Brunei
Darussalam (2001), Burkina Faso (1998), Cameroon (1995 and 2001), Canada (1990, 1992, 1994,
1996, 1998 and 2000), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995 and
2001), Côte d’Ivoire (1995), Cyprus (1997), th e Czech Republic (1996 and 2001), the Dominican
Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991,
1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Gabon (2001), Ghana (1992 and 2001),
Guinea (1999), Hong Kong (1990, 1994 and 1998),  Hungary (1991 and 1998), Iceland (1994 and
2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica
(1998), Japan (1990, 1992, 1995,1998 and 2000), Keny a (1993 and 2000), Korea, Rep. of (1992, 1996
and 2001), Lesotho (1998), Macao (1994 and 2001), Madagascar (2001), Malaysia (1993, 1997 and
2001), Mali (1998), Mauritius (1995 and 2001), Mexico (1993 and 1997), Morocco (1989 and 1996),Mozambique (2001), New Zealand (1990 and 1996) , Namibia (1998), Nicaragua (1999), Nigeria
(1991 and 1998), Norway (1991, 1996 and 2000), OECS  (2001), Pakistan (1995), Papua New Guinea
(1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993 and 1999), Poland (1993 and
2000), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic
(1995 and 2001), the Solomon Islands (1998), S outh Africa (1993 and 1998), Sri Lanka (1995),
Swaziland (1998), Sweden (1990 and 1994), Sw itzerland (1991, 1996 and 2000 (jointly with
Liechtenstein)), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago
(1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996, 1999 and
2001), Uganda (1995), Uruguay ( 1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe
(1994).PRESS/TPRB/180
Page 5
MORETRADE POLICY  REVIEW BODY
MALAYSIA
Report by the Secretariat – Summary Observations
Economic environment
During the period under review (1997-2001), Malaysia's economy has remained relatively
open to trade and foreign investment.  This is especially true of the goods sector;  by comparison, the
services sector is more closed, although judging from the recently launched Eighth Malaysia Plan, the
Government does envisage opening up the sector gradually.  Imports and exports of goods and
services were equivalent to 106% and 117% of GDP on average during the period 1997-2000.Inbound foreign direct investment (FDI) typically accounts for between one quarter and one third of
private investment in each year, while the stock of inbound foreign direct investment (FDI) currently
amounts to nearly half of GDP.  Moreover, according to a globalization index used in a recent
independent survey, Malaysia is in the top 20 of the most globalized economies.
In the second half of 1997, Malaysia was struck by the Asian financial crisis, which
contributed to a severe deterioration in its economic performance in 1998.  This deterioration occurred
despite apparently strong economic fundamentals (including full employment, low inflation, a high
national saving rate, a prudent fiscal position, and a reasonably sound banking system).  Nonetheless,
both capital and total factor productivity (TFP) growth had dropped markedly (from an annual
average rate of 2.4% in 1990-1995 to 0.9% in 1995-2000), perhaps reflecting over-investment, if notan increasingly inefficient allocation of capital.  The outcome was that, after having grown on average
by more than 8% annually since the recession of 1985, real GDP fell by 7.4% in 1998 owing to a
large drop in private domestic demand caused by a sharp decline in investment and, to a lesser extent,
by lower consumption.  As a consequence, the unemployment rate rose to 3.3% in 1998, up from
2.5% in the previous year.  Inflation doubled, from 2.6% in 1997 to 5.3% in 1998, partly due to higherimport prices resulting from the depreciation of the ringgit, which fell from about RM 2.8/US$ in the
third quarter of 1997 to RM 3.8/US$ a year later.
Initially, Malaysia responded to the crisis by tightening financial policies, but with the further
worsening of the economic situation, the Government changed its policy stance towards the end of
1998, cutting interest rates and raising government spending in order to stimulate the economy.  Inaddition, with a view to supporting the domestic financial markets, and to provide scope for the easing
of monetary and fiscal policies, temporary controls were imposed on selected capital account
transactions and the ringgit was pegged at RM 3.80 per U.S. dollar.
The issue of whether these macroeconomic policies, especially the imposition of capital
controls, helped Malaysia to recover more quickly from the crisis has been highly debated.  Indeed, at
the time the capital controls were put in place, markets both in Malaysia and elsewhere in South East
Asia appeared to have already stabilized.  Nonetheless, the economy did rebound, with GDP growingby 6.1% in 1999 and by 8.3% in 2000 so that at the end of 2000, real output in value terms exceeded
the pre-crisis level (however, per capita income was US$3,531 in 2000, around 20% lower than the
pre-crisis level).  This rebound can be attributed to rising private consumption and a revival in
domestic investment as well as to strong export growth owing to the fact that Malaysia's trading
partners kept their markets open throughout the crisis.  Unemployment declined to 3.1% in 2000 andinflation slowed from 2.8% in 1999 to 1.6% in 2000.PRESS/TPRB/180
Page 6
MOREA sustained recovery of the Malaysian economy depends not just on prudent macroeconomic
policies, but also on structural reforms.  The Asian crisis revealed weaknesses in several areas,
including in corporate structure and governance as well as in the financial system.  Accordingly, the
Government has taken steps or announced plans to restructure the corporate and financial sectors.
These are in addition to a long-standing privatization programme and labour market reforms.  The
Government has also adopted measures to diversify the economy by further widening and deepeningthe industrial base, enhancing the contribution of the agriculture to GDP, and by fostering the
development of the services sector.
Developments Concerning Institutional Framework
There have been a few noteworthy changes in Malaysia's trade-related institutional
framework since its previous Trade Policy Review.  In January 1998, the National Economic Action
Council (NEAC) was established as a consultative body to the Cabinet with a view to dealing with
economic problems arising from the Asian financial crisis, and in July 1998, the NEAC announcedthe National Economic Recovery Plan (NERP).  Furthe r, with a view to strengthening the resilience of
Malaysia's financial market, Danaharta (the national asset management company), Danamodal (a
special purpose vehicle to revitalize the banking sector), and the Corporate Debt Restructuring
Committee (CDRC) were established under NERP.  In 1997, the National Consumer Affairs Council
was also formed under the chairmanship of  the Minister of Domestic Trade and Consumer Affairs, todeal with consumer protection issues.
WTO Agreements continue to play a pivotal role in the formulation of Malaysia's trade and
trade-related policies.  Regional arrangements are also important, notably those involving the
Association of South East Asian Nations (ASE AN) and the Asia Pacific Economic Cooperation
forum, and various bilateral agreements, including in areas not covered by WTO Agreements.Malaysia coordinates its policies on WTO matters with other ASEAN members, and, at the same
time, it endeavours to ensure that its participation in regional trade arrangements is consistent with the
main principles underlying the WTO Agreements.
Trade and Trade-Related Policies, Practices and Measures
During the period under review, Malaysia's economy has remained relatively open as far as
international trade in goods and foreign investment are concerned.  While some trade barriers were
raised "temporarily" in the wake of the Asian financial crisis, certain restrictions on foreign direct
investment (FDI) were at the same time relaxed, also temporarily.  In addition, the Government, by
promoting corporate and financial restructuring, has taken steps to address structural weaknesses that
became more evident during the crisis.  Nonetheless, there are several barriers to trade and investmentthat still constitute potentially important distortions to competition and thus potential impediments to
Malaysia's long-term development.
The tariff continues to be the main border measure on imports; it also accounts for 5.8% of
total tax revenues.  As a consequence of "temporary" increases in rates in 1998, the average applied
MFN tariff increased from 8.1% in 1997 to 9.2% in 2001.  This rise in tariff protection was facilitated
by the fact that one third of tariff lines are not bound and, even for those lines that are subject to
bindings, bound rates often considerably exceed applied rates.  This lack of bindings, together withthe gap between bound and applied rates, can impart a degree of unpredictability to Malaysia's tariff.
Furthermore, the multiplicity of applied rates contributes to the complexity of the tariff.  However, the
decline in non-ad valorem tariffs from 4.5% of all tariff lines in 1997 to only to 0.7% in 2001 has
increased the transparency of the tariff, as such dut ies tend to conceal tariff "peaks".  Tariff peaks
apply, inter alia, to automobiles, beverages, textiles and clothing.  With an increase in the number oftariffs both below 10% and above 30%, the dispersion in applied MFN rates has risen, therebyPRESS/TPRB/180
Page 7
MOREincreasing the potential for the tariff to distort the allocation of resources to the detriment of
Malaysia's economy.
The average level of tariff protection is lower than that indicated by the simple applied MFN
average owing to tariff concessions, often for capital and intermediate inputs, as well preferential
rates, particularly those favouring ASEAN countries;  indeed the average rate of duty collected on
total imports was 1.3% in 2000 (compared with 3% in 1997).  The widening gap between the averagelevel of applied MFN tariffs and the average level of  the preferential AFTA tariff has increased the
potential for trade diversion.  ASEAN's share of Malaysia's imports rose substantially between 1996
and 1999, although this trend may be due more to the depreciation of ASEAN countries' currencies in
the wake of the Asian financial crisis than to the AFTA.  Insofar as trade diversion does occur owing
to the AFTA, and outweighs trade creation, it could possibly be detrimental to Malaysia's non-
ASEAN trading partners.
Apart from import prohibitions implemented for national security, religious, and
environmental reasons, various non-tariff border measures barriers are also used as instruments of
Malaysia's trade and development policy.  In particular, an increasing proportion of tariff lines is
subject to import licensing;  for some agricultural and industrial products, such licencing can
seemingly provide the authorities with scope for administrative discretion.  On the other hand,
Malaysia is not a major user of contingency measures;  during the review period, it has taken few anti-dumping (AD) actions and no countervai ling (CV) or safeguard measures.
Local-content requirements were abolished in 2000, except in the case of the automobile
industry.  Government procurement procedures, notably preference margins, tend to favour locally
owned businesses, particularly where relatively small amounts are involved.  Foreign suppliers are
usually excluded for contracts of larger amounts unless the supplies or services are not availablelocally;  for works contracts, foreign contractors are allowed to participate if there is no local
expertise. Malaysia is not a party to the GPA, although it does participate in the WTO working group
on transparency in government procurement.  Furthermore, restrictions on foreign ownership
encourage local participation in companies operating in Malaysia, although these restrictions tend to
be relaxed for companies with higher exports.
Some items, notably forest products, crude oil, and selected palm oil products, are subject to
export duties, which account for around 2% of total tax revenues.  A few products are also subject to
prohibitions, restraints, and licensing requirements.  At the same time, assistance is provided to
exports through, inter alia, tariff concessions, tax relief, export processing zones, concessionary
credits, insurance, and guarantees as well as promotion and marketing assistance.
Tax measures are among the main instruments of Malaysia's economic development strategy.
They include a wide array of investment incentives that are offered to various manufacturing
activities, including exports thereof, agriculture, tourism, and other approved service sectors, research
and development, training, and environmental protection.  It appears that some of these incentives
might have been provided as a quid pro quo for local-content requirements that the authorities
sometimes attached to investments;  with the re moval of most of these requirements, the question
arises whether such incentives are still necessary.  Tax incentives are often costly (in terms of taxrevenues forgone) and their effectiveness is not always clear.  While tax as well as non-tax incentives
for investment can sometimes be justified on grounds of "market failure", they also run the risk of
subsidizing good investments, which need no such assistance and could well have been undertaken in
any event, or turning otherwise dubious investments into profitable ones.  Insofar as incentives have
stimulated investment in the latter, they may well have contributed to over-investment, and to adistortion in the allocation of resources, thereb y possibly contributing to the fall in total factor
productivity that occurred in Malaysia during the early 1990s.PRESS/TPRB/180
Page 8
MOREMalaysia is gradually bringing domestic standards into line with international norms.
Although 31% of the 2,862 Malaysian standards currently in force are aligned with or based on
international standards, 80% of the new standards developed by Malaysia in 1998 and 1999
correspond to international standards.
Since its previous Review (in 1997), Malaysia has enacted two new laws and amended four
others to strengthen the protection of intellectual property rights and bring domestic legislation intoconformity with the TRIPS Agreement.  It has also stepped up enforcement of IPR laws, especially
those pertaining to copyrights.
State-owned enterprises continue to play an important role in the Malaysian economy,
especially in petroleum, electricity, transportation, telecommunications, and postal activities.  Aside
from their own operations, some of these enterprises provide finance not just to each other, but also to
private companies.  For example, PETRONAS, the highly profitable state-owned oil company has
purchased stakes in, inter alia, automobile and shipping companies , and Khazanah Holdings, a state-
owned investment fund, has purchased shares in a private company's telecom unit.  However, the
Government has a long-standing privatization progra mme, although the onset of the Asian crisis has
seemingly slowed its progress.  Indeed, the Government has bought back stakes in some companies.
Currently, Malaysia does not have a comprehensive competition law.  It does, however, have
various other laws that regulate the activities of enterprises and protect consumer interests.  Moreover,with a view to fostering competition in telecomm unications, the Government has recently established
competition guidelines for this sector.  Steps are being taken to improve corporate governance in
Malaysia.
Sectoral Issues
The Malaysian economy is relatively open to both trade in goods and foreign investment,
although rice and automotive products are notable exceptions.  The electronics sector appears to offer
a striking example of the benefits of an open regime in fostering development.  The sector has drawn
significant flows of foreign direct investment (FDI), has had fairly little tariff and non-tariff
protection, and has grown to account for approximatel y 2.5% of global electronics production:  it has
been among the main engines of Malaysia's growth, and its strong external competitiveness was animportant element in Malaysia's recovery from Asian financial crisis, with the sector accounting for
more than half of Malaysia's total exports.  By contrast, the domestic automotive sector has been
relatively sheltered from foreign competition;  it has been protected by high tariffs and supported by
various other incentives;  the sector has been successful in winning a large share of the domestic
market but, contrary to stated objectives, its exports are modest, suggesting perhaps a certain lack ofexternal competitiveness.
The Government's recently launched the Eighth Malaysia Plan envisages a further gradual
opening of the services sector, which accounts for over half of Malaysia's GDP, but is not yet as open
to trade as  agriculture and manufacturing.  This is largely because of restrictions on foreign direct
investment, which is necessary for the establishment of commercial presence, the main mode of
delivery for most services.  Commercial presence is generally confined to joint ventures, in which
combined foreign ownership cannot exceed 30%.  Insofar as barriers to commercial presence restrictcompetition in the provision of services, they tend to impair efficiency in the sector, so that the prices
paid for these services, both by businesses and households, are higher than would be the case in a
more competitive market.  The resulting higher costs of doing business could hamper the
competitiveness of all firms in Malaysia that require essential services (such as energy, finance,
telecommunications, and transportation) as inputs in their production and delivery of goods andservices.PRESS/TPRB/180
Page 9
MOREThe Government's plans to further open the financial services sector to international
competition, reform measures undertaken by the Securities Commission, and steps taken to promote
corporate governance and corporate retructuring are all mutually supporting.
Outlook
Malaysia is a trading nation, with exports and foreign direct investment playing an important
role in its economy.  The recent sharp slowdown in  the U.S. economy, and Japan's further weakening,
pose major challenges for Malaysia's trade and investment outlook and thus to Malaysia's short- and
medium-term economic prospects.  Indeed, the Central Bank predicts that growth will fall to between
5% and 6% in 2001, mainly due to the slowdown in exports to the United States (the Asian
Development Bank has forecast growth of 4.9% in 2001), notwithstanding stimulative fiscal measures
adopted in March 2001.  This raises the question of whether Malaysia's economic policy has perhaps
over-emphasised exports at the expense of domestic demand (i.e. national saving is excessive),making it too dependent on foreign markets (and a narrow range of products, namely electronics).
Another major challenge looming on the horizon is the impending accession of China to the
WTO.  China is a formidable competitor in Malaysia's export markets, including electronics, it also
competes strongly with Malaysia for FDI.  Indeed, China has recently attracted a lion's share of
inbound FDI in the region.
The Government has made considerable progress in addressing structural weaknesses that
became more evident during the Asian crisis, by promoting corporate and financial restructuring.  A
more liberal trade and investment regime could also contribute greatly not just to a sustained
economic recovery, but also to Malaysia's long-term economic development.PRESS/TPRB/180
Page 10
MORETRADE POLICY REVIEW BODY
MALAYSIA
Report by the Government of Malaysia – Economic Development
With an average growth rate of 7.8% per annum, the period 1991-1997 witnessed the
continuation of rapid economic progress, which started in the mid-1980’s.  Due to the financial crisis,
Malaysia's GDP contracted by 7.4% in 1998.  However, the economy quickly recovered in the second
quarter of 1999 leading to an average growth rate of 7.2% during the 1999-2000 period.
The quick recovery can be attributed to the Government’s efforts, beginning mid-1998, in
easing monetary policy and providing fiscal stimulus to reactivate domestic demand, and the stronggrowth in exports registered in 1999 and 2000.  The per capita income in current terms, which
declined in 1998 rebounded to RM 13,359 in 2000, higher than the pre-crisis level of RM 11,234
(US$4, 493) in 1996 though, in US$ terms it recorded a lower value of US$ 3,515.
The unemployment rate averaged at 2.9% for the 1997 to 2000 period with the highest level
of 3.3% in 1998, and the lowest at 2.5% in 1997.  The inflationary rate based on the consumer priceindex was maintained at an average of 3.1%, with the highest record of 5.3% in 1998 and the lowest
at 1.6% in 2000.
The manufacturing and services sectors together contributed the major portion of the total
GDP increasing from 81.8% in 1997 to 83.7% in 1998, to 85.1% in 1999 and to 86.1% in 2000.  The
manufacturing sector’s contribution ranged from  27.9% to 33.4% while the services sector’s
contribution ranged from 51.9% to 55.8% for the same period.  The agricultural sector’s contribution
to the economy was consistently above 9% except in 2000 with a decline to 8.4%.  The construction
sector saw a declining contribution from 4.8% in 1997 to 3.3% in 2000.
During the period, the domestic investment based on approved projects dropped sharply to
RM 4.7 billion in 1999 from a high RM 14.3 billion in 1997 and RM 13.2 billion in 1998 beforebouncing back to RM 13.7 billion in 2000.  However FDI remained strong at RM 11.4 billion in 1997,
RM 13.0 billion in 1998, RM 12.2 billion in 1999 and RM 19.8 billion in 2000.
Domestic investment for the period 1997-2000 was mainly in seven sectors namely petroleum
products (including petrochemicals), electronics and electrical products, basic metal products, natural
gas, chemicals and chemical products, transport equipment and non-metallic mineral products.  Theseseven industries together accounted for 76% of total domestic investment in approved manufacturing
projects during the period 1997-2000.
After registering exports of US$77.3 billion in 1997, Malaysia’s exports fell by 7.2% to
US$71.8 billion in 1998.  However, exports grew by 1.6% and 17% in 1999 and 2000 respectively
mainly because of sustained demand for electrical and electronic goods.  The share of primary
commodity exports declined largely due to lowe r prices and lower export volume for palm oil.
Nevertheless, higher prices of crude petroleum and LNG helped to offset export growth in this sector.The imports followed the same trend for the period recording a negative 26% in 1998, an increase by
12.9% in 1999 and a further increase by 34.4% in 2000.  The decline of imports in 1998 can be
attributed largely to slowdown in business activities,  deferment of major infrastructure projects and
weak consumer demand.  Import items that registered declines were machinery and equipment,
transport equipment and iron and steel products.  In 2000, Malaysia was ranked the 18
th largest
exporter and 18th largest importer in world trade.PRESS/TPRB/180
Page 11
Concerning balance of payments, external reserves rose to US$30.9 billion at end 1999,
equivalent to 5.9 months of retained imports.  However, external reserves declined to US$29.9 billion
at end 2000, equivalent to 4.5 months of retained imports, largely due to a narrowing merchandize
surplus balance as growth in imports outpaced the growth in exports.  In addition, despite the
Government continuing to maintain a fiscal stimulus for year 2000, the fiscal deficit remained
sustainable at 6.3% of GNP.
Malaysia introduced selective exchange control measures on 1 September 1998 to restore
stability to the financial markets and the economy.  The stability accorded by the controls has enabled
the country to accelerate the restructuring of the financial and corporate sector.  At present, the only
remaining rules affecting short-term inflows are m easures preventing the internationalization of the
Ringgit.
END