Malaysia: December 1997
Malaysia's pursuit of open trade policies and its attractiveness to foreign direct investment (FDI) have led to impressive growth and continued economic transformation, says a new WTO Secretariat report on Malaysia's trade policies and practices.
Open trade and investment lead to growth in Malaysia - some measures hamper efficient use of capital
Malaysia's pursuit of open trade policies and its attractiveness to foreign direct investment (FDI) have led to impressive growth and continued economic transformation, says a new WTO Secretariat report on Malaysia's trade policies and practices. Since the previous trade policy review in 1993, Malaysia's strong economic performance has continued. The underlying strength of the economy has meant that the effects of the current financial crisis in Asia have been somewhat less serious for Malaysia than for some other markets. However, Malaysia does face macroeconomic and structural challenges if rapid economic growth is to be maintained.
The WTO Secretariat report on Malaysia's trade policies and practices, along with a policy statement prepared by the Malaysian government, will provide the basis for a review of Malaysia's trade policies and practices in the Trade Policy Review Body on 4 and 5 December.
The WTO report states that Malaysia has cut its import tariffs by almost one half since 1993. The average applied most-favoured-nation tariff has declined from 15.2 per cent in 1993 to 8.1 per cent in 1997. As part of Malaysia's WTO commitments, the coverage of tariff bindings increased from under one per cent to almost two thirds of tariff lines. However, the report notes that high levels of tariff protection remain in some agricultural sub-sectors as well as in the automobile industry, with peaks up to 145 per cent.
Import licensing affects some 17 per cent of all tariff lines, principally in the agricultural and automobile sector. Imports of coffee beans and round cabbages are restricted and imported motor vehicles are subject to quotas and high tariffs. Domestic manufacturers of cars, meanwhile, benefit from sales tax reductions.
The report states that Malaysia maintains a very active industrial policy, which involves tariff and non-tariff measures together with internal measures such as incentives, regulations and preferential government procurement practices. Export promotion measures and export levies also play a part in this policy. A central feature of Malaysia's industrial policy is the discouragement of labour-intensive activities and the promotion of capital- intensive processes such as the automation of low-skill industries and the development and acquisition of advanced technologies.
During the period 1992-96, investment in Malaysia averaged 40 per cent of GDP, with a considerable share coming from abroad, especially in manufacturing, where more than half of all firms' equity is now foreign-owned. Investments are encouraged by an array of tax and non-tax incentives granted, for the most part, on a non-discriminatory basis to domestic and foreign-owned enterprises. The report notes that Malaysia's recent growth has largely been based on increases in the volume of capital rather than in its efficient allocation. Total factor productivity growth has slowed, with adverse implications for resource allocation.
In regard to services trade, the report notes that Malaysia maintains restrictions on foreign access to much of this sector, thus reducing competition and efficiency in the domestic market. For example, the Malaysian government refuses to grant new licenses to private providers of telecommunications services or prohibits the establishment of new banks and the expansion of foreign bank branches. However, in its 1998 budget, the government re-emphasized its commitment to deregulation and liberalization, particularly in the financial sector. Measures were introduced to extend foreign access to real estate purchases and to develop the capital market. Malaysia has also reaffirmed its commitment to the WTO financial services negotiations, with plans to liberalize insurance and brokerage industries.
Malaysia is a member of the Association of South East Asian Nations (ASEAN) and of the Asia Pacific Economic Cooperation (APEC). Under the ASEAN Free Trade Area Agreement (AFTA), Malaysia has substantially reduced tariffs on imports from its AFTA partners. It is also committed to reducing tariffs on imports of practically all manufactures, including automotive products, to a maximum of 5 per cent by 2003. The report notes that as AFTA tariffs are reduced ahead of MFN tariffs, imports from ASEAN countries receive a substantial margin of preference. However, AFTA commitments help drive Malaysia's MFN liberalization, albeit with a time lag.
The report notes that the WTO, together with ASEAN and the APEC forum, is at the core of Malaysia's external trade policy making. Malaysia has made substantial commitments under GATT 1994 and GATS provisions. It is also currently introducing new legislation required by the TRIPS Agreement, ahead of the five-year period provided for developing countries. However, Malaysia is not a party to the plurilateral agreement on government procurement; the report notes that government procurement practices expressly favour local suppliers of goods and services through specified preferences and informal local- content policies. Nevertheless, foreign partners have been awarded a large share of government contracts. Malaysia has no competition laws and the report notes that the lack of such legislation could be another form of assistance to domestic producers by sheltering them from domestic and foreign competition.
The report concludes that the outlook for the Malaysian economy appears healthy. The increased openness of the economy to trade in goods and services resulting from the implementation of the Uruguay Round agreements will foster competition and specialization. Growth and productivity will be further enhanced if, as envisaged, regional trade liberalization measures under ASEAN and within APEC are extended to all other WTO Members on an m.f.n. footing.
Despite renewed commitment to deregulation and liberalization, some selective trade control measures have been introduced in Malaysia's recent budget, along with more general fiscal measures aimed at budget balance. It is hoped that such selective measures will be of short duration.
Notes to Editors
The WTO Secretariat's report, together with a report prepared by Malaysia will be discussed by the WTO Trade Policy Review Body (TPRB) on 4 and 5 December 1997. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system. The two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of Malaysia and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover the development of all aspects of Malaysia's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993), Brazil (1992 & 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991 & 1997), Colombia (1990 & 1996), Costa Rica (1995), Cte d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 & 1995), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: MALAYSIA
Report by the Secretariat Summary Observations
Malaysia has achieved impressive growth and continued its economic transformation since the previous review of its trade policies, under GATT in 1993. These trends are largely attributable to the pursuit of open trade policies and continuing high rates of investment. During the review period, exports and imports of goods and non-factor services averaged 90 and 91 per cent of GDP. Malaysia has cut its import tariffs by almost one half since 1993, reducing protection for most agricultural and manufactured goods. Nevertheless, high levels of tariff protection remain in some agricultural sub-sectors as well as in the automobile industry. Investment averaged 40 per cent of GDP during the period 1992-96; a considerable share came from abroad, especially in manufacturing, where more than half of all firms' equity is now foreign-owned. Whereas foreign direct investment (FDI) policies in manufacturing are generally liberal, and investment in the multi-media and other technologically-advanced service sub-sectors has been fully liberalized, restrictions remain on foreign investors' access to much of the services sector, thus curtailing competition and impairing the potential efficiency of that sector.
Like other countries of the sub-region, Malaysia has been hit by the financial crisis originating with Thailand in mid-1997. The underlying strength of the economy has meant that the effects of the crisis have been somewhat less serious for Malaysia, which has indeed contributed to the financial relief package for Thailand. However, questions arise concerning the scope and direction of trade measures taken in the recent Budget.
Recent Economic Performance
With real GDP growing at average annual rates of approximately 8.6 per cent, unemployment below 3 per cent, inflation declining to 3 per cent in 1996 and low external debt, Malaysia's macroeconomic performance since the previous TPR has been impressive. Malaysia has also been at pains to ensure that the benefits of growth are shared equitably among different social and ethnic groups.
Notwithstanding this outstanding performance, the Malaysian economy faces two major challenges to future growth. First, labour, particularly skilled labour, has become increasingly scarce. In so far as the scarcity results in nominal wage increases above gains in labour productivity, it would erode the competitiveness of Malaysian industry and contribute to inflationary pressures. The lack of skilled labour may also hinder the absorption of new techniques embodied in new capital and thus inhibit growth in total factor productivity (TFP). Whereas in the past the authorities have dealt with the labour shortage by promoting capital-intensive industries through investment incentives and relying on unskilled immigrant labour in agriculture and construction, greater emphasis is now placed on investment in human capital.
Secondly, Malaysia's recent growth has largely been based on increases in the volume, rather than the efficient allocation, of capital; hence, total factor productivity growth has undergone a marked slowdown. Despite the external (spill-over) benefits usually associated with FDI, including the acquisition of new technologies, managerial expertise and learning-by-doing, TFP growth averaged 0.9 per cent annually for the period 1991-1996 compared to an annual average of 2.9 per cent in 1987-1990. If the rate of improvement in TFP in the earlier period had been maintained, the same rate of GDP growth could have been accomplished with considerably less investment.
A further macroeconomic challenge facing the Malaysian Government is the investment- savings gap and the associated current account deficit. Gross national savings, although averaging 33 per cent of GDP during 1992-1996, fell considerably short of domestic investment; with the budget roughly in balance, the 7 percentage point gap has been largely made up by a net inflow of foreign direct investment (FDI). The counterpart of the gap is a current account deficit also averaging around 7 per cent of GDP, and reaching over 10 per cent in 1995, a level that gave serious concern to the authorities. With tight monetary policy, the deficit was cut to 5.2 per cent in 1996 and is expected to decline further in 1997.
Trade Policy Formulation
The Government's declared long-term vision for Malaysia is to become a fully developed nation by 2020. The medium- and short-term objectives of trade and investment policies are published in periodic industrial plans and the annual budget. The authorities do not publish any evaluations of the effectiveness of specific policy instruments, such as tax incentives, in achieving policy objectives or of the relationship between the revenue loss from each measure and the investment that would not have been undertaken in the absence of the incentive, the possible misallocation of resources resulting from the incentive, or the net welfare gains or losses to consumers. Although business has a substantial consultative role in policy-making, consumer groups do not appear to make any formal input. In the absence of any convincing evidence to the contrary, therefore, the cost-effectiveness of Malaysia's active industrial policy might well be questioned.
Both as a member of ASEAN and individually, Malaysia regards the WTO as at the core of its external trade policy making. Under the Marrakesh Agreement, Malaysia has reduced its import tariffs by roughly one-half during the period under review; it has made substantial commitments under the GATS Agreement and is introducing new legislation required by the TRIPS Agreement ahead of deadlines. Malaysia has also, by and large, made notifications on time, used the Dispute Settlement Mechanism actively and co-operated fully in preparing this Trade Policy Review. These elements are illustrative of its strong commitment to the WTO mechanisms.
At the same time, ASEAN provides both a preferential trading area and a major outward- looking regional forum where Malaysia can coordinate policy with its immediate neighbours. The APEC process, through "open regionalism" and the pursuit of Individual Action Plans, involves further development of policies with regional trading partners. ASEAN and APEC also play important roles in preparing member States for discussion of new topics that may be raised in the WTO.
Trade and Related Structural Policies
Trade and trade-related policy instruments are major features of the Malaysian Government's active industrial policy, implemented in close collaboration with the business sector. Policy involves border measures such as tariffs, non-automatic licensing procedures, quantitative restrictions and anti-dumping actions, together with internal measures such as incentives, regulations and preferential government procurement.
Tariffs have been liberalized substantially since the previous review. The average applied MFN tariff rate has declined from 15.2 per cent in 1993 to 8.1 per cent in 1997, and as part of Malaysia's WTO commitments, the coverage of tariff bindings has increased from under one per cent to almost two thirds of tariff lines. Furthermore, whereas only 13 per cent of tariff lines were exempt from import duty in 1993, over half of all lines now bear duty-free applied rates. There is, however, substantial flexibility for Malaysia to raise tariffs within ceiling bindings. On the other hand, some rates remain well over 100 per cent. The maintenance of some 500 specific, mixed and alternative duties conceals very high ad valorem rates; for example, roughly 100 specific duties involved rates whose average ad valorem equivalent was 145 per cent.
In accordance with its commitments under the ASEAN Free Trade Area (AFTA) Agreement, Malaysia has substantially reduced tariffs on imports from its AFTA partners. It is also committed to reducing tariffs on imports of practically all manufactures, including automotive products, to a maximum of 5 per cent by 2003. As AFTA tariffs are reduced ahead of MFN tariffs, imports from ASEAN countries thus receive a substantial margin of preference. However, it appears that many MFN tariffs are also being reduced in parallel with AFTA tariffs, to limit the trade diverting impact of such preferences. It thus seems that Malaysia's AFTA commitments may drive its MFN liberalization, albeit with a time lag, during which ASEAN countries receive preferential access to Malaysia's market.
Import licensing is the major non-tariff measure, affecting some 17 per cent of all tariff lines, principally forestry and logging, agricultural and mineral items, and the automobile sector. Most licences appear to be granted automatically or predictably upon fulfilment of certain criteria. Import quotas are applied to completely-built-up motor vehicles; coffee beans and round cabbages are also restricted under import licensing.
Although the Malaysian authorities have yet to change their anti-dumping legislation so that it accords fully with WTO rules, only two such measures currently apply. Malaysia's exporters also face anti-dumping and countervailing actions in certain partner markets. To some degree, these are justified by partners as seeking to offset "unfair" assistance received by exporters from the Malaysian Government or a lack of competition in Malaysia's domestic market.
Export promotion measures and export levies also play a part in Malaysia's industrial policy. Exports are encouraged by exemptions or drawbacks for import duties and other indirect taxes, as well as internal incentives and government-sponsored trade information initiatives. Apparently, such promotional measures are partly designed to offset disincentives arising from other policies, such as import tariffs levied on inputs used in goods for export and "cascading" sales taxes, which, unlike a VAT, tend to discriminate against exports. At the same time, taxes and other levies as well as licensing arrangements are applied to certain exports, thus tending to discourage the export of the goods affected and reduce their domestic prices. This constitutes an indirect subsidy to domestic users of such goods. The authorities justify some export taxes and levies, including those on logs, on the grounds that they are intended to take into account the environmental damage caused by the production process. However, to the extent that this is the case, production levies would be a more efficient way of correcting the environmental externality than export duties. Thus, although such instruments may serve legitimate objectives, the same objectives may be achieved more efficiently by alternative measures.
A central feature of Malaysia's industrial policy is discouragement of labour-intensive activities and the promotion of capital-intensive processes such as the automation of low-skill industries and the development and acquisition of advanced technologies. Foreign direct investment in such activities is actively encouraged.
An array of tax and non-tax incentives exists; some are granted to all sectors, while others are aimed at specific firms or industries. Incentives have also been designed to encourage participation by the Bumiputra community in investments as well as the development of small businesses. The granting of such incentives is administered by the Malaysian Industrial Development Authority (MIDA), the Government's principal "one-stop" agency for the promotion and co-ordination of industrial development. Incentives are, with one notable exception concerning reduced sales taxes on "national" cars, granted on a non-discriminatory basis to domestically- and foreign-owned enterprises. As a consequence, foreign-owned firms accounted for more than two thirds of the value of investment qualifying for Pioneer Status and the Investment Tax Allowance during the period 1992-1996.
While the Malaysian authorities appeared (prior to the 1998 Budget) to be reviewing the use of incentives with a view to making them more selective, the overall utility of investment incentives may be questioned. These measures may have an adverse effect not just on resource allocation, and thus total factor productivity, but also on the fiscal balance, thereby reducing national savings, widening the savings-investment gap, and exacerbating the current account deficit. Estimates of the annual costs of tax incentives in terms of revenue forgone are not available. However, judging from information provided by the Malaysian authorities, such costs may be substantial; for example, the Reinvestment Allowance alone cost roughly RM 1 billion annually in forgone income tax revenues during 1995-96. Such incentives may also contribute to a "beggar-thy-neighbour" situation in which other countries react by offering incentives of their own, just as the Malaysian Government may have responded to other countries' incentives.
The Malaysian Government attaches importance to the protection of intellectual property as a tool of industrial policy. Legislative protection for patents, copyrights and trademarks is in the process of revision to conform with the TRIPS Agreement; although Malaysia has formally invoked the five-year grace period for developing countries under the agreement, this legislation is expected to enter into force by 1998 at the latest.
Malaysia is not a party to the Plurilateral Agreement on Government Procurement. In contrast to general regulations, licensing requirements and incentives, Malaysian government procurement expressly favours local suppliers of goods and services through specified preferences and informal local-content policies. In addition, selected state-owned enterprises are required to follow similar practices. Such preferences provide assistance to the favoured firms; but by increasing the cost to the Government and state-owned enterprises of procuring goods and services, they impair economic efficiency. However, despite these preferences, foreign partners have been awarded a large share of government contracts.
Through state ownership of enterprises, the Government is involved not just in the procurement of goods, services and inputs, but also in their supply. In order to foster economic efficiency, however, some state-owned firms are allowed greater autonomy, including freedom from public procurement regulations while others have been privatized. Privatization has made a significant contribution to economic growth and public revenue. Foreign investors have been invited to participate in some privatization exercises, while they have also been allowed to invest in Malaysian listed companies up to a maximum of 25 per cent of equity.
Malaysia has no competition laws. This absence (particularly coupled with the drive to privatization) may in some circumstances act as an additional form of assistance to domestic producers by sheltering them from domestic and foreign competition. This is the outcome of a situation in which trade and domestic resource allocation are distorted not so much by government action, but rather its inability to take action against anti-competitive private practices. As with border and internal measures, such protection is obtained at the expense both of other domestic producers who, as a consequence, face higher prices for their inputs, and of Malaysian consumers. While freedom to raise prices for certain essential products is limited by price controls, such controls may constitute a further potential distortion to competition.
Trade Policies by Sector
Trade and trade-related measures, individually or in combination, tend to affect industries and even firms in the same industry differently, producing "winners" (the net beneficiaries) and relative "losers" (industries or firms that cannot benefit from such measures or are adversely affected by them). In Malaysia, with the exception of a few products, agriculture receives little protection, and benefits from the supply of low-skilled immigrant labour. By contrast, relatively high tariffs, combined with an import quota on imported automobiles and sales tax reduction applicable to the national car, directly favour manufacturers of the latter, not just to the detriment of other domestically-manufactured or imported cars, but also at the expense of other sectors, such as agriculture and other manufacturing industries, that receive lower protection. Likewise, restrictions in service sectors, such as refusal to grant new licences to private providers of telecommunications services, or the prohibition of establishment of new banks or of the expansion of foreign bank branches, reduce competition and efficiency in the domestic market.
The ultimate losers from such measures are consumers; moreover, protective measures applied to one sector (particularly inputs like banking or telecommunications) affect others indirectly. On the other hand, tax and non-tax incentives or subsidies accorded to firms producing goods and services in one sector reduce not only the costs of those firms, but also the costs of firms elsewhere for whom those goods and services are inputs. Even a seemingly general measure, such as an investment or R&D incentive, will affect industries and firms differently, depending on their capital and R&D intensities. It would be surprising if the array of measures currently used in Malaysia did not significantly influence the allocation of resources among and within sectors. In the absence of sufficiently large social benefits, the outcome would be less efficient domestic allocation of resources and lower productivity in the economy as a whole.
To the extent that savings and investment in Malaysia remain close to the high rates experienced during the 1990s, and its openness to trade and attractiveness to FDI are maintained, the underlying outlook for the economy appears healthy, despite the recent disappointing pace of total factor productivity improvement and notwithstanding the recent turbulence in the region. Future productivity and growth would be enhanced by the increased emphasis being placed on development of human capital; and the increased openness of the economy to trade in goods and services resulting from the implementation of the liberalization measures envisaged in the Uruguay Round agreements will foster competition and specialization. Growth and productivity will be further enhanced if, as envisaged, regional liberalization measures under the ASEAN Free Trade Agreement and within APEC are extended to all other WTO Members on an MFN footing.
Notwithstanding this optimistic overall economic outlook, Malaysia does face some macroeconomic and structural challenges to the maintenance of its rapid economic growth. Malaysia's pro-active industrial policy, involving large amounts of public investment in infrastructure and the provision of generous incentives to promote private investment in specific sectors may well have led to sub-optimal allocation of the capital stock. If capital were allocated more efficiently, the same rate of output growth could be maintained with a lower rate of investment, bringing the latter more into line with gross national savings.
Continuing trade liberalization would obviously contribute to more efficient use of resources: specific measures might include parallel implementation of AFTA and MFN tariff cuts, implementation of a more competitive tendering and bidding process for public infrastructure projects, the curtailment of investment (and other) incentives and the relaxation, if not removal, of restrictions on foreign ownership in service sectors. Many of these measures would also assist the Government in controlling the fiscal balance and give scope either for across-the-board cuts in tax rates or for higher expenditure in more essential areas, such as the development of human capital, where the social returns are arguably higher. Any improvement in the fiscal balance, together with a narrowing of the gap between investment and savings, would also tend to reduce Malaysia's current account deficit; it would, in addition, alleviate pressure to use border or non-border measures to restrain imports or encourage exports of specific categories of goods and services.
The 1998 Budget
The 1998 Budget was unveiled on 17 October 1997, after the main body of this report was drafted. While noting the strength of economic fundamentals, a major focus was placed on reducing the current account deficit through, inter alia, a package of measures aimed at reducing imports and increasing exports of goods and services. The package included increases in import duties on selected consumer goods, including cars and a number of consumer durables, on construction materials and heavy machinery used in construction; imports of such machinery were also to be subject to MITI's approval, given only if machinery is not available locally. The package also contained income tax exemptions for exporting companies in manufacturing and selected agriculture and services, with the scale of the exemptions directly related to increases in export values and the value-added content of exported goods and services.
At the same time, the Government re-emphasised its commitment to deregulation and liberalization, particularly in the financial sector: measures were introduced to extend foreign access to real estate purchases and develop the capital market, and Malaysia's commitment to the WTO financial services negotiations was reaffirmed, with particular reference to liberalization of the insurance and brokerage industries. Other features of the budget were confirmation of the postponement of several public works projects, a cut in the corporate tax rate from 30 to 28 per cent, measures aimed at increasing national savings and measures designed to curb credit. The budget is projected to raise revenue and expenditure by 1.9 per cent and 1.7 per cent, respectively, thereby slightly increasing the fiscal surplus; growth is expected to slow to around 7 per cent in 1997.
The Budget has added several new measures to the wide array of incentives available in Malaysia. The two percentage point reduction in the corporate tax rate has, admittedly, slightly reduced the value of some tax incentives, particularly accelerated depreciation allowances, and brings the rate closer to that of Singapore. It would appear, however, that the Malaysian Government is seeking to reduce the current account deficit as much by adopting restrictive trade measures as by directly addressing the fundamental macroeconomic cause of the deficit, namely the gap between investment and savings.
The trade control measures contained in the Budget are directed selectively at goods and non-factor services. The deficit in these areas is very small (0.9 per cent of GDP in 1996). The slowing of the economy and the depreciation of the ringgit since the beginning of July 1997 should, in any case, independently tend to discourage imports and encourage exports. Given the underlying strength of Malaysia's economy and the decline already seen in the current account deficit, it is to be hoped that such selective measures will be of short duration.Back to top
TRADE POLICY REVIEW BODY: MALAYSIA
Report by the Government
The Malaysian economy has consecutively enjoyed strong rates of growth since 1990. This vibrant and sustained growth has been attributed to a number of factors, particularly the liberal trade and investment polices, economic restructuring and deregulation as well as a stable political environment.
The Malaysian government's pro-business stance and active private sector efforts have helped Malaysia integrate into and benefit from the world economy. This had resulted in FDI inflows, accelerated the industrialization process, aided the technology transfer process and evolved Malaysia into a production base of high quality products.
The dynamism of the external sector has been a fundamental factor in Malaysia's economic advancement, with the export sector contributing to more than 75% of the GNP. Future economic expansion and the realization of the vision to become a developed country by the year 2020 will hinge on further growth of this sector. The targeted annual economic growth of 7% visualised under Vision 2020 objectives is to be export led.
Malaysia's trade policy is designed to promote and sustain economic growth. Malaysia's open economy, underpinned by a liberal trade policy, provides the means for economic growth and adaptability to an increasingly globalized economy. Malaysia takes a global approach in both trade and investment relations.
In sustaining ties with its traditional partners, Malaysia is continuously forging new trade ties with other trading nations. Whilst pursuing a multilateral approach, Malaysia is also supportive of regional initiatives (like ASEAN, APEC, EAEC) which would be able to strengthen economies in such regional groupings, hence providing strong and viable trading partners for Malaysia.
Malaysia, in particular, attaches great importance to the multilateral trading system. The multilateral trading system has contributed much to the stability and growth in international trade. Malaysia has, therefore, always supported the role of the WTO in strengthening the multilateral trading system. Malaysia is committed to implementing the obligations and responsibilities arising from the Uruguay Round and other subsequent negotiations under the ITA and basic telecommunications.
In the market access area, Malaysia is committed towards continual liberalization of trade and investment in goods and progressive opening of the services sector. Malaysia will continue to pursue tariff reduction in line with its trade liberalization efforts and commitments in ASEAN and the WTO, APEC and other initiatives to enhance South-South Cooperation. Non-tariff measures would continuously be reviewed and where appropriate be eliminated.
In the services sector, Malaysia has made substantial commitments under GATS. In the financial services sector, Malaysia has made additional commitments under the interim financial agreement to allow greater foreign participation in the leasing and stockbroking sectors. Malaysia is committed in implementing the market access package for a variety of business, professional, telecommunications and hospitality services.
Malaysia will continue to maintain a liberal investment regime with opportunities and flexibilities for foreign equity ownership, enhancing the transparency of its investment regime as well as nurturing a competitive environment for business.
In the area of deregulation, Malaysia has reduced substantially government involvement in business and actively promoted private sector initiatives in economic development. To promote efficiency, a major programme of privatization was undertaken in power generation, telecommunication, infrastructure and other government services. This approach is to be continued in the future.
The Government will work together with the private sector in promoting a balanced, broad based resilient and internationally competitive economy. This would be achieved through productivity driven growth, skills upgrading, capital deepening and technology investments. In the medium term efforts to achieve further structural transformation of the Malaysian economy will include increasing the contribution of the service sector and the restructuring of the manufacturing sector.
The manufacturing sector is expected to continue its role as the engine of the nation's economic growth. The sector is projected to grow by 10.5% in GDP increasing from 27% in 1990 to about 37% by the year 2000. In line with this, manufactured exports are expected to account for 81.8% of total exports by the year 2000 compared to 60.4% in 1990.
Malaysia would assume an active and positive role in international fora alongside her regional and bilateral approach to promote liberalization and facilitation of trade, taking into account changes in world trading patterns as well in Malaysia's broadening trade interests.
Economic and Trade Environment
The period 1993-96 witnessed the continuation of rapid economic progress which started back in the late 1980s. During the period, real GDP grew at an average annual rate of 8.8 per cent, with the highest growth rate recorded at 9.5 per cent in 1995 before moderating to a more sustainable growth rate of 8.2 per cent at the end of the period. In fact, 1996 marked the ninth consecutive year of rapid growth where the economy enjoyed the longest period of sustained robust growth. With this growth, per capita GNP rose from RM 8,022 (US$2,971) in 1993 to RM 11,234 (US$4,493) in 1996. More significantly, this high growth was achieved with price stability as inflation was successfully contained below 4 per cent throughout the whole period. The low rate of inflation resulted in better purchasing power without increases in costs or lowering of the level of competitiveness.
The manufacturing, construction and services sectors contributed increasingly to economic growth while contributions from agriculture and mining declined steadily. Since 1993, the manufacturing sector accounted for about one third of GDP and more than three quarters of merchandise exports. The manufacturing sector's share of 28.8% of GDP in 1992 increased to 34.3% by 1996. At the same time, its base had become broader and more sophisticated. A similar trend was noted for exports of manufactures with the share to GDP in 68.6% in 1992 increasing to 76.8% by 1996.
The period saw the increasing role of the private sector as the engine of growth. Private investment grew at 16.6 per cent per annum in real terms, amounting to RM 207.4 billion (US$82.3 billion) in nominal terms, higher than anticipated. This was due to the high inflows of foreign direct investment as well as enhanced domestic investment following the Domestic Investment Initiative (DII) launched in 1993. The accelerated privatization programme also contributed to the growth of private investment as well as improved efficiency and productivity that led to rapid economic growth.
After registering a strong growth of 22.4% in 1995, Malaysia's external trade grew by 3.9% to RM 394 billion (US$157.6 billion) in 1996. The slower growth was due to sharp deceleration in both export and import growth during the year. The improvement in the external trade position has enabled the merchandise account of the balance of payments to record a significantly larger surplus of RM 8.6 billion (US$3.44 billion) in 1996, against a surplus of RM 0.2 billion (US$0.078 billion) in 1995. The deficit in the services account narrowed slightly to RM 18.8 billion (US$7.52 billion) in 1996 (1995: RM 19.0 billion (US$7.48 billion), mainly due to 27% growth in receipts from non-factor services such as freight and insurance, air transportation, travel and professional services which outpaced the 17% growth in the imports of these services. Consequently, the current account deficit narrowed significantly to RM 13.0 million (US$5.2 million) (5.5% of GNP) in 1996 (1995: 9% of GNP). The basic balance recorded a deficit of RM 1.0 billion (US$0.4 billion) in 1996 as against a deficit of RM 2.5 billion (US$0.98 billion) recorded in 1995, reflecting that the current account deficit was largely financed by long-term capital, especially in the form of corporate investments. The basic balance would have recorded a surplus of RM 1.5 billion (US$0.6 billion) if not for the net prepayment of external debt amounting to RM 2.5 billion (US$1 billion). With the overall balance recording a surplus of RM 6.2 billion (US$2.48 billion), the international reserves of Bank Negara Malaysia rose to RM 70 billion (US$28 billion) as at the end of 1996 from RM 63.8 billion (US$25.1 billion) as at the end of 1995.
Malaysia's Trade Regime
Over the last decade, Malaysia has undergone significant structural changes evolving from a commodity based producer exporter into an increasingly diversified and broad based economy. It is now more industrialized and more oriented towards the exports of manufactured products.
From a low ranking of 40th in 1980, Malaysia according to recent WTO statistics on International Trade has moved up to 19th largest exporter and 17th largest importer in the world
Malaysia's foreign trade is conducted within the framework of a free enterprise system. The conduct of the two way trade is completely in the hands of the private sector. Malaysian traders are free to import and export to all friendly countries irrespective of their socio-political systems.
Bearing in mind the heavy dependence of the Malaysian economy on the export sector, Malaysia's basic foreign trade policy approach favours a progressive liberalization of trade on a global basis.
Malaysia's open economy underpinned by outward looking trade policies and practices including its policy of trade liberalization provide the means for economic growth and adaptability to an increasingly global economy. Its trade and economic policies are shaped to facilitate the economy to integrate into the vagaries of the global economy and partake in the opportunities resulting from it.
Trade Policy Developments 1993-1997
Implementation of Uruguay Round Commitments
Malaysia has made substantial offers in the Uruguay Round contributing to greater market access for imports of industrial and agricultural goods. The scope of tariff bindings increased from 1% to 65% as a result of the Uruguay Round negotiations.
Malaysia's market access offers in the goods sector now cover 70% of Malaysia's total imports. Malaysia's manufactured exports are envisaged to enjoy 45% tariff cuts in its major export markets. As a result of tariff liberalization commitments in the agriculture sector, tariffs in some of Malaysia's major markets will be reduced by 35%. Malaysian producers and exporters would have to face stiffer competition in the domestic market in view of her tariff liberalization commitments as well as to meet the increasing competition from emerging economies in the international market.
The improved trading rules in areas such as anti-dumping and countervailing measures, subsidies, use of safeguards, rules of origin, pre-shipment inspection, technical barriers to trade, import licensing procedures and SPS will provide a relatively more predictable and transparent global trading environment. Malaysia has initiated actions to modify some of its existing legislations and policies as well as introduce new legislations to confirm to the WTO obligations as required under the Uruguay Round commitments.
The measures include: - phasing out local content
measures tied to incentives by 2000
- adjustments to the customs valuation system
- phasing out export subsidies in the manufacturing sector by the year 2003
- ensuring consistency of the Malaysian Countervailing Duty and Anti-Dumping Act 1993 with the WTO agreements
- formulating additional legislation to provide further protection of intellectual property rights such as those relating to layout designs of integrated circuits, industrial design and patent protection for plant varieties.
- drafting a new Act to accommodate all the provisions in the SPS Agreement and other inadequacies in the existing Act. National standards on control, inspection and approval procedures will be developed based on relevant international standards.
- Existing Malaysian standards are being reviewed to align them to international standards.
The existing incentive system is being reviewed to ensure incentives are consistent with WTO disciplines as embodied in the TRIMs and Subsidies Agreements.
As required under the Uruguay Round agreements, Malaysia has submitted various notifications to the WTO Secretariat. These were undertaken according to the specified deadlines and timeframe.
Tariff Liberalization Initiatives
In the implementation of the Uruguay Round market access commitments, tariffs of a total of 3426 items have been reduced thus far. This included tariff reductions on 988 industrial products and 49 agricultural products. Some of these included mainly plastic and plastic articles, chemical products, wood products, paper and paper products, vehicles and accessories, machinery and mechanical appliances, precision instruments and medical equipment. Several agricultural items, experienced accelerated tariff cuts or had their rates reduced much lower than the ceiling bound rates. These included fresh temperate and processed fruits as well as various kinds of food preparations.
The tariff reduction exercises undertaken by the Ministry of Finance in October 1994 (Budget 1995) and in August 1995 saw tariffs being reduced on a total of over 3,000 items. This included tariff reductions on the 1,566 industrial items and 751 agricultural items. Of the industrial items, duties on 217 items were reduced at rate faster (acceleration) than that required under the WTO proportionate cuts reduction schedule, 318 items were reduced to their bound rates while 1,031 items were reduced to levels lower than the bound rates (deepening). For agricultural products, 80 items had their tariff rates reduced faster than was required, 147 items were reduced to their bound rates, while another 524 items had their tariff rates reduced lower than the bound rates. On the 12 tariffied agricultural products, the applied rates are currently zero.
In the 1996 Budget excise tariffs on a total of 1,047 items were reduced. This included tariff reduction on 998 industrial items and 49 agricultural items. Of the industrial items 33 were reduced at a rate faster (acceleration), 125 items were reduced to their bound rates, while 840 items were reduced to levels lower than the bound rates (deepening). For agricultural products, 12 items had their tariff cuts accelerated. 12 items reached their bound rate level, while another 35 items had their tariff rates lower than bound rates.
For the year 1997, 62 items experienced tariff cuts.
Deregulation and Measures on Services
As one of the signatories to the GATS and "interim agreement" on financial services, Malaysia is committed to gradual and progressive liberalization of financial services sector. Malaysia's schedule of commitments covers a total of 14 sectors out of the 16 sectors in banking, insurance, securities and other financial services identified under the GATS for liberalization. Malaysia made substantive bindings on a standstill basis. In banking, insurance and the securities industries, the offers in market access binds the Government to maintain current policies affecting foreign participation. Malaysia also made a major improvement through the withdrawal of the MFN exemption filed in December 1993, so that Malaysia's commitments to all foreign services suppliers are on a full MFN basis. In addition, Malaysia improved its offers by binding new entry in Offshore Financial Centre (IOFC), and general reinsurance and charge card business. Entry is also permitted through investment in existing financial institutions subject to an aggregate foreign shareholding limit of 30%. In the case of financial leasing companies and stockbroking companies, aggregate foreign shareholding will be increased to 40% with effect from 1 July 2000.
Over the years, Malaysia has removed many structural barriers that inhibit competition and efficiency without compromising prudential standards. The structural deregulation was important in creating a more "level playing field" among the various groups of banking institutions and in making the sector more liberal and competitive. One of the major reforms undertaken was the introduction of the two-tier regulatory system for the banking institutions, which saw the emergence of strong and well-capitalized institutions which were permitted to undertake a broader range of activities and operate under a more liberal environment. Another reform was the revision in the framework of the base lending rate (BLR) whereby the BLR was computed based on the interbank rate.
In the insurance sector, Malaysia has liberalized the foreign share holding limit from 30% to 49% for insurance companies that incorporate locally by 30 June 1998. In addition, Malaysia also made a commitment to grant seven new general reinsurance licences.
Capital Market Sector
Since the establishment of the Securities Commission in 1993, many developments have taken place in the domestic capital market.
Liberalized guidelines on private placement of new shares were introduced in March 1994 and new guidelines for the issue of securities and valuation of domestic public listed companies were introduced in December 1995.
Access to the primary market has been broadened substantially with the introduction of call warrants (December 1994), the listing infrastructure project companies (September 1995) and closed-end funds (October 1995) and recently allowing foreign based companies to list (April 1997).
Two new exchanges have been launched - the Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) in December 1995 and Malaysian Monetary Exchange (MME) in May 1996. With the establishment of such futures exchanges, foreign service suppliers have the opportunity to hold equity up to 30% in local incorporated futures broking companies.
Foreign fund management companies can now establish a commercial presence in Malaysia (August 1995). They must be locally incorporated (and licensed) with either 100% foreign equity or 70% and 30% local equity. The first 10 joint-venture foreign fund management companies approved by the Securities Commission will also be entitled to manage local unit trust funds. Local stock broking companies are also now allowed to establish unit trust companies (September 1995).
With the introduction of securities borrowing and lending in December 1995, foreign securities firms can now borrow securities directly from Malaysian counterparts.
Measures on Investment
Malaysia continues to maintain a liberal investment regime which is characterised by liberal foreign equity ownership policies. Up to 100% foreign equity is permitted, particularly in export-oriented projects, projects of high-technology and projects with high value added features or products/activities highly prioritized for development including R&D. No sectors are closed to foreign direct investment in the manufacturing sector, although a few sectors are required to be undertaken on a joint-venture basis to enhance Malaysian capabilities. Freedom of ownership has been assured for multimedia or IT projects located in the Multimedia Super Corridor (MSC).
There are no legislation specific to foreign investors. Foreign investors are generally granted fair and equitable treatment as accorded to domestic investors and Malaysia does not discriminate between source economies of foreign investment.
Restrictions on entry of key managerial and technical personnel for the purpose of investment are minimal. Key or permanent posts are granted to foreign investors upon fulfilment of a set of established criteria. There will be unrestricted employment and entry of foreign knowledge workers in the MSC.
The present exchange control regime in Malaysia is very liberal and applies uniformly to transactions with all countries. Investors are free to source capital globally for MSC infrastructure and have the right to borrow funds globally.
A highly transparent investment regime is maintained where up-to-date information on investment regulations, policies and incentives are fully accessible through published documents and the electronic media.
Malaysia's readiness to conclude investment guarantee agreements (IGAs) with other countries, 54 as of June 1997 (additional 25 since the last TPRM), reflects the commitment to increase investor confidence. The IGAs would ensure protection against expropriation, nationalization, and allow for the free transfer of capital, profits and other fees, as well as to provide for the settlement of investment disputes under the International Convention on the Settlement of Investment Disputes (ICSID).
In recognition of the contribution of investment to economic growth and the well being of the people, Malaysia will continually work towards improving regulations on investment, with a view to facilitate and further liberalize the investment regime.
New Measures on Protection and Promotion of Intellectual Property Rights
Since the last review, Malaysia has undertaken a concerted exercise to improve existing IPR protection and procedures in accordance with international standards and practices as prescribed by all international conventions and intellectual property. Efforts are also underway to enact new laws and amend existing ones in compliance with the WTO/TRIPS Agreements. These include:
- Amendments of the Trade Marks Act 1976 to include
protection for service marks. The amendment is expected to be enforced by the end of 1997.
- Amendment of the Patents Act 1983 to provide for modified substantive examination. it will result in faster grant as examination is based on reports from granted patent (for the same application) from certain countries. The amendment was enforced on 1 August, 1995.
- Amendments of the Copyright Act 1987 in 1996 to provide for the Copyright Tribunal to deal with copyright licensing. The Act was again amended in 1997 to provide adequate protection for the 'contents' that are going to move through the Malaysian Multimedia Super Corridor (MSC) as well as to provide adequate IT protection. The amendment also sought to incorporate most of the provisions of the WIPO Copyright Treaty (WCT) and WIPO Phonogram and Performance Treaty (WPPT) done at Geneva in December, 1996.
In conjunction with the Malaysian Multimedia Super Corridor, the Government has come up with a Bill of Guarantees. One of the commitments is to enhance Malaysia's position as a regional leader in intellectual property and cyberlaws.
Enactment of the Malaysian Industrial Designs Act. The Act was passed by parliament in 1996 and is expected to be enforced by the end of 1997. The Act complies with the requirement of the TRIPS Agreement.
Steps are undertaken to fulfil Malaysia's WTO/TRIPS obligations fully by the year 1999. Enactment of new laws, namely, for the protection of plant varieties, performers' right and lay- out designs of integrated circuits as well as minor amendments to the existing patents and trademark laws are at various stages of drafting.
The Intellectual Property Office is working towards full automation of patents and trademark examination and procedures. It is expected to be fully operational by the end of 1997.
Participation in Regional Groupings
Malaysia attaches strong importance to regional cooperation and continues to participate actively in various regional groupings, namely ASEAN, APEC, and G-15. Malaysia has maintained that as long as regional trading arrangements are WTO consistent, they can positively, contribute towards multilateralism and strengthen global linkages.
Malaysia's priority is to focus on efforts to enhance trade and economic cooperation within ASEAN. In addition to efforts undertaken to strengthen and expand intra ASEAN trade through the CEPT, Malaysia together with other ASEAN members are also actively working towards expanding the fields economic cooperation in the areas of trade in services, intellectual property, transport and communications infrastructure development and industrial cooperation.
ASEAN is working on a framework of cooperation to enhancing the capacity and competitiveness of ASEAN Services Industries and a similar arrangement for intellectual property.
As of 1997, Malaysia has phased in 8580 tariff lines (92% of total tariff lines) into the Common Effective preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area. There are 516 tariff lines in the Temporary Exclusion list which will be phased into the CEPT Scheme by 2000. Only 60 tariff lines have been excluded from CEPT Concessions. The average CEPT tariff for Malaysia in 1997 is 4.04% and will gradually decrease to 1.97% in 2003.
ASEAN countries, apart from eliminating tariffs and NTBs, are focusing on technical barriers to trade and are committed to achieve greater transparency, align products standards in priority sectors to International Standards. A list of 20 priority product groups for standard harmonization have been identified.
Future Direction and Strategy
In line with Malaysia's aspirations to become a developed nation by the year 2020, the focus of development will be on the promotion of a balanced, broad-based, resilient and an internationally competitive economy to provide a strong foundation for the attainment of long- term sustainable growth. This would be achieved through productivity-driven growth, skills upgrading, capital deepening and technology investment.
Policy initiatives will focus on accelerating the privatization programme, strengthening the financial and capital markets, encouraging private investment and improving the quality of trained manpower. These efforts are geared towards the expansion of the industrial base and ensuring that the investment climate remains attractive to both private domestic and foreign investors and that manufactured export retain its dominant role and growing trend. These measures are also designed to meet external challenges and to position the country to take advantage of opportunities afforded by the expansion in world trade.
The Government will continue to initiate measures to provide a conducive policy framework to facilitate commercial endeavours by the business community both domestic and international. In order to spur competition, Malaysia will progressively liberalize its domestic sector and its trade regime. Domestic industries would be increasingly exposed to international competition in order to be efficient in a competitive rather than a protected environment.
Internationally, Malaysia within the context of multilateral trade rules will try to ensure an open trading environment which is predictable. In order to resist protectionist tendencies, Malaysia will keep her markets open and at the same time work with all countries to keep markets open. This will be done on bilateral, regional and multilateral bases.
The drive for growing exports will not only focus on traditional markets but also a continual development and search for new markets. These efforts would also be complemented with aggressive marketing strategies, that include joint ventures with strong global links and also the development of local capability in international product promotion, product quality, design and packaging, market research and intelligence.
In the context of industrialization, the manufacturing sector will continue its role as the engine of the nation's economic growth. The contribution of the manufacturing sector will reach 37.5% by the year 2000 (38.4% by year 2005) from 33.1% in 1995.
Investments in the manufacturing sector will be encouraged to move towards new sources of growth with consequent diversification of products and markets. Industrial deepening will be pursued to achieve greater value added and linkages both horizontal and vertical. Downstream industries will also be encouraged in high-tech and resources-based industries. Efforts will be emphasised to promote the establishment of more small-medium scale industries that not only provide support for industrial expansion but also lead to greater industry linkages.
The services sector will also be assigned an important role in supporting the transformation of the economy as the country strives towards becoming an industrialized nation by the year 2020. To contribute effectively to the growth process, the services sector has to be competitive and efficient. Malaysia recognises that liberalization will help promote grater competition, efficiency, productivity and innovation in the sector. Therefore, Malaysia is committed to the process of gradual and progressive liberalization of the sector. Liberalization will be undertaken in accordance with the prevailing domestic fundamentals and the ability of the sector to accommodate changes without negatively impacting on the orderly development of the sector. Back to top