Malaysia: Recent Trends and Challenges

11. Globalisation and the Challenges Facing Malaysia’s Economy

Denis Hew 260 Globalisation and the Challenges Facing Malaysia’s Economy d e n i s h e w Introduction 2004 was a very good year for Malaysia. Although the Malaysian economy showed some signs of easing in the fourth quarter of 2004, strong growth in the first three quarters (averaging 7.6 per cent) delivered a robust GDP growth of 7.1 per cent for the full year. (The economy grew 5.3 per cent and 4.1 per cent in 2003 and 2002 respectively.) Although growth prospects appear fairly positive over the next year or two, is Malaysia able to sustain a strong rate of economic growth in the medium to long term? Malaysia has undoubtedly recovered from the Asian financial crisis of 1997/98 (see Figure 11.1) but the world has changed significantly since then. Besides the US and Japan, China has in recent years become an important engine of growth for the region as well as a major recipient of foreign direct investments (FDI).The world economy has also become increasingly globalised and this poses new challenges for Malaysia.These emerging challenges may affect Malaysia’s economic development and 261 11: Globalisation and the Challenges Facing Malaysia’s Economy Figure 11.1 Real GDP Growth, 1988–2004 (Based on 1987 Prices) Source: CEIC Data; Malaysian Institute of Economic Research. 12.0 10.0 8.0 6.0 4.0 2.0 0 –2.0 –4.0 –6.0 –8.0 –10.0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F Denis Hew 262 overall international competitiveness in the coming years. This chapter aims to identify the key economic challenges that will have an impact on Malaysia’s medium- to long-term economic development. Rising Competition for FDI FDI inflows to Malaysia have been showing a declining trend in the 1990s. Using UNCTAD’s World Investment Report 2004 database, as a percentage of developing countries total, FDI inflows to Malaysia declined from 8.7 per cent in 1992 to 1.4 per cent in 2003. According to the UNCTAD Inward FDI Performance Index, which measures the extent to which host countries receive inward FDI, there has been a sharp deterioration in Malaysia’s FDI performance. From ranking among the top 10 till the mid-1990s, Malaysia fell in ranking every year in the latter part of the decade, reaching 75th place in 2001–2003.1 This is a worrying trend as Malaysia is dependent on FDI as a driver of growth. In contrast, China has become the country of choice for foreign investment especially in manufacturing and its accession to the World Trade Organisation (WTO) could potentially pose a serious challenge to Malaysia’s ability to attract new FDI. According to UNCTAD, China received US$53.5 billion worth of FDI inflows in 2003 and is now the world’s largest recipient of FDI. As a percentage of developing world total, China’s FDI inflows has risen from 18.8 per cent in 1992 to 31.1 per cent in 2003. Because of its potentially huge domestic market and lower unit labour costs (particularly in labour-intensive industries), China and increasingly India have become major competitors for global FDI.2 See Table 11.1. Greater competition notwithstanding, the quality of FDI is just as important as the quantity. Okabe3 found that recent foreign applications for manufacturing projects appear to concentrate on higher valueadded products. Since 2002, there has also been a rise in new FDI in engineering-supporting industries in the electronic sector which, albeit small projects (less than RM10 millon), are vital to maintain Malaysia’s global industrial competitiveness.4 263 11: Globalisation and the Challenges Facing Malaysia’s Economy Industrial Challenges The manufacturing sector has been the main driver of Malaysia’s economic growth over the past three decades. This sector continues to play an important role in the country’s economic development. From 1970 to 2003, the manufacturing sector’s share of GDP rose from 13.3 per cent of GDP to 30.9 per cent. In 2003, the sector contributed 83 per cent of total exports and 27 per cent of total employment (see Table 11.2). What are the Challenges in the Manufacturing Sector? Poor industrial linkages The different phases of industrial development reflects Malaysia’s “dual” approach towards globalisation. The government allows an open policy in certain sectors (viz...