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Malaysia Environmental Export Market Plan
Chapter 1 - Economic Overview of Malaysia

Malaysia is coming to grips with its mounting financial troubles after being caught in the contagious economic downturn that began in Thailand in July 1997 and spread from Southeast Asia to other parts of Asia. In December 1997, the government announced sweeping austerity measures aimed at stemming the crisis and preventing further deterioration of the country's financial system and its currency.

For Malaysia, this austerity was an especially bitter pill. Until recently, Malaysia was the envy of its neighbors, with its booming economy and relatively stable politics. (See table 1 for Malaysia's economic indicators for 1996 and 1997.) Prime Minister Datuk Seri Mahathir Mohamad, 71, the country's longest-serving leader, has presided over an economy for the past 10 years that has had close to double-digit average annual growth in its gross domestic product (GDP). Despite his strong-arm tactics and political patronage, Mahathir remains the popular leader of the ruling coalition dominated by his political party, UMNO.
Table 1: Economic Indicators

Gross domestic product (GDP) growth8%8.6%
Gross national product (GNP) growth10.2%14.3%
Per capita incomeRM12,102RM 11,239
Per capita income growth7.7%11.7%
Nominal per capita income (in terms of purchasing power parity against $US)*$10,663$12,305
Nominal per capita income growth(15.4%)11.6%
Private sector investment10.6%15.8%
Public investment12.7%3.2%
Exports of goods and nonfactor services7.1%10.1%
Imports of goods and nonfactor services7.1%4.5%
Consumer price index (CPI) - Inflation**2.6%3.6%
* Calculation based on an exchange rate of RM3.1975=$1 on September 30, 1997.
** Accounts for first nine months only for both 1996 and 1997.
Source: Ministry of Finance, Malaysia

Malaysia's phenomenal success resulted largely from its rapid expansion from an agricultural and commodity-based economy (mainly exports of rubber and tin) to a competitive manufacturing economy through diversification into resource processing, high technology, and export industries. The electronics industry now accounts for nearly 80 percent of the country's export earnings. Malaysia is the world's third largest producer of semiconductors, after the United States and Japan. Today, agricultural exports account for only 13 percent of Malaysia's total export earnings. Oil and gas exports contribute less than 6 percent. Exports have bolstered the nation's wealth and created a large Malaysian middle class.

During the past 10 years, Mahathir has advanced an ambitious vision of Malaysia as a fully developed economy by 2020, rushing ahead with large, privatized infrastructure projects to achieve that goal. Mahathir continues to drive that vision with elaborate plans, including one aimed at transforming his country into the region's high-tech powerhouse. Mahathir has begun laying the groundwork by enlisting the world's leading information technology companies to assist in planning and development. The plan would require up to $25 billion in investments by 2005.

Signs of an overheated economy began to appear in 1995 and persisted over the next two years. Analysts point to the brutal pace of economic growth 8.3 percent in 1996 and 8 percent initially forecast for 1997 coupled with several huge infrastructure projects that will require 19.2 billion Malaysian ringgit (RM); (about $6 billion) during the Seventh Five-Year Plan (1996-2000). Some of the projects, such as an eye-popping 95-kilometer bridge linking peninsular Malaysia with the Indonesian island of Sumatra and one of Asia's largest hydroelectric dams, were clearly aimed at enhancing Malaysian prestige. Many were concerned that the boom emanated from Malaysia's brand of capitalist business culture, where projects went to powerful, well-connected businessmen and were financed by heavy bank borrowings and stock market deals, rather than to those who showed the most technical or commercial merit.

The July 1997 crisis in Thailand's financial sector that led to the Thai baht devaluation triggered similar currency devaluations across Southeast Asia, including that of the Malaysian ringgit, which, as of December 1997, had depreciated 33 percent against the U.S. dollar. The situation continued to worsen after the government presented its 1998 budget in October 1997. In an effort to head off the country's financial woes, Deputy Prime Minister and Finance Minister Anwar Ibrahim announced in December 1997 the most sweeping policy changes in the country in a decade. Malaysia's inflation-adjusted economic growth for 1997, already down to 7.5 percent from the initial 8 percent forecast, is predicted to slow to 4 to 5 percent in 1998, its lowest level since the aftermath of the oil crisis in 1985-86. Among the measures announced in 1997 were plans to:

The government also announced plans to narrow the account deficit (a measure of trade in goods and services plus financial transfers) to 3 percent of gross national product (GNP) from about 5 percent of GNP in 1996.

Although economists maintain that the Malaysian economy is essentially sound, they believe the dramatic belt-tightening is much needed to avert any deeper economic turmoil. These policies, if effectively enforced, are expected to push interest rates and inflation rates up, slow domestic investment and consumption, dampen stock-market activity, and erode corporate earnings in the coming year and possibly beyond. The measures could also precipitate bankruptcies and increase unemployment.

The government has announced that many of Mahathir’s showy projects will be shelved or delayed indefinitely. Some of the more prominent delayed projects include the highly controversial RM15 billion ($5 billion) Bakun hydroelectric dam planned to be built in Sarawak; a RM10 billion ($2 billion) road, rail, and pipeline project; and the RM10 billion ($2 billion) Linear City project. Malaysia is proceeding with the RM1.8 billion ($250 million) gas pipeline project linking peninsular Malaysia and southern Thailand, but the fate of the Kedah coastal reclamation project is unclear. The Public Works Ministry announced that it aims to achieve 25 percent reductions in expenditures during the Seventh Plan period (1996-2000).

The region's sharp financial deterioration, in addition to Malaysia's cutbacks, will likely have a significant impact on foreign direct investments. Under the Seventh Plan, the government hoped to attract more than $150 billion in private investment, 40 percent of it from abroad. The United States, Malaysia's biggest export market, has been a major foreign investor, with cumulative private investments of over $8 billion. Approximately 65 percent of this investment is in the oil and gas sector. The remainder is in manufacturing, particularly semiconductors and electronic products. Recent figures indicate a slowing of U.S. investments, in part due to financial uncertainties sweeping the region.

It remains to be seen how firmly the Malaysian Government will adhere to its economic policy changes. There are continuing concerns that Mahathir may be reluctant to implement such drastic steps for political reasons. Analysts agree that for now the leader must restore confidence in Malaysia's economy and the government's ability to stave off deeper crisis. If implemented fully, the austerity package, while leading to a painful shakeout, has the potential to ultimately put the economy on more solid ground for future growth.

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