Malaysia, a federation of 13 states forming a constitutional monarchy, comprising two distinct regions separated by some 650 km of the South China Sea, was formed in 1963 when the former British colonies of Singapore and the East Malaysian states of Sabah and Sarawak on the northern coast of Borneo joined the Federation. Being a middle-income country, it has transformed itself since the 1970s from a producer of raw materials into an emerging multi-sector economy. In the last decade, the economy has moved farther up the value-added production chain by attracting investments in high technology industries, medical technology, and pharmaceuticals. The political and legal system is largely based on the fact executive power lies with the government. The government is led by the prime minister and is composed of members of parliament who are in turn elected by their constituencies. The central organ of government is the cabinet, which is appointed by the prime minister.
Malaysia, largely because of its expanding industrial sector, grew with 8%–9% yearly growth rate from 1987 to 1997. During the 1997–98 Asian financial crisis, growth contracted and the government was forced to cut spending and defer several large infrastructure projects. The economy began recovering in 1999, and growth continued into the early 21st century. Malaysia is a large producer of rubber and tin; palm oil, crude petroleum and petroleum products, electronics, textiles, and timber are also important. Since the late 1980s, the government has moved to privatize large industries that had been under state control, and foreign investment in manufacturing has increased significantly. Subsistence agriculture remains the basis of livelihood for about 13% of Malaysians and agriculture provides about 8% of GDP. Malaysia's exports include electronic equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, chemicals, and textiles. The main imports are electronics, machinery, petroleum products, plastics, vehicles, iron and steel, and chemicals.
GDP /capita (PPP) and GDP Growth Rate
Since the Asian Crisis in 1998, Malaysia’s growth performance has been mixed. As with other countries in the Southeast Asian region, Malaysia has suffered two recessions during the past seven years. Malaysia enjoyed a decade of consistently high growth rate driven by manufacturing investments and exports until the Asian financial crisis in 1997-1998, which saw Malaysia experiencing real GDP contraction by 7.4% in 1998. In 2001, Malaysia was hit again by a downturn in global demand resulting in a plunge in exports and a sharp fall in GDP growth- GDP only grew by 0.3% as depicted in exhibit 1.1. Growth resumed in 2002 and picked up significant momentum in 2004, when the economy expanded by 7.1% but in 2001-2005 growth performance at 4.5% was far below both its potential growth rate of 6.7% and target growth rate of 7% which is required to reach a developed nation status by 2020. According to Asian Development Bank (ADB) study, Malaysia is ranked sixth in terms of real per capita income among developing Asia-Pacific economies.
Malaysia has a remarkable record of maintaining a low and stable price environment. Despite its robust economic growth in 1980s and 1990s, Malaysia’s inflation rate had been relatively low by international standards. Even after the severe regional financial crisis in 1997/98, Malaysia’s inflation rate has been contained at a relatively low level. Inflation rate has almost double during 2005-2007 owing to rise in global energy and food prices but is still under control and lower than the regional inflation rate (exhibit 2.1). The main reasons for the surge in inflation included high global oil prices, removal of domestic fuel subsidies, high global food prices (in particular grain prices), rise in electricity tariff, and rise...