ECO 501 Economics for Business Unit Coordinator: Dr James Nayagam

Assignment 2

Due: 20th February 2010

Analysis of Malaysia Economic Policy 1998 to 2007 with Focus on Fiscal, Monetary and Supply side

Student ID: Mr RALPH YEW (10166320)

TABLE OF CONTENTS

I. II. III. IV.

Introduction Analysis of Malaysia Gross Domestic Product 1998 to 2007 Analysis of Malaysia Overall Economy 1998 to 2007 Bank Negara Malaysia Statement of Assets and Liabilites 1998 to 2007

3 4 5 14

V. VI. VII. VIII.

Seven Malaysia Plan (1996 2000 ) Eight Malaysia Plan ( 2001-2005) Nine Malaysia Plan ( 2006-2010 ) Situational Analysis based on the political , economic, social and technology ( PEST ) analysis

16 17 18

19 21 23 24 27 29

IX. X. XI. XII. XIII.

Analysis based on Economic factor Recommendation for Strategic Economic Action Plan Conclusion References Bibliography

Analysis of Malaysia Economic Policy 1998 to 2007

I.

Introduction

The two types of demand-side policy are fiscal and monetary. The fiscal policy involves the government manipulating the level of government expedinture and the rates of tax so as to affect the aggregate demand ( Sloman, 2007). To increase aggregate demand will involved government raising the expenditure and reducing taxes. Thus a multiplied rise in national income and a situation known as expansionary fiscal policy. However, when government cut expenditure and raise taxes it will be deflationary fiscal policy. The two main functions that can be perform by fiscal policy are: Firstly, to prevent fundamental disequilibrium in the economy. And secondly, to smooth out fluctuations in the economy due to business cycle a time when government reduce its expenditure or raise taxes during a boom phase of cycle. Hence, preventing an overheating economy (Sloman, 2007).

II.

Analysis of Malaysia Gross Domestic Product from 1998 to 2007 YEAR 1998 1999 2000 2001 2002 GDP -4.8% 6.5% 8.9% 0.5% 5.3% YEAR 2003 2004 2005 2006 2007 GDP 5.8% 6.8% 5.3% 5.8% 6.3%

(Source : Treasury Malaysia, 2008 )

Malaysia GDP 1998 to 2007

10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -2.00% -4.00% GDP -6.00%

( Source : Treasury Malaysia, 2008 )

III.

Analysis of Malaysias Overall Economy from 1998 to 2007

ECONOMIC PERFORMANCE YEAR 1998 In 1998, Malaysias economic activity remains weak, and the prospects for sustained medium-term recovery are more uncertain than the other East Asian countries in crisis. The 4.8% percent contraction in GDP in 1998 indicate that the policy stimulus of July 1998 has yet to take effect. Policy is becoming more expansionary in Malaysia. There was larger fiscal deficit implemented in 1998 and through an easing in monetary policy. At the same time, some steps were taken to strengthen the financial and corporate sectors. However the effect of these measures on medium-term growth prospects was jeopardized by the imposition of capital and exchange controls and introduction of directed lending. While capital outflows have been stemmed and external reserves have risen, investor confidence has been damaged by the capital

controls, and some official sources of external finance has reduced significantly. Neither source is likely to recover until the overall stance of policies is modified.

ECONOMIC PERFORMANCE YEAR 1999 The performance for year 1999,the Malaysian economy sprang back to life by registering 6.5 percent GDP growth. Due to the strong rise in the countrys lead indicator, and improvement in consumer confidence. More fundamentally, the vast bulk of the fiscal and monetary stimulus measures took time to feed through to the real economy since the aftermath of the 1997 Asian financial crisis. Malaysia, is one of the main beneficiaries of the turn in the regional trade cycle, as exports represent roughly 120% of GDP. Relatively high palm oil and rubber prices help the agricultural sector and boosting the share of investment in GDP.

ECONOMIC PERFORMANCE YEAR 2000 The performance for year 2000 we observed that the Malaysian economy registered 8.9 percent GDP. The higher growth rate was due to the robust growth in three consecutive quarters: 11.9 per cent for the first quarter, 8.5 per cent for the second quarter, and 7.7 per cent for the third quarter. The result is impressive and is attributed to the expansionary fiscal and monetary policy since 1998. Concurrent with the high growth, macroeconomic and financial stability has been restored. The growth is supported by favourable external environment of high savings and low inflation. The rise in per capita income will exceed the pre-crisis thus improving a standard of living of the population. High GDP growth is important for its impact on employment as the unemployment rate has been falling from 3.4 per cent in 1999 to 3.3 per cent in 2000. It resulted in stronger social safety net of the country.

From the supply side, the robust growth has been primarily due to the robust performance of the manufacturing and the services sectors. Contribution by exportand domestic-oriented industries, the manufacturing sector has turned in 22.6 per cent output growth for the first three quarters of 2000 compared to 10 per cent growth in the same corresponding period in 1999. The same year also saw the bank level of non- performing loans recede with improved asset quality of the banking system. With improved financial indicators, financial institutions are on a much stronger footing than during the crisis period. The mergers of banking institutions which will eventually create 10 large domestic banking groups to strengthen the sector took place.

As for the domestic environment it continue supported by both the accommodative monetary policy and the expansionary fiscal policy. Inflation and the balance of payments remained healthy with accommodative monetary policy, that is characterised by low interest rates and easy monetary conditions further strengthen corporate recovery and boost the recovery in private expenditure and investment in 2000.

ECONOMIC PERFORMANCE YEAR 2001 For 2001, the Malaysian economy which are very dependent of international export was severely affected by the world economy slowdown particularly USA and Japan. On September 11, America suffered a severe terrorist attack on its Twin Tower World Trade Center, leading to further uncertainty. The Malaysia services sector was leading the growth followed by construction, agriculture since manufacturing suffered a huge setback. The growth is led by domestic with public sector investment and consumption. The economic growth is achieved with low inflation and unemployment. Government continue pursuing the expansionary fiscal stimulus to keep the domestic

economic activities. The monetary policy remain accommodative to spur domestic growth and mitigate adverse effect of external global economy slowdown.

ECONOMIC PERFORMANCE YEAR 2002 For 2002, Malaysia moderate economic recovery took hold after low growth of only 0.5% in 2001. The 5.3 percent GDP growth represents a notable achievement given the many uncertainties on the global front both global trade and domestic investor confidence. Growth was driven by public and private consumption, which in turn was boosted by a series of fiscal measures. The economy began to show some signs of a rebound in the first quarter of the year when it grew by 1.1% year on year. The pace of the recovery accelerated further in the second quarter and third quarter of the year, when growth averaged over 5% year on year.

On the production side, manufacturing and services played a lead role in strengthening output growth in 2002. After a sharp decline of 6.2% in 2001, manufacturing output in 2002, boosted largely by resilience of consumption demand and a turnaround in manufacturing exports.

Overall, industrial production was still in the process of recovery in 2002. Electronics outperformed other subsectors and recorded the highest growth, followed by chemicals and vehicles. Agriculture, which accounted for about 8% of GDP, continued with low growth of 0.3% in 2002. Palm oil production registered lower yields, but good weather conditions led to increases in the production of rubber and cocoa. The services sector sustained its strong performance, recording robust growth of 4.5%. Construction maintained its 2001 growth rate of 2.3%. A greater number of government investment projects and of civil engineering activities contributed to the

subsector's performance. Since the 1997 Asian financial crisis, the Government has maintained a fiscal pump-priming policy to boost domestic demand, aimed at preventing recession and keeping unemployment down, in the wake of volatility in the global economy. For 2002, the Government continued its expansionary fiscal policies to stimulate investment and production.

Monetary policy was accommodative in 2002. Ample liquidity was available and interest rates remained low in the financial markets. Bank lending to the business sector remained strong. Major recipients of loans were manufacturing, wholesale and retail trade, construction, insurance, and businesses. The focus of fiscal policy in 2002 was on boosting domestic demand in the short term, and also aimed at enhancing long-term industrial competitiveness and labor productivity through spending on infrastructure development and education, and training for human resources development.

ECONOMIC PERFORMANCE YEAR 2003 For 2003, Malaysia's exports were on a recovery track in line with the higher growth in the global economy in the second half of 2003. This positive trend further boost consumer and business confidence in the economy. Malaysia's exports in 2004 are encouraging, not only based on the positive export trend in the second half of last year, but also on the recent improved global outlook and the optimism for a sustained recovery in world output and world trade. This augur well with Malaysia's gross domestic product (GDP) achieving 5.8 per cent for 2003. Malaysia export were on a recovery trend in 2003 from a 10.4 per cent contraction in 2001, due to improved external demand,especially electronic products. This positive trend is encouraging, given that exports form more than 110 per cent of Malaysia's GDP. Malaysia retained

its position as the 18th largest exporter in the world in 2002 . Malaysia's ability to maintain its position as a major trading nation in the world reflects its strong industrial capacity torespond to global demand. The higher exports generated a substantial increase in trade surplus for 2003. In 2003. the trade sector had generated RM68.9 billion in trade surplus, exceeding RM51.5 billion for 2002 and it helped the economy to operate in an environment in which liquidity was ample. The increasing export trend was contributed by a broad-based recovery from various economic sectors. with exports of eight major sectors registered increases exceeding 10 per cent, namely food, beverages and tobacco, crude materials, mineral fuels and lubricants, animal and vegetable oils and fats, chemicals, and manufactured goods. Export of electronic and electrical products was recovering. Such broad-based recovery had a large impact on the overall economic activity and income in the country because of the extensive linkages between these export industries and the rest of the economy. Malaysia remains strong in terms of international competitiveness due to high degree of economic openness, efficient labour market, large pool of skilled labour force, efficient physical and financial infrastructure, high commitment to research and development, and efficient supporting industries. These factors are supported by other favourable conditions such as low inflation, stable and pro-business macroeconomic policies, strong government finance, stable and low interest rate environment plus the competitive and stable ringgit peg.

ECONOMIC PERFORMANCE YEAR 2004 For 2004, Malaysia's economic performance registered GDP of 6.8 percent has exceeded expectations due to stronger domestic and external demand. For the first

nine months of this year, the Malaysian economy has already registered a growth rate of 7.6 per cent, one of the fastest growth in the region after China (9.5 per cent),Singapore (9.2 per cent) and Hong Kong (8.8 per cent). The growth was driven by quality sources as it was solidly backed by the strength of the private sector . Growth in private consumption, investment and export was stronger than that of 2003. High economic growth with low inflation in recent years have contributed to a stronger domestic economy, particularly the private sector with healthier balance sheet. In 2004, economic growth was well established,helped by the broad-based growth across economic sectors. In the first nine months of this year, manufacturing and services sectors have already grown by 11.5 per cent and 6.8 per cent, respectively. The growth in agriculture and mining sectors was also strong. Malaysia's economic fundamentals such as inflation, unemployment, current account surplus and international reserves are at their best compared to their positions after the Asian financial crisis in 1997/1998.

ECONOMIC PERFORMANCE YEAR 2005 For 2005, the growth in the Malaysian economy continued to be achieved within a stable price environment: the consumer price inflation remained under control. Despite the surge in global oil prices, the consumer price index (CPI) increased moderately to 2.4 per cent in the first quarter of 2005. The growth in the first quarter was within the Government's expectation. For the supply side , the growth in the first quarter of 2005 was led by the manufacturing and services sectors. The steady growth in both sectors has helped the economy deepen into a manufacturing-services led growth. The growth was also in line with the Government's efforts to strengthen domestic sources of growth. Accounting for about 58 per cent of GDP, the services

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sector grew by 6 per cent. In particular, the intermediate services (such as transport, communication and financial services) expanded by 6.6 per cent and the final services (such as wholesale and retail trade, hotels and restaurants, electricity etc.) expanded by 5.6 per cent. The growth in the services sector was boosted by robust private consumption and stronger tourism and telecommunication activities. Accounting for about 31 per cent of GDP, the manufacturing sector grew by 5.6 per cent in the first quarter, buoyed by growth in the resource-based industries such as chemical and rubber product industries. Growth in the manufacturing sector was constrained by the slower growth in the export-oriented industries such as the electronics and electrical industries, textiles and wearing apparels, and wood and wood products.

The primary sector which accounts for about 15 per cent of GDP continued to turn in robust growth. Led by palm oil, the agriculture sector expanded by 6 per cent. The mining sector expanded by 3.3 per cent contributed by higher production of natural gas. The construction sector, however, contracted by 2.4 per cent in the first quarter, partly due to fewer public sector projects.

Our domestic demand remained resilient in the first quarter of 2005, amid the consolidation of the Government's fiscal position . Growth in private consumption sustained at 10.1 per cent due to higher disposable income, low interest rates and stable employment conditions.

The health of the public finance strengthened in the first quarter of this year. The Government registered a fiscal surplus of 2.3 per cent of GDP in the first quarter due to strong revenue collection and lower development expenditure. Government revenue increased by 19.2 per cent, while the development expenditure dropped by almost 43 per cent compared to 2004. The banking sector also remained sound with a

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strong capital base, improved profitability, lower non-performing loan (NPL) ratio and steady loan growth. In the first quarter, the risk-weighted capital ratio of the banking system was strong at 13.7 per cent and the pre-tax profits of the banking system improved by 12.2 per cent to RM3 billion due to higher asset quality. The net NPL ratio of the banking system trended down to 5.4 per cent at end-March this year Annual loan growth of the banking system increased from 8.5 per cent at end-2004 to 9.1 per cent at end-March.

ECONOMIC PERFORMANCE YEAR 2006 For 2006, as a leading trading nation trading economy, Malaysia receives greater support from the external demand. The greater economic activity and growth in the developed and East Asian economies absorb more than 80 per cent of Malaysian exports translate into higher industrial activity in Malaysia and also higher Malaysia's exports to these economies. Malaysia registered GDP of 5.8 per cent. Strong external demand strengthen Malaysia's external position. Malaysia's international reserves continue to remain high and strong which in turn provide further support to the ringgit and also to the liquidity in the economy. High and stable international reserves also provide higher coverage for Malaysia's short-term external debt.Support from the external demand create a virtuous cycle for the domestic economy as it further stimulates domestic private demand through higher consumer spending and investment activity. Because of the present high capacity utilisation in the manufacturing sector of 75 per cent, increased external demand also reinforce the rising trend of capital expenditure in Malaysia. On inflation, the increase in domestic demand and activity will not exert significant pressure on inflation as the economy has no major resource bottlenecks. Aggregate

12

demand is not expected to outstrip aggregate supply. The monetary and fiscal policies are to remain prudent.

ECONOMIC PERFORMANCE YEAR 2007 For 2007, GDP was 6.3 per cent Economic activity will also continue to be supported by the accommodative monetary policy. Bank Negara Malaysia continues to maintain its Overnight Policy Rate unchanged at 3.5 per cent since May 2006 in order to support domestic economic activity. The low and stable interest rates will continue to support healthy growth in both household and business spending in Malaysia. Despite the stronger ringgit exchange rates, the overall monetary condition in Malaysia remains supportive of economic activity and consistent with the long-term objective of the monetary policy to keep economic growth on a smooth course.

The Government is fully committed to pro-growth and anticyclical economic policy. In March last year, the Government launched its 9MP, a medium term plan to steer the economy towards its long-term development objectives. To implement the plan, the Government has allocated RM220 billion (including RM20 billion for projects under Private Financial Initiatives) to be spent in the Plan period. In the 9MP, the Government is committed to spend efficiently to ensure that the expenditure yields maximum benefits and high multiplier effects to the economy. The 9MP projects are expected to have a wider distributional impact on the population and also to reduce regional disparity. Malaysias economic growth has been accompanied by stable and low inflation, helped by prudent monetary policy. Malaysias headline inflation moderated substantially from its peak of 4.8 per cent in March to 3.1 per cent in December 2006, after a one-off adjustment arising from the Governments decision to reduce fuel subsidy.

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Higher private sector's capital spending in the manufacturing and construction sectors was contributed by high business sentiment and high capacity utilisation. Growth in domestic demand, in particular private investment, will remain strong, back by the implementation of projects under the Ninth Malaysia Plan 2006-2010 (9MP).

IV.

Bank Negara Malaysia Statement Assets & Liabilities 1998 to 2007 ( RM million)

YEAR 1998 1999 2000 2001 2002

ASSETS 124,709 mill 147,047 mill 148,908 mill 149,678 mill 162,400 mill

YEAR 2003 2004 2005 2006 2007

ASSETS 201,257 mill 285,051 mill 295,869 mill 323,783 mill 425,492 mill

Source : Bank Negara Malaysia ( 2008)

450,000,000,000 400,000,000,000 350,000,000,000 300,000,000,000 250,000,000,000 200,000,000,000 150,000,000,000 100,000,000,000 50,000,000,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 BNM Statement of Assets & Liabilities from 1998 to 2007 ( RM million) Assets

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Bank Negara Malaysia International Reserves from 1998 to 2007 ( USD mill )

YEAR Intl Reserve ( USD mill ) 1998 1999 2000 2001 2002 26,196 mill 30,859 mill 29,885 mill 30,848 mill 34,601 mill

YEAR 2003 2004 2005 2006 2007

Intl Reserve ( USD mill ) 44,901 mill 66,712 mill 70,497 mill 82,450 mill 101,349 mill

(Source : Bank Negara Malaysia, 2008)

Bank Negara Malaysia International Reserve ( USD ) for 1998 to 2007

120,000.00 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Intl Res. USD

(Source : Bank Negara Malaysia, 2008

V.

Seven Malaysia Plan (1996 to 2000) a Government Policy

In 1996 the Seven Malaysia Plan was launched and some adoption of policies with sound macroeconomic to couner the rising challenges arise from rapid economy during the early 90s. To attained the balanced economy envision in New Development Policy ( NDP). Before this, the Six Malaysia Plan (1990-1995) has managed to achieved 8.7 per cent growth. It was indeed remarkable considering the growth was possible in an environment of low inflation. During the period it has 15

manage to lower the poverty and raise the standard living of all Malaysian. The per capita income in 1995 has improved to RM 9,786 from a low of only RM 1,106 in 1970. In purchasing power parity its USD 9,470 in 1995. During this stage was a structural transformation from key exporter of commodity to a modern industrial economy concentration in manufacturing sector. Private sector was identified as an engine of growth.

Under the Seven Malaysia Plan some specific policies to address the future challenges like transforming from investment output driven growth to total factor productivity (TFP) , the shift towards higher value added activities which are capital and technology intensive production processes, managing strong growth and maintaining price stability, encouraging a global approach towards industrialization, developing a modern outward oriented services sector, strengthening science and technology and research and development and continued socio-economic stability with equal distribution of nations wealth.

Here macroeconomic stability will emphasis on maintaining high growth and maintaining socio-economic objectives.

VI.

Eight Malaysia Plan (2001 to 2005) a Government Policy

The key policy will be pursuing sound macroeconomic management and prudent fiscal and monetary policy with an effort to develop a knowledgebased society, ensuring balanced participation between within ethnic and income groups, enhancing productivity growth in workers knowledge and skills, expanding the usage of ICT within and across all sectors to accelerate the growth process, adopting a holistic

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approach in addressing environmental and resources issues to attain sustainable development. ( BNM, 2005)

Lesson from 1998 economic crisis has underscored the need to have a resilient economy to faced the unexpected shocks and to recover with minimal adverse effects. On continuing the macroeconmic stability , Government to encourage more domestic investment, attract quality FDI, assist the small medium enterprises, maintain healthy balance of payment with two-prong approach on reducing deficit on services balance and increasing the merchandise surplus.

VII.

Nine Malaysia Plan (2006 to 2010) a Government Policy

For the Nine Malaysia Plan is guided with a National Mission to achieve Vision 2020 and become a fully developed nation. The macro economic management will be on sustaining growth strengthening the economy capacity to cushion against shocks. The five main thrust are:

Firstly, to move the economic up the value chain by increasing value added in manufacturing, services, and agriculture. Secondly, to raise capacity for knowledge and innovation and nurture first class mentality.Thirdly, to address socia-economic inequalities constructively and productively. Fourthly, improve the standard and sustainability quality of life. And fifthly, to strengthen the institutional and implementation capacity.( BNM, 2009)

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VIII. Situational Analysis based on political, economy, social and technology ( PEST )

To analyse further and come up with a strategic economic action plan, I would like to assess it using the situational analysis consisting of the political, economic, social and technology ( PEST ) and its influence on the growth of Malaysia beyond 2008. My recommendation for a strategic economic plan of action among other will focus on addressing the weaknesses I had observed from my research here. Many macroenvironmental factors are country-specific and a PEST analysis can be applied here to address the specific issue.

On political factors include the type of government regulations, the government stability, rule of law, bureaucracy, Freedom of press, corruption, social or

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employment legislation, regulation trends, legal issues and how the company must operate. Some examples include:

y y y y y y y y y y y

The tax policy Employment laws Legal framework for contract enforcement Intellectual property protection Trade regulations & tariffs Favored trading partners Anti-trust laws Pricing regulations Environmental regulations Trade restrictions and tariffs Political stability

On Economic Factors

Economic factors affect the purchasing power of potential customers and the company's cost of capital. Examples of factors in the macroeconomy include:

y y y y y y y

Economic growth Interest rates Exchange rates Inflation rate Type of economic system in countries of operation Government intervention in the free market Comparative advantages of host country

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y y y y y y y y y y

Exchange rates & stability of host country currency Efficiency of financial markets Infrastructure quality and skill level of workforce Labor costs Business cycle stage (e.g. recession, recovery, prosperity) Economic growth rate Discretionary income Unemployment rate Inflation rate Interest rates

On Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Some social factors include:

y y y y y

Population growth rate Age distribution Career choice Health consciousness and lifestyle The emphasis on safety and security

On Technological factors, it can lower barriers to entry, influence outsourcing decisions, and reduce minimum efficient production levels, Some technological factors include:

y y

Automation of plant R&D activity

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y y

Technology incentives The rate of technological change

IX.

Analysis based on Economic Factor

On economic analysis of Malaysia policy we can analyse the economy based on its

y y y y y y y y

Stage of business cycle Current and project economic growth, inflation and interest rates Unemployment and labor supply Labor costs Levels of disposable income and income distribution Impact of globalization Likely impact of technological or other change on the economy Likely changes in the economic environment

Recent research( Imbs and Wacziarg , 2003)suggested that countries with more diversified export baskets tend to grow faster because they are less subject to term of trade and external demand shocks. This positive correlation is however nonlinear. High-income economies that specialize in producing certain products seem to growth faster.This tends to reinforce Imbs and Wacziarg (2003)iii conjecture that, as countries move through economic development process, they tend to experience three stages of economic diversification. In the first stage, economicactivities (such as production and exports) will concentrate around primary or resource-based

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products. In the second stage, economic activities will become more diversified, as the primary sector tends to shrink while manufacturing and service sectors start to grow. In the third stage,countries are likely to specialize in producing certain types of products or in providing some services, which will be reflected in more concentrated economic activities The challenge facing Middle-incomecountries is to fully realize their diversificationpotential and making the transition to the thirdstage described above, i.e. specialization in theproduction of a limited number of products orservices. Countries that miss the transition run therisk of being caught in a middle-income trap.This trap occurs when economic growth is fueleddominantly through capital accumulation. Overtime, as the marginal productivity of capitaldiminishes, further economic expansion becomesdifficult. It is arguedthat, for middle-income countries to avoid themiddle-income trap, achieving economies of scalein production is essential. In order to enjoysustainable growth, both export diversificationand scale economies are vital. Some mitigating factors like the fiscal stimulus, regional development projects, sound banking sector and sound macroeconomic policy, potential strength of ringgit, healthy services sector, especially tourism, comfortable reserves and high savings rate among the Malaysians. Major Concerns with Malaysia swelling fiscal deficit, over-dependence on oil revenue, liquidity trap, ringgit weakness and easing commodity prices.

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X.

Recommendation for Strategic Economic Plan of Action for Malaysia for next 10 years

To move up from a middle income country Malaysia has a difficult challenge. Only a few countries have successfully met this challenge. Malaysia must immediately address a number of weaknesses. According to the World Bank report and my own recommendation an integrated strategy with few key elements are needed for Malaysia to move up the economic ladder, and they are:

Firstly, bolstering public finances. Going forward, fiscal rules could be considered to stabilize public finances. There must be shifts in expenditure patterns from man on the street to initiatives in the areas of specialization, skills and inclusiveness. In addressing investor concern on the rising fiscal deficit the need for fiscal reform and consolidation, and to lessen the significant role of subsidies as part of expenditures. May also include the broadening the narrow revenue base, and to reduce the crowding-out of private initiative.

Secondly, by making growth more inclusive. Inclusive policies not only help households cope with poverty, but are also essential in promoting risk-taking and entrepreneurship. Inclusiveness policies is another building block of a competitive economy. Well-targeted social safety nets would protect the needy in times of adversity and reduce fiscal costs. And an effective social insurance programs could help mitigate unemployment risks and ensure adequate pension coverage. There must be continuous effort for government to support and encourage creation of new jobs in new sectors especially among the small medium enterprises ( SME).

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Thirdly, through specializing the economy further. Due to scarcity in resourcesboth public and private. It is vital to focus on a few high value-added, innovation-based sectors with strong potential. Improvements to the enabling environment can facilitate this through the building of an internally-competitive and business-friendly economy and the provision of appropriate soft and hard infrastructure to support the knowledge economy i.e. improving the internet broadband connectivity. A more focused technology, innovation plus urbanization policies can nurture niches of growth by building on existing strengths in new sectors such as biotechnology, electrical & electronics, Islamic finance, and resource-based industries.

Finally, the fourth element is by improving the skills of the workforce. Better specialization will assist in creating demand for skilled labor thereby increasing social and private returns. The demand can be satisfied with skilled labor which currently are at very small percent of the labor force. The simultaneous efforts are required to improve the quantity and quality of skilled labor. This will need proper incentives, and better training for teachers and workers, plus leveraging efforts of the private sector.

XI.

Conclusions

The lesson from this macro economics project paper has taught me that the importance of understanding the equilibrium between aggregate demand and aggregate supply. For Malaysia to climb up the income ladder among other things, addressing skill shortages according to World Bank which also include skilled labor

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shortage , tax regulations and/or high taxes. The lacking of business support services and bureaucratic burden must be address immediately.

Also from my analysis and understanding of current global megatrends I can better address this challenges. There are like global climate change, urbanization, globalization, demographic change, a move into green sustainable technology. Here, the country will be able to aligned its new economic strategy and policy to some up with solution in addressing the constant rising inflation and unemployment problems. In macroeconomics, to address social unrest and political upheaval the priority is in job creation and fighting inflation.

A hard lesson learnt from the 1997 Asian financial crisis has taught the local banks to strengthened its fundamental and its responsive policies in accordance with Bank Negara Malaysia. With the understanding of the theory learned and analyzed here I have worked on a strategic new economic policy transformation plan to allow Malaysia to take a lept from the middle income countries into a country that is competitive globally, able to achieved sustainable growth and to move up the value chain to become a fully developed nation within the next 10 years. Also to work on improving private investment in Malaysia and same time attracting FDIs.

The aggregate data show a significant over investment in the years leading to the Asian crisis. The long-term relationship between investment and its macroeconomic determinants, points to overinvestment for about 4 years prior to 1998 exceeding 10 percent of GDP. The decline in investment following the Asian crisis in part reflects this overinvestment. In addition, the estimates indicate that the

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adjustment process is slow, suggesting that periods of over- and underinvestment are not short-term phenomena. This may reflect the nature of excess investment, which appears to have been concentrated in the property sector with a more durable capital stock, and/or a shift in investor sentiment, including worsening perceptions of the investment climate.

Another main finding is that profitability has been low in Malaysia across all sectors studied, and has been lower than the average of emerging market economies in the region. Furthermore, low market valuation indicators indicate that the market expects low future profitability, which could further contribute to the sluggishness of investment. Meanwhile, higher cash flow has a positive impact on investment, indicating that the availability of internal funds matter for investment decisions. With some evidence of the effects of corporate financial restructuring on investment. Regarding firm size, smaller companies investment appears to depend relatively more on cash flow and liquidity, indicating that access to external financing may be more constrained for smaller firms. The overall, our findings suggest that addressing the worsening perceptions of the investment climate and enhancing prospects for profitability at the corporate level are critical for sustaining the ongoing recovery for private investment.

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XII.

REFERENCES

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http://www.adb.org/Documents/Reports/SustainableInfrastructure/sustaina ble-infrastructure.pdf 19. Association of Southeast Asian Nations. (2009). Joint Media Statement Action Plan to Restore Economic and Financial Stability of the Asian Region. Press release, http://www.aseansec.org/22158.htm 20. IMF (2009). World Economic Outlook: Crisis and Recovery. Accessed from http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf 21. IMF . (2009). World Economic Outlook Dataset. April 2009 Edition.http://www.imf.org/ 22. IMF. (2009). Fiscal Implications of the Global Economic and Financial Crisis. IMF Staff Position Note SPN/09/13. http://www.imf.org/ 23. IMF. (2009). Initial Lessons of the Crisis. http://www.imf.org/ 24. IMF. (2009). Regional Economic Outlook Asia and Pacific: Global Crisis: https://www.imf.org/external/pubs/ft/reo/2009/apd/eng/areo0509.pdf 25. Bank Negara Malaysia: http://www.bnm.gov.my 26. Treasury Malaysia: http://www.treasury.gov.my/index.html 27. Department of Statistics: http://www.statistics.gov.my/ 28. Securities Commission: http://www.sc.com.my/ 29. Bursa Malaysia: http://www.klse.com.my/

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