Many attribute Malaysia’s admirable economic growth to liberal economic policies. However, this view ignores the way coalitional politics often drove illiberal government intervention in the economy to correct ethnically based economic inequality, create national heavy industries, and favor politically well-connected entrepreneurs. A more nuanced analysis reveals a complex mix of liberal and illiberal economic policies designed to balance competing coalitional interests. These policies led to rapid economic growth sufficient to support redistributive politics. Yet they also retarded technological development, leaving Malaysia mired in mediocrity: neither price competitive with China nor technologically competitive with Singapore, the East Asian NICs, or the OECD countries.

Coalitional Politics, Economic Reform, and Technological Upgrading in Malaysia

By Bryan K. Ritchie. Michigan State University, East Lansing, USA.

[Download]

Two Different Policy Responses to the Asian Financial Crisis During the1990s, Asian businesses in developing nations acquired short-term funds in global markets. Much of this dollar denominated debt was unhedged. Over time, the quality of the investments made with these funds deteriorated. For example, short-term borrowing was used to acquire assets with a long-term payoff, thereby creating a mismatch between loan maturities and asset maturities. The lack of adequate financial oversight and objective financial data obscured what was happening. Thailand’s economy was the first to falter. By mid-1997, doubts emerged about the ability of Thai borrowers to repay their loans and lenders started to withdraw capital from the country. With insufficient dollar reserves to defend its currency, the baht, the Thai government cut it loose from the dollar and allowed it to depreciate. In the wake of the Thai currency crisis, the value of the Philippine peso, the Malaysian ringgit, and the Indonesian rupiah also depreciated as those currencies were converted into dollars for safety (Stiglitz, 1998). Greene (2002) notes that capital flight from the region caused developing countries like Indonesia, Malaysia, the Philippines and Thailand, each of which had experienced real growth exceeding 5 percent annually for much of the 1990s, to experience real declines in GDP during 1998.

By Pearl M. Kamer, the Adelphi University, New York. [Download]

This report is part of the advisory services being provided by the World Bank at the request of the Government of Malaysia. The first phase of advisory services includes (i) the firm-level survey and (ii) the report on firm competitiveness. The second phase is aimed at implementing the findings of this report and will include (i) TA to reform skills and technology institutes, and (ii) a detailed study on services as a source of growth.

This report was prepared by Ejaz Ghani and Albert G. Zeufack (Co-Task Leaders), Ana Margarida Fernandes, Hiau Looi Kee, Aart C. Kraay, Manjula M. Luthria, and Charles C. Udomsaph. The peer reviewers were Barry Bosworth, Indermit Gill, Arvind Subramanian, and Shahid Yusuf. Albert G. Zeufack took the lead in the design and implementation of the Productivity and Investment Climate Survey. Production of the report was supported by Hedwig Abbey. Editorial assistance was provided by Emily Evershed. The preparation of this report benefited greatly from the assistance and cooperation provided by the Government of Malaysia. In particular, the authors would like to thank officials in the Economic Planning Unit (EPU), the Ministry of Finance, the Ministry of Trade and Industry, the Malaysian Industrial Development Authority, Bank Negara Malaysia, the Ministry of Human Resources, and the Department of Statistics for their generous help in providing data and explanations to the mission. A World Bank mission visited Malaysia from June 9 to June 18, 2003. The diagnostics of the firm level data was carried out jointly with the EPU staff during this period.

Based on the Productivity and Investment Climate Survey conducted between December 2002 and May 2003 with reference period of 1999-2001. Published on June 30, 2005. Poverty Reduction, Economic Management, and Financial Sector Unit (PREM), East Asia and Pacific Region, The World Bank.  [Download]