Economic system in Malaysia

Identify and evaluate the nature of economic system in Malaysia. Discuss the rationale of Malaysia’s economic system in terms of utility maximization attainment and pricing mechanism for distribution of goods and services

Kenal pasti dan nilai bentuk sistem ekonomi di Malaysia. Bincangkan rasional-rasional sistem ekonomi Malaysia dari segi pencapaian pemaksimuman utiliti dan mekanisme penetapan harga untuk pengedaran barang-barang dan perkhidmatan.

Malaysia is a federal constitutional monarchy which lies in Southeast Asia. It is composed of 13 states and 3 federal territories and separated by the South China Sea into 2 regions including Peninsular Malaysia and Malaysian Borneo.

The country became independent on 31 August 1957. Since then, it has been able to be as one of countries which have the best economic records in Asia, and it has been progressing with an average 6.5% for almost 50 years. From 1971 to 1990, the government strived to eradicate poverty by New Economy Policy (NEP) and outline perspective plan 1(OPP1). The NEP policy was replaced with another program known as National Development Program (NDP) from 1991 to 2000 which the NDP` target was development of a united and just society.

Get quality help now

Sweet V

Verified writer

Proficient in: Economics

4.9 (984)

“ Ok, let me say I’m extremely satisfy with the result while it was a last minute thing. I really enjoy the effort put in. ”

+84 relevant experts are online

Hire writer

From 2001 to 2010, National Vision Policy (NVP) based on its target which was sustainable development performed. In order to achieve long-term plan`s targets should medium term plans (EPU) and short term plans (Annual planning) accurately plan and perfectly perform.

According Malaysia Economic Monitor, December 2013 Edition High-Performing Education by The World Bank, The Malaysian economy recovered from a soft patch in early 2013 with growth accelerating between the second and third quarters of the year.

On a sequential basis, GDP expanded at a quarter-on-quarter, annualized rate of 6.8 per cent over the previous quarter, up from 5.8 per cent in the second quarter and a contraction of 1.1 per cent in the first quarter. This left real GDP higher by 5.0 per cent in the third quarter of 2013 from the same period in 2012, with growth for the first nine months of the year at 4.5 per cent. Growth over the past two quarters came in lower than previous forecasts mainly due to a more negative contribution from inventories and exports, while consumption performed better than expected and import growth lagged. As a result, GDP growth is now expected to moderate from 5.6 per cent in 2012 to 4.5 per cent in 2013.

Growth was driven by robust expansion in private sector consumption and green shoots in external demand, reflected in large contributions from the services and manufacturing sectors. Sectors catering to domestic demand especially services, contributed 3.1 percentage points to total GDP growth. Within services, the largest contributions came from government services, retail trade and real estate and business services. Net exports contributed positively to growth for the first time in two years in the third quarter, supporting growth in the manufacturing sector, which contributed another 1.0 percentage point to GDP growth. Across East Asia, the performance of the Malaysian economy followed a pattern seen in most other regional economies where a weak first quarter was followed by sequential improvements. Notable exceptions were Indonesia and the Philippines, where growth decelerated throughout the year.

Malaysia has achieved significant economic and social progress over the past several decades. However, the world economy is changing, and Malaysia needs a fundamentally new economic model in order to become a high-income nation. Our historical growth engines are slowing, we risk being caught in a middle-income trap, our fiscal position is arguably unsustainable while global competition for markets, capital and talent is increasingly intense. Thus the government commence the Economic Transformation Programme (ETP) represents a marked change in approach that builds on the Tenth Malaysia Plan and input from the National Economic Advisory Council (NEAC).

The ETP focuses on key growth engines or National Key Economic Areas (NKEAs). It relies heavily on private sector-led growth, describes very specific investments and policy actions and has a clear transparent implementation roadmap with strong performance management. This strong economic performance has helped improve the quality of life for Malaysians and supported advances in education, health, infrastructure, housing and public amenities. There are three factors to be considered for these strong economic performances which are high income economy, inclusiveness and sustainability.

The Government defines high income as a per capita income USD15, 000 or RM48, 000 in 2020, based on the World Bank’s current definition of high income. Malaysia’s per capita gross national income (GNI) is currently about RM23, 700 or USD6, 700. Therefore, achieving high-income status by 2020 will require GNI to grow at an annual real growth rate of 6 percent between 2011 and 2020.The Government’s high-income objective is not just a quantitative target. It is also about Malaysia becoming an advanced, developed nation with an economy possessing the characteristics that are common to developed nations. Specifically, Malaysia will focus on developing large and thriving services sector to supplement the nation’s historical strengths in oil and gas, agriculture and manufacturing.

Developing balanced economy with significant contributions from private consumption and investment as well as from government spending and exports. In developed countries domestic demand typically accounts for 50 to 70 percent of GDP. In Malaysia it is currently 53 percent and productivity levels similar to those of other leading Asian economies. Achieving this will require developing an economy that is more heavily driven by skills, innovation and knowledge. These three structural shifts in the economy will support Malaysia’s on-going growth and will enable Malaysia to compete more effectively with other developed nations in the region and beyond.

The way in which Malaysia grows to achieve this high-income target will be inclusive in nature, enabling all Malaysians to share in the benefits. The Government will encourage employment-rich growth that creates new higher-wage jobs. We will also invest in education and training to ensure that more Malaysians are able to participate in these new opportunities. A key focus will be on ensuring that substantial improvements are made for people with the lowest household incomes. Specific attention will be paid to lifting the incomes of the bottom 40 percent of households, with a target of increasing the mean monthly income of this group from RM1, 440 in 2009 to RM2, 300 in 2015, as stated in the Tenth Malaysia Plan.

The measures we take to achieve high-income status must be sustainable in both economic and environmental terms, meeting present needs without compromising those of future generations. In economic terms, growth will have to be achieved without running down Malaysia’s natural resources. Malaysia will not achieve high-income status simply through the income derived from extracting Malaysia’s natural resources. In addition, Malaysia’s fiscal policy will be made sustainable. There will be a much stronger focus on investment led by private sector that will avoid reliance on government funding.

As stated in the Tenth Malaysia Plan, the Government is committed to reduce its fiscal deficit from 7 percent in 2009 to 3 percent in 2015. In environmental terms, the Government is committed to the stewardship and preservation of our natural environment and non-renewable resources. The Government will ensure that environmental resources are properly priced and that the full costs of development are understood before investment decisions are made.

In Malaysia, government had been set up few policies and agencies to promote the industrial sector to the foreign investors and encourage domestic and foreign investment grow up. With promoting industrialization and capital inflow from foreign investment, it will boost up the economic growth and with the policies should ensure that Malaysia’s rapid development towards achieving National Economic Policy and Vision 2020. Malaysia has reached a defining moment in its development path. Vision 2020 is not possible without economic, social and government transformation. To move the country forward, the government has crafted a framework comprising pillars to drive change.

Government has few supportive polices that maintain a business environment with opportunities for growth and profits have made Malaysia an attractive manufacturing and export base in the region. The private sector in Malaysia has become partners with the public sector in achieving the nation’s development objectives. There are three main supportive government policies such as liberal equity policy, employment of expatriates, and attractive tax incentives (Siew Ee et al., 1987). Liberal equity policy is the policy to allow foreign investors in Malaysia’s manufacturing sector can hold 100% equity for all investment in new projects, as well as investment in expansion or diversification projects by existing companies irrespective of their level of exports.

Employment of expatriates is one of the supportive government policies for foreign companies in the manufacturing sector are allowed to employ expatriates where certain skill not available in Malaysia. With a foreign company paid-up capital above USD 2 million will be allowed up to 10 expatriate posts including five key posts that are permanently filled by foreigners. Malaysia’s government offer a low company tax rate is attractive at 27% and is applicable to both resident and non-resident companies. Malaysia also offers a wide range of tax incentives for manufacturing projects under the Promotion of Investment Act 1986 and the Income Tax Act 1967. The main incentives are

• the Pioneer Status,
• Investment Tax Allowance,
• Reinvestment Allowance;
• Incentives for the Setting-up of International/ Regional Service- based Operations.

An economic system is the combination of the various agencies, and entities that provide the economic structure that defines the social community. Malaysia has adopting mixed economic systems. Mixed economic system is an economy where there is more government intervention than in a free market economy. Many of the activities of production, distribution, and exchange are undertaken by central government, but where there is more economic freedom for the individual than in a command economy. Mixed economy is also an economic system in which both the state and private sector direct the economy, thus reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety of government-sponsored aspects.

The Elements of a mixed economy is basically to include a variety of freedoms such as to possess means of production like farms, factories, stores, to participate in managerial decisions in cooperative and participatory economics, to travel (needed to transport all the items in commerce, to make deals in person, for workers and owners to go to where needed), to buy the items for personal use, for resale; buy whole enterprises to make the organization that creates wealth a form of wealth itself), to sell (same as buy), to hire (to create organizations that create wealth), to fire (to maintain organizations that create wealth), to organize (private enterprise for profit, labor unions, workers' and professional associations, non-profit groups, religions, etc.), to communicate (free speech, newspapers, books, advertisements, make deals, create business partners, create markets).