Threats facing the Malaysian economy

Malaysia, being a trading country that highly dependent on international trade, our economic efficiency is extremely vulnerable to the performance of our major international trading partners. For years, our economic development has actually been overly reliant on external sector developments, foreign direct financial investment (FDI) and international trade. Domestic financial investment choices are not base upon economic basics but rather these choices are quite influenced by the market behavior of foreign financiers.

In view of the difficulties occur from the globalization impacts, it is essential for the Government to sustain growth and enhance the macro-economic basics within the nation.

This is done by focusing on domestic service and industrial activities and increasing the acquiring power of our population. The federal government's fiscal policies and corporate reforms need to be continued to develop a condition appropriate for a speedy recovery and sustainable growth. It is also important to guarantee that the reorganized loans remain performing. Emphasis should be positioned on continuing improvements on corporate governance, transparency, responsibility and stringent enforcement of powers by the market regulators.

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There is likewise a need for the nation to preserve its tranquil environment and security in order to secure the investors' self-confidence.

Currently, the last destination for most of Malaysian exports is the United States. For that reason, the effective healing of the United States economy is pivotal to Malaysia's continuing healing. The existing stagnation in the US economy, especially in the electronic chip industry, is a damper on economic recovery in Malaysia where electronics related exports make up more than 30% of the gdp.

With the American demand looking weak, we should search for alternative locations of development and need to increase the financial durability.

The emergence of China

With China rising at such rapid rate, this means that the mid-sized economies of Asean (such as Malaysia) will have to run faster! Data has shown that China is taking away global market share, employment and foreign direct investment from Asean, with no exception to Malaysia:

"h Between 1995 ?V 2001, China's share of world clothing exports rose to 18.3% from 15.3%. Shares of Malaysia, Indonesia and Philippines have all shrank.

"h In the last four years, China has overtaken Malaysia and Singapore in electronics exports to the world's largest consumer, the United States.

"h A report from Japan's Research's Institute of Economics Trade and Industry shows that China competes with Asean for 100% of exports from Southeast Asia.

"h In 2000, China captured 89% of FDI entering the Asean-China region compared with 63% between 1989 and 1994.

"h Southeast Asia received $57million from China, whereas China received $600million investment from Southeast Asia in year 2000.

"h From nowhere, China has come up as the 4th largest furniture producer in the world.

With all these facts, even developed-country, such as Japan, is taking this awakening dragon seriously. The Japanese are now considering how to fit China into their plans, rather than to compete against them. To the Japanese, China has dual allure: it is a place to make things and a place to sell things.

China, with its vast population that supplies abundance labor and mass-market opportunities, has certainly poses a certain level of threat to some Malaysian companies, especially those in the labor-intensive industries. We may overcome this threat by attracting regional offices and retaining existing foreign direct investments. Also, foreign multinational companies manage their investment risk by organizing their operations using the "China + 1" concept. It is certainly a challenge to ensure that Malaysia be considered as the other destination.

Implementation of AFTA

With the implementation of Afta at the beginning of the year, it has changed the competitive landscape for most Malaysians. Tariffs on a wide range of products have been drastically reduced and Asean manufacturers have to be factored into competitive analysis.

The liberalization of the market place permeates more innovative tax-based deals, structured securitization and the use of derivatives. Hence, the start of Afta would see an influx of foreign suppliers offering "price competitive" products to the Malaysian market due to the reduction in import tariff. This will greatly increased the prospect of competition, especially when bigger producers from Thailand and Indonesia enter the markets. Due to the bigger populations of these countries, the foreign competitors enjoy a greater degree of economies of scale and lower unit costs.

Removal of protective tariffs will require local players to be more efficient and competitive in facing a level playing field, while forcing many companies to re-strategize, restructure, build alliances and re-position themselves for survival. This would require the companies to increase competitiveness, to reduce production cost to a competitive level and to produce superior quality products, which will be difficult to surpass. These tariff changes will only be beneficial if the industries concerned can remain competitive.

Nevertheless, Afta should also be looked upon as a considerable opportunity ?V an alternative to believing that the West is our only market. To put more focus on Afta trade will cushion Malaysian businesses on the impact of dependency on traditional markets. We should recognize that free trade is inevitable if we want efficient allocation of resources to achieve the best value for the consumers.