GDP $USD 399.65 billions
GDP Per Capita: $USD 11,648
Currency MYR (Malaysian ringgit RM)
Imports $USD 253.48 billions
Exports $USD 273.43 billions
Main Industries Peninsular Malaysia - rubber and oil palm processing and manufacturing, petroleum and natural gas

The ‘Know Your Region’ series is designed to support unit and individual professional military education on the South East Asian region. It’s important for all serving members of our military to have a foundational knowledge of the countries and issues in the Indo-Pacific.

MALAYSIA – ECONOMY

On this page:

  • Overview
  • Economy and GDP
  • Trade Policies

 

Overview

After independence, the Malaysian gross domestic product (GDP) grew at an average of 6.5% per annum for almost 50 years. The economy has traditionally been fuelled by its natural resources but is expanding in the sectors of science, tourism, commerce, and medical tourism. Malaysia has a newly industrialised market economy, ranking third largest in Southeast Asia and 33rd-largest in the world. It is a founding member of the Association of Southeast Asian Nations, East Asia Summit, Organisation of Islamic Cooperation, and a member of Asia-Pacific Economic Cooperation, the Commonwealth and the Non-Aligned Movement.

Under Prime Minister Mahathir Mohamad there was a period of rapid economic growth and urbanisation beginning in the 1980s. The economy shifted from being agriculturally based to one founded on manufacturing and industry. Numerous mega-projects were completed, such as the Petronas Towers, the North-South Expressway, the Multimedia Super Corridor, and the new federal administrative capital of Putrajaya. However, in the late 1990s, the Asian financial crisis almost caused the collapse of the currency and the stock and property markets, although they later recovered. Having transformed itself since the 1970s from a producer of raw materials into a multi-sector economy, Malaysia is now an upper middle-income country. The next video explores how Malaysia is stuck in the middle-income trap and some solutions to move ahead.

Under former Prime Minister Najib, Malaysia is attempting to achieve high-income status in the 2020s and to move further up the value-added production chain by attracting investments in high technology, knowledge-based industries, and services. Najib's Economic Transformation Program is a series of projects and policy measures intended to accelerate the country's economic growth. The Government has also taken steps to liberalise some services sub-sectors. Malaysia is vulnerable to a fall in world commodity prices or a general slowdown in global economic activity.

The Najib administration is continuing efforts to boost domestic demand and reduce the economy's dependence on exports. Malaysia has embarked on a fiscal reform program aimed at achieving a balanced budget by 2020, including rationalisation of subsidies and the 2015 introduction of a 6% Value Added Tax (VAT). Sustained low commodity prices throughout the period not only strained government finances, but also shrunk Malaysia’s current account surplus and weighed heavily on the Malaysian ringgit (MYR). The only legal tender is the MYR, which was among the region's worst performing currencies during 2013 to 2017.

The central bank, Bank Negara Malaysia, maintains adequate foreign exchange reserves. A well-developed regulatory regime has limited Malaysia's exposure to riskier financial instruments, although it remains vulnerable to volatile global capital flows. In order to increase Malaysia’s competitiveness, the Najib administration raised possible revisions to the special economic and social preferences accorded to ethnic Malays under the New Economic Policy of 1970, but retreated from these in 2013 after he encountered significant opposition from Malay nationalists and other vested interests. In September 2013 Najib launched the new Bumiputra Economic Empowerment Program – policies that favour and advance the economic condition of ethnic Malays. Such affirmative action policies targeting ethnic Malays are being amped up under Prime Minister Ismail Sabri Yaakob. Although constitutionally enshrined – endowing bumiputera’s a special position relative to other groups – critics argue the structure has a corrosive impact on the country’s larger social fabric and minimal effect as a socioeconomic tool to engender social mobility and reduced economic inequality between local ethnic groups.

Economic inequalities exist between different ethnic groups. Chinese-Malaysians make up about one-quarter of the population, but account for 70% of the country's market capitalisation. These businesses in Malaysia are part of the larger bamboo network, a reference to the network of overseas Chinese businesses spread across Southeast Asian markets which share common cultural and sometimes family ties. To learn about Malaysia's New Economic Plan, watch the video below.

Although the Government promotes private enterprise and ownership in the economy, the economic direction of the country is heavily influenced by Kuala Lumpur's five years development plans. The economy is also shaped by agencies, for example the Economic Planning Unit, and public-linked wealth funds such as Khazanah Nasional Berhad, Employees Provident Fund, and Permodalan Nasional Berhad.

The Government of Malaysia’s development plans, dubbed the Malaysian Plan, started in 1950 during British colonial rule. Largely centred around accelerating the growth of the economy by selectively investing in selective sectors of the economy and building infrastructure to support said sectors. For example, in the current Twelfth Malaysia Plan (12MP), three sectors – agriculture, manufacturing and services – will receive special attention to promote the transition to high value-added activities in the respective areas. After the Asian financial crisis of 1997-1998, Malaysia’s economy has been on an upward trajectory, averaging growth of 5.4% since 2010, and is expected to achieve its transition from an upper middle-income economy to a high-income economy by 2024.

The Malaysian Government subsidises and controls prices on a lot of essential items to keep the prices low. Approximately 30% of goods are price controlled, the list includes items such as palm oil, cooking oil, petrol, flour, bread, rice, and other essentials have been kept under market prices to keep cost of living low. For more information on the history of business in Malaysia, check out the following video and resources underneath.

 

Economy and GDP

Malaysia is a relatively open state-oriented and newly industrialised market economy. The Government plays a significant but declining role in guiding economic activity through macroeconomic plans. The economy of Malaysia is the fourth largest in Southeast Asia according to the International Monetary Fund 2020. It is also the 36th largest economy in the world. The economy of Malaysia in terms of GDP at purchasing power parity (PPP) in April 2019 was estimated to be $999.397 billion, the third largest in ASEAN and the 25th largest in the world.

Labour productivity in Malaysia is significantly higher than in neighbouring Thailand, Indonesia, the Philippines, and Vietnam due to a high density of knowledge-based industries and adoption of cutting-edge technology for manufacturing and digital economy. According to the Global Competitiveness Report 2019, the Malaysian economy is the 27th most competitive country economy in the world.

International trade – facilitated by the shipping route in the Strait of Malacca – and manufacturing are the key sectors. Malaysia is an exporter of natural and agricultural resources. Petroleum is also a major export. It was once the largest producer of tin, rubber, and palm oil in the world. Although the country's economic structure has been moving away from it, manufacturing continues to have a large influence on the economy. Despite its minor contribution to the country's GDP, Malaysia retains a significant foothold in the world's agricultural sector – for example, remaining one of the world's largest producers of palm oil.

The predominant industries differ according to the geographical region of the Malay Archipelago. Peninsular Malaysia is known for rubber and oil palm processing and manufacturing, petroleum and natural gas, light manufacturing, pharmaceuticals, medical technology, electronics and semiconductors, and timber processing. Whereas Sabah and Sarawak on Borneo have fewer industries, only logging, petroleum and natural gas production, agricultural processing, and logging. The following video poses the question: will Malaysia reach high income status?

During the colonial period, development was mainly concentrated in economically powerful cities and in areas of military concern. Although rural areas have been the focus of great development more recently, they still lag behind areas such as the West Coast of Peninsular Malaysia. The telecommunication network is second only to Singapore's in Southeast Asia, yet its strength in urban areas is undermined by reduced availability to rural populations. The divide is especially clear between Peninsular Malaysia with their extensive road network, whilst the road system in East Malaysia is not as well developed.

Still, Malaysian citizens enjoy an affluent lifestyle compared to almost all other ASEAN countries, in which only Singapore and Brunei manage to rival this status. This is due to a fast-growing export-oriented economy, a relatively low national income tax, highly affordable local food and transport fuel, as well as a fully subsidised single-payer public healthcare system.

Despite Government policies to increase income per capita in order to hasten the progress towards becoming a high-income country by 2020, Malaysia's growth in wages has been very slow. It is lagging behind the Organisation for Economic Co-operation and Development (OECD) standard. Recently, the government stepped up measures to increase revenue by introducing the Sales and Service Tax at a rate of 6%. Its immediate goals were to reduce deficits and meet federal debt obligations in 2018.

The COVID-19 pandemic has had a major economic impact on Malaysia, particularly on vulnerable households. Having revised its national poverty line in July 2020, 5.6% of Malaysian households are currently living in absolute poverty. The Government is focused on addressing the well-being of the poorest 40% of the population (‘the bottom 40’). This low-income group remains particularly vulnerable to economic shocks as well as increases in the cost of living and mounting financial obligations.

Income inequality in Malaysia remains high relative to other East Asian countries but is gradually declining. While income growth for the bottom 40 has outpaced the top 60 over much of the last decade, the absolute gap across income groups has increased, contributing to widespread perceptions of the poor being left behind. Following the removal of broad-based subsidies, the Government has gradually moved toward more targeted measures to support the poor and vulnerable, mainly in the form of cash transfers to low-income households. This social welfare benefit scheme has also been in place since 2011, with direct cash benefit transfer called Cost of Living Assistance.

Over the longer term, as Malaysia converges with high-income economies, incremental growth will depend less on factor accumulation and more on raising productivity to sustain higher potential growth. While significant, Malaysia’s productivity growth over the past 25 years has been below that of several global and regional comparators. Ongoing reform efforts to tackle key structural constraints will be vital to support and sustain Malaysia’s development path. The next report by CNA Insider investigates the question: who are Malaysia’s new poor?

To learn more about the economy of Malaysia, access the following resources.

 

Trade Policies

Malaysia is one of the most trade-focused economies in the world with a trade to GDP ratio averaging over 130% since 2010. Openness to trade and investment has been instrumental in employment creation and income growth, with about 40% of jobs in Malaysia linked to export activities.

Malaysia's largest trading partner is China, making up 24% of the country's imports. The second largest import destination is Singapore at 14%, and Malaysia is Singapore's biggest trading partner. Next is Japan and the United States at 6% each, closely followed by Taiwan and Thailand at 5% each. The main exports are integrated circuits, refined petroleum, crude petroleum, broadcasting equipment, and coal. Heavy reliance on oil exports has also affected the stable growth of Malaysia's economy.

Malaysia is strategically located on the Strait of Malacca, one of the most important shipping lanes in the world. There are two key ports on the Malay Archipelago, Port Klang and Port of Tanjung Pelepas, which are respectively the 2nd and 3rd busiest ports in Southeast Asia after the Port of Singapore.

Kuala Lumpur has signed a total of 16 free trade agreements (FTAs) and implemented 14 of them, split evenly between bilateral and regional FTAs through ASEAN. The bilateral agreements range from Japan to Pakistan and even Chile – the first between Malaysia and a Latin American country. For a full list and more details see the Ministry of International Trade and Industry.

Malaysia and Australia concluded negotiations on the Malaysia-Australia Free Trade Agreement (MAFTA) on 30 March 2012. MAFTA entered into force on 1 January 2013. It is a comprehensive agreement comprising 21 chapters encompassing trade in goods, services, and investments as well as economic cooperation. It also covers intellectual property rights, e-commerce, and competition policy. Australia had eliminated 100 per cent of its import duties beginning 1 January 2013, upon entry of the agreement into force. Malaysia on the other hand will progressively reduce or eliminate import tariffs on 99% of its tariff lines by 2020. MAFTA marks another important milestone in Malaysia-Australia economic relations – complementing the already established ASEAN-Australia-New Zealand FTA.

In 2019, collective trade with countries covered by both the regional and bilateral FTAs accounted for 66.7% of Malaysia's total trade, or MYR1.22 trillion. Exports to FTA countries amounted to MYR672.1 billion, while imports totalled MYR551.5 billion. The following report highlights an increase in trade with free trade partners despite the pressures from the pandemic.

Kuala Lumpur has been an advocate for deepening economic ties between ASEAN members, with the aim to advance regional economic integration. The main objectives of the ASEAN Free Trade Area (AFTA) are to create a single market and an international production base, attract foreign direct investments, and expand intra-ASEAN trade and investments. It is designed to leverage the huge potentials and similarities that exist in the region in order to strengthen and deepen intra-ASEAN linkages. The liberalisation of trade in the region through the elimination of both intra-regional tariffs and non-tariff barriers had contributed towards making ASEAN's manufacturing sectors more efficient and competitive in the global market.

The FTAs waiting for entry into force are the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). While the Malaysia-European Free Trade Association Economic Partnership Agreement (MEEPA) is still being negotiated. The countries consist of Iceland, Lichtenstein, Norway, and Switzerland which are separate from and are non-members of the European Union. In contrast, efforts to coordinate an FTA between Malaysia and the European Union reached an impasse in September 2012 and negotiations have been sidelined ever since. For more about the barriers to an FTA between the European Union and Malaysia, watch the next video.

To learn more about Malaysia’s trade policies and FTAs, access the resources below.