Policy Frawork of Malaysia

 Policy Frawork of Malaysia

          The Malaysian economic policy framework is based upon the NEP, which was launched in 1974. The political and economic objectives of the NEP is to reduce poverty by increasing income levels for all Malaysians and to restructure the Malaysian society in order to erase all racial identification in economic terms. In other words, the NEP calls for a financial redistribution from the minority of wealthy non-Bumiputra (native Malaysians also known as “Princes of the Soil") racial groups to the Bumiputras (Goldsworthy 1991: 51). The goal is to achieve corporate equity of 30 per cent Bumiputra, 30 per cent foreign and 40 per cent other-Malaysians (Onn 1988: 8). This goal can only be facilitated with an expanding economy, so that no racial group should suffer from economic or social deprivation. Other specific economic goals include; maintain high sustainable growth, low unemployment rates and ensure the stability of economic factors such as inflation Under the NEP, FDI incentives were designed to achieve social rather than economic objectives (Goldsworthy 1991:53). According to the Malaysian Industrial Development Agency (MIDA), “Malaysia received political stability from the NEP. Racial turmoil attracts neither foreign nor local investments.”(Appelbaum et Al: 1993, 180) The National Development Policy (NDP) replaced the NEP when it expired in 1990. This new policy can be considered an add-on document to the NEP, the objectives of which were not achieved in 1990. Furthermore, it provides a framework towards Dr. Mahathir’s new vision 2020 plan symbolizing the way forward” policy towards a “developed” nation in 2020. This will require the nation to maintain a 7-plus per cent growth rates for the next 25 years. Prime Minister Mahathir believes raising workforce quality and developing expertise in sophisticated industries to be decisive elements in the country's road to economic success and development (Brown 1993: 43). In order to facilitate these growth requirements, the NDP has relaxed many of the FDI restrictions imposed by the NEP such as equity and licensing requirements and procedures.

           The Fifth and the Sixth Malaysia plans (1986-1997) place great emphasis upon the privatization process of certain government owned industries and utilities. For instance, the major motorhighways now belong to “Plus”, a privately owned entity which is responsible for the construction of such transportation infrastructure. According to Dr. Mahathir, “The Malaysia Incorporated concept requires the private and public sectors see themselves as sharing the same fate and destiny as partners, shareholders and workers within the same ‘Corporation', which in this case is the nation...”(Huq 1994: 189). The overall objective of this policy is rationalization of the government sector and to foster more initiatives from the private sector. The private sector is the driving force to economic prosperity and the government will provide the needed support. In close cooperation with the NDP, the Sixth Malaysia plan is the driving motivation for development. The purpose of the Industrial Master Plan which was formulated by the United Nations Industrial Development Organization (UNIDO) is to focus private and government agencies on core competencies and develop industries with great export potentials in the next 15 years (Please refer to Appendix 3 for such industries). 

Export Facilitation

        In the South East Asian region, most of the incoming FDI has been exported oriented rather than intended for domestic sales (World bank 1993: 318). Presently, Malaysia has one of the world's highest export to GDP ratios (Petri 1994: 11). The economic rationale of Malaysia to promote exports provides the nation with three important advantages. First, it generates foreignexchange that can reduce the amount of foreign debt needed to fund development. Second, it contributes to developing a competitive industry infrastructure from learning from investors- a move that brings technological excellence leading to higher value-added exports. By the promotion of specific industries, such as the semi-conductor industry, has speeded technology acquisition and enhanced the nation's competitive Worldwide positioning. Finally, FDI provides employment in the industry sector, which to a large extent is attracted from the agricultural sector.

          Critics argue that Malaysia has become largely dependent on foreign technology and failed to develop its own technology base (Goldsworthy 1991: 58). For instance, it is true that Malaysia is the world's largest manufacturer of Air conditioners, but it is also true that Japanese companies account for 90 per cent of all exports. In this relationship, Malaysia is "sitting between Japanese capital and these sorts of exports”(Goldsworthy 1991: 58). If Malaysia cannot develop its own competitive industry with a solid technological base, it may be difficult for the nation to achieve its 2020 vision. In the case of Malaysia, the critical success factors of FDI lay in the economic policy. FDI incentives such as taxable income deductions linked to domestic performance and local content, other tax allowances, location incentives, double deduction for promotion of exports and political and economic stability have all contributed to the massive influx of FDI and increase of exports (Carrol, Errion 1991 21). In addition, nine Free Trade Zones (FTZ) provides tax-free areas with liberal custom controls for manufacturers that assemble at least 80 per cent of their products. 

Import Substitution

          Economic development in Malaysia was first built on the basis of Import Substitution, indicated by the large shift of GNP distribution from agricultural sectors to manufacturing sectors. Import substitution has increased in mainly three areas, transport equipment, Industrial chemicals and fertilizers and in Industrial machinery (Onn 1988: 28). However, exports constitutes the main source of growth in the manufacturing sector from 1970-1990 (refer to appendix 6). This trend can be explained by economic policy that places great emphasis on improving industrial competitiveness as a vehicle towards vision 2020.