Malaysia fashions own path to recovery, looks to strengthen growth
| Author | Olin Liu |
| Position | IMF Asia and Pacific Department |
| Pages | 282-284 |
Page 282
Malaysia is showing signs of rapid recovery and reduced vulnerability. Since mid-1999, the country’s output growth has been among the strongest of the Asian crisis economies, led by buoyant world demand for electronics and supported by accommodating macroeconomic policies. This recovery has become more broad-based in recent months, with domestic consumption picking up and private investment beginning to recoup. Inflation remains subdued, and international reserves are at a comfortable level. In response to better economic performance and a gradual easing of the capital controls imposed during the crisis, market confidence in Malaysia has begun to strengthen and portfolio inflows have resumed.
This article looks at Malaysia’s evolution into an emerging market economy, its distinctive handling of the Asian crisis (notably the use of selective capital controls and a pegged exchange rate), and the challenges it now faces.
Malaysia’s rapid growth from 1970 to the mid-1990s reflected a dramatic shift from agriculture and mining to a growing reliance on manufacturing. By the early 1980s, however, growth was accompanied by substantially increased budget deficits and an unsustainable public debt.
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The Malaysian authorities took steps to reduce the federal government deficit and lower the public debt, while more open trade and payments systems helped rapidly expand Malaysia’s export base. Diversification, coupled with deregulation and liberalization of its financial system, helped transform Malaysia into a middle-income emerging market by the end of the decade and allowed it to improve living standards and income distribution.
In the early 1990s, Malaysia’s macroeconomic performance was very strong. Real output growth averaged 81/2 percent a year; unemployment dipped below 3 percent; prices and the exchange rate remained stable; and international reserves were robust. But there were also signs of stress, as exports decelerated and large current account deficits developed.
With the benefit of hindsight, it is clear that Malaysia’s accelerated economic growth also gave rise to vulnerabilities that exposed it to the crisis.
• Excessive investment produced a number of uneconomical capital-intensive projects and created substantial unused capacities. Deteriorating investment quality led to lower productivity and declining corporate earnings. Also, close government involvement in the privatized infrastructure projects created potential public sector liabilities and the perception of reduced transparency and weak corporate governance.
• Fast economic growth, a stable exchange rate, and relatively low external indebtedness induced large private capital flows, fueling excessive investment in real estate and equity markets that raised their prices beyond underlying values. Relatively easy access to bank credit encouraged further speculative investment, and the ensuing fast credit growth weakened the quality of bank assets.
• A high level of stock market capitalization combined with substantial corporate short-term bank financing left the corporate sector vulnerable to declines in asset prices and increases in interest rates, with adverse repercussions for the financial system.
• Malaysia’s...
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