Malaysia Truly AsiaGrowth Accounting: 1990-2010

Ilyana Badlisham, Gayatri Bahadur, Sue Chen, Andisya Siregar

Introduction

There are two primary focuses to this paper – the first is a

quantitative objective to calculate Total Factor Productivity

(TFP) growth in Malaysia over a twenty year period using data

regarding output, labor and capital. The second part is to

analyze and understand the economic and political policies and

qualitative reasoning behind the results we obtained. The twenty

year period we chose to focus on was from 1990-2010, primarily

because the employment data we had for Malaysia only began in

1990.

Given that economic growth is the predecessor for economic

development, it will be interesting to see whether policies aimed

at promoting growth managed to spur development as well.

Additionally, our selected time period includes the financial

crisis of 2007-2009 and given Malaysia’s investment in export

2

processing zones it would be interesting to look at the effects

on the country’s economy.   

Malaysia is extremely multi-ethnic and multi-cultural which

has a strong impact on its politics. Although the constitution

declares Islam as the official religion, there is still freedom

of religion and a large population of Buddhists, Christians and

Hindus.

In the 1970s, Malaysia was a producer of raw materials but

it has developed into an emerging multi-sector economy. According

to a 2012 estimate, 48.3% of GDP is attributed to services, 40.2%

to industry and 11.4% to agriculture. As of 2010, the energy

sector contributed to 20% of GDP, palm oil exports are the fourth

largest component of GDP, and financial services contributed to

11% of GDP. Malaysia’s unemployment is low at around 3% and its

currency has been appreciating in the last five years. Under

Prime Minister Najib, the goal is to be classified as a high-

income country by 2020.

Methodology and Data

3

This section is dedicated to computing TFP of the Malaysian

economy from 1990-2010. Table 1 shows the construction of capital

stock (K):

Table 1: Constructing Capital Stock

Year

Gross Fixed Capital Formation - Local LCU in millions

Consumption of Fixed CapitalLocal LCU in millions

Capital Stock (K)Local LCU in millions

1990 60,602.11 22,752.35 41,8814.53

1991 74,155.94 25,244.30 47,0218.11

1992 82,305.80 28,098.23 527,279.61

1993 96,955.62 31,266.92 596,137.00

1994 112,584.90 34,525.40 677,454.98

1995 138,299.34 39,355.00 781,228.91

1996 149,662.86 43,706.24 891,536.78

1997 163,375.43 46,778.56 1,011,205.97

1998 931,79.59 41,728.97 1,057,607.00

1999 87,084.93 44,642.72 1,102,962.97

2000 110,092.32 48,885.40 1,168,412.57

2001 107,821.86 49,034.20 1,227,349.03

2002 108,444.74 51,887.20 1,286,759.57

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2003 111,528.61 55,066.85 1,346,400.98

2004 115,491.84 59,230.31 1,406,825.97

2005 121,237.00 61,756.13 1,468,832.66

2006 128,832.00 65,728.61 1,535,908.54

2007 142,178.00 70,717.10 1,612,357.93

2008 145,525.00 74,922.95 1,687,165.83

2009 141,584.00 73,046.67 1,753,826.88

2010 156,346.00 79,084.30 1,837,126.21

Source: WorldBank

The formula that was used was:

where is the capital stock during the year in question, is

capital stock in the previous year, is consumption of capital

is the previous year and is the gross fixed capital

formation in the current year. This formula uses consumption of

fixed capital to calculate the gross fixed capital formation, but

is equivalent to the perpetual inventory method formula which

incorporates depreciation. In Table 1, depreciation is assumed to

be constant at 5% and fixed capital was found at % of GNI on the

WorldBank.

5

Next, the employment, or number of people in the Malaysian

economy needed to be derived:

Table 2: Calculating Employment

YearEmployment to Population Ratio

Population (millions)

Employment (millions)

1991 60.10 18.71 11.241992 60.00 19.21 11.521993 59.80 19.70 11.781994 59.90 20.21 12.101995 60.40 20.73 12.521996 60.80 21.26 12.931997 60.70 21.81 13.241998 60.30 22.36 13.481999 60.10 22.90 13.762000 61.50 23.42 14.402001 60.90 23.93 14.572002 60.60 24.41 14.792003 60.20 24.89 14.982004 60.00 25.37 15.222005 59.80 25.84 15.452006 59.60 26.33 15.692007 59.40 26.81 15.932008 59.00 27.30 16.112009 58.40 27.79 16.232010 58.50 28.28 16.542011 58.60 28.76 16.85

Source: WorldBank

The employment was calculated by obtaining the employment-to-

population ratio and population statistics and then multiplying

the employment-to-population ratio by the population.

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All the growth rates in this paper were calculated using the

formula:

The following table shows the growth rates of GDP (Y), Capital

Stock (K) and Employment (L). Due to limited information

available, it was not possible to calculate the employment growth

rate for 1991. From 1991 to 2011 the average growth rate of GDP

was 5.88%, of Capital Stock was 7.04% and of Employment was

2.05%.

Table 3: Growth Rates of Y, K and L

Year GDP GrowthRate

CapitalGrowthRate

EmploymentGrowth Rate

1991 9.55% 11.74% NA1992 8.88% 11.63% 2.48%1993 9.90% 12.54% 2.24%1994 9.21% 13.10% 2.74%1995 9.83% 14.66% 3.42%1996 10.00% 13.56% 3.26%1997 7.32% 12.84% 2.40%1998 -7.36% 4.02% 1.84%1999 6.14% 3.10% 2.08%2000 8.86% 4.93% 4.67%2001 0.52% 4.27% 1.16%2002 5.39% 3.94% 1.54%2003 5.79% 3.85% 1.28%2004 6.78% 3.82% 1.57%2005 5.33% 3.92% 1.55%

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2006 5.58% 4.12% 1.53%2007 6.30% 4.67% 1.51%2008 4.83% 4.45% 1.14%2009 -1.51% 3.81% 0.75%2010 7.15% 4.37% 1.92%2011 5.08% 4.56% 1.88%

Average 5.88% 7.04% 2.05%

To continue with the growth accounting, it was necessary to

obtain or estimate a value of α to represent the share of profits

in the Malaysian economy. The value of 1-α represents the amount

of wages in the economy. Since information on the value of α in

the Malaysian economy was not readily available, 0.3 was used as

an estimate. Furthermore, employment figures alone were not

substantial enough to base total factor productivity upon, and

factors which indicated levels of development within the country

were necessary to reflect a more accurate labor productivity.

Therefore, table 4a shows the Human Development Index (HDI) for

Malaysia over 1991-2011. The HDI ranges from 0-1, with 1 being

the highest score a country can obtain and indicating high levels

of development. There were years where data was omitted, so

constant growth with a linear slope in the HDI was assumed for

the intermittent periods of time.

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Table 4a: HDIYear HDI1991 0.641992 0.651993 0.661994 0.671995 0.671996 0.681997 0.691998 0.701999 0.702000 0.712001 0.722002 0.722003 0.732004 0.742005 0.742006 0.752007 0.752008 0.762009 0.762010 0.762011 0.77

Source: UNDP

The following table shows Table 2 accommodating the HDI

statistics from Table 4a:

Table 4b:

Year GDP (ConstantLCU)

Capital Stock(Constant LCU)

Employment *HDI

1991 237,766.00 495,069.17 7.231992 258,891.00 552,621.51 7.491993 284,509.00 621,946.05 7.751994 310,718.00 703,433.64 8.061995 341,258.00 806,561.30 8.431996 375,393.00 915,896.10 8.81

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1997 402,882.00 1,033,476.73 9.121998 373,233.00 1,074,982.48 9.391999 396,140.00 1,108,318.29 9.692000 431,234.00 1,162,994.70 10.262001 433,466.00 1,212,666.82 10.462002 456,834.00 1,260,478.22 10.712003 483,278.00 1,308,982.92 10.942004 516,061.00 1,359,025.62 11.202005 543,578.00 1,412,311.34 11.472006 573,936.00 1,470,527.77 11.742007 610,087.00 1,539,179.38 11.992008 639,565.00 1,607,745.41 12.192009 629,885.00 1,668,942.14 12.302010 674,946.00 1,741,841.03 12.622011 709,261.00 1,821,233.98 12.91

The production function that will be used in this paper to

calculate TFP is:

In this equation, A represents TFP so by rearranging the equation

to solve for A, it becomes:

Keeping in mind that 0.3 is being used as an estimate for α,

using the equation above, the following table shows us TFP

including the HDI figures to calculate labor productivity as

demonstrated in Table 4b:

Table 5: Calculating TFP

10

Year

GDP (Y) inLCU

(millions)Capital Stock (K)in LCU (millions)

Employment *HDI(L) (millions) TFP (A)

1991 237,766.00 495,069.17 7.23 1,165.421992 258,891.00 552,621.51 7.49 1,196.921993 284,509.00 621,946.05 7.75 1,239.731994 310,718.00 703,433.64 8.06 1,270.031995 341,258.00 806,561.30 8.43 1,297.111996 375,393.00 915,896.10 8.81 1,332.341997 402,882.00 1,033,476.73 9.12 1,345.691998 373,233.00 1,074,982.48 9.39 1,206.941999 396,140.00 1,108,318.29 9.69 1,241.582000 431,234.00 1,162,994.70 10.26 1,280.472001 433,466.00 1,212,666.82 10.46 1,253.452002 456,834.00 1,260,478.22 10.71 1,284.412003 483,278.00 1,308,982.92 10.94 1,323.882004 516,061.00 1,359,025.62 11.20 1,374.822005 543,578.00 1,412,311.34 11.47 1,408.202006 573,936.00 1,470,527.77 11.74 1,445.232007 610,087.00 1,539,179.38 11.99 1,492.612008 639,565.00 1,607,745.41 12.19 1,526.572009 629,885.00 1,668,942.14 12.30 1,477.562010 674,946.00 1,741,841.03 12.62 1,535.322011 709,261.00 1,821,233.98 12.91 1,566.99

This is the growth accounting formula:

It implies that the growth rate of GDP should equal the growth

rate of TFP plus the share of profits in the economy times the

growth rate of capital plus the share of wages in the economy

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times the growth rate of labor. Rearranging the equation solves

for the growth rate of TFP:

The table below shows the calculated yearly growth rates for TFP,

along with the growth rates for GDP, capital stock, and

employment as shown in Table 3:

Table 6: Growth Rates of GDP, Capital, Employment and TPF

YearGDP

GrowthRate

CapitalGrowth Rate

(Employment*HDI) Growth Rate

TFP GrowthRate

1991 9.55% 11.74% NA NA1992 8.88% 11.63% 3.70% 2.70%1993 9.90% 12.54% 3.45% 3.58%1994 9.21% 13.10% 3.94% 2.44%1995 9.83% 14.66% 4.62% 2.13%1996 10.00% 13.56% 4.44% 2.72%1997 7.32% 12.84% 3.56% 1.00%1998 -7.36% 4.02% 2.98% -10.31%1999 6.14% 3.10% 3.21% 2.87%2000 8.86% 4.93% 5.82% 3.13%2001 0.52% 4.27% 2.01% -2.11%2002 5.39% 3.94% 2.39% 2.47%2003 5.79% 3.85% 2.12% 3.07%2004 6.78% 3.82% 2.40% 3.85%2005 5.33% 3.92% 2.37% 2.43%2006 5.58% 4.12% 2.35% 2.63%2007 6.30% 4.67% 2.19% 3.28%2008 4.83% 4.45% 1.67% 2.27%2009 -1.51% 3.81% 0.89% -3.21%2010 7.15% 4.37% 2.59% 3.91%2011 5.08% 4.56% 2.28% 2.06%

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Malaysia’s GDP growth rate can therefore be largely attributed to

its accumulation of capital stock, with employment and TFP

growths also making minor contributions.  

Historical Analysis of Data

During the chosen period between 1990-2010, Malaysia

experienced two hard-hitting economic crises: the East Asian 1997

crisis and the 2008 global financial crisis. Although Malaysia is

a relatively young country, the government’s reactionary measures

succeeded in containing both the crisis and defending

developmental efforts towards the economy. In order to obtain a

comprehensive understanding as to how Malaysia was able to better

combat the effects of these crises relative to other countries in

the region, it is essential to note a couple of historic policy

reforms implemented prior to 1990.

The first game-changing economic plan in Malaysia occurred

after the racial riots in 1969. Ethnically heterogeneous, wealth

distribution in the country biasedly favored the Chinese

community during Malaysia’s colonization period. The ethnically

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indigenous Malay population only controlled 9.2% of the country’s

wealth at the time, while non-Malay citizens held 34%. This led

to tension culminating in a riot that resulted in the murder of

hundreds of Chinese by the Malay community. After the tragic

incident, then prime minister Tun Abdul Razak implemented an

affirmative action policy called the “New Economic Policy”. Its

aim was to "eventually eradicate poverty...irrespective of race"

through a rapidly expanding economy, which would reduce the non-

Malay share of the economy in relative terms while still increase

it in absolute terms (Funston). The government embarked on a

wide-ranging investment scheme that established numerous new

public corporations and launched a number of rural development

schemes.

Another major contributor to Malaysia’s macroeconomic

discipline for the crisis occurred during the mid 1980’s

commodity crisis in which the Malaysian central bank, Bank

Negara, tightened regulation policy and encouraged the

consolidation of banks. This led to a rush by smaller commercial

banks to raise new capital resulting in a rapid growth of bank

credit to the real estate and equity sector (ISIS). The

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government made moves to shift the economy towards private sector

control, denationalizing the manufacturing industry, liberalizing

trade barriers to promote foreign direct investment and foreign

ownership of equity and most importantly banning the acceptance

of deposits that were repayable in foreign currency (ISIS).

The adjustments made above contributed towards the healthy

economic growth seen in the 1990’s. The Prime Minister at the

time, Tun Mahathir, proposed the Vision 2020 in 1990 which

targeted the attainment of becoming a high income status nation

by the year 2020.  This initiated the “big push” that developing

countries needed to achieve higher growth. These events led to

excess public investment, particularly in the construction

industry which also benefited from the ease of credit lending.

Thus, prior to 1997, Malaysia’s GDP grew at an average 8.3% per

annum outperforming all the other ASEAN countries. As mentioned

before in our analyses, Malaysia’s GDP growth was mainly

attributed to its growth in capital stock. Between the years

1991-1997 the capital growth rate ranged between 11.74% to

14.66%. This growth, along with the Vision 2020 initiative of

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rapid and export oriented growth led to Malaysia as being well

known for being one of the Tiger Cub Economies.

In 1997, when the Thai Baht depreciation exacerbated the

East Asian financial crisis, Malaysia experienced a contraction

in GDP growth of 3% compared to the 10% growth in 1996. The

Malaysian Ringgit came under speculative attack leading to a

massive capital flight by foreign equity owners seeking to make a

profit from selling short on the market. The Malaysian Ringgit

which was free floating prior to the crisis, depreciated over 40%

from RM2.50/US$ to an all time low of RM4.88/US$. The stock

market dropped by 68.58% in a week during the close of July 1997.

Real impacts of the crisis were only reflected in the

following year when GDP growth dropped to -7.4% in 1998, leading

Malaysia into a depression. This is reflected again in our data,

as the capital growth rate sinks to 4.02% while TFP growth rate

bottoms out at -10.31% the same year. Considering the importance

of the capital growth rate to GDP growth, 4.02% was well below

the average capital growth rate of 7.04% throughout our data

period.  The depreciation in currency and the abandonment by

foreign ownership on the stock market aggravated the situation by

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raising the lending rate, making investments more expensive

resulting in a drop of 50.5% in private investment during the

year. The over capacity of investment in the manufacturing and

construction sectors during the boom of the early 90’s coupled

with the expected decreased consumption rate saw these sectors

get hit the worst during the year with a contraction of about 19%

and 30% respectively (Mahani).

As with other countries in the region struggling to fight

the economic pressures during this crisis, Malaysia adopted the

orthodox method of economic remedy. Mid-1997 saw tighter credit,

substantial government budget cuts of 20%, and increased short-

term rates to 11% intended to quell fears of jittery foreign

depositors and to stem the outflow of currency (Mahani). However,

these policies were not producing a satisfactory outcome and

instead of accepting aid from the IMF as other countries such as

Indonesia and Thailand were doing, Malaysia launched a whole new

recovery plan in July 1998 that was at the time considered to be

radical by traditional economic standards (Athukorala).

The New Economic Recovery Plan (NERP) was considered to be

against the grain of traditional economic practices because it

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called for control over capital accounts. Essentially, instead of

letting the markets correct themselves through the adjustment of

monetary and fiscal policies, Malaysia opted to close themselves

off from foreign flows of capital. This marks the first time in

history that an emerging market has closed capital accounts to

foreign markets (Athukorala). The defense behind embarking on

this new policy and refusing to participate in an IMF recovery

program was justified by the Tun Mahathir’s speech in which he

stated that the conditions the IMF would impose upon Malaysia

would require Bumiputera quotas erected in the NEP to be

abolished. Mahathir weighed the socio-economic costs and benefits

and decided to implement the NERP instead (Athukorala).

Through the 1998 NERP, Malaysia defended its currency by

pegging it to the Dollar at a rate of RM3.80/US$. Based on the

trilemma, or the impossible trinity, the fixed exchange rate came

at the cost of the closed capital movement. Independent monetary

policy was retained, and Bank Negara intervened through the NERP

to lower interest rates to ease the liquidity crunch that was

choking the private investment sector. By controlling short term

capital flows, the legal tender of the Ringgit was invalid

18

outside the country making foreign exchange trading with the

Ringgit costly to speculators who now have to buy back the

Ringgit at a higher price of RM3.80/US$. This helped to curb the

plunging equity market as well as assist in raising domestic

demand. Restrictions on portfolio financing required investors to

keep proceeds from asset sales in Ringgit for up to a year before

converting them into foreign currency (Mahani).

The result of the NERP saw an astounding recovery by the

very next year. In 1999, the GDP actually started growing in

March and by the year-end, had recorded a growth rate of 6.4%. A

stark contrast to the -7.4% growth attained in the previous year.

However, capital growth rates remained at a slower pace around

the 3-4% level post-crisis. Although the NERP was fixed to not

affect FDI or current account transactions directly, it deterred

foreign investors and rating agencies downgraded Malaysian

assets. The time period restrictions imposed on foreign currency

withdrawals made “greenfield investments less attractive”

(Charette).

By 2000, the capital controls were replaced by a tax exit,

and by 2001, it was abolished completely. However, capital growth

19

never returned to pre-crisis pace. One probable reason is that

Malaysia is a highly export dependent economy which exposes them

to risks in fluctuations of global demand. The 2000’s brought

with it the boom of electronics and fiercer competition for

outsourcing materials, this prompted the shift towards import

substitution.

Import substitution policies were subsidies heavily by the

government, allocating resources in areas that were inefficient.

Justification of the protectionism goes hand in hand with the NEP

policy of Bumiputera quotas, which staffed these inefficient

import substitution firms. The reluctance of eradicating these

uncompetitive industries stems from protest from the large

population of rural Malays and the Malay led UMNO party that

takes the majority of seats in the parliament.

Racial bias also perpetrates the qualitative development

progress, particularly in education. Public universities were

required by law to fill a hard quota of Bumiputeras and although

this policy was removed in 2003, the lack of transparency in the

public education system still carries the perceived notion that

less deserving Bumiputeras are admitted over non-Bumiputera.

20

Those non-Bumiputera who have the funds to travel abroad for

their higher education do so and arguments have been made that

this contributes to the high levels of brain drain that Malaysia

is experiencing currently.

The lingering tension resulting in the NEP coupled with the

rapid interconnectivity of society through social media has

culminated in the racial polarization of both the Malaysian

community and its politics. In 2008, the first mass protest

against the government since Malaysia’s independence took place

to call for cleaner elections. Malaysia ranks as 56 in the 2010

Corruption Perceptions Index, and it is not uncommon to hear

politicians defending rights of their own race while demeaning

the rights of others. The political clash between races could

destabilize the country’s economic growth and development. The

brain drain problem and quality of education in Malaysia is

deterring the improvement of labor quality, subsequently making

it less competitive against other countries in the area that are

already attracting the foreign direct investment market.

In October 2008, a global financial crisis brought enormous

ramifications for the world economy, but Malaysia was lucky

21

enough to avoid a financial meltdown. The nation’s economy had

little exposure to the financial derivatives that emerged from

the sub-prime stocks, so the currency and capital markets were

insulated from any direct effects of the crisis. However, the

contraction in aggregate demand drove the nation’s economy into

recession. In the last quarter of 2008, Malaysia’s GDP growth

declined to 0.1%, and by the first two quarters of 2009, it

decelerated to -6.2% and -3.9% respectively. (Abidin)

These contractions in the Malaysian economy were mainly

caused by a collapse in exports, which greatly aggravated the

already cooling economy. Because the nation has a high export to

GDP ratio, the decline in external demand became a serious issue.

Sources from this contraction arose from the demand for exports,

particularly in manufacturing, quickly declining during the

recession because target markets for exports were primarily

developed countries such as the United States, who were greatly

affected by the global meltdown. Additionally, there was a

contraction in foreign direct investment inflows from these

developed countries. Because of this, manufacturing in the

country slowed down, and sectors that depended on GDP growth for

22

consumer and investment demand also collapsed; the falling demand

of exports drove firms to fire a significant number of workers.

The financial crisis provided Bank Negara with incentive to

regulate the financial sector without excessively affecting the

stock market. Due to the nation’s minimum exposure to foreign

loans, non-performing loans as a share of total loans fell to

2.2% and remained at this level throughout the first two quarters

of 2009; this was among the lowest rates for Asian economies

during the time. Such an achievement proved that Malaysia

remained to have strong economic fundamentals during the global

crisis. (Abidin)

Policy and Trade Developments

Malaysia has been a member of the United Nations since 1957

and is a founding member of the Association of Southeast Asian

Nations (“ASEAN”) and the Organization of Islamic Cooperation

(“OIC”). Additionally, Malaysia is a founding member of the World

Trade Organization (“WTO”) and through its membership and active

participation it strives to maintain trade regulations and

measures that will ensure flexibility for Malaysia’s development.

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Through ASEAN, Malaysia participates in the ASEAN Free Trade Area

(“AFTA”) and is thus engaged in trade negotiations with Japan,

India, Korea, China, Australia and New Zealand. As of today,

Malaysia has bilateral Free Trade Agreements (“FTA”) with

Pakistan, New Zealand, Chile, and Japan. Additionally, it is

currently in negotiations for the Trans-Pacific Partnership which

is a regional trade pact between the United States and countries

in the Pacific Rim. Malaysia is also pursuing free trade

negotiations with Singapore, Thailand, the European Union, and

Hong Kong. These trade negotiations are an important mechanism to

expanding Malaysia’s market reach and further its development.

Its relationships with many countries within and outside its

region have spurred its economic development through agreeable

terms of trade and mutually beneficial partnerships.

Malaysia has been highly successful in attracting foreign-

direct investment (“FDI”) with its largest benefactors being

China, India, Brazil and the United States. The Southeast Asian

country received RM46.1 billion FDI in just 2008, which accounted

for 73.4% of total investment in 2008, an all-time high for FDI

in the country. The country has also shifted its trade policy

24

away from supporting agricultural and industrial sectors to

promoting service-based sectors. This kind of shift is a typical

indication of a newly development economy as it moves away from

traditionally relying on a manufacturing base dependent on low-

cost labor to innovative and knowledge-based services. This marks

an important transition for Malaysia to compete successfully in

the international trade arena in the years ahead.

In 2011, Malaysia’s top five trading partners are China,

Singapore, Japan, the United States, and Hong Kong. Partnerships

with these countries are incredibly important as China, Singapore

and Japan each facilitate more than 10% of Malaysia’s total

trading volume. India and Brazil are noted to become important

trading partners as well in the years to 2020.

As mentioned in the introduction, Malaysia has set goals to

become a high income nation by 2020 by the Economic

Transformation Program (“ETP”). It is managed by the Performance

Management and Delivery Unit under the Prime Minister. It aims to

more than double GDP per capita from $6,700 in 2010 to $15,000 by

2020. In order to accomplish this goal, they need to grow at 6%

per year. Furthermore, 12 National Key Economic Areas (NKEAs)

25

have been determined to focus investments on in accordance with

the necessary growth. Around 92% of the funding for the

investments will come from the private sector, and companies such

as Shell Malaysia, Airasia, Exxon-Mobil, and Cisco are part of

the project.

The government has continued to commit its national economic

policy spearheaded by the Ministry of International Trade and

Industry (“MITI”) to expanding opportunities in new markets and

to support domestic industries. Malaysia’s open trade policies

relative to most of its regional peers minus Hong Kong and

Singapore have allowed it to accelerate its development in the

region. Going forward, Malaysia is expected to continue that

commitment and continue to seek free trade negotiations to

maintain its goal of becoming a high income economy that is

knowledge-driven and high technology and service industry-based.

Conclusion

Malaysia’s rapid economic growth was initiated by the

proposed Vision 2020 goal in 1990. Since then, Malaysia has

endured two crises – the 1997 Asian financial crisis, and the

26

global financial crisis of 2008. But due to the strong policy

reforms implemented prior to the 1990s, Malaysia was not greatly

affected by these meltdowns and was able to weather these crises

with its strong macroeconomic fundamentals. However, these crises

widened the gap between the nation’s GDP growth and the rate

targeted for the achievement of Vision 2020.

Malaysia has been able to achieve great technical progress,

which has been a source of the nation’s TFP growth; due to their

technological innovation, their economy was able to shift in its

own frontier. Additionally, Malaysia’s rapid accumulation of

capital as well as increase in foreign-owned companies have

increased TFP growth and contributed to the rapid transformation

of the economy. Due to the upturn in the global economy in 2009,

Malaysia’s economy has continuously been improving, and today,

Malaysia is known for being one of the Tiger Club economies.

Malaysia’s successful economic policies have helped to

sustain the nation’s economic growth. But in a rapidly changing

environment, it is important for Malaysia to maintain strong

economic fundamentals and a vigorous financial sector in order

27

for the nation to compete with foreign competition and achieve

its targeted goal of Vision 2020.

28

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