How globalized is Malaysia?

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How globalized is Malaysia?

By

Zaharul Nizam Bin Hussain

Introduction

Malaysia is a medium size economy that has benefitted from the globalization of the world

economy. Globalization includes flows of goods and services across borders, international

capital flows, reduction in tariffs and trade barriers, immigration, cultural transformation, and

the spread of technology and knowledge beyond borders.

Economic 'globalization' is generally defined as the openness, integration, and

interdependence of various economies, whereby economic activities, products, services,

capital, intellectual properties and investments are flowed across borders; whereby global

resources are operated internationally. Globalization and liberalization are no strangers to

Malaysia. An open economy even before her independence in 1957, Malaysia has from the

very beginning sought to integrate her economy with the rest of the world by carrying out a

series of liberalization policies in trade and investment – all in an effort to make trade the

engine of growth. This strategy has been very successful in the past, propelling the country

into the ranks of middle-income countries. As long as Malaysia enjoyed robust economic

growth rates, this strategy was never in question.

Malaysia showed her commitment in accepting the challenges of globalization by joining the

General Agreement on Tariffs and Trade (GATT), and further ratified the establishment of

the World Trade Organization (WTO) on 6 September 1994 (to replace the GATT with effect

from 1 January 1995).

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Globalization in Theory

Robertson (1992, p.8) one of the most influential exponents of globalization defines it as:

“Globalization as a concept refers to the compression of the world and the intensification of

consciousness of the world as a whole”. While Giddens (1990, p.64) states that

“Globalization can thus be defined as the intensification of worldwide social relations which

link distant localities in such a way that local happenings are shaped by events occurring

many miles away and vice versa”. According to Bradley et al. (2000, p.15): “For Giddens, a

key aspect of modernity has been the significance of what he calls ‘time-space instantiation’.

By this Giddens is referring to the way in which, during the modern period, developments in

transportation and communications technologies have meant that local events and institutions

have come to be increasingly influenced by distant developments.”

For Tan (2002, p.82) globalization is predominantly an economic concept. Camilleri (1998,

pp.5-18) certainly will agree with Tan. Camilleri (1998, p.7) especially sees the accelerating

trade, investment, and finance and technology flow across national boundaries as the engine

of globalization. Lodge (1995, p.xi) summarizes it in the following passage: “Globalization is

a fact and a process. The fact is that the world’s people and nations are more interdependent

than ever before and becoming more so. The measures of interdependence are global flows of

such things as trade, investment, and capital, and the related degradation that constantly

reminds us that we are passengers on a spaceship, or, more ominously, a lifeboat.”

The process of globalization is both technological and human. Technologically, new systems

of global information and communication foster and link the agents of globalization-

multinational corporations, sometime with governments as their partners. On the human side,

globalization is pulled by exploding consumer desires, especially in the rapidly growing

countries of Asia, and pushed by ingenious corporate managers, who themselves are driven

by variety of urges- to serve their communities or their shareholders, to gain wealth and

power, or simply to exercise their skills and talents. Globalization is a promise of efficiency

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in spreading the good things of life to those who lack them. It is also a menace to those who

are left behind, excluding from its benefits.

Malaysian Economics

The Malaysian economy has experienced significant structural changes since the last four and

half decades. Agriculture was the main source of growth in the early phase of development.

The country has since moved rapidly away from agriculture towards manufacturing and is

presently leaning towards a service centered knowledge based economy. Since independence

in 1957, Malaysia has moved from an agriculture-centered economy to a more diversified and

export oriented industrial economy (Sunthralingam & Santiago, 2006, p.6).

The Malaysian economy has been relaying on foreign direct investment, international trade

and foreign capital to grow for many years. From an agrarian economy, Malaysia has become

industrialized in about 30 year, where many multinational corporations have their operation

here. “Seventy-five per cent of our manufacturing was produced by foreign multinational

corporations which also employed 45 per cent of the work force” (Phua & Soo, 2004, p.158).

Table 1 shows the direction of Malaysia trade with various selected countries. It shows the

volume and percentage of Malaysia total export and import from 1995 to 2005.Table 2 shows

the Malaysia’s Balance of Payments and Table 3, Malaysia’s External Trade for year 2011

and 2012. It shows that the Malaysian economy is increasing global in nature.

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Table 1: Direction of Malaysian Global Business in the World Economy from 1990 to 2005

(From Al-Amin, Abul Quasem, Siwar, Chamhuri, Jaafar, Abdul Hamid and Mazumder,

Mohammad Nurul Huda , Globalization, Environment and Policy: Malaysia Toward a

Developed Nation (August 29, 2007). Available at SSRN: http://ssrn.com/abstract=1010565)

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Table 2: Malaysia Balance of Payments

Table 3: Malaysia External Trade

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Chart 1 shows the Malaysian direct investment. According to Department of Statistics, DIA

stock rose by RM38.7 billion to stand at RM337.5 billion in 2011 from RM298.8 billion

attained a year ago. Such an increase was mainly attributed to equity capital & reinvested

earnings of RM23.7 billion (11.7 per cent). In terms of proportion, equity capital &

reinvested earnings represented 66.9 per cent while other capital constituted the remaining.

The bulk of this investment was generated mainly by Malaysian companies in financial &

insurance sector of 28.9 per cent, followed by oil & gas sector 27.3 per cent, and agriculture

sector 10.1 per cent. The top three destinations of DIA were Singapore, Indonesia, and

Mauritius. The level of FDI in Malaysia rose to RM363.9 billion in 2011 from RM313.0

billion in 2010, an increase of RM50.9 billion or 16.3 per cent. Equity capital & reinvested

earnings components formed the largest portion amounted to RM341.6 billion or 93.9 per

cent. The manufacturing sector remained as the leading FDI recipient of 47.5 per cent,

followed by financial & insurance sector of 22.4 per cent, and wholesale & retail trade sector

of 8.3 per cent. The top three sources of FDI were from Singapore, Japan, and USA.

On net basis, FDI showed a higher position as compared to DIA to record a net direct

investment position of -RM26.5 billion (2010: -RM14.2 billion). Equity capital & reinvested

earnings recorded a net position of -RM115.7 billion (2010: -RM91.8 billion). In contrast,

other capital showed a positive net position of RM89.2 billion from +RM77.5 billion in 2010.

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Chart 1: Direct Investment, 2001 - 2011

Source: Department of Statistics

Globalizing Phenomena in Malaysia

During the past 30 years, the Malaysian economy has changed from an agrarian based

economy to an industrialized economy; and now it is trying to develop into a K (Knowledge)

Economy. All these mega projects have made Malaysia go global in one way or another. In

order to achieve the above objectives Malaysia has to adopt a more open policy, not only

economically but also socially and culturally. Now, Malaysian youth have more access to the

alternative media, and are open to more influences from around the world (Phua and Soo,

2004, pp.151-182).

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In 1990, the NEP was replaced by the more liberal National Development Plan (1990-2010).

In 1991, in order for Malaysia to become a developed nation by the year 2020, the then Prime

Minister, Tun Dr Mahathir Mohamad, announced Vision 2020. Consequently, there has been

an opening up of the Malaysian market, migration of people in and out of Malaysia, opening

up of education policies, etc.; all this marks a globalized era for Malaysia. This is in fact

ambitious social engineering, and a deliberate policy choice in order to transform Malaysia.

However, after the Asian economic crisis in 1997, Malaysia is now much more cautious

about opening up its economy and other policies. However, in order to achieve the above

objective the Malaysian government still has to adopt a more open policy in a few key areas

as compared to before, thus resulting in some globalizing experience.

Malaysia and AFTA

AFTA is a free trade zone in Southeast Asia where member countries include Malaysia,

Singapore, Thailand, Philippines, Indonesia, Vietnam, Laos, Myanmar, Cambodia and

Brunei. The AFTA agreement supports the effort to relax trade barriers amongst member

countries in order to achieve direct trade benefits. AFTA was established in 1992. AFTA is a

collective effort by ASEAN member countries to reduce/eliminate tariffs on intra-ASEAN

trade. The purpose was to develop greater trade and industrial linkages among ASEAN

member countries. With a combined population of 513 million people, the establishment of

the Free Trade Area among ASEAN offers vast potential for greater economic collaboration.

AFTA has been realized through the Common Effective Preferential Tariff (CEPT) Scheme.

Under the CEPT:

a) import duties among member countries will be reduced to between 0-5% by the full

implementation of AFTA in 2010

b) elimination of quantitative restrictions (import permit, quota) & other non-tariff

barriers (NTBs) among ASEAN Member countries

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c) progressive transfer of products into the CEPT Scheme based on each ASEAN

member's capacity and capability.

The following charts show Malaysia’s trade with ASEAN countries for January 2012.

Chart 2: Exports, Jan 2012, percentage share

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Chart 3: Exports, Jan 2012, percentage share

Source: Department of Statistics

Malaysia and WTO

The World Trade Organization (WTO) is the only international organization dealing with

multi-laterally agreed rules on trade among its member countries. Through the WTO

agreements, which spell out their rights and obligations, Member countries operate a non-

discriminatory trading system that has allowed world trade to grow. The goal is to help

producers of goods and services, exporters and importers conduct their business in a manner

that ensures predictability and stability (MBAM, 2007, p.70).

WTO provides benefits to its members through the establishment of an international trading

environment which is transparent and predictable. These benefits are secured through the

implementation of members’ obligations in the form of trade rules and market access

negotiated on a multi-lateral basis. As a major trading nation, transparency and predictability

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in trade rules are important to Malaysia. Malaysia is able to comply with WTO obligations as

it has:

a) Adhered to multi-lateral trading rules as a member in the GATT;

b) Continuously been undertaking voluntary reduction and elimination of tariffs to

enhance Malaysia’s competitiveness; and

c) Adopted open and transparent trade policies and measures over the years

Malaysia already had a liberal and open import regime. On its own accord, Malaysia

liberalized its import regime by reducing duties on many products beyond its WTO

commitments. Malaysia’s specific commitments include:

a) Binding of tariffs on 6,741 tariff lines (products) comprising 5,531 non-agricultural

and 1,210 agricultural products accounting for 64% of Malaysia’s tariff lines. The

average bound tariff rate for Malaysia is 14.9%. This compares favorably with the

average bound rate of other developing countries such as Thailand (24.2%),

Philippines (23.4%), Egypt (28.3%), India (34.3%) and Mexico (34.9%).

b) Elimination of duties in stages for information technology products under the

Information Technology Agreement (ITA). Being a party to the ITA supports

Malaysia’s wider objective of encouraging greater use of information and

communication technology.

Malaysia is fully supportive of efforts in the WTO to develop multilateral rules on trade

facilitation as these measures would speed up delivery of goods, simplify custom procedures

and reduce transaction costs (MBAM, 2007, pp.71-77).

Conclusion

Malaysia is now the 14th most competitive economy in the world, according to a survey

carried out by the Institute for Management Development (IMD) of Switzerland. The IMD

survey measures how well countries manage their economic and human resources to increase

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prosperity. Malaysia’s overall improved ranking in the IMD survey reflects the impact of the

measures the Government has undertaken to improve the competitiveness of the Malaysian

economy. These wide-ranging measures include improvements in the delivery and efficiency

of public services and increased transparency and accountability. Malaysia’s enhanced

competitiveness is rooted in the innovative and bold initiatives undertaken by the

Government in the past year to drive development, growth and create a resilient private

sector. (18th APEC Ministers Responsible for Trade (MRT) Meeting in Kazan, Russia from 4

– 5 June 2012).

The IMD survey assessed countries according to 4 main competitiveness factors:

a) Economic Performance

b) Government Efficiency

c) Business Efficiency

d) Infrastructure

The simplest and usual index for measuring trade openness is ratio of trade (sum of export

and import) to the Gross Domestic Product (GDP) of country. The trade openness of

countries depends on trade policy (restriction on trade) as well as the geographical and

economic characteristics of a country. Therefore, countries with small population will trade

(as a proportion of GNP) more than large countries (Samami, Lim, & Buang, 2011, p.7).

The measurement of globalization is not an easy task, given that there is lacks of uniform and

generally acceptable definition of globalization. There is variety of globalization

measurement and no standard rule for measuring it. According to Samami, Lim and Buang,

2011, the simple measurement to measure globalization are:

a) Gross capital flows

The sum of gross inflows and outflows as a ratio to national GDP is known as good ratio

that can capture two-way flows. It also provides sensible and logical picture of

globalization.

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b) Foreign assets and liabilities

The sum of gross stocks of foreign assets and liabilities as a ratio to GDP is corrected for

valuation effects. This ratio omits the problems of flow data.

c) Foreign direct investment

From production standpoint, FDI is an important vehicle of globalization. FDI is the best

kind of foreign investment that is non-debt flows. This type of foreign investment is less

volatile than other types of foreign investment. It also plays a significant role to transfers

of technology and new management knowledge to the host country.

The progress of Malaysian economy is highly influenced by three critical factors namely

public delivery system, foreign direct investments and financial markets. The opening of

Malaysia’s market has encouraged inflows of foreign direct investment and injected

competitive elements into domestic industries. The implementation of the WTO and AFTA

trade agreements will result in positive benefits for Malaysia’s globalization economy.

Overall, globalization has done a tremendous job in Malaysia, making one of the successful

world leaders. Globalization has enormous potential and as long as it is properly managed, it

will affect all parties involved.

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References

Bradley, H. et al. (2000). Myths At Work, Cambridge: Polity.

Camilleri, J. A (1998). “Globalization and the New Internationalism” in Camilleri, J. A. &

Muzaffar, C. (ed.). Globalisation: The Perspectives and Experiences of the Religious

Traditions of Asia Pacific, Petaling Jaya: International Movement for a Just World. Lodge, G.

C. (1995). Managing Globalization in the Age of Interdependence, Kuala Lumpur: Golden

Book Centre.

Giddens, A. (1990). The Consequences of Modernity, Cambridge: Polity Press.

MBAM. (2007). Master Builders Association Malaysia 4th

Quarter Article. Kuala Lumpur.

Phua, K. L. & Soo, K. S. (2004). What’s Ahead for Malaysia: Contemporary Challenges and

Emerging Trends, Subang Jaya: Pelanduk.

Robertson, R. (1992). Globalization: Social Theory and Global Culture, London: SAGE.

Samami, P., Lim, G.C. & Buang, A.Z. (2011) Globalization Measurement: Notes on

Common Globalization Indexes. Journal of Knowledge Management, Economics and

Information Technology, 7, 1-20.

Sunthralingam, C. & Santiago, C. (2006). The Impact of Malaysian Economic and Small

Scale Producers, Kuala Lumpur: Southeast Asian Council for Food Security and Fair Trade.

Tan, A. M. (2002). Malaysian Private Higher Education: Globalization, Privatization,

Transformation and Marketplaces, London: Asean Academic Press.

How globalized is Malaysia?

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