A long way from 1954
MALAYSIA has come a long way since the World Bank’s first mission to the country in 1954. The mission, spanning five months from January to May, covered Malaya and Singapore, then dependencies of Britain.
From the mission came the World Bank’s first economic report of the 11 peninsular states and Singapore, published in 1955, the same year the first Malayan 5-year plan was unveiled.
It came at a time when a communist insurgency was raging in the countryside where more than two-thirds of the British-administered territory’s 5.7 million people lived. The population is now 30 million and by some measures, 70% urban. Malaysia will also unveil the 11th Malaysia Plan in May.
The World Bank mission then was favourably impressed with the country’s economic potentialities and prospects for expansion but questioned whether the pace of growth could move ahead or even keep up with the population growth in general and labour growth in particular.
The per capita income then was around US$250, today it is US$10,500. Right up to the late 1960s, agriculture in the form of rubber cultivation and tin mining formed the basis of the economy. Since the mid-2000s, domestic demand has overtaken exports as the main growth driver.
Modern Malaysia has a diversified economic base with a thriving manufacturing sector and a growing services sector. Agriculture has not been neglected with oil-palm cultivation now the sector’s mainstay and efforts to move up the value chain for the industry ongoing. In the mining sector, oil and gas projects in recent years have taken centre-stage.
Coming full circle, after several years of working closely with Malaysia on the twice-yearly Malaysia Economic Reports, the World Bank is now setting up an office in Kuala Lumpur, a cosmopolitan city of skyscrapers, expressways, modern public transportation and malls.
Unlike the young Malaya then, today’s Malaysia has a matured economy. While Axel van Trotsenburg, the World Bank’s regional vice president for East Asia and Pacific, says the country has developed successfully over the last couple of decades, challenges remain for Malaysia’s march to high-income status.
Here recently to sign off on an agreement with the Government on the establishment of the office, he says Malaysia’s progress has been impressive with a per capita income in purchasing power parity (PPP) terms nearing US$24,000.
The 2014/2015 Economic Report released by the Finance Ministry shows that per capita income in PPP terms is projected at US$23,512.
The macro issues
Malaysia’s diversified economy now has other issues than just job creation as the first mission noted. Plunging global oil prices and an uncertain economic outlook, for one, will test the country’s commitment to reforms aimed at lowering the fiscal deficit in the coming months.
In fact, the World Bank has cut its assumptions for Malaysia’s gross domestic product (GDP) growth to 4.7% from 4.9% and for global growth to 3% from 3.4% previously.
Foreign investors are cautious over Malaysia’s outlook, which has led to a weakening ringgit and higher yields for the country’s benchmark 10-year sovereign bonds.
Fitch Ratings has maintained a “negative” outlook on the country’s sovereign ratings while Standard & Poor’s Ratings Services and Moody’s Investors Service have decided to maintain respectively a “stable” and “positive” outlook for now.
Given the slower global growth, Malaysia’s exports will be affected with the World Bank now assuming that exports will slow to a 4.1% pace this year compared to an estimated 5.4% in 2014. This will in turn impact the current account, where several economists expect the country to have a trade deficit in the coming months.
However, van Trotsenburg says it is not for the World Bank to prescribe to countries like Malaysia that has a more advanced economy and well-developed institutions what it needs to do.
“There is a difference between a very poor country that still has to go through institutional development in many areas whereas Malaysia has reached a stage of development where it knows exactly what it wants and then wants very specific advice from the bank. I think its a very healthy relationship,” he tells StarBizWeek.
Van Trotsenburg points out that Malaysia has specific programmes to transform the economy and society and the World Bank’s role with the setting up of the office will be to bring more international experts to help the country in areas where it seeks the bank’s advise.
“We can discuss options that Malaysia can consider but I think Malaysia knows best how it will manage the reforms,” he says, pointing to the revised Budget 2015 and other measures such as the abolishment of the fuel subsidy as moves that give clarity and reassurance to investors.
“I think that is a very strong measure and a very clear indication of the resolve to also deal with the fiscal soundness of this country,” van Trotsenburg says, adding that volatile oil prices do not make economic management any easier.
He contends that in the context of the drop in oil prices, Malaysia’s fiscal deficit is still lower, at the revised 3.2% of GDP (from a 3% deficit target previously), than last year’s deficit of 3.5%.
“This shows clearly that the Government is very much committed and clear about maintaining sustainable macroeconomic policies. In this regard, it has a very good track record,” van Trotsenburg says.
Similarly, he adds that the country has used the time afforded by the last couple of years’ growth to craft policies preserving economic performance. “Nobody is denying that there are continuing challenges for everybody but overall Malaysia has used its degree of freedom well over the last couple of years in order to preserve fairly strong growth,” van Trotsenburg says.
The Government has revised GDP growth assumptions to 4.5% to 5.5% from 5% to 6% earlier.
Van Trotsenburg says Malaysia’s performance is not too bad when compared to Japan and the eurozone, where despite strong measures, growth has been disappointing.
On the matter of the reforms needed for economic development to forge ahead, he says a macroeconomic framework based on a sound financial system, the ease of setting up and operating businesses and a more inclusive society supported by a decent education system, are important.
Regional integration is one area in which the World Bank is pushing.
For the 10-member Asean grouping, this year will be a crucial period because at the end of the year, the first of the three pillars of Asean integration, the Asean Economic Community will be realised.
Van Trotsenburg says Malaysia will play an important in regional integration this year given the country’s position as Asean chair. “I think 2015 is a unique opportunity to provide that leadership, we still see a lot of potential in Asean integration and we hope that a country like Malaysia can be a leader in Asean integration,” he adds.
Drawing from the experiences of the European Union, van Trotsenburg says there are more benefits in integration than pitfalls.
“I believe that despite all the problems that the EU has encountered, there have been successes such as boosting incomes,” he says.
Van Trotsenburg says besides trade, there is still enourmous potential for Asean integration including on transportation and infrastructure. “I think there are many areas where we can actually find new ways of cooperating. We feel that Malaysia can play a very active role,” he says.
Although integration is moving along at a steady pace, critics have noted that this is because Asean members have largely concentrated on trade issues, leaving sensitive issues such as free movement of labour out of the discussions.
Van Trotsenburg says in regional integration, a winning formula is important and trade is where the low-hanging fruits are usually found. “If you start with the most difficult chapter, this may actually be more difficult to deepen as free movement of labour is one of the hardest areas to come to an agreement.
“However, this should not prevent countries seeking new ways of integration,” he says.