Bridges Weekly Trade News Digest • Volume 14 • Number 3 • 27th January 2010

Further Liberalisation Can Help Malaysia Ensure Economic Growth: TPR

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Malaysia experienced steady economic growth from 2005 through 2007 but its economy began to slow in 2008 and contracted even more rapidly in 2009, according to the WTO’s Trade Policy Review (TPR) that was released this week.

Malaysia’s real GDP registered 6.2 percent growth in 2007 but only 4.6 percent in 2008. Exports decreased sharply in the second half of 2008, contributing significantly to the slowing of the Malaysian economy and a slight rise in unemployment.

The government reacted promptly to the crisis in 2009, relaxing restrictions on foreign investment in services and increasing public spending. Due to the combination of these factors and positive growth in private consumption, Malaysia’s economy contracted only 3.9 percent in the second quarter of 2009, compared to a 6.2 percent contraction in the first quarter. The review found that healthy foreign exchange reserves, a relatively small external debt, and ongoing financial and corporate sector restructuring are factors which helped Malaysia hold up under the pressure of the financial crisis.

However, Malaysia’s economy is still vulnerable to a downturn and several existing barriers to trade and foreign direct investment may hinder its recovery, the WTO concluded. The review recommended that Malaysia continue to pursue a more liberal trade and investment regime.

“Malaysia’s development of export‑oriented production remains highly successful, and trade plays an important role in the economy,” the report concluded. In the four years since its last review, Malaysia has also retained a very high gross national savings rate of about 37 percent of GDP-one of the highest in the world. Rising gross national saving and substantial decreases in gross domestic investment have created a growing account surplus.

Despite such recent successes, Malaysia might struggle to find new domestic sources of economic growth, the WTO warned. To contribute to the long-term health of its economy, the Malaysian government plans to continue to unilaterally liberalise trade and investment, especially by following through with reforms to its services sector, which were recently begun. However, Malaysia’s development policy still depends on trade and trade-related policy instruments, a feature the report stated was most evident in government procurement and auto manufacturing. Malaysia does have a generally liberal trade policy for the rest of its manufacturing sector as well as for agricultural products.

Growth in services has become a major goal of the Malaysian authorities, who hope to increase services’ share of GDP from around half to 60 percent by 2020. Since April 2009, the government has allowed 100 percent foreign equity in 27 services subsectors.

Other major trade objectives of the Malaysian government include increasing market access for goods and services, advancing the global competitiveness of Malaysian exports, expanding and diversifying trade with existing partners, and exploring new markets.

The WTO reviews its members’ trade policies at regular intervals; Malaysia’s last TPR was conducted in March 2006.

ICTSD reporting.