Malaysia is one of the leading members of ASEAN countries driving the economic growth of the region. It has transformed itself from low base to high base manufacturing region with strong labor force and business friendly economic climate. The macro fundamentals are strong with sustainable GDP growth comparing with region members and global players. The government is maintaining its focus on economic growth to provide better living standards, improved health care and enhanced productivity of the people to achieve the strategic goal of becoming a developed country. Indeed, there are critics who would like the government to do more and turn around the situation. Governments are not perfect. They have got some shortcomings and they try to improve upon. However, Malaysian government has weathered the global financial storm with some tactical maneuvering and strategic moves for its economy to keep pace with the global environment and to benefit the local entrepreneurs of becoming major players not only regionally but also globally as well. It is quite impressive when local companies are making investment abroad thus sending the signal to the market players about its strategic intent, capture the mind share of the investors, create employment in the foreign country, make effective use of the productive labor force and above all continue to bolster the GDP growth of the foreign country.
Malaysian growth success: Strategic analysis
Let’s analyze how Malaysian growth has progressed and what are the key factors that can add value to the growth trajectory. GDP was maintained at 5% is above average globally speaking. Inflation is well under controlled i.e. 4% taking into account that government provides subsidiary in many areas like many other governments around the world. Major Banks like CIMB and MayBank are spreading their wings and moving into big markets like Indonesia and India. The market cap of both the banks is over $17 billion according to Forbes magazine Jan-2012 issue. Major development in infrastructure and construction is going on with government planning to invest around $450 billion by 2020 and raising funds through Sukuk. This is huge and clearly illustrates the government intention to give a boost to infrastructure development in order to attract foreign direct investment and to lay the ground work for more MNC relocating their operations in the region. Many companies are relocating their operation from China to Malaysia since cost structure in China is not cheap anymore. If you read the book from my Harvard educated friend, “The End of Cheap China” by Shaun Rein, readers will get lot of insight about the Chinese cost mechanism. Real Estate market in malaysia is getting a lot of foreign investment in the shape of Malaysia As Second Home policy. Financial markets are looking to Malaysia as she is turning into herself as the hub / center of Global Islamic Finance in the APAC region. Malaysia currently holds the largest market share of Sukuk issuance amounting to 67% globally. Toyota has issued Sukuk bonds recently for over $150 million to cite a small example. Islamic Finance is getting strong foothold in Indonesia, Japan, France, UK, Singapore and UAE. Malaysia is leading from the front in the Islamic Banking whose market size is over $1.3 trillion globally.
I came across a recent World Bank paper written by Sohrab Rafiq and Albert Zeufack titled “Fiscal Multipliers over the growth cycle” March 2012 in which they concluded that government spending is the only way to boost GDP growth and stimulating economy. They were less enthusiastic about tax cut reforms can boost growth. In my humble opinion, it is not true. Government spending does not stimulate the economy. Careful analysis of leading economists globally and Nobel laureate provide some interesting facts. The debate hinges on the scale of the “fiscal multiplier”. This measure captures how effectively tax cuts or increases in government spending stimulate output. A multiplier of one means that a $1 billion increase in government spending will increase a country’s GDP by $1 billion.
Read the article in the Economist magazine “ Much ado about multipliers” dated 24th September, 2009 gives you a clear indication the importance of tax cut over government spending to enhance GDP growth. Empirically proven.
The size of the multiplier is bound to vary according to economic conditions. For an economy operating at full capacity, the fiscal multiplier should be zero. Since there are no spare resources, any increase in government demand would just replace spending elsewhere. But in a recession, when workers and factories lie idle a fiscal boost can increase overall demand. And if the initial stimulus triggers a cascade of expenditure among consumers and businesses, the multiplier can be well above one.
The multiplier is also likely to vary according to the type of fiscal action. Government spending on building a bridge or Infra structure development may have a bigger multiplier than a tax cut if consumers save a portion of their tax windfall. A tax cut targeted at poorer people may have a bigger impact on spending than one for the affluent, since poorer folk tend to spend a higher share of their income. Tax cuts are more effective in provide boost to the economic growth going forward. Plus it is the monetary policy that drives the economy and not the fiscal policy. I have attended the lecture series delivered by Christina Romer Ex-Economic Advisor to President Obama titled: " The lessons from great depression" which she read at Brooking institute in March 2009 emphasising the role of monetary policy has in driving the economy for the nation. Malaysian central bank has used the monetary policy in a very strategic and effective manner to stimulate the economy with the right ammunition required for the economy.
Crucially, the overall size of the fiscal multiplier also depends on how people react to higher government borrowing. If the government’s actions bolster confidence and revive animal spirits, the multiplier could rise as demand goes up and private investment is “crowded in”. But if interest rates climb in response to government borrowing then some private investment that would otherwise have occurred could get “crowded out”. And if consumers expect higher future taxes in order to finance new government borrowing, they could spend less today. All that would reduce the fiscal multiplier, potentially to below zero. I think Malaysian government is focusing in a strategic manner. GDP does not increase just on the basis on one variable either it is Investment or government spending or Consumption only . 4 factors i.e Consumption, Investment, Government and Net Exports combined together give boost to GDP growth. Prime Minister Najib’s government is focusing and revisiting his strategy to bring about structural reforms to remain on growth path to compete globally with advance economies. So critics and people who write in the newspapers have limited knowledge about basis economics and finance and tend to gain nothing by writing sub-par articles of no economic value. In my humble forecast, Malaysian GDP growth would touch 5% in 2012 taking into account the strong economic reforms and structural measures taken by the government to bring about change to achieve economic prosperity.