Concluding Remarks

Looking back on the fifty years since Independence, there is no doubt that Malaysia is a development success story. While Malaysia’s economic performance has been impressive by developing-country standards throughout the post-independence period, the achievements have been truly remarkable in the decade from the late 1980s (prior to the 1997 financial crisis), when there was a decisive shift towards greater outward-orientation of economic policy. The rapid economic growth in the years leading up to the crisis was accompanied by sharp increases in living standards, and some improvement in the distribution of income, ameliorating the twin problems of poverty and racial income imbalances. Although the crisis had devastating effects on output, recovery came relatively quickly and Malaysia soon returned to brisk growth, but at a slower and more sustainable pace. This looks likely to continue into the foreseeable future.

The macroeconomic management policy experience in Malaysia over the past fifty years is one best described as conservative pragmatism. Apart from the period of crisis management, when monetary policy played the dominant role in reviving the economy, fiscal policy has been the major discretionary instrument. As a small, open economy, fiscal policy has served the role of a counter-cyclical stabilizer, to minimize the impact of exogenous shocks, with monetary policy playing an accommodating role. But fiscal policy has also been actively employed in an attempt to address the disparities in income along racial lines. The affirmative action policies of the NEP, designed to improve the status of the Malay population, did constrain the flexibility of fiscal policy to some extent, but never in a significant way.

It would appear that the affirmative action program under the NEP played an important role in ensuring political stability and social harmony. It was an important signaling device, and at the very least it served to demonstrate the intention that all should share in future growth. The actual role that it played in delivering these outcomes is difficult to determine, especially when rapid economic growth and structural change were taking place almost concurrently and may have been the key drivers. The important point is that the resource cost of these direct redistributional policies was not a major drag on growth, given that FDI flows and rapid export expansion were available to augment the domestic resource base.

But that is now history. FDI inflows have not returned to their pre-crisis levels, and the emergence of the People’s Republic of China as a major competitor in export markets suggests the need for change, going forward. Skills shortages and other bottlenecks also appear to be impeding Malaysia’s progression up the technology ladder.

The huge swing against the ruling coalition, resulting in the loss of its two-thirds majority in Parliament following the 8 March 2008 elections, provides both the opportunity and imperative for reform. The most important policy change would be a revamping of the NEP. The focus should shift to eradication of poverty among the entire population, as the goal of reducing inter-ethnic income inequalities has been largely achieved. In its place, intra-ethnic income disparities have worsened, and some of this must be attributed to the way in which the NEP has been implemented.

As noted earlier, the NEP has played an important signaling role, and has played its part in delivering the peace and stability that Malaysia has enjoyed. It is now past its expiry date however. Furthermore, changes to Malaysia’s demographics as a result of Chinese outmigration and significantly higher Malay fertility rates imply that the current system is simply unsustainable. Unless Malaysia is willing to sacrifice macroeconomic stability, then the resource requirements of the current system will be overwhelming. Malaysia has always opted for economic pragmatism during times of economic stress or impending crises and it is to be hoped that this approach will prevail in the future.

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