Question

(Netherlands and Malaysia )

Discuss attempts that have been made by the authorities to reduce budget deficits post - GFC (from 2010 to 2018). Were they successful in their endeavour?

Answer 1

ation: United Nations Development Programme

Cite this publication

• Rajah Rasiah

  • 35.94
  • University of Malaya

• Mahani Zainal Abidin

Abstract

As with most of the East and Southeast Asian economies, the impact of the global economic and financial crisis on Malaysia has been felt largely through a contraction in aggregate demand caused by a collapse in exports, either directly or indirectly, to the United States. GDP growth slowed down to 0.1% in the last quarter of 2008, and decelerated by -6.2% and -3.9% respectively in the first two quarters of 2009 as a consequence. This contraction has aggravated the already cooling Malaysian economy. Not only did manufacturing slow down substantially, but the overall GDP growth rate of Malaysia had fallen significantly below its targeted vision 2020 rate for 2000-2007, which was to achieve a per capita income of US$15,450 by 2020. The deceleration is expected to create a shortfall of 26% in 2010 in comparison with the vision 2020 GDP growth trajectory. This is despite the fact that price volatilities and commodity price swings have largely spared Malaysia from serious problems in the commodity sector, even though the subsidy amount borne by the Government to independent power plants and the domestic market increased each time world prices of petroleum and gas rose. Malaysia also did not absorb any direct destabilisation through either the currency or capital market, as it had little exposure to the financial derivatives that emerged from the sub-prime stocks. The Central Bank in the country, Bank Negara Malaysia, also managed the financial sector well following the bitter experience of the Asian financial crisis, and hence non-performing loans as a share of total loans fell to 2.2% in 2008 and remained at roughly that level in the first two quarters of 2009. The Government introduced two rescue packages with attractive fiscal stimuli totalling RM67 billion (US$18.1 billion). The purpose of these packages was to absorb retrenchment and the destabilisation shocks faced by the people and to accelerate development expenditure to offset a fall in aggregate demand because of significantly reduced exports. The 2009-2010 budget went further in its attempt to transform Malaysia into a high-income country. While this is an excellent objective, what is unclear are the strategies required to achieve it. This report details the following steps that must be taken to achieve the 2020 vision: 1. Maintain strong macroeconomic fundamentals and the excellent financial policies undertaken by the Government and its key agencies. 2. Bring much greater balance between external and domestic sources of demand by significantly increasing the latter. 3. Ensure better targeting of stimulus and development packages. 4. Maintain stimulus and development packages to address and overcome the vision 2020 GDP growth path deficit. 5. Ensure a central focus on human resource development policies, prioritising the creation of a much larger pool of indigenous scientists and technologically skilled people. 6. Deepen the policy shift towards a knowledge-based economy. 7. Significantly increase research and development as a percentage of GDP. 8. Re-orientate FDI

policy toward technological upgrading