Malaysia and the Challenges of Globalization: An Economic ...



Malaysia and the Challenges of Globalization:

An Economic Perspective

Mansor Md. Isa

Faculty of Business and Accountancy

University of Malaya

50603 Kuala Lumpur, Malaysia

mansor@um.edu.my

Paper presented at the “10th Biennial Tun Abdul Razak Conference”, Multicultural Center, Ohio University, Athens, Ohio, USA, 11-12 May 2007.

Malaysia and the Challenges of Globalization:

An Economic Perspective

Mansor Md. Isa, University of Malaya

1. Introduction

One of the main focus of the third Malaysia’s Outline Perspective Plan that was termed as the National Vision Policy that runs over a 10-year period 2001-2010 was stated as “enhancing competitiveness to meet the challenges of globalization and liberalization”. In fact similar assertion was already made in the previous 10-year plan, the National Development Policy, 1991-2000. It was towards the end of the eighties and into the nineties that the Malaysian government gave explicit recognition to the need of our industries to increase its competitiveness to face the world of globalization. However, enhancing competitiveness is just one of many responses towards globalization which itself has many facets of interpretations.

Globalization may be defined as a process of promoting greater movement of people, goods, capital and ideas due to increase economic integration especially in the form of trade and investments as manifested in efforts by many countries to remove trade and travel barriers. In many respects, globalization is not a totally a new phenomenon as people have been interacting economically, socially and politically, with each other from great distances for centuries. What is really new is that the pace of this interaction has accelerated dramatically in the last few decades, as countries have opened their economies to trade and capital through the implementation of free-market economic systems and the reduction in barriers to international trade.

The term globalization in the economic sense can be broadly defined as a process relating to the integration of economies worldwide where world economy is viewed as a single market and production area with regional or sub-sectors rather than a set of national economies linked by trade and investment flows. In addition it is characterized by cross border operations of economic activities in terms of investment, financing, technology utilization, production and marketing with the aims of achieving cost competitiveness.

The term globalization is often used in tandem with the term liberalization. In fact liberalization is a response to or resulting from globalization. If countries were to obtain maximum benefit from globalization they need to liberalize or “open-up” domestic market. Liberalization include the reduction of tariff and non-tariff barriers; deregulation of domestic laws, rules and procedures such as the relaxation of investment and capital flows between countries; and enhanced transparencies in policies and practices.

2. The Blessings of Globalization

Logically globalization should bring more benefits than costs to all participating countries. In a rather slanted view, Griswold, 2000 insisted that the less-developing countries (LDCs) have the most to gain from engaging in the global economy. First, they gain access to much larger markets, both for imports and exports. On the import side, consumers gain access to a dramatically larger range of goods and services, raising their real standard of living. Domestic producers gain access to a wider range and better quality of intermediate inputs. On the export side, domestic industries can enjoy a quantum leap in economies of scale by serving global markets in addition to selling in domestic market. However in order to benefit from international trade industries in LDCs must achieve global competitiveness in their production and marketing activities.

Second, LDCs that open themselves up to international trade and investment gain access to a much higher level of technology. This confers on LDCs a "late-comer's advantage": rather than bearing the cost of expensive R & D, LDCs can import the technology off the shelf. They can incorporate new technology by importing capital equipment that embodies the latest advances and computers with the latest software. Foreign Direct Investments (FDIs) and subsidiaries of multinational companies also bring with them new production techniques and employee training that bolsters the host nation's stock of human capital. In order to ensure smooth technology transfer however, host countries must educate and equip its human resource to be technology literate.

Third, engagement in the global economy provides capital to fuel future growth. Most LDCs are people-rich and capital-poor. In a few countries in Asia, the level of domestic savings has been high enough to finance domestic investment, but typically the domestic pool of savings in an LDC is inadequate. Global capital markets can fill the gap, allowing poor nations to accelerate their pace of growth. A poor country that closes its door or fails to maintain sound domestic policies will forfeit the immense benefits this capital can bring. However, we have also witnessed many examples of financial globalization resulting in economic turmoil and crisis. The East Asian financial crisis in 1997 was a case in point.

Fourth, globalization offers hope to the poor countries. Just as more open trade tends to promote economic growth, growth in turn leads to poverty reduction. The greatest reductions in poverty in the last twenty years have occurred in nations that have moved decisively toward openness and domestic liberalization. The wealthiest nations and regions of the world – Western Europe, the United States, Canada, Japan, Hong Kong, Taiwan, South Korea, Singapore –are all trade-orientated. Their producers are competing successfully with other multinational producers in the global marketplace. In contrast, the poorest regions of the world – the Indian subcontinent and sub-Saharan Africa – remain the least friendly to foreign trade. And those countries that have moved decisively towards openness like Chile, China, and Poland, among others have reaped real (in the case of China, spectacular) gains in living standards.

3. Malaysia’s “Involvement” in Globalization

3.1 Malaysia and Global Trade

Malaysia has long felt that the most effective ways to develop its economy is through industrialization programs and the fastest way to do this was by inviting foreign direct investments (FDI). Since domestic market was limited in size, Malaysia has been aggressively exporting its industrial products to the world. It may be said that our economic success has been largely due to external trade.

Table 1 shows the ratio of external trade to gross domestic product (GDP) of several selected countries for the years 1999 and 2000. Malaysia is ranked number three in the list, preceded only by Singapore and Hong Kong. The fact that Singapore and Hong Kong top the list is not surprising as both island states traditionally function as entree ports and export outlets for their hinterlands. The trade to GDP ratio of 2.3 garnered by Malaysia means that the total size of Malaysia’s external trade was 2.3 times the size of its GDP.

Table 1

Ratio of External Trade to GDP for Selected Countries for 1999 and 2000.

|Country |Merchandise Ratio |Service Ratio |Total Trade Ratio |

| |1999 |2000 |1999 |2000 |1999 |2000 |

|Singapore |3.099 |2.953 |0.581 |0.523 |3.680 |3.476 |

|Hong Kong |2.234 |2.562 |n.a. |0.410 |n.a. |2.972 |

|Malaysia |1.333 |2.013 |0.208 |0.295 |1.541 |2.307 |

|Canada |0.438 |0.758 |0.080 |0.113 |0.518 |0.871 |

|South Korea |0.534 |0.728 |0.076 |0.135 |0.610 |0.863 |

|New Zealand |0.441 |0.545 |0.131 |0.175 |0.572 |0.719 |

|Germany |0.460 |0.563 |0.077 |0.114 |0.537 |0.677 |

|United Kingdom |0.413 |0.439 |0.100 |0.147 |0.513 |0.586 |

|France |0.371 |0.466 |0.111 |0.110 |0.482 |0.577 |

|Australia |0.264 |0.347 |0.075 |0.091 |0.339 |0.438 |

|USA |0.158 |0.207 |0.040 |0.048 |0.198 |0.255 |

|Japan |0.171 |0.177 |0.041 |0.038 |0.213 |0.215 |

Source: World Development Indicators, 2002, The World Bank

Table 2 shows the direction of external trade (exports and imports) between Malaysia and other selected countries/regions for the first-half of the years 2002 and 2003. The major export markets for Malaysia are the USA (about 21% of total export), Singapore 17%, Japan 10% and European Union 12%. ASEAN countries excluding Singapore take about 9% of Malaysia’s export. Major import sources include USA and Japan with each supplying about 18% of Malaysia’s needs, Singapore 12% and EU 11%, and ASEAN 11%. An additional point to note from the table is that, except with Japan, trade balance with all countries and regions are largely positive in Malaysia’s favor. In view of its dependent on external trade, it would be wise for Malaysia to take the forces of globalization in a very serious manner, especially in relation to developed countries such the USA, Europe and Australia, as these are our largest trade partners.

Table 2

Malaysia: Direction of External Trade for Selected Countries/Regions, 2002-2003, January-June (USD million)

|Country/Region |Export |Import |Trade Balance |

| |2002 |2003 |2002 |2003 |2002 |2003 |

|United States |9,352 |8,044 |6,804 |6,112 |2,548 |1,932 |

|% |21.0 |16.9 |17.6 |16.1 | | |

|Singapore |7,712 |7,996 |4,673 |4,631 |3,038 |3,365 |

|% |17.3 |16.8 |12.1 |12.2 | | |

|Japan |5,042 |5,426 |6,817 |6,719 |-1,774 |-1,293 |

|% |11.3 |11.4 |17.7 |17.7 | | |

|European Union |5,535 |6,140 |4,350 |4,479 |1,185 |1,660 |

|% |12.4 |12.9 |11.3 |11.8 | | |

|ASEAN (excluding Singapore) |4,092 |4,426 |4,178 |4,404 |-87 |23 |

|% |9.2 |9.3 |10.8 |11.6 | | |

|Australia |957 |1,142 |682 |607 |275 |535 |

|% |2.1 |2.4 |1.8 |1.6 | | |

|TOTAL |44,570 |47,595 |38,594 |37,962 |5,976 |9,633 |

Source: Economic Reports (2002-2003 and 2003-2004)

3.2 Malaysia and Global Investments

Immediately after gaining independence, Malaysia embarked on economic diversification programs that focused on the development of the industrial sector, commercialization of agriculture and development of a modern services sector. The development and expansion of the industrial sector was made possible through large inflows of FDIs, principally from multinational companies based in UK, USA and Japan. To attract these inflows Malaysia introduced various forms of investment incentives.

One of the important incentives was the granting of Pioneer Status to foreign investors through the Pioneer Status Act of 1958 that allowed tax holidays to a maximum of eight (8) years depending mainly on the amount of capital invested. Those who did not qualify for Pioneer Status may qualify for other tax benefits such as investment tax allowance, industrial adjustment allowance, infrastructure allowance, double deduction for promotion of exports, incentives for the multimedia super corridor, incentives for strategic knowledge-based company, incentives for the manufacture of machinery and equipment, incentives for manufacturing related services, etc.

Malaysia’s strength in fundamentals such as trade openness, legal protection of patents, low tax rates, commitment to market pricing, a highly educated workforce, an efficient and diversified financial system, strong corporate governance, well-developed infrastructure and a wide array of tax incentives continue to be recognized as strong points in attracting FDI. Based on the various incentives offered, Malaysia received large inflows of FDIs that significantly contributed towards the development and expansion of the industrial and services sectors and, to some extent, the agricultural sector. Within a short period of time Malaysia moved ahead from import substitution industries in the 1960s, to export oriented (1970s), and followed by the heavy industries (1980s). Today, Malaysia is amongst the world’s largest producer and exporter of electric and electronic goods, textiles and other related products. Exports of manufactured goods for 2003 account to 82 percent of the total exports.

The UNCTAD World Investment report 2003 listed Malaysia as one of the top ten economies with the largest FDIs.[1] This is shown in Figure 1 and Table 3. As shown by the table in 2002 Malaysia attracted some USD3.2 billion investments (or about 0.5 percent of the world’s total FDI). The largest recipient seems to be Peoples Republic of China with a whopping USD53 billion of FDI inflows.

Figure 1

Top 10 Developing Economy FDI Recipients in 2002.

[pic]

Source: UNCTAD (from Bank Negara Malaysia Annual Report, 2003)

Table 3

FDI Inflows by Selected Host Country/Region, 1991-2002 (USD million)

|Host Country |1991-96 |1997 |1998 |1999 |2000 |2001 |2002 |

| |(Ann..Avg) | | | | | | |

|Malaysia |5,438 |6,323 |2,714 |3,895 |3,788 |554 |3,203 |

|North Afr (6 |1,615 |2,716 |2,882 |3,569 |3,125 |5,474 |3,546 |

|countr) | | | | | | | |

|European Union1 |87,584 |127,888 |249,934 |475,542 |683,883 |389,432 |374,380 |

|Asia2 |31,564 |49,199 |28,839 |39,390 |84,139 |41,827 |37,121 |

|Singapore |6,856 |13,533 |7,594 |13,245 |12,464 |10,949 |7,655 |

|Japan |890 |3,225 |3,192 |12,742 |8,323 |6,243 |9,326 |

|World |280,550 |476,934 |683,211 |1,096,554 |1,200,783 |711,445 |647,363 |

1 Refers to former group of 15 nations

2 Refers to West Asia, Central Asia, and South, East and South-East Asia

Source: World Investment Report, 2003, UNCTAD, United Nations

Table 4 shows the outflow of FDIs by selected home country/region for the period 1991-2002. Again, the European Union tops the list with a total of FDI outflow of USD394 billion or 60 percent of the world’s total in 2002. This is to be expected as it is normally developed countries that would be keen to explore outward investments as they possess the necessary capital and know-how desperately needed by the developing countries. Malaysia, being a developing country however, is beginning to get into the act of investing abroad albeit on a very modest scale – its FDI outflows for the year 2002 amounts to USD1.2 billion or about 0.2 percent of the world’s total.

Table 4

FDI Outflows by Selected Home Country/Region, 1991-2002 (USD million)

|Home Country |1991-96 |1997 |1998 |1999 |2000 |2001 |2002 |

| |(Ann.Avg) | | | | | | |

|Malaysia |1,656 |2,675 |863 |1,422 |2,025 |267 |1,238 |

|North Africa |27 |476 |367 |313 |228 |202 |267 |

|European Union1 |127,762 |220,953 |415,367 |731,068 |819,169 |451,911 |394,146 |

|Asia2 |31,564 |49,199 |28,839 |39,390 |84,139 |41,827 |37,121 |

|Singapore |2,967 |8,955 |380 |5,397 |6,061 |9,548 |4,082 |

|Japan |20,943 |25,994 |24,151 |22,745 |31,557 |36,333 |31,481 |

|World |280,550 |476,934 |683,211 |1,096,554 |1,200,783 |711,445 |647,363 |

1. Refers to former group of 15 nations

2. Refers to West Asia, Central Asia, and South, East and South-East Asia

Source: World Investment Report, 2003, UNCTAD, United Nations

To realize the full potential of trade and investments and to achieve the economies of scale, a country needs also to engage in reverse investments, that is, to invest in other countries. This enables a country to search for new opportunities in overseas markets, especially for export oriented home industries. Table 5 shows Malaysia’s gross overseas investments by host countries for the years 1999 to 2002. The data in the table show the outflow of funds for various purposes, such as direct equity investments, purchase of real estates and extension of loans to non-residents abroad, and capital invested or loans extended by foreign-owned companies in/to their parent companies abroad. As such this table may not reflect the true FDI outflow activities of Malaysia. Keeping these in mind, US seem to be the largest recipient of Malaysia’s gross overseas investments. This may be due to the presence of many US multinationals that transfer funds back to their parents.

Malaysia has obviously reaped tremendous gain from its success in attracting FDIs. Among others FDIs has contributed to rapid economic growth in the seventies and eighties that was badly needed to redistribute wealth in order correct economic imbalances among different races that existed since independence. However, the situation of overly dependent on FDIs, has also led to a host of economic problems, such as (i) lack of transfer of technology leading to continuous dependence on imported technologies; (ii) failure to improve unemployment problems because of the adoption of capital-intensive technologies; (iii) persistent deficits in the services account of the balance of payments account resulting from continuous repatriation of investment incomes abroad; and (iv) restriction in the growth of local technology, expertise and know-how.

Table 5

Malaysia's Gross Overseas Investment by Host Country1(in USD million)

|　Country |1999 |2000 |2001 |2002 |

|United States |135.00 |1032.63 |1056.32 |1503.68 |

|Singapore |430.26 |768.42 |547.89 |278.16 |

|Netherlands |27.37 |0.53 |139.74 |244.21 |

|Indonesia |104.74 |141.05 |442.89 |236.84 |

|Hong Kong China |114.47 |41.58 |26.32 |107.89 |

|United Kingdom |145.53 |140.00 |71.05 |105.26 |

|People's ROC |52.89 |40.26 |82.37 |80.53 |

|Australia |27.37 |19.21 |80.00 |45.26 |

|Japan |41.84 |21.84 |15.26 |37.37 |

|Sudan |- |- |3.95 |32.89 |

|Ireland |1.05 |1.32 |- |32.11 |

|Vietnam |37.37 |13.16 |23.16 |20.26 |

|India |26.58 |5.79 |11.32 |20.00 |

|Philippines |26.32 |28.68 |14.21 |15.53 |

|Thailand |39.74 |76.84 |35.26 |11.84 |

|Chinese Taipei |7.37 |7.89 |2.63 |8.95 |

|Germany |8.68 |7.37 |5.53 |7.63 |

|Pakistan |50.53 |41.05 |55.00 |7.37 |

|Korea |3.68 |4.21 |3.68 |0.53 |

|Ohters2 |2243.15 |1242.11 |832.63 |1526.16 |

|TOTAL |3523.95 |3633.95 |3449.21 |4322.11 |

Source: Bank Negara Malaysia Annual Report, 2003, p32)

1. Refers to direct equity investments, purchase of real estates and extension of loans to non-residents abroad, and capital invested or loans extended by foreign-owned companies in/to their parent companies abroad.

2. Includes Labuan International Off-Shore Financial Center, which is treated as non-resident for exchange control purposes.

3.3 Malaysia and Global Finance

Free flow of financial resources is of course one aspect of globalization. Malaysia’s experience in this respect is best explained by analyzing the 1997 financial crisis when it was caught somewhat off-guard. It began with the forced devaluation of its currency and this triggered various waves other financial repercussions – credit squeeze among borrowers, especially those borrowing from abroad, scaling down of corporate investments and production, scaling down of consumer expenditure, banks facing non-payment of loans and stock market plummeted to an all time low. For example, in US dollar terms, Malaysian stock prices were reduced to just 22% of what it was before the crisis.

Why was there a currency crisis in the first place? From an academic point of view one could offer several reasons. Firstly, the pace of economic growth in the first half of the nineties was too rapid that it became unsustainable – a state of overheating of sort. Secondly there was excessive credit growth that led to overleveraging the economy. The loan to GDP ratio climbed from 97% in 1990 to 145% in 1997. Thirdly, there was a prolonged current account deficit and short-term capital inflows beginning in 1993 and continued until the time of the crisis. These factors resulted rapid domestic monetary growth of nearly 20% leaving the market flushed with liquidity. A great amount of this liquidity was channeled to non-productive purposes such as to finance share market and real estate speculation. It was estimated that these two sectors received almost half of total bank loans in 1997. There was noticeable escalation in asset prices that were not justified by their fundamental values. Share prices as measured by the Kuala Lumpur Composite Index rose from 500 in 1990 to a staggering 1200 in the first quarter of 1997.

All these problems were seen to have contributed to a gradual deterioration in the currency value. Indeed the warning signs were clear that the pace of economic growth was unsustainable and an economic crisis was inevitable. But no one predicted the timing, speed and magnitude of the crisis. What triggered the devaluation was the manipulation of currency traders. Those who doubt this explanation need only to look at the many speeches and writings of the former Prime Minister of Malaysia, Mahathir Mohamed in the years following the crisis (see for example Mahathir 2000).

Malaysia’s immediate policy response was to adopt the IMF style deflationary policies. Government expenditure was cut drastically in the October 1997 budget announcement. This was followed by further austerity announcements in December 1997. At the same time interest rate was hiked up. However, these measures failed to revive the economy. Instead it went into “formal” recession with negative GNP in the first half of 1998. There was a sharp fall in bank lending and an increase in non-performing loans leading to liquidity crisis in the banking sector. The share market went further down.

After about one year adopting the IMF style policies, it was obvious that intended results were not forthcoming. On 1st September 1998, the government decided on drastic policy reversals: Imposition of capital controls beginning from September 1998, adoption of expansionary policies - increase government spending and lowering of interest rates, reduction of Statutory Reserve Ratio from 8% to 4%, and issuance of directives forcing banks to achieve 8% loan growth for 1998.

4. Challenges and Policy Response

As globalization can bring benefits and costs to a country, Malaysia needs to follow appropriate strategies reap maximum benefits and to prevent the adverse effects. Malaysia in a way has been blessed to have experienced both worlds. It is often heard from the voices of developing countries that globalization is invented by the rich and developed countries to serve their own purposes but is detrimental to developing countries. These accusations are often heard in the context of bilateral and multilateral trade negotiations under GATT and later WTO framework. But as we have seen globalization is more than just trading. One needs to take a holistic approach in dealing with economic globalization.

Malaysia has taken multi-faceted strategies to continuously prepare itself to be able to become a smart player in the world of globalization. In fact the whole of national development policies are geared towards preparing the country for higher economic growth while at the same time to cope with and to benefit from globalization.

4.1 Management of Domestic Economy

It has been almost 10 years since Malaysia suffered the economic crisis brought about by its currency devaluation fiasco. Although the crisis has resulted in serious setbacks in long-term development plans, recovery was brisk. After registering a negative GDP growth in the crisis year of 1998, we have since registered positive growth ranging from 4% to 6% with inflation kept well below 3%. The challenge ahead is spelled out very clearly in the current Outline Perspective Plan (2001-2010) as well as the Ninth Malaysia Plan (2006-2010). The emphasis must be to maintain economic growth, stability and sustainability and to reinforce the implementation of structural policies that will make the economies more flexible, encourage diversification, and reduce their vulnerability to exogenous shocks.

Rising capital flows place additional burdens on banking regulation and supervision, and require more flexible financial structures. This aspect of globalization thus confronts the country with a new challenge to accelerate the development and liberalization of financial markets, and to enhance the ability of financial institutions to respond to the changing international environment. Malaysia has been given a rude wake-up call when its currency was devalued in 1997. To this, Malaysia responded by engaging in a quick and decisive reformation of the banking sector.

4.2 Banking Reforms

On 29th July 1999, the Central Bank of Malaysia announced its effort to consolidate the fragmented local banking institutions into a few large banking groups. At the time of the announcement there were 21 domestic commercial banks, 25 finance companies and 12 merchant banks. The central bank envisaged that there would be only six banking groups when the consolidation program is completed, each providing a complete range of banking services. This announcement, although not unexpected, came rather abruptly during the time the country was recuperating from the 1997 financial crisis. The crisis, among others, has exposed the vulnerabilities of a fragmented banking system. Many banks experienced extreme liquidity squeeze and saddled with unprecedented amount of nonperforming loans. The troubled banks are only saved from bankruptcy by the swift action of the government to refinance the nonperforming loans and to recapitalize ailing banks. Taking lessons from the crisis, it is inevitable that a rationalization and consolidation program of the banking sector need to be taken so that the banking sector is able to withstand such future shocks.

It has long been felt that having many small banks, leads to inefficiency and structural weakness in the banking system. At the same time, Malaysia has to liberalize its financial sector in conjunction with the AFTA and WTO programs. With the increased pace of globalization and financial liberalization, the local banks have little choice but to become stronger and more efficient. The consolidation program is expected to result in the strengthening of the banking sector. Active negotiations among the banking institutions took almost a year when finally the Central Bank approves a final list of 10 anchor banks.

4.3 Education Reforms

In the last two decades or so the demand for higher education in Malaysia increased tremendously, fueled by the rapid economic growth and prosperity. Since places in local universities were limited Malaysia had been aggressively sending students overseas, especially to United States and United Kingdom. However, the financial crisis of 1997-98 had resulted in the cost of overseas education to Malaysia to be prohibitively expensive. We were forced to consider alternative strategies. We improved local educational infrastructure by building more universities and colleges and upgrading existing ones. The high demand for tertiary education is being absorbed by local universities and colleges. The need to send students overseas has greatly diminished, except for selected disciplines. At the same time, more foreign students, especially from developing countries, are now coming to Malaysia for their tertiary education.

In 2005 Malaysia has 17 public and 22 private universities compared to 11 and 16 public and private universities respectively five years ago, representing a 44% increase in half a decade. Total enrolment in local universities degree programs increased from 260,000 in year 2000 to 313,000 in 2005 representing a 21% increase. At Diploma level, the number increased by more than 100% over the 5-year period, from 209,000 in 2000 to 441,000 in 2005.

The importance of education has long been recognized by Malaysian population and government. It is no longer adequate to possess abundance of natural wealth if the society does not have the knowledge and know-how to add value to the raw materials. As experienced by almost all developing countries, becoming a mere supplier of raw materials only served to enrich the developed countries while themselves getting minimum benefits. In order to correct the situation, developing countries need to take a serious look at their education system, especially at the tertiary level, with the aim of creating a knowledge-based society, capable of producing things from our own raw materials, or imported raw materials.

In today's world of globalization, tertiary education is basic education, and should be accessible to the masses, no longer to a selected few. This is especially true for Malaysia with its aspiration to achieve the status of a developed country by year 2020. In year 2000, about 25 percent of the university going age cohort enters tertiary education.[2] This is a far cry from the percentages for developed countries; for example USA 81%, Australia 72%, UK and Canada 60%, Germany and Japan around 50%.[3] Our target is by year 2020 this percentage will increase to 60 percent, which would be at par with that of a developed country. It’s a daunting task indeed.

4.4 Development of Small and Medium Scale Industries (SMIs)

Presently, the small and medium scale industries constitute about 80 percent of the manufacturing establishments in Malaysia and they are mostly owned and managed by local investors. However, their investment is less than half of the total investment while their contribution to the manufacturing sector value-added is a just a third. They are plagued by various problems such as inadequate capital, poor managerial, marketing, production skills, and low technology. These problems resulted in poor quality products that are not competitive even in domestic market let alone in international markets.

Malaysia realizes the potential of SMIs in the industrialization process and the importance of this sector to generate business opportunities, employment, income and reduction of poverty. Therefore Malaysia has decided to improve the capability of SMIs to supply the intermediate inputs to the larger firms and encourage these SMIs to export their products, especially in the light of the establishment of AFTA in 2003. The focus of the activities of the SMIs is in the supportive industries producing parts and components, mould and die, testing and tool making, and high quality casting and forgings. The linkage between the SMIs and the larger firms are done through subcontracting arrangements. The government provides infrastructure facilities to SMIs and relocates them from the congested urban areas to the less developed regions by building industrial complexes to promote R&D activities, improve productivity, and competitiveness. This is necessary to increase the local content of manufactured goods and pave the way for industrial expansion through industrial linkages.

4.5 Development of Science and Technology and R&D

Malaysia considers science and technology as an important vehicle to meet the challenges of globalization. Toward this end the government has encouraged students to undertake science and technology in the secondary and tertiary education. This is to increase the number of scientists, creates conducive environment for activities in R&D, improve creativity and innovativeness, productivity and competitiveness. The government has also emphasized the technical and vocational training to provide sufficient number of skilled and semi-skilled labor force.

Malaysia has already achieved satisfactory level of competence in R&D in agriculture such as in rubber and oil palm. But R&D in the industrial sector is at a low level. In year 2000 national R&D expenditure in relation to GDP was only 0.5%, compared to Germany 2.3%, USA 2.5%, Japan 2.8 and South Korea 2.9%. Although national budget on R&D is on the rise, it is still a far cry compared to the amounts spent by developed countries.

Additionally, Malaysia has also taken the initiative to upgrade the R&D facilities in the universities and science and technology parks to provide better environment for the R&D activities. Fiscal incentives are extended to the private sector to encourage them to participate in education, training and R&D.

4.6 The Challenge of Liberalization

As Suppermanian 2000 puts it, the trend towards liberalization is not only irreversible, but the pace can only intensify and accelerate. Malaysia recognizes that there are benefits to be derived from liberalization. Thus far Malaysia’s liberalization initiatives have enabled her to effectively respond to the challenges and opportunities of an increasingly globalize economy. These policies had resulted in expansion of exports, FDI inflows, accelerated the industrialization process, aided the technology transfer process and evolved Malaysia into a production base of high quality products.

However, unfettered liberalization could also adversely affect the domestic industry if they do not have the capacity to compete. The scheduling of liberalization measures is crucial so as to ensure that the domestic sector is sufficiently prepared – it has to be done gradually and progressively to avoid any major disruption or dislocation. Commitments made should be properly sequenced and phased as domestic industries acquired the necessary competitive strength.

Conclusion

Defined as a process of promoting greater movement of people, goods, capital and ideas due to increase economic integration especially in the form of trade and investments, globalization should serve to benefit all participating countries regardless of their development stages, if properly and fairly executed. It therefore presents great challenge to governments and policy makers to devise appropriate strategies in order to benefit from globalization. Studies indicated that countries that opened their markets stand to gain and experience greater development compared to autarky countries. The benefits include rapid economic growth, increase in social welfare and reduction of poverty, acquisition of technology and accessibility of foreign capital.

Malaysia’s involvement in globalization activities may be divided into three broad categories – international trade, investments and capital flows. In trading, Malaysia is currently rank number 17 in the world’s trading countries based on the size of its international trade compared to its GDP. In investments, Malaysia has been net recipient of FDIs since its independence, but in the last decade it has begun investing abroad as well. FDIs have been very important elements in making Malaysia’s industrialization program a success. Malaysia has also benefited a great deal from liberalizing its financial market to facilitate capital flows that has greatly facilitated FDIs. However, unfettered short-term fund flows and unregulated currency trading have resulted in the currency and economic crisis in 1997. Malaysia’s response in liberalizing the financial market and reforming the banking sector should benefit the country in the long run.

The challenges of globalization facing Malaysia are many. Basically it has to balance the need to open-up its market and the need to safeguard its local industries. With clear globalization and liberalization strategies, these two needs need not be mutually exclusive. But proper scheduling needs to be made for gradual opening-up in order to allow sufficient preparation by domestic industries to upgrade their competitiveness. At macro level, Malaysia needs, among other things: first, to manage its domestic economy to maintain a sustainable pace of development while at the same time be heavily involved in globalization activities. Second, it should continue to monitor the liberalization of financial markets in order to attract capital flows and to improve its resilience to external shocks. Third, it should reform its higher education very quicky in order to create a knowledge-based society. Compared to developed countries, Malaysia has still a long way to go in providing higher education to its population. Fourth, it has to allocate more resources, financial, facilities and human, to expedite R&D activities. Compared to developed countries, Malaysia’s current R&D expenditure is very small.

References

Daniel Griswold, 2000, “The Blessings and Challenges of Globalization” at .com.

Gaber Awad and Mansor Isa (eds), 2006, “Malaysia-Egyptian Comparative Perspective on the World of Globalization”, Proceedings of the Second Department of Malaysian Studies Egyptian-Malaysian Conference, Department of Malaysian Studies, Cairo University, Egypt.

Mahathir Mohamad. 2002. Globalization and the New Realities. Subang Jaya: Pelanduk Publications (M) Sdn. Berhad.

Mahathir Mohamad, 2000, “The Malaysian Currency Crisis: How and Why It Happened”, Pelanduk.

Malaysia, Government of. 2003. Economic Report, 2003-2004. Ministry of Finance, Percetakan Nasional Malaysia Berhad: Kuala Lumpur.

Mohammed Yusoff, Fauziah Abu Hasan and Suhaila Abdul Jalil,2000, “Globalisation, Economic Policy, and Equity: the Case of Malaysia”, paper presented in “Poverty and Income Inequalities in Developing Countries: A Policy Dialogue on the Effects of Globalization”, OECD, 30 Nov-1 Dec 2000.

M. Suppermaniam, 1999, “Globalization and economic liberalization” Paper presented at Human Resource Workshop, Organized by Public Service Department Malaysia in cooperation with the Commonwealth Secretariat, Langkawi, 12-14 Nov 1999.

Todaro, M.P. 1980. Economics for a Developing World, Hong Kong: Longman.

World Investment Report, 2003. FDI Policies for Development: National and International Perspectives. United Nations Conference on Trade and Development, United Nations. New York.

World Bank, World Development Indicators 2002.

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[1] Bank Negara Malaysia Annual Report, 2003.

[2] Ministry of Education Malaysia (2001).

[3] World Bank (2002)

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