Academic journal article Journal of Southeast Asian Economies

Trade Policy in Malaysia: Liberalization Process, Structure of Protection, and Reform Agenda

Academic journal article Journal of Southeast Asian Economies

Trade Policy in Malaysia: Liberalization Process, Structure of Protection, and Reform Agenda

Article excerpt

I. Introduction

Malaysia is widely held as a great development success story in the developing world. Notwithstanding the massive economic contraction experienced during the 1997-98 financial crisis, Malaysia's economic performance has been impressive throughout the post-independence period. Sustained high growth (averaging to nearly 6 per cent per annum for the past four decades) has been accompanied by the rising living standards with a relatively equal distribution of income, ameliorating the twin problems of poverty and racial imbalances. This dramatic economic transformation has been underpinned by a long-standing commitment to maintaining a remarkably open trade policy regime. Historically, trade and investment barriers in Malaysia have been low in relation to other countries in the region except for Hong Kong and Singapore. It is widely acknowledged that this policy stance enabled the Malaysian economy to respond successfully to opportunities arising from increasing internationalization of production and world trade expansion. However, this general perception does not imply that all is well with the trade policy regime in Malaysia. As we will argue in this paper, much remain to be done in order to achieve a policy setting needed to place the economy on a sustained rapid growth path.

The purpose of this paper is to examine trade policy-making in Malaysia in the post-independence era with emphasis on factors underlying key policy shifts and to identify key elements of the unfinished reform agenda. The paper begins with a historical overview of trade policy-making in Malaysia, paying attention to the underlying political economy (section II). Section III undertakes a critical evaluation of the current trade and investment policy regime from a comparative regional perspective. Section IV examines Malaysia's changing policy posture relating to multilateral trade negotiations, ASEAN-wide economic integration, and bilateral free trade agreements (FTAs). The final section presents some concluding remarks.

II. Policy Trends

In the 1950s and 1960s, Malaysia's policy thrust was to continue with the colonial open-door policy stance relating to trade and industry, while attempting to redress ethnic and regional economic imbalances through rural development schemes and the provision of social and physical infrastructure (Snodgrass 1980). As in many other developing countries, industrialization through import substitution was a key emphasis of the Malaysian development strategy during this period. However, Malaysian policy-makers, unlike their counterparts in other countries, eschewed "forced" industrialization through direct import restrictions and the establishment of state-owned industrial enterprises (Lim 1992). Moderate tariff protection was by and large the key instrument used in encouraging new investment in manufacturing. The industrialization strategy of the Malaysian government at the time was "largely a promotional effort, geared to the provision of an investment climate favourable to the private enterprise" (Wheelwright 1963, p. 69). The average tariff rate in 1965 was estimated at a mere 13 per cent and very few industries enjoyed nominal tariffs of more than 30 per cent and non-tariff barriers were almost non-existent (Power 1971).

Following the communal riots of 13 May 1969, the Malaysian Government embarked on an affirmative action-based policy package, the New Economic Policy (NEP) (later modified and renamed National Development Policy, or NDP, in 1990) (Leigh 1992, Snodgrass 1980). The overriding objective of the NEP, which came into effect in 1970, was to maintain national unity through the pursuance of two objectives: eradication of poverty among the entire population, and restructuring of the Malaysian society so that the identification of race with economic function and geographical location is reduced. These objectives were to be achieved through a wide range of direct redistribution polices including privileged access to subsidized credits, modern sector employment, and share ownership in private enterprises for the native Malays (bumiputra). …

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