Academic journal article Journal of Southeast Asian Economies

The Malaysian Path to Sustainable Development in the Manufacturing Sector

Academic journal article Journal of Southeast Asian Economies

The Malaysian Path to Sustainable Development in the Manufacturing Sector

Article excerpt

I. Introduction

Malaysia has come a long way from being a low-income developing economy to that of a high middle-income export-oriented economy. Its real per capita GDP has more than doubled from US$1,750 in 1975 to US$4,650 in 2004. Despite the 1997/98 financial crisis, the September 11 attacks in 2001 and the SARS epidemic in 2003, Malaysia's GDP has grown at an annual average of 4.6 per cent during 1996-2005. In addition, inflation rate averaged 3.2 per cent over 1996-2000 and 1.8 per cent over 2000-05, and unemployment rate has not exceeded 3.5 per cent over the last decade. As early as 1993, the World Bank hailed Malaysia as the next Asian newly industrializing country (World Bank 1993). Thus it is undeniable that the Malaysian economic story so far is a good news story. However, it remains to be seen if Malaysia can sustain its growth momentum to enter the league of developed industrial nations by 2020, envisaged as Vision 2020 in 1991.

The challenges facing the rapidly developing Malaysia in fulfilling its vision are different from those that developed countries of today faced in their times. Thus limited lessons can be drawn from the earlier experiences of the developed nations. Given Malaysia's openness and highly trading environment, (1) the vulnerability of the economy to external shocks necessitates rethinking of strategies for sustainable growth and development. The next phase of its transition to a developed country lies in Malaysia's ability to achieve global competitiveness as outlined in the Third Industrial Malaysian Plan 2006-2020. While Malaysia's global competitiveness rank of 23 out of 117 economies in 2005 (2) is quite impressive, the recent Industrial Plan has identified total factor productivity (TFP) growth as holding the key for continued growth in the face of the more liberalized global economic environment of today.

While there have been numerous studies which have computed TFP growth measures for Malaysia and discussed policy-making, this paper differs in two aspects where policy analysis is concerned. By decomposing TFP growth into technical efficiency (TE) and technological progress (TP), (3) current policies are evaluated to highlight some flaws in policy thinking, and suggestions on how policy-making can be made more effective by appropriate policy coordination are discussed. This is done by first establishing the relationship between the two sources of TFP growth given by TP and TE in order to achieve optimal TFP growth. Second, as TP and TE are conceptually different, the implementation of a certain policy is shown to have opposing effects on TFP growth. Thus, the failure of current policies to take explicit account of these two types of policy analysis has major repercussions on the long term objective of achieving sustainable growth.

The above policy-making aspects are applied to the manufacturing sector (using 3-digit industry level data) which contributes about 30 per cent of the economy's GDE The rest of the paper is organized as follows. The next section briefly reviews the Malaysian manufacturing sector. Section M sets out the theoretical framework underlying the stochastic production frontier to obtain measures of TFP growth and the two sources of TFP growth while section IV explains data sources and the variables used. The causality links between the sources of TFP growth are established in section V and the differing impact of polices are discussed in section VI. The last section summarizes the key findings of the paper.

II. The Malaysian Manufacturing Sector

The Malaysian manufacturing sector has undergone significant structural changes since the 1970s. Table 1 shows some summary statistics on the manufacturing sector.

The gross output shares indicate that the electrical and non-electrical machinery are important contributors and they also have the highest share of intermediate inputs. These are in part due to the large presence of foreign direct investment (FDI) in these industries since the mid 1980s. …

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