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Statement by discussant Harald Neple on Malaysia's 6th Trade Policy Review

Last updated: 07.03.2014 // Geneva, 3 March 2014

Statement by the Discussant Mr. Harald Neple

I want to begin by welcoming the delegation from Malaysia, headed by Dr. Rebecca Sta Maria, Secretary General of the Ministry of International Trade and Industry, and thank you for your opening statement.  I would also like to thank Malaysia and the Secretariat team for their high quality reports which form a good factual basis for our discussions.  The breadth and experience of the Malaysian delegation coming from a number of ministries and institutions, will ensure interesting discussions on the challenges ahead for Malaysia, both when it comes to its trade policy and its overall economic performance.

During my intervention I will touch upon the economic and trade performance of Malaysia, on issues linked to trade facilitation and corruption, and finally some aspects of the many plans linked to Malaysia’s Vision 2020, such as the services sector, the oil and gas sector and manufacturing, including the automotive sector, and SMEs.

Malaysia is a country with a strong overall economic performance during the period under review due to pragmatic economic management and appropriately calibrated macroeconomic policies.  Malaysia has clearly stated ambitions for its economic development and trade performance, with an impressive number of plans under the overall tenth Malaysia Plan.  The aim is to transform Malaysia into a developed high income nation by 2020. The strategies, i.a., emphasize the importance of driving private sector growth, reducing state involvement in the economy, encouraging high value-added activities, integrating Malaysian companies into global value chains, and developing commercial ties with new markets.

However, external shocks such as the financial crisis, the earthquake and tsunami in Japan and the flooding in Thailand have had a strong influence on Malaysia’s trade balance. While still in surplus, it has declined significantly.  Yet, the level of foreign reserves seem adequate, covering 9.7 months of retained imports and 3.7 times the short term foreign debt. It would be interesting to hear the views of the Malaysian delegation on their expectations going forward, seen in relation to the foreseen developments under the New Economic Model from 2010. 

GDP growth has also been reduced, while still higher than in neighboring countries.  The latest figures available predict a growth level of 4.7 % for 2013. The plan’s forecasts for the period 2011-2015 are for a 6 % average growth per annum in GDP, in other words lower levels of growth than before the global downturn.  What are the expectations going beyond 2015?

Malaysia has an impressive low level of 3 % unemployment recorded in the reports, coupled with a large influx of foreign workers which constitute 16 % of total employment.  At the same time I note that 8.2% of total employment is in the informal sector, and that the reentry into the formal sector is a stated aim.  With 59.4 % of employment in the informal sector in services there are many plans for the further development and innovation for this important sector of the economy. 

With a few exceptions, Malaysia has an open economy and its trade policy is focused on efforts towards creating a more liberalized and fair international trading environment. The general assessment of Malaysia’s business climate is very positive, although further reforms are deemed necessary to improve government services, tackle corruption, and increase the country’s technological readiness. 

I would like to commend Malaysia for the very high ratings it gets in both the Trading across borders report and in the Ease of doing business report.  Trade facilitation measures and efforts to improve corporate governance and fight the challenge of corruption have also been high on the agenda, all being important elements in creating the necessary framework conditions for the increase in FDIs upon which Malaysia relies.  However, with an estimated loss of 1-2% of GDP to corruption, there is still a job to do. This is recognized by the government by identifying corruption as one of the national key results areas in the Government Transformation Program.

Malaysia has strong economic performance, is strongly outward oriented, but at the same time one of the most heavily subsidized countries in the world.  I note that many of the written questions to Malaysia relate to import licensing, local content provisions, export controls, tax incentives and other forms of support given to domestic industries to promote increased exports.  This seems to be in contrast to the high ratings I just mentioned in trading across borders and ease of doing business.  It leads to the question: How is the use of some of these measures conducive to achieve Vision 2020 and to achieving economic prosperity and social justice as outlined in the tenth Malaysia plan?  Will the planned reforms planned entail changes to some of these measures?

The launch of The New Economic Model in 2010 comprising an impressive list of plans, result areas, strategic reform initiatives and growth targets aims to propel Malaysia to become a high income nation which is both inclusive and sustainable.  The plans include modernizing labor laws, public sector reforms, deregulation and liberalization as the basis for competing in the global market place.  I would find it useful if Malaysia could share with the membership what results were achieved so far, what problems have been encountered, and what lessons were learned during the process.  The role of the private sector will be pivotal if plans are going to succeed, both in terms of which sectors should have priority and in terms of investment.  Some elaboration on the role of the private sector in the planning would therefore be of great interest, so as to understand to what degree there is common ownership of these ambitious plans.

From an overall perspective the link between trade policy and the New Economic Model and Vision 2020 seems not to be highlighted to a very large extent, even though the further opening up of the services sector to foreign ownership is one of the measures being pursued. 

During the period under review, the services sector continued to be the main contributor to GDP with a share of 54.6 % in 2012.  The services sector is among the main priorities in the ambitious plans going forward under the Vision 2020.  Among the 12 National Key Economic Areas, 7 concern the services sector.  At the same time, Malaysia is undergoing a further liberalization of 18 service sub-sectors as announced in the 2012 Budget Speech.  These sub-sectors were identified as having high economic impact that support and serve as enablers to the Economic Transformation Program.  With this liberalization, the government envisages stronger growth in the key sectors through expansion or collaboration between local and foreign services suppliers. I note that quite a few of the questions in the field of services concern the possibility of foreign ownership and participation in services.  What are the possibilities for the cross border delivery of services? With the latest liberalization, the system is more liberal than the bindings in both GATS and present FTAs.  I also not that at present there is a deficit in the services trade with other countries.  What are the future expectations in this regard? 

Coming from an oil and gas producing country, I find the role of the oil and gas sector in the Malaysian economy of particular interest.  I am particularly curious about the Secretariat’s formulation that “to some extent PETRONAS appears to act as an oil fund from the point of view of macroeconomic management”, given that 48% of government revenue derives from this sector.  This seems to imply that oil and gas revenue accruing to the government as dividends, royalties and taxes forms part of the regular budget and is not put into a separate fund.  With declining oil and gas production this would seem to be a challenge in the long term. In this context it is important to note that the IMF has advised that the government in its fiscal policy should take into consideration the potential long-term decline in oil related revenue, and that the revenue base should be broadened away from volatile oil and gas related receipts.  These are important inputs into the work in the government on fiscal consolidation, tax reform and expenditure rationalization.

Energy subsidies have been high on the agenda i.a. in G 20 and the OECD/IEA context for some time, and I note that in the case of Malaysia, efforts to change the present system have been made.  In this context targeting marginal groups would be a priority, as I understand has been done in some of the reforms already undertaken. Given that this is a systemic issue of interest to many of the members it would be interesting to hear how the government plans to deal with these challenges. 

In manufacturing, Malaysia is generally relatively open to trade and competition, with the exception being the automotive industry.  With an overall GVC participation rate in the manufacturing sector of 68% Malaysia ranks 7th in the world and has an impressive record of 58% when it comes to domestic value addition in export, a rate that has been growing over the review period.  Malaysia also ranks high in terms of high-technology export to total exports.

However, the performance over the review period has been mixed, and the manufacturing sector is undergoing transformation and restructuring.  According to the government, the manufacturing sector will remain one of the leading contributors to growth. The government has the stated aim of shifting from resource-based economy to high technology, knowledge based and capital-intensive industries such as medical devices and green technologies, such as led-lighting, solar panels and generic drug manufacturing.  It would be interesting to hear whether the choice of these sub-sectors have been based on certain criteria, and what sort of policy measures the government intends to maintain in order to achieve this.

Malaysia has the ambition to transform the automotive industry to become the production hub in the ASEAN region by 2020.  At present this sector is heavily regulated.  The government in January issued a National Automotive Industry Policy in order to fulfill this ambition, which was referred to in the Malaysian presentation today.  Quite a few of the written questions concern the automotive sector and the need for increased transparency and competition.  It would therefore be interesting to hear some details as what concrete measures are foreseen, and to what extent the concerns of members are met in the changes foreseen.

Finally, I would like to touch upon SMEs which according to the reports constitute 97.3 % of business establishments, and are also highly present in the informal sector.  An estimated 90 % of these SMEs are in services. With this prevalence of SMEs, the elaboration of an SME masterplan to support innovation and transformation is understandable.  At present the contribution of SMEs to the GDP is 32%, and the plan for 2020 is to increase this to 40%, while at the same time urging reentry into the formal sector.    In 2020 the plan is for 62% of employment to be in SMEs and for 25% of exports to derive from SMEs.  To what extent are these plans succeeding up till now?

Overall I have been very impressed by both the performance and the ambitions of the government of Malaysia.  I have also tried to highlight some of the challenges as the government continues its efforts to achieving a high-income advanced economy by 2020.  I am sure that the Government will continue to further strengthen the economic and trade integration of Malaysia while taking an ecosystem approach to promote the development of the services sector as the next engine of growth, and accelerating the shift to high value-added, high technology, knowledge-intensive and innovation-based industry.

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