KUALA LUMPUR, November 18, 2009 — Malaysia is emerging from an economic recession and will return to moderately high growth next year, said the World Bank in a new report released today. However, its medium-term outlook will depend on sustained global improvements and on how quickly the country manages to implement structural reforms.
In Malaysia Economic Monitor November 2009, the World Bank forecast that Malaysia’s gross domestic product would decline 2.3 percent this year, before growing 4.1 percent in 2010. Both the decline and rebound are attributable to conditions in the country’s manufacturing sector, which accounts for some 30 percent of GDP.
As global trade slumped during the last quarter of 2008 and the second quarter of 2009, manufacturing firms, especially in electronics, cut production, ran down inventories, and slashed investments. Recently, industrial production and exports began to pick up again, thanks to rising regional demand. But it remains unclear whether this recent trend represents the beginning of a sustained recovery, as demand from advanced economies still needs to firm up, the World Bank said.
Managing the recovery will be a delicate balancing act, the Monitor cautioned. Withdrawing policy support too early runs the risk of choking off the recovery, whereas extending support for too long could hamper efforts to reduce government deficits and debt accumulation.
Malaysia Economic Monitor November 2009 will be a bi-annual World Bank’s review of the Malaysian economy, which will include the Bank’s policy recommendations to address the medium-term economic challenges. The Monitor being launched today is the first for Malaysia, member of the World Bank Group since 1958.
The Monitor is part of a wider effort to promote the sharing of knowledge among internal and external stakeholders—a requisite for the innovation-and knowledge-driven economy and a key pillar of the World Bank’s partnership with the Government of Malaysia, the World Bank said.
Malaysia’s medium-term outlook remains promising, but this is conditional on making headway on the structural reform agenda. The World Bank now forecasts that the country’s economy will grow 5.6 and 5.9 percent in 2011 and 2012, respectively.
The overriding challenge for Malaysia, the World Bank said, is to make the next step up the income ladder from upper-middle to high income economy. This is a difficult challenge—one which only few countries have successfully met in the post-war period—and requires strong and consistent leadership over a long period of time.
For Malaysia to reach its ambition of becoming a developed nation by 2020, the Malaysia Economic Monitor November 2009 proposes a four-pillar strategy. The World Bank argued that the strategy consists of efforts to specialize the economy further, improve the skills of its workforce; make growth more inclusive; and strengthen public finances.
Specializing the economy further will help boost the demand for skilled labor and raise incomes, the World Bank said. But for this to happen, Malaysian firms need to become more innovative. To promote innovation, the World bank said Malaysia’s economy needs to become more competitive internally. Highly focused technology and urbanization policies are also key.
The World Bank also called for improving the skills of the workforce, so that high-quality skills are available as the economy specializes further. Promoting incentives, competition and merit-based recruitment in education is essential. Curriculum development, teacher training, and private sector involvement will contribute as well to a better skill base.
Making growth more inclusive will ensure no one is left behind as the economy climbs up the income ladder. Effective and well-targeted social safety nets and social insurance programs will help households cope with poverty, promote entrepreneurship and support social cohesion, the World Bank said.
Strengthening public finances will help generate the resources for the high-income model, address concerns about the fiscal deficit, and reduce the crowding-out of private initiative. The World Bank called for measures to broaden the revenue base, lessen the significant role of subsidies and consider fiscal rules to stabilize public finance.
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Malaysia Economic Monitor November 2009 is available for download at www.worldbank.org/my
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