The Malaysian Economy: Developments and Challenges

Summary

Introduction

Like many economies in Southeast Asia, Malaysia currently faces a number of challenges that could have a significant impact on its economic growth and development.Despite the fact that 2007 was generally seen as a good year economically, events in the second half of the year, particularly the U.S. sub-prime mortgage crisis, and poor U.S. economic data could trigger a recession in the world's largest economy, which in turn could lead to a global slowdown in 2008. Added to these concerns are the high oil prices and rising food and commodity prices, which could stoke fears of global inflation. All these downside risks would clearly affect macroeconomic stability in the region. Against this backdrop, Malaysia's relatively good economic performance in 2007 may be insufficient to guarantee that the country will be immune from the downside risks faced by the rest of the world.

At the same time, Malaysia is currently going through a challenging period in its economic development as it attempts to maintain its economic competitiveness vis-à-vis the emerging economies of China, India and, closer to home, Vietnam. Like a number of middle-income developing countries in the region, Malaysia has economically been “punching below its weight” in the sense that it is not maximizing its full economic potential. To address these challenges, Malaysia has been trying to develop two ambitious economic corridor projects that could revitalize its economy.

These two economic corridors are the Iskandar Development Region (IDR) in South Johor (which borders Singapore) and the Northern Corridor Economic Region (NCER) in the northern Peninsular Malaysia. Besides reviewing Malaysia's economic performance in 2007, this chapter will examine the development of these two economic corridors.

Economic Performance in 2007

Malaysia's economic performance in 2007 was better than market expectations. The country registered a real GDP growth rate of 6.3 per cent in 2007 (the economy grew 5.9 per cent in 2006) which was higher than the Malaysian Institute of Economic Research's (MIER) projection of 6.1 per cent (see Table 1 and FIgure 1). A better than expected fourth quarter economic growth rate of 7.3 per cent helped to push up the overall economic growth for the year.