Country Economic Work for Malaysia - Islamic Development Bank

Acknowledgements
Appreciation for special contribution
Tan Sri Dr Wan Aziz Wan Abdullah, Dato’ Dr. Mohd Irwan Serigar bin Abdullah, Mr. Maliami Hamad, and Mr.
Jaya Kumaran Vengadala, Ministry of Finance, Government of Malaysia; Datuk Dr. Abd Shukor Abd Rahman,
Malaysian Agriculture Research and Development Institute; Mr. Lt Col Prof Dato’ Husin Bin Jazri, Cybersecurity;
Mr. Ahmad Zam Zam Mohamed, Marditech; Mr. Amilin Yusman Yusoff, Maybank; Mr. Anas Ahmad Nasarudin,
Marditech; Mr. Daud David Vicary, INCEIF; Dr. Mazliham Mohd Su'ud, UniKL; Ms. Mazidah Malik, Bank
Negara Malaysia; Mr. Rafaiq Bakri bin Zakaria, Suruhanjaya Tenaga; and Ms. Sharifah Noor Ashikin Syed Aznal,
Rafulin Holdings.
IDB Group Team
Country Programs Department and ROKL
Mr. Mohammad Jamal Al-Saati, Director; Mr. Kunrat Wirasubrata, Office-In-Charge ROKL; Mr. Mohammad
Nassis Sulaiman, Country Manager; Mr. Abdallah M. Kiliaki (Peer Reviewer); Dr. Nosratollah Nafar (Peer
Reviewer); Mr. Mohammad Takyuddin Yahya and ROKL Staff.
Overall Coordinator
Mr. Ahmed Hariri, Regional Manager, South & South East Asia Region and Surinam
Report Authors & Contributors
Dr. Zafar Iqbal, Lead Economist, Country Programs Department
Mr. Saifullah Abid, Country Manager for Malaysia
Mr. Hammad Zafar Hundal, Country Manager
Special Thanks to Dr. Mohammad Ahmed Zubair, Principal Economist, Country Programs
Department; Dr. Intizar Hussain, Division Manager; Mr. Aamir Ghani Mir, Database Management
Expert; and Mr. Waleed Ahmad Addas, Lead Operations Officer, Operations Policy and Services
Department (OPSD) for their valuable comments and improving the quality of the document.
Team-I
Reverse Linkages
Mr. Zishan Iqbal, Team Leader
Islamic Financial Services Department
Mr. Haseebullah Siddiqui
Human Development Department
Mr. Aminuddin Bin Mat Ariff
Islamic Research and Training Institute
Dr. Nasim Shah Shirazi
Treasury Department
Mr. Zainol bin Mohamud
Mr. Zakky Bantan
Economic Research and Policy Department
Dr. Muhamed Zulkhibri
Team-II
Private Sector Development
Mr. Irfan Bukhari, Team Leader
Islamic Corporation for the Development
of the Private Sector (ICD)
Mr. Ahmed bin Abdul Khalid
Dr. Elvin Afandi
Islamic Corporation for the Insurance of
Investment and Export Credit (ICIEC)
Mr. Zishan Iqbal
International Islamic Trade Finance
Corporation (ITFC)
Mr. Abdul Aleem Habib
Mr. Amir Asad Hedayati
Infrastructure Department (PPP)
Mr. Irfan Bukhari
Group Risk Management Department
Mr. Ahmed Murad Hammouda
Mr. Husam AlAkhal
External Consultants: Dr. Tengku Mohd Azzman Shariffadeen and Mr. Rizal Kamaruzzaman,
Tindakan Strategi (Empowering Strategic Decisions) SDN BHD.

Abbreviations and Acronyms
ADB : Asian Development Bank
AIM : Agensi Inovasi Malaysia
APIF : Awqaf Properties Investment Fund
ASEAN : Association of Southeast Asian Nations
BAP : Business Accelerator Programme
BNM : Bank Negara Malaysia
CEW : Country Economic Work
CGC : Credit Guarantee Corporation
CIS : Commonwealth of Independent States
CMSA : Capital Market Services Act
E² : Enrichment & Enhancement Programme
ECER : East Coast Economic Region
EIU : Economic Intelligence Unit
EPP : Entry Point Projects
ETP : Economic Transformation Program
EU : European Union
FASAS : Federation of Asian Scientific Academies and Societies
FDI : Foreign Direct Investment
GDP : Gross Domestic Product
GHP : Good Hygiene Practices
GOM : Government of Malaysia
GLC : Government Linked Companies
GTP : Government Transformation Programme
HDC : Halal Industries Development Corporation
HDI : Human Development Index
HIPs : High Impact Programmes
IAS : Islamic World Academy of Sciences
IBFIM : Islamic Banking and Finance Institute Malaysia
ICD : Islamic Corporation for the Development of the Private Sector
ICIEC : Islamic Corporation for Insurance of Investment and Export Credit
ICSU : International Council for Science
IDB : Islamic Development Bank
IDB Group : IDB, ICIEC, IRTI, ICD, ITFC
IDB-MDP : IDB Microfinance Development Programme
ICBU : International Currency Business
ICM : Islamic Capital Market
ICT : Information and Communication Technologies
IFAD : International Fund for Agricultural Development
IFSB : Islamic Financial Services Board
IMF : International Monetary Fund
INCEIF : International Centre for Education in Islamic Finance
IRDA : Iskandar Regional Development Authority
IRTI : Islamic Research and Training Institute

ISRA : International Shari’ah Research Academy for Islamic Finance
ISTIC : International Science Technology and Innovation Centre for South
South Cooperation
ITAP : Investment Technical Assistance Program
ITFC : International Islamic Trade Finance Corporation
KEI : Knowledge Economy Index
KLIFD : The Kuala Lumpur International Financial District
MARDI : Malaysia Agriculture Research and Development Institute
MATRADE : Malaysian External Trade Development Corporation
MC : Member Country
MCPS : Member Country Partnership Strategy
MDBs : Multilateral Development Banks
MDGs : Millennium Development Goals
MIDA : Malaysian Investment Development Authority
MIGHT : Malaysian Industry-Government Group for High Technology
MIFC : Malaysia International Islamic Financial Centre
MNCs : Malaysian Multinational Companies
MTCP : Malaysian Technical Corporation Programme
MTN : Medium Term Note
NEM : New Economic Model
NCER : Northern Corridor Economic Region
NCIA : Northern Corridor Implementation Authority
NKEA : National Key Economic Areas
ODI : Overseas Development Institute
OEM : Original Equipment Manufacturing
OIC : Organization of Islamic Conference
OIC-CERT : OIC-Computer Emergency Response Team
PFI : Private Finance Initiative
PIA : Promotion of Investment Act
PPP : Public Private Partnership
RBF : Results Based Framework
RENTAS : Real-time Electronic Transfer of Funds and Securities
REITs : Islamic Real Estate Investment Trusts
ROKL : Regional Office Kuala Lumpur
R & D : Research and Development
SAC : Shariah Advisory Council
SARS : Severe Acute Respiratory Syndrome
SCORE : Sarawak Corridor of Renewable Energy
SDC : Sabah Development Corridor
SEZ : Special Economic Zones
SEAP : SME Expert Advisory Panel
SIP : SME Investment Programme
SMEs : Small and Medium Size Enterprises
SRI : Strategic Reform Initiatives
TWAS : Academy of Sciences for the Developing World
UNCTAD : United Nations Conference on Trade and Development

TABLE OF CONTENTS
EXECUTIVE SUMMARY………………………………………………………….. 1
I. DIAGNOSTING THE MALAYSIAN ECONOMIC: SOCIO-ECONOMIC
DEVELOPMENT…………………………………………................................. 5
II. RECENT SOCIO-ECONOMIC DEVELOPMENT………..….…………...... 5
III. MAJOR ISSUES/ CHALLENGES FACING THE COUNTRY …………… 10
IV. DIAGNOSTIC ANALYSIS OF BINDING CONSTRAINTS TO
SUSTAINABLE ECONOMIC GROWTH…………….……..……..……....... 12
i. Growth Diagnostic Framework………………………………………… 13
ii. Constraints to Private Investment……………………………………… 15
iii. Constraints to Public Investment……..……………………….……….. 23
iv. Constraints to Software of Economic Growth………………………… 25
v. Conclusion ……………………………………………………………….. 30
V. DIAGNOSTIC ANALYSIS OF PRIVATE SECTOR DEVELOPMENT IN
MALAYSIA ……………………………………………………………............. 33
i. Malaysia’s New Economic Model: Private Sector as Primary Growth
Engine…………………………………………………………………….. 34
ii. Binding Constraint to Private Sector Development …….…………….. 37
iii. Diagnostic Analysis at Sub-Sector Levels……………………………… 39
(i) Public Private Partnerships………………………………………... 39
(ii) Innovation………………………………………………………........ 44
(iii) SMEs Development…………………………………………………. 46
(iv) Private Sector Resource Mobilization…………………………….. 48

(v) Foreign Direct Investment…………………………………………. 52
iv. Conclusion………………………………………………………………... 54
VI. DIAGNOSING THE POTENTIAL OF REVERSE LINKAGES
OPPORTUNITIES IN MALAYSIA ………………………………….............. 55
i. Reverse Linkages: Tool for Promoting South South Cooperation…… 55
ii. Reverse Linkages Opportunities in Malaysia. ….……………………... 55
(i) Benefitting from Islamic Financial System Strengths …………... 56
(ii) Collaboration with Malaysia Science Academy………………….. 62
(iii) Sharing SMEs Development Experience…………………………. 65
(iv) Promoting Halal Industry…………….…………………………… 67
(v) Enhancing Innovation Exchange…………………..……………… 72
(vi) Getting Benefit from Trade and EXIM Activities……….………. 73
(vii) Benefitting through Malaysia Technical Cooperation Program.. 75
(viii) Sharing Information and Communication Technology................ 80
iii. Conclusion………………………………………………………………... 82

EXECUTIVE SUMMARY
The main objective of this Country Economic Work (CEW) is to provide analytical basis for
designing IDB Group Member Country Partnership Strategy (MCPS) for Malaysia. This CEW is
prepared by the IDB Group MCPS Team based on available information and data from reliable
national and international sources; two background studies prepared by the local Consultants;
bilateral meetings with the key stakeholders; and outcome of two Consultative Workshops
(attended by the public sector, private sector, academia, civil society etc.) held in Malaysia.
The growth story that has transformed Malaysia to be an upper-middle income country can be
divided into two main phases: First phase, high economic growth during 1967-1997 when
Malaysia (as one of 13 countries in the world) sustained growth of more than 7% per annum. The
main driver of economic growth was surging domestic private investment rate at 26.9% of GDP
accompanied by supportive public investment rate of 12.4% of GDP during 1990-1997 1 . Second
phase: (post-Asian financial crisis) relatively slow economic growth during 2000-2011 of
average 5% per annum was mainly due to perceptible drop in domestic private investment rate at
10.5% of GDP per annum while public investment performed countercyclical role to partly offset
the slowdown in private investment. In terms of sectoral performance, the services sector
remained the main source of economic growth. In 2009, the manufacturing sector was hit hard
with negative growth of 9.3% on account of global recession but recovered remarkably with a
positive growth of 11.4% in 2010. Compared to other key sectors, growth in the agriculture sector
remained relatively slow. During 2000s, the agriculture sector grew by 3.2% per annum.
Other macroeconomic indicators also showed sound performance of the economy. For example,
the average current account surplus remained 12.8% of GDP and trade surplus 16.9% of GDP per
annum during 2000-2011, significantly high compared to other competitive countries in the Asian
region. Inflation remained at the modest level (average 2.2% per annum during 2000-2011).
Banking sector is built on solid foundations, with strong capital adequacy and a considerable
amount of excess liquidity (surplus liquidity of MYR255 billion or $82.6 billion in 2011).
However, federal budget deficit remained average 5% of GDP during 2000-2011 but currently
fiscal consolidation is underway.
In addition to the remarkable progress in macroeconomic indicators, Malaysia has steadily
improved its human development indicators and has been considered as a high human
development country (HDI ranking 61 out of 169 countries in 2011). The country has also made
remarkable achievement in reducing poverty (from 49.3% in 1970 to 3.8% in 2009), and the
economy remains almost at full employment level (i.e. unemployment rate 3.1% in 2011).
Using a comprehensive Growth Diagnostic Framework, which was developed by the MCPS
Team (an extended version of Growth Diagnostic Framework of Hausmann, Rodrik, and Velasco
1 Malaysian National Accounts and the World Bank, World Development Indicators do not provide data on private
investment prior to 1990.
1

(2005)), key insights emerged in two areas; namely, Private Sector Development and Reverse
Linkages Opportunities (also main pillars chosen for the MCPS for Malaysia for 2012-2015). The
diagnostic analysis identifies the following binding constraints to economic growth in Malaysia:
(i)
(ii)
Low Level of Private Investment: Prior to the Asian financial crisis, private investment
was at the maximum level of 32% of GDP in 1997, which considerably declined to
10.3% of GDP in 2010 and FDI declined from 6.3% of GDP during 1990s to 2.9% of
GDP during 2000s. Current total investment rate (both public and private investment) in
Malaysia (i.e. 20.3% of GDP) is less than the benchmark investment rate of 25% of GDP
for achieving high and sustainable real GDP growth, according to World Bank
Commission’s Report on Growth and Development (2008). The local and foreign private
investments have been constrained mainly due to low level of returns on investments, and
some bureaucratic issues. In particular, investors’ major concerns are related to starting a
business, obtaining construction/ business permits, registering property, and getting
credit.
Low Level of Public Investment: Public investment declined from the peak level of
15.4% of GDP in 2002 to 10% of GDP in 2010, which is attributed to budgetary
limitations (average budget deficit 5% of GDP during 2000-2011). This is also attributed
to the Government’s policies towards supporting and encouraging private sector
investment, particularly the infrastructure. The 7% sustained real GDP growth in
Malaysia achieved during 1967-1997 was not only due to high level of private investment
but also attributed to strong public investment, which could not be sustained thereafter.
(iii) Weak Software of Growth: Malaysian global competitiveness ranking slipped from 19
in 2006 to 26 in 2010 (out of 142 countries); however, it has improved to 21 in 2011.
Comparing with other competing countries in the region, Malaysia’s international
competitiveness is weak due to low quality of higher education, skills and training, weak
technological readiness, low spending on R&D, slow innovation, and low labor
productivity. These findings are consistent with the World Bank (2010) Composite Index
of Constraint, which ranked Malaysia 2 for skill development and 3 for entrepreneurial
development (0 for severe binding constraint and 10 for least severe binding constraint).
(iv)
Similar to private investment, relevant stakeholders in the country identified the
following binding constraints for overall Private Sector Development:
‣ Inadequately educated workforce
‣ Difficulties in dealing with tax administration and getting business licenses and
permits
‣ Difficulty to locate and recruit the needed skills
‣ In terms of higher education and training, and technological readiness, the
challenges remain even more substantial
‣ Evidence suggests that weak innovation is hindering the private sector
development in the country
2

(v)
(vi)
(vii)
(viii)
‣ Weak innovation and business sophistication are due to low budget for research
and development (R&D)
Binding Constraints Facing the PPPs: They include inadequate availability and
accessibility to long-term financing; and land acquisition issues/disputes settlement
particularly for road projects.
Critical Constraints Facing the SMEs: They include insufficient access to funding
sources; weak access to markets; poor ability to absorb and retain good talent in the
industry; and insufficient availability of skilled workforce.
Binding Constraints for Private Sector Resource Mobilization: They include limited
products offered by Islamic banking industry; narrow international base of Islamic capital
market; lack of innovation; and shortage of skilled and experienced professionals in
Islamic finance industry.
Malaysia is not Exploiting its Full Potential of ‘Reverse Linkages’ Opportunities:
Diagnostic analysis finds that Malaysia has huge potential of Reverse Linkages (RLs)
opportunities through which the country can transfer its knowledge and expertise to other
IDB member countries through win-win-win situation. In particular, IDB member
countries can benefit from Malaysia’s Islamic financial system strengths; collaborate with
Malaysia Science Academy; gain from SMEs development experiences; promote Halal
industry; replicate Tabung Haji; acquire benefits from EXIM expertise; and benefit
through Malaysian Technical Corporation Programme. Therefore, Reverse Linkages have
been chosen as one of the major engagement pillars in the MCPS exercise.
The Tenth Malaysia Plan, covering the period 2011-2015, targets an annual economic growth of
6% and to raise GNI per capita from its current level of $9,575 to $12,139 by 2015 and to over
$15,000 by 2020 through inclusive and sustainable growth. In order to achieve these objectives,
the New Economic Model is being implemented through an Economic Transformation Program,
which envisages an investment outlay of MYR1.4 trillion ($523 billion), of which 92% will be
sourced from the private sector. The Plan goals can be realized through vigorously pursuing an
inclusive and sustainable growth strategy which directly addresses regional disparities and
income inequality.
In conclusion, the remarkable story of socio-economic transformation of Malaysia resulted from
visionary and inclusive development policies of the Government. However, at this stage of
economic development, Malaysia appears to be facing the so-called “Middle Income Trap”. In
the postwar era, like many countries in similar circumstances, Malaysia had rapidly moved into
upper middle-income group by capitalizing on low-cost skilled labor, adoption of appropriate
technology, pro-business environment, openness to FDI and trade, and effective privatization
policies.
In the next phase of its socio-economic development, Malaysia needs to embark on more
inclusive development as well as build on new sources of growth, which can propel the economy
to reach high income status by 2020. Similarly, the Government also needs to tackle the growing
unemployment, particularly among the young graduates, as well as incentives to reverse brain
3

drain. Further, the Government needs to fix the binding constraints, particularly related to private
sector development.
Both public and private sectors also need to fully exploit Reverse Linkages opportunities by
transferring country’s knowledge and expertise to other IDB member countries in a mutually
beneficial arrangement to achieve a win-win-win outcome. Further, South-South cooperation
concept is considered a viable developmental tool, which can be enhanced through RLs. Within a
sector-specific context, there are three critical players in the implementation of RL activities: (i)
Provider institutions from Malaysia; (ii) Recipient countries / institutions of IDB member
countries; and (iii) as a facilitator, the relevant Entities / Sector Departments in the IDB Group.
The key findings of this Country Economic Work help to identify focused programs under two
key pillars namely Private Sector Development and Reverse Linkages of the “IDB Group
Member Country Partnership Strategy for Malaysia, 2012-2015: Partnering for Achieving the
Status of High Income Country”. Further, it also helps to find out niche areas for the MCPS
focused-programs to help the Malaysian private sector by fixing some of the binding constraints.
The IDB Group MCPS Report was launched by the Prime Minister of Malaysia and the President,
IDB Group, during the Malaysia-IDB Investment Forum held on 9-11 May 2012 in Kuala
Lumpur, Malaysia. The Country Economic Work and the MCPS Report are placed on the IDB
website www.isdb.org.
During the Launching Ceremony, Dr. Ahmad Mohamed Ali (first from right) the President, IDB Group, presented a
copy of the MCPS Report to Datuk Seri Najib Razak (center), the Prime Minister of Malaysia. On the occasion of
the Malaysia-IDB Investment Forum held on 9-11 May 2012 in Kuala Lumpur, H.E. Dato’ Sri Mustapa Mohamed
(first from left), Minister of International Trade and Industry of Malaysia, also attended the Launching Ceremony.
4

I. DIAGNOSING THE MALAYSIAN ECONOMY:
SOCIO-ECONOMIC DEVELOPMENT
1. As part of its Vision 1440H (2020), the IDB Group embarks on Member Country
Partnership Strategy (MCPS) for its member countries, aimed at improving the efficiency and
effectiveness of Group operations through close consultation with the key stakeholders. Before
preparing any MCPS, it is extremely important to undertake a proper diagnostic of the country in
order to understand key socio-economic challenges facing the country, particularly, identifying
the binding constraints to achieving sustainable economic growth. Adopting this process, the IDB
Group can assist the country in more effective way through the MCPS exercise.
2. Before undertaking the MCPS for Malaysia, the IDB Group MCPS Team initiated the
Country Economic Work (CEW) aimed at providing analytical analysis of recent socio-economic
development and major challenges facing the country. In particular, the CEW focuses on
identifying binding constraints to achieving sustainable economic growth in Malaysia. Further,
through extensive consultation with key stakeholders (public sector, private sector, business
community, academia, civil society etc.), two main pillars namely (i) Private Sector
Development; and (ii) Reverse Linkages have been identified for the IDB Group support over the
next 4 to 5 years. Therefore, in-depth diagnostics have been undertaken for these two sectors in
order to find out niche areas for IDB Group interventions. This Country Economic Work uses the
latest available information and data from reliable national and international sources.
3. The CEW document is structured as follows. Recent socio-economic developments of
Malaysia are analysed in Section II. Major issues and challenges facing the country are
highlighted in Section III. Using the Diagnostic Framework developed for this study, the binding
constraints to sustainable economic growth are identified in Section IV. Diagnostic analysis of
binding constraints to Private Sector Development is presented in Section V. Finally, the analysis
of Reverse Linkages opportunities is given in Section VI.
II.
RECENT SOCIO-ECONOMIC DEVELOPMENT
4. Since gaining independence (more than five decades ago), Malaysia has achieved
remarkable successes, particularly, in terms of socio-economic development. From a low-income
agrarian country dependent on rubber and tin, Malaysia has emerged as a modern, industrial, and
high-middle income nation with strong economic fundamentals. Malaysia’s successful
implementation of various socio-economic policies over the years with significant support from
the private sector, provide a solid platform on which the country is basing its next phase of
development to achieve high income and developed nation status by 2020. Data on major
5

macroeconomic indicators are given in Annex Table 1.1 and key developments are summarized
below.
5. The country achieved strong and sustainable economic growth. Despite several
regional and global challenges such as the Asian financial crisis of 1997-98, the post-September
11 (2001) recession, outbreaks of
Severe Acute Respiratory
Syndrome (SARS) in 2000-2003,
avian flu in 2003-2006, increases
in world oil and food prices in
2007-2008, and global financial
and economic crisis in 2008-2009,
Malaysia has made significant
strides in achieving sustainable
economic growth, on average of
over 5% during the decade (2000-
2011), mainly due to strong
economic fundamentals 2 (Figure
1.1). In particular, in the post
global economic crisis period,
10
8
6
4
2
0
-2
-4
Figure 1.1 Real GDP Growth, 2000-2011
(% per annum)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Economic Planning Unit, The Malaysian Economy in Figures (various Issues)
after a contraction of economic growth by 1.6% in 2009, Malaysia has recovered fast as its real
GDP grew by 7.2% in 2010, owing mainly to a rise in private domestic demand (both
consumption and investment) and
higher capacity utilization returning
to pre-crisis period (currently
Table 1.1 Malaysia: Sources of Economic Growth (% p.a.)
around 85%). The Government
Major Drivers of Growth 2010 2011
stimulus packages and higher
GDP 7.2 5.1
development spending under the
Domestic demand 10.7 6.5
Ninth Malaysia Plan (2006-2010)
Final consumption 3.6 5.9
have also contributed to a rebound
Private sector 3.5 3.7
in economic activities. The sources
Public sector 0.1 2.2
of recent output growth Gross Fixed Capital Formation 2.1 1.3
demonstrated a shift from
Private sector 1.8 1.6
externally-driven demand to
Public sector 0.3 -0.3
domestically-oriented demand with
Change in stocks 5.0 -0.7
the economy recorded a steady
External demand -3.5 -1.4
pace of growth of 5.1% in 2011.
6. Domestic demand
remains the major driver of
economic growth. According to
Exports of Goods & Services 10.6 4.0
Imports of Goods & Services 14.1 5.4
Source: Department of Statistics, Malaysia (May 2012)
2 World Bank (2008), Growth Report by the Commission of Growth and Development has identified Malaysia as one
of 13 countries in the world that has sustained growth of more than 7% for over 25 years (1967-1997).
6

the Department of Statistics, Malaysia (May 2012), domestic demand contributed the largest
share, accounting for 10.7 percentage points of total GDP growth in 2010 while the growth was
contracted by 3.5 percentage points due to decline in external demand. Among domestic demand
factors, private consumption contributed 3.5% and private investment 1.8% and will likely be the
key growth drivers in 2011 and 2012, with rural areas benefitting from elevated commodity
prices and urban areas from continued growth in the manufacturing and services sectors (Table
1.1). Leading indicators such as rubber prices, stock market index, consumer sentiment index, and
number of retrenched workers suggest that consumer spending will remain buoyant in the coming
years. Solid employment and modest wage increase in line with improving external demand as
well as buoyant commodity prices are also expected to support household income and
consumption. Similarly, private investment is likely to rise with the implementation of projects
under the Government’s Economic Transformation Program (ETP), which is being largely driven
by the private sector.
7. In terms of sectoral
performance, services sector
remained the main source of
economic growth. During 2000s,
annual average growth in the services
sector was 6.2%, attributed mainly
due to strong performance in the
finance, insurance, real estate and
business services, wholesale and
retail trade, hotel industry, and
transport and communication (Figure
1.2). The share of services sector in
GDP also increased from 49.3% in
2000 to 57.7% in 2010 (Figures 1.3
and 1.4). Currently, 87% of the
15
10
5
0
-5
-10
Figure 1.2. Malaysia: Sectoral Growth
Rates, 2001-2010 (% per annum)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Agriculture Manufacturing Services
Source: Economic Planning Unit, The Malaysian Economy in Figures (various Issues)
Figure 1.3 Sectoral Shares in Gross Domestic
Product of Malaysia, 2000 (% of total GDP)
Figure 1.4. Sectoral Shares in Gross Domestic
Product of Malaysia, 2010 (% of total GDP)
Agriculture
8.6% Mining
10.6%
Agriculture
7.3% Mining
7%
Services
49.3%
Manufactrin
g 27.6%
Construction
3.9%
Manufactrin
g 30.9%
Services
57.7%
Construction
3.3%
Source: Economic Planning Unit, The Malaysian Economy in Figures (2011)
7

SMEs are concentrated in the services sector. During the last five years, SME growth
outperformed the overall economic growth. However, there are some important areas of concern
for SMEs such as the issue of low productivity, slow innovation and lack of financing, which
need to be addressed effectively.
8. The manufacturing sector was hit hard by the global recession but recovered
remarkably in 2010. The manufacturing sector grew by 3.5% per annum during 2001-2010.
Since the manufacturing sector is largely dependent on global demand, it was adversely affected
by the global recession with a negative growth of 9.3% in 2009. This was largely due to the sharp
deterioration in the demand for export-oriented products. Subsequently, the manufacturing
sector’s share of GDP declined from 30.9% in 2000 to 27.6% in 2010 (Figures 1.3 and 1.4).
Nonetheless, in 2010, the manufacturing sector strongly recovered with a positive growth of
11.4%.
9. Compared to other key sectors, growth in the agriculture sector remained relatively
slow. During 2000s, the agriculture sector grew by 3.2% per annum. The slower growth was
mainly attributed to a decline in the output of rubber and sawlogs, which is due to a reduction in
rubber hectrage and controlled logging for sustainable forest management. However, increases in
the production of oil palm, livestock and fisheries supported the growth of the agriculture sector.
The share of agriculture in the GDP declined marginally from 8.6% in 2000 to 7.3% in 2010.
10. Malaysian economy remains at almost full employment level. The unemployment
rate declined from the maximum level of 7.4% in 1986 to 3.1% in 2011. Due to global financial
and economic crisis, the
unemployment rate increased
slightly to 3.7% in 2009. However,
the employment situation
recovered from the crisis and
returned to the pre-crisis/ normal
level of 3.1% in 2011(Figure 1.5).
Recovery in employment appears
in all the major sectors including
manufacturing, construction,
agriculture, and services. Real
wages in the manufacturing sector
have risen to fairly high compared
to the pre-crisis level, owing to
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Figure 1.5. Malaysia: Unemployment Rate,
1986-2011 (% p.a.)
1986
1987
1988
1989
1990
1992
1993
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Economic Planning Unit, Government of Malaysia (www.epu.gov.my)
persistently high number of available vacancies. The economy is expected to remain at full
employment level with an estimated unemployment rate of 3.1% in 2015.
11. Remarkable achievement in reducing poverty. Based on the national poverty line
(defined as MYR750 per capita per month), poverty declined from 49.3% in 1970 to only 3.8% in
2009, due to the implementation of targeted poverty eradication programs in both rural and urban
areas. Hardcore poverty has reduced to almost zero in 2010. Despite this great success, some deep
pockets of poverty remain among some groups and in remote parts of the country. In particular,
8

the incidence of rural poverty
(8.4%) was significantly higher
compared to urban poverty of 1.7%
in 2009 (Figure 1.6). During the
Tenth Malaysia Plan period, the
Government plans to reduce
poverty further to 2% by 2015.
Per Capita Income (US$)
70
60
50
40
30
20
Figure 1.7. Malaysia: Real GDP Growth and
Per Capita Income, 2000-2015
14,000
10
12,000
10,000
8,000
6,000
4,000
2,000
0
Figure 1.6. Malaysia: Incidence of Poverty
(% of households)
12. In order to achieve highincome
10
advanced country status
by 2020, Malaysian economy
0
needs to grow by an average
annual growth rate of around 6%
Overall Poverty Urban Poverty Rural Poverty
during the 10 th Plan Period
(2011-2015), taking into account
Source: Economic Planning Unit, Government of Malaysia (www.epu.gov.my)
the risks associated, notably from
the return of high food and fuel prices, sluggish recovery in developed nations, debt crisis in some
European countries and USA, and instability due to volatile capital inflows. Further, the main
risks to medium-term growth have been identified as reform implementation risks, slow progress
on fiscal consolidation, and the quality of public service delivery. Economic growth also needs to
be based on more innovations with
greater emphasis on the quality of
capital and high labor efficiency in
its production system through
addressing the long-standing
problem of brain drain and the lack
of skilled labor. This translates into
the course of achieving high
income status that the country will
have to raise current GNI per capita
from $9,575 in 2011 to a highincome
target of $12,139 by 2015
and to over $15,000 by 2020
through inclusive and sustainable
growth (Figure 1.7).
Per Capita Income (US$) Real GDP Growth (%)
Source: Economic Planning Unit, The Malaysian Economy in Figures
13. Despite remarkable achievements during the last decade, Malaysia appears to be
facing the so-called “Middle Income Trap”. In the post-war era, like many countries, Malaysia
developed rapidly and moved into middle-income status. Out of 101 middle-income economies in
1960, only 13 countries escaped this middle-income trap and became high income by 2008. 3 The
factors that propelled high growth in Malaysia during its rapid growth phase were low-cost labor,
8
6
4
2
0
-2
-4
Real GDP Growth (% p.a.)
3 These countries include Equatorial Guinea, Greece, Hong Kong, China, Ireland, Israel, Japan, Mauritius, Portugal,
Puerto Rico, Republic of Korea, Singapore, Spain and Taiwan.
9

easy technology adoption, pro-business environment, and effective privatization policies, which
weakened when the country reached upper-middle income level, forcing it to find new sources of
growth in the coming years. 4 Much more is needed for transition from middle-income to highincome
status. In particular, high level of investment (both domestic and foreign) with new
technologies and improved quality of physical and human capital is needed. The business
environment needs to be further improved. Innovation needs to be supported. Improved logistics
and connectivity are vital for rapid growth. With regard to improving global competitiveness,
conducive environment for innovation, technological enhancement, and skill-match are the key factors. 5
III.
MAJOR ISSUES/ CHALLENGES FACING THE COUNTRY
14. Despite above-mentioned remarkable socio-economic performance achieved during the
last decade, the country is facing a number of domestic as well as external challenges, which may
affect its medium-term growth prospects. The major challenges facing the country are described
below.
15. The structural reforms required in the manufacturing sector pose significant
challenges in terms of strengthening skills-mix and maintaining its competitiveness. For
many years, manufacturing has been the strongest sector in the country, which is now being
progressively replaced by the services sector. However, the manufacturing sector is a major
contributor to GDP growth. The structural reforms required in this sector pose significant
challenges in terms of skills mix and competition, and a strong desire to move up the technology
chain to produce higher value-added technology-intensive products. There is a misalignment
between the skills-mix produced by the current education and training systems and the needs of
the manufacturing industry, which results in lower quality output. Moreover, there is an intense
competition, both regionally and internationally, for appropriate human capital with high-end and
high-tech skills for moving the industrial sector to higher level of development.
16. Despite full employment rate in Malaysia, there is a worrying trend of growing
unemployment among the young graduates. Malaysia has increasingly large and young
population with approximately 50% of the population below 25 years of age. The unemployed
graduates (with College Degree and above) increased from 27,700 in 2008 to 33,800 in 2010
while unemployed graduates (with Diploma) rose from 26,400 to 31,700 during the same period.
The increasing number of unemployed graduates was due to more graduates produced and joined
the labour market. Although the number has increased, the unemployment rate of graduates
decreased from 3.2% in 2008 to 3.1% in 2010 6 .
17. Malaysia economy is facing brain drain. According to the World Bank (2011) 7 , the
number of skilled Malaysians living abroad has tripled in the last two decades, with two out of
every 10 Malaysians with tertiary education opting to leave for either OECD countries or
4 World Bank (2012), “China 2030 Building a Modern, Harmonious, and Creative High-Income Society”.
5 World Bank (2010), “Robust Recovery, Rising Risks”, Section III on Escaping the Middle-Income Trap.
6 The Department of Statistics, Government of Malaysia (2011).
7 World Bank Senior Economist Philip Schellekens, Kuala Lumpur, April 28, 2011.
10

Singapore which took 54% of Malaysia's graduate migrants, compared to just 20% in the 1990s.
Some 15% went to Australia, 10% to the USA and 5% to Britain. These four countries accounted
for over 80% of the entire Malaysian Diaspora. Young Malaysians going overseas for higher
education, in many instances opt to remain in those countries, contributing to brain drain.
Therefore, the Government of Malaysia is focusing on enhancing employment opportunities for
people with higher education and research skills and reversing the brain drain.
18. Income inequality continues to remain a challenge. Since 1970, income inequality
steadily fell for two decades as Gini-coefficient (a measure of income inequality, which ranges
from zero to 1 with a higher number indicating greater income inequality) declined from 0.51 in
1970 to 0.46 in 1992, but more or
less stagnated at this level. It is
worth noting that Malaysia
remained outside the efficient
income inequality range of 0.25 –
0.40 throughout the period (Figure
1.8). The Gini-coefficient in
Malaysia remained higher
compared to other countries in the
region such as India (0.37),
Indonesia (0.37), Vietnam (0.38),
China (0.42), and Philippines
(0.44). Furthermore, the vast
majority of the bottom 40%
percentile of the society is
Bumiputra (73% of the total) had
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Figure 1.8. Malaysia: Income Inequality
(Gini-coefficent values)
Source: Economic Planning Unit, Socio-Economic Statistics (April 2012)
an average household income of MYR1,440. The Bumiputra generally have limited economic
mobility and a weak ability to secure high-paying jobs in the private sector. Most of them are
living in the rural areas with inadequate quality of education and health services, and limited
access to quality utilities.
19. According to recent household income surveys, income growth has been strong for
the top 20% of income earners while bottom 40% of households have experienced slow
growth in average incomes. In order to reduce inequality, Malaysia needs to raise economywide
income-earning opportunities by encouraging mobility of workers and improving labor
market competition while reducing rigidities; promoting investment in human capital through
enhancing basic education in under-served areas, improving vocational training system;
strengthening employable and industry-led skills development. Reaching out to the vulnerable
segment of the society, providing social protection for the poor by strengthening the poverty
focus of social safety net programs, refining targeting mechanisms to reach the needy and moving
towards a coordinated social protection system.
20. There is a challenge is to reduce regional disparities through balanced development
in five Growth Corridors, which is one of the key objectives of the Tenth Malaysia Plan.
Among various states, Kuala Lumpur has the highest per capita GDP of MYR51 thousand while
11

Kelantan with the lowest per
capita GDP of MYR8 thousand in
2009. Nine out of 15 states are
having the per capita GDP below
the national average GDP per
capita (Figure 1.9). During the 9 th
Plan period, the Government
embarked on a number of
initiatives to promote balanced
regional development and
accelerate growth in less
developed geographic areas. As a
result, five Growth Corridors
namely Iskandar Malaysia,
Northern Corridor Economic
60
50
40
30
20
10
0
Figure 1.9. Malaysia: Inter-State Disparity, 2009
(GDP Per Capita by State, 000 RM)
Source: Tenth Malaysia Plan, 2011-2015
National Average
Region, East Coast Economic Region, Sarawak Corridor and Sabah Development Corridor, are
identified with the key objective of reducing regional disparities during the 10 th Malaysia Plan
(2011-2015).
IV.
DIAGNOSTIC ANALYSIS OF BINDING CONSTRAINTS TO SUSTAINABLE
ECONOMIC GROWTH
21. Compared to its major competing Asian countries, Malaysia’s economy experienced
strong economic growth during 1990s but it slowed during 2000s. Malaysia had achieved an
annual average growth of 7.4% during 1990s (Figure 1.10). However, this strong growth
momentum could not be sustained and the growth rate slowed to 4.7% per annum during 2000s
(Figure 1.11). The economy was expected to grow by 6% per annum during the 9 th Plan period
China
Singapore
Malaysia
Vietnam
Korea
Taiwan
India
Thailand
Indonesia
Hong Kong
Philippines
Figure 1.10. Real GDP Growth in Selected
Asian Countries (average 1990-2000)
2.9
7.5
7.4
7.3
6.9
6.3
5.6
5.2
4.4
4.0
0.0 2.0 4.0 6.0 8.0 10.0
9.8
China
India
Vietnam
Singapore
Indonesia
Philippines
Malaysia
Thailand
Korea
Hong Kong
Taiwan
Figure 1.11. Real GDP Growth in Selected
Asian Countries (average 2001-2010)
5.7
5.2
4.8
4.7
4.4
4.2
4.1
3.9
7.4
7.3
10.5
0.0 2.0 4.0 6.0 8.0 10.0 12.0
IMF, World Economic Outlook Database, September 2011
12

(2006-2010) but its annual average growth rate remained 4.2%. Compared to 11 high growth
performing Asian countries (China, India, Singapore, Korea Republic, Vietnam, Hong Kong,
Taiwan, Indonesia, Thailand, and Philippines), Malaysia was at the 3 rd position (after China and
Singapore) in terms of high growth during 1990s but over the last decade its momentum of
growth noticeably slowed and its ranking moved to 7 th position, while the growth rates of several
other countries in the region have improved during 2000s.
22. Keeping in view the deceleration in growth during 2000s, it is important to find out what
are the major causes and binding constraints to Malaysian’s sustainable growth, using an
appropriate growth diagnostic framework, which is described as follows.
i. Growth Diagnostic Framework
23. The widely used Growth Diagnostic Framework developed by Hausmann, Rodrik,
and Velasco (2005), which considers low level of private investment as the only binding
constraint, to economic growth, while ignoring the role of public investment and software of
growth in achieving sustainable economic development. In this study, Hausmann, Rodrik, and
Velasco framework is extended by including all the possible sources of economic growth (i.e.
public investment, private investment and software of growth). The IDB Group MCPS Team for
Malaysia has developed the problem tree, which provides a complete framework for diagnosing
critical constraints to sustainable economic growth in Malaysia (Figure 1.12).
24. The Growth Diagnostic Framework starts with private investment: First, it starts by
asking what keeps the level of private investment low. Is private investment low due to low return
on investment or high cost of financing? If it is low because of low social returns, is that due to
poor geography (natural disasters) or poor human capital or physical infrastructure? If the
problem is poor appropriately, is it due to government failures, market failures or both? If it is
government failure, is that due to micro risks (i.e. high cost of doing business), macro risks (i.e.
financial, monetary and fiscal instability) or restriction on foreign ownership for the foreign
investors? If the impediment on private investment is due to high cost of financing, is that due to
bad international finance (i.e. high interest rate and stringent conditionalities) or shortage of local
finance. If the problem is of bad local finance, is that due to low private saving or poor
intermediation of the banking system. 8
25. Starting from the second part of the problem tree with regard to low level of public
investment, it starts by asking what keeps the level of public investment low. Is public
investment low because of budgetary constraints, leakages, or limited implementation capacity?
If it is due to budgetary constraint, is it because of tight fiscal position, high borrowing cost or
other development priorities? Are the leakages due to corruption or poor governance? Is limited
implementation capacity due to weak institutions or poor human capital?
8 For further detail on the Growth Diagnostic Framework, see Iqbal Z. and A. Suleman (July 2010), “Indonesia: Critical
Constraints to Infrastructure Development”, and ADB-IDB-ILO (2010), Joint Country Diagnostic Study on “Indonesia:
Critical Development Constraint”.
13

Figure 1.12. General Growth Diagnostic Framework
Critical Constraints to Sustainabale Economic Growth
Low Level of
Public Investment
Weak Software of Growth
Low Level of Private Investment
(including FDI)
Budgetary
Constraint
Tight
Fiscal
Position
High
Borrowing
Costs
Other
Development
Priorities
Leakages
Corruption
Poor
Governance
Limited
Implementation
Capacity
Weak
Institutions
Lack of
Huamn
Capital
Weak
Business
Sophistication on
Limited
Local
Supplier
Quantity
Poor Local
Supplier
Quality
Weak State of
Cluster
Development
Narrow
Value Chain
Breadth
Weak
Production
Process
Sophistication
Low Level of
Innovaion
Low
Capacity for
Innovation
Poor Quality
of Scientific
Research
Institutions
Lower
Company
Spending on
R&D
Lack of
Availability
of Scientists
and
Engineers
Low Govt.
Procurement
of Advanced
Tech.
Products
Poor
Reverse
Linkages
Low Social
Returns
Poor
Geography
(Natural
Disasters)
Low Return on
Investment
y
Poor
Physical and
Human
Capital
Government
Failures
Low
Appropriability
Micro Risks
(High Cost of
Doing
Business)
Macro Risks
(Financial,
Monetary,
and Fiscal
Instability)
Restriction on
Foreign
Ownership
Market
Failures
Information
Externalities
Coordination
Externalities
High Cost of
Finance
Bad
International
Finance
Shortage of
Local
Finance
Low Private
Savings
Poor
Intermediation
Source: IDB Group MCPS Team (2012): An Extended Version of Growth Diagnostic Framework of Hausmann, Rodrik, and Velasco (2005)
14

26. The final part of problem tree starts asking questions whether weak software of
growth are due to weak business sophistication, low level of innovation, or poor reverse
linkages. Is weak business sophistication due to poor quality of local supplier, weak state of
cluster development, narrow value chain breadth, or weak production process sophistication?
With regard to low level of innovation, is it due to low capacity for innovation, poor quality of
scientific research institutions, lower company spending on research and development (R&D),
lack of availability of scientists and engineers, or low government procurement of advanced
technical products.
27. Final branch of problem tree is whether poor Reverse Linkages (RLs) are constraining to
growth (i.e. country is not fully exploiting RLs opportunities through sharing its knowledge and
expertise to other IDB member countries).
28. Using the growth diagnostic framework developed in this study, binding constraints
to Malaysia’s sustainable economic growth are identified in terms of private investment, public
investment, and software of growth as follows:
ii.
Constraints to Private Investment
Low Level of Private Investment appears as binding constraint to sustainable
economic growth
29. Data show that during 2000s, economic growth was mainly constrained by
significant decline in private investment. The key challenge in the 10 th Malaysia Plan is to
stimulate private investment growth by 12.8% per annum over the Plan period (2011-2015).
Prior to the Asian financial crisis,
private investment as a
percentage of GDP was at the
maximum level of 32% in 1997
(average annual private
investment was 26.9% of GDP
during 1990-1997), which
drastically declined to 10.3% in
2010 (Figure 1.13). During 2001-
2010, real private investment
growth remained 4.2% per
annum while the real public
investment grew by 4.3% per
annum. In particular, during the
Ninth Plan period (2006-2010),
the moderation in private
30.0
25.0
20.0
15.0
10.0
5.0
Figure 1.13. Malaysia: Gross Fixed Capital
Formation (% of GDP)
Private Investment
Public Investment
Source: World Development Indicators, World Bank (1 Jan. 2012)
investment was partially offset by higher public investment through stimulus packages in 2009
and 2010. Achieving high income status by 2020 requires that the private sector must be placed in
the driving seat of the economy through creating a more enabling environment. It is worth noting
15

that the Government’s Economic Transformation Program with an amount of MYR1.4 trillion
($523 billion) has targeted (92% of total investment) by the private sector (out of total, 73% by
the local private investors and 27% by the foreign investors).
30. Similar to local private investment, low level of foreign investment also appears to
be a binding constraint to growth. Compared to competitor countries in the region, Malaysia is
also lagging behind in terms of attracting FDI inflows. Country has begun to lose some FDI to
China and other newly emerging destinations, including Vietnam, through relocation of existing
factories and a reduced inflow of new investors. During 1990s, Malaysia attracted average FDI
inflows of $4.9 billion (6.3% of GDP) per annum, which declined to $4.2 billion (2.9% of GDP)
per annum during 2000s. While during the same period, FDI flows to China increased from $32.8
Figure 1.14. Average Annual FDI
Flows, 1990-2000 (% of GDP)
Singapore
Hong Kong
Viet Nam
Malaysia
China
Thailand
Philippines
Indonesia
Korea
Taiwan
India
3.7
2.6
1.7
0.7
0.7
0.7
0.4
6.6
6.3
9.0
0.0 5.0 10.0 15.0
Source: UNCTADstat website (September 2011)
12.0
Hong Kong
Singapore
Viet Nam
Thailand
Malaysia
China
India
Philippines
Taiwan
Indonesia
Korea
Figure 1.15. Average Annual FDI Flows,
2001-2010 (% of GDP)
5.9
3.5
2.9
2.8
1.7
1.3
1.0
0.9
0.7
13.9
20.2
0.0 5.0 10.0 15.0 20.0 25.0
billion (4% of GDP) to $71.7 billion (2.9% of GDP); Hong Kong from $14.9 billion (9.4% of
GDP) to $35.8 billion (18.8% of GDP); Singapore from $9.6 billion (11.7% of GDP) to $18.1
billion (13.6% of GDP); and
India from $1.9 billion (0.5% of
GDP) to $16.6 billion (1.7% of
GDP) (Figures 1.14 and 1.15). It
is worth noting that the Asian
financial crisis of 1997-98 caused
significant outflows of foreign
portfolio investment and foreign
direct investment from Malaysia,
which has not recovered yet.
31. According to Growth
Commission Report (2008) 9 , for
high and sustainable economic
growth, investment rate of 25%
50
45
40
35
30
25
20
15
10
5
0
Figure 1.16. Malaysia: Gross Domestic Savings and
Gross Capital Formation, 2000-2010 (% of GDP)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bank Negara Malaysia (website)
Gross domestic savings (% of GDP)
Gross capital formation (% of GDP)
9 World Bank (2008) Growth Report by the Commission of Growth and Development.
16

of GDP or above is needed. The current overall investment level of 20.3% of GDP (public
investment 10% and private investment 10.3% of GDP) in Malaysia is not adequate to support
strong growth over the medium-term. Sustained higher levels of investment are critically
necessary along with much-improved efficiency and returns on investment. Low investment rates
in Malaysia do not appear to be due to insufficient savings (Figure 1.16). Saving rates in Malaysia
has not changed much during 2000s and remained above 40% of GDP while total investment rate
declined significantly and remianed average 21% of GDP during the same period.
32. After identifying private investment as a binding constraint to sustainable economic
growth, it is important to find out what are the binding constraints to private investment.
The following sub sections explain what are (or not) binding constraints to private invesmtnet.
(i)
Availability and Cost of Finance do not appear binding constraints
33. Country has huge internal resource surplus (S-I), thereby no shortage of local
financing. During 2000s, overall investment rate remained below the domestic saving rate,
leaving the internal resource surplus (saving-investment gap) between 17–23% of GDP per
annum, which indicates abundant availability of domestic financing.
34. Country’s Banking sector has ample liquidity and remained well-capitalised. In
banking system, loans-to-deposits ratio has steadily increased from 70.5% in 2006 to a
comfortable level of 80.9% in 2011. Total outstanding loans from the banking system in Malaysia
has significantly increased from MYR315 billion in 2000 to MYR1,004 billion in 2011, however,
it remained lower compared to the
cumulative deposits which
increased from MYR363 billion to
MYR1,300 billion during the same
period, leaving the surplus liquidity
of MYR255 billion ($82.6 billion)
in 2011. During 2000-2011, the
average growth in loans by
commercial banks was 11.3% while
the growth in deposits was 12.5%.
It is worth noting that the average
lending rate by commercial banks
declined from 7.7% in 2000 to
5.1% in 2011 (Figure 1.17). The
Malaysian banking system and
bond market have ample liquidity
to meet borrowers’ medium-term
Loan-Deposit Ratio
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
-
Figure 1.17. Banking System in Malaysia: Loan-Deposit
2000
Ratio and Average Lending Rate (% p.a.)
2001
2002
2003
2004
Source: Bank Negara Malaysia, Annual Reports (various issues)
2005
2006
Loan-Deposit Ratio (end of year) Average Lending Rate (%)
funding needs. Healthy domestic demand is expected to drive growth in Malaysia’s banking
sector in the medium-term as public and private projects identified in Economic Transformation
Program (worth MYR1.4 trillion) will help to stimulate lending.
2007
2008
2009
2010
2011
10.0
8.0
6.0
4.0
2.0
0.0
Average Lending Rate (% p.a.)
17

(ii) Low Returns to Investments appears as binding constraint
35. Malaysia’s social returns to investment is lower compared to Singapore; China;
Philippines and India while higher than Indonesia, Vietnam, Hong Kong, Thailand and
Korea. Slow economic growth can also be explained by lower returns to economic activity,
which in turn can be on account of low social returns to investment and or low appropriability of
the returns. Social returns (or returns to society) can be affected by the level of investment in
human capital, infrastructure, or public goods that compliment private investment. Inadequate
investment in these complementary factors can lead to low social returns by dampening the
productivity of factors of production and increasing the cost of doing business, which in turn
lower the returns to investment. A
comparison of social returns
across selected Asian countries
suggest that Malaysia’s average
annual social returns to investment
during 2000-2010 were 22.2%,
which were lower compared to
Singapore (26.8%); China
(24.7%); Philippines (23.6%) and
India (23%) while higher than
Indonesia (20.4%), Vietnam
(20.2%), Hong Kong (19.7%),
Thailand (16.7%) and Korea
(15.3%) (Figure 1.18). A
relatively low level of social
returns could be a symptom of
deficiencies in human capital. 10
30.0 26.8 24.7 23.6 23.0
25.0
22.2 20.4 20.2 19.7
20.0
15.0
10.0
5.0
0.0
Figure 1.18. Returns to Investment in Selected
Asian Countries (%)
16.7 15.3
Data Source: World Bank, World Development Indicators
Note: Return to investment is estimated as the ratio of real GDP growth rate and
gross capital formation as % of GDP.
(iii) Macroeconomic Risks do not appear as binding constraints
36. Malaysia’s macroeconomic performance is sound with significant current account
and trade account surpluses, low inflation rate, and low level of foreign debt. However,
fiscal deficit appears to be a concern. Performance of major macroeconomic indicators is
described below.
37. Country has significant current account and trade surplus, and sufficient level of
foreign exchange reserves. The country’s current account surplus increased substantially from
9% of GDP in 2000 to 17.7% in 2008. However, due to the adverse impact of the global financial
and economic crisis, the current account surplus fell to 11.5% of GDP in 2011. Higher foreign
capital inflows including FDI and workers’ remittances improved the balance of payments
position of the country. Similarly, during the last decade, the country enjoyed maximum trade
10 For detail on social returns on investment, see ADB-IDB-ILO joint Country Diagnostic study “Indonesia: Critical
Development Constraints” (2010).
18

surplus of 19.8% of GDP in 2005,
which declined to 13.4% of GDP
in 2011, due to adverse impact of
global economic crisis (Figure
1.19). Malaysia’s foreign exchange
reserves improved significantly
from $29.9 billion (5.1 months of
retained imports) in 2001 to $133.6
billion (9.6 months of retained
imports) as of end-2011. It is worth
noting that post-global financial
crisis, Malaysia experienced large
short-term capital inflows, which
exerted significant upward pressure
on the exchange rate.
25.0
20.0
15.0
10.0
5.0
0.0
Figure 1.19. Malaysia: Current Account and Merchandise
Trade Account Balance, 2000-2011 (% of GDP)
Current Account Balance (% of GDP)
Trade balance (% of GDP)
Sources: Data for current account balance, IMF World Economic Outlook
(April 2012); and Data for trade balance, Department of Statistics, Malaysia
(website) (taken as trade balance as share of GDP at purchaser’s price)
38. Malaysia has been
successful in diversification of its exports. During the last two decades, country’s exports
moved from mainly agricultural and mining to high-value added manufacturing products. The
share of manufactured exports in total merchandise exports increased from 65% in 1991 to 72%
in 2010. In contrast, the share of exports of forestry declined from 8% to 1%, rubber from 3% to
1%, and oil and gas from 14% to 11%, while the share of palm oil’s exports increased from 5% to
8% during the same period (Figures 1.20 and 1.21).
Palm Oil
5%
Forestry
8%
Figure 1.20. Diversification of Malaysia's
Exports, 1991(% of Total)
Rubber Other
3% 5%
Figure 1.21. Diversification of Malaysia's
Exports, 2010 (% of Total)
Palm Oil
8%
Rubber
1%
Other
7%
Forestry
1%
Oil & Gas
14%
Manufacture
d
65%
Oil & Gas
11%
Manufactured
72%
Source: The Malaysia Economy in Figures (1991 and 2011)
39. The destination of Malaysia’s exports also changed over the years. During the last
two decades, the significant change was observed in case of exports to West Asia, as the share of
exports increased from 2% of total exports in 1991 to 23% in 2010 to West Asia and from 10% to
12% to newly industrializing economies (NIEs) during the same period. Conversely, exports
shares declined to other regions such as ASEAN (29 to 25%); North America (from 18 to 10%);
EU (from 15 to 11%); and rest of the world (ROW) (from 26 to 19%) between 1991 and 2010
(Figures 1.22 and 1.23).
19

Figure 1.22. Malaysia's Exports by
Destination, 1991 (% of Total)
Figure 1.23. Malaysia's Exports by
Destination, 2010 (% of Total)
ROW
26%
ASEAN
29%
ROW
19%
ASEAN
25%
West
Asia
2%
NIEs
10%
EU
11%
North
America
18%
EU
15%
West Asia
23%
NIEs
12%
North
America
10%
Source: The Malaysia Economy in Figures (1991 and 2011)
40. Inflation remained modest. Over the last decade, the average inflation remained 2.2%
per annum. However, consumer price inflation had risen from 1.5% in 2000 to a maximum of
5.4% in 2008 mainly due to rise in food and oil prices. This rising trend is also consistent with
most countries in the region experiencing similar inflationary trends, though the inflation rates
were much higher in competing Asian countries such as India at 13.2% and Vietnam at 9.2% in
2010. Although inflation rate was back to the normal level of 1.7% in 2010, but again rose to
3.2% in 2011. Core inflation rate (y-o-y) remained lower than CPI inflation (i.e. 1% in December
2010 and 2.1% in December
2011). 11
41. Federal Government
debt, mainly domestic debt, is
at manageable level. The
Federal Government total debt
steadily increased from 35.2% in
2000 to 53.1% of GDP in 2010.
However, the external debt of
the Federal Government
declined from the maximum
level of 9.5% in 2002 to 2.2% of
GDP in 2010, while domestic
debt increased from 43% to
53.1% during the same period
(Figure 1.24).
60.0
50.0
40.0
30.0
20.0
10.0
-
Figure 1.24. Malaysia: Federal Government
Domestic and Excternal Debt (% of GDP)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Domestic Debt External Debt Total Debt
Source: Economic Planning Unit (www.epu.gov.my)
11 Ecmlibra Investment Research, Consumer Price Index (February 2012)
20

(iv) Some Microeconomic Risks appear as binding constraints
42. Both local and foreign private investment in Malaysia is constrained by business
environment, particularly starting a business and dealing with construction permits.
According to the World Bank/IFC Doing Business 2012 Report, out of 183 countries, Malaysia
ranked well at 18 position, which is also an improvement over the last year ranking of 21 but is
behind compared to Singapore (1 st ), Hong Kong (2 nd ), Korea (8 th ) and Thailand (17 th ). In
particular, Malaysia ranked relatively weak dealing with contracts (113); registering property
rights (59); getting credit (59) and starting a business (50) (Table 1.2).
Table 1.2. Ranking of Doing Business of Selected Asian Countries, 2011 (out of 183 countries)
Economy
Ease of
Doing
Business
Starting
a
Business
Dealing with
Construction
Permits
Registering
Property
Getting
Credit
Protecting
Investors
Paying
Taxes
Trading
Across
Borders
Enforcing
Contracts
Closing a
Business
Singapore 1 4 3 5 14 8 2 4 1 12
Hon Kong 2 5 1 4 57 4 3 3 2 5
Korea 8 24 26 11 71 8 79 38 4 2
Thailand 17 78 14 9 28 67 13 100 17 24
Malaysia 18 50 113 59 59 1 4 41 29 31
Taiwan 25 16 87 3 33 67 79 71 23 88
China 91 151 179 115 40 67 97 122 60 16
Vietnam 98 103 67 135 47 24 166 151 68 30
Indonesia 129 155 71 161 99 126 46 131 39 156
India 132 166 181 98 97 40 46 147 109 182
Philippines 136 158 102 54 117 126 133 136 51 112
Source: World Bank/IFC Doing Business Report 2012
14
12
Figure 1.25. Most Problematic Factors for Doing Business in Malaysia, 2011-2012
(percent of responses)
10
8
6
4
2
0
Source World Economic Forum, The Global Competitiveness Report 2011-2012
21

43. Malaysia’s private firms are facing a number of business constraints in the country.
According to Global Competitiveness Report 2011-2012, business firms in Malaysia are
concerned about government bureaucracy, access to financing, restrictive labor regulations,
corruption, and inadequately educated workforce identified as top most five problematic factors
for doing business in Malaysia in 2011-2012 (Figure 1.25). These business constraints
significantly reduce social returns to investment and lower the productivity of firms, thereby
constraining private investment.
(v) Infrastructure and Human Capital do not appear as binding constraints
44. Overall quality and quantity of infrastructure does not appear as binding constraint
to private investment and
growth, however, it needs further
improvement in order to achieve
sustainable growth of 6% during
2011-2015. Higher global
competitiveness requires better
quality of infrastructure. In
comparison to the neighboring
Asian countries, Malaysia’s
performance in terms of quality of
infrastructure needs some further
improvements. According to the
Global Competitiveness Report
2011-2012, out of 142 countries,
Malaysia was ranked at 26 th
Figure 1.26. Ranking of Overall Infrastructure
(out of 142 countries)
Philippines
Viet Nam
India
Indonesia
China
Thailand
Malaysia
Taiwan
Korea Rep.
Singapore
Hong Kong
Hong Kong
Korea
Singapore
Malaysia
China
Thailand
Philippines
Indonesia
Viet Nam
India
9
3
1
Source, Global Competitiveness Report, 2011-2012
Figure 1.27. Rankings of Human Development
Index of Selected Asian Countries, 2011 (out of
187 countries)
13
15
26
20
Source: UNDP Human Development Report, 2011
26
44
42
61
101
103
112
124
128
134
0 50 100 150
76
90
89
105
0 20 40 60 80 100 120
position, compared to Hong Kong (1 st ), Singapore (3 rd ), Korea (9 th ), and Taiwan (20 th ) while it
was better than other competing Asian countries (Figure 1.26).
45. With regard to quality of
various components of
infrastructure, Malaysia ranked
out of 142 countries, best quality of
port infrastructure with ranking of
15 th , followed by roads and railroads
(18 ranking), air transport (20), and
electricity (38).
46. Malaysia has steadily
improved its Human Development
Index ranking and is categorized
as a high human development
country. According to 2011 UNDP
Human Development Index (HDI) –
22

a composite of education, health and
per capita income indicators –
Malaysia ranked 61 out of 187
countries (Figure 1.27). Since 1980,
Malaysia has shown sustained and
enhanced improvement in all the three
components of HDI. The overall HDI
value increased from 0.56 in 1980 to
0.76 in 2011. With regard to various
components of HDI, education index
value improved much faster from 0.42
to 0.70, while income index improved
from 0.55 to 0.70 and health index
from 0.75 to 0.86 during the same
period (Figure 1.28). It is worth
0.90
0.85
0.80
0.75
0.70
0.65
0.60
0.55
0.50
0.45
0.40
Figure 1.28. Malaysia: Human Development
Index and Its Components
1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011
Health index
Education index
Income index
Overall HDI
Source: UNDP Human Development Report (various issues)
noting that Malaysia has largely
achieved or is on track to achieve its MDGs well ahead of 2015 target year (Annex Table 1.2). 12
iii.
Constraints to Public Investment
Low Level of Public Investment appears as binding constraint to economic growth
47. Prior to the Asian financial crisis, average public investment was 12.4% of GDP during
1990-97, which along with high private investment rate supported the economy to achieve over
7% of sustained real GDP growth during the same period. However, public investment reached at
the maximum level of 15.4% of GDP in 2002 but later declined to around 10% of GDP in 2010.
48. The diagnosis of public investment starts by examining why the level of public
investment is low. Is this due to budgetary constraint or limited implementation capacity? Is it
due to corruption or poor governance? The following sub sections attempts to answer to these
questions.
(i)
Budgetary Limitation
49. Growth in public investment is constrained by higher budget deficit. The Federal
Government successfully reined in the deficit at 5.6% in 2010 and 5.0% of GDP in 2011 (Figure
1.29). The target fiscal deficit is 4.7% in 2012. Prior to the global financial and economic crisis,
the Federal Government budget deficit had been steadily reduced from 5.2% in 2002 to 3.2% of
GDP in 2007. However, the budget deficit rose to 7% of GDP in 2009 when the Government
implemented two stimulus packages to support aggregate demand when commodity prices and
the external sector collapsed. However, fiscal consolidation is firmly on track after the global
financial and economic crisis. The Government is committed to strengthening public finances
12 United Nations Country Team Report (April 2011), Malaysia: The Millennium Development Goals at 2010.
23

over the medium-term. Several
initiatives have been taken to rein
in expenditure and improve
revenue collection. The measures
include rationalising fuel subsidies,
cutting back on non-critical
expenditure, maximising utilisation
of Government resources,
introducing ‘value management’ in
development projects to ensure
value for money and cost
optimization. A stringent
monitoring system has been
instituted to ensure timely
implementation of projects while
outcome based budgeting will be
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
Figure 1.29. Malaysia: Public Investment and
Fiscal Deficit, 2000-2011 (% of GDP)
Fiscal Balance (% of GDP)- Federal Government
Public Investment (% of GDP)
Source: For Fiscal Deficit, Economic Planning Unit, The Malaysian Economy in Figures
Source: For Public Investment, World Development Indicators, World Bank (1 Jan. 2012)
introduced in stages beginning 2013. Revenue enhancement will be through broadening the tax
base. Tax administration will be improved through greater ICT usage while tax audit,
investigations and enforcement will be stepped up to minimize leakages. Medium-term fiscal
targets pursued include reducing the budget deficit to about 3% of GDP and observing a debt to
GDP ratio of about 50% of GDP by 2015.
(ii)
Governance do not appear as binding constraint
50. In terms of governance indicators, Malaysia compare favorably well with all its
competing regional countries, thereby not constraining public investment. The World Bank
Table 1.3. Governance Indicators in Selected Asian Countries, 2010
(Percentile Rank between (0 - 100, lower the value, worst the indicators)
Voice and
Accountability
Political
Stability
Government
Effectiveness
Regulatory
Quality
Rule of
Law
Control of
Corruption
Malaysia 31.3 51.9 82.3 71.3 65.4 61.2
China 5.2 24.1 59.8 45.0 44.5 32.5
Hong Kong 66.4 77.8 94.7 99.5 91.0 94.7
India 59.2 10.8 55.0 39.2 54.5 35.9
Indonesia 48.3 18.9 47.8 39.7 31.3 27.3
Korea 69.2 50.0 84.2 78.9 81.0 69.4
Philippines 46.9 6.6 51.7 44.0 34.6 22.5
Singapore 37.4 89.6 100.0 98.6 93.4 98.6
Taiwan 73.9 72.6 84.7 83.7 81.5 74.2
Thailand 30.3 12.7 58.4 56.5 49.8 46.9
Viet Nam 8.5 51.4 44.0 31.1 38.9 33.0
Source: World Bank, Governance Indicators, 2010
24

Governance Indicators Report (2010) show that the country ranked quite high in terms of better
government effectiveness (82.3%), followed by regulatory quality (71.3%), rule of law (65.4%),
control of corruption (61.2%), and political stability (51.9%) (Table 1.3). Recent studies have
established positive relationships between good governance and improved investments, better
economic performance, and improved human welfare and development, while corruption hinders
development and therefore increases poverty 13 . Further, a strong positive correlation has been
found between per capita income and the quality of governance across countries 14 .
(iii) Quality of Institutions does not appear as binding constraint
51. In terms of quality of institutions, the Global Competitiveness Report (2011-2012)
shows that Malaysia stands at a high ranking of 30 out of 142 countries – third best in 11
selected Asian economies (Figure
1.30). The quality of institutions
has a strong bearing impact on
competitiveness and economic
growth in an economy. Strong and
fair institutions play a positive role
in terms of investment decision
making. The role of institutions
goes beyond the legal and
regulatory framework. In
particular, the government attitude
toward markets and the efficiency
of its operations are very important
in achieving sustainable high
economic growth. 15
120
100
80
60
40
20
0
Figure 1.30. Malaysia: Ranking of Institutions of
Selected Asian Countries (out of 142 countries)
1
9
30 31
48
Source” Global Competitiveness Report, 2011-2012
65 67 69 71
87
117
iv.
Constraints to Software of Economic Growth
Weak Software of Growth appears as binding constraint
52. Generally, software of growth includes global competitiveness, innovation, business
sophistication, quality of education, R&D and Reverse Linkages activities. Software of growth
plays a key role in achieving sustainable high economic growth in Malaysia. In order to achieve
sustained 6% growth, Malaysia needs to improve software of economic growth. In particular,
efforts to innovation and creativity have been insufficient due to low R&D expenditure, which
resulted in lack of innovation in the industrial and exports sector. Malaysia is relatively weak in
13 ODI (2006). Governance, development and Aid Effectiveness: A Quick Guide to Complex Relationships. Briefing
Paper.
14 Ishrat Husain (2009). Economic Governance in Pakistan.
15 For further detail on this institution matter, see World Economic Forum, Global Competitiveness Report 2011-12.
25

growth software compared to its major competitor countries in the region. The following sub
sections briefly describe the binding constraints to software of growth.
(i)
Weakening Global Competitiveness
53. Malaysia’s global competitiveness has been weakening and is considered to be one
of the binding constraints to economic growth during 2000s. In terms of global competitive
landscape, Malaysia is facing
intense competition with both high
income developing countries as
well as developed countries.
Malaysia’s exports began to
experience erosion in
competitiveness partly due to rising
costs and partly due to the
overvaluation of the ringgit as well
as the depreciation of dollar.
Malaysia has lost its comparative
advantage in several products to
newcomers due to relatively higher
restrictive business environment.
According to World Economic
Forum Global Competitiveness
27
25
23
21
19
17
15
Figure 1.31. Malaysia: Global Competitiveness
Ranking, 2006-2010 (out of 142 countries)
19
21
Source: Global Competitiveness Report, World Economic Forum (various
issues)
21
2006 2007 2008 2009 2010 2011
Reports, Malaysia’s ranking continuously weakened during 2006-2010 as global competitiveness
ranking slipped from 19 in 2006 to 26 (out of 142 countries) in 2010. However, recently Malaysia
ranking improved to 21 in 2011.
Comparing with the competing
countries,
Malaysia’s
competitiveness is weaker
compared to Singapore (3), Hong
Kong (11), and Taiwan (13), while
it better ranked compared to Korea
(22), China (27), Thailand (38),
Indonesia (48) and India (51) in
2011-2012 (Figure 1.31). However,
compared to Malaysia, the other
emerging developing economies
like China, India, Thailand, and
Indonesia, have the advantage of
scale, both in terms of cost of
production and size of domestic
markets. More recently, a number
of countries in South America and
Table 1.4. Malaysia: Global Competitiveness Indicators Ranking,
2011-2012 (out of 139 countries)
Basic Requirements 25
Institutions 30
Macroeconomic Environment 29
Health and Primary Education 33
Infrastructure 26
Efficiency Enhancers 20
Higher Education and Training 38
Technological Readiness 44
Labor Market Efficiency 20
Market Size 29
Goods Market Efficiency 15
Financial market Development 3
Institutions and Sophistication Factors 22
Business Sophistication 20
Innovation 24
Source: Global Competitiveness Report, World Economic Forum, 2011-2012
24
26
21
26

Eastern Europe are also increasingly entering regional markets in direct competition with
Malaysia.
(ii) Low Level of Higher Education and Training, Low R&D and Weak
Technological Readiness
54. Among various competitiveness indicators, Malaysia needs to improve its
performance in higher education and training, and technological readiness. The country is
placed at ranking of 44, with room for improvement in technological adoption by both businesses
and the population at large. In terms of higher education and training, Malaysia ranked (38),
improving access remains a priority in light of low enrollment rates of 69% (101 ranking) and
36% (66 ranking) for secondary and tertiary education, respectively. Innovative technologies can
also increase returns on investment and improve productivity of labour and capital. Individuals
and companies/firms involved in innovation need tighter connectivity at home and abroad (Table
1.4).
55. The indicators regarding the level of science and technology in Malaysia also appear
to be a binding constraint as they do not portray an encouraging picture. Country’s share of
researchers and technicians in R&D remains a fraction of that in competing nations. Malaysia’s
Table 1.5: Malaysia: Researchers in R&D (per million people)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Malaysia 90 154 276 295 503 372
China 448 477 390 423 549 582 630 666 710 853 927 1,071
Hong Kong 1,047 1,201 1,159 1,360 1,570 1,981 2,131 2,619 2,650
India 154 117 111 137
Indonesia 219 205
Korea 2,209 2,262 2,023 2,173 2,334 2,919 3,023 3,207 3,298 3,780 4,187 4,627
Philippines 71 81
Singapore 2,535 2,615 2,977 3,203 4,139 4,103 4,398 4,820 5,087 5,575 5,736 6,088
Thailand 100 72 169 281 281 311
Vietnam 115
Source: UNESCO Institute for Statistics
Researchers in R&D are professionals engaged in the conception or creation of new knowledge, products,
processes, methods, or systems and in the management of the projects concerned. Postgraduate PhD
students engaged in R&D are included.
research and development expenditure, as a percentage of GDP, stands at 0.6%. This lags behind
Japan’s R&D expenditure (3.4%), South Korea (3%), and Singapore (2.3%). The number of
27

esearchers and technicians in R&D per million people has grown, respectively, from 90 and 31
in 1996 to 503 and 63 in 2004. However, in 2006 (the latest available data), both researchers and
technicians declined, respectively, to 372 and 44 per million, indicating significant brain drain
from the country and inconsistent with the growing population and country’s needs. Further,
Malaysia considerably lags behind with competing countries, for example, researchers and
technicians in Singapore in 2006 were 5,736 and 549 per million; Hong Kong (2,650 and 459),
Korea (4,187 and 587) (Tables 1.5 and 1.6). This gap is negatively affecting the technological
capabilities and innovative capacity of Malaysia, therefore, appears to be a binding constraint to
economic growth. The number of researchers and technicians in Malaysia is below compared to
Table 1.6: Malaysia: Technicians in R&D (per million people)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Malaysia 31 43 40 57 63 44
Hong Kong 218 197 206 173 226 314 424 341 459
India 112 100 86 94
Korea, Rep. 635 581 534 567 457 456 499 571 585 552 587 720
Philippines 11 10
Singapore 315 369 352 369 338 352 385 412 485 557 549 529
Thailand 38 73 85 113 204 160
Source: UNESCO Institute for Statistics
Technicians participate in R&D by performing scientific and technical tasks involving the application
of concepts and operational methods, normally under the supervision of researchers.
the level of regional competitors. The deficits have been persistent as the supply of researchers
and technicians has not kept up with the pace of economic development in Malaysia. Adequate
skills of the workforce are also important in the innovation process.
56. In order to address the talent needs arising from key industries driving the national
economic transformation agenda, the Prime Minister of Malaysia unveiled a comprehensive
Talent Roadmap 2020. 16 The Government plans to address the underlying issues affecting talent
availability and to identify shortages in key sectors and attract and retain the necessary skilled
human capital. The Talent Roadmap identifies three strategic thrusts for talent interventions
namely: Optimise Malaysian Talent; Attract And Facilitate Global Talent; and Build Networks of
Top Talent. The first Strategic Thrust focuses on optimizing Malaysian talent, recognizing that
ultimately Malaysian talent is the most important and sustainable pipeline of talent to meet the
needs of future development. At the same time, the second Strategic Thrust of attracting and
facilitating global talent recognizes that with the fast changing economic requirements,
Malaysians abroad and foreign talent are an important source to complement Malaysians to drive
16 Speech delivered by the Prime Minister of Malaysia on the launching of the “Talent Roadmap 2020” on 24 April
2012 in Putrajaya, Malaysia.
28

transformation. Final Thrust is in relation to TalentCorp building networks of top talent by key
sectors and geographies to better enable leading employers to engage and source needed talent.
(iii) Low Labor Productivity
57. High performing countries in the Asian region. During 2000-2008, the growth in
productivity level in Malaysia was 3.3% per annum, which was significantly below compared to
China (10.9%), India (5.1%), Viet Nam (4.8%) and Indonesia (3.4%). However, labour
Figure 1.32. Labour Productivity Per
Person Engaged, 2000-2008 (average
12.0 10.9 annual growth rates)
10.0
8.0
6.0
4.0
2.0
5.1 4.8
3.4 3.3 3.3 3.0 2.6 2.6 2.0
0.4
0.0
Figure 1.33. Labour Productivity Per
Person Engaged, 2010 (average annual
growth rates)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
13.6
9.1 8.6
5.7 5.6 5.1 4.9 4.6 4.6 4.3 3.9
Source: International Labour Organization (ILO) Website, (KILM 17)
productivity in Malaysia increased to 4.6% in 2010, but still remained below compared to
Singapore, China, Taiwan, India, Hong Kong, and Korea (Figures 1.32 and 1.33).
(iv)
Country is also not exploiting full potential of its Reverse Linkages opportunities
58. Malaysia appears to be weak in terms of unleashing its “Reverse Linkages”
opportunities with other IDB member countries. Malaysia has huge potential of ‘Reverse
Linkages’ opportunities through
which the country can transfer the
knowledge and expertise to other
IDB member countries through winwin-win
situation. In particular, IDB
member countries can benefit from
Islamic financial system strengths;
collaborate with Malaysia Science
Academy; gain from SMEs
development experiences; promote
Halal industry; get benefits from
EXIM expertise; and benefit through
Malaysian Technical Corporation
Programme.
15
13
11
9
7
5
3
1
-1
Figure 1.34. Malaysia: Intra-Imports and
Intra-Exports with IDB Member Countries,
(% of total total)
2004 2005 2006 2007 2008 2009 2010
Intra-Imports (% of total imports)
Source: IDB Annual Report (various issues)
Intra-Exports (% of total imports)
29

59. Malaysia can further enhance its trade, particularly intra-trade with other IDB
member countries by promoting Reverse Linkages (i.e. helping other member countries in
the areas of its expertise and creating markets for its products). The country has expertise in
various areas such as Islamic Finance, Halal Industry, Science & Technology, Palm Oil,
PETRONAS etc., which can be transferred to other member countries, achieving a win-win
outcome. So far, Malaysia has not unleashed its full potential of Reverse Linkages, which is also
evident from the slow increase in intra-OIC trade (7% in 2004 to 10% in 2010), much below the
intra-OIC trade target of 20% to be achieved by 2015 (Figure 1.34).
v. Conclusion
60. Based on the above diagnostic analysis, Table 1.7 summarises binding constraints to
achieving sustainable economic growth in Malaysia.
Table 1.7. Summary of Constraints to Sustainable Economic Growth in Malaysia
Constraints to Economic Growth
Low level of Private Investment (declined
from average 26.9% of GDP per annum during
1990-1997 to 10.5% of GDP per annum during
2000-2010)
which appears to be constrained by
i. relatively low returns to investment
ii. some microeconomic risks (i.e. business
firms dealing with construction permit,
registering property, and starting business)
Low Level of Public Investment (declined
form12.4% of GDP per annum during 1990-
1997) to 11.4% of GDP per annum during
2000-2010)
which appears to be constrained by
higher fiscal deficit (average 5% of GDP
per annum during 2000-2011)
Weak Software of Growth
which appears to be constrained by
i. weakening global competitiveness due to
low level of higher education and skill
development, low R&D, and low
innovation,
ii. low labor productivity
iii. not fully exploiting Reverse Linkages
potential of the economy
Binding
Constraints
(BC)
BC
BC
BC
Remarks
Current total investment rate (both
public and private) in Malaysia (i.e.
20.3% of GDP) is less than the
benchmark investment rate of 25%
of GDP for achieving high and
sustainable real GDP growth,
according to World Bank,
Commission on Growth and
Development Report (2008)
The 7% sustained real GDP growth
in Malaysia achieved during 1967-
1997 was not only due to high level
of private investment but also
attributed to strong public
investment, which could not be
sustained thereafter
These findings are consistent with
the World Bank (2010), ‘Composite
Index of Constraint’ which ranked
Malaysia 2 for skill development
and 3 for entrepreneurial
development (0 for severe binding
constraint and 10 for least severe
binding constraint)
30

Annex Table 1.1 Malaysia: Socio-Economic Indicators
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Economic Development
GDP at Purchasers Price($ billion) /1/ 93.8 92.8 100.8 110.2 124.7 137.5 155.3 188.8 225 194.3 232.1 236.6
Per Capita Income($ current price) ) /2 3,450 3,540 3,780 4,163 4,626 5,038 5,701 6,724 7,837 6,767 8,126 9,575
Real GDP Growth (%) /2 8.9 0.5 5.4 5.8 6.8 5.3 5.8 6.5 4.8 -1.6 7.2 5.1
Agriculture -0.6 2.8 5.6 5.0 2.6 5.4 2.2 4.3 0.6 2.1 4.5
Manufacturing -5.9 4.3 8.4 9.8 5.2 7.1 3.1 1.2 -9.3 11.4 6.7
Services 6.0 6.5 4.5 6.8 7.2 7.3 9.7 7.6 3.1 6.8 5.3
Fiscal Deficit, Federal (% of GDP) /2 -5.5 -5.5 -5.6 -5.3 -4.1 -3.6 -3.3 -3.2 -4.8 -7.0 -5.6 -5.0
Gross Domestic Savings (% of GDP) 1/ 46.1 41.8 42.0 42.5 43.4 42.8 43.1 42.1 42.5 36.0 39.2
Gross Capital Formation (% of GDP) /1 26.9 24.4 24.8 22.8 23.0 20.0 20.5 21.6 19.3 14.4 21.4
Private 13.4 11.5 8.1 8.1 10.7 10.3 10.8 11.9 10.5 9.5 10.3
Public 11.9 13.6 15.4 14.3 10.3 10.2 9.9 9.6 9.1 10.7 10.0
Foreign Direct Investment (% of GDP) /3 4.4 0.6 3.2 2.2 3.7 2.9 3.9 4.6 3.2 0.7 3.8
Inflation Rate (%) /2 1.6 1.4 1.8 1.2 1.4 3.0 3.6 2.0 5.4 0.6 1.7 3.2
Current Account Surplus (% of GDP) /4 9.0 7.9 8.0 12.0 12.1 15.0 16.4 15.9 17.7 16.5 11.5 11.5
Merchandise Trade Surplus (% of GDP) /5 17.3 15.3 14.2 19.4 17.2 19.8 19.3 15.9 19.3 17.3 14.4 13.4
Total Debt, Federal (% of GDP) ) /2 35.2 41.3 43.0 45.1 45.7 43.8 42.2 41.5 41.3 53.3 53.1
Domestic 30.0 34.4 33.6 36.2 38.4 38.0 37.8 38.5 38.5 51.3 51.0
Foreign 5.3 6.9 9.5 8.9 7.3 5.7 4.4 3.1 2.7 2.0 2.2
Total Foreign Reserves ($ billion)l 6 28.7 29.9 33.8 44.2 66.3 70.2 82.3 101.6 91.7 96.8 106.6 133.6
(months of retained imports) 5.1 5.4 6.6 8 7.7 7.8 8.4 7.6 9.7 8.6 9.6
Exchange rate (average, RM/US$) /6 3.8 3.8 3.8 3.8 3.8 3.8 3.7 3.4 3.3 3.5 3.2 3.1
Social Development
Unemployment rate 2/ 3.0 3.5 3.5 3.6 3.5 3.5 3.3 3.2 3.3 3.7 3.4 3.1
Population (million) /2 23.5 24 24.7 25.3 25.9 26.5 26.8 27.2 27.5 27.9 28.3 28.6
Incidence of poverty 2/
1/
Overall 6.0 5.7 3.6 3.8
Rural 13.5 11.9 7.1 8.4
Urban 2.3 2.5 2.0 1.7
World Bank, World Development Indicators
2/ Economic Planning Unit (2011), The Malaysian Economy in Figures (various issues)
3/UNCTAD, UNCTADstat
4/ IMF Economic Outlook (April 2012)
5/ Department of Statistics, Government of Malaysia (website) (calculated as merchandise trade balance (exports – imports) as share of GDP at
purchaser’s price)
6/ Bank Negara Malaysia
31

Annex Table 1.2. Malaysia: MDGs Achievement 1990 2009
32

V. DIAGNOSTIC ANALYSIS OF PRIVATE SECTOR
DEVELOPMENT IN MALAYSIA
(Based on the IDB Group Team Inputs, Background Study Prepared by the
Consultants and Consultations with Key Stakeholders in Malaysia)
61. After the diagnostic analysis of the overall economy in socio-economic
perspectives in the above Section IV, the IDB Group MCPS Team identified two main
pillars: Private Sector Development and Reverse Linkages for designing partnership strategy
for Malaysia for the period 2012-2015. Before the identification of focused-programs, it is
important to provide a diagnostic analysis of these two pillars of the economy. In this regard,
this Section V attempts to find out opportunities and binding constraints facing the private
sector in the country. The key findings of this Section help to identify focused programs
under Pillar 1: Private Sector Development of the “IDB Group Member Country Partnership
Strategy for Malaysia, 2012-2015: Partnering for Achieving the Status of High Income
Country” (published and placed on IDB website www.isdb.org). Further, it also helps to find
out niche areas for the MCPS focused-programs to help the Malaysian private sector by fixing
some of the binding constraints. The following sub sections provide the analysis of key
components of the private sector as well as critical constraints they are facing.
62. The Malaysia Government has always recognized the pivotal role of the private
sector in stimulating economic growth, with the public sector ensuring overall
macroeconomic stability and conducive environment for both domestic and foreign
investments. In order to promote cooperation between the public and private sectors, the
Privatization Policy in 1981 was launched. To facilitate this process, a number of policy
reforms were established, including economic liberalization and deregulation, improving
investment policies and incentives to promote more dynamic private sector participation
towards the economic development. The privatization program of the 1980s had facilitated
the private sector involvement in large investments, particularly in transportation,
telecommunications and energy sectors. The success of the involvement of the private sector
in nation building has now become increasingly evident in Malaysia. Many Malaysian private
corporations have become large market capitalized companies on Bursa Malaysia and have
successfully venture abroad and are now emerging into Malaysian multinational companies.
The privatization program has surged foreign interests into the Malaysian stock market, which
also contributed to rapid development of Malaysia’s financial and capital markets.
63. Notable is the rapid growth and significant contribution of the private sector to
the nation’s GDP. The years prior to Asian financial crisis of high and sustained growth have
been associated with robust private investment. In terms of contribution to GDP, private
sector investments accounted for about two-thirds of the total economy. Prior to the Asian
financial crisis of 1997-1998, real private sector investments expanded at double digit rate of
20.6% per annum (1990-1996), thus spearheading the nation’s economic development.
33

64. The Malaysian experience has also shown that involving the private sector often
brings stronger managerial capacity, access to new technology as well as specialized
skills. The country has benefitted from the infusion of new technology and specialized skills,
thus enhancing the country’s global competitiveness.
65. Going forward, the drivers for sustained economic growth have to come from
domestic private investments. The Government of Malaysia continued to assist and
facilitate the private sector to provide the dynamism in economic activities. Malaysia’s
healthy current account surpluses continue to ensure that the country has the sufficient
resources to finance a much higher level of private investments, aiming at achieving the high
income and advanced country status by 2020.
i. Malaysia’s New Economic Model: Private Sector as the Primary Growth Engine
66. Malaysia’s Vision 2020 is to lift the country to an accelerated growth path
towards achieving high income economy and developed nation status. To achieve this
objective, the Government is committed to support effective public private partnerships
through active participation of the private sector and the Government’s policies and resources
that can be channeled towards driving the economy forward. Particularly, during recent
challenging global economic environment, economic recovery cannot be engineered by the
Government alone and it is only possible through the combined efforts of the private sector
and the Government, that Malaysia will be able to achieve its Vision 2020 targets.
67. The Government recognises that successful transformation requires close
collaboration between the private sector and the public sector. Amidst changing global
landscape, Malaysia is committed to meeting new challenges. This commitment includes
structural reforms to adapt to an ever-changing economic and business environment.
Recognising this, the Government of Malaysia has initiated detailed and comprehensive longterm
reforms to transform Malaysia into a competitive and achieving high income and
developed economy status by 2020 and beyond. The aspiration for Malaysia to attain highincome
nation status cannot be achieved in isolation. It is equally important for growth and
development to be inclusive and sustainable. Inclusiveness enables the benefits of
development to be experienced by people from different backgrounds across all communities,
while sustainability ensures that current wealth is not obtained at the expense of future
generations. To that end, the Economic Transformation Programme (ETP) 17 is being
implemented to chart the way forward, so that Malaysia is able to realise its Vision as a united
nation.
68. A key underlying principle of ETP is that the private sector must serve as the
primary growth engine. The ETP comprises two key components – the National Key
Economic Activities (NKEAs), which are the drivers of growth; and the Strategic Reform
Initiatives (SRIs), the enablers of growth. These activities are supported by Malaysia
Development Plans, which chart their development over five-year periods. Each Development
Plan is fine-tuned through the Malaysian Annual National Budgets. Achieving the ETP
targets is ultimately a shared responsibility between the private sector and the Government.
This requires initiatives to create business opportunities, investment, and to convert
innovative ideas into reality.
17 Source: PEMANDU, Malaysia
34

69. The Government has become an active enabler of private sector-led initiatives,
ensuring that the operating environment is conducive to business, and market forces are
functioning appropriately. Importantly, the ETP is not merely a strategic aspiration for
transformation. It provides clear platforms in the form of wide-ranging investment and
business opportunities across numerous identified sectors. It also includes numerous measures
to facilitate private sector efforts. All in all, ETP is a roadmap to help the nation become a
high-income economy that is inclusive and sustainable.
70. The future economic growth and prosperity of the country will depend on the
competitiveness of Malaysia as an investment destination. The Government is committed
to provide a stable and consistent policy framework. While the Government sets the strategic
direction and creates a business enabling environment, the development of the economy rests
significantly with the private sector. The future direction of the country has been set under the
ETP, which was launched by the Government in 2010 with the objective of propelling the
country from a middle-income economy to a high income and advanced nation status. The
goal is to elevate the country’s per capita GNI from the $6,700 recorded in 2009 to a level
exceeding $15,000 by 2020. In order to achieve this goal, a target annual growth of 6% in
GDP over the next decade has been set as one of the main objectives of the ETP. Under the
ETP, the Malaysian economy is expected to undergo significant changes to become a
developed nation. This would require a shift towards a predominantly service-based economy.
During the ETP period, the contribution of the services sector in GDP is expected to increase
from 58% in 2010 to 65% by 2020 (Figure 5.1).
Figure 5.1: Malaysia’s New Economic Model
Source: New Economic Model (2010), Prime Minister’s Department, Malaysia
71. About 92% of MYR1.4 trillion funding required for the National Key Economic
Areas (NKEAs) is expected to come from the private sector. The ETP identified 12 key
areas known as NKEAs, which are expected to contribute substantially to Malaysia’s
35

economic growth. The ETP is expected to be primarily private-sector driven but facilitated by
the Government through prioritized public investment and policy support. To jump-start the
effort, the Government of Malaysia announced in January 2010 Government Transformation
Programme (GTP), aimed at delivering fast track public services that were most important to
the people. Later, the ETP - a road map to lead Malaysia to high-income status by 2020 -
followed in October 2010. The program targets annual growth of 6% and a doubling of gross
national income (GNI) per capita, to $15,000, thus meeting the World Bank standard for a
high-income country.
72. The 12 NKEAs - core of the ETP - are defined as drivers of economic activity
that have the potential to directly contribute a quantifiable amount to economic growth.
The 12 NKEAs are: Oil, Gas and Energy; Palm Oil; Financial Services; Tourism; Business
Services; Electronics and Electrical; Wholesale and Retail; Education; Healthcare;
Communications Content and Infrastructure; Agriculture; and Greater Kuala Lumpur/Klang
Valley. The NKEAs were selected because they are significant engines of future growth and
their expected contribution to GNI in 2020 will help Malaysia achieve high-income status. In
addition to the 11 industry sectors, Greater Kuala Lumpur/Klang Valley was selected as an
NKEA through a separate process. Kuala Lumpur currently accounts for about one third of
Malaysia’s GDP. Cities are significant drivers of growth, in particular, Kuala Lumpur is
vitally important to the better health and performance of the overall economy. The portfolio
of NKEA sectors will evolve over times, depending on the performance of various sectors in
the economy.
73. The ETP was launched with 131 Entry Point Projects (EPPs), mainly driven and
led by the private sector. The NKEAs are the engines of growth, while the EPPs are the
Figure 5.2: Malaysia's Economic Leap Timeline
Source: Malaysia Productivity Corporation (2011)
36

spark plugs that will fire up these engines, to a new level of economic performance. They are
called Entry Point Projects because these projects kick start the ETP. These are high impact
projects, matched with specific ideas and actions, to spur the growth of the NKEAs. Some
EPPs involve large infrastructure investments while others have a more direct impact on the
output of their sectors and on the life of Malaysians. Each EPP plays clearly defined role in
the ETP. For example, the Greater Kuala Lumpur/Klang Valley NKEA has nine EPPs that
together will ensure economic dynamism whilst being ranked amongst the most liveable cities
by 2020. All the EPPs within the NKEAs will lead Malaysia towards achieving the high
income nation by 2020 (Figure 5.2).
74. Private sector development is at the center of the Tenth Malaysia Plan (2011-
2015). The main elements of the Plan include modernizing business regulation, liberalizing
the service sector, removing market distortions, introducing competitive legislation, and
improving the interface between the Government and business community. By the end of the
plan period, the Malaysian Government envisions the country to be listed among the top ten
nations in the world for doing business. Under the Tenth Plan, the Government aims to
support the private sector through the following policies:
Downsizing Government’s role in the field of economic production and business
Overseeing and providing effective legal and regulatory framework for rapid
economic and social development
Escalating the development of the necessary physical infrastructure and providing
the most conducive business environment (consistent with its other social
priorities)
Continuing de-regulation process
Re-engineering government linked companies (GLCs) to support the private
sector
ii.
Binding Constraints to Private Sector Development
75. Based on the consultations held with various stakeholders (i.e. the private sector,
academia, civil society and business community) as well as the latest available information
and data, the following binding constraints to private sector development are identified:
76. The private sector entities in Malaysia believe that inadequately educated
workforce, complex tax administration, and getting business licenses and permits are
the major obstacles in the country’s investment climate. The World Bank’s “Enterprise
Survey” (2008) provides most comprehensive data regarding private sector challenges at the
firm level. The Survey provides data of 1,115 firms about the top 10 constraints to firm
investment in Malaysia. Among these challenges, the shortage of skills is one of the most
binding constraints as firms find it difficult to locate and recruit the skills they seek. More
than 40% of firms have reported vacancies of skilled production workers, and the average
time to fill a vacancy is about four weeks. Firms often hire people who do not have the
appropriate skills for the job. The shortage of skills also tends to limit firms’ technological
capabilities. In particular, the supply of researchers and technicians in Malaysia, although
increasing, still falls short of the level consistent with the country’s income level. This leads
Malaysian manufacturing firms to continue to function more as “adaptors” rather than
“creators” of new technologies.
37

77. According to the Global Competitiveness Report 2011-2012, Malaysia needs
improvement in sector such as education performance and technological readiness. The
economy ranks 44 th in technological readiness dimension among 139 countries. Moreover, in
terms of enrollment in secondary and tertiary education, the challenges remain even more
substantial.
78. The Knowledge Economy Index (KEI) of the World Bank (2008) indicates that
shortage of skills and relatively weak innovation are hindering private sector
development in Malaysia. The KEI is an aggregate index that represents the overall level of
development of a country towards the knowledge economy and is calculated based on the
average of the normalized performance scores of a country on economic incentive and
institutional regime, education and human resources, the innovation system and ICT. Among
selected Asian countries, Malaysia is below compared to Taiwan, Singapore, Korea, and
Hong Kong, while better off compare to Indonesia, Philippines and Thailand (Figure 5.3).
According to the same source, the level of innovation and education in Malaysia is wellbehind
the levels of relevant dimensions of Taiwan, Singapore, Korea and Hong Kong.
Figure 5.3: The Knowledge Economy Index, 2008
Indonesia
3.29
Philippines
4.12
Thailand
5.52
Malaysia
6.07
Korea
7.82
Hong Kong
Singapore
Taiwan
8.32
8.44
8.45
Source: World Bank, Knowledge Economy Index 2008
79. Malaysia lacks behind in total expenditures on R&D (i.e. about 0.5% of GDP).
One of the prerequisites for technological advancement and business sophistication in
Malaysia is fostering research and development (R&D) expenditures by the private sector.
The Government of Malaysia recognizes that the high level of R&D expenditure can enhance
innovative capacity of the country. Therefore, under the 10 th Malaysia Plan, the Government
aims at increasing R&D spending of at least 1% of GDP by 2015. Reaching that goal will
require a bold commitment, including large injections of funds from the Government and,
more importantly, by the private sector. Since across the world, the private sector carries out
over two-thirds of R&D activities, private sector involvement in research-driven activities
will be key for technological advancement and business sophistication over the coming years.
38

iii.
Diagnostic Analysis at Sub-Sector Levels
80. In order to understand various dimension of Private Sector Development, it is
imperative to undertake the diagnostic analysis at the sub-sector levels, in particular,
finding of opportunities and the challenges and binding constraints facing various key
sub-sectors. The findings of this section help the IDB Group to identify focused programs for
the niche areas in various sub-sectors. The following sub-sectors are chosen for the analysis.
(i)
(ii)
(iii)
(iv)
(v)
Public Private Partnerships (PPPs)
Innovation
SMEs Development
Private Sector Resource Mobilization
Foreign Direct Investment
(i)
Public Private Partnerships: Key to Malaysian Economy
Overview of PPPs in Malaysia
81. In Malaysia and across the world, demand for public services is increasing overtime.
Insufficient public sector capital to meet this demand is leading to an unsustainable gap
between demand and supply. To bridge this gap, the Government is turning to Public Private
Partnership (PPPs) as they allow the public sector to access new sources of finance and get
the benefits that private sector skills and management with reducing cost and generating
greater value from public sector assets. The common link is that both the public and private
sectors need to work closely with a clear and common objective. The PPP presents a number
of recognised advantages for the public sector which include the ability to:
raise additional finance in an environment of budgetary constraints
make the best use of private sector operational efficiencies to reduce cost
increase quality to the public services
speed up infrastructure development
82. Over the years of Malaysia’s economic development, national leaders had the
wisdom and the foresight to recognize that private initiatives are crucial for national
development. Way before concepts such as PPP, Private Finance Initiative (PFI) or even
privatization existed. Malaysia’s development efforts have always been premised on a probusiness
strategy, where the private sector plays an important role in stimulating economic
growth, with the public sector ensuring overall macroeconomic stability and a conducive
environment for both foreign and domestic investments.
83. Realizing the fact that infrastructure development is a key component to unlock
potential economic activities and support sustainable economic growth, the Government
of Malaysia continues to encourage the participation of the private sector in the
39

development of infrastructure through PPP. In this context, the Public Private Partnership
Unit or 3PU was established in April 2009, under the Prime Minister’s Department. The main
mission of 3PU was to facilitate and encourage the country’s private sector’s involvement in
the national development agenda. The 3PU is mandated to support the country’s GDP growth
through increased private sector by ensuring that optimum and appropriate risk distribution
takes place in PPP projects. The Government strategy is to transform the economy through
strategic PPP projects implementations. This vision is supported by the following strategic
missions:
a. strengthen and foster strategic PPP with transparency and integrity to
stimulate economic growth
b. enhance service delivery successful execution and implementation of PPP
projects
c. uphold value for money principle
84. The Government strategy for the development of infrastructure is based on PPP
financing structures. Building on the success of privatization programs of the 1980s,
Malaysia has used PPP modalities in many economic infrastructure projects like toll roads,
power plants, ports, airports and urban transportation. These structures are also being used in
Social Infrastructure, especially in Health and Education areas.
Public Private Sector Collaboration: Malaysia Incorporated Concept
85. Recognising the growing and important role of the private sector in an exportled
economic growth, the Malaysian Government views the private sector as an
important partner of the public sector in achieving economic growth and prosperity.
Towards this end, in February 1983, the Government introduced the “Malaysia Incorporated
Concept (MIC)” as part of its overall strategy to underpin a new and enhanced relationship
between the Government and the private sector. This was an evolution over the then
prevailing system of ad-hoc and informal consultations between the Government and the
business community. The MIC institutionalized the use of public-private sector collaboration
to enable both parties to strive cooperatively towards national development. The fundamental
basis of the MIC is that successful national development required the public and private
sectors to adhere to the view that the nation is a corporate or business entity, jointly owned by
both the sectors and working in pursuit of shared goals. The resulting benefits of that
cooperation, from the private sectors’ perspective means a higher level of profit leading to
spin offs in economic investment expansion and growth. The Government’s interest in the
success of the Malaysian Corporation lies in the generation of employment opportunities,
economic development and increasing revenue, which is channeled to fuel socio-economic
development of the nation. The introduction of the MIC has effaced the perception of
dichotomy between the roles of the public and private sectors. In the past, this dichotomy had
generated conflict between the two sectors. The public sector, entrusted with specific powers
to safeguard public interest, has long emphasized its regulatory role over the conduct and
activities of the private sector.
86. Under the MIC, the public sector was required to redefine its role in relation to
business activities and to embark on new approaches to facilitating the private sector’s
40

ole in spearheading economic development. The Government demonstrated strong
commitment to the public-private collaboration. In the early years, it took some time for
Government Departments and Agencies to work closely with the private sector. With greater
appreciation of the need for close cooperation, the collaborative environment between public
and private sectors has improved over the years. Strong commitment and conscious efforts
made by the Government to encourage consultative panels to invigorate their activities have
substantially contributed to the effective operationalisation of the MIC over the years. The
Government has played a key role in delivering high quality services and has increased its
interaction with the private sector. This was further complemented by specific measures to
intensify training of the middle and lower level functionaries of the Government to enhance
their understanding on the MIC and bring about a positive change in their mindset and
attitude. Further, the planned, coordinated and coherent manner in which the Government
went about implementing the policy also contributed to MIC success.
87. The fruits of Malaysia’s pioneering privatisation drive are now increasingly
evident. Several corporatized and privatised Government Linked Companies (GLCs) as well
as private firms have become large market cap companies on Bursa Malaysia (Kuala Lumpur
Stock Exchange) and have successfully ventured abroad and are now emerging as Malaysian
Multinational Companies (MNCs). The privatisation programme has also elicited a surge of
foreign interests in Malaysia’s stock markets. The depth and variety that privatisation brought
to the stock market had also contributed to the more rapid development of Malaysia’s
financial and capital markets.
88. As a way forward, Malaysia’s Vision 2020 is to lift the country to an accelerated
growth path towards a high income economy and developed nation status through
supporting effective PPP. Through active participation of the private sector, the
Government’s policies and resources are being channelled towards driving the economy
forward. In particular, during the challenging global economic environment, economic
recovery cannot be engineered by the Government alone. It is only possible through the
combined efforts of the private sector and the Government, that Malaysia will be able to
achieve Vision 2020 targets. Towards this end, the Tenth Malaysia Plan embraces a new
economic model, necessary for their transformation into a high income country. In
encapsulating the policy direction and developmental priorities for Malaysia’s transformation
ahead, a key thrust that the Plan will be forging is effective public private partnerships,
mainly through establishing five “Growth Economic Corridors”, which are described briefly
below.
Growth Economic Corridors: balanced regional growth through PPPs
89. With commitment to bring balanced regional growth, the Government of
Malaysia established five economic growth corridors namely Northern Corridor Economic
Region; Eastern Corridor Economic Region; Iskandar Malaysia; Sarawak Corridor of
Renewable Energy; and Sabah Development Corridor under the Ninth Malaysia Plan (Figure
5.4). These corridors are aimed at bridging development imbalances throughout the country
and have been pushing forward the country's economic growth through public private
partnerships in these regions. Further, disperse economic activities across states to spread
benefits from development Cluster- and corridor-based economic activities with focus areas
are being carried out mainly by the PPP, which are described briefly below.
41

a. Northern Corridor Economic Region
90. The Northern Corridor Economic Region (NCER), which encompasses the states of
Perlis, Kedah, Penang and Northern Perak, has a vision to achieve a status of world-class
economic region by 2025. It aims to become a sustainable economic region empowered by a
population living a balanced lifestyle with a holistic approach to business. The rationale
Figure 5.4: Great KL/KV and the Economic Corridors
Source: www. investkl.gov.my
behind NCER is to increase the competitiveness of the country in order to facilitate
improvement in the standard of living of the nation. Overseeing this initiative is the Northern
Corridor Implementation Authority (NCIA), which provides direction and devises policies as
well as strategies for NCER’s socio-economic development. Under the NCER Development
Plan, focus areas include agriculture, manufacturing, tourism, logistics services, education
and health services.
b. Eastern Corridor Economic Region
91. The East Coast Economic Region (ECER), covering the states of Kelantan,
Terengganu, Pahang and the district of Mersing in Johor, is set to become one of Malaysia's
dynamic regions offering diverse business opportunities to potential investors. Located
strategically in the east coast of Peninsular Malaysia, the ECER is well placed to become a
major trade and industrial gateway, offering investors access to the vast, burgeoning markets
of the Asia-Pacific region and beyond, encompassing a vibrant market of about two billion
people. Major investments in the region are currently focused in the booming oil, gas and
42

petrochemical sector, but given the abundant non-hydrocarbon resources available in the
region, the ECER is also set to experience economic developments in the fast-growing sectors
of tourism, manufacturing, agriculture and education. The development initiatives detailed in
the ECER Master Plan will be the basis for guiding the development of this region until the
year 2020 where it will be transformed into a major local and international tourism
destination, an exporter of agro and resource based products and manufactured goods, a
vibrant trading centre and an infrastructure and logistics hub. The focus areas under the ECER
Master Plan include tourism, oil, gas, petrochemical, manufacturing, agriculture and
education.
c. Iskandar Malaysia
92. Iskandar Malaysia (IM), formerly known as Iskandar Development Region (IDR),
was established on 30 July 2006. The project is administered by the Iskandar Regional
Development Authority (IRDA) and covers an area of 2,217sq km. Iskandar Malaysia has
been allocated MYR6.83 billion by the Government. Encompassing a vast acreage of land, it
is the largest single development project ever to be undertaken in the region. The focus areas
in the IM region include creative industries, education, electrical and electronics, financial
services, food and agro processing, healthcare, logistics, petrochemical, oleo chemical and
tourism.
d. Sarawak Corridor of Renewable Energy
93. The Sarawak Corridor of Renewable Energy (SCORE) is a major initiative
undertaken to develop the Central Region and transform Sarawak into a developed state by
the year 2020. It aims to achieve the goals of accelerating the state's economic growth and
development, as well as improving the quality of life for the people of Sarawak. The core of
the Corridor is its energy resources (28,000 MW), particularly hydropower (20,000 MW),
coal (5,000 MW), and others (3,000 MW). This allows Sarawak to price its energy
competitively and encourage investments in power generation and energy-intensive industries
and acts as triggers for the development of a vibrant industrial development in the corridor.
The focus areas in SCORE region include aluminum, glass, steel, oil-based, palm oil, fishing
and aquaculture, livestock, timber-based, marine engineering and tourism.
e. Sabah Development Corridor
94. The Sabah Development Corridor (SDC) was launched on 29 January 2008 to
enhance the quality of life of the people by accelerating the growth of Sabah’s economy,
promoting regional balance and bridging the rural-urban divide while ensuring sustainable
management of the state’s resources. The initial focus is on enhancing Sabah’s livability
index and making it a business friendly location via targeted infrastructure upgrading and by
lowering the cost of doing business. By 2025, the SDC initiative aims to triple Sabah’s GDP
per capita and increase its income by four times through the implementation of the prioritised
programmes in the areas of tourism, agro-based industries, manufacturing and logistics.
Challenges/ Constraints Facing PPPs in Malaysia
95. The key binding constraints facing the PPPs in Malaysia are the following:
43

The challenge is for financial institutions to put in place a more efficient intermediation
process, to channel these funds to meet the financing needs of the PPP projects. A critical
component in ensuring the success of PPPs is the availability and accessibility to financing to
enable the private sector to mobilise funds to finance their projects. The Government needs to
ensure that financing continues to be available to support the financing needs of PPPs. In this
regard, the vital role played by the Developed Financial Institutions (DFIs) and other
financial institutions as well as the capital market in promoting the offering of financial
products and services to meet different funding requirements, including large infrastructure
and developmental projects.
Long-time period for resolving land acquisition issues/disputes settlements: This is an
issue which is common for most road projects in most countries, and Malaysia is no
exception. Investors should ensure that the land acquisitions are fully resolved prior to
financing. It is important that the issue is handled earlier, so that critical PPP projects,
particularly road projects are not disrupted.
Project Supervision and Support: The role of an independent checking engineer in
assessing the quality of works on behalf of the financier is one of the key successes to ensure
smooth implementation of the PPP projects. This is a significant factor, especially for those
financiers who have limited presence in Malaysia.
Government Support: Having Government support to resolve any potential disputes or
disagreements encountered between the financiers and the project company is critical. To
streamline the bureaucratic process, it would be more efficient to have one focal point in the
Government to assist in resolving the same. In order to resolve this issue, the Government of
Malaysia has established the PPP Central Unit (UKAS) under the Prime Minister’s Office.
Strong Sponsors: Having sponsors who are both, financially stable and have a track-record
in the sector is very important. Infrastructure projects require a significant amount of ‘patient
capital’. As delays and changing orders are not uncommon, in such projects, which could
translate into a significant additional funding and costs escalation. If the project is not
supported by strong sponsors, then the risk of the banks can considerably increase, with banks
having no option but to increase debt, and extend maturity periods.
(ii) Innovation: Malaysia’s Way Forward to Ensure Economic
Sustainability 18
96. To reach the developed nation status by 2020, the Government has projected that the
economy needs to grow by 6% annually and this growth will be innovative and productivitydriven
(Figure 5.5). There is general consensus that an innovation-driven economy must have
the ability to commercialise ideas through enhancing research and development (R&D). It
also must have the capacity to commercially exploit patent ideas and resources for public use.
In order to enhance innovation, the Government has taken a number of policy measures. For
example, the Government and GLC procurement policies are being changed to support local
innovative products and services. Universities have also been assigned the role of R&D
18 Sources: Malaysia Productivity Corporation (2011); Business Time (November 2011); Institute of Management
Development (2011); and World Economic Forum, Global Competitiveness Report 2011-2012.
44

centres to collaborate with the private sector. In this regard, a key move has been the
establishment of Unit Inovasi Khas (UNIK) in the Prime Minister's Office. The UNIK's
mandate is to formulate policies and strategies to promote innovation in the country. With the
setting up of UNIK's implementation arm namely Agensi Inovasi Malaysia (AIM), country
now has the sound institutional structure to undertake an organised and sustained programme
of innovation initiatives. These initiatives are designed to improve the innovation ecosystem
and create new wealth from innovation in Malaysia. Hence, following are the major
innovation related challenges facing the country.
Figure 5.5: Malaysia’s 12 Pillars of Economic Success
Source: Ministry of International Trade and Industry (September 2011)
Challenges/ Constraints to Innovation
97. Following are the challenges/critical constraints hindering the innovation:
Preference for Imported Technology: There is a preference in Malaysia for imported
technologies over those developed domestically, both by individual firms and various
industries. The multinational corporations (MNCs) located in Free Trade Zones do not invest
significantly in research and innovation, referring to undertake small incremental technical
production-related operational changes to improve efficiency and productivity. There is
limited technology diffusion and transfers through intra-industry trade and FDI flows.
Low Innovation Capacity among SMEs: While there are examples of MNCs working with
SMEs to help them innovate, most Malaysian SMEs still have low innovation capability as a
result of the MNC ecosystem which has focused on a strong sub-contracting network for
45

Original Equipment Manufacturing (OEM) suppliers. Thus, they do not have the size and
scale to expand their operations and compete in the regional and global markets. This, in turn,
inhibits their capacity to introduce and manage innovative activities.
Weak Procurement Practices: Based on the New Economic Model Report recently released
by the Prime Minister’s Department, these weaknesses are compounded by the Government
and GLC procurement practices that do not lend sufficient support to SMEs or buddingentrepreneur-researchers
with innovative products/processes to offer.
Absence of an Innovation Culture and Community: According to the New Economic
Model Report released by the Prime Minister’s Department, insufficient attention has been
paid to recognizing and celebrating innovation and the efforts of individuals or firms that
come up with innovative products, ideas and processes in an orchestrated commemorative
manner. A culture of innovation involves a society that creates incentives, monetary as well
as social rewards that value creativity and diversity of ideas. The culture is created through
recognition that innovation is also a process with a supply chain that requires collaboration
between many parties. In Malaysia, the relationship among industry, academia, and
researchers is weak. There is insufficient knowledge flow and collaboration on innovation
projects. There is low demand for R&D personnel in industry and low mobility between
industry, the public sector and academia. There is also an outflow of R&D talent to
neighboring countries due to unattractive compensation packages, poor job prospects, and
insufficient opportunity to build a professional reputation in the country.
Weak Knowledge-based Economy: The knowledge-based economy of the future differs
from the capital-based economy of the past. Knowledge will become the core element of
competitiveness and the driving force for long-term growth. The rules of the game in the
knowledge-based economy are speed, flexibility and innovation. The Government’s role is to
foster innovation through sound governance arrangements developed with greater
involvement of stakeholders in defining policy orientation and priorities.
Shyness of the Private Sector to Take the Lead: As described above, the private sector
must be allowed to take the lead. Policies related to industry structure, upgrading and
expansion, as well as product or process development and specialisation need to be marketdriven.
The market should dictate the pace of technological innovation on the basis of
sustainable demand trends, whether in traditional or new areas of growth. The market needs
to decide whether to utilise domestically-sourced or internationally-acquired innovative
products or processes. This is dependent on the adequacy of the physical and ICT
infrastructure that facilitates the location and development of knowledge and innovation
investment platforms, and on an adequate skilled workforce.
(iii)
SMEs Development
98. SMEs and micro enterprises form the majority of business enterprises in most
countries, and they contribute significantly to GDP, employment and wealth creation.
Therefore, efficient access to SME financing is critical. The Malaysian experience to address
the financing issue has been resolved through the establishment of the Credit Guarantee
Corporation (CGC) to assist viable SMEs without collateral or without adequate collateral
and track record to access financing by providing guarantees and credit enhancements for
SME financing. The credit evaluation is carried out by banks, and by the CGC. A highly
46

successful programme in Malaysia has been the MYR2 billion SME Assistance Guarantee
Scheme which was established in February 2009 to ensure that viable SMEs, which were
adversely impacted by the economic slowdown, would have continued access to financing.
Under this scheme, SMEs are able to obtain financing with 80% guarantee cover provided by
the CGC. The cost of the guarantee was borne by the Bank Negara Malaysia. This scheme has
assisted about 10,000 SMEs from all sectors of the economy in sustaining their businesses
and preserving employment. 19
SME Master Plan: 2012 – 2020 Policy 20
99. The Government of Malaysia revealed the details of the SME Master Plan 2012-2020
that would create an ecosystem to accelerate the growth of SMEs towards achieving a high
income economy status. In line with this, the Government will ensure that the implementation
of the Plan will be a part of the Rural Transformation Programme (RTP), with main
objectives to modernise the rural areas, improve the infrastructure, and increase the income
level of the rural population. As a result of this implementation, rural area integration with the
economic main stream, rural entrepreneur involvement in the global supply chain and
economic activities that directly involve in inclusive innovation, can be achieved.
100. The SME Master Plan is an inclusive plan for all SMEs, across sectors, regions
(i.e. East Malaysia and rural) and strategic areas (i.e. Bumiputera and women). The Plan
proposes bold measures not only to develop champions but also to develop micro enterprises
to ensure balanced growth. In April 2011, the Council had endorsed the First Phase of the
Plan which comprised of the new SME development Framework and the broad policies and
strategies. Under the Plan, the Government is translating the policies and strategies into 32
key initiatives, including the Six High Impact Programmes (HIPs) that would contribute
significantly to achieving the targeted goals. The Plan will be built on existing initiatives
which has resulted in SMEs outperforming the overall economy in terms of value added,
employment and productivity growth. In the period 2004-2010, value added growth of SMEs
had consistently exceeded that of the overall economy to average at 6.8% versus 4.9% overall
GDP growth. These HIPs are being reinforced by other key initiatives including creating
demand for SME products through Government procurement; resource pooling to overcome
scale disadvantages; reducing information asymmetry; building capacity of SMEs and
specific measures for East Malaysia set the pace to achieve the following goals during the
period 2012 - 2020:
Increase business formation to facilitate a constant stream of new entrants into the
market (target of 6% per year increase in registration of new companies)
Expand the number of high growth and innovative firms (10% per year) as they
generate bulk of employment and output in the country
Raise labour productivity of SMEs from MYR47,000 per worker in 2010 to
MYR91,000 per worker in 2020
19 Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Langkawi International
Dialogue 2011: Innovative Financing for Transformation, Putrajaya, 19 June 2011.
20 Source: National SME Development Council, November 2011
47

Intensify formalisation to promote growth and fair competition (informal sector to be
reduced from 31% of GNI to 15% in 2020)
101. Achieving the SME development goals will contribute towards meeting the macro
targets set in the Plan as follows:
Increase the contribution of SMEs to GDP from 32% in 2010 to 41% in 2020
Raise the current employment share from 59% to 62% by 2020
Enhance the recent export share from 19% to 25% by 2020
Challenges and Binding Constraints Facing the SMEs
102. The SMEs in Malaysia are facing a number of challenges and critical constraints in
the following areas:
‣ Insufficient access to funding sources, particularly, for trade finance and venture
capital
‣ Weak access to markets
‣ Poor ability to absorb and retain good talent in the industry
‣ Not ready to compete at regional or international level
‣ Insufficient availability of skilled workforce
‣ Fierce competition and protectionism policies of international markets
(iv) Private Sector Resource Mobilization 21
103. Malaysia has rapidly become the Islamic financial centre for Asia with smart
regulation and a growing ecosystem around Islamic finance. In Malaysia, the Sukuk
market now accounts for more than 50% of the total bond and Sukuk market and is
considered world's largest Sukuk market with over 60% of global Sukuk issuance originating
from Malaysia. Therefore, there are ample investment opportunities in local currency and US
dollars Sukuk.
104. Established corporates will require efficient sources of financing for expansion
as well as advisory services to maximise enterprise value. A deep and liquid bond market
with good information flow and modern infrastructure will allow for efficient pricing of
corporate issuances – from short-term commercial papers to support liquidity and working
capital, to longer-term bonds for project financing. Treasury services are also important to
manage the funds of larger corporations to achieve higher returns as well as access to risk
management and hedging instruments to manage foreign exchange, commodity price and
other forms of market risks.
21 This Section is greatly benefitted from the Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of
Malaysia, at the Langkawi International Dialogue 2011: Innovative Financing for Transformation, Putrajaya, 19
June 2011.
48

105. By facilitating private sector resource mobilization, Government is increasingly
shifting its role from being a driver of growth towards having a facilitating role and to
promote the private sector as the driver of growth. Malaysia has leveraged on the
comparative advantage of the public and private sectors through Public Private Partnerships
for infrastructure projects. The objective is to optimise on the cost efficiency and
sustainability of the financing model, so as to enhance the financial viability of the
infrastructure project. This is achieved as risks are transferred to parties that can best manage
those risks. Hence, the public sector can provide the regulatory risk guarantees and incentives
to ensure adequate demand, whilst the private sector will raise financing as well as technical
expertise. This model was successfully implemented for the biggest highway concessionaire
in Malaysia. For example, PLUS operates and maintains 973km of expressways in Peninsular
Malaysia, stretching from the border of Thailand to Singapore and linking all major cities on
the west coast of Peninsular Malaysia. Financing for infrastructure development is equally
important as this has implications on the fiscal position. To structure the most competitive and
efficient financing for each stage of the infrastructure project schedule, several options can be
considered – including direct funding from the budget, the issuance of long-term Government
bonds, the issuance of long-term Government-guaranteed bonds, the securitization of works
completed, and the issuance of long-term bonds backed by the Government’s undertaking to
make deferred payments. The actual funding mix adopted needs to be based on the
Government’s fiscal position and on economic conditions. By adopting a mix of strategies
over the overall duration of the project, the Government can optimise on the funding costs.
Malaysian Experience in Islamic Finance: Sukuk
106. Islamic finance requires financial transactions to be supported by underlying
productive economic activities that generate legitimate income and wealth. This gives
rise to a close link between financial transactions and productive flows. Therefore, the growth
in Islamic financial assets is generally in line with the growth of underlying economic
activities, thereby ensuring that the financial system is always grounded to the real economy.
Other inherent features arising from risk- sharing also contribute to the stability and integrity
of Islamic finance. Thus, Islamic finance, embraced in its entirety, is supportive of sustainable
growth. Islamic finance offers an extensive range of innovative financial products and
services from consumer financing, asset and wealth management to Islamic insurance and
capital markets. The Sukuk market has become a highly competitive fund-raising option for
large scale projects and infrastructure development, fast emerging as an attractive new asset
class for investors and evolving to become a preferred financing and capital raising option for
issuers.
107. The Sukuk market in Malaysia accounts for more than 50% of Malaysia’s bond
market and Sukuk, drawing the participation of not only their own corporates but also a
wide range of international corporations and multilateral agencies. In Malaysia, a
comprehensive Islamic financial system operates in parallel to the conventional financial
system. This is now internationalized to enhance their inter-linkages with other emerging
economies and traditional markets.
108. Malaysia pioneered the development of the global Sukuk market with the launch
of the first sovereign five-year global Sukuk worth $600 million in 2002. Since then the
49

Sukuk market has experienced unprecedented growth with Malaysia firmly established as one
of the largest issuers of Sukuk over the years.
Facilitative Environment for Sukuk Issuance 22
109. Malaysia provides a facilitative framework for Sukuk issuance; both for local and
international issuers. In addition to issuing ringgit Sukuk, the current issuance framework
allows for issuers to issue a non-ringgit Sukuk in Malaysia. Malaysia's facilitative
environment encompasses a sound infrastructure platform, consisting of the Electronic
Trading Platform (ETP) and the Real-time Electronic Transfer of Funds and Securities
(RENTAS) system. These systems allow for an efficient platform for the trading of bonds,
with a high level of post-trade transparency and market liquidity. For global investments,
flexibility is also accorded for foreign investors to leverage on international clearing and
settlement systems.
110. Malaysia has an active secondary market, which gives investors the option to
either hold Sukuk investments until maturity or to sell the Sukuk prior to maturity. The
secondary market enables greater trading activity and attracts more investors including
foreign-owned corporations, who are continuously tapping the market for funding. This
eventually augments the depth and liquidity of the Sukuk market. Investors will benefit from
the wide array and increasing size of Sukuk transactions as they look towards diversifying
their asset portfolios. In this aspect, Malaysia offers well-developed value propositions, which
enables a dynamic scenario that benefits both issuers and investors.
111. Infrastructure and Utilities Sectors and Financial Services are the highest
number of bond issuers in Malaysia with a total outstanding amount of MYR113.2
billion and MYR109.8 billion, respectively (Figure 5.6). The transportation and
Figure 5.6: Outstanding Amount for Active Bonds Excluding Public Finance (RM million)
Source: Bond Pricing Agency Malaysia (31 October 2011)
22 Malaysia International Islamic Financial Centre (MIFC) (official website)
50

construction engineering sectors are expected to see a major increment in terms of Sukuk to
be raised as Malaysia will be moving ahead with major public infrastructure projects i.e. the
Klang Valley Mass Rapid Transit, Greater Kuala Lumpur / Klang Valley development and
many other economic corridors projects.
Challenges/ Constraints for Private Sector Resource Mobilization
112. Following are the binding constraint for private sector resource mobilization in
Malaysia:
While Islamic banks worldwide have proven their resilience during the global crisis, the
supply shortage of Islamic instruments has impacted the effective management of
liquidity within Islamic banks. Recognising this, Malaysia has collaborated with other
countries to establish the International Islamic Liquidity Management Corporation (IILM) in
2010 to support cross-border liquidity management with the intent of both deepening and
broadening the global Islamic finance industry. The establishment of IILM was initiated by a
recommendation from the High Level Task Force on Liquidity Management, which was
established by the Islamic Financial Services Board Council.
Due in large part to the recent financial crisis, there has been default cases involving
Sukuk in the Islamic financial industry worldwide. A significant component of an
established global Islamic financial system has the dispute resolution framework, which is
crucial to providing the necessary assurances and strengthening confidence in the system,
especially in the event of a crisis or transaction default. As part of the effort to strengthen the
dispute resolution process for the Islamic finance industry, Malaysia has already established a
dedicated High Court in Kuala Lumpur to adjudicate Muamalat cases. As an alternative
dispute resolution channel to the court system, the Kuala Lumpur Regional Centre for
Arbitration has been enhanced to serve as a platform to deal with cases involving Islamic
finance, particularly within the Asia Pacific region. By having adopted United Nations
Commission on International Trade Law Arbitration Rules, it offers speedier settlements
relative to the court’s process and freedom to choose governing laws.
New strategy is needed to facilitate internationalisation through the widening of the
Islamic Capital Market’s international base. This includes the need to further strengthen
the capacity to structure multi-currency and cross border transactions and build greater scale
to enable Malaysian intermediaries to make greater inroads into the international market. The
transition into the mainstream of the global financial system will provide opportunities for
Malaysian market intermediaries to seek new frontiers and expand new markets, as well as
contribute towards further widening the diversity of products and services.
In order to meet the new challenges, innovation in Islamic financial system is
paramount. In this context, the Islamic financial system has to continually innovate and
adapt in order to be competitive. At the same time, innovation is also the driving force behind
developing greater diversity of products and services. Therefore, there is a need to focus on
product innovation and development efforts that will provide a comprehensive array of
Shariah-based products for the industry. While in Islamic finance, innovation has been
significantly pervasive, there is a need to further accelerate its momentum to ensure that they
achieve the objectives that they aspire. However, the challenge to innovate and adapt must
be based on the core principles and values as well as ethics of Islam.
51

For innovation to become an important driver of growth, a critical area that needs
attention is addressing the shortage of skilled and experienced professionals in the
Islamic finance industry. While Malaysia has been instrumental in talent development for
the Islamic finance industry, continuing the endeavor to build pool of talents who have the
ability and creativity to develop new ideas and the capacity to turn ideas into achievable
results are pertinent. Recognizing this, another key thrust of the Islamic Capital Market Plan-2
is to develop capacity and expand the pool of talent and technical expertise in Islamic finance,
through strengthening training and professional development to increase the supply of Shariah
experts.
A number of local relevant stakeholders have also identified some other constraints for
private resource mobilization as follows:
Sukuk market is still heavily weighted towards a discrete number of national
markets
Sukuk market needs more issuance, in varying maturities and currencies
(v)
Foreign Direct Investments in Malaysia: Complementing the Domestic
Private Investment 23
113. FDI is an important source of capital, complements domestic private investment,
enhances technology transfer, and increases overall economic growth. The Malaysian
Government’s effort of introducing more liberal incentives including allowing a larger
percentage of foreign equity ownership in enterprises under the Promotion of Investment Act
(PIA) 1986. Under the Second Malaysia Plan (1971-1975), the Government established Free
Trade Zones (FTZs in order to attract a larger inflow of FDI. As the result, Malaysia attracted
significant amount of FDI between 1986 and 1996 at an annual average growth rate of 38.7%.
In 1995, for instance, Malaysia was the second largest FDI recipient among Asian economies
with $5.8 billion. 24
FDI Inflows to Malaysia during 1990-2010
114. Malaysia has received significant FDI since 1990, which has become an important
contributor to economic growth and the transformation of Malaysia’s economy whereby it
creates job opportunities for the local citizens. In terms of FDI, Malaysia’s performance
appears to improve impressively during 1990s compared with the years before 1990s,
showing improvement in investor confidence. However, the lowest figures of FDI inflows
recorded in 2001 were due to the global trend and followed by the collapse of technology
bubble. Malaysia has attracted a steady inflow of net FDI in the recent decade, averaging 3%
of GDP per annum with a peak of 4.5% of GDP in 2007. However, relatively lower FDI
inflows were recorded in 2001 and 2009, similar to the global trend, following the collapse of
the technology bubble and the global financial crisis, respectively. According to the World
Investment Report 2010, Malaysia’s FDI dropped more than 81% in 2009 on year-on-year
basic, from $7.3 billion in 2008 to $1.4 billion in 2009, which were even less than half of the
annual average total FDI inflow between the years of 1995 to 2005, taking long recovery
23 Source: Ministry of International Trade and Industry, Government of Malaysia
24 UNCTAD, 1996.
52

Figure 5.7: Net FDI as of % of GDP Regional Comparison
period after the 1997 Asia Economic Crisis. Besides, Malaysia’s FDI inflow in 2009 was also
lower than Singapore, Thailand, Indonesia, Vietnam, and the Philippines. This was the first
time in the history where the FDI in Philippines was more than FDI in Malaysia. However,
FDI increased to 3.6% of GDP in 2010 (Figures 5.7).
115. According to the Ministry of International Trade and Industry, Malaysia attracted
MYR21.3 billion worth of FDI in first half of 2011, compared to MYR12.1 billion in first half
of 2010. Approved foreign investments are primarily in the electrical and electronics industry;
metal-based products; food processing; chemical and chemical products; transportation
apparatus; petroleum products, including petrochemical; and fabricated metal products
(Figure 5.8). The top investing countries are Japan (with MYR2.4 billion total FDI) followed
Figure 5.8: Cumulative Net FDI Flows by Sectors
53

y the United States (MYR2.3 billion); Singapore (MYR1.9 billion); the Netherlands
(MYR1.2 billion); and Taiwan (MYR1.2 billion).
Binding Constraint to Attracting FDI
116. To attract more FDI inflows, Malaysia has had to implement more liberal economic
policies similar to those implemented by Singapore and Indonesia. The UNCTAD report
attributes the strong FDI inflows into the high performing Southeast Asian countries as being
due to proactive policy efforts by the various Governments to attract FDI inflows. The release
of the New Economic Model, the institutionalization of PEMANDU, the Economic
Transformation Program and the Government Transformation Program together with the
release of the Tenth Malaysia Plan have given positive signals to the foreign investors that the
Government is committed to creating a more market friendly environment in Malaysia.
iv.
Conclusion
117. Based on the above analysis, Table 5.1 highlights a number of constraints hampering
overall private sector development as well as PPPs, SMEs and private resource mobilization
in Malaysia.
Table 5.1. Summary of Constraints to Private Sector Development in Malaysia
Components of Private Sector Development
Constraints
Private Sector Development
Public Private Partnership (PPPs)
Inadequately educated workforce, difficulties in dealing
with tax administration and getting business licenses and
permits
Firms find it difficult to locate and recruit the skills they
seek
In terms of enrollment in secondary and tertiary
education, the challenges remain even more substantial
Weak innovation and business sophistication and low
budget for research and development (R&D) activities
Weak innovation system is hindering the private sector
development in the country
Land acquisition issues/disputes settlements take longertime
to resolve, particularly for road projects
Lack of project supervision and support
Ensuring adequate resources
Small and Medium Enterprises (SMEs)
Private Sector Resource Mobilization
Insufficient access to funding sources
Weak access to markets
Poor ability to absorb and retain good talent in the
industry
Insufficient availability of skilled workforce
Shortage of Islamic instruments
Lack of innovation
Shortage of skilled and experienced professionals in
Islamic finance industry
54

VI. DIAGONISING THE POTENTIAL OF REVERSE
LINKAGES OPPORTUNITIES IN MALAYSIA
(Based on the IDB Group Team Inputs, Background Study Prepared by the
Consultants and Consultations with Key Stakeholders in Malaysia)
i. Reverse Linkages Opportunities: Tool for Promoting South-South Cooperation
118. In 2010, the IDB Group launched Member Country Partnership Strategy (MCPS) as
one of its major business tools adopted under the IDB Vision 1440H. Under the new business
process, the MCPS of the IDB Group has become a principal tool for achieving alignment,
selectivity and focus between member countries’ critical development needs and the mediumterm
strategic priorities of the IDB Group. Among the main implementation modalities,
“Reverse Linkages” initiative is one of the major engagement pillars in MCPS exercise.
Reverse Linkages (RLs) are specific cooperation activities whereby member countries
themselves are primary, forefront, and direct agents in the provision of specific expertise,
knowledge, know-how, investments, success stories, and best practices. They address specific
development needs and take advantage of unique opportunities in other member countries in a
mutually beneficial arrangement to achieve a win-win-win outcome. Further, South-South
cooperation concept is considered a viable developmental tool, which can be enhanced
through RLs. Within a sector-specific context, there are three critical players in the
implementation of RL activities: (i) Provider country / institutions, (ii) Recipient countries /
institutions, and (iii) as a facilitator, the relevant Entities / Sector Departments in the IDB
Group.
ii.
Reverse Linkages Opportunities in Malaysia
119. Malaysia has vast opportunities of Reverse Linkages through which country’s
expertise and knowledge can be exported to other IDB member countries in a win-win-win
situation for Malaysian institutions (as Providers), other IDB member countries (as
Recipients) and IDB Group Entities/ Departments (as Facilitators). The following subsections
identified Reverse Linkages opportunities available in Malaysia.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Benefitting from Islamic Financial System Strengths
Replicating Tabung Haji
Collaboration with Malaysia Science Academy
Sharing SMEs Development Experience
Promoting Halal Industry
Leveraging on the Benefits from Trade and EXIM Activities
55

(vi)
(vii)
Sharing Eexperience and Expertise Under Malaysian Technical
Corporation Programme
Sharing Information and Communication Technology
(i) Benefitting from Islamic Financial System Strengths in Malaysia 25
Well-Developed Islamic Financial System
120. Malaysia has emerged as a leader in the global Islamic financial market and has
pioneered many 'World Firsts', both in engineering innovative products as well as in
developing enabling infrastructure to facilitate the progress of the Islamic financial
industry. Over more than 30 years, Malaysia has placed strong emphasis on four sub-sectors
in Islamic finance namely (i) Islamic Banking; (ii) Takaful; (iii) Islamic Capital Market; and
(iv) Islamic Money Market. These have resulted in the development of a sound Islamic
financial environment that is rich in diversity of financial institutions, and vibrant with
continuous product innovation and market activity; as well as possessing an ingrained
maturity that adds stability and robustness to the overall Islamic financial system.
121. Islamic banking business in Malaysia continues to grow significantly in terms of
assets, deposits, and financing. According to Bank Negara Malaysia’s Financial Stability
and Payment System Report 2011, total assets of Islamic banking grew by 23.8% over the last
year to MYR434.9 billion as at December 2011, and comprised 22.4% of total banking assets.
Total deposits grew by 22.6% to MYR340.2 billion and accounted for 24.4% of total deposits
in the banking system by end- 2011. Islamic financing continued to be in higher demand with
growth of 20.7% amounting to MYR268.3 billion, which represented 24.3% of total loans in
the banking system by the end of 2011. The stability and strength together with the gradual
liberalisation of Malaysia's Islamic finance system has encouraged foreign financial
institutions to make Malaysia their destination of choice.
122. The Malaysian Islamic capital market continues to play a significant role in
providing an alternate source for raising capital. As at end of 2011, 839 Shariah-compliant
securities were listed on Bursa Malaysia (KL Stock Exchange), representing 89% of total
listed securities with a market capitalization of MYR806.4 billion or 62.8% of total market
capitalization. The trading volume of Shariah-compliant securities accounted for $24.5
million as at end-2011.
123. The Takaful industry continues to grow faster. According to Bank Negara
Malaysia’s Financial Stability and Payment System Report 2011, assets of Takaful industry
grew by 15.8% over 2010 to MYR17 billion, accounting for 8.9% of total assets in the
insurance and Takaful sector by the end of 2011.
124. Law Harmonisation Committee was established to further review the Malaysian
laws with regards to Islamic finance contracts. Given the need in the industry to develop
the qualified human capital to cater to the needs of the growing industry, Malaysia has
established key institutions which are dedicated towards developing Islamic finance talent.
25 Sources: Malaysian Islamic Finance Centre (MIFC); Bank Negara Malaysia (BNM); Ministry of Finance;
International Centre for Education in Islamic Finance (INCEIF); Economic Planning Unit; Securities Commission
Malaysia; Bursa Malaysia (KL Stock Exchange); and Malaysia Institute of Accountants.
56

For example, International Centre for Education in Islamic Finance (INCEIF), Islamic
Banking Institute of Malaysia (IBFIM), and International Shariah Research Academy for
Islamic Finance (ISRA) were established for this purpose. In addition, various higher learning
institutions are also offering under-graduate and post-graduate programs in finance with
specialization in Islamic finance.
Government Strategy for the Islamic Finance
125. The Government of Malaysia (GoM) has been quite supportive of the Islamic
finance industry. Separate laws for Islamic banks and Takaful operators were promulgated in
as early as 1983 and 1984, respectively. Dedicated Shariah Advisory Councils, which act as
the highest authority to advise and determine Shariah resolutions, were formed at financial
regulatory bodies namely Bank Negara Malaysia, Securities Commission and Labuan
Financial Services Authority. The country’s judiciary has also strengthened with the
introduction of a dedicated High Court which is presided by Shariah conversant judge to deal
with Islamic finance cases. Since 2001, regulatory bodies in Malaysia (BNM, Securities
Commission and Labuan Financial Services Authority) have been actively providing capacity
building programs on Islamic banking regulation and supervision to other central banks. In
2006, Malaysia Islamic Finance Centre (MIFC) was launched with the aim to develop
Malaysia as the global hub for Islamic finance in the following four key areas: (i) Islamic
capital market – instruments and players for international business; (ii) banking and re-
Takaful; (iii) talent development; and (iv) professional service providers. In order to enable
comprehensive human development in the area of Islamic finance, the country has established
an endowment fund named “Fund for Shariah Scholars in Islamic Finance” worth $62.5
million.
Diversity of International and Domestic Financial Institutions
126. Malaysia has diverse and growing number of domestic and international
financial institutions. Malaysia's diversity of market intermediaries consists of commercial
and investment banks, local and foreign Islamic banks, international Islamic banks, Takaful
and re-Takaful operators, brokers and fund managers. These institutions include Islamic
subsidiaries and also entities undertaking international currency business (ICBU). Many of
Malaysian Islamic financial institutions have participated in Malaysia's several notable
achievements such as record-setting Sukuk issuances and various product innovations. With
Malaysian Islamic financial institutions extensive experience and pioneering many innovative
products, these institutions have gained mileage in terms of track record. By leveraging on
the inherent strengths of Malaysia's intermediaries, the issuers may able to benefit from cost
competitive issuances and facilitative process. The reputation of these intermediaries adds
further credibility to the issuance. This is also attributed to their rich experience in using
various Islamic principles or a combination of principles to produce innovative Islamic
banking, Takaful and Islamic Capital Market (ICM) offerings.
Facilitative Islamic Finance Environment in Malaysia
127. Malaysia provides a facilitative environment for Islamic finance industry, which
has enabled efficient delivery channels for the proliferation of foreign Islamic finance
57

institutions as well as Islamic products and services. This applies to the banking and
Takaful sectors as well as the ICM industry. In particular, Malaysia provides a facilitative
framework for Sukuk issuance for local and international issuers. In addition to issuing ringgit
denominated Sukuk, the current framework allows issuers to also issue a non-ringgit based
Sukuk with ready approval based on the following criteria:
For issuance of Ringgit denominated Sukuk:
‣ Deemed approval granted to sovereigns, quasi-sovereigns, multilateral
development banks (MDBs) and multilateral financial institutions (MFIs)
rated "AAA"
‣ 14 working days to foreign multi-national corporations (MNCs) and
foreign corporations
For issuance of non-ringgit denominated Sukuk:
‣ Deemed approval granted to sovereigns, quasi-sovereigns, MDBs and
MFIs rated “BBB” on foreign rating scale
‣ Governing laws of Malaysia, England or United States may be used for
bond documentation
For both ringgit and non-ringgit denominated Sukuk:
‣ Both resident and non-resident issuers are free to utilise proceeds from
the issuance onshore and offshore
‣ The issuers are also free to hedge upto full amount of the underlying
commitment
128. Malaysia's facilitative environment also encompasses a sound infrastructure
platform, consisting of the Electronic Trading Platform (ETP) and the Real-time
Electronic Transfer of Funds and Securities (RENTAS) system. Both systems allow for an
efficient trading of bonds, with a high level of post-trade transparency and market liquidity.
For global investments, flexibility is also accorded for foreign investors to leverage on
international clearing and settlement systems. The presence of an active secondary market
also attracts more investors, who are encouraged by the choice of either holding Sukuk
investments until maturity or to sell Sukuk prior to maturity. This creates a more vibrant
trading activity which, in turn, expands the depth and liquidity of the Sukuk market.
Malaysia’s Central Strategic Location for Islamic Financial Hub
129. Malaysia's strategic location enables the country to serve as a link between the
East and West - positioning it ideally to facilitate cross flow of funds and greater economic
linkages between South East Asia and the Middle East. As the economies of these regions
continue expanding, Malaysia is expected to play a pivotal role as a regional Islamic financial
hub in these regions, particularly for transnational investments and the sourcing of funds.
Through its various global economic inter-linkages, Malaysia provides access to financial
pipelines to tap surplus funds, the wealth of high net worth investors and the largely untapped
opportunities of these fast growing markets.
58

Adopt Global Legal and Regulatory Best Practices
130. Malaysia's legal framework caters the specific regulation of Islamic finance. The
Islamic banking and Takaful industries are governed by dedicated legislation - the Islamic
Banking Act 1983 and the Takaful Act 1984. There is a designated judge at the High Court to
preside over Islamic finance cases and dedicated arbitration rules for Islamic finance under
the Kuala Lumpur Regional Centre for Arbitration of Malaysia. Issues pertaining to
enforceability of Shariah-based contracts, investor protection and legal redress for Islamic
financial institutions are well addressed within this legal framework. The ICM is governed by
the Capital Market Services Act 2007 (CMSA) which defines the parameters for permitted
capital market activities in Malaysia, while reinforcing the protection framework and
promoting international best practices among financial institutions. In ensuring laws are
refined to best practices, the legal and regulatory framework is constantly updated in
accordance with market requirements to ensure continued effectiveness of laws with the
rapidly growing Islamic finance industry.
Well-Developed Shariah Governance Framework
131. Malaysia has dedicated Shariah Advisory Councils for the Islamic banking and
Takaful sectors, as well as for the ICM and offshore market. This approach was taken, by
recognising the importance of Shariah-compliance in the Islamic financial system which
possesses distinctive characteristics when compared to the conventional system. The Shariah
Advisory Council of the Bank Negara Malaysia advises on issues related to Shariahcompliance
matters pertaining to the Islamic banking and Takaful industry. The Shariah
Advisory Council of the Securities Commission Malaysia advises on issues related to the
operations of the ICM while provides guidance and advises to investors, Government and
Islamic finance industry. The existence of these Councils who work in tandem with each
other ensures a high standard of compliance in Islamic finance industry practices and provides
a high level of consistency in interpretation and harmonisation of standards. This progressive
approach has allowed the Islamic banking and Takaful and ICM sectors to flourish by
cultivating an environment for product innovation and flexibility while ensuring compliance
with Shariah principles.
Wide Range of Innovative Islamic Investment Products
132. Malaysia's banking, Takaful and Islamic Capital Market have cultivated the
growth of various innovative Islamic finance products. The scope of business
opportunities continues to expand in line with innovative environment and industry’s best
practices that regulate as well as encourage the proliferation of quality Islamic finance
products. This has resulted in a vibrant and dynamic sector with healthy competition that
provides various options for investors. For the banking sector, opportunities abound in asset
management, corporate finance, capital markets and treasury, private equity, and strategic
mergers and acquisitions, including bancatakaful (bancassurance). The same large breadth
and width also exists in the ICM where foreign financial institutions can participate in the
origination and issuance of Sukuk, Islamic fund managements, Islamic securities, unit trusts
and mutual funds, Islamic Real Estate Investment Trusts (REITs), and Islamic Exchange
Traded Fund.
59

Liberal Foreign Exchange Administration Rules
133. Malaysia continues to maintain liberal foreign exchange administration (FEA) policy
to support and enhance the competitiveness of the economy while promoting financial and
economic stability. The liberalisation of FEA rules are aimed at creating a more positive
environment for trade, business and investment activities in line with the readiness of the
Malaysian economy. Greater flexibility is given for effective financial and risk management
practices, as well as in support of Malaysia as an International Islamic Financial Centre. In
this regard, flexibility is given for Islamic funds to be freely invested abroad.
Tax Neutrality in Treatment of Islamic Banking
134. Malaysia offers the unique proposition whereby there is tax neutrality in the treatment
of Islamic banking and conventional banking products. Tax neutrality has been accorded to
Islamic finance instruments and transactions executed to fulfill Shariah requirements. There is
no additional stamp duty and tax payment incurred in the usage of Islamic products that have
comparable products in the conventional banks. Malaysia's tax neutrality framework is to
promote level playing field between conventional and Islamic financial products. Tax
neutrality reduces the cost of doing business in Islamic finance, thereby contributing to the
overall competitiveness and spurs the development of Islamic finance.
Comprehensive Human Capital Development for Islamic Finance Industry
135. Malaysia has placed a strong emphasis on human capital development alongside the
development of Islamic finance industry to ensure the availability of Islamic finance talent.
Malaysia has a large and diverse pool of Islamic finance talent comprises product innovators,
regulators, intermediaries and risk managers who have both financial and Shariah knowledge
and expertise. Malaysia adopts a structured and comprehensive approach to human capital
development in Islamic finance to meet the growing needs of Islamic finance talent by
domestic and foreign financial institutions. Malaysia has various institutions targeted at all
levels of Islamic finance education, training and research. Courses have also been developed
for professional talent enrichment, for undergraduate and postgraduate qualifications, for
research and for thought leadership in Islamic finance and Shariah. Many institutions of
higher learning in Malaysia also offer undergraduate and post-graduate programmes in
finance with a specialisation in Islamic finance. Malaysia has the edge in attracting talent in
Islamic finance to participate in its Islamic financial industry through its recent MIFC
initiatives by providing withholding tax exemption and facilitative immigration policies to
Islamic finance expatriates working in Malaysia.
Continuous Product Innovation and World Firsts
‣ First bai' bithaman ajil Islamic debt securities by Shell MDS Sdn. Bhd in 1990
‣ First Sukuk mudharabah by Cagamas Berhad in 1994
‣ First global corporate Sukuk ijarah by Kumpulan Guthrie Berhad in 2001
‣ First global sovereign Sukuk ijarah by Government of Malaysia in 2002
‣ First tradable Sukuk Istisna' by SKS Power Sdn. Bhd. in 2003
60

‣ First ringgit-denominated Sukuk by foreign issuer - International Finance
Corporation (IFC), the private arm of the World Bank in 2004
‣ First Sukuk Musharakah by Musharakah One Capital Berhad in 2005
‣ First exchangeable Sukuk by Khazanah Nasional Berhad in 2006
‣ Launching of the first Global Sukuk index - Dow Jones Citigroup Sukuk Index in
2006
‣ First Islamic REIT - Al 'Aqar KPJ REIT focused on hospitals, launched by KPJ
Healthcare Bhd in 2006
‣ World's largest Sukuk issuance by Binariang GSM in 2007
‣ First Asian Shariah Exchange Traded Fund (ETF) - MyETF Dow Jones Islamic
Market Malaysia Titan 25 in 2008
‣ Malaysia adopts a unique business model - a parallel Islamic financial system
operating side by side with the conventional financial system
‣ Malaysia became the first country in the world to establish a Shariah Advisory
Council (SAC) within the ambit of a regulatory
‣ Malaysia became the first jurisdiction in the world to put in place a Shariahcompliant
deposit insurance scheme
‣ Founding member and host country of the Islamic Financial Services Board
(IFSB). IFSB is the international-standard setting body of regulatory and
supervisory agencies to ensure soundness and stability of the Islamic banking,
Takaful and Islamic capital market.
Potential Opportunities in the Areas of Islamic Finance under Reverse Linkages
136. Following are the key institutions through which Malaysia can offer its expertise to
other IDB member countries for promoting Islamic banking and finance.
The “International Centre for Education in Islamic Finance (INCEIF), The Global
University of Islamic Finance” offers Chartered Islamic Finance Professional
(CIFP) programme to working professionals and students globally. In addition to
the CIFP programme, INCEIF also provides post graduates programmes namely
Masters and PhD in Islamic Finance.
Islamic Banking and Finance Institute Malaysia (IBFIM) and Securities Industry
Development Centre (SIDC) as the leading technical training centres for Islamic
banking, Takaful and capital market also provide specialised training in the area
of Islamic finance.
International Shariah Research Academy for Islamic Finance (ISRA), which
focuses on applied research Shariah activities, with its primary objective to
promote innovation and enhancement to the Islamic financial industry.
Malaysia has established an endowment fund worth $62.5 million, the Fund for
Shariah Scholars in Islamic Finance, to enhance knowledge, research, talent, and
intellectual discourse in the field of Shariah and Islamic finance.
61

Issues/Challenges Facing the Islamic Finance in Malaysia
137. Despite the fact that Islamic finance industry is quite well-developed in Malaysia, it
faces key issues and challenges which if addressed can further unlock the industry’s potential
to contribute significantly more to national and international development of Islamic finance.
Key challenges facing the Islamic banking are as follows:
Awareness: There remains the need to enhance awareness about the commercial values of
Islamic finance instruments amongst retail and corporate customers and the growing usage of
Islamic finance has transcend beyond Muslims customers.
Standardization and Harmonization: There is further need to promote standardisation of
documentations globally in supporting the Islamic finance cross-border business from
Malaysia.
Product Innovation: There is an opportunity to foster product innovation with distinctive
features in order to open up new and enterprising avenues through Islamic finance.
Talent and Research Development: There is an on-going need to cater for the talent demand
of the industry in particular in enlarging the pool of talent that is both Shariah and finance
conversant. Research on under-explored areas need to be intensified further e.g. Islamic
venture capital.
Waqf Opportunities: The concept of Waqf as a tool of utilizing Shariah-compliant financing
for development and poverty alleviation remains under-utilized in Malaysia. This area
requires special attention from the concerned authorities and viable projects can be identified.
(ii) Collaboration with Malaysia Science Academy 26
Overview of Science and Technology in Malaysia
138. The Science and Technology related activities have been essentially Reverse
Linkage exercises for which knowledge and expertise are shared by the Malaysian
entities for the benefit of other IDB member countries involved. In this regard, Malaysian
Industry-Government Group for High Technology (MIGHT) has launched 3 new initiatives;
(i) the Malaysian Biomass Initiative (MBI); (ii) the SMART Community Initiative (SMI); and
(iii) Human Capital Building Initiative (HCBI). The aim of these initiatives is to utilize the
Information and Communication Technology (ICT) and new scientific discoveries to enhance
the quality of life in Malaysia and the other IDB MCs and Non-MCs. In this regard, Malaysia
Science Academy continues to play a key role in S&T development.
Malaysia Science Academy
139. The Malaysia Science Academy was established in 1995 and is funded by the
Government of Malaysia. The main objectives of the Academy are the following:
26 Sources: Malaysia Science Academy, Annual Report (2010); Ministry of Higher Education; Ministry of Science,
Technology and Innovation; and Malaysia Institute of High Technology Industry (MIGHT)
62

promote development of science, engineering and technology
provide a forum for the inter-change of ideas among scientists, engineers and
technologists
promote national awareness, understanding and appreciation of the role of
science, engineering and technology in human progress
promote creativity among scientists, engineers and technologists
promote national self-reliance in the fields of science, engineering and
technology
act as a forum for maintaining awareness on the part of the Government of the
significance of the role of science, engineering and technology in the
development process of the nation and for bringing national development needs
to the attention of scientists, engineers and technologists
analyse particular national problems and identify where science, engineering and
technology can contribute to their solution and accordingly to make
recommendations to the Government
keep in touch with developments in science, engineering and technology and
identify those developments which are relevant to national needs and to bring
such developments to the attention of the Government
prepare reports, papers or other documents relating to the national science,
engineering and technology policy and make the necessary recommendations to
the Government
initiate and sponsor multi-disciplinary studies related to and necessary for the
better understanding of the social and economic implications of science,
engineering and technology
encourage research, development, education and training of human resource in
the appropriate scientific, engineering and technical fields
establish and maintain relations between the Academy and overseas bodies
having the same or almost similar objectives in science, engineering and
technology as the Academy
advise on matters related to science, engineering and technology as may be
requested by the Government from time to time
Previous S&T Activities with IDB Member Countries
140. The Malaysia Science Academy and other relevant institutions are already involved
in various S&T activities in the IDB/OIC member countries. Some of them are highlighted
below.
OIC Conference on S&T, 7-10 Oct. 2003, Kuala Lumpur (Produced Kuala
Lumpur Declaration on S&T for Socio-Economic Well-Being of the Ummah –
Vision 1401H)
S&T Management Training Course for Researchers in OIC Countries
2 Weeks Training Course of Sharing Malaysia Experience in S&T Management
63

Funding from Government of Malaysia under Malaysia Technical Cooperation
Programme (MTCP)
Since 2005, 100 Researchers from OIC Countries have been trained
International Symposium on STI: Towards a Prosperous and Secure Islamic
World, 9-11 August 2007, Kuala Lumpur
International Youth Workshop on STI: Towards a Prosperous and Secure Islamic
World, 6-7 August 2007, Kuala Lumpur
International Exhibition on Scientific Excellence in Islamic Civilisation: Islamic
Science Ahead of Its Time, 8 Jan - 14 Feb 2007, Kuala Lumpur
Member of the Network of Academies of Sciences in OIC Countries (NASIC)
Co-organise Scientific Meetings and Conferences with the Islamic World
Academy of Sciences (IAS)
Potential S&T Areas for IDB Member Countries with Malaysia Science
Academy
141. The Academy’s International Program focuses on collaboration with the
scientific fraternities in ASEAN, Asia, and Islamic countries and on the Antarctic
Program. The Academy’s international linkages and network is vast. It has signed
Memorandums of Understanding with 13 sister academies and worldwide S&T bodies. The
Academy is also a member of the International Council for Science (ICSU), the Global
Network of Academies of Sciences (IAP), the Federation of Asian Scientific Academies and
Societies (FASAS), the Academy of Sciences for the Developing World (TWAS), the Science
Council of Asia (SCA) and the Association of Academies of Sciences in Asia.
142. The Research Program on the Antarctic is a result of collaborative network of
linkages. The Academy is also hosting the ICSU Regional Office for Asia and the Pacific and
the International Science, Technology and Innovation Centre for South-South Cooperation
under the auspices of UNESCO. The IDB member countries can collaborate and benefit from
this Research Program.
143. Malaysia is embarking on a focused, holistic and dedicated effort to develop
human resource in the S&T field to enhance the level of innovation and competitiveness.
The Brain Gain Malaysia (BGM) Programme is one such effort initiated by Ministry of
Science, Technology and Innovation (MOSTI) to create a sustainable pool of scientific talents
through brain gain. Among the responsibilities of the Expert Review Panels are to proactively
seek for potential candidates for the BGM Programme and match them with the local
collaborators (including industries). The candidates will be anchored to the collaborators for
several months. They are expected to share their expertise with the local researchers and
eventually help to accelerate research and technology development in other MCs and Non-
MCs.
Issues/Challenges Facing the S&T in Malaysia
The need to balance between facilitating the strategic needs of the country that is
focused on developing soft infrastructures (i.e. innovation) and the needs and
64

priorities of other IDB member countries in areas that Malaysia has depth of expertise
and can effectively contribute.
The need to identify a win-win-win scenario (i.e. Malaysian institutions as
knowledge/service providers; IDB member countries as beneficiaries; and IDB as
facilitator) for all parties involved to ensure effectiveness and sustainability of S&T
operations.
To move away from financing short-term activities like Conferences and
Symposiums with relatively little impact/sustainability of resulting outcomes and
refocus the limited financial resource of the S&T in the areas of maximum positive
impact to Malaysia and benefiting IDB member countries.
The identification and selection of the right focal points in Malaysia in the respective
areas of potential collaboration is a critical factor in determining the direction and
success in the development of any bilateral and trilateral initiative. Understanding the
cultural and professional ecosystem of these focal points will assist in maximizing the
potential collaborations between MCs.
The need to enhance the familiarity of Malaysian entities to the rules and regulations
(processing, disbursement and settlement of operations) with respect to the S&T
operations and programs.
The need to ensure that the Malaysian institutions have a realistic expectation of the
outcome of the potential collaboration with other IDB member countries.
(iii) Sharing SMEs Development Experiences of Malaysia 27
SME Sector in Malaysia
144. According to Ministry of Finance Economic Report 2011-2012, the SME sector
accounts for 99.2% of establishments, employ 56% of the workforce and contribute
about 31% of GDP. Small and Medium Enterprises (SMEs) play an important role in
developed and developing countries in terms of increasing economic growth and providing
employment. The SMEs sector has become the prime mover and also the backbone of
industrial development in Malaysia. The setting up of Small and Medium Industries
Development Corporation (SMIDEC) in 1996 was an early initiative by the Malaysian
Government to promote SMEs (Figure 6.1).
SME Policies in Malaysia
145. The establishment of the National SME Development Council (NSDC) in 2004
presented another chapter in SME development in Malaysia. As the highest policy-making
body, its role was to formulate strategies for SME development across all economic sectors,
coordinate the tasks of related Ministries and Agencies, encourage partnership with the
private sector, as well as ensure effective implementation of the overall SME development
27 Sources: SME Corporation Malaysia; Ministry of Finance; Tenth Malaysia Plan; Malaysia 2012 Budget; SME
Bank Malaysia; Bank Negara Malaysia; and National Trust Council (MARA).
65

programmes in the country. Initiatives under NSDC included enhanced access to financing,
financial restructuring and advisory services, information, training and marketing
coordination and a comprehensive SME database to monitor the progress of SMEs across all
economic sectors. In recent challenging economic environment, it has also become evident
Figure 6.1 SMEs as Backbone of the Malaysia Economy
Source: SME Corporation Malaysia (2011)
that the contribution of SMEs has become even more important in the country. It is
recognized that they can be leaders in exploring new opportunities, and in becoming creative
and innovative in new products development, packaging and branding, new services in ICT
and outsourcing sector. The 10 th Malaysia Plan and the New Economic Model are committed
to ensure that SMEs’ full potential growth is unlocked. The framework advocated by SME
Corporation is given in Figure 6.2.
146. Realising that SMEs play a significant role in Malaysian economy, the
Government has introduced various strategies and incentives to encourage SME sector
to undertake high-value added activities such as innovations, design, and R&D. A key
strategy implemented in 2011 was the introduction of the Green Lane Policy (GLP) for
SMEs. Under the GLP, eligible innovative SMEs will be entitled to four main incentives
namely, soft loans, tax benefits, priority in Government procurement and Ministry of Finance
(Incorporated) (MOF Incl.) companies’ procurement programmes (Economic Report, 2011-
2012, Ministry of Finance, Government of Malaysia).
SME Development Programmes and Potential Areas for Cooperation with IDB
Member Countries
147. The following are the main SME development programs In Malaysia that can be
offered to IDB member countries under the Reverse Linkages.
66

Figure 6.2. New Framework of the SMEs under 10 th Malaysia Plan and the New Economic Model
Source: SME Corporation Malaysia (2011)
Business Accelerator Programme (BAP)
Enrichment & Enhancement Programme (E²)
1-Innovation Certification for Enterprise Rating & Transformation (1-InnoCERT)
SME Competitiveness Rating for Enhancement (SCORE)
The National Mark of Malaysian Brand
Enterprise 50 Award Programme
Malaysia-Japan Automotive Industries Cooperation (MAJAICO A-1)
Brand Innovation Centre
SME Expert Advisory Panel (SEAP)
Skills Upgrading Programme
SME University Programme
Business Matching
(iv)
Promoting Halal Industry in IDB Member Countries
148. The Halal industry is emerging as one of the most lucrative and influential
market arenas in the world with $2 trillion business opportunities. Food related health
care and overall consumer demand have converged to push the Halal issue into the forefront
of consumer awareness worldwide. In fact, the most important engine of growth of the Halal
is a shift of perception. Halal food, for example, has been around for over fourteen hundred
years, but it is only in recent decade, and particularly in multi-cultural societies, that the
67

labeling and branding of Halal products has developed. Obviously, Halal is no longer just a
purely religious issue; it is becoming a global symbol for quality assurance and lifestyle
choice. The global market for Halal goods and services is developing into a powerful force in
the arena of world commerce and finance. Halal products and Islamic financial services
represent a combined strength of over $2 trillion annually, and market monitoring indicates
that the current strong growth trends can be expected to continue over the next five to ten
years. 28 Countries across the globe, Muslim and non-Muslim alike, have boosted income from
food exports by joining a growing consumer market force particularly Muslim and those who
needs extra guarantees on food safety and quality products.
149. Malaysia has managed to secure a significant market share worldwide. There are
4,785 Halal certified companies (small scale, medium-scale and multinational companies) in
Malaysia. The country’s Halal exports increased from MYR23.1 billion (3.6% of global Halal
products) in 2010 to MYR35.4 billion (5.1% of global Halal products) in 2011 (Figure 6.3).
Major share in Halal exports were of the SMEs (75% of all exporters). 29 Seeing the potential,
even non-Muslim countries have started to take important steps to produce food and non-food
in conformity with the standard. The Halal standard does not cover just food. It also has rules
regarding the transporting, packaging, labeling and logistics of foods; preparation procedures
are also analyzed to ensure their accordance with Halal standards, the Malaysian Certification
Scheme for Hazard Analysis and Critical Control Point (HACCP) in food industries, Good
Figure 6.3. Exports by Halal Certified Companies in Malaysia, 2010 and 2011
28 The Asian World Street Journal, 2005.
29 Presentation by the CEO, Halal Industry Development Corporation (2011), Malaysia, in IDB Headquarters,
Jeddah, Saudi Arabia (24 April 2012)
68

Manufacturing Practices (GMP) certification scheme for manufacturers of food products and
food related products and other recognized safety/quality standards and compliances. These
standards are applied to food processing plant, hotel operations, pharmacies, cosmetics,
medical and many other businesses. The growth of Halal food market represents a significant
potential for international companies, not only in Muslim countries but also, in western
markets with significant and growing Muslim populations among whom Halal observance is
on the increase.
Halal Industry Policies in Malaysia
150. Malaysia has aspirations to become a global hub for the production and trade of
Halal products and services, as outlined in the Third Industrial Master Plan (IMP3)
2006-2020. As a modern Islamic country at the forefront of economic development, Malaysia
has unparalleled potential. With a progressive living and operating environment boasting
political stability and consistent economic growth, Malaysia is fast becoming a business hub
Halal industry as it has unique advantages in developing and promoting Halal products and
services industry for following reasons:
Free Market
151. Malaysia is a progressive Islamic country. It is business-friendly to Muslims and non-
Muslims alike, making it a Halal industry advantage. From Halal product traceability to
Islamic finance facilities, Malaysia is able to provide end-to-end Halal services. Furthermore,
Malaysia strategically located country within Asia Pacific, providing easy in-roads emerging
markets in Asia and a total population larger than 500 million. Halal business owners will
enjoy easier trade and market access to IDB/OIC member countries.
Full Government Support
152. Malaysia has a pro-business Government, offering tax and other investor incentives.
In a bid to create a conducive operating environment, the Government has introduced policies
and an efficient institutional infrastructure to develop Halal industry.
Rich Talent and Skills
153. The Malaysian talent pool is rich with young, educated and productive workers with
skills necessary for science- and service-based industries. With Malaysia being a multi-racial
and multi-lingual country made up of predominantly Malays, Indians and Chinese, Halal
business owners will find no shortage of bilingual talent skilled to enrich trade relations with
IDB MCs and non-MCs.
Strong Infrastructure
154. The topography of Malaysia's economic landscape is made up of strong infrastructure
such as a network of well-maintained highways and railways that links to efficient seaports
and world-class international airports. With Malaysia's commitment to industrial development
and free trade, the Government has established five Economic Growth Corridors, in addition
69

to over 200 industrial estates or parks and 13 free industrial zones. And as part of HDC's
initiatives, Malaysia is also home to one of the world's first Halal Parks.
Halal Certification Value Chain
155. Malaysia is positioning itself to be the Halal food hub centre by 2010. The Malaysian
Standard Halal Food (MS1500:2004) has been cited by Codex Alimentarius Commission as
the best example in the world in terms of justification of Halal food. The Malaysian Halal
Certification for food and other consumable goods issued by the Islamic Development
Department Malaysia (JAKIM) and State Islamic Religious Council (JAIS) is also highly
recognized and recommended in the international market. Despite its size, Malaysia is the
only country whose Halal certification is issued by the Government, unlike in other countries
whose certifications are endorsed by their respective Islamic associations. JAKIM’s Halal
logo is now among the most widely recognized and respected symbols of Halal compliance in
the world. The launching of the Malaysian Halal Standard (MS1500:2004) in August 2004
further demonstrates the Government’s commitment to the creation of clear and practical
guidelines for Halal compliance. This MS1500:2004 is developed in accordance with ISO
methodologies and is the first Halal Standard developed by a Muslim nation. After several
years of dedicated hard work, the National Body of Standardization and Quality (SIRIM) has
completed the “Malaysian Standard MS1500, General Guidelines on the Production,
Preparation, Handling and Storage of Halal Foods”, which includes compliance with Good
Manufacturing Practices (GMP) and Good Hygiene Practices (GHP). This new standard will
further strengthen Malaysian Halal certification which is already the longest established and
most widely recognized registered Halal logo in the world.
Halal Park (or Halal Hub)
156. Malaysia plans to become a global hub for Islamic Halal food by 2010-2012, using its
edge over other Muslim nations in trading, logistics, banking and Halal certification
(NewsEdge, 2006). Halal Hub or also known as Halal Park is a concerted effort among the
Islamic organizations/bodies such as Halal manufacturers, Halal traders, buyers, and
consumers from all over the world. To be the central trading hub for Halal products, Malaysia
is intelligently marketing itself and achieving Halal-hub main objective of providing a
credible platform in connecting global markets. The Malaysian Government in its 2006-2010
national economic development plans talks about creating a nodal agency to promote the
country as a centre for Halal foods that meet Islamic dietary requirements and the religiously
approved way of slaughtering animals. Malaysia certification standard for Halal food
moreover is widely recognized. In addition, it has a highly developed logistics network
including ports, and is fast becoming a hub for Islamic financing (Bernama, 2006). There are
various opportunities available in the Halal parks for investors. These includes industrial land
to be purchased and to be leased, ready built factories and tax free incentives for investors in
HDC designated Halal parks (HALMAS status). The incentives are eligible for park
operators, Halal logistic operators and industrial players who are involved in 4 promotional
Halal activities namely meat and livestock; specialty processed food; Halal ingredient;
cosmetics; and personal care. 30
30 Halal Industry Development Corporation, Global, Malaysia.
70

Potential Opportunities for Halal Industry for IDB Member Countries
157. During 2-7 April 2012, the Government of Malaysia and the Private Sector
hosted “Malaysia Halal Week 2012” in order to strengthen Malaysia's position as an
International Halal Hub. Three major events namely Malaysia International Halal Showcase
(MIHAS); World Halal Research Summit (WHRS); and 7th World Halal Forum 2012 (WHF)
were held. These events brought thousands of delegates and exhibitors from over 50 countries
to promote global Halal industry; discuss issues and challenges facing the industry and share
best practices and experiences; and promote R&D in the Halal sector (Figure 6.4).
HDC Offerings
Figure 6.4. Potential HDC Offerings in Halal Industry
Programs Objective Offerings
Halal Business
Transformation
• Assist Halal companies increase
competitiveness, sales and export
performance
• Halal best practices
• Halal industry linkages
• Halal business mentoring
• Halal market access
• G to G Halal business development
Global Halal
Support Centre
• Make Malaysia as the global halal
reference centre
• Knowledge management and database
• Trading portal
• Knowledge dissemination
• Customer support
• Gap analysis
Training and
Consultancy
• Increase understanding about Halal
matters and capabilities of Halal
industry players.
• Public awareness
• Technical consultancy for industry players
• Halal education for students
Halal Parks
Development
• Promote Halal Parks as the
preferred location for Halal
establishments
• Investment promotion
• Incentives
• Upgrading and maintenance
• Facilitate development of value add services
i.e. shared laboratory etc.
Source: Presentation by the CEO, Halal Industry Development Corporation (2011), Malaysia, in IDB Headquarters, Jeddah,
Saudi Arabia (24 April 2012).
158. In an effort to increase Malaysia’s competitiveness in the Global Halal Market
particularly for inward and outward investment into the country under win-win situation, IDB
71

member countries can be provided technical know-how and incentives be granted to
companies operating in the designated Halal Park. Further, in an effort to promote Halal
Industry and Halal supply chain, the incentives can be broadened for the logistic operators
from IDB MCs and non-MCs.
(v) Enhancing Innovation Exchange among IDB Member Countries 31
Importance of Innovation Exchange
159. The changes that the world is experiencing today are largely a result of an accelerated
pace of innovation, which can lead countries out of their “locked space” and propels them
forward, thereby increasing both their economic status as well as the quality of lives of their
citizens. The main theme of the New Economic Model initiated by the Malaysian
Government is to create innovation-led economy.
Malaysian Government’s Role in Innovation Ecosystem
160. The Government of Malaysia is an important component of the innovation
ecosystem. It has embarked on a Transformation Programme and this is already beginning to
show favourable results. The Government is aware that it has to bring ‘Innovation into
Government and Government into Innovation’. This involves every level of the public sector
– from the highest to downwards. Decision makers in government have become conversant
with innovation and are formulating frameworks, regulations and policies that support
innovation.
Formation of a New Unit in Prime Minister’s Office, called UNIK (Unit Inovasi
Khas)
161. The Malaysian Government formed a new Unit under the purview of the Prime
Minister’s Office, called UNIK (Unit Inovasi Khas). This Unit has begun identifying
solutions to address the gaps in the innovation ecosystem. The UNIK will be examining all
the areas of the ecosystem – Government, universities, the education system, funding and
skills.
Agensi Inovasi Malaysia (AIM) Act 2010
162. For Malaysia to achieve high income and advance country status, it must be able
to compete regionally and globally, which is only possible through innovation. In order
to enhance innovation and R&D, the Agensi Inovasi Malaysia (AIM) Act was passed on 21
December 2010 by the Parliament and was operationalised on 15 April 2011. The main
objective of the AIM was to design programmes and activities to enhance innovation, and
commercialize new products. As a result of the Government’s efforts, the number of
trademarks and patents registered domestically increased 55.4% during the first eight months
of 2011 compared to 14.7% in the corresponding period of 2010.
31 Sources: Special Innovation Unit (UNIK), Prime Minister’s Department; National Innovation Foundation; Tenth
Malaysia Plan; Malaysia Budget 2012; Economic Planning Unit; Ministry of Science, Technology and Innovation;
and Malaysia Technology Development Corporation (MTDC).
72

Innovation Exchanges among IDB Member Countries
163. The New Economic Model charts the way forward for Malaysian and sharing its
experiences with other countries. To achieve the bold ambitions targets that have been set out,
Malaysia plans to change the way it has been doing things – country must innovate. Malaysia
has achieved tremendous success so far in terms of innovation, but it needs to intensify its
innovation skills. However, the innovations achieved so far can be shared with the IDB
member countries.
(vi)
Getting Benefits from Trade and EXIM Activities
164. Under the Economic Transformation Program (ETP), which is a comprehensive effort
spearheaded by the Performance Management and Delivery Unit (PEMANDU), 12 National
Key Economic Areas (NKEAs) have been identified to transform Malaysia into a high
income nation by 2020. The NKEAs which include electrical and electronics, business
services, and wholesale and retail trade are expected to make substantial contributions to
Malaysia’s economic performance. The private sector will continue to assume the main role
in driving economic growth. To facilitate private sector participation, Ministry of
International Trade and Industry (MITI) is redoubling its efforts to further improve
Malaysia’s business environment by introducing more pro-business policies and reviewing
and updating existing business rules and regulations. The private sector is trying to enhance
competitiveness by continuously improving its products and processes, and by being
innovative and efficient.
165. The Government will continue to steer the nation towards a high income
economy through knowledge-driven and high technology industrial base. The focus will
be on attracting quality investments and encouraging existing industries to shift from lower
value added products and services to reinvesting in higher value added and knowledgeintensive
products and services. The emphasis will be on creating quality jobs, linking with
local suppliers and contributing to export growth. These efforts are in line with the National
Economic Model (NEM) aiming to transform the Malaysian economy to become one with
high incomes and quality growth by 2020.
Malaysian Trade Experience as a Model for IDB Member Countries
166. The launch of the Business Strategic Plan (BSP) 2011-2015, charts a new
milestone for the Malaysian External Trade Development Corporation (MATRADE).
The BSP provides a 5 year strategic plan to govern the organisational direction of
MATRADE towards transforming the organisation into a credible, client centric and value
creating Trade Promotional Organisation (TPO). The BSP will be used as a tool to position
MATRADE as an effective trade promotion agency and to provide an important platform for
MATRADE to improve its core business areas and operational processes including
identifying appropriate measures to remedy any weaknesses. Over the next 5 years, under the
BSP, MATRADE will adopt and implement 6 Strategic Pillars (SPs) containing 20 Strategic
Initiatives (SIs). These strategic initiatives cut across various areas of the organization,
ranging from exporters’ development and export promotion, information and communication
technology, human capital development and processes improvements (Figures 6.5 and 6.6).
73

Figure 6.5: MATRADE Business Strategic Plan (2011 - 2015)
Source: MATRADE Business Strategic Plan (2011-2015)
Figure 6.6: MATRADE Thought Process Chart for Business Strategic Plan
Source: MATRADE Business Strategic Plan (2011-2015)
Malaysia’ to Help Achieving Intra-OIC Trade Target
167. It is imperative that Malaysia work closely with the IDB/ OIC member states in
achieving OIC-Intra trade target of 20% by 2015. The Malaysian Business Strategic Plan
74

can play a synergistic role to ensure the OIC aspirations are achieved. Malaysia can further
enhance its trade, particularly intra-trade with other IDB member countries by promoting
Reverse Linkages. With respect to intra-trade, it increased slowly i.e. 7% in 2004 to 10% in
2010, much below the intra-OIC trade target of 20% to be achieved by 2015.
(vii) Benefitting through Malaysian Technical Cooperation Programme 32
Malaysian Technical Cooperation Programme
168. The Malaysian Technical Cooperation Programme (MTCP) was launched in 1980 to
promote and facilitate technical cooperation amongst developing countries through the
sharing of Malaysian experiences and successes in various fields. The MTCP was officially
launched on 7 September 1980 at the Commonwealth Heads of State Meeting in New Delhi,
India, to signify Malaysia’s commitment to South-South Cooperation (SSC). The Economic
Planning Unit, which is the national focal point for all technical cooperation, was initially
responsible for the administration and coordination of MTCP activities but Since January
2010, the MTCP activities have been taken over by the Ministry of Foreign Affairs. Since its
inception, the MTCP has expanded in terms of its scope and coverage with emphasis on the
exchange of development experience. More than 2,000 participants from 135 member
countries come to Malaysia annually under the MTCP. Currently, the MTCP has a
membership of about 13,400 alumni worldwide. About 130 short-term specialized courses are
Figure 6.7: Number of MTCP Participants (since inception in 1980)
Source: Economic Planning Unit, MTCP, Ministry of Foreign Affairs, Malaysia, 2011
32 Sources: Sixth, Seventh, Eighth, Ninth and Tenth Malaysia Plans; UN Millennium Development Goal Report;
Malaysian Technical Cooperation Programme (MTCP) Report of the Ministry of Foreign Affairs, Malaysia; and
Economic Planning Unit Reports (1994 – 2010).
75

offered by the 35 MTCP training institutions, many of which are centres of excellence for
training, with the aim of building human capital in other developing countries (including IDB
member countries (Figure 6.7).
169. Malaysia has a wealth of development experience to share with other developing
countries, especially specific areas in which Malaysia has strengths and expertise. South-
South Cooperation (SSC) provides a “smart partnership” framework for Malaysia to share its
development experience and expertise under the MTCP with other developing countries in
line with the policy of “prosper thy neighbour”. The creation of the MTCP is seen as a vehicle
for sharing Malaysia’s development experience with other developing countries, especially in
specific areas where it has strengths and expertise. The MTCP was part of the strategy and
commitment of the Government to promote Technical Cooperation among Developing
Countries (TCDC), strengthen bilateral, regional and sub-regional cooperation, and nurture
collective self-reliance among developing countries. The establishment of the MTCP is a big
step forward for Malaysia, as it signifies the country’s willingness to assist other developing
countries in their efforts at developing their economies. It has provided the Malaysian
Government with an instrument to further Malaysia’s commitment in the international arena
to play a leading role among developing countries. The main objectives of the MTCP are the
following:
Share Malaysia development experience with other developing countries
Promote South-South Cooperation based on collective self-reliance and selfsufficiency
Strengthen bilateral relations between Malaysia and other developing countries and
cooperation partners
170. Malaysia’s main objective in initiating the programme is to strengthen its
relationship with other developing countries through trade and industry and to provide
assistance in selected areas. To reflect the spirit of partnership and cooperation among
developing countries, the MTCP which changed its name in 1983 from the Malaysian
Technical Assistance Programme (MTAP), signaled a departure from donor-recipient
relationship to a partner-in development approach. This is consistent with Malaysia’s strong
support of SSC and Technical Cooperation among Developing Countries (TCDC), based on
the principle of equality and mutual benefit. Furthermore, Malaysia recognises that TCDC
can play a significant role in achieving the international development goals, including MDGs.
171. In the true tradition of SSC, MTCP provides a channel for developing countries to
study each other’s experience in nation building. At its inception, the MTCP was confined to
ASEAN, OIC and Pacific Island countries. The Programme was later expanded to include
many other developing countries, particularly those that are categorised as economies in
transition.
172. The identification and prioritisation of countries to be participants of the
MTCP’s technical cooperation is based on three major considerations, i.e. political,
economic and humanitarian. When MTCP was first launched, countries which had friendly
diplomatic relations with Malaysia and it had a political interest in regions such as ASEAN
and OIC countries, Pacific islands and other developing countries in the Asia Pacific region,
were targeted to enhance bilateral relations between Malaysia and these countries through
76

development cooperation. Apart from diplomatic and political considerations, countries
considered as potential new markets for Malaysia’s goods and services were identified as the
MTCP recipient countries. MTCP’s assistance was also based on humanitarian in nature, to
provide emergency relief assistance to countries that have experienced calamities and turmoil
such as Mali, Bosnia & Herzegovina and Timor Leste.
173. A review of the thrust and direction of Malaysia’s experience in technical
cooperation reveals SSC as one of its significant features, and the role of the MTCP in
promoting cooperation among developing countries. The creation of the MTCP is seen as
a vehicle for sharing Malaysia’s development experience with other developing countries,
especially specific areas in which Malaysia has strengths and expertise. The Programme was
part of the strategy and commitment of the Government to promote TCDC, strengthen
bilateral, regional and sub-regional cooperation, and nurture collective self-reliance among
developing countries. The establishment of the MTCP is a big step forward for Malaysia, as it
signifies the country’s willingness to assist other developing countries. It has provided the
Malaysian Government with an instrument to further country’s commitment in the
international arena to play a leading role among developing countries.
Funding Modalities of MTCP
174. Malaysia’s own development experience and experience as a recipient of ODA put
the country in good position to implement SSC under the MTCP. Launched in 1980, the
MTCP aims to promote technical cooperation between Malaysia and other developing
countries based on the concept of self-reliance. Bilateral in nature, the MTCP is designed to
assist developing countries through the sharing of the development experiences of Malaysia
in areas where it has a comparative advantage. The Programme is mainly aimed at
improving national capacity, human resource development, policy reform and
governance. More importantly, the Programme encourages the exchange of relevant
experience, pooling and sharing of resources and development of complementary
capabilities.
175. Since the inception of the MTCP, a total budget of approximately MYR600 million
has been allocated for the Programme to-date. As in the case of Programmes under the Five
Year Malaysia Plans, the MTCP budget operates on a rolling plan. This enables the
Programme to be flexible, responsive and adjustable. Although, small when compared to
donor budgets, the MTCP budget has steadily increased from MYR45 million during the
Fourth Malaysia Plan period (1980-85) to MYR200 million under the Ninth Malaysia Plan
(2006-2010), a more than four-fold increase. Of this, three-quarters of the budget has been
allocated for human capital development.
176. Rapid changes in the global environment urge that the MTCP have to be
relevant to the needs of recipient countries. Under the Programme, courses usually
conducted for a period of three years. The implementing agencies take into consideration
feedbacks from participants at the end of each course to improve the Programme. In addition,
there has been constant revision and expansion of its existing courses and regular designing of
new courses particularly in the technological fields to meet the changing needs of the
developing countries. Apart from the planned training courses, the MTCP has been able to
design and offer specially-tailored courses to address the specific needs of countries as in the
77

case of the economies in transition. These special courses are based on the priorities of the
requesting countries.
177. MTCP interventions focus primarily on capacity building and human resource
development. These are made available at all levels: for individual (through long-term and
short-term courses); for organisations (through attachment of officials with relevant agencies
and assignment of experts to assist organisations); and for institutional policy (through
advisory services in response to requests). This broad approach has enabled the Programme to
reach out to a large number of developing countries.
178. The MTCP currently services 138 countries in 10 different regions (ASEAN,
SAARC, CIS, East and Central Europe, North and West Africa, Africa, Pacific, Islands,
South America, and the Caribbean). Overall, the MTCP initiatives have been well-received
by a large number of developing countries. The Programme has also attracted interest of
donor countries and multilateral organisations. Despite its limited budget, the MTCP has
managed to reach out to a large number of developing countries. Since its inception, the
MTCP has grown in depth as well as in coverage. As at end of 2011, cumulatively 1,004
programmes have been arranged by the MTCP (Figure 6.8).
180
Figure 6.8: Number of MTCP Programmes since 1980 (Inception)
160
140
Number of MTCP Courses
120
100
80
60
122
136
156
146
119 118
40
20
36 42 47
54
28
0
1980 - 1985
(4MP)
1986 - 1990
(5MP)
1991 - 1995
(6MP
1996 - 2000
(7MP)
2001 - 2005
(8MP)
2006 2007 2008 2009 2010 2011
Year
Source: MTCP, Ministry of Foreign Affairs, Malaysia, 2011
Review of MTCP since its Inception
179. Overall, the response and interest for all the modalities of MTCP have been
positive. However, the MTCP recognises that the impact and sustainability of the
Programmes have been variable. In terms of output, the modality that was the most successful
has been the human resource development programmes through the short-term and long-term
courses (Figure 6.9). The key success factors for the training programmes are largely
attributed to the experience of the Malaysian training institutions and their ability to design
and implement programmes that meet the priorities and needs of the developing countries.
78

Figure 6.9: Types of Programmes by MTCP, 2010
3% 3% 4%
1%
Short Term Courses
Long Term Courses
Study Visits / Attachments
Sending Experts
Project Type Assistance
Others
8%
81%
Source: MTCP, Ministry of Foreign Affairs, Malaysia, 2010
These implementing agencies are usually the primary/leading agencies in their respective
fields, carrying out activities in the domestic environment and they have been able to design
appropriate programmes/courses to meet the needs of the participating countries. In fact,
some of the implementing agencies are ranked high and well-regarded by their regional peer
organisations. Malaysia’s own experience of addressing issues pertaining poverty reduction
and economic growth puts the country in a good position to share their experiences with other
developing countries.
102. Feedback from many beneficiaries of training courses, i.e. ex-participants and
sending agencies from beneficiary countries, has been generally positive. It has been
acknowledged that the MTCP training has made a difference in many developing countries.
Overall, while most ex-participants found the courses relevant to their current needs and that
they are utilising the knowledge and skills acquired, the lack of equipment, budget and trained
personnel in their respective organisations has limited the impact, effectiveness and
sustainability of the training. The sending agencies also acknowledged that courses had
resulted in the introduction of new technology, improvement in human resource and capacity
development. The training attended by their staff was relevant to the daily needs of the
organisations and that the skills and knowledge acquired were being transferred to other staff
members through seminars, workshops and daily job functions.
Enhancing the Role of MTCP through Reverse Linkages
Recognition of contribution by participating countries/cooperation partners.
Enhanced relations with participating MTCP countries and cooperation partners
Fulfillment of the South South Cooperation commitment
Increased people to people exchanges, overall trade and investments relations
with participating countries
79

Key Challenges Facing the MTCP
Diminishing resources – need for optimization
Seeking best workable practice
Avoiding mismatch
Instituting workable post training M&E mechanism
(viii)
Sharing Information and Communication Technology
180. Malaysia's information and communication technology (ICT) industry is
expected to achieve a significant milestone in 2011 with the transformation of the
country into a net ICT exporter. In 2010, a number of key developments had clearly
signaled the Government's seriousness in transforming the country's economic framework to
meet the challenges of an innovative digital economy. The transformation of Malaysia into a
knowledge-based society using ICT as an 'enabler' across all economic sectors to drive the
country's productivity and innovations has created the country to become a vibrant hub for
creation of ICT solutions. Malaysia`s attractiveness as a regional/global Shared Services &
Outsourcing (SSO) hub is evident by many world-class companies like Affiliated Computer
Services (ACS), BMW, DHL, HSBC, IBM, Intel, Motorola, Nokia, Shell, Unisys and many
others that have set up their base of regional and global operations in Malaysia. Malaysia is
also an ideal location for most offshore activities ranging from the back office operations to
upstream activities such as research, design and development to downstream activities such as
marketing. Malaysia is in a strategic location for business process outsourcing and
information technology (IT) consulting services. The country's time zone is ideal for handling
transactions for many countries, offering quality skills and a multilingual workforce that is
proficient in English, Tamil and Mandarin. Malaysia has been ranked globally as the third
most attractive off-shoring location in the world by AT Kearney in 2004, 2005, 2007, 2008
and 2009. Shared services or outsourcing and off-shoring of business activities include
services for back office operations such as:
Contact centre operation and services
Data centre, disaster recovery and business continuity
Technical helpdesk and after-market services
Transaction processing services
Application management service
Financial analytics
Technology consulting and services
181. Four Malaysian outsourcing companies have been placed in a list of the world's top
100 service providers by 2008 Global Services 100 (GS100). There are approximately 170
Shared Services & Outsourcing companies in Malaysia.
80

Industry Strengths
182. A wide range of ICT services are offered by Malaysian companies in areas such as:
Mobile and wireless communication
Business application software development
Digital content development
Internet-based business applications in the financial sector
Shared services and outsourcing (SSO)
E-Commerce for networking and on-line transaction
Bio-informatics
Infra- and info-structure
E-Government
Creative multimedia content
Cloud Computing as a means to reduce operational costs, while increasing
mobility and productivity
Data centre and desktop virtualization
International Achievements
183. Among the ICT services exported include:
Implementation of the Islamic financing and credit management system in North
Africa
Supply of electronic passport issuing systems for the Government of Turkey.
Supply of e-Passport enrolment and issuance systems, public-key infrastructure
solutions and e-Passport personalisation equipment
Integrated Gate Management System and Flight Information Display System for
Boston-Logan International Airport, United States
Animation production for Combo Ninos for Disney/ Jetix, A Kind of Magic and
Milly Molly Seasons 1 & 2 for ABC Australia
Establishment of Security Operation Centre (SOC) with Benz International Tech
Distribution FZ LLC in Dubai
Transferring ICT Knowledge to IDB Member Countries
184. Malaysia is in a strategic location for business process outsourcing and information
technology consulting services. The country's time zone is ideal for handling transactions for
offering quality skills and a multilingual workforce that is proficient in English, Tamil and
Mandarin to many IDB member countries.
81

iii.
Conclusion
185. Above diagnostic analysis finds that Malaysia has huge potential of ‘Reverse
Linkages’ opportunities through which the country can transfer the knowledge and expertise
to other IDB member countries through win-win-win situation. In particular, IDB member
countries can benefit from Islamic financial system strengths; collaborate with Malaysia
Science Academy; gain from SMEs development experiences; promote Halal industry; get
benefits from EXIM expertise; benefit through Malaysian Technical Corporation Programme,
and sharing information and communication technology.
82