Country Economic Work for Malaysia - Islamic Development Bank

(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
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