Country Economic Work for Malaysia - Islamic Development Bank

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(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
Page 4: Acknowledgements Appreciation for s
Page 7 and 8: ISRA : International Shari’ah Res
Page 9 and 10: (v) Foreign Direct Investment……
Page 11 and 12: (2005)), key insights emerged in tw
Page 13 and 14: drain. Further, the Government need
Page 15 and 16: macroeconomic indicators are given
Page 17 and 18: SMEs are concentrated in the servic
Page 19 and 20: easy technology adoption, pro-busin
Page 21: Kelantan with the lowest per capita
Page 25 and 26: that the Government’s Economic Tr
Page 27 and 28: (ii) Low Returns to Investments app
Page 29 and 30: Figure 1.22. Malaysia's Exports by
Page 31 and 32: 43. Malaysia’s private firms are
Page 33 and 34: over the medium-term. Several initi
Page 35 and 36: growth software compared to its maj
Page 37 and 38: esearchers and technicians in R&D p
Page 39 and 40: 59. Malaysia can further enhance it
Page 41 and 42: Annex Table 1.2. Malaysia: MDGs Ach
Page 43 and 44: 64. The Malaysian experience has al
Page 45 and 46: economic growth. The ETP is expecte
Page 47 and 48: 77. According to the Global Competi
Page 49 and 50: development of infrastructure throu
Page 51 and 52: a. Northern Corridor Economic Regio
Page 53 and 54: The challenge is for financial inst
Page 55 and 56: Original Equipment Manufacturing (O
Page 57 and 58: Intensify formalisation to promote
Page 59 and 60: Sukuk market has experienced unprec
Page 61 and 62: For innovation to become an importa
Page 63 and 64: y the United States (MYR2.3 billion
Page 65 and 66: (vi) (vii) Sharing Eexperience and
Page 67 and 68: institutions as well as Islamic pro
Page 69 and 70: Liberal Foreign Exchange Administra
Page 71 and 72: Issues/Challenges Facing the Islami
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Funding from Government of Malaysia
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programmes in the country. Initiati
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labeling and branding of Halal prod
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to over 200 industrial estates or p
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member countries can be provided te
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Figure 6.5: MATRADE Business Strate
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offered by the 35 MTCP training ins
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case of the economies in transition
Page 89 and 90:
Key Challenges Facing the MTCP
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iii. Conclusion 185. Above diagnost
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Country Economic Work for Malaysia - Islamic Development Bank

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