Country Economic Work for Malaysia - Islamic Development Bank

(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