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Economy
The Malay Peninsula and Southeast Asia has become a center for trade for about centuries. Various materials such as porcelain and spice were actively traded before Malacca and Singapore rose to prominence.
In the 17th century, large deposits of tin were captured in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were produced for commercial purposes. Over time, Malaya became the world's largest maufacturer of tin, rubber and palm oil. These three commodities along with other raw materials firmly set Malaysia's economic tempo well into the mid-20th century.
In 1970s, Malaysia imitated the footsteps of the original four Asian Tigers and committed itself to a transition from being reliant on mining and agriculture to an economy that depends more on production. By means of Japan's assistance, heavy industries flourished and in a matter of years, Malaysian exports became the country initial growth engine. Malaysia consistently acknowledge more than 7% GDP growth along with low inflation in the 1980s and the 1990s.
During the same period, the government tried to eradicate poverty with a controversial race-conscious program called New Economic Policy (NEP).
The rapid economic boom led to a variety of supply problems. Labor shortages became apparent resulting in an influx of millions of foreign workers, not all of whom were legal. Outrageous mega infrastructure projects were proposed to alleviate the bottlenecks faced, mainly by cash rich PLCs and consortiums of banks eager to benefit from increased and rapid growth. This all ended when the Asian Financial Crisis hit in 1997, delivering a massive external shock to the financial system.
The year 1997 saw a very sudden and disruptive boom to bust transition caused initially by huge speculative short selling of currency, characteristic of the demolished in the region. Foreign direct investment fell at an alarming rate and Ringgit depreciated substantially from MYR 2.50 per USD to much lower levels (up to MYR 4.80 per USD at its bottom intraday) as capital flowed out from Malaysia and the rest of the region. The Kuala Lumpur Stock Exchange's composite index fell from approximately 1300 to nearly merely 400 points in a few short weeks. After the sacking of the ex finance minister Anwar Ibrahim, a National Economic Action Council was formed to deal with the monetary crisis. Bank Negara imposed capital controls and pegged the Malaysian Ringgit at 3.80 to a US dollar. Economic aid from International Monetary Fund (IMF) and World Bank was refused, surprising analysts unfamiliar with the nature of the crisis. The financial sector suffered massive retrenchment as the banking sector was forced to consolidate and bank licenses were withdrawn to prevent further reckless lending. Remaining banks were also allowed to recapitalise through Danamodal, while NPLs were discounted and bought off by Danaharta to provide for an orderly asset realization procedure.
In March 2005, the United Nations Conference on Trade and Development (UNCTAD) published a paper on the sources and pace of Malaysia's recovery, written by Jomo K.S. of the applied economics department, University of Malaya, Kuala Lumpur. The paper concluded that the controls imposed by Malaysia's government neither hurt nor helped that country's recovery. The chief factor was an rapidly increase in electronics components exports, which was caused by a large increase in the demand for components in the United States, which was caused, in turn, by a fear of the effects of the arrival of the year 2000 (Y2K) upon older computers and other digital devices.
However the post Y2K slump of 2001 did not affect Malaysia as much as other countries. This may have been clearer proof that there are other causes and effects that can be more properly attributable for recovery. One possibility is that the currency speculators had run out of finance after failing in their attack on the Hong Kong dollar in August 1998 and after the Russian Ruble collapsed.
Regardless of cause/effect claims, rejuvenation of the economy also coincided with huge government spending and budget deficits in the years that followed the crisis.(2% to 5% of GDP) Later, the country enjoyed faster economic recovery compared to its neighbors though in many ways, the level of pre-1997 affluence has yet to be achieved. The alternative claim is that pre 1997 affluence was fueled by an asset price bubble.
While the pace of development is not as frenetic, it is also seen to be more sustainable. And, although the controls and economic housekeeping may not have been the principal reason for recovery, there is no doubt that the banking sector is more resilient to external shocks. The current account has also settled into a structural surplus providing a cushion to capital flight. Asset prices also are a fraction of their heights pre crisis.
The fixed exchange rate regime was abandoned in July 2005 in favor of managed floating system within an hour of China's announcing of the same move. In the same week, Ringgit strengthened a percent against various major currencies and was expected to appreciate further. As of December 2005 however, expectations of further appreciation was quited as capital flight exceeded USD 10 billion.
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