GROUP PAPER

THE DYNAMICS OF EAST ASIAN DEVELOPMENT

Malaysia and the Global Financial Crisis

The Case of Malaysia as a Plan-Rationality State in Responding the Crisis

Dyah Ayunico Ramadhani (0706291230)

Erika (0706291243)

Muti Dewitari (0706165570)

DEPARTMENT OF INTERNATIONAL RELATIONS

FACULTY OF SOCIAL AND POLITICAL SCIENCES

UNIVERSITY OF INDONESIA

2010
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 CHAPTER 1

INTRODUCTION

1.1 Background
The subprime crisis that began in August 2007 in the USA has been labeled as the worst financial
crisis since the Great Depression by many including George Soros, Joseph Stiglitz, and the International
Monetary Fund. The housing burst in the US has led to a sequence of economic consequences in the US, and
then it has got transmitted to other economies, be it to developed and emerging economies. This crisis has
developed into the largest financial shock, affecting heavy damage on markets and institutions at the core of
the global financial system. The present financial crisis is very different from the one Malaysia experienced
in 1998. In 1998, Malaysia experienced a reduction in Gross Domestic Product (GDP) growth due to the
Asian Crisis which originated from Thailand. On the contrary, the present crisis did not start with Asia or
Malaysia, yet it is due to the weaknesses in the U.S. financial industry which escalated into an acute
international financial crisis and deep collapse in global trade by late 2008. The world‘s major economies—
particularly the US, the European countries and Japan—are experiencing the worst economic contraction
since the Great Depression of the 1930s.
Being a small open and export-dependent economy, Malaysia has not been separated from this
external shock. The negative shock was transmitted to the Malaysian economy in the fourth quarter of 2008.
Exports and industrial output‘s deteriorated, outflow of portfolio investments increased, and investments
declined. As a result, GDP growth in the fourth quarter of 2008 was significantly lower at 0.1% compared
with an average of 6% in the first nine months of the year. It is fortunate that Malaysian banking have tiny
exposure to securities linked to US subprime loans, Malaysia‘s financial institutions and banks are also in a
better shape than they were during the Asian financial crisis in 1997.1 However, many economists forecast
that though Malaysia may not perceive sharp downturns as compared with that of 1998, this may be a longer
recession than the recession of 1998.2
This paper intends to examine the impact of the global financial crisis on the Malaysian economy
sector (both in financial sector and in trade sector) and discusses several policy implications that Malaysian
government has adjusted in respond with the economy crisis in Malaysia.

1
―Bank Negara Malaysia, Annual Report 2008, accessed from http://www.bnm.gov.my/files/ publication/ar/en/2008/ar2008_book.pdf, on 29
April 2010, at 14.34
2
StarBizWeek, A roundtable discussion on the impact of the global crisis on Malaysia‖, 28th February 2009. Panelists are Tan Sri Lin See Yan
(former Bank Negara Deputy Governor), Professor Datuk Mohamed Ariff Kareem (MIER Executive Director), and Ms Tan Beng Ling
(Meridian Asset Management Sdn Bhd chief Investment officer).
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1.2 Research Question
This paper will try to answer this specific question: “How does the Malaysian government
responds through its policy in addressing the impact of the global financial crisis, both in the financial
sector and the trade sector?”

1.3 Theoritical Framework

1.3.1 Developmental State
―The issue is not one of state intervention in the economy. All states intervene in their economies for
various reasons. The question is how the government intervenes and for what purposes‖. 3 This is what
Johnson and Henderson wrote in their book called MITI and the Japanese Miracle. Furthermore, they
classified four different models of state‘s intervention in political economy sector, including market-
ideological, market-rational, plan-ideological, and plan-rational.
Market-ideological basically refers to the idea of how state merely allocates those resources and
responsibilities that have been traditionally under its control. National defense, internal security, and legal
structure that allow market to operate in a safe way. Policies are taken based on ideological dogma that
expressed by neo-classic and relatively impermeable to argument and empirical evidence which contradicts
its basic values.4
Johnson argues that market-rational5 is the first step of product of industrialization in terms of how
state‘s role to maintain competition, protect consumers, and so forth. States which acts as a market-rational
do not have any industrial policies, while in the other hand, efficiency and effectivity are important to be
stressed. State also stresses and decides the parameters in which private companies operate, while
investment, production, and distributional decisions are the preserve of those companies and their actions.
Plan-ideological in the other hand refers the model which state owns the productions. Resources
allocation is doing based on the state‘s plan rather than market operation. State‘s roles include redistributive
function where defined by the ideological dogma over empirical analysis. In the other hand, plan-rational is
the last step of industrialization process itself. The state led industrialization drive, that is, it took on
developmental functions. Plan-rational, unlike market-rational, urges state to have a dominant feature in
setting the substantive social and economic goals. The government will dive the greatest priority in domestic
industry and with promoting the structure that enhances the nation‘s international competitiveness that
implies a strategic, or goal-oriented approach to the economy.6
Unlike the plan-ideological, the economy in plan-rational holds by the private corporations who
compete with each others in market disciplined environment. More than just formulating the rules over
market like in market-rational, state intervenes to discipline companies, where necessary, in order to achieve
3
Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, (Stanford: Stanford University Press, 1992),
p. 32.
4
Ibid, p. 34.
5
Ibid.
6
Ibid, p. 38.
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national goals. Castell once said state can be classified as a developmental state if it establishes as its
principle of legitimacy its ability to promote and sustain development, understanding by development the
combination of steady high rates of economic growth and structural change in the productive system, both
domestically and in its relationship with the international economy. Ultimately, for the developmental state,
economic development is not an end but a means.
Johnson and Henderson said that East Asian countries can be classified as plan-rational model unlike
West countries that combine market-rational and market-ideological model.7 South Korea as written by Koo
is one of the Capitalist World‘s most tightly supervised economies, with the government initiating almost
every major investment by the private sector. The government regulates the flow of foreign capital through
its control of the banks, the level and use of foreign loans, and power to screen and monitor the activities of
MNCs and other foreign investors.8
Phil Deans in his article The Capitalist Development State in East Asia, stressed five important
points in developmental state, including separation between public and private, state‘s ideology and
capitalist consideration, development legitimacy, plan-rationality, and the autonomy of economy‘s
technocrats.9 Yet, in this paper, we will focus on the analysis of plan-rationality variable, which is the role of
the state in market planning and how it institutionalizes market. There is an identification over national
economic goals and how state do its parts and influence towards public and private sector in achieving those
particular goals. Furthermore, there is an unclear seperation between private and public since it is done by
purpose.

7
Chalmers Johnson, op.cit.
8
H. Koo, State and Society in Contemporary Korea, (Ithaca and London: Cornell University Press, 1993), p. 87.
9
Chalmers Johnson, loc.cit.
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 CHAPTER 2
CONTENT

2.1 Malaysia’s Financial Sector Model Before Global Financial Crisis

Pivotal to the development process for the financial sector was the Financial Sector Masterplan
(FSMP) that was issued in 2001. The FSMP's objective is to create a diversified, competitive, efficient, and
resilient financial sector that is able to facilitate the economic transformation process. To date, more than
90% of the recommendations under the FSMP have been implemented. The reforms and capacity building
measures implemented have resulted in the emergence of more resilient financial institutions that are well-
positioned to support the economy and compete meaningfully in a more liberalized environment key
financial indicators. Measures were also formulated towards developing a comprehensive and diversified
financial landscape to meet the changing needs of the economy Malaysian financial players and ensure
accessibility of financial services across all sectors of the economy.10

As the financial sector matures, greater competitive pressures were infused through progressive
liberalization that provides opportunities to strengthen economic linkages and promote greater regional
integration. The development of the financial sector also focused on modernizing the financial infrastructure,
enhancing financial inclusion and developing human capital. As a result of the initiatives taken to develop
the Malaysian financial sector, the financial sector has progressed beyond its role as an enabler of growth, to
become a driver and catalyst of economic growth. This has produced value-added business, attracted
investments and created employment both within the sector and spillover effects to other economic sectors.
Over the years, the contribution of the financial sector to gross domestic product has grown from 9.2% in
2000 to 11% in 2008.11
Since 2005, BNM and the government of Malaysia has focused on further strengthening the role,
capacity, and contribution of the financial sector in the economic transformation and, hence, the successful

10
―Financial Sector Development‖, accessed from http://www.bnm.gov.my/index.php?ch=236 &pg=762&ac=737&lang=bm, on 2 Mei 2010, at
17.41.
11
―Financial Sector Development‖, loc.cit.
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realization of strategies outlined in the Ninth Malaysia Plan. Liberalization in financial sector is taken in
order to catch up the economic growth itself. Trying to harmonize the current situation where changes
constantly happen, the responsibility in maintaining financial system ability is no longer the sole
responsibility of the Central Bank of Malaysia. The banking industry, together with its consumers,
shareholders, and other stakeholders are also accountable for their actions and share the task of maintaining
stability of the overall system.12
Malaysia has shown a high degree economic openness, especially on trade and cross-borders
financial flows. Based on the research by BNM, in 2004 in relative to 58 economies representing the 30
developed economies that make up the Organization for Economic Co-operation and Development (OECD),
as well as 28 emerging countries in the world, Malaysia has reached the third place of economic openness,
after Hongkong and Singapore. In significance, the research has also shown that Malaysia even has more
economic openness than developed economies, such as United States and Japan themselves. 13 The chart
meanwhile indicates that the degree of openness of the Malaysian economy has increased significantly over
time. It is highly likely that this evolution is an outcome of the structural changes occurring in the economy
arising from Malaysia‘s trade orientation, open current account and the liberalization of the capital account.
Thus, the domestic economy and financial system may have, over time, become more sensitive to external
developments as Malaysia became more integrated with the global economy. 14

2.2 Global Financial Crisis 2007 and Malaysia

2.2.1 Global Financial Crisis 2007
The year 2007 began favorably with international financial market conditions supported by a
broadly positive global outlook. Major economies were projected to sustain their expansion, while growth in
emerging market economies was expected to continue escalated. As a result, equity markets turned in a
vigorous performance in early 2007, with emerging market equities achieving new records. After several
years of robust growth, 2007 signified a pivotal turning point in the international economic and financial
environment. Financial market conditions turned rowdy as the recitation sub-prime and credit crisis in the
US spread across the major financial markets. This has been accompanied by the prolonged depreciation of
the US dollar vis-à-vis other major currencies, as well as the persistence of large global disparities and
surging food and commodity prices.
Concerns on the prospects of a prolonged decline in US house prices and the implications on the
US economy began to surface at the end of the first quarter of 2007. Few people attributes the global
financial crisis to the collapse of the housing prices and the sub-prime mortgage market in the US, yet other
people believe that the collapse of the housing prices and the subprime mortgage market were themselves

12
―Bank Negara Malaysia Annual Report 2005‖, accessed from http://www.bnm.gov.my/files/ publication/ar/en/2005/ar2005_book.pdf, on 30
April 2010, at 16.10.
13
―Bank Negara Malaysia Annual Report 2006‖, accessed from http://www.bnm.gov.my/files/publication/ar /en/2006/ar2006_book.pdf, on 2
Mei 2010, at 14.12.
14
Ibid.
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the consequences of another problem. The crisis‘ underlying cause was the (invariably lethal) combination
of very low interest rates and unprecedented levels of liquidity. 15 These low interest rates are reflected in the
US government‘s overly accommodating monetary policy after 9/11, by lowering the federal funds rate to
nearly one percent in late 2001 and maintained it near that very low level for three years. While the liquidity
is reflected on the ―global savings glut‖ phenomena, indicated by the enormous financial surpluses by
certain countries like China, Singapore and countries in Persian Gulf. These surpluses grew throughout the
world and then were consistently recycled back to the West in the form of portfolio investments. Huge
amounts of capital thus flowed into the weak borrowers around the world, including the subprime mortgage
sector in US.
This flood of mortgage money caused residential and commercial real estate prices to rise at
unprecedented rates. But like most spikes in commodity prices, this one eventually reversed itself—housing
prices have been falling sharply and so far there is no sign that they will bottom out.16 Countless subprime
mortgages that were structured to be artificially cheap began to convert to more expensive terms.
Innumerable borrowers could not afford the adjusted terms. Losses on these loans began to emerge in the
mid-2007 and quickly grew to staggering levels. 17 With prices in real estate and other asset values still
dropping, the value of these loans is continuing to deteriorate. Financial institutions are reporting continuous
losses; they mark down the value of a loan, only to mark it down again in the next. This self-reinforcing
downward cycle has caused markets to plunge across the globe. This credit freeze phenomena has brought
the global financial system to the brink of collapse. At the early stage, the impact of the sub-prime turmoil
was deemed to be limited within the financial markets. While liquidity conditions in most emerging markets
remained auspicious given their limited exposure to the US sub-prime assets and asset-backed securities
markets, the integration across financial markets did lead to a sharp sell-off in equities and selected
currencies in the Asia region.

2.2.2 Impact to Malaysia

Malaysia is an open economy that highly integrated with international market in terms of trade and
investment. Table 1 illustrates the degree of openness for Malaysia from 2001 to 2008. The openness ratio
(exports plus imports divided by nominal GDP) has been increasing from 2001 to 2008. From 2004 to 2008,
total trade was more than twice the size of the economy, indicating that Malaysia is one of the most
economically open nations in the world.18 According to statistic from MATRADE, Malaysia‘s main trading
partners in 2007 were US, Singapore, Japan, People Republic of China (PRC) and Thailand. In 2008,
Singapore recorded 13.1% of total trade with Malaysia; followed by Japan 11.6%, US 11.6%, PRC 11.0%

15
Roger C. Altman, ―The Great Crash, 2008: A Geopolitical Setback for the West‖ in Foreign Affairs 88 No. 1, Jan/Feb. 2009, p. 4.
16
Ibid.
17
Ibid, p. 5.
18
Ooi Shuat Mei, Global Financial Crisis: Implications on Malaysian Economy. Accessed from
http://www.globalresearch.com.my/main/papers/icber/PAPER_156_GlobalFnancial.pdf, accessed on 28 April 2010, 08.02.
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and Thailand 5.2%. 19 If trade flows of Malaysia with developed and developing nations of China and
ASEAN are taken into consideration, the extent of exposure of the Malaysian economy with crisis affected
developed and developing countries will be quite significant.
Table 1. Malaysia’s Trade Openness
Year Total Export (RM billion) Total Import (RM billion) GDP (RM billion) Trade Openness
2001 334.28 280.23 358.2 1.72
2002 357.43 303.09 377.6 1.75
2003 397.88 316.54 399.4 1.78
2004 481.25 399.63 426.5 2.07
2005 536.23 432.87 449.3 2.16
2006 588.97 480.77 475.2 2.25
2007 605.15 504.81 505.4 2.20
2008 663.49 521.61 528.8 2.24
Source: Department of statistics Malaysia, various years.20

From 2000 to 2005, Malaysia economy achieved an average real growth rate of 5.42%; the real
growth rates were further increased to 5.83% in 2006 and 6.18% in 2007. Up to the first half of 2008,
Malaysia was relatively unaffected by the financial turmoil. The effect of financial turmoil enters the
Malaysian financial and economic environment in the second half of 2008 and first quarter of 2009. In 2008,
the global economy is under threat of recession generated by the financial chaos from US. As a small open
economy that integrated with global market, Malaysia is not excluded from the financial chaos. The country
felt the impact in Q4 2008, with one of its lowest growths of 0.1%. This pulled down the economic growth
for the whole 2008 to 4.73%. In 2009, the impact of global financial crisis to Malaysian economy has been
deepened. Malaysian economy was announced to be in recession, with two quarters of negative growth. The
output declined with 6.2% and 3.9%.
Chart 1. Malaysia’s Quarterly GDP Growth, 2006-2009

Source: Bank Negara Malaysia, Quarterly bulletin, 2006-2009.

19
Ibid.
20
Department of Statistics, Malaysian Economic in Briefing 2008, (Kuala Lumpur: Department of Statistics Malaysia, 2009).
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The deteriorating GDP growth in Malaysia proved that the global financial crises has transmitted to
Malaysian economy. The distribution of global financial crisis in Malaysia is transmitted mainly through the
financial and trade channels.21

2.2.2.1. Impact on Malaysian Finance Sector

2.2.2.1.1. Capital Flows
Like other Asian countries, Malaysia experienced capital flight since the second quarter of 2008.
Banks and financial institutions in the US and the West trimmed down their international businesses and
focused on their home markets. There was a big drop in funds flowing into Malaysia (see Table 2) with net
financial and capital flows falling from negative RM37.8 billion in 2007 to negative RM123.9 billion in
2008.

2.2.2.1.2. Portfolio Flows

Of these capital flows, portfolio investments are the most volatile and noted the largest net outflow
of RM92.4 billion in 2008, compared to a positive net inflow of RM18.4 billion in 2007 (see Table 2).
Malaysia is one of the countries affected by portfolio investment outflows in 2008. 22 There is a massive
foreign participation in the Malaysian stock market. The reversal of the portfolio capital flows due to the
repatriation by foreign participants affected the stock market significantly.

Table 2. Financial Account in the Malaysia Balance of Payment, 2007-2008

2007 2008 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1
Financial Account -37,81 -123.90 26.45 -12.31 -61.48 -76.57 -29.7
Direct Investment -9.14 -20.50 -2.98 2.91 -18.97 -4.36 3.19
Abroad -38.22 -47.10 -6.33 -14.48 -19.5 6.43 0.43
In Malaysia 29.08 26.70 3.36 17.39 0.88 5.07 2.76
Portfolio Investment (net) 18.36 -92.40 21.07 -24.02 -56.18 -33.27 -12.15
Other Investment (net) -46.92 -11.00 7.56 8.84 13.79 -41.19 -20.8
Official Sector -5.79 -2.70 -0.71 1.61 -2.74 -0.86 -0.97
Private Sector -41.14 -8.30 8.28 7.24 16.53 -40.34 -19.8
Sources: Bank Negara Malaysia, Monthly Statistic Bulletin

2.2.2.1.3 Impact on Direct Investment

Another direct effect of the crisis is the possibility of a slowdown in the private investment sector.
In Malaysia, the growth rate of private investment for most of the sectors had actually altered into negative
in the fourth quarter of 2008, except for sales of commercial vehicles. This trend continued in 2009. Up to
the second quarter of 2009, all of the sectors have experienced negative growth. From Table 4, it is observed

21
W. E. James, et.all, ―The US Financial Crisis, Global Financial Turmoil, and Developing Asia: Is the Era of High Growth at an end?‖ in ADB
Economics Working Paper Series No.139, 2008.
22
Khor, M. 2009. ―How developing countries are hit?‖ in The Star (Malaysia), 9 March 2009.
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that some sectors suffered more than others. In this case, investment in the manufacturing sector experienced
the biggest decline. The current crisis has slowed down overall investment activities worldwide. The tighter
credit and sharp decline in company profits have been the driving force for the deterioration of investment
flows in Malaysia.

Table 4. Private Investment Indicators in Malaysia, 2007-2009 (% Annual Change)

2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Sales of passenger cars 70.9 -60.1 60.1 -55.3 13.0 20.3 11.2 13.3 5.4 -10.6
Capital goods (excl. transport -4.9 6.1 10.4 9.7 13.8 6.6 0.2 -8.9 -12.4 -18.0
equipment)
Machinery for industry -5.6 -1.0 8.1 32.1 20.2 9.7 15.8 -20.5 -45.9 n.a
Transport equipment -7.7 -38.7 95.3 78.6 -24.8 53.5 17.9 -36.2 38.0 -15.5
Impact of intermediate goods 9.0 6.5 -0.7 13.6 9.0 10.4 17.2 -12.2 -34.9 -27.1
Manufacturing projects approved 25.0 153.4 60.5 87.2 247.6 33.1 60.3 -47.8 -100.0 -50.5
by MITI

Private debt securities -9.5 133.3 52.0 255.0 60.4 -4.2 -8.8 -68.9 -7.4 -1.9
23
Source: UNDP Report

2.2.2.2 Impact on Malaysian Trade Sector: Reduction of Trade

The main spread channel was through reduction in export demand, which had spread to other
components of consumption and investment.24 Looking at international trade performance on the Chart 2
below, export in Q4 2008 contracted by 13.3%, indicating the slowed down in Malaysia‘s major export
markets. This was, however, offset by a 10.2% fall in import, and thus narrowed the negative growth in
Malaysian trade. Exports remained weak in the first quarter of 2009 with a contraction of 15.2%. Meanwhile,
contraction of import was further increased to 23.5% for this period. In Q2, the shock arising from external
markets was further deepened with reduction of export and import for 17.3% and 19.7% in Q2 2009.
Chart 2. Exports and Imports of Goods and Services

Sources: Department of Statistics Malaysia.25

23
UNDP Report, The Global Financial Crisis and The Malaysian Economy, Impact and Responses. (Kuala Lumpur: UNDP, 2009), p. 14.
24
Ooi Shuat Mei, op.cit., p. 3.
25
Department of Statistics, loc.cit.
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 The most worrying decline has been in manufactured exports, particularly electronics, electrical
machinery and appliances, that together account for 40% of Malaysia‘s exports. 26 In the Table 3, it is
observed that in the fourth quarter of 2008, total manufactured exports declined 20% quarter to quarter led
by semi-conductors and electronics. Agricultural and natural resource exports also fell as commodity prices
dropped. In the same period, palm oil exports dropped 32% and crude oil by 33% quarter to quarter.

Table 3. Gross Export of Manufactures Goods, Agricultural and Mining Commodities

2008
Sector Total 2008
Q1 Q2 Q3 Q4
Manufactures 111,474 131,367 138,711 110,376 491,930
Electronics 61,588 75,108 78,217 62,367 277,282
Semiconductors 17,251 26,659 26,375 19,532 89,819
Electronic equipment and parts 26,651 27,632 28,220 23,609 106,113
Electrical products 10,332 13,222 16,358 12,562 52,476
Resource-based products 31,011 35,426 37,985 28,104 132,529
Palm oil 10,587 12,592 13,504 9,271 45,953
Rubber 2,165 2,107 2,501 1,338 8,112
Crude oil and condensates 10,371 11,822 12,462 8,385 43,040
Liquefied natural gas 8,235 8,459 9,312 14,726 40,732
Sources: Bank Negara Malaysia, Monthly Statistic Bulletin

The external shock had depicted structural weaknesses in Malaysian economy. Trade openness is
crucial for economic growth, but being highly integrated to international market increases Malaysia‘s risk
arising from external volatility. Malaysian trade reliant on these markets is likely to explain the reduction in
exports for the period of 2008-2009. Given the fact that The United States remains one of the main trading
partners for Malaysia, an economic crisis in US will slow down the import demand of the US, and this will
in turn hit the economies of Malaysia.

2.3 Malaysia’s Policy Towards Financial Sector After Global Financial Crisis
2.3.1 The Stimulus Package
When the impact of the global financial crisis was finally starting to hit Malaysia in second quarter of
2008, the government started to give out its own stimulus package. On 4 November 2008, the Malaysian
Government announced the first economic stimulus package amounting to RM7 billion.27 The funds would
be allocated to projects which have a high and immediate multiplier impact on the economy. Furthermore,
several measures to directly support private consumption were also introduced, such as a reduction of

26
Goh Soo Khoon and Lim Mah Hui, ―The Impact of the Global Financial Crisis: The Case of Malaysia‖. Paper presented at the Conference on
the Effects of the Global Financial Crisis on Asian Developing Countries and Policy Responses and Lessons, held in Penang, Malaysia on 18-20
August 2009, organized by Third World Network and Consumers Association of Penang.
27
Bank Negara Malaysia, ―Annual Report 2008‖, loc.cit..
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Employees Provident Fund (EPF) contributions from 11% to 8% and higher vehicle loan eligibility for civil
servants.
Furthermore On March 10th Malaysia's government unveiled a stimulus program worth RM60
billion (US$16 billion).28 At around 9% of GDP, this is one of the largest fiscal packages relative to GDP to
be announced in the region, and it follows a RM7 billion package in November last year. According to the
reports, there are four part of spending outlined in the new package allocated for the year 2009 and 2010.29
Thrust 1 - Reducing Unemployment and Increasing Employment Opportunities amounting RM2
billion. Specifically aimed for Creating 163,000 training and employment opportunities, which are 100,000
training opportunities and job placements under collaborative effort between the government and the private
sector, and 63,000 staff to fill vacancies and serve as contract officer in various government agencies.
Thrust 2 - Easing the burden of the Rakyat, in particular, the vulnerable groups with the budget of
RM 10 billion allocated for: Providing subsidy to avert price increases of basic necessities, Increasing home
ownership; To issue Syariah-compliant Savings Bonds amounting RM5 billion (The bonds are available to
all citizens aged 21 and above, with a minimum investment of RM1,000 and maximum of RM50,000);
Improving public infrastructure; Providing basic amenities in rural areas especially electricity and water
supply, roads and it includes Sabah and Sarawak (RM580 million); Implementation of RM1.2 billion
infrastructure projects in Sabah and Sarawak including the expansion of Sibu Airport and deepening work at
Miri Port; Human Capital Development by building and improving school facilities especially in rural area
including Sabah and Sarawak (RM1.95 billion); Microcredit programs to assist farmers and agro-based
small businesses in rural areas (RM300 million); Initial allocation for Fishermen‘s Welfare Fund (RM2
million).
Thrust 3 - Assisting the private sector in facing the crisis with a budget around RM 29 billion to be
used for: Working Capital Guarantee Scheme (RM5billion) to provide working capital to companies with
shareholder equity below (RM20 million); Industry Restructuring Guarantee Fund Scheme for loans to
increase productivity and value added activities, as well as the application of Green Technology (RM5
billion); Reducing Cost of Doing Businesses; Facilitating Access to Capital Market; Attracting High-Net-
Worth and Skilled Individuals; Promoting the Automotive Sector; Accelerated Capital Allowance –
encourage businesses to invest; Carry Back Losses.
Thrust 4 - Building Capacity for the Future amounting RM 19 billion for: Investment by Khazanah
Nasional Berhad; Off-Budget Projects; Private Finance Initiatives (PFI); Liberalization of Services Sector;
Role of Foreign Investment Committee (FIC); Development of Creative Arts Industry; Effective
Management of Government Financial Resources; 25 billion ringgit in "guaranteed funds" for companies;
15bn ringgit in extra fiscal spending; 10bn ringgit in equity investments; and 10bn ringgit in off-budget

28
_____, ‗Surprise Stimulus: Malaysia's government plans to spend so much that an alarmingly high fiscal deficit will result‖ accessed from
http://www.economist.com/displayStory.cfm?Story_ID=E1_TPNSTPQR
29
____, ―Second Economic Stimulus Package (Mini Budget RM 60billion‖,
http://www.rangsanganekonomi.treasury.gov.my/index.php?option=com_content&view=article&id=59&Itemid=78&lang=en
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projects and other measures which the latter category includes some tax cuts, but there was no reduction in
personal or corporate taxes. At least some of the extra fiscal spending will go towards a number of new
major infrastructure projects, including new airport terminals. Much of the package is explicitly geared
towards shoring up employment; the government pledged to create 163,000 jobs or training positions,
including 63,000 government hires.
Under the second economic stimulus package, two loan guarantee facilities, namely the Working
Capital Guarantee Scheme and Industry Restructuring Loan Guarantee Scheme were established, to provide
working capital and to encourage investment by businesses respectively. In addition, the Financial
Guarantee Institution will also be established to provide credit enhancement to companies that raise funds
from the bond market. Taking into account the expectation of a deepening global downturn as well as the
support provided by the policy measures, real GDP performance in 2009 is projected to be between -1% to
1%.30 According to the annual report from Malaysian Government, domestic demand is expected to provide
the main support to the economy and is projected to record a positive growth, with public sector expenditure
and private consumption as the main anchors. Public sector expenditure is projected to increase substantially
following the implementation of the Government‘s stimulus measures, thus providing major support to the
overall economic growth in 2009. The policy responses will provide important support to household
consumption given the anticipated weakness in the labor market and relatively lower commodity prices.
Private investment is expected to slow in an environment of a more broad-based slowing of
economic growth. On the supply side, sectors that are directly exposed to the external demand will be
significantly affected in 2009. Output in the manufacturing sector is expected to decline due to the
contraction in the export-oriented industries as well as weaker support from the domestic-oriented industries.
The services sector is expected to still contribute positively to growth with continued expansion, albeit
moderately, given the weaker performance in the trade- related industries. The agriculture and mining
sectors will register negative growth due mainly to lower production of palm oil, rubber, and crude oil, in
part discouraged by lower prices. Meanwhile, the construction sector is expected to record a stronger growth,
benefiting from the implementation of projects under the two economic stimulus packages.
Dr Sulaiman said to the Asia One respondent that the first stimulus package, announced last year,
was to address the public sector expenditure. While the Second is aimed at boosting the private sector, and it
will definitely be more comprehensive than the first, covering more sectors, Economic Planning Unit
director-general Tan Sri Dr Sulaiman Mahbob said. 31 It was to minimize further damage to Malaysia's
economy by boosting domestic demand at a time when the crucial export sector has already been battered by
twin blows: falling commodity prices and the collapse of demand, particularly for electronics, in developed
markets. But if the government's unexpectedly large stimulus package will be welcomed by many, it will

30
Bank Negara Malaysia, ―Annual Report 2008‖, loc.cit.
31
____, ―Second Malaysian stimulus package is for private sector‖, accessed from
http://www.asiaone.com/Business/News/My%2BMoney/Story/A1Story20090221-123525.html
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also make a major dent in the country's finances. The government expects the extra spending to push the
fiscal deficit from 4.8% to 7.6% of GDP in 2009.32

2.3.2 Other Policy Response Coming from the Government

Monetary Policy Changes Overnight Policy Rate (OPR)

Bank Negara has announced monetary policy responses to the crisis by cutting the overnight policy
rate from 3.5 percent to 3.25 percent in November, 2008.33 The rate was further reducing to 2.5 percent in
January 2009. On 24 February 2009, Bank Negara announced the lowest rate of 2 percent and this has been
maintained until January 2010. The loosen interest rate policy is to facilitate the ability of banking sector to
lend money, boosting investment and economy activities. In line with the policy to increase the liquidity in
the market Bank Negara Malaysia has reduced the statutory reserve requirement from 4% to 3.5% effective
1 December 2008.
Furthermore, there was also a change of policy in the banking sector specifically upon the law of the
Central Bank. The Central Bank of Malaysia Act 2009 came into force 25 November 2009, giving Bank
Negara Malaysia (BNM) a more effective role in managing risks and challenges.34 The new Act provides
greater clarity on the central bank's mandate and vests it with the necessary powers and instruments to
achieve this mandate, which includes the formulation of the monetary policy by the Monetary Policy
Committee (MPC). The Act stipulates that monetary policy is to be autonomously formulated by the MPC
and effectively implemented by BNM also provides for an enhanced role for the Syariah Advisory Council
on Islamic Finance to facilitate consistent application of Islamic law on Islamic financial matters. Minister
of International Trade and Industry Datuk Mustapa Mohamed told the Dewan Rakyat that his ministry had
conducted an audit exercise on all companies that were holders of approved permits (APs) from August to
December 2008 and from March to June 2009. He said the audit exercise was to obtain information and
gauge the financial position and management of the companies that held APs. The results of the audit
exercise would guide his ministry in determining the number of open APs to be issued to such companies in
2009, Mustapa said.35 Not only that, a reform upon one of the most famous policy involving racial favoring
in the economy also planned to be terminated. On April 22nd 2009, the government announced plans to

32
―Surprise Stimulus‖, loc. Cit.
33
Ooi Shuat Mei, loc.cit.
34
The edge financial daily, ―Central Bank of Malaysia Act 2009 comes into force‖, accessed from http://www.theedgemalaysia.com/business-
news/154496-central-bank-of-malaysia-act-2009-comes-into-force.html
35
Yong Min Wei, ―RM6.8b from first stimulus package distributed‖, http://www.theedgemalaysia.com/political-news/16959-rm68b-from-first-
stimulus-package-distributed.html
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eliminate local-equity requirements for investment in sections of the services sector. Under the old rules,
companies in the sector had to offer a 30% stake to investors from among the Bumiputera (ethnic Malays
and other indigenous peoples). 36 Nevertheless now that it has been removed, the equality principles has
finally come across in the economy.
Meanwhile, with the risk of inflation receding rapidly, the easing of the monetary policy has been
front-loaded and directed towards supporting domestic economic activity by reducing the cost of
intermediation. Bank Negara Malaysia has reduced the Statutory Reserve Requirement (SRR) by 300 basis
points to 1.0%.37 In addition, several measures have also been introduced to ensure continued access to
credit as well as to minimize the impact of the economic downturn on specific affected groups. These
include the setting up of four new financing facilities to facilitate access to financing by the small and
medium enterprises and micro enterprises as well as measures by the financial institutions to lessen the
burden on the affected groups through loan restructuring.

2.4 Analysis of State’s Role in Responding the Global Financial Crisis

Analyzing the Malaysian government‘s role in operating the economic sector, and also responding
the crisis that hit the country, Malaysia has shown itself as a plan-rational country model, where state has
played a dominant and important role over the operation of economic sector, especially market itself.
Malaysia adopted strategies in order to increase the competitiveness of domestic economy over global
economy while in the same time; there is a blueprint over economic sector where the government would like
to achieve in certain years without neglecting the role of private sectors that are believed to work more
effective and efficient.
After the global financial crisis eventually hit Malaysia in certain areas after the second quarter of
2008, Malaysian government took action in order to recover its economy and back in track in achieving the
goals that have been formulated before. In this point, we can see how the development planning that has
been created by the state as a dominant actor was made in order to recover domestic economic‘s situation,
including the real and financial sector. First action that is taken is the stimulus package over several sectors
that are believed have significant contributions and have a multiplier impact on the economy. From the
previous part, they can be divided into 4 layers/thrusts as the main purpose of the stimulus action, which are
to reduce unemployment, opening new jobs opportunity, social service and income distribution, and even
giving an assistance to the private sectors in facing crisis. This stimulus action nonetheless is one of the
actions state possibly do in order to drive the economic situation back in track where a conducive and
comfortable environment of economy can be made. The government of Malaysia also took such action to
address the public sector expenditure in order to boost the private sector.

36
The Economist, ―Malaysia's reform drive: Economic reforms are being stepped up in Malaysia‖, The Economist 5th June 2009.
37
Bank Negara Malaysia, ―The Annual Report 2008‖, loc.cit.
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 Not only by giving a stimulus package in boosting the economy, the government of Malaysia has
intervened in area of policies, especially through monetary policy as a respond to the crisis itself. It is shown
on the cutting of overnight policy rate starts in November 2008. Furthermore, the government of Malaysia
also made some changes in banking sector specifically upon the law of the Central Bank, where the goals
are to provide a more dynamic environment for the BNM in managing risks and challenges. This is shown
by the new responsibility over the formulation of monetary policy itself. In the same time, the differentiation
over Bumiputera and other ethnics in Malaysia has been removed by the government, and the equality
principles has finally come across in the economy. This new changes can be shown as a new structural
reform towards economic sector where the government starts to give a bigger space and opporunities for
private sectors in economy.
With all the actions and policies that have been taken by the government of Malaysia as a respond to
the global financial crisis, we can see how Malaysia has followed the model of plan-rational with the main
variable of plan-rationality itself. This is shown in how state plays a significant role in the economy without
neglecting the interests of the state and private sectors. Market is not operating by itself, rather than
operating while the state plays its role as the ―driver‖, and it can be implemented through the policies that
are taken by the government as a mean to shape the operation of economic activities themselves. There is a
main goal that will be achieved in certain years, and how state plays its role in ―driving‖ and influencing
other actors, especially private actors, therefore each actor can move in the same direction and trying to
accomplish a same goal without neglecting each interests that may exist.

2.5 The Recent Condition of Malaysian Economy

There are several reports from the government of Malaysia concerning the current progress of the
economy. Some of which include macro economic indicators, the business indicators and also general
economic activity. If we conclude from the table below we could see that the GDP of Malaysia on the first
& second quarter of 2009 is still showing negative numbers. In fact as we see in the table, the trend of
diminishing of GDP has emerged since the second quarter of 2008.

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 Gross Domestic Product, Selected Economies, 2007-2009 (% Annual Change)

Gross financing by the banking system and the capital market was higher at RM68.8 billion in March. All
major loan indicators across both business and household sectors improved compared to the previous
month.38 In addition, following the increase in the OPR from 2.00% to 2.25% on 4 March, the average
overnight interbank rate traded higher and interbank rates of other maturities also rose accordingly. 39
Between 1 March and 29 April 2010, the ringgit appreciated by 6.3% against the US dollar. The ringgit also
appreciated against the Japanese yen (11.7%), euro (8.5%) and pound sterling (7.7%). Against regional
currencies (excluding the Remimbi), the ringgit recorded an appreciation within the range of 2.2% to 4%.
This resulted to the increase of Consumer Price Index (CPI) by 1.3% in March 2009 on an annual basis
(while February rise around 1.2%). Headline inflation was largely the result of price increases in the food
and non-alcoholic beverages category, and the slight rise in the housing, water, electricity, gas and other
fuels category. These were, however, off-set by a slower increase in price for transport and miscellaneous
goods and services categories.
Moreover according to the Business Tendency Survey Report, First Quarter 2010, the business
performance for the fourth quarter of 2009 showed an increase in gross revenue and employment. This was
indicated by net balances of +15.1 per cent and +1.4 per cent respectively of firms covered by the survey
which reported higher gross revenue and employment during the period. This means there is a positive
feedback coming from the economy.

38
―Monetary and Financial Developments in March 2010 Highlights of the Press Release‖, accessed from
http://www.bnm.gov.my/view.php?dbIndex=0&website_id=1&id=775, on 3rd May 2010, at 06.48.
39
Annual Report of Bank Negara Malaysia 2009.
Page | 16
 Based on the chart above, we could also see how after the decline in the second quarter of 2009 the
confidence indicator in bussiness sector has risen back into almost 10%. This might also be referred as a
positive comeback of investor coming to Malaysia. Since one of the pull factor of investor coming is also
about confidence, a raise in confidence might result in raise in bussiness situation. The Chart below is
showing to us the net balance of currest bussiness situation and bussiness situation for 6 months ahead. It is
greatly also showing a raise after the flunk around the first quarter of 2009. Although the net balance of
current bussiness situation still in a negative level, if this trands keep up it would certainly reach a positive
value around the second quarter of 2010.

In another report, it shows that the Coincident Index (CI), which measures current economic activity,
rose by 1.1% in February 2010.40 The main components that contributed to the increase were Real Salaries
& Wages in Manufacturing Sector (which raise around 0.6%) and Real Contributions to EPF (0.5%). The
six-month smoothed growth rate of the CI further increased to 7.0% in February 2010 compared with 5.6%
in the previous month. Although the growth rates always went up and down but the major down fall after the

40
Department of Statistics Malaysia, Malaysia Economic Indicators: Leading, Coincident, & Lagging Indices, Februari 2010
edition, accessed through http://www.statistics.gov.my/portal/images/stories/files/cli/CLI_Feb_10.pdf 2 May 2010 08.24
Page | 17
asian financial crisis in 1997-1998 was around the second quarter of 2009 (marked by the last shaded area).
The graphs show that right after it has fallen, it has also risen up again although in the last quarter it went
back down again. However it was more or less in a positive value.

The Six-Month Smoothed Growth Rates of Coincident Index, 1990-2010

Therefore, it can be concluded that the trend right after the big down turn in 2009 was an upright raise
of value. The confidence level went up again and also growth rates and GDP is also climbing up a stairs. It
may not yet gotten back to it original stats before the global financial crisis but as it was predicted by the end
of 2010 the economy should be getting back where it use to be.

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 CHAPTER 3
CONCLUSION

The financial crisis that started in United States of America, spread to the rest of the world, without
exception of Malaysia. It has proved how the economy has integrated one another, and how Malaysia has
taken a part of it. The economic openness of Malaysia to the global economy has turned Malaysia as one of
a country that might get hit from this crisis, in financial or even real sector themselves. The crisis started to
hit Malaysia in the second quarter of 2008, in two areas. First, the decreased of investment towards Malaysia
through capital inflows, portfolio inflows, and also direct investment. Datas have shown how the decreased
of the inflows on financial sector has given a significant effect on the economic activities themselves. In the
other hand, on the real sector, there is trade reduction because of the huge decline of international demand.
The decline of international demand then caused a significant deterioration in terms of total Malaysian
export. The contraction of Malaysian trade, which continues until the fourth quarter of 2009, has proved that
the external shock had depicted structural weaknesses in Malaysian economy. Trade openness is crucial for
economic growth, but being highly integrated to international market increases Malaysia‘s risk arising from
external volatility. Malaysian trade reliant on these markets is likely to explain the reduction in exports for
the period of 2008-2009. In this point, Malaysia‘s government then took action that can be classified into 2
types of action, including stimulus package and policy changes, in order to cope with the changes in its
economy. The stimulus package was brought in two flows of stimulus; the first flows of stimulus aimed for
the public sector whereas the second was more for the private and motivating the productivity of the
economy as a whole. Besides that policy changes in the rates and also terminating favourness for certain
ethnic in economy was also undergone in the name of encouraging investation and economic activity.
The action that have been taken by the Malaysian government has shown us that Malaysia as a
developmental state played a significant role in deciding and even intervening the economic activity.
Malaysia has followed the model of plan-rational with the main variable of plan-rationality itself. This is
shown in how state plays a significant role in the economy without neglecting the interests of the state and
private sectors. Market is not operating by itself, rather than operating while the state plays its role as the
―driver‖, and it can be implemented through the policies that are taken by the government as a mean to
shape the operation of economic activities themselves. There is a main goal that will be achieved in certain
years, and how state plays its role in ―driving‖ and influencing other actors, especially private actors,
therefore each actor can move in the same direction and trying to accomplish a same goal without neglecting
each interests that may exist.
The recent trend showed by the data in the previous section also has shown that cerently Malaysia has a
positive trend in the economy. Although it has not yet revive to its previous condition, there is nothing
wrong about being optimistic about the economy next year.

Page | 19
 BIBLIOGRAPHY

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Conference:
―A Roundtable Discussion On the Impact of the Global Crisis On Malaysia‖, 28th February 2009. Panelists
are Tan Sri Lin See Yan (former Bank Negara Deputy Governor), Professor Datuk Mohamed Ariff
Kareem (MIER Executive Director), and Ms Tan Beng Ling (Meridian Asset Management Sdn Bhd
chief Investment officer).
Goh Soo Khoon and Lim Mah Hui, ―The Impact of the Global Financial Crisis: The Case of Malaysia‖.
Paper presented at the Conference on the Effects of the Global Financial Crisis on Asian Developing
Countries and Policy Responses and Lessons, held in Penang, Malaysia on 18-20 August 2009,
organized by Third World Network and Consumers Association of Penang.

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