Like many other independent nations, Malaysia's economic policies were shaped by various events in the nation's history since independence.
Prior to the 1997 Asian Financial Crisis, the Malaysian ringgit was an internationalized currency, which was freely traded around the world. Just before the crisis, the Ringgit was traded RM2.50 at the dollar. Due to speculative activities, the Ringgit fell as much as RM5.00 to the dollar in matter of weeks. Bank Negara Malaysia, the nation's central banks decided to impose capital controls to prevent the outflow of the Ringgit in the open market. The Ringgit is not traded internationally, a traveler needs to declare to the central bank if taking out more than RM10,000 out of the country and the Ringgit itself was pegged at RM3.80 to the US dollar.
The fixed change rate was abandoned to floating exchange rate in July 2005, hours after People's Republic of China announced the same move. At this point, the Ringgit is still not internationalized. The Ringgit continue to strengthen to 3.18 to the dollar in March 2008. Meanwhile, many aspect of the capital control has been slowly relaxed by Bank Negara Malaysia. However, the government continues to not internalized the Ringgit. The government stated that the Ringgit will be internationalized once it is ready.
This affirmative action policy is a direct result of the May 13 Incident in 1969. Prior to the incident, the poverty rates among Malays were extremely high (at 65%) as was discontent between races, particularly towards the Chinese, who controlled 34% of the economy at the time.
Through NEP, Bumiputera quotas are placed in housing developments, scholarship admission and also for ownership of publicly listed companies. The quota system has been relaxed recently since the March 8 2008 General election. Bumiputera equity requirement for publicly listed companies has been relaxed since 12 November 2008 by allowing those companies to remove the quota once after IPO has been done.Further liberalization in the retail sector is expected to remove the present 30% Bumiputera listing requirements. According to the Secretary-General of Ministry of Domestic Trade and Consumer Affairs Datuk Mohd Zain Mohd Dom said, the amendments is reflective of Malaysia "moving towards progressive liberalisation"
The Malaysian New Economic Policy was created in 1971 with the aim of bringing Malays a 30% share of the economy of Malaysia and eradicating poverty amongst Malays, primarily through encouraging enterprise ownership by Bumiputeras. After 30 years of the program, the NEP had somewhat met some of its goals. Bumiputera ownership increased to 18.9% in 2004 against 2.4% in 1970 and poverty decreased to 8.3% in 2004 against 64.8% in the 1970s.
The NEP is accused of creating an oligarchy, and creating a 'subsidy mentality'. Political parties such as Parti Keadilan Rakyat and Democratic Action Party have proposed a new policy which will be equal for every Malaysian, regardless of race. When the Democratic Action Party was elected in the state of Penang in 2008, it announced that it will do away with the NEP, claiming that it "... breeds nepotism, corruption and systemic inefficiency".
The Malaysian government subsidizes and control prices on a lot of essential items to keep the prices low. Items such as palm oil cooking oil, petrol, flour, bread, rice and other essentials has been kept under market prices to keep cost of living low. In 2008, the government announced that it has spent RM40.1 billion in 2007 in subsidies to keep prices leveled.
Smuggling and hoarding, which leds to shortages, is a prominent problem in Malaysia due to the subsidies. For example, cooking oil is subsidised for domestic use only. This situation creates an environment where industrial players hoard domestic cooking oil for industrial use. During shortage time, such as the January 2008 cooking oil crisis, the government impose a 5 kg limit for each purchase to relief domestic demand. However, the limited purchase has created more panic buying, which prompt the Government to negotiate with cooking oil manufacturers to increase their production capacity, and situation revert to normal within one week time. example is where vehicles in Thailand come to Malaysia to smuggle cheap petrol and diesel out of the country. The government also looking into restructuring the fuel subsidy so that the selected needy group will get the subsidy. The government is considering to remove subsidy on diesel on general consumers while maintaining subsidies for the right groups, for example those involved in public transport.
On May 5, 2008 the Malaysia government raised the price of petrol by 41 percent from MYR1.92 to MYR2.70, (87 cents) a liter, or 10.23 Ringgit ($3.30) a gallon. The government stated that the spiraling fuel subsidy bill that could have been more than 56 billion Ringgit ($17 billion) this year due to rising world oil prices. Diesel prices also were raised upwards of 63 percent to 2.58 Ringgit (80 cents) per liter. In addition to the fuel hike, Malaysia also increased electricity tariffs starting in July by as much as 26 percent for some consumers. The government in the meantime promised cash rebates for owners of vehicles with engine capacities of 2 liters or less, and diesel subsidies for truck and bus operators. According to the Malaysian government the revised energy prices would save the government 13.7 billion Ringgit ($4.4 billion), part of which will be used to help subsidize rising food prices. Before the price revision, Malaysia was spending 7.5 percent of total economic output on fuel subsidy, the highest percentage in the world.
The government has considered to remove the subsidies but a formal plan had yet to materialized as of 2007. In 2008, the government is considering to remove price controls on construction materials such as cement and steel bars while banning exports to ensure steady supply. The government is experimenting with the idea through allowing Sabah and Sarawak construction players to import steel and cement since February 2008. The government then, on May 12, 2008 removed ceiling prices on steel bars and billets and removed import duties on selected items under HS Code 7214.10 110 and 7214.20 910, which do not fully cover steel bars use by the construction industry.The government then further liberalized the cement industry by abolishing ceiling prices on June 5, 2008.
Another strategic item which Malaysia is heavily subsidize but moving towards a market based approach is Natural Gas which is used in the industrial sector. Beginning July 1, 2008, the government is expected to reduce the gas subsidy 5% to 10% per annum over 11 years, in which the gas price will reflect market price.
The government owns and operates several sovereign wealth funds that invests in local companies and also foreign companies. One such funds are Khazanah Nasional Berhad which was established in 1993.Its objective is to help shape selected strategic industries in Malaysia and develop those investment for the benefit of Malaysia.The fund invest in major companies in Malaysia such as Proton Holdings in the automotive sector, CIMB in the banking sector, Pharmaniaga in the medical sector, UEM Group in the construction sector, Telekom Malaysia in the communications industry and many other companies in many other industries.It is estimated that the fund size of Khazanah Nasional stands at around 19 billion USD.
Another fund that is owned by the Malaysian government is the Employees Provident Fund which is claimed to be the fourth largest state run pension fund in Asia.Like Khazanah Nasional, the EPF invests and sometimes owns several major companies in Malaysia such as RHB Bank.EPF investment is diversified over a number of sectors but almost 40% of their investment are in the services sector.Fund size in 2007 is estimated at 100 billion USD.
Pemodalan Nasional Berhad is a major fund manager controlled by the Malaysian Government. It offers capital guaranteed mutual funds such as Amanah Saham Bumiputera and Amanah Saham Wawasan 2020 which are open only to Malaysian and in some cases, Bumiputeras. As of April 2008, it manages MYR120 billion of funds (36 billion USD), of which MYR76 million is unit trust funds.The fund manager is a sizable investor in strategic companies such as MMC Corporation Berhad, Maxis Communications Berhadand TM International Berhad among others.
Although the federal government promotes private enterprise and ownership in the economy, the economic direction of the country is heavily influenced by the government though five years development plans since independence. The economy is also influenced by the government through agencies such as the Economic Planning Unit and government-linked wealth funds such as Khazanah Nasional Berhad, Employees Provident Fund and Pemodalan Nasional Berhad.
The government's development plans, called the Malaysian Plan, currently the Ninth Malaysia Plan, started in 1950 during the British colonial rule. The plans were largely centered around accelerating the growth of the economy by selectively investing in selective sectors of the economy and building infrastructure to support said sectors. For example, in the current national plan, three sectors - agriculture, manufacturing and services, will receive special attention to promote the transition to high value-added activities in the respective areas. Other than the generalized plans like the Ninth Malaysia Plan, the government also have a development plan that are targeted to improve the manufacturing sector which is called the Industrial Master Plan. Currently, the plan is called the Third Industrial Master Plan (IMP3) which covers a period from 2006 to 2020. The industrial plans aim to make Malaysia a major trading nation and build up the country's economy and human capital.
Economic Planning Unit (Malay: Majilis Tindakan Ekonomi Negara), established in 1961 was instrumental in steering Malaysia to recovery from the 1997 Asian Financial Crisis. The unit is an agency under the Prime Minister's Department responsible for steering Malaysia's socio-economic development towards achieving a developed-nation status by the year 2020 through various measures such as preparing policies and strategies for socio-economic development, prepare medium and long term plans for the government and most importantly, advise the government on economic issues.
Government-linked investment vehicles such as Khazanah Nasional Berhad, Employees Provident Fund and Pemodalan Nasional Berhad invest and sometimes own major companies in major sectors of the Malaysian economy. For example, Khanazah Nasional is a major shareholder in Proton Holdings, an automaker and CIMB banking group in the financial sector.The government, however, is keen to sell stakes in their companies such as Malaysia Airlines to let the companies remain globally competitive