Country Profile 2002 Malaysia, Brunei This Country Profile is a reference work, analysing the countrys history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Units Country Reports analyse current trends and provide a two-year forecast. The full publishing schedule for Country Profiles is now available on our website at http://www.eiu.com/schedule The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom
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Country Profile 2002
Malaysia, BruneiThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.
The full publishing schedule for Country Profiles is nowavailable on our website at http://www.eiu.com/schedule
The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom
The Economist Intelligence Unit
The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.
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ISSN 0269-5588
Symbols for tables�n/a� means not available; ��� means not applicable
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5 Politics5 Political background7 Recent political developments9 Constitution, institutions and administration11 Political forces12 International relations and defence
15 Resources and infrastructure15 Population16 Education17 Health17 Natural resources and the environment18 Transport, communications and the Internet19 Energy provision
28 Economic sectors28 Agriculture29 Mining and semi-processing30 Manufacturing31 Construction32 Financial services34 Other services
35 The external sector35 Trade in goods38 Invisibles and the current account38 Capital flows and foreign debt40 Foreign reserves and the exchange rate
41 Appendices41 Membership of regional organisations42 Sources of information44 Reference tables44 Population44 Labour force44 Transport statistics45 Energy production45 Federal government finances46 Consolidated public-sector finances
46 Money supply46 Interest rates47 Gross domestic product47 Gross domestic product by expenditure47 Gross domestic product by sector48 Consumer price index48 Agricultural and forestry production48 Minerals production49 Manufacturing production49 Construction statistics49 Banking statistics50 Stockmarket indicators50 Exports50 Imports51 Main traditional exports51 Imports by end-use51 Main trading partners52 Balance of payments, IMF series53 Balance of payments, national series53 External debt, World Bank series54 Official development assistance54 Foreign reserves54 Exchange rates
Brunei
55 Basic data
56 Politics56 Political background56 Recent political developments57 Constitution, institutions and administration57 Political forces59 International relations and defence
59 Resources and infrastructure59 Population60 Education61 Health61 Natural resources and the environment61 Transport, communications and the Internet63 Energy provision
63 The economy63 Economic structure64 Economic policy65 Economic performance
65 Economic sectors65 Agriculture66 Mining and semi-processing67 Manufacturing67 Construction
68 The external sector68 Trade in goods68 Invisibles and the current account69 Capital flows and foreign debt69 Foreign reserves and the exchange rate
70 Appendices70 Membership of regional organisations71 Sources of information72 Reference tables72 Population72 Labour force, 200073 Transport and telecommunications73 National energy statistics73 Government finances74 Money supply74 Gross domestic product74 Gross domestic product by sector75 Consumer prices75 Agricultural production75 Forestry production76 Oil and natural gas production and prices76 Balance of trade76 Main exports76 Main imports77 Main trading partners77 Balance of payments, national series78 Exchange rates78 International reserves
Kuala Lumpur (capital) 1,367Johor Baharu 724Ipoh 601Klang 503Petaling Jaya 460
Tropical
Hottest months, April and May, 23-33°C (average daily minimum and maximum);coldest month, December, 22-32°C; driest month, July, 99 mm average rainfall;wettest month, April, 292 mm average rainfall
Malay (the official language); main other languages: Chinese dialects (includingMandarin), English, Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 139living languages altogether
The metric system has gradually replaced the UK (imperial) system. Localmeasures include:
Malaysian dollar or ringgit (M$, or RM)=100 sen (cents). Average exchange ratesin 2001: M$3.8:US$1 (pegged at this rate since September 2nd 1998); M$5.47:£1.Exchange rates on December 4th 2002: M$3.80:US$1; M$5.97:£1
Peninsula: 7 hours ahead of GMT; Sabah and Sarawak: 8 hours ahead of GMT
February 1st-2nd (Chinese New Year); 12th-13th (Hari Raya Haji); March 5th(Islamic New Year); May 1st (Labour Day), 15th (Vesak Day); June 7th (the king�sbirthday), 14th (the Prophet Mohammed�s birthday); August 31st (National Day);October 23rd (Deepavali); November 26th-27th (Hari Raya Puasa, the end ofRamadan); December 25th (Christmas Day)
Fundamental to the understanding of Malaysia�s political development is anappreciation of its geographical, ethnic and cultural diversity. Political parties arelargely based on ethnicity, locality or religion. Basic themes of post-war politicalhistory are the maintenance of racial harmony, positive discrimination in favourof the bumiputera (�sons of the soil�, the ethnic Malays and other indigenouspeoples) and friction between Islamic parties and the government. Sinceindependence in 1957, Malaysia has been ruled by coalition governmentsdominated by the principal Malay party, the United Malays NationalOrganisation (UMNO). Dr Mahathir Mohamad has been prime minister since1981, but has announced his intention to step down in October 2003.
Political background
British colonial policy was the major formative influence on Malaysia. From thelate eighteenth century, British influence was gradually extended across theMalay peninsula and North Borneo. The colonial administration encouraged(and sponsored) the arrival of immigrants from southern China and southernIndia to work in tin mines and on rubber plantations. As the region developedinto a commodity exporter, it remained administratively fragmented, withinternal government largely under local control. By the 1930s, �Malaysia�consisted of the Straits Settlements (Malacca, Penang and Singapore), theFederated Malay States (Selangor, Perak, Negeri Sembilan and Pahang) and theunfederated states (Kedah, Perlis, Kelantan, Terengganu and Johor), as well asNorth Borneo (Sabah) and Sarawak.
After the second world war, the restored British colonial system sought to createa more integrated territory, a more cohesive society and a stronger centralgovernment. The ethnic Chinese were in the majority on the Malayanpeninsula, including Singapore. The new Malayan Union (1946-48) sooncollapsed on opposition from the Malay rulers to a loss of sovereignty andproposed citizenship for non-Malays. Relations between the different ethnicgroups, especially between the Malays and the Chinese, have remained a highlysensitive issue in Malaysian political life.
After the second world war, many of the ethnic Chinese sympathised with thecommunist revolution in China. A guerrilla war was started by the largelyethnic-Chinese Malayan Communist Party (MCP), leading to the declaration of aState of Emergency in 1948, which did not officially come to an end until 1960.One of the measures used by the colonial regime to suppress the insurrectionwas detention without trial, a practice that successive Malaysian governmentshave continued to employ. The Emergency was to cast a long shadow overMalaysian politics.
Rapid progress towards full independence�which was proclaimed in 1957�andthe establishment of democracy in a pluralist society formed part of theanti-insurgency strategy. The successor of the Malayan Union, the Federation ofMalaya (1948-63), passed some powers back to the states. Singapore, with its
largely Chinese population, was excluded from both arrangements. The politicalframework that emerged at this time reflected Malaysia�s ethnic variety. TheUnited Malays National Organisation (UMNO) was formed in 1946, theMalaysian Chinese Association (MCA) and the Malayan Indian Congress (MIC)in 1949. These three parties formed the Alliance in 1952 and have remained thecore of post-independence governments.
British decolonisation policy continued to shape the country afterindependence. Sarawak, Sabah and Singapore were added to the peninsula-based federation in 1963 to form a new Federation of Malaysia, with the NorthBorneo territories offsetting the preponderance of ethnic-Chinese citizensresulting from Singapore�s membership. Brunei refused to join the federationbecause of a disagreement over the position of the sultan and the control of oilresources. When Singapore withdrew from the federation in 1965, there was adecisive switch in political power towards the ethnic Malays and the centralgovernment in Kuala Lumpur.
Losses for UMNO in the 1969 general election stirred up anti-Chinese sentimentand provoked serious racial riots, in which many Chinese were killed. The riotswere both a political and an economic turning point. In the crisis that followed,parliamentary government was suspended for 21 months. The Alliance that hadruled since independence was replaced by a broader-based coalition, the BarisanNasional (BN, National Front). With minor changes in its composition, the BNhas ruled Malaysia ever since. After the riots, the BN government instituted a20-year New Economic Policy (NEP), a programme of positive discriminationaimed at reducing interracial tensions by improving the incomes and economicweight of the bumiputera (Malays and other native peoples, accounting for 63%of the population in 2001). The National Development Policy (NDP), whichfollowed the NEP after 1990, relaxed some of the positive discriminationmeasures that favoured the bumiputera. An extended period of strong economicgrowth�at least until 1998�made it possible to raise the status of the bumiputerawithout transferring wealth from the ethnic Chinese, thereby avoiding seriousintercommunal conflict. In recent years there have been growing doubts withinUMNO about the effectiveness of positive discrimination.
A decisive shift towards more authoritarian government occurred in 1987, whenthere was a serious split in UMNO in which Dr Mahathir, who had been partypresident and prime minister since 1981, nearly lost power. After his victory,Dr Mahathir consolidated his power within UMNO, making it difficult tochallenge an incumbent leader. The judiciary was stripped of much of itsindependence and power, and the constitution was changed after thegovernment lost a number of cases in the High Court. The following year, thegovernment intimidated the judiciary by sacking the chief justice, suspendingfive Supreme Court judges and increasing the powers of the attorney-general,leaving little or no check on the government�s exercise of power.
The 1997-98 Asian financial crisis plunged Malaysia into a severe economicdownturn, but also exposed corruption within UMNO. Calls for political reformand a change in leadership intensified, especially among younger UMNOpoliticians. The deputy prime minister, Anwar Ibrahim, who became the focalpoint of the reformasi movement, was dismissed from the government inSeptember 1998, expelled from UMNO and later jailed for a total of 15 years oncharges of obstruction of justice, sodomy and corruption. The dubious treatmentof Dr Mahathir�s long-standing heir apparent and his controversial trialunleashed a vigorous campaign for political reform that revitalised theopposition. In the November 1999 general election, UMNO�s share of the voteplunged. The main beneficiary was the Malay-based Islamist opposition party,the Parti Islam sa-Malaysia (PAS). PAS took 27 seats in the lower house, up fromseven, gained control in a second state, Terengganu, while retaining theneighbouring of Kelantan, and made strong inroads in other northern Malay-beltstates, including Dr Mahathir�s native Kedah. It was only because of thecontinued allegiance of a majority of the Chinese electorate that the BN retainedits two-thirds majority in parliament.
Despite this humiliating loss of Malay allegiance, Dr Mahathir�s positionremained strong enough for him to resist calls for his resignation. Instead, he setout in 2000 and 2001 to reform UMNO and act against blatant corruption andcronyism. The most spectacular outcome of this was the resignation of thefinance minister and Dr Mahathir�s long-standing confidant, Daim Zainuddin, inJune 2001. UMNO�s renewed appeal received another boost from thediscrediting of Islamist extremism after the September 11th 2001 terrorist attackson the US. To counter the pledge made by PAS that it would set up an �Islamicstate� should it win the next general election, Dr Mahathir declared inSeptember 2001 that Malaysia was already an Islamic state. Public opposition toa programme of further Islamisation has been limited, notwithstanding the factthat on independence Malaysia was declared to be a secular nation. During thepast two decades, the government has actively promoted and favoured Islam,which is the country�s official religion. It has promised further Islamisation; thishas drawn only limited protests from the non-Muslim 40% of the population.
The terrorist attacks on Bali, Indonesia, on October 12th 2002 have furtherhighlighted Dr Mahathir�s delicate balancing act between supporting the US waron terrorism while condemning a war against Iraq and cracking down onIslamist extremists while promoting a moderate version of Islam in Malaysia. Inlate 2002 the tension between moderate and more extreme forms of Islam inMalaysia was intensifying as PAS steered towards a confrontation with thegovernment over the passage of Islamic laws in the states that it controls.Dr Mahathir�s stance also risks alienating the Muslim Malay majority, whichperceives the US war on terrorism as a war on Islam.
At the same time, Dr Mahathir�s long drawn-out departure�announced in June2002, but not due to take place until October 2003�and his desire to makechanges to government policy before he goes (for instance, introducing science
The Asian crisis leads to callsfor political reform
The impact of September 11thbenefits the government
and mathematics teaching in English and university admission on a merit basis)could undermine UMNO�s chances in a general election, which may be held in2003, before the prime minister retires. Dr Mahathir�s successor, the deputyprime minister, Abdullah Badawi, appears to be a safe pair of hands, but maylack the firm party support needed during the transition period.
Malaysia�s particular political culture is the result of its racial and geographicaldiversity, as well as the way in which political institutions have been shapedand altered under Dr Mahathir. Political stability has to some extent been theresult of Dr Mahathir�s authoritarian influence; the removal of that influencewill not change the political institutions, but is likely to lead to calls for greaterdemocratic freedom�with uncertain consequences. Divisions within the Malaymajority are potentially destabilising, with negative implications for relationsbetween the races and, more broadly, for the economic outlook. AfterDr Mahathir�s departure from mainstream politics, the government will need toreform bumiputera privileges, deal with conservative Islam, reduce corruptionwithin the government and UMNO�but it will be tempting to do nothing. TheBN is unlikely to lose power outright�incumbency continues to giveconsiderable advantages. Government control of the Election Commission,which supervises elections and checks electoral rolls, and the recent redrawingof constituency boundaries make another BN victory highly likely in 2003.However, the coalition�s majority may be reduced further.
Parliamentary forces(no. of seats)
Election 1995 Election 1999 Situation in Sep 2002Barisan Nasional (BN, National Front) 162 147 151United Malays National Organisation (UMNO) 88 72 73Malaysian Chinese Association (MCA) 30 28 28Parti Pesaka Bumiputra Bersatu Serawak (PBB) 13 10 10Sarawak United Peoples� Party (SUPP) 6 7 7Malaysian Indian Congress (MIC) 6 7 7Parti Gerakan Rakyat Malaysia (PGRM) 7 7 6Parti Bangsa Dayak Sarawak (PBDS) 4 6 6Sarawak National Party (SNAP) 4 4 4United Sabah National Organisation (UPKO) 4 3 4Parti Bersatu Sabah (PBS)a 8 3 3Sabah Progressive Party (SAPP) 0 2 2Liberal Democratic Party Sabah (LDP) 0 1 1Barisan Alternatif (BA, Alternative Front)b - 42 31Parti Islam sa-Malaysia (PAS) 7 27 26Parti Keadilan Nasional (PKN) - 5 5Parti Melayu Semangat �46 (S46)c 6 - -Democratic Action Party (DAP)d 9 10 10Independent 0 1 1Total 192 193 193
Note. The next election is due to be called by November 2004.
a Rejoined the Barisan Nasional in 2001. b The 1999 election was the first contested as a coalition. c Reunited with UMNO in 1996. d The DAP leftthe Barisan Alternatif in September 2001.
The opposition alliance, the Barisan Alternatif (BA, Alternative Front), consists ofPAS and the Parti Keadilan Nasional (Keadilan, or PKN), the party led by WanAzizah, the wife of the jailed former deputy prime minister, Anwar Ibrahim. Themainly Chinese-based left-wing Democratic Action Party (DAP) left the BA inSeptember 2001, protesting at the intention of PAS to found an Islamic stateshould the BA win the next general election. Keadilan objects to this as well, but,with a stronger Malay Muslim influence on the party, does not find thissufficient reason to leave the BA.
Important recent events
September 1998: Anwar Ibrahim, the deputy prime minister and deputy president of the United Malays NationalOrganisation (UMNO), is sacked from the government and expelled from the party. After leading a series of rallies againstthe prime minister, Mahathir Mohamad, he is arrested, beaten in custody and indicted on charges of obstructing justice andof sodomy.April 1999: Following a five-month trial, Mr Anwar is controversially convicted of obstruction of justice and sentenced tosix years in jail for corruption; the following year, Mr Anwar is sentenced to a further nine years in jail for sodomy, to beserved consecutively.November 1999: The ruling Barisan Nasional (BN, or National Front) coalition wins the general election�despite a drop inits share of the vote, especially that of Dr Mahathir�s United Malays National Organisation, or UMNO�and controls morethan two-thirds of the seats in the national parliament. The BN loses control of a second state assembly�that ofTerengganu�to the opposition Parti Islam sa-Malaysia (PAS).November 2000: The ruling coalition suffers a humiliating defeat in a by-election in the Lunas constituency inDr Mahathir�s native Kedah state, a seat that the BN had held since independence.January 2001: A new chief justice, Dzaiddin Abdullah, with a reputation for independence and incorruptibility, isappointed. After Mr Dzaiddin�s appointment, the judiciary increasingly refuses to bow to the demands of the authorities.June 2001: Daim Zainuddin, the finance minister and former confidant of Dr Mahathir, resigns, as the prime ministerembarks on a campaign against corruption in UMNO and cronyism in order to revive the party�s fortunes. Mr Daim wasthe mastermind behind Malaysia�s recovery after the 1997 Asian financial crisis and was responsible for the bailing out ofpolitically well connected businesses at that time.September 2001: Dr Mahathir declares that Malaysia is already an Islamic state, in an attempt to strengthen UMNO�sIslamic credentials and respond to the declared intention of PAS to set up an Islamic state, should it win a general election.The government announces further Islamisation measures, triggering concern among the ethnic minorities that it may wantto change the secular constitution. Following the September 11th 2001 attacks on the US, UMNO gains support amongMalay moderates as PAS is associated with Islamist extremism. The Barisan Alternatif (BA, Alternative Front) splits as theethnic-Chinese Democratic Action Party (DAP) leaves the opposition coalition over the issue of an Islamic state.June 2002: Dr Mahathir announces to the UMNO annual congress that he intends to retire from all his functionsimmediately, but he is persuaded by the UMNO supreme council to stay on until October 2003.July 2002: Mr Anwar�s final appeal to the High Court against his sentence for abuse of power fails. The verdict disappointsmany who had pinned their hopes for an acquittal on the reformist Mr Dzaiddin. Mr Anwar�s best hope now lies with aroyal pardon, which needs to be proposed by the prime minister.August 2002: In a by-election caused by the death of the PAS leader, Fadzil Noor, UMNO does not fare as well as thegovernment had hoped, delaying an early general election.
Constitution, institutions and administration
Malaysia is a federal, constitutional monarchy within the Commonwealth. Theposition of king (yang di-pertuan agung, meaning �supreme ruler�) is rotatedevery five years. The nine-strong Conference of Rulers of the states of thepeninsula, excluding Malacca and Penang (the sultans of Kedah, Perak, Johor,
Selangor, Pahang, Terengganu and Kelantan; the yang di-pertuan besar, orsupreme minister, of Negeri Sembilan; and the raja of Perlis) elects one of itsnumber to serve as king.
The king�s powers have been cut back under Dr Mahathir. After a constitutionalcrisis in 1983, the powers granted to the traditional rulers on independence werereduced. Although the constitution does not say so explicitly, the king must, ineffect, accept the government�s advice and must not withhold royal assent fromparliamentary bills. In 1992 UMNO drew up a code of conduct for rulers, afterthe rulers and their families were accused of abusing their power for privategain and exceeding their constitutional authority. In February 1993 constitutionalamendments were passed that limited rulers� personal legal immunity.
The federal parliament consists of an upper chamber, the Senate or DewanNegara (Council of the Nation), of 68 members, of whom 42 members areappointed by the king and 13 pairs are elected by the state legislatures, and alower chamber, the House of Representatives or Dewan Rakyat (Council of thePeople), directly elected by universal suffrage. The number of seats in the DewanRakyat was increased from 192 to 193 in 1999. The lower house has long been arubber stamp for the BN, with little real debate on draft legislation or issuestaking place there.
Each of the 13 states in the Federation has an Executive Council dealing withnon-federal matters under a menteri besar (chief minister), who is answerable toelected state assemblies. The constitutional head of each state government iseither one of the traditional rulers or (in Penang, Malacca, Sabah and Sarawak) astate governor appointed by the king on the advice of the federal government.
The Malaysian judicial system still resembles the UK system inherited from thecolonial period, but also borrows from the US system. The constitution gives anindependent judiciary the powers to pronounce on the constitutionality andlegality of executive acts. (The independence of the judiciary was effectivelycurbed by Dr Mahathir in 1987-88 in response to a court ruling on the April 1987UMNO leadership contest, which declared the elections invalid. Dr Mahathirpushed through amendments to the constitution, stripping the High Courts ofthe power of judicial review and terminating the separation of executive andjudicial power.) As with the traditional rulers, the government has established acode of conduct for judges, the breaching of which may result in dismissal.Important changes have taken place in recent years, including the abolition ofthe jury system in 1995, tending to increase the power of the executive andreduce the scope for independent action by the judiciary. The appointment inJanuary 2001 of a new chief justice, Dzaiddin Abdullah, raised expectations thatthe judiciary would reassert its independence. The legal framework as it standsprobably leaves little room for this, and the dubious appointments of officialswith a controversial past will have narrowed the path of judicial reforms further.
The United Malays National Organisation (UMNO), the party of Malaynationalists in the colonial period, remains the most important of the Malayparties. Although it attracted only just over half of the total Malay vote in the1999 election, it has since rebuilt its support. The president of UMNO invariablyserves as the prime minister. Elections to leading party posts and to the UMNOsupreme council determine the leadership succession and can also affect theposts occupied by ministers in the cabinet. An incumbent leader is rarelychallenged; when this happened to Dr Mahathir in the internal UMNO electionof April 1987 he altered the voting mechanism in favour of the incumbent infuture party elections. UMNO is the dominant party in the multiracial rulingcoalition, the Barisan Nasional (BN).
PAS is an Islamist party and a haven for Malay protest votes, offering a greaterdevotion to Islam and possibly also a stronger commitment to Malaynationalism than UMNO. From its inception, PAS has intended to set up anIslamic state and introduce Islamic law. It benefited from the Islamist resurgencethat followed the Iranian revolution in 1979. But the intention to create anIslamic state also presents a major obstacle to the building of a coalition ofopposition forces. In September 2001 the largely Chinese-based DemocraticAction Party (DAP) left the opposition alliance Barisan Alternatif (BA, orAlternative Front) over the PAS commitment to transform Malaysia into atheocracy. The Islamic state issue limits the appeal of PAS�and the BA�as aviable alternative for those voters dissatisfied with UMNO, especially whenattention is focused on Islamist extremism and terrorism. It is unlikely that PAScould wrest power from UMNO with an austere Islamist agenda, but it remainsa formidable opponent for UMNO.
At the time of independence, the Malaysian Chinese Association (MCA) wasthe acknowledged political representative of the ethnic Chinese. It quicklybecame an apologist for the government coalition in which it served, and wasidentified with the richer Chinese and business interests. It is the second largestparty in the BN after UMNO, but its leadership succession is proving to be adivisive issue. Gerakan Rakyat (Parti Gerakan Rakyat Malaysia, or PGRM, theMalaysian People�s Movement Party), founded as a left-of-centre multiracialparty, and the DAP, also a multiracial party, but further to the left, both attractmainly ethnic-Chinese voters (although the DAP also has prominent Indianand Malay members).
One of the features of political activity in the past was the open and directparticipation by coalition parties in entrepreneurial activities and companyownership as a means of obtaining party funds. UMNO, the biggest party(open since 1992 to other bumiputera besides Malays, and with a totalmembership of more than 2m), had the biggest portfolio of businesses. Theseactivities were criticised for putting temptation in the way of both businessmenand politicians, creating �money politics.� They have been officially wounddown since the 1997-98 Asian financial crisis, but the shares were transferred to�safe hands��in practice, groups or individuals with close links to influential
party members. UMNO�s major business interest is the conglomerate, Renong,which was taken back into government ownership in July 2001 after it failed toresolve its debt problems.
The MCA was also engaged in business activities grouped under holdingcompanies, Multi-Purpose Holding (MPH) and Huaren Holdings. It has been lesssuccessful than UMNO in retaining influence over management after the failuresof MCA businesses in the late 1980s. Huaren Holdings, which owns the English-language daily, The Star, was used to extend the MCA�s influence over theChinese-language press in 2002.
Key political figures
Mahathir Mohamad: The prime minister and president of the United Malays National Organisation (UMNO) since July1981. He is the architect of both the economic advance of the Malay community and the rapid industrial growth ofMalaysia. His popularity declined after the 1997 Asian economic crisis, a trend that was exacerbated by the ouster inSeptember 1998 of Anwar Ibrahim, his deputy in the party and government, and the campaign for change that it triggered.He was returned unopposed in May 2000 for another three-year term as UMNO president. Dr Mahathir has said that hewill retire in October 2003 and will not stand for parliament in the next general election, due by November 2004.Abdullah Ahmad Badawi: The deputy president of UMNO and deputy prime minister. In July 2002 Mr Badawi wasnamed as Dr Mahathir�s official successor. He is taking over a number of the prime minister�s duties, but will not gain fullresponsibility until October 2003. He has a degree in religious studies, is an affable but unassuming personality, but manyquestion his ability to keep UMNO united when Dr Mahathir has gone.Anwar Ibrahim: Dr Mahathir�s former deputy in UMNO and the former deputy prime minister, jailed for a total of 15years for abuse of power and sodomy. The reformist movements that were inspired by his detention have been weakenedby arrests and by suppression of government criticism in the official media. A natural leader with a background in theIslamic Youth Movement (ABIM), Mr Anwar remains the official candidate for prime minister, should the BA win thegeneral election. Mr Anwar failed in his final appeal to the Supreme Court against his conviction for abuse of power in July2002; he launched an appeal against his sodomy conviction in July 2001. His best hope for a comeback to the politicalarena lies in a royal pardon, proposed by the new prime minister, Mr Badawi, as a gesture of reconciliation.Najib Tun Razak: UMNO�s senior vice-president, the defence minister and son of a former prime minister, Tun Razak. He ispopular, has a reputation for putting the party�s interests before his own interests and holds a strong third place in theUMNO hierarchy. He is the preferred choice of Dr Mahathir to succeed Mr Badawi in the post of deputy prime minister. Itis possible that he will sooner or later challenge Mr Badawi for the party leadership.Abdul Hadi Awang: The president of the opposition Parti Islam sa-Malaysia (PAS) since July 2002, following the death ofFadzil Noor, and the chief minister of the hydrocarbon-rich north-eastern peninsular state of Terengganu. UnderMr Awang�s leadership, PAS is likely to be more aggressive in opposition. A confrontation with the federal governmentlooms, after the Terengganu parliament agreed to implement Islamic law�a change in the law that is the prerogative of thefederal parliament.Dzaiddin Abdullah: Malaysia�s chief justice. He raised expectations upon his appointment in January 2001 that he wouldclean up the image of the judiciary, tarnished by frequent allegations of corruption and political interference. In mid-2001the government lost several eye-catching cases, as the judiciary refused to bow to the authorities. However, Mr Dzaiddindisappointed Malaysia�s reformist movement by rejecting Mr Anwar�s final appeal against his corruption sentence in July2002, notwithstanding criticism by the Federal Court of the Anwar trial. A further disappointment came in September2002, when the Federal Court ruled that the arrest under the Internal Security Act (ISA) of five reformasi leaders in April2001 was illegal, but failed to order their immediate release.
International relations and defence
Malaysia, aware of its limited influence as a small country acting on its own, isan active member of numerous international bodies, especially Asian regional
organisations (see Appendices: membership of regional organisations). TheAssociation of South-East Asian Nations (ASEAN) remains central to the country�sforeign policy objectives. Under Dr Mahathir, Malaysia has followed a policy ofnon-alignment and, in the post-cold war era, has become a champion of theinterests of �the South�, developing countries, to be defended against attempteddomination by �the North�, the developed countries. Dr Mahathir has frequentlyadopted highly vocal positions on a number of international questions, whichhave attracted strong criticism from the West.
A regular theme in Dr Mahathir�s speeches is that foreigners are trying to gaincontrol of Malaysia and that foreign multinationals are preying on weakMalaysian firms. He blamed the Asian financial crisis, triggered in mid-1997 bythe large-scale sell-off of regional currencies and stocks, on Western�speculators�, but failed in his outspoken campaign to establish some degree ofinternational supervision of short-term capital flows. Most notably, he rejectedand severely criticised the austerity-based remedies advocated by the IMF,claiming that the organisation was little more than an executor of policiesframed by the US government. After the September 11th 2001 attacks on the US,relations with the US, which had suffered over human rights and the treatmentof the jailed deputy prime minister, Anwar Ibrahim, improved substantially, asthe US sought moderate Islamic allies in South-east Asia.
Regional co-operation to suppress and prevent terrorist activity has increased sinceSeptember 11th 2001, with greater urgency following the bomb attacks in Bali,Indonesia, on October 12th 2002. Since the terrorist attacks on the US, Malaysiansecurity forces have been active in tracking down suspected terrorists andbreaking up suspected cells, some related to the militant Muslim group, JemaahIslamiah (JI), now thought to have carried out the attacks on Bali. It now appearsthat the JI has been operating within Malaysia�s borders for several years, with theaim of setting up an Islamist state embracing Indonesia, Malaysia Singapore,Brunei and the southern Philippines. Relations with Indonesia have been marredby the country�s apparent failure to deal with terrorist threats within its borders,illegal immigration and air pollution from forest fires originating in that country.Relations with neighbouring Singapore remain sensitive and Malaysia has borderdisagreements with Indonesia and the Philippines. A further disagreement overChina�s claims to the Spratly islands in the South China Sea may ease followingagreement on a code of conduct between ASEAN and China. Malaysia was afounder-member of ASEAN in 1967 and also a member of the broader, but moreloose-knit, Asia-Pacific Economic Co-operation (APEC) forum. Dr Mahathir hasremained lukewarm about APEC, which he views as a means of extendingWestern, in particular US, influence over Asia. In 1991 Dr Mahathir proposedsetting up another regional body, the East Asian Economic Group, later renamedthe East Asian Economic Caucus (EAEC), to strengthen the negotiating power ofAsian economies vis-à-vis such blocs as the EU and the North American Free-Trade Agreement (NAFTA). The EAEC includes ASEAN, China, Japan, and SouthKorea (�ASEAN+3�). After a slow start, the group has moved into unchartedterritory with proposals for the creation of a free-trade area (FTA) between ASEAN,China, Japan, and South Korea. In April 2001 �ASEAN+3� agreed to set up anetwork of currency swap arrangements that link the disbursement of short-term
liquidity to IMF conditions. Malaysia proposed to develop this currency swapscheme further, strengthen financial co-operation among Asian countries andcreate a regional monetary fund for Asia.
Under Dr Mahathir�s leadership, Malaysia�s international influence has grown;without Dr Mahathir at the helm, the country�s ability to bring influence to bearon developments abroad is likely to diminish. The prime minister may continuein some international capacity after his resignation in October 2003. In recentyears, Malaysia has strengthened its links with Muslim countries, at least in partfor domestic reasons, and a similar motive is behind improved relations withChina. Domestic political interests will remain one of the driving forces offoreign policy, but the broader economic interests may be more difficult todefend without Dr Mahathir�s vocal, sometimes innovative, interventions.
Under a 15-year strategic plan, Malaysia�s armed forces, which at present mainlyserve in an anti-insurgency capacity, are developing a full capability to deterexternal threats. The plan to modernise the armed forces was derailed by theAsian financial crisis. During 2002 Malaysia placed large orders abroad forweapons purchases totalling M$12.7bn (US$3.3bn). The defence minister, NajibRazak, declared in September 2002 that defence spending would focus onimproving the armed forces� electronic warfare capability. Malaysia has bilateraldefence and military training agreements with the UK, Australia and NewZealand, but remains a member of the Non-Aligned Movement.
Security risk in Malaysia
The security risk to foreign companies operating in Malaysia has increased since the September 11th 2001 terrorist attackson the US, and particularly so since the bombings in Bali, Indonesia, in October 2002. The major threat comes fromIslamist extremism, which has become better organised in recent years. Attention has focussed on the militant Islamistgroup, Jemaah Islamiah (JI), which appears to act as a central co-ordinator for radical groups across the South-east Asianregion, as it works towards its goal of establishing an Islamist state embracing Malaysia, Indonesia, Singapore, Brunei andthe Southern Philippines. However, the importance of the JI may have been overstated and the Islamist group may havebecome a convenient target for the governments involved. Planned terrorist attacks were foiled in September 2002 with thearrest of terrorist suspects in Singapore; they included attacks on foreign targets, private companies and embassies, with theintention of destabilising the governments of Singapore and Malaysia and fomenting ethnic strife between Singapore�sChinese majority and the Malay Muslim majority in Malaysia. Islamist extremism may become more motivated in theevent of a US attack on Iraq, and the Economist Intelligence Unit now believes the security risk to foreign companies to bemoderate (compared with low in our last country profile). The government has taken action against Islamist extremism,wielding the draconian Internal Security Act (ISA), which allows for indefinite detention without trial, and co-operatingwith neighbouring countries and the US in the search for terrorist suspects. The recent bombings in Bali and the greaterevidence of the extent of militant Islamist activity across the region have raised the security risk in the country.
Social unrest
The major risk to business comes from the return of economic and political conditions that may contribute to the outbreakof inter-racial violence. Tensions persist below the surface between the majority Malays on the one hand and the minorityethnic Chinese and Indian populations on the other. In the most serious post-war racial conflict in 1969, divisions withinthe Malay majority led to the scapegoating of the ethnic Chinese, hundreds of whom were killed in riots. The Malaymajority is once again split and this may be exacerbated by tensions between the moderate and more conservative faces ofIslam that are becoming increasingly divided in the country. However, given the tight controls by the government, the near-term risk of large-scale racial violence appears quite low.
Malaysia�s influence maydecline without Dr Mahathir
There is no immediate risk of a return of the large-scale demonstrations against the government and the ruling UnitedMalays National Organisation (UMNO) that last took place in 1998, when the deposed deputy prime minister, AnwarIbrahim, led reformasi (�reform�) demonstrations. But there is widespread frustration with the government, which hasblocked most traditional means of protest through censorship, libel suits, tight controls on demonstrations and control ofthe judiciary. There is widespread awareness within Malaysia that it is heavily dependent on foreign direct investment. Theopposition is unlikely specifically to target foreign businesses.
Armed conflict
The risk of armed conflict affecting business is low. Sporadic Islamism-inspired violence has occurred during the pastcouple of years, and more recently the security forces have made a number of arrest of suspected Islamist terrorists.Previously the suspicion was that incidents might have been staged by the government in an attempt to compromise themain opposition party, PAS, by associating it with Islamist extremism, although the evident rise of militant Islam across theregion has made government action more defensible. Nevertheless, there are no �no-go� areas in Malaysia and thegovernment clearly remains very much in control of the country.
Organised crime
Malaysia is, in general, a fairly safe country. Violent crime, kidnapping and extortion are rare and organised crime isseldom a threat to foreign business. Foreigners are, however, often the target of pickpocketing, burglaries, car break-ins andpurse-snatching.
Resources and infrastructure
Population
The Malaysian population is estimated to have reached 24.5m by mid-2002. TheEighth Malaysia Plan forecasts an annual average increase of 2.3% in 2001-05; in1996-2000 the annual average rate of growth was 2.4%. Around 80% of thepopulation lives in peninsular Malaysia. The rate of growth has been the fastestin Malaysia�s more developed states, at 2.8% in 1996-2000. The dependency ratio(those under the age of 15 and over the age of 64 divided by the rest of thepopulation) is expected to continue to decline, from 59.1% in 2000 to 55.3% in2005, as the median age rises from 23.9 years in 2001 to 25.3 years.
The average population density, at 73 persons per sq km in 2001, is relativelylow. However, there are wide disparities between the peninsula and thesparsely populated Borneo states. The proportion of the population living inurban areas stood at 61.8% in 2000, up from 55.1% in 1995. (Reference table 1provides historical data on population.)
Population, 2001(mid-year estimates)
'000 %Total 23,795 100.0Malaysian 22,529 94.7 Bumiputera 14,886 62.6 Malay 12,341 51.9 Other bumiputera 2,545 10.7 Chinese 5,720 24.0 Indian 1,671 7.0 Others 252 1.1Non-Malaysian 1,266 5.3
Age structure0-14 7,881 33.115-64 14,956 62.965+ 958 4.0Median age (years) 23.9 -
Source: Department of Statistics, Monthly Bulletin of Statistics.
Rates of population growth vary considerably between the main ethnic groups,probably owing to differences in geographical location, income levels andtraditions. In 1996-2000 the annual average rates of growth of the bumiputera(�sons of the soil�, ethnic Malays and other indigenous peoples), Chinese andIndian communities were 3.2%, 1.4% and 1.8%, respectively. The Chinese, longurbanised and enjoying higher average incomes, now have smaller families; theMalay urban population is growing, but most families remain in rural areas.
Mean monthly gross household income increased from M$2,020 (US$532 at thecurrent pegged exchange rate of M$3.8:US$1) in 1995 to M$2,472 in 1999, anaverage growth rate of 5.2% a year, according to official data. The proportion oflower-income households, defined as those earning between M$1,500 andM$3,000, increased from 32.3% in 1995 to 37% in 1999. Growth rates varied byethnic group. The mean monthly income of Malay households expanded by5.5% annually to M$1,984, that of Chinese households by 4.6% a year to M$3,456,and that of Indian households by 6.3% a year to M$2,702. The mean monthlyincome of urban households rose by 4.6% annually to M$3,103 in 1999, and thatof rural households by 6.7% to M$1,718.
Slowing death and birth rates presage an increase in the proportion of thepopulation aged over 65 and a decline in the under-14 age group, as well as arise in the median age, accompanied by further urbanisation.
Education
The government places great emphasis on raising the general level ofeducational achievement. It provides universal education up to secondary level,and there is, in addition, a large number of private-sector schools and colleges.The provision of state tertiary educational institutions has steadily expanded.Sending pupils abroad for study, a long tradition on the part of both families andthe government, intensified during the boom years. The switch to the use ofMalay as the medium of instruction in all state secondary schools encouragedthis trend. State assistance mostly takes the form of soft loans, repayable whenstudents graduate and take paid employment. Under the terms of the NewEconomic Policy (NEP), almost all government assistance was directed towardsthe children of bumiputera. During the Asian financial crisis, many of thosestudying overseas were brought home, increasing the pressure on localeducational institutions. Tamil and Mandarin Chinese continue to be thelanguages of instruction in some primary schools. The government,disappointed with the failure of bumiputera students to qualify for universityplaces, announced that from 2002 university entrance would be based on merit.From 2003, science and mathematics will be taught in English, with the aim ofboosting Malaysia�s international competitiveness.
The public health system, with its emphasis on community-based care, has longbeen internationally recognised as a model provider of quality services at littleor no cost to consumers. As a result, Malaysia�s basic indicators comparefavourably with most other Asian countries. But there are geographicalvariations: health indicators for Sabah, Sarawak and some predominantly ruralstates on the Malayan peninsula are well below average.
Already low by regional standards, government spending on the health sectorfell from 3% of GDP in 1990 to 2.4% in 1998, reflecting the authorities� desiregradually to reduce their role as a provider. But the Eighth Malaysia Plan, whichcovers 2001-05, has targeted government spending on heath at M$5.5bn(US$1.4bn), or 5% of the social sector development budget, representing a 48.6%increase compared with the M$3.7bn allocated in the Seventh Malaysia Plan.
Whereas the Seventh Malaysia Plan (1996-2000) focused on an expansionarydevelopment programme that saw a strong increase in the numbers of newprivate hospitals and clinics, the Eighth Malaysia Plan aims for an overallimprovement in the quality of public health services with greater emphasis onthe use of information technology, improvements in the quality of healthpersonnel and an upgrading of rural facilities. A total of M$715m (US$188m) hasbeen allocated for rural and environmental health.
Natural resources and the environment
In the colonial period economic development was dominated by tin mining andthe cultivation of natural rubber. Depletion of the richest, lowest-cost tindeposits, rising labour costs and a period of low tin prices combined to reducelocal production and end Malaysia�s dominant position as the world�s largestproducer of tin concentrates. However, it is still one of the world�s main centresof tin refining, although it must supplement declining domestic mine outputwith imported concentrates.
Petroleum and natural gas are now more important mineral products. Both oiland natural gas are extracted from two main areas in the South China Sea, offTerengganu and off Sabah.
Malaysia is no longer the world�s biggest producer of natural rubber, itsdeclining output having been overtaken in 1993 by rising production in Thailandand Indonesia. Plantation companies have for many years been switching to themore profitable cultivation of palm oil. Malaysia is the world�s largest producerof palm oil.
Malaysia remains the world�s leading producer of tropical saw logs. For someyears its pre-eminence resulted partly from the flouting of controls on tree-fellingby loggers. These controls are now being imposed more strictly and output hasfallen. Bans on log exports were originally imposed as much to encourage moredownstream processing as to preserve the Malaysian rainforest. Controls arenow linked to replanting.
It has been the aim of successive Malaysian governments to raise earnings fromall primary products by increasing the degree of domestic processing. Thecountry now has large commodity-based industries: demand from rubber goodsmanufacturers has reached the point where rubber must be imported, becausefalling domestic output is fully committed to trading contracts.
Transport, communications and the Internet
Malaysia�s physical infrastructure compares favourably with that of most othercountries in the region, having benefited from substantial investment�bothprivate and public�during the boom years. Between 1995 and 2000 the totalroad network increased from 61,380 km to 65,880 km. A slowdown in privateinvestment owing to the financial crisis was offset to some extent by increasedgovernment spending on roads in 1999 and 2000.
Malaysia has made considerable progress in the creation of a more integrated,efficient and reliable urban transport system, although the 1997-98 economicdownturn caused several rail projects to run into financial difficulties.
Kuala Lumpur International Airport (KLIA) was opened in June 1998, with acapacity of 25m passengers a year. Traffic was hit by the Asian financial crisis,and again by the economic downturn in 2001 and the impact on internationaltourism of the September 11th 2001 terrorist attacks. After the fall-off in businessand a reduction in the number of international carriers landing at KLIA, thegovernment concluded �open sky� policy agreements with several developedcountries, obtained additional international landing rights, increased flightfrequencies and added new destinations. Malaysia intends to become theregional hub for air transport.
More than 90% of Malaysia�s international trade is conducted through seaports,which handled 220.8m tonnes in 2000, up from 152.3m tonnes in 1995, largelybecause of a rise in containerised and liquid bulk cargo. A huge expansion isunder way on the central west coast at Port Klang, as well as at the Port ofTanjung Pelepas (PTP) in Johor, in competition with Singapore. PTP cargothroughput increased fivefold in 2001. (Reference table 3 provides data ontransportation.)
Although the monopoly of the state-owned Telekom Malaysia over theprovision of fixed-line and cellular services ended in 1994, Telekom remains thedominant provider of fixed-line services. In 2000 there were 21 fixed-linetelephones for every 100 people. Telekom continues to be favoured by thegovernment; the company will have a dominant 46% market share in mobiletelephony when its takeover of Technology Industries Resources is completed inearly 2003. Competition in mobile telephony in the early stages brought lowertariffs and improved service quality. The number of mobile telephonesubscribers increased from 872,000 in 1995 to 5.1m in 2000 and 7.5m in 2001. InJuly 2002 Malaysia awarded third-generation (or 3-G) spectrum licences toTelekom Malaysia and Mxis Communications, shutting out other bidders.
Domestic processing
Large investments ininfrastructure
Kuala Lumpur InternationalAirport attracts more traffic
The development of information and communications technology (ICT) isconsidered crucial by the government to the enhancement of productivity andcompetitiveness. ICT usage, measured in terms of installed personal computers,rose from 47 per 1,000 head of population in 1997 to 126 in 2001, according togovernment officials. The number of Internet subscribers increased from205,000 in 1997 to about 2.1m in 2001. The government estimated in 2001 thatInternet penetration was 25 per cent, compared with between 40 and 50 percent in Singapore, Japan, South Korea and Taiwan. The government activelypromotes electronic services, but keeps a wary eye on the Internet, fearinguncensored criticism.
Energy provision
Malaysia is well endowed with energy resources. It is a net exporter of oil andgas, which are extracted from beneath the South China Sea. Receptioninstallations in Terengganu handle the oil and gas extracted from fields east ofthe peninsula; other fields are located north of Sarawak and around the coast ofSabah. Coal is mined in Sarawak, and the high rainfall and rugged topographyof both peninsular Malaysia and Sabah and Sarawak provide extensive scopefor hydroelectric power, still largely to be exploited.
Energy balance, 2001(m tonnes oil equivalent)
Oil Gas Coal Electricity a Other TotalPrimary supplyProduction 36.3 39.6 0.1 1.9 b 2.6 80.5Imports 13.7 0.0 2.5 0.0 0.0 16.2Exports -28.0 -20.2 0.0 0.0 0.0 -48.2Stock change 0.0 0.0 0.0 0.0 0.0 0.0Total 22.0 19.4 2.6 1.9 b 2.6 48.5
0.6 c 47.2Processing & transformationInput to refining -28.0 0.0 0.0 0.0 0.0 -28.0Input to transformation -1.2 -11.0 -1.9 -1.9 b 0.0 -16.0Refining/transformation output 28.0 0.0 0.0 6.5 c 0.0 34.5Energy industry fuel/loss -3.3 -5.5 0.0 -0.9 c -1.0 -10.7Final consumptionTransport fuels 10.8 0.0 0.0 0.0 c 0.0 10.8Industrial fuels 4.7 1.8 0.7 3.0 c 0.1 10.3Residential fuels 1.4 0.0 0.0 2.6 c 1.5 5.5Non-energy uses 0.6 1.1 0.0 0.0 0.0 1.7Total 17.5 2.9 0.7 5.6 c 1.6 28.3
a Primary electricity output and imports and exports of electricity are expressed as input equivalents on an assumed generating efficiency of 33%.b Input basis. c Output basis.
Source: Energy Data Associates.
Rapid industrial development has significantly boosted demand for electricity,and the resulting supply shortfall led the government in the early 1990s to awardcontracts to private consortia, known as independent power providers (IPPs), tobuild and operate thermal generating plants to supply the national grid. The IPPsproduced 37% of Malaysia�s electricity in 2000. Malaysia�s reserve margin�the
difference between installed capacity and peak demand�remains large: byend-2000 the reserve margin stood at 32%. However, by 2005 Tenaga Nasional,peninsular Malaysia�s main, predominantly state-owned utility, and the IPPs areexpected to raise installed capacity by 61% to meet an anticipated surge indemand. The government has revived the giant 2,400-mw Bakun HydroelectricProject in Sarawak; the enormous increase in electricity supply when Bakun iscommissioned in 2006 may be used for a (highly polluting) bauxite smeltingplant. (Reference table 4 provides national energy statistics.)
Sources: Bank Negara Malaysia; official and Economist Intelligence Unit estimates.
During the past 30 years Malaysia has industrialised rapidly, transforming itselffrom an economy whose livelihood relied primarily on the production ofmineral and agricultural export commodities�palm oil, natural rubber, tropicaltimber and other minor mineral and agricultural products�into an economydominated by manufacturing and services. In 2001 manufacturing accounted for30.6% of nominal GDP, down from 33% in 2000, whereas services increased itsshare to 50.8%, up from 48% in 2000. The manufacturing sector tends to raise itsshare of GDP during (export-led) economic upturns; the share of services tendsto grow in a more stable manner. Malaysia aims to become a fully developednation by 2020.
Malaysia still plays a leading role in world markets for some of its commodities.It is still an important source of rubber and is the dominant world producer ofpalm oil. Palm oil output reached a record 11.8m tonnes in 2001. Manufacturesaccount on average for 85% of gross export earnings. Electronic goods are thesingle most important category and have grown at a double-digit rate for mostof the past 25 years, declining only in 1985 and in 2001. Electronic goodsproduction is heavily dependent on imported parts. It is government policy toraise the domestic content of exports and the value added in production. Thestrong export orientation of the electronics industry makes it vulnerable tofluctuations in global demand. In 2001 Malaysia�s total exports of goodsand services were equivalent to 117% of nominal GDP, a high figure byinternational standards.
A major change in economic structure in Malaysia during the last decade hasbeen the decline in capital investment. Two economic downturns in the past
five years have severely dented gross fixed investment, which fell from 43.1% ofnominal GDP in 1997 to 21.9% in 1999, to stand at 24.9% in 2001. The reductionhas been caused by both lower foreign direct investment (FDI) and lowerdomestic investment. Fearing that a sustained level of lower investment willeventually lead to slower economic growth, the government introducedmeasures to stimulate private domestic investment in the 2003 budget, afterboosting public investment for four consecutive years.
Comparative economic indicators, 2001Malaysia Thailand Singapore Indonesia US
For the past five years the government has followed a stimulative fiscal policy,initially to aid economic recovery from the regional financial crisis and later onto help to narrow the wide, persistent gap between actual and potential output,which in 2001 amounted to 5.6% of GDP. Previously, fiscal policy tended to beprudent, with revenue during the boom years outstripping current outlays and,for much of the 1990s, development spending as well. The budget went intodeficit in 1998. The impact of two domestic demand-boosting packages,introduced during 2001 with a total value of M$7.3bn (US$1.9bn), could still befelt during 2002. The 2003 budget is mildly stimulative, does more to boostprivate-sector investment than consumption, and slows the necessary process offiscal consolidation. The budget forecasts a decline in the fiscal deficit to 3.9% ofGDP in 2003 from an estimated outcome of 4.7% in 2002. The decline is largelyowing to a forecast 7.5% increase in revenue because of faster economic growth,and, to a lesser extent, a mild squeeze on development expenditure. Thegovernment is committed to achieving a balanced budget by 2005, but isunlikely to adhere to this deadline rigidly. (See Reference table 5 for historicaldata on federal government finances.)
Federal government finances, 2002a
M$ bn % change year on yearRevenue 83.6 5.0 Tax revenue 67.5 9.7 Direct taxes 46.1 9.6 Indirect taxes 21.3 10.1 Non-tax revenue 16.1 -11.1
Source: Ministry of Finance, Economic Report 2002.
Monetary policy is accommodative, reinforcing the impact of the currentexpansionary fiscal measures. It is unlikely that interest rates will be cut furtherduring 2002 or 2003, given current low levels and the government�s forecast offaster growth in 2003; interest-rate increases are possible from the second half of2003, but are more likely in 2004. (See Reference table 7 for data on moneysupply growth and Reference table 8 for date on interest rates.)
The Malaysian ringgit has been pegged to the US dollar at M$3.80:US$1 sinceSeptember 1998. The weakness of the US dollar in 2002 came as a relief to theMalaysian authorities, after growing concerns that earlier persistent US dollarstrength was making Malaysia less competitive, especially in relation toneighbouring economies. There is no indication as yet that the government willwant to change the fixed currency regime, but it may become less determined tomaintain the peg once the prime minister, Mahathir Mohamad, has retired inOctober 2003.
A new policy direction in the 2003 budget
Mahathir Mohamad, who is finance minister as well as prime minister, announced achange in policy in the budget speech made on September 20th 2002. Dr Mahathirsaid that the government had redrafted Malaysia�s growth strategy to promotedomestic sources of economic growth. Malaysia had been heavily dependent onforeign investment and trade for too long: in particular, Malaysia had becomevulnerable to changes in import demand and foreign direct investment inflows fromits two main trading partners, the US and Japan. Although government investmenthad helped to offset weakness in the external sector, the ensuing fiscal deficits couldraise borrowings beyond prudent levels. The private sector needed to resume its roleas the main driver of economic growth.Dr Mahathir argued that the private sector was capable of increasing investment tolevels achieved in 1988-97, when growth in investment averaged 21% per year. Thegovernment aimed to promote domestic investment, particularly in services suchas tourism, education, transport and health, with agriculture as a third engine ofeconomic growth together with manufacturing and science. The government�s rolewas to provide the infrastructure, incentives and administrative support for acompetitive business environment. The 2003 budget contained a tax cut for smalland medium-sized enterprises, from 28% to 20%, as well as a host of smallermeasures aimed at boosting domestic investment.Given the lukewarm response of the Malaysian private sector to existing incentivesin recent years, the government�s new strategy is a risky course. In practice, however,it may have no alternative. Without foreign investment or fiscal stimulus, onlydomestic investment can carry growth to a higher level. There is a large chance offailure, either because the domestic private sector remains risk-averse or becauseforeign, especially regional, demand for domestic manufactured products remainslow. In that case, fiscal policy is likely to remain stimulative beyond 2005. This
would lead to a build-up of foreign debt and probably also the abandonment of thefixed exchange rate with the US dollar, in order to raise the competitiveness of thecorporate sector.
Official development strategies have been based on a series of five-year plans.The current plan is the Eighth Malaysia Plan (EMP), which aims for 7.5% annualgrowth in 2001-05, with the objective of becoming a fully developed nation by2020. The structural shift towards high-end manufacturing is expected tocontinue; manufacturing, agriculture and services are expected to contribute35.8%, 7% and 55.1%, respectively, to GDP by 2005. The new growth target will bedifficult to achieve, given that real GDP increased by only 0.5% in 2001; the EMPis likely to disappoint, as did the Seventh Malaysia Plan (1996-2000), whenannual average growth reached only 4.7%, well below the plan�s original targetof 8%.
The 2003 budget announcement of a new private-sector domestic investment-based growth strategy might suggest that a revision of the EMP is necessary, butprobably only changes of emphasis are needed. Under the EMP, economicexpansion is expected to be driven by an upturn in private investment. The EMPaims for an average 19% annual rise in private investment, following an averageannual contraction of 11.6% under the Seventh Malaysia Plan. Public investmentis forecast to grow by only 1.1% per year, contributing a declining share of GDPas it resumes its role as the facilitator of private-sector participation in theeconomy. Under the EMP, foreign investment will remain important, but itsshare of total investment is expected to decline, in part because of expectedglobal competition for foreign funds. The government�s new plans give a greaterrole to private domestic investment, without abandoning the hope of a revivalin total private-sector investment.
Malaysia�s five-year plansSeventh plan Eighth plan
target Outturn targetAnnual average real GDP growth (%) 8.0 4.7 7.5Inflation (av; %) 2.7 3.4 2.7GNP per head (M$; end-period) 14,788 13,359 17,779Unemployment (%) 2.8 3.1 2.7General government balance (% of GNP) 1.5 1.5 1.5Current-account balance (% of GNP) 0.5 6.5 3.9
Source: Economic Planning Unit, Eighth Malaysia Five-Year Plan (2001-2005).
The EMP, together with the Second Industrial Masterplan (1996-2005),emphasises the importance of strengthening the links between industries andproviding them with appropriate support, in particular through thedevelopment of human resources, physical infrastructure and other services. TheEMP aims to achieve its growth targets by boosting productivity: according to theplan, 2.8% of the targeted average 7.5% annual GDP growth will come from anincrease in total factor productivity. A more efficient use of labour and capitalwill hinge on improving the quality and skills of the workforce, which thegovernment may find difficult to achieve within the plan period.
The imposition in September 1998 of capital and currency controls (which werelargely abolished by May 2001) in response to the Asian financial crisis gainednotoriety abroad because they trapped foreign portfolio capital in Malaysia. Inmid-1997 Malaysia was hit by a financial crisis, triggered by heavy selling of theringgit and shares by foreign fund managers. The crisis degenerated into a full-blown recession in 1998. Dr Mahathir refused to accept the assistance of theIMF�which demanded higher interest rates and expenditure cuts as a means ofdealing with the financial crisis�and justified capital and currency controlswith what he called a �disastrous� failure of the free market. Together with thepegging of the exchange rate to the US dollar at M$3.80:US$1, capital controlsallowed for an easing of interest rates without undermining the value of theringgit. Official agencies used the breathing space afforded by capital controls totry to restore the overextended financial system to health. However, thegovernment also bailed out many badly run, but well connected, corporationsat the same time. Criticism of capital controls waned after Malaysia�s economicperformance proved at least as good as that of the regional economies that hadsought the IMF�s help, and after the IMF grudgingly admitted that capitalcontrols might, after all, have a role to play during a balance-of-payments crisis.Although most capital controls have now been lifted, some persist, largely forMalaysian residents; the currency peg remains in place and offshore ringgittrade is still banned. The system of capital controls could easily and quickly berestored during a crisis. The authorities� willingness to impose controls protectsthe ringgit, but also risks making foreign portfolio managers wary of investingin Malaysia.
Dr Mahathir has, for the past 25 years, been the main director of economicpolicy. His personal interests, such as privatisation, a preference for large projectsand visionary schemes such as the Multimedia Super Corridor (MSC), havecharacterised Malaysia�s economic course. In conducting economic policy, thegovernment is assisted by the Economic Planning Unit (EPU), which is in thePrime Minister�s Department. In addition to the prime minister, the ministers offinance and trade and industry determine policy. Since the departure of thefinance minister and economic advisor, Daim Zainuddin, in June 2001,Dr Mahathir has also occupied this position. It is likely that policy will changeafter Dr Mahathir retires, but it remains unclear how or how soon. Policy maybegin to drift but, equally, it may become more flexible, less involved with grandprojects and more in line with economic orthodoxy.
The government remains committed to a policy of privatisation, notwithstandingpast abuses of the privatisation process. A high-profile campaign of privatisinggovernment assets was launched in the 1980s with the explicit intention ofpromoting Malay interests by increasing the share of the nation�s corporate assetsin the hands of bumiputera (ethnic Malays and other indigenous peoples). Criticshave said that many lucrative projects went to political favourites with littleindustry knowledge or expertise. The 1997-98 economic downturn exposed theweaknesses and the lack of managerial skills in many well connected companies.Many companies had to be bailed out and the resolution of the bad debtproblem has been difficult and slow, requiring additional government help. Someof the past excesses may have been exorcised with the forced resignation of the
finance minister, Mr Daim. The commitment to privatisation cannot be separatedfrom bumiputera advancement; although the bumiputera policy does not have thehighest priority, the government will find it difficult to abandon it withoutseriously damaging the political interests of the main government party, theUnited Malays National Organisation (UMNO).
An important taxation change in the 2003 budget was a tax cut for small andmedium-sized enterprises, from 28% to 20%, which was introduced as a meansof stimulating investment by domestic enterprises. The budget contained nobroad-based tax relief, but instead widened and refined a large number ofspecific tax and tariff exemptions and fiscal incentives. There was also no cut inthe corporate tax rate, despite corporate pressure for a reduction. The govern-ment claims that Malaysia�s corporate tax rate is competitive and lower than thatof other countries in Asia and most developed countries, except for Hong Kong,Singapore, Taiwan, Ireland and Germany. Malaysia does not impose tax ondividend income and, in addition, it has a comprehensive system of taxincentives and therefore, the government calculates, the effective tax rate for themanufacturing sector is only 8%.
Economic performance
In line with other countries in South-east Asia, Malaysia has suffered tworecessions during the past five years. The country had enjoyed a decade ofconsistently fast growth, with economic expansion driven by manufacturinginvestment and exports, until the Asian financial crisis of 1997-98. (Reference tables9-11 provide data on Malaysia�s gross domestic product.) Malaysia benefited fromthe surge in global demand for information and communication technologygoods, which pulled the economy out of recession in 1999. But by 2001 it was hitby a downturn in global demand for investment goods, which resulted in aplunge in exports and a sharp fall in GDP growth to only 0.4%. Malaysia�sdependence on exports, particularly electronics and electrical goods, which madeup 60% of exports in 2001, means that economic growth is vulnerable to globalfluctuations in the demand for these products. The dependence cannot bereduced quickly and the shift to other sources of economic growth, which thegovernment is now promoting, could take a long time.
Gross domestic product(1987 prices; % real change, year on year)
Sources: Bank Negara Malaysia; Ministry of Finance; Economist Intelligence Unit and official estimates.
Malaysia�s rapid growth over the last 20 years has been financed and sustainedby high domestic savings and by large inflows of FDI, attracted by Malaysia�swell developed infrastructure, capable administration and well educatedworkforce. These inflows reached a peak of 8.7% of GDP in 1992-93. However,
they never fully recovered after the Asian financial crisis: the inflows stood at4.2% of GDP in 2000 and declined further in 2001 owing to the manufacturingdownturn. In the first half of 2002 net FDI inflows were barely positive.Nevertheless, Malaysia continues to benefit from the trend among companies indeveloped countries to relocate some of their operations to lower-cost centres. Alarge part of FDI inflows is channelled into manufacturing, which in 1998-2000accounted for 43% of FDI inflows. A further 35% went into the services sector.Malaysia is hoping to attract investment in higher-knowledge-content industriesin line with its ambition to become a knowledge-based economy. But Malaysiais increasingly having to do battle with its regional neighbours vying for thatinvestment, most notably China. The government did not announce any largenew initiatives to attract FDI in the 2003 budget, preferring instead to give newinvestment incentives to private domestic companies.
Inflation(% change)
Annual average2001 1997-2001
Consumer price index (2000=100) 1.4 2.7
Source: Bank Negara Malaysia.
The government seeks to control inflation by means of fiscal, monetary andindustrial policies, and also intervenes directly to monitor and control prices. Formost of the 1980s and 1990s it succeeded in keeping consumer price inflation atlow levels, certainly compared with other developing countries. Wheninflationary pressures built up, during periods when the government wasdriving the economy too hard or foreign demand for Malaysia�s exports grewstrongly, monetary tightening, direct price controls and mediation in wagebargaining kept price rises in check. A low inflation climate was also aided by afairly tight fiscal position, at least until the 1997-98 downturn. Producer prices, bycontrast, are far more volatile, far less susceptible to government interventionand generally reflect global commodity prices and cyclical conditions.
The inflationary environment changed following the financial crisis in 1997-98.After a brief price surge caused by the plunging Malaysian ringgit, the economyhas since consistently operated well below its full potential and unemploymenthas risen, notwithstanding sustained fiscal expansion. A further factor that hashelped to moderate inflation is the low interest-rate policy maintained by themonetary authorities since 1997�aided more recently by low US interest rates.Inflationary risks will remain low as long as there is plenty of spare capacity inthe economy and excess labour. Some upward pressure on prices will resultfrom government efforts to reduce subsidies, in particular on fuel, and raiseofficially administered prices, but this will be insufficient to alter the lowinflation climate. Rising producer prices, in particular higher oil prices, in thesecond half of 2002 will also have a limited impact on consumer prices. In 2001annual inflation stood at only 1.4% and average inflation seemed unlikely to riseabove 3% until 2003 or even 2004. (See Reference table 12 for IMF and nationalconsumer price indices.)
The consumer price index (CPI) is the most widely cited measure of pricemovements. It is derived from a weighted average of household expenditurepatterns within five income groups and includes 430 items, of which 20 aresubject to price controls. The 20 controlled items have a high weighting in theindex. By concentrating its attention on these items, the government hasmanaged the index and controlled the official inflation measure. This policy ofcontrolling prices reduces the hardships caused to poorer households byinflation, but both this policy and the CPI itself can conceal underlyinginflationary pressures.
Manufacturing sector real wages(% change)
Annual average2001 1997-2001
Wages 1.5 2.6
Source: Bank Negara Malaysia.
Malaysia�s traditionally tight labour market has eased as a result of theeconomic slowdown. Unemployment stood at only 2.4% in 1997, but edged upafter the financial crisis, briefly falling during 2000 to reach 3.6% in 2001. TheMalaysian authorities consider an unemployment rate of 4% or less a fullemployment level. As in past downturns, the government has responded byrepatriating large numbers of foreign workers, even in 2002, when labour-market conditions improved. Over the past decade Malaysia has experiencedpersistent shortages of skilled labour. As Malaysia moves to become aknowledge-based economy, one of the greatest challenges is the need to equipworkers with new skills. Many government schemes and incentives set up totrain or re-train workers and upgrade skills are in place. (See Reference table 2for historical data on the labour force.)
Wage growth has moderated in recent years. The manufacturing sector hastended to pay the highest wages in the past, a reflection of strong growth inlabour productivity. Two manufacturing downturns in the past five years havedepressed real wage growth to only 2.6% on average, compared with an increaseof 6% during 1997, according to data published by Bank Negara Malaysia (BNM,the central bank). Unusually, in 2001 wage growth in the private non-manufacturing sector exceeded wage growth in the manufacturing sector.Sectoral employment trends have similarly diverged. Manufacturingemployment declined in 2001, but there was a large increase in jobs in theservices sector.
Regional trends
Economic development is concentrated in the western states of the peninsula.Tin mining and plantation development began in the nineteenth century inSelangor, Perak and Johor�areas that, together with Penang, still have the largestconcentrations of manufacturing industry. Penang and the Klang Valley (incentral Selangor, between Kuala Lumpur and the coast) are the main locations ofexport-oriented manufacturing. Penang�s customs-free industrial zones havebeen the focus of investment by international electronics companies, whereas
Skill shortages continue in aneasier labour market
the Klang Valley has the largest and longest-established concentration of generalmanufacturing operations.
Successive five-year plans have fostered the location of industrial projects innew areas, still mainly in states on the west of the peninsula (Kedah, NegeriSembilan and Malacca). In the predominantly rural states on the east coast ofthe peninsula (Kelantan, Terengganu and Pahang) and the two Borneo states(Sabah and Sarawak) industrial activity is mainly related to the processing oflocal raw materials. Timber processing has developed in all of these states.
Primary oil and gas installations are necessarily located close to offshore sources.Terengganu on the east coast of the peninsula and Sabah on the island ofBorneo have reception units. Manufacturing operations using oil and gas havegrown up around these primary industries, including petrochemical facilities inTerengganu and Pahang. Other primary industries have generated similarlyrelated manufacturing units: for instance, a tinplate production line in thesouthern state of Johor serves Malaysia�s main fruit-canning industry. Productionof plantation crops is widely dispersed among all states of the federation.
Kelantan is still dominated by agriculture. Rice and natural rubber account fortwo-thirds of the cultivated area. The state also produces 90% of domesticallygrown tobacco. There is substantial logging activity, but little local sawing andprocessing capacity. Income per head in Kelantan is the lowest and slowestgrowing in Malaysia.
Economic sectors
Agriculture
In recent years the output of the agricultural, forestry and fisheries sectors takentogether has stagnated, and the relative importance of these rural-based sectorswithin the economy as a whole has declined because of the rapid growth of theindustrial and services sectors. (Reference table 13 gives historical data onagricultural and forestry production.) The most important activities aresubsistence or domestic food production (fisheries and the cultivation of ricebeing the most important subsectors) and plantation crops for internationalmarkets, led by rubber, palm oil, cocoa, fruit, pepper, coconut oil and timber.
Agriculture and forestry production, 2001('000 tonnes unless otherwise indicated)
Production of rice, once the dominant subsistence crop of Malay farmers, hasbeen threatened by the general population drift to the towns, competing uses forland and competition for labour from manufacturing industries. As a potentsymbol of traditional Malay life, rice growing continues to attract specialgovernment help, such as schemes for raising yields and productivity. Malaysia
is now a net importer of rice. This is not a problem to the extent that there areimportant surplus countries in the region�Thailand and Vietnam.
Natural rubber is Malaysia�s longest-established large-scale agricultural product.Although refinements in plant breeding and biological controls have raisedyields and enabled growers to manipulate output, the availability of cheap orfamily labour is crucial to productivity levels. Plantation companies rely heavilyon immigrant labour, and have steadily converted plantings to the moreprofitable oil palm. The main source of output is now the smallholder sector.Production has been declining since the late 1980s, dropping by 11.2% to 546,000tonnes in 2001.
The palm oil sector also recruits workers from low-wage countries in the region.Output of palm oil and associated products has continued to expand, reaching arecord 11.8m tonnes in 2001�an increase of 8.9% compared with 2000�andaccounting for 35% of the total value added in the agricultural sector. Malaysiacontinually tries to find new uses for palm oil. The commodity has benefitedfrom the view of dieticians that it is a healthy alternative to animal fats andoilseed products, and it is also favoured because it is not proscribed by anyreligious dietary rules (an important selling point in Pakistan, India and theCentral Asian republics). Malaysia has also offered palm oil in part-payment forits weapons purchases abroad.
Malaysia is still a major supplier of tropical timber. It has frequently beencriticised for allowing the destruction of its rainforests by logging companies. Inthe interests of maximising income from forest products, it has graduallyextended the ban on direct exports of saw logs from all states except Sarawak. Ithas also increased statutory and administrative controls on logging and hasbegun to enforce more strictly the conditions applying to logging licences(including requirements for reafforestation). As a result, log production has fallen,affecting both exports of logs and the production of sawn timber. Theproduction of saw logs declined by 14.5% in 2001, depressed by poor externaldemand, to stand 36.7% below the level achieved in 1997.
Mining and semi-processing
Minerals production, 2001Crude oil ('000 barrels/day) 666Natural gas (m standard cu ft) 4,542Tin ('000 tonnes) 5.0
Source: Bank Negara Malaysia, Monthly Statistical Bulletin.
The production of minerals accounts for 22% of Malaysia�s industrial output,although most of the total is made up of petroleum and natural gas (marketedas liquefied natural gas, or LNG). In recent years 63% of crude oil output hascome from offshore fields in peninsular Malaysia, 23% from Sarawak and 14%from Sabah. Malaysia has six refineries with a total capacity of 520,000barrels/day for both domestic consumption and export, supplying more than80% of total domestic demand for petroleum products. A new oilfield was
discovered in Sabah in 2000. A total of 18 oil production wells and 38development wells were drilled in 2000.
In contrast to the slowly declining trend of crude oil output, production ofnatural gas has continued to grow. Between 1997 and 2001 production increasedby 15%. In 2001 natural gas output rose by 4% in response to increased utilisationby the power generation sector, which accounts for 72% of the domesticutilisation of natural gas. External demand for LNG was sluggish, as theeconomic slowdown hit the main customers, Japan and Taiwan. In December2001 a new offshore gasfield in Terengganu started operations, to cater for futureincreases in demand. Three new gasfields are expected to begin production in2002, and a further five in 2003.
Malaysian output of tin concentrates reflects the precipitous decline in miningactivity since the mid-1980s. The 4,972 tonnes of tin concentrate produced in2001 represent a 21% year-on-year fall in output, in part as a result of the closureof some tin mines. There are now around 30 units of all types, compared withthe 141 units in operation in 1990. Malaysia�s other main mineral operation is theMamut copper mine in Sabah. Iron ore and bauxite ore are also mined.(Reference table 14 includes historical data on minerals production.)
Manufacturing
Since the 1970s Malaysia has built up its export-oriented manufacturing capacitybased on inward direct investment. Previously, the country had developedimport-substitution industries and industries based on processing of output fromthe domestic primary sector. Malaysia�s development of export-relatedproduction has been highly successful: the value added in exports of goods andservices as a percentage of GDP, which in 1980 stood at 14%, had by 2000reached a peak of 117.5%, declining to 108.2% in 2001. Manufacturing accountedin 2001 for 31% of GDP, down from 33% in 2000.
The export-oriented industries are the biggest component of manufacturing,accounting for around three-quarters of the total. Manufacturing has a 70% shareof the industrial production index (1993 base). The domestic-oriented sectoraccounts for around one-quarter of manufacturing, with the main componentsconsisting of the fabrication of metal products, non-metallic mineral products,food products and transport equipment.
Manufacturing, 2001(%)
Output growth -6.4 Export-oriented -10.2 Domestic-oriented 7.4Share of labour force 26.7Share of total outstanding loans 14.5Capacity utilisation 78.0
The main location of export-oriented manufacturing was until not long ago theisland of Penang and the central industrial belt to the west of Kuala Lumpur, theKlang Valley. Other manufacturing centres are emerging as a result of adeliberate government policy to disperse manufacturing. The governmentremains hopeful that a centre of high-technology industry will develop in theso�called Multimedia Super Corridor (MSC), a 750-sq km information-technology zone near Kuala Lumpur. The MSC is one of the pet projects of theprime minister, Mahathir Mohamad, which has been hit by two economicdownturns and has been slow to take off owing to limited interest frompotential investors.
Although the government aims to stimulate inward investment, all industrialprojects are subject to an approval system, operated through the MalaysianIndustrial Development Agency (MIDA). This involves vetting equity stakes,financing, technology transfer, local content and, increasingly, the products andprocesses concerned. In the past the government seemed ready to welcome anyinvestment promising industrial employment. As skilled and semi-skilledworkers became increasingly scarce, MIDA stopped granting approvals to low-productivity industries, and the government encouraged existing low-productivity industries to relocate to Thailand or Indonesia.
A long period of strong growth came to an end in 1998, when manufacturingproduction fell by 10.2%, undermined by the combined decline in domestic andexternal demand caused by the regional downturn. The turnaround was swift,with an increase of 12.9% in 1999 being followed by a surge of 25% in 2000,driven by overseas demand for products from the electronics sector, whichboosted its output by 21% in 1999 and 44.8% in 2000. The renewed downturn in2001 was again focused on electronics production, which plunged by 20.1%, andoverall manufacturing output declined by 6.4%. Future growth in manufacturingmay be more focused on domestic and regional demand than has been the casein recent decades. (Reference table 15 details changes in the output of themanufacturing sector.)
Construction
The 1997/98 financial crisis was a turning point for the construction industry.Construction had been an important contributor to GDP growth, expandingrapidly in the years preceding the 1997/98 recession, driven by strong private-and public-sector demand, the expectation of continuing high economic growthand attractive capital gains from property, and the easy availability of funds fromthe local banking system and stockmarket. Having averaged 15.2% annually in1994-96, growth slowed to 10.6% in 1997 owing to oversupply, the nearcompletion of major projects and the deferral of several planned infrastructuredevelopments. The construction sector then contracted by 24% in 1998 and by4.4% in 1999, as private investment plunged. Some stability resumed thereafter,with the sector registering growth of 1% in 2000 and 2.3% in 2001, largely as aresult of the government�s fiscal stimulus. Without government projects or asignificant improvement in the economic outlook, the construction sector is
likely to remain in the doldrums. (See Reference table 16 for historical data onthe construction sector.)
Financial services
Malaysia has a well developed financial sector; banks (the central bank, or BankNegara Malaysia; commercial banks; finance companies; merchant banks anddiscount houses) account for two-thirds of the sector�in terms of assets�andnon-bank financial intermediaries (provident, pension and insurance funds;development finance institutions; savings institutions; and other financialintermediaries such as unit trusts, building societies, leasing, factoring, andventure capital companies) for one-third. Since the 1997-98 financial crisis theauthorities have reorganised the financial system, tightened supervision and setlong-term targets for the development of financial institutions and capitalmarkets. Before the crisis, commercial banks generally enjoyed profitableexpansion during the period of rapid economic growth, but profit margins haveremained under pressure since then. (Reference table 17 provides historical dataon banks� assets and liabilities.)
Assets of the financial system, end-2001Assets (M$ bn) % share
Banking system 865.9 66.9 Bank Negara Malaysia 149.7 11.6 Commercial banks 529.9 40.9 Finance companies 121.7 9.4 Merchant banks 41.1 3.2 Discount houses 23.8 1.8Non-bank financial intermediaries 429.3 33.1 Provident, pension & insurance funds 294.3 22.7 Employees' Provident Fund 191.1 14.8 Development finance, savings & other institutions 135.0 10.4Total 1,295.2 100.0
Source: Bank Negara Malaysia, Annual Report.
An unusual feature of the Malaysian financial sector is that financial institutionsare required to provide loans �at reasonable cost� to priority sectors�allbumiputera groups (groups owned by ethnic Malays or other indigenouspeoples), low-cost housing and small-scale enterprises. The government also setslending targets for the banking sector within an overall macroeconomicframework and threatens sanctions when targets are missed, as has happened inrecent years. In 2001 growth in outstanding loans reached only 3.4%, well belowthe official target of 8%; the target for 2002 is again 8% and likely to be missedonce more. In September 2002 Dr Mahathir said that reserve requirements�theamount kept interest-free with the central bank�might be raised, increasing coststo the banks, unless they started to lend more aggressively.
The 1997-98 financial crisis was a watershed for the financial sector, which wasoverextended and undermined by imprudent lending. During the decade beforethe crisis, credit had expanded by an annual average of almost 30%�much fasterthan growth in nominal GDP�to fund the investment boom. A large proportionof the credit created was directed towards property development and into
stockmarket investments. By end-1997 outstanding loans were equivalent to 170%of GDP, one of the highest such ratios in the world. A sizeable proportion ofthese borrowings was collateralised by shares whose value had fallen steeply.When the crisis hit and the economy turned down, non-performing loans(NPLs) soared, precipitating a serious banking crisis.
The two agencies established by the government to help the banks to cope withthe consequences of the crisis�one to manage faulty assets and another to aidbank recapitalisation�had largely completed their work by the end of 2001. Aseparate corporate debt restructuring agency ceased to operate in late 2002,having failed to force some large corporates to restructure. As the economythreatened to go into recession during 2001, the NPL ratio (NPLs as a percentageof bank loans) began to rise again to 11.5% at end-2001 (on a 3-monthclassification), compared with 9.6% at end-2000. The biggest source of NPLscontinued to be the property sector, accounting for 41% of total. But after therecent recapitalisation, the banking system is better able to withstand thedeterioration in asset quality.
The government also used the financial crisis as an opportunity to push throughthe restructuring of the financial sector. A major consolidation of the financialsector was considered necessary to ensure the emergence of strong, wellcapitalised institutions capable of competing effectively in an increasinglyglobalised environment. The merger programme to reorganise 58 locally ownedcommercial banks, merchant banks and finance companies from 58 into 10banking groups was completed in 2000; business integration and rationalisationwas carried out during 2001. In March 2001 Bank Negara Malaysia (BNM)published a ten-year financial sector masterplan (FSMP), which aims tostrengthen further the sector�s competitiveness. It consists of a large number ofrecommendations, the implementation of which is closely monitored by thecentral bank. The first, current phase focuses on the building of domesticcapacity. It includes benchmarking bank performance against internationalstandards to improve results.
Malaysia has a sizeable, fast-growing Islamic banking sector, which at end-2001accounted for 8.2% of banking system assets and 9.5% of deposits. Rapidexpansion has been fostered by the introduction of new Islamic financialinstruments, as well as official promotion of Islamic banking and of KualaLumpur as a regional Islamic financial centre. The FSMP has set a target forIslamic banking to hold 20% of banking assets by 2010.
The government�s imposition of currency and capital controls in 1998 initiallyappeared to have ended the government�s hopes of turning Kuala Lumpur intoa regional centre. The bail-outs of politically well connected entrepreneurs tothe detriment of minority shareholders also undermined Malaysia�s free-market credentials. The last residual restriction on foreign investors, the 10%levy on the repatriation of profits from portfolio investments held for less thanone year, was not scrapped until May 2001. Undaunted, the government inFebruary 2001 presented a ten-year capital market masterplan (CMM), settingout the strategic position and future direction for the capital market. Under the
The financial workout islargely completed
A financial sector master planfollows bank mergers
CMM, a large number of measures and initiatives are being implemented tomake the Malaysian capital market more attractive to borrowers and investorsand also to lower the cost of fundraising. In 2001 measures were introduced tostrengthen corporate governance by improving the rights of minorityshareholders. The Kuala Lumpur Stock Exchange (KLSE) will be allowed totake action against the directors of listed companies and their advisers. Thestockmarket authorities have issued warnings and fines, but their authoritywill not be credible until they are seen to act against one of the large,politically well connected quoted companies.
Much of the focus of the CMM is on the development of the corporate bondmarket, but the plan also aims to develop the venture capital market byencouraging the participation of foreigners and local institutional investors.Foreign majority ownership of unit trust companies will be permitted from 2003.In June 2001 the KLSE launched a new derivatives exchange called the MalaysianDerivatives Exchange (MDEX), aimed at introducing new products includingbond futures and Islamic index futures. The new bourse is the result of themerger of the Commodity and Monetary Exchange of Malaysia (COMMEX) andthe Kuala Lumpur Options and Financial Futures Exchange (KLOFFE).
The equity market remains an important source of finance for the private sector,especially when share prices are high. During the last four years, corporationshave relied mainly on the bond market for the supply of capital market funds. In2001 only 27% of total funds raised by the private sector in the capital marketwere raised through equity issuance, principally by means of rights issues, initialpublic offerings and private placements. (Reference table 18 includes historicaldata on the stock exchange.)
Other services
Services (including financial services) are the largest part of national output,accounting for 56% of constant-price GDP in 2001. The share of services in GDPhas continued to increase steadily, although it tends to decline whenmanufacturing grows strongly, usually during export-led recoveries. The sector isusually divided into intermediate services (21.7%) and final services (34.1%).Intermediate services include transport, storage and communications, andfinance, insurance, property and business services. Final services consist ofutilities; wholesale and retail trade, hotels and restaurants; government services;and other services.
The growth in intermediate services has fluctuated strongly in recent years,largely because of the finance and property sectors. During the last three years,intermediate services have expanded rapidly, increasing by 6.5% in constantprices in 2001. The sector has benefited from the fast growth of mobile phoneand Internet services, as well as increasing transshipment activities in localports, which have been promoted to take business away from the Port ofSingapore; all three factors are likely to persist in the near future.
The growth of final services has generally been fairly stable in recent years, inpart because of the government�s expansionary economic policies. In 2001 final
services increased by a real 3.9%. The strong expansion of production by theutilities (gas, water and electricity) is continuing as consumer demand grows. Thewholesale and retail trade, hotel and restaurants category also benefited from thesustained fiscal stimulus, as well as from a surge in foreign tourist arrivals.
The Eighth Malaysia Plan (EMP) set a target of 9.5% annual average growth intourism receipts. This is likely to be far exceeded: in 2001 alone tourism receiptssurged by 47.5% as a result of strong growth in tourist arrivals and day trippers,as well as higher spending per head. The tourism sector continues to benefitfrom strong government support to promote Malaysia as a tourist destinationand increase business travel, with the aim of diversifying and broadening theeconomic structure. These efforts are likely to be affected by the perceived rise interrorist activity in South-east Asia, particularly in the wake of the terroristattacks on Bali, Indonesia, in October 2002. Nevertheless, Malaysia is aiming todiversify its tourist market, boosting both foreign and domestic tourism, openingniche areas such as eco-tourism and agro-tourism, as well as new markets, suchas Eastern Europe, West Asia, India and China. The supply of hotel roomscontinues to rise rapidly. In addition, the government is increasingly promotingtourism by hosting international conventions and major sporting events.
The external sector
Trade in goods
International trade has played a crucial role in Malaysia�s economicdevelopment, starting with the early export of raw materials. During the 1970sindustrial development was mainly based on export-oriented manufacturingand on imported inputs. Many of the fastest growing production lines,particularly in the electronics sector, were set up on the basis of low localcontent, with the result that the bill for imported manufactures rose in line withrevenue from exports. Malaysia�s merchandise trade account has usually been insurplus: the surplus soared during the 1997/98 recession and has remained highin its aftermath.
In 2001 the trade surplus (customs basis) fell to M$53.7bn (US$14.1bn) fromM$61.8bn in 2000 because of a downturn in the electronics cycle and aslowdown in the global economy; both exports and imports contracted. Thecontinued high merchandise and current-account surpluses reflect the fact thatMalaysia�s economy has failed to recover fully after the Asian financial crisis: inparticular, demand for imported capital goods has not returned to its pre-crisislevels, as private investment remains depressed.
The primary commodity sector accounted for 13% of total exports in 2001�agricultural commodities accounted for 6% and minerals 7%. With the exceptionof palm oil, Malaysia�s economy continues to move away from plantation andforestry products, which form the bulk of agricultural exports. Exports ofminerals consist almost entirely of crude oil and liquefied natural gas (LNG). The
A highly successful expansionof tourism
Export growth is matched byrising imports
A persistent trade surplus
The global market determinesprimary export earnings
main determinant of primary export earnings is global oil prices; fluctuations inexport volumes are of less importance.
Exports of manufactured goods accounted for 85% of Malaysia�s total exports in2001. The share of manufactured goods in total exports soared during the 1980sand 1990s from a level of 20% in the late 1970s. Exports of electronic andelectrical goods accounted for 70% of manufactured exports in 2001, a share thatstood at around 30% in the late 1970s. The heavy dependence on electronic andelectrical goods means that total exports rise and fall as global demand for theproducts of those two sectors fluctuates. The Malaysian government isencouraging manufacturers and exporters to move up the value chain andimprove product quality, in order to improve international competitiveness. Thegovernment promotes export trade through the Malaysian External TradeDevelopment Corporation (MATRADE). (Reference tables 19-22 provide exportand import data.)
Malaysia�s international trade has generally benefited from the relativeexchange-rate stability created by the ringgit:US dollar exchange-rate peg sinceSeptember 1998. Before this, Malaysia was vulnerable to fluctuations in thecurrencies of its main trading partners, particularly Japan, which was its mainsupplier, especially of parts and components. Although this dependence hasbeen reduced, it has not disappeared altogether. The vulnerability to movementsin the US dollar and the yen may increase as trade is increasingly liberalised,particularly with the implementation of regional free-trade agreements.
The US is Malaysia�s largest export market and its most important tradingpartner in aggregate, with a trade value of M$112.5bn and a share of 18.3% oftotal trade in 2001. Japan remains Malaysia�s principal source of imports and isalso the country�s second largest trading partner, with a trade value of M$98.5bnand a 16% share of total trade. The importance of Japan is gradually declining, asMalaysia diversifies its trade, regional trading links intensify and the Japaneseeconomy remains depressed. In 2001 the EU became a more important exportmarket than Japan as total trade with the EU reached M$81.5bn, a 13.3% share ofthe total.
Main trading partners, 2001Exports to: % of total Imports from: % of totalUS 20.2 Japan 19.2Singapore 16.9 US 16.0Japan 13.3 Singapore 12.6Netherlands 4.7 Taiwan 5.7Hong Kong 4.6 China 5.2China 4.3 South Korea 4.0
Source: Bank Negara Malaysia, Annual Report.
The Association of South-East Asian Nations (ASEAN) economies are much lessintegrated than EU economies, but internal trade has grown rapidly. In 2001Malaysia�s trade with the main ASEAN countries (Singapore, Thailand,Indonesia and the Philippines) was worth M$146.3bn, or 23.8% of total trade.However, largely owing to the region�s exposure to the global downturn, this
represented a sharp fall�15.2%�compared with trade with these countries in2000. Another reason for this decline is the expansion of port facilities inMalaysia, which has taken away entrepôt trade from Singapore.
The 2001 trade figures also highlight the rapid rise of trade with China, whichbecame Malaysia�s fourth largest single trading partner, with a 4.7% share of totaltrade. Exports to China grew by 26% in 2001, when exports to most destinationsfell. The opening up of China following its entry into the World TradeOrganisation (WTO) in December 2001 is likely to lead to a further rise in itsshare of Malaysia�s trade. (Reference table 23 provides data on trading partners.)
Malaysia has a persistently large deficit on invisibles trade. The two largestcategories of net payments are both by-products of the country�s successfulindustrialisation drive: investment income, mainly as a result of foreign directinvestment (FDI), and services associated with merchandise trade, such asinsurance and freight. (Reference tables 24 and 25 provide a full breakdown ofthe balance of payments, based on IMF and national calculations.)
The deficit on the income account, which consists mainly of investment incomeflows, declined by 11.4% to M$25.6bn in 2001 from M$28.9bn in 2000. Thesmaller deficit mainly reflected lower profits and dividends accruing to foreigndirect investors, particularly in the export-oriented electronics and electricalindustries, as the global economy turned down. Bank Negara Malaysia (BNM,the central bank) treats all profits on the overseas equity of FDI ventures as ifthey are payments across the exchanges, even if they are retained andreinvested. Such reinvestments are then treated as capital inflows.
A large flow of profits to overseas equity holders is a consequence of an FDI-financed industrialisation programme. Rising remittances from overseasinvestment by Malaysian companies tend to reduce the net size of the deficit,but, as the government has relaxed the rules that formerly limited theproportion of equity in approved investments that non-residents were allowedto own, gross profits due to non-residents have risen faster.
The weakness in Malaysia�s trade-related services is of long standing, but ishighlighted whenever exports rise quickly during export-led economicrecoveries. Because of the economic downturn in 2001, the services deficitnarrowed from M$11.2bn in 2000 to M$8.4bn. The government has had limitedsuccess in trying to reduce the trade-related services deficit, although this formspart of its long-term economic plans. It has had more success in boosting thesurplus on the travel account as Malaysia develops its tourism business. In 2001the travel account surplus soared to M$16.1bn from M$10bn in 2000.
Capital flows and foreign debt
Malaysia has long had a low rate of international indebtedness on both theofficial and private accounts, although external indebtedness rose sharply during
the Asian financial crisis. At its peak in 1998, the ratio of external debt to GDPstood at 58.5%, but it declined in the three following years, reaching 46.6% ofGDP in 2001.
Malaysia has been careful to avoid becoming dependent on external debt andthis determination has intensified since the Asian financial crisis. Thegovernment�s external debt management strategy requires that corporationsseeking external funds for operations in Malaysia must assure the authoritiesthat they will have the foreign-exchange income to repay the debt. Thegovernment encourages companies to raise medium- and long-term loans andavoid short-term debt. In 2001 about two-thirds of outstanding medium-andlong-term debt had remaining maturities of more than three years. Short-termdebt is matched against international reserves. National sources indicate that in2001 short-term debt was equivalent to 19.9% of international reserves andrepresented only 14% of total external debt. The bulk of Malaysia�s externaldebt�77%�is denominated in US dollars; 15% was denominated in yen atend-2001.
Foreign debt, 2000Total debt (US$ bn) 41.8Total debt (% of GNP) 46.6Debt-service ratio (%) 5.2Interest payments ratio (%) 2.0
Source: World Bank, World Debt Tables.
Although government external borrowing at end-2001 amounted to only 14% oftotal external debt, it has increased rapidly in recent years to finance theexpansionary fiscal programme. Federal government external debt outstandingreached M$24.3bn at end-2001 according to government sources, up by 29.3%year on year. The main funding source for the government�s financingrequirement has been the domestic capital market. In the 2003 budget thegovernment stated its intention of funding a larger share of its financingrequirement through the international capital markets to prevent crowding outprivate-sector investment in the domestic market. (Reference table 26 sets outWorld Bank data on debt and Reference table 27 provides data on aidcommitments.)
Malaysia experienced its most serious balance-of-payments crisis in 1997-98. Asthe Asian financial crisis deepened, the sell-off in the currency and equitiesmarkets resulted in officially estimated net private short-term outflows ofM$12.9bn in 1997 and M$20.6bn in 1998�and the imposition of capital controlsin September 1998. The curbs were underpinned by the fixing of the exchangerate at M$3.8:US$1 and were designed to quash speculation in the local currencyand shares�therefore targeting primarily footloose short-term flows�as well asto encourage further monetary easing to jump-start the stalled economy.Although the government made clear that the repatriation of principal andprofits from direct investments was unaffected by the curbs, many investors feltthat any regime that restricted capital flows could well disrupt such transfers.Net long-term capital inflows fell back to M$10.6bn in 1998 from M$19.1bn in1997, before edging back up to M$12.6bn in 1999.
In the following two years the government gradually relaxed capital controls.Net long-term capital inflows fell back to M$11.1bn in 2000, but in May 2001 thegovernment abolished the flat 10% exit tax on the repatriation of profits fromportfolio investments held for less than one year, thus removing the last residualrestriction on foreign portfolio investors. Capital controls now exist forMalaysians only. However, the ringgit�s peg with the US dollar remains andoffshore ringgit trade is still banned.
Foreign reserves and the exchange rate
The 1997-98 balance-of-payments crisis was the last time that there was a big fallin Malaysia�s international reserves. Large outflows of non-resident short-termcapital and intervention to support the exchange rate of the ringgit reducedforeign-exchange reserves from US$27bn at end-1996 to US$20.8bn at end-1997,equivalent to 3.4 months of retained imports, down from four months in 1996. Asecond, minor fall occurred during 2001, when doubts about the sustainabilityof the ringgit peg and speculation about a change in the political leadershipboth intensified�reserves fell to US$26.3bn by mid-April 2001 from US$29.5bn atend-2000. Subsequently, reserves began to rise again in the second half of theyear owing to the large merchandise trade surplus. Reserves rose to US$30.5bnat end-2001, equivalent to 5.1 months of imports, and have since risen further, inpart because of increased overseas borrowing. (Reference table 28 providesinformation on foreign reserves.)
Until September 1998 the international value of the ringgit was managed byBNM in relation to an international basket of currencies with, until mid-1997,allowance made for some appreciation to reflect the underlying strength of thecurrency owing to Malaysia�s buoyant export performance and high rate ofcapital inflows. Following wide fluctuations in the value of the currency during1993-94, the central bank had imposed restrictions on non-resident holdings,most of which were dismantled from late 1994 onwards. In 1995 the ringgitfollowed the yen�s decline against the US dollar. The ringgit tumbled heavilyfrom mid-1997 as investor confidence in the region�s economies wasundermined, triggered by the floating of the Thai baht. The ringgit has beenpegged at M$3.80:US$1 since September 1998. Initially, large capital inflowsresulting from huge current-account surpluses and rising portfolio inflows meantthat the ringgit was undervalued at this rate, which resulted in sterilisation bythe central bank in 1999 and 2000 to reduce upward pressure on the exchangerate. Later on, ringgit undervaluation turned into overvaluation as the US dollarremained strong against most global currencies, causing many regionalcurrencies to fall against the ringgit in line with South-east Asia�s worseningeconomic and political outlook. The situation changed again in early 2002,when the US dollar began to weaken, easing pressure for a change in the rate orthe abandonment of the ringgit peg altogether. (Reference table 29 provideshistorical data on exchange rates.)
The Association of South-East Asian Nations (ASEAN) was established in 1967.The five original members were Indonesia, Malaysia, the Philippines, Singaporeand Thailand. Subsequent joiners were Brunei (1984), Vietnam (1995), Laos andMyanmar (1997) and, most recently, Cambodia (1999).
ASEAN summit meetings, which bring together the heads of government ofmember states, must now be held every three years. The most recent was inPhnom Penh, Cambodia, in November 2002. Informal summits of heads ofgovernments are also held. In addition, member states� foreign and economicaffairs ministers meet annually. Joint meetings of foreign and economic affairsministers are held before each ASEAN summit. There is also a standing committee(consisting of the members� accredited ambassadors to the host country), whichusually meets every two months. There is a permanent secretariat, based inJakarta, Indonesia, and a number of committees.
The organisation started with grand objectives, but has generally failed todeliver. Early hopes that ASEAN could engineer a regional economicdevelopment strategy�with particular countries concentrating on particularindustries�were soon dashed. In 1977 the Basic Agreement on the Establishmentof ASEAN Preferential Tariffs was concluded, but a decade later only about 5% oftrade between members was covered by this system. (Members had beenpermitted to exclude �sensitive� sectors, a let-out clause that a subsequentagreement in 1987 only slightly curtailed.)
Plans for a proper ASEAN free-trade area (AFTA) were unveiled in 1992, withthe aim of achieving this by 2008. A common effective preferential tariff (CEPT)scheme was applied in 1993, providing for the gradual reduction of tariffs onintra-ASEAN trade in certain goods over a number of years. Again, however,member states could exclude �sensitive� items, limiting progress. A new AFTAprogramme, with a wider spread of products covered, was launched in 1994.During the mid-1990s the timescale for implementing the programme wassteadily tightened, with the aim being to reduce tariffs on most goods to below5% by 2000. A limited AFTA, between the original five members of ASEAN andBrunei and involving a reduction on tariffs on intra-ASEAN trade to between 0%and 5%, came into operation on January 1st 2002. (Recent joiners have beenallowed more time.)
The 1997-98 regional financial crisis exposed ASEAN�s failings in a brutal fashion.The organisation was unable to stop the regional currency devaluations, or toalleviate the subsequent economic hardship. A Statement on Bold Measures,released at end-1998, was exactly the opposite of what the title implied.Unfolding events in Indonesia then moved the focus on to the organisation�ssecurity plans. ASEAN members� commitment to the principle ofnon-interference in the internal affairs of other members complicated theresponse to the East Timor crisis. (Some members did eventually participate in
the multinational force that oversaw the territory�s transition to independencefrom Indonesia, but not under ASEAN auspices.)
On the economic front, ASEAN�s slow progress towards AFTA has encouragedsome of its members, notably Singapore, to opt instead for bilateral trade pacts.Singapore�s bilateral trade agreement with New Zealand in 2000 promptedprotests from other ASEAN members, but the island state is pursuing similaragreements with other countries, including the US, and in 2002 concluded anagreement with Australia. (It is unlikely that this approach will prove universallyapplicable, as the absence of an agricultural sector in Singapore makes it mucheasier for it to negotiate with trading partners with heavily protected primarysectors.) A decision in 2001 by various ASEAN members to set up bilateralcurrency-swap arrangements to protect against currency volatility is limited inscope, and does not presage further ASEAN economic collaboration.
The organisation�s political hopes could be severely tested in the next few years.Changing governments in member states could undermine any remainingpretence about political consensus in the region. On the security front, theASEAN Regional Forums (ARFs�which bring together the ASEAN ministers offoreign affairs with those of other countries, notably China) are likely to remainjust talking shops, with little impact on changing geopolitical trends.
Sources of information
Bank Negara Malaysia, Annual Report, Kuala Lumpur
Bank Negara Malaysia, Monthly Statistical Bulletin, Kuala Lumpur
Department of Statistics, External Trade Summary, Kuala Lumpur
Department of Statistics, Survey of Manufacturing Industries, Kuala Lumpur
Department of Statistics, Yearbook of Statistics, Kuala Lumpur
Economic Planning Unit, Eighth Malaysia Five-Year Plan (2001-2005), KualaLumpur
Malaysian Industrial Development Agency (MIDA), Statistics on theManufacturing Sector, Kuala Lumpur
Ministry of Finance, Economic Report (annual), Kuala Lumpur
Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)
Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ
IMF, International Financial Statistics (monthly), Washington, DC
International Institute for Strategic Studies, Military Balance (annual), London
OECD, Financial Statistics (monthly), Paris
OECD, Geographical Distribution of Financial Flows to Developing Countries(annual), Paris
General governmentRevenuecd 79.8 69.4 70.9 76.0 91.6Operating expenditure -50.1 -50.3 -54.3 -64.4 -72.3Current surplus 29.6 19.1 16.6 11.6 19.3Non-financial public enterprisesRevenue 69.7 73.4 98.2 112.9 105.1Current expenditure -42.0 -49.5 -61.6 -71.7 -65.9Retained income 27.7 23.9 36.6 41.2 39.1Public-sector current surplus 57.3 43.0 53.3 52.8 58.3Development expenditure 40.0 46.8 46.4 50.4 65.4 General government 18.7 17.1 21.0 27.1 35.7 Non-financial public enterprises 21.3 29.7 25.4 23.4 29.7Overall balance 17.3 -3.8 6.8 2.3 -7.1 % of GDP 6.1 -1.3 2.3 0.7 -2.1Memorandum itemGDP at current market prices 281.8 283.2 300.8 342.2 334.6
a Actual. b Estimates. c General government comprises federal government, state governments, statutory authorities and local governments.d Excludes transfers within government.
Sources: Bank Negara Malaysia, Annual Reports; Ministry of Finance, Economic Reports.
Reference table 7
Money supply(M$ m unless otherwise indicated; end-period)
Bandar Seri Begawan (capital; population 27,285, 2001 census)
Tropical
Hottest month, August, 24-33°C (average daily minimum and maximum); coldestmonth, January, 24-30°C; driest months, February and August, 100 mm averagerainfall; wettest months, January and November, 3,000 mm average rainfall
Brunei dollar or ringgit (Br$)=100 sen (cents). Average exchange rates in 2001:Br$1.78:US$1; Br$2.57:£1. Exchange rates on December 6th 2002: Br$1.77:US$1;Br$2.78:£1
8 hours ahead of GMT
January 1st (New Year�s Day); February 1st (Chinese New Year), 12th (Hari RayaAidiladha, Feast of the Sacrifice), 23rd (National Day); March 5th (Islamic NewYear); May 14th (Prophet Mohammed�s birthday), 31st (Royal Brunei ArmedForces Day); July 15th (sultan�s birthday); September 24th (Israk Mikraj,Ascension of the Prophet Mohammed); October 27th (beginning of Ramadan),November 12th (Anniversary of the Revelation of the Koran), 26th (Hari RayaAidilfiltri, end of Ramadan); December 25th (Christmas Day)
Land area
Population
Main towns
Climate
Weather in Bandar SeriBegawan (altitude 300 metres)
Brunei Darussalam, or Brunei Abode of Peace, is a small autocratic sultanatelocated on the north-west coast of Borneo. It is surrounded by the Malaysianstate of Sarawak, and the Malaysian state of Sabah and the Indonesian state ofKalimantan are close neighbours. The sultan, Paduka Seri Baginda Sultan HajiHassanal Bolkiah Mu�izzaddin Waddaulah, is also the prime minister, ministerof finance and minister of defence. There is a hereditary aristocracy and thechecks on excessive executive power are few. The oil and gas industry has madethe small state of Brunei one of the richest in the world, although income perhead has fallen since the Asian economic crisis of 1997-98.
Political background
The Brunei sultanate rose to prominence in the 15th and 16th centuries, when itcontrolled coastal areas of north-west Borneo, parts of Kalimantan and also thesouthern Philippines. The expansion of European colonialism signalled thebeginning of a long period of decline. In the 19th century internal strife hastenedthis decline and most of Brunei�s remaining Borneo territory was lost toSir James Brooke, the so-called White Rajah of Sarawak, who had acquiredSarawak in 1841. Rather than be absorbed by Sarawak, Brunei voluntarilybecame a British protectorate in 1888. The Limbang district was lost to Sarawakin 1890, splitting the country in two. In 1906 a treaty was signed between the UKand Brunei, making Brunei a full protectorate. In 1929 oil was discovered inSeria. Oil and gas continue to be the basis of Brunei�s wealth.
The present sultan�s father, Omar Ali Saifuddien, who ascended the throne in1950, was keen to maintain a separate Brunei identity and control its oil wealth,and consequently resisted British proposals to merge Brunei with Sarawak andBritish North Borneo (Sabah). In 1959 a written constitution was introducedgiving Brunei internal self-rule under British protection. An election for aLegislative Council was held in 1962, which the Parti Rakyat Brunei (BruneiPeople�s Party, or PRB) won in a landslide victory. When the PRB was preventedfrom forming a government, it staged an armed rebellion, which was suppressedby Gurkha units of the British army. A state of emergency was declared and thishas been renewed every two years since. In October 1967 Sultan Omar AliSaifuddien was succeeded by his eldest son, Hassanal Bolkiah, who is thepresent sultan. Brunei became a fully independent, sovereign state onJanuary 1st 1984.
Recent political developments
Political activity and criticism of the system have been deterred by the lack ofelections, the banning of the PRB, the state of emergency, media controls andcensorship, the influence of the national ideology, Malay Islamic Monarchy, andthe propagation of cultural and religious values. Political parties�the few thatexist�lead a perilous existence. The Parti Kebangsaan Demokratik Brunei (BruneiNational Democratic Party, or PKDB) emerged in 1985, but was banned in 1988
and its leaders imprisoned when it called for free elections and an end toemergency rule. The Parti Perpaduan Kebangsaan Brunei (the Brunei NationalSolidarity Party or PPKB), which split off from the PKDB, has been more closelyallied with the government, but its activities remain circumscribed and the partyhas little influence.
Although the scandal surrounding the sultan�s brother, Prince Jefri, who wascharged in 2000 with misappropriating US$14.8bn in state funds to subsidise hislavish lifestyle, has subsided, the consequences still resonate in Brunei. With agovernment hiring freeze and a sluggish private sector, public criticism of thegovernment has grown, even if it remains constrained by governmentcensorship. The sultanate has responded to this by acknowledging the country�seconomic difficulties and providing more open access to economic information,while maintaining its policy of strict social control. High oil prices and a Br$1bn(US$566m) stimulus package for the economy in 2002 are expected to dampenpublic criticism in the short term. However, the future of the sultan�s absoluterule depends on his ability to sustain the economic prosperity to which thecountry has grown accustomed.
Constitution, institutions and administration
The constitution states that the sultan is head of state with full executiveauthority. He is assisted and advised by five councils: the Religious Council, thePrivy Council, the Council of Ministers (the cabinet), the Legislative Council andthe Council of Succession. The Religious Council is responsible for advising thesultan on matters relating to Islam; the Privy Council on the award of honours;and the Council of Succession determines the succession to the throne in theevent of a dispute. The Legislative Council, originally conceived to be a partlyelected body, became a solely appointed body after the abortive rebellion in1962 and was eventually suspended in 1984. The sultan has since ruled byemergency decree. The Council of Ministers became the cabinet in 1984. Thesultan is the prime minister, finance minister and minister of defence. Hisbrother, Prince Mohamed Bolkiah, is minister of foreign affairs.
The sultan and government do not see any place for liberal democracy inBrunei. It is argued that people�s concerns and views can be voiced throughofficials at the local level. In February 1993 the Mukim (district) and Kampong(village) Consultative Council was established. The council�s first generalassembly was held in May 1996. These elected officials are said to be the mostappropriate means of consultation between government and people, althoughthey have no formal power to make policy. The only registered political party,the PPKB, has gained a higher profile since 1999, but consultative councils willcontinue to be considered the most appropriate model for consultation betweenthe people and the government.
Political forces
With the Legislative Council suspended and political parties proscribed, thesultan and his government espouse a national ideology, Melayu Islam Beraja
(Malay Islamic Monarchy, or MIB), which seeks to justify absolute monarchy byinvoking Brunei�s history and Islam in support of the sultanate. MIB, a fusion ofIslamic values and Brunei Malay culture, presided over by the sultan as thedefender of race and faith, has become the touchstone of loyalty in the country.In the small, hierarchical society of Brunei, it is not acceptable for any Malay toquestion any aspect of MIB, whether it be the pre-eminence of the Malays inBrunei, the piety and authority of the sultan or the �Islamisation� ofgovernment policy and of society at large.
The ethnic-Chinese minority, which numbers between 60,000 and 70,000 (thegovernment underestimates the real figure), has considerable economicinfluence and expertise, but plays a negligible role in politics. The MIB focusesexclusively on the Malay majority, which merely contributes to the existing levelof discrimination against the Chinese and other non-Muslims. Calls to increaseMalay participation in the economy are frequent and popular. Workers from theIndian subcontinent and the Philippines, although important to the economy,are also targets for resentment. In 2001 and 2002 guest workers at severalfactories engaged in strikes, protesting about poor treatment by Bruneian bosses.Indigenous groups, although recognised, tend to remain on the fringes of societyunless they convert to Islam and intermarry with Malays.
In the wake of the September 11th 2001 terrorist attacks, Brunei has tried toposition itself as a conservative oasis of calm in South-east Asia. Although thesultan has grown noticeably more pious since the 1980s and has expanded therole of Islam in civic life, he is wary of the Islamist resurgence across urbanSouth-east Asia, which may undermine his claim to absolute role. Any Islamicteachings that challenge the national ideology of MIB are banned, and in early2002 all private religious schools were placed under the control of the publiceducation system. Nevertheless, with around 25% of school-leavers unable tofind jobs, social discontent among the young has the potential to spark the riseof a more militant Islamism in Brunei. The risk of Islamist opposition to thesultanate is, however, rather low, as Brunei appears willing to use the legal andmilitary powers granted to the sultan under the state of emergency to suppressany challenges to his rule.
Key political figures
Sultan Hassanal Bolkiah: The sultan, prime minister, defence and finance minister. The sultan received his early educationin Brunei Darussalam and Kuala Lumpur, Malaysia, and trained as an officer at the Royal Military Academy, Sandhurst, UK,in 1966-67. He became crown prince in 1961 at the age of 15 and was installed as sultan on October 5th 1967. The sultan issaid to be one of the world�s richest men.Prince Mohamed Bolkiah: The minister of foreign affairs and brother of the sultan. He received his early education inBrunei Darussalam and Kuala Lumpur, Malaysia, and trained as an officer at Sandhurst in 1965-67.Prince Jefri Bolkiah: The youngest brother of the sultan, former finance minister and head of the Brunei InvestmentAgency. Prince Jefri is known for his extravagant, playboy style of living, and was to be the next sultan of Brunei until it wasdiscovered that he had embezzled US$14.8bn from the government through his flagship company, Amedeo DevelopmentCorporation, which collapsed in 1998.Crown Prince Al-Muhtadee Billah: The eldest son of the sultan, named as heir to the throne in 1998.
Brunei is a member of the UN, the Organisation of the Islamic Conference andthe Non-Aligned Movement. Of particular importance is its membership of theAssociation of South-East Asian Nations (ASEAN), which the country joined in1984 on independence. (See Appendices: membership of regional organisations.)ASEAN provides Brunei with a framework for dealing with affairs in the regionand worldwide, and membership has helped to improve relations betweenBrunei and its fellow members, Malaysia and Indonesia. Brunei lays claim topart of the South China Sea, as do several of its partners in ASEAN, and Chinaand Taiwan. In November 2000 Brunei hosted the summit meeting of the Asia-Pacific Economic Co-operation (APEC) forum and in 2002 hosted the ASEANRegional Forum.
In 1991 the Royal Brunei Armed Forces (RBAF) were reorganised into fiveseparate services: land, navy and air forces, the armed forces services and thearmed forces training centre. In 2001 the total number of armed forces was5,900 active personnel and 700 reserves. The army numbered 3,900, the navy900 and the air force 1,100. A large proportion of the defence budget is spent onacquiring military hardware, mainly from the UK. Expansion of the armed forcesis limited more by a lack of volunteers than by a lack of funds.
The RBAF is not perceived to be a threat to the government. However, thesultan prefers to entrust his personal security and that of the arsenal of theRBAF to his Gurkha Reserve Unit (the GRU, totalling more than 2,300personnel), whose presence, along with that of the British Gurkhas (800Gurkhas and 200 UK support forces based in Seria to protect the oil facilities),reduces the chance of the RBAF turning against the sultan. Brunei pays for theGRU, which is led by retired British officers, and provides substantial financialsupport for the maintenance of the British forces. The UK uses jungle-trainingfacilities in Temburong district and participates in joint military exercises withBrunei. There have also been defence ties with Singapore since the 1970s andSingaporean troops train in Brunei. The US also participates in joint militaryexercises with Brunei.
Resources and infrastructure
Population
The population according to the 2001 census was 332,844. The annual averagerate of population increase over the preceding decade was around 2.5%, downfrom 3.5% in the previous decade. In 2000 average life expectancy at birth wasestimated at 75.4 years for men and 77.7 years for women. In 1999 about 107,600persons (32.5%) were below 15 years of age, 211,900 persons (64.1%) were ofworking age (15-64 years) and 11,200 persons (3.4%) were over 65 years of age.(Reference table 1 provides population data.)
Population by district, 2001Brunei-Muara 202,745Bandar Seri Begawan 27,285Belait 55,602Tutong 38,649Temburong 8,563Total 332,844
Source: Borneo Bulletin.
In 1999 67% of the population were Malay (a classification that includes someindigenous groups apart from the Malays) and 15% were Chinese (althoughsome Chinese leaders claim that the number is much higher). Other indigenousgroups probably account for 6% of the population. Foreign workers fromelsewhere in the Association of South-East Asian Nations (ASEAN) and SouthAsia, and expatriate professionals from ASEAN, the UK and Australia, make upthe remaining 12%.
Most Brunei Malays (bumiputera, or �sons of the soil�) aspire to work ingovernment service, Brunei Shell Petroleum (BSP), Royal Brunei Airlines (RBA) orin more prestigious jobs in the private sector, such as in the banking sector.Bumiputera generally avoid the construction industry, agriculture and othersectors regarded as having low status. The Chinese play a dominant role in theprivate sector, particularly as shopkeepers, in the services industries and in theconstruction and oil and gas sectors. Although well over half are permanentresidents, only a minority are recognised as citizens and a large number ofChinese are stateless, but with travel documents provided by Brunei.
The economically active population in 2000 reached 146,300 and is growing at arate of 2.5% per year. The labour force participation rate for 1996-2000 was 83.3%for males and 41.4% for females. Just under half of the workforce is estimated tobe employed in the public sector. Foreign workers made up 41% of the totallabour force in 1991, increasing to 45% in 2000, despite a government goal tolimit their participation to 30%. Foreign workers fill 72% of jobs in the privatesector. (Reference table 2 provides labour force data.)
Education
In 1999 there were 147 government schools and 60 non-government or privateschools. In 2000 around 56,686 children were enrolled in pre-primary andprimary education and 31,952 in secondary education. There were 2,500students in vocational schools and 2,867 students enrolled at the UniversitiBrunei Darussalam (UBD). The literacy rate (of those aged 15 years and over)stood at 92% in 2001, up from 89% in 1991.
At the secondary and tertiary level teaching is mainly in English, althoughEnglish language skills in Brunei vary widely. There have been attempts tomodernise the curriculum and teaching methods; current methods of instruction(which emphasise rote learning) do not appear to foster creative and criticalthinking skills among students. In 2002 all religious instruction was placed
under the control of the state school system in order to prevent radical Islamistideas from gaining a foothold in Brunei.
The two main tertiary institutions are the UBD and the Institut Teknologi Brunei(ITB). Many Bruneians, however, prefer to send their children to the UK andAustralia for secondary and university education, and the government providesscholarships for this.
Health
Medical and dental services were provided free to Brunei citizens and to thoseemployed in government service and their dependants until 1995. Since then anominal fee has been charged for hospital and dental visits. There are ninedoctors for every 10,000 inhabitants. The central referral hospital is the 552-bedRaja Isteri Pengiran Anak Saleha (RIPAS) Hospital in Bandar Seri Begawan. Thereare government hospitals in Kuala Belait, Bangar and Tutong. Brunei ShellPetroleum has a 91-bed hospital at Seria. Total available hospital beds stood at880 in 1999. Community-based outpatient services are provided in health clinicsand health centres throughout the country, as well as by travelling health clinics.For medical care not available in Brunei, citizens are sent overseas, usually toSingapore, at government expense. Many expatriate medical personnel leftBrunei after the 1997-98 Asian economic crisis and there is now a shortage ofspecialist physicians.
Natural resources and the environment
Brunei comprises two sections, which are separated by the Limbang River valley,which is part of the Malaysian state of Sarawak. The larger, western part of thecountry consists of the three districts of Brunei--Muara, including the capitalBandar Seri Begawan, Tutong and Belait. The eastern part of Brunei, theTemburong district, is sparsely populated and predominantly forested. Brunei�s161-km coastline faces the South China Sea. The population is concentratedalong the coast; about three-quarters of the land area is forest.
Brunei has a high rainfall level and water is in plentiful supply. Poormaintenance of the water infrastructure results in heavy losses owing to leakageand the occasional interruption of supply. Large parts of the interior aredesignated either as national park or as protected forest; logging is restricted.There is concern about large-scale development along the coast. High-qualitysilica sands on the coast could be used in glass manufacture, but have not so farbeen exploited.
Transport, communications and the Internet
There is continuing development of the road network, which totalled 2,800 kmin 2001. The Eighth National Development Plan (2001-05) recommendscontinual expansion and improvement of the road network. (Reference table 3provides data on transport and telecommunications.)
The level of private car ownership is high. Car ownership is encouraged byinterest-free government car loans for civil servants, subsidised motor fuel, lowroad tax and the poor state of public transport. Car sales dropped substantiallyduring the economic crisis in 1997, but rose sharply in early 2002 when thegovernment cut import duties from 20-200% to a flat 20%.
Since 1996 there have been attempts to improve public transport by expandingtaxi and bus services serving Bandar Seri Begawan and its environs and thereare now six routes in the district. Bus services to other districts are infrequentand irregular. There are no railways in Brunei.
The main port is Muara, 29 km from the capital. In 1995 nearly 2m tonnes offreight were discharged at the port, 50% of it originating from Singapore, butshipments fell to 600,000 tonnes in 2001. Under a 25-year agreement, the Port ofSingapore Authority, in a joint venture with a local company, began to managethe container terminal at Muara in 2000 and has already nearly doubledproductivity. Bandar Seri Begawan port is primarily used by passenger vesselsserving the Brunei River and Temburong district, as well as the nearbyMalaysian ports of Limbang and Lawas. Labuan and Kota Kinabalu in Malaysiaare now served by passenger ferries departing from the Serasa ferry terminal,which was opened at Muara port in 1997. More than 20,000 passengers permonth use the ferry terminal.
Brunei International Airport at Bandar Seri Begawan is designed to handle 1.5mpassengers and 50,000 tonnes of cargo a year, and is being expanded. The state-owned carrier, Royal Brunei Airlines (RBA), serves 22 destinations in Asia,Australia, the Middle East and Europe, including several short-haul destinationsin Malaysia and Indonesia. The RBA has a fleet of eight Boeing 767-300s andtwo Boeing 757-200s. Although the RBA registered a 10% growth in passengernumbers in 2001, the airline has yet to record a profit and is currentlyundergoing restructuring.
Jabatan Telekom Brunei (JTB, or Brunei Telecoms Department) is the mainprovider of telecommunications services in Brunei. A private company, DSTCom,provides cellular mobile services. The JTB will be privatised under the nameSyarikat Telekom Brunei Berhad (BruTel) in April 2003. The telecoms sectoraccounts for 4-5% of Brunei�s GDP. Brunei has been connected to the Internetsince September 1995 through BruNet, a subsidiary of the JTB. After complaintsabout poor service and slow connections, a second, independent Internet serviceprovider was licensed in 2000. BruNet has cut prices and has been investing inupgraded services, including introducing an Asymmetric Digital Subscriber Line(ASDL) in March 2000, which will speed up Internet access.
The government publishes the Government Gazette with legal information. ThePelita Brunei is a weekly Malay-language news sheet/court circular, published bythe government. There is a Brunei Darussalam Newsletter, which is publishedevery fortnight in English by the government�s Information Department, whichalso publishes a Daily News Digest. There is a weekly Malay-language tabloid,Media Permata, which has been published since 1995. The English-language
Borneo Bulletin dates from 1953 and has been published daily on weekdays since1990; in March 2000 the Sunday Borneo Bulletin was launched. (The BorneoBulletin circulates in Brunei, Sarawak and Sabah.) A rival English-language daily,News Express, was launched in August 1999, but closed in September 2002. Thepress, including Internet sites published from Brunei, is subject to strictgovernment censorship.
Radio Brunei has six channels broadcasting in Malay, English and Chinese. AnIslamic radio channel started operations in May 1997. The British ForcesBroadcasting Service (BFBS) also broadcasts from Seria. The governmenttelevision network, broadcasting in Malay and English, was the sole televisionoperator until 1999, when Brunei�s first commercial cable television channel,Kristal, began broadcasting.
Energy provision
Most of Brunei�s energy production is exported. Electricity production hasgrown steadily in recent years, reaching 2.54bn kwh in 2000, over 50% of whichwas for household use. Demand is expected to grow at 5-6% per year during2001-05 owing to increased oil and gas industrial activity, and Brunei hasallocated 7.3% of its total development budget to the electricity sector. Natural gasconsumption has nearly doubled over the last ten years. (National statistics onenergy production are given in Reference table 4.)
Brunei�s economy is dominated by the oil and gas sector, which in 2001 isestimated to have contributed over 50% to GDP at current prices and to haveaccounted for 75-90% of government revenue. A 1999 report issued by the BruneiDarussalam Economic Council (BDEC) recommended developing othereconomic sectors, but the oil and gas sector remains the country�s maineconomic priority.
Economic policy
Economic policy has been formulated in a series of development plans. TheEighth National Development Plan (2001-05), published in 2001, recommendsboosting annual government expenditure to Br$7.3bn (US$4.1bn at the 2001average exchange rate of Br$1.78:US$1), compared with Br$7.2bn in 1996-2000,Br$5.5bn in 1991-95, Br$3.7bn in 1986-90 and Br$1.7bn in 1980-84. Br$1bn has beenallocated for economic stimulus activities in 2002. Brunei has, however,historically been slow at implementing its national development plans, with only50-60% of the funds allocated being spent during 1991-2000. Brunei�s economywas blown off course by the region�s 1997-98 economic crisis, the collapse of theAmedeo group of companies and the misappropriation of funds from the BruneiInvestment Agency (BIA). Rising oil prices in 1999-2001 have increased thegovernment�s ability to follow through on its planned programmes.
Government revenue and transfers, excluding income from internationalreserves, amounted to Br$5.08bn in 2000. The main source of income for thegovernment is corporate income tax, which is set at a rate of 30% and mostlycollected from the oil and gas sector. Brunei has considered levying an incometax, but fears that it may lead to public dissent. Transfers from the BIA make upfor budget shortfalls. (See Reference table 5 for data on government finances.)
Summary of government finances, 2000(Br$ m)
Total revenue 5,084.4Total expenditure -3,813.2Balance 1,271.2
Source: Department of Economic Planning and Development.
In February 2000 the BDEC issued a blunt assessment of the economy,highlighting many weaknesses and stating that prosperity could no longer betaken for granted. The BDEC proposed strengthening both the public and privatesectors through a series of measures that included streamlining governmentexpenditure and the budgeting system to emphasise national rather thanministerial priorities; promotion of local small and medium-sized enterprises(SMEs); expansion of the tax base by introducing a personal income tax;privatisation of some government functions and contracting out non-coreservices to local SMEs; encouraging greater local and foreign participation in theeconomy; improving competitiveness in the oil and gas industry, including thecreation of a national oil company; strengthening and modernising the legal andregulatory framework; improving national productivity; reviewing educationand training policies; and relaxing limitations on the employment of skilledforeigners. The critical report appeared to receive the support of the sultan and
The oil and gas sectordominates the economy
Economic Development Plansmake slow progress
Public finances dependedupon the oil and gas sector
Brunei backtracks on plans tofind a new economic model
the public. However, by 2001 Brunei was apparently reverting to its traditionalemphasis on the oil and gas sector with the announcement of the formation ofa national oil company and new deepwater blocks that would increase thecountry�s oil revenue and allow for more government support for the privatesector. The 8th National Development Plan, although recommending expansionof the country�s revenue base through new taxes and the privatisation of keygovernment sectors, states that reforms should be implemented slowly or scaledback should they appear to influence the stability of the country.
Economic performance
Gross domestic product(% real change)
Annual average2001a 1997-2001
GDP 3.5 2.3
a Estimate.
Sources: IMF Staff Country Report 99/19, Brunei Darussalam: Recent Economic Developments, drawn from Ministry of Finance,
Brunei Darussalam Statistical Yearbook (various issues); Department of Economic Planning and Development.
The main factor determining the economy�s performance is oil prices. GDP fellsharply during the 1980s as a result of the world oil glut and the consequent fallin prices. The performance of the economy was erratic during the 1990s. RealGDP grew by 4.1% in 1997, but by only 1% in 1998, when the regional economiccrisis, the crash of the Amedeo Corporation and plunging oil prices hit theeconomy. GDP fell by 0.5% in 1999, but sharply higher oil prices in the secondhalf 1999 and in early 2000 increased government revenue and boosted growthto 3.5% in both 2000 and 2001, notwithstanding continued weakness in theprivate sector. (Data on GDP growth and GDP by sector are given in Referencetables 7 and 8.)
Brunei�s dependence on imports means that it is affected by global inflationtrends and currency fluctuations. Inflation rose to 1.2% in 2000 from -0.1% in 1999as the application of strict halal (Islamic dietary) laws led to higher food prices.Historically, inflation has been constrained by the imposition of price controlsand subsidies on essential foods and petrol. (Reference table 6 gives data on themoney supply and Reference table 9 provides data on consumer prices.)
Economic sectors
Agriculture
Agriculture accounts for less than 3% of GDP, and Brunei has to import 80% ofits food. (Reference table 10 gives data on agricultural production.) Bruneifarmers supply approximately 60% of local demand for vegetables, and theproduction of tropical fruit is being encouraged with a view to creating anexport market. Brunei must import approximately 98% of its rice, the staplefoodstuff. The introduction of strict halal (Islamic dietary) regulations has
hampered the development of the local small-scale food-processing industryand considerably increased costs.
Forest exploitation has been limited, no timber is exported and more than 80%of Brunei is still under forest�60% of the country is under primary forest.Timber extraction for local consumption is allowed, but only under strict controlby the Forestry Department. However, illegal logging is on the increase,especially near the Malaysian border. (Data on forestry output are given inReference table 11.)
Fish is an important part of the local diet. Brunei�s catch in 1999 was about 9,470tonnes of fresh fish, more than two-thirds of which was caught by small-scalefishermen. Brunei has set a goal for the industry of 20,000 tonnes per year.
Mining and semi-processing
Brunei�s wealth is based on its hydrocarbon reserves, which in 2001 wereestimated at 1.35bn barrels of mainly low-sulphur oil, expected to last 25 years.Brunei currently produces an average of 193,000 barrels/day of oil and 22,000barrels/day of natural gas liquids. Brunei�s gas reserves have been estimated at390bn cu metres, which should last another 40 years. The government hasadopted a policy aimed at conserving resources and continuing exploration toopen up new fields, the most recent of which was a 10,000-sq km area ofdeepwater in Brunei�s Exclusive Economic Zone in the South China Sea thatopened in October 2000. (Data on oil and gas production and prices are given inReference table 12.)
Petroleum Brunei is responsible for managing Brunei�s assets in its joint oil andgas ventures and for regulating the country�s petroleum industry. This nationalcompany took over the roles of the Brunei Oil and Gas Authority and thePetroleum Unit in early 2002. Brunei Shell Petroleum (BSP) is the major producerin Brunei, with seven offshore and two onshore oilfields in Brunei. The Bruneigovernment and the the Anglo-Dutch petroleum firm, Royal Dutch Shell Group,are equal shareholders in the company. A consortium of the French oil company,Total-Fina-Elf, and a local company has been active in oil exploration since the1980s. New deepwater blocks were awarded in 2002 to joint ventures betweenTotal-Fina-Elf, the Australian mining firm, BHP Billiton, and the US energycompany, Amerada Hess; and to BSP, Japan�s Mitsubishi Corp and ConocoBrunei, a unit of the US energy company, ConocoPhillips. A 10,000-b/d BSPrefinery at Seria has met domestic demand for petroleum products since 1983.
Brunei currently produces approximately 350bn cu ft of liquefied natural gas(LNG) a year, making it the world�s fourth largest producer. The bulk of the LNGis purchased by three Japanese utility companies under a long-term contract firstsigned in 1972 and extended for 20 years in 1993. It is hoped that reserves ofnatural gas will be nearly doubled and a 4m tonnes/year liquefaction plantadded by 2008. Brunei is also considering using its natural gas resources todevelop domestic petrochemicals and energy-intensive industries, such asaluminium smelting.
Forestry
Fishing
Brunei has substantialhydrocarbon reserves
Petroleum Brunei is Brunei�snational oil and gas company
Manufacturing remains a minor portion of Brunei�s output, contributing anestimated 3% to GDP in 1998. The main large-scale industries are cementproduction, garment-making and the production of pre-cast concrete structures.The garment industry has benefited from a quota agreement with the US, butthis is due to expire in 2005 and high labour costs will hamper Brunei�scompetitiveness thereafter. The sultanate has also targeted the food industry fordevelopment, especially in the case of halal (Islamic dietary) foods.
Bureaucratic obstacles and delays, a shortage of skilled labour, the smalldomestic market, an unwillingness on the part of the government to underwriterisk-taking ventures and the ban on foreigners owning land have all deterredforeign capital and technology from investing in industry in Brunei.
Construction
The construction sector contracted by 2.4% in 2001, 3.5% in 2000 and 3.9% in 1999.The industry was badly damaged by the 1998 collapse of Prince Jefri�s Amedeoconglomerate, which had spent lavishly on construction projects. The governmenthas announced a number of projects aimed at bolstering the industry, but a realestate glut in the capital has largely offset these government efforts.
Financial services
There is no central bank in Brunei. The functions of the central bank are carriedout by the Treasury�s Department of Financial Services, the Brunei CurrencyBoard�which is responsible for issuing and managing the currency�and theBrunei Investment Agency. These bodies all come under the jurisdiction of theMinistry of Finance.
There are nine banks operating in Brunei, three locally incorporated banks andsix branches of foreign banks, of which the three largest are the Hongkong andShanghai Banking Corporation, Standard Chartered Bank and Citibank. Thereare a number of Malaysian banks and three locally incorporated banks: theIslamic Bank of Brunei (IBB), Baiduri Bank and the Islamic Development Bank ofBrunei (IDBB), formerly the Development Bank of Brunei. The banking sectorhas suffered since 1997, with the ratio of non-performing loans rising from 9.79%in 1997 to 24.35% in 2001. In July 2000 Brunei opened the Brunei InternationalFinancial Centre (BIFC), an offshore financial centre that has attracted severalinternational firms. Brunei has updated its legislative and regulatory frameworkto attract investors to the BIFC. Brunei has been especially eager to tap the nichemarket for Islamic banking.
Other services
Since 1995 a more international range of shops has come to Brunei. The retailsector has, however, been slow to develop. The 1997 Asian economic crisis andthe 1998 collapse of the Amedeo conglomerate damaged consumer confidence
and several stores have been forced to close. Many Bruneians prefer to shopacross the border in Malaysia, where goods are less expensive.
Brunei designated 2001 �Visit Brunei Year�. Tourist arrivals fell, however, by 20%partly as a result of a global tourism slowdown after the September 11th terroristattacks on the US. A range of factors has discouraged tourism: limited access toalcohol; the high cost of accommodation; inadequate accommodation andtransport facilities outside the capital; and the perception that there is little ofinterest to see in the country. The large areas of Brunei that are still covered inprimary forest have been earmarked as sites for ecotourism. However, untiltransport and accommodation facilities are improved and expanded outside thecapital, the ecotourism market is likely to remain underdeveloped.
Source: Department of Economic Planning and Development.
Brunei�s trade surplus rose sharply in 2000 and 2001 owing to rising oil pricesand a weakening of consumer demand within Brunei for imported goods as aresult of the economic slowdown. (Reference tables 13-16 provide data onforeign trade.)
Main trading partners, 2000Imports from: % of total Exports to: % of totalSingapore 33.0 Japan 40.7Malaysia 19.0 Thailand 14.6US 10.8 South Korea 12.9Japan 4.7 US 12.0
Source: IMF, Direction of Trade Statistics.
Exports are dominated by petroleum production, with crude oil, partly refinedpetroleum and natural gas accounting for the bulk of total exports. By far themost important export market is Japan, which according to IMF figures took 41%of Brunei�s exports in 2000, followed by Thailand, South Korea and the US.
Source: IMF Staff Country Report 99/19, Brunei Darussalam: Recent Economic Developments, drawn from Ministry of Finance, Brunei
Darussalam Statistical Yearbook (various issues).
According to data provided by the Brunei authorities to the IMF in 1998�thelast available balance-of-payments breakdown�Brunei in the late 1990s wasrunning a services deficit of between US$300m and US$350m a year, roughlydouble the rate of the early 1990s. The income account, however, is insubstantial surplus because of returns from oil earnings invested overseas. As aresult of these large surpluses, the overall current account has historicallyregistered a substantial surplus, although at an estimated US$2.1bn in 1998 itwas 27% below the year-earlier level. (Reference table 17 provides balance-of-payments data, national series.)
Capital flows and foreign debt
The sultan has invested abroad in his own right. Notable acquisitions includethe Dorchester Hotel in London, the Ritz Hotel in Paris, the Beverly Hills Hotel inCalifornia and the New York Palace Hotel. Some of these were subsequentlytransferred to the Brunei Investment Agency (BIA), as were properties recoveredfrom Prince Jefri, the sultan�s brother who was charged in 2000 withmisappropriating US$14.8bn in state funds. A number of Brunei companies,including those with royal connections, have been investing in Vietnam andChina since 1993. Brunei has held talks with the Philippines to discussinvestment possibilities.
Foreign reserves and the exchange rate
Brunei�s large foreign assets were estimated at Br$80bn (US$47bn) in 1999,according to the Borneo Bulletin, and generate a substantial investment income,which during most years in the 1990s exceeded the combined revenue from oiland gas. About one-third of the reserves are managed on a day-to-day basis bythe BIA; the management of the remainder is divided between eight foreigninstitutions. Up to 80% of the investments are in the form of government bonds,and the balance is held in cash, equities, gold and real estate. (See Referencetable 19 for historical data on international reserves.)
The Brunei dollar, or ringgit, is fully interchangeable at par with the Singaporedollar. A trend of steady appreciation was disrupted by the 1997 regionaleconomic crisis, but the currency began to rise again in 2000, falling in late2001 owing to the weakness of the Singaporean economy. (See Reference table18 for historical data on exchange rates.) Rumours that the Singapore dollar andBrunei dollar peg would be cut have been denied by the financial authorities inboth countries.
The Association of South-East Asian Nations (ASEAN) was established in 1967.The five original members were Indonesia, Malaysia, the Philippines, Singaporeand Thailand. Subsequent joiners were Brunei (1984), Vietnam (1995), Laos andMyanmar (1997) and, most recently, Cambodia (1999).
ASEAN summit meetings, which bring together the heads of government ofmember states, must now be held every three years. The most recent was inPhnom Penh, Cambodia, in November 2002. Informal summits of heads ofgovernments are also held. In addition, member states� foreign and economicaffairs ministers meet annually. Joint meetings of foreign and economic affairsministers are held before each ASEAN summit. There is also a standing committee(consisting of the members� accredited ambassadors to the host country), whichusually meets every two months. There is a permanent secretariat, based inJakarta, Indonesia, and a number of committees.
The organisation started with grand objectives, but has generally failed todeliver. Early hopes that ASEAN could engineer a regional economicdevelopment strategy�with particular countries concentrating on particularindustries�were soon dashed. In 1977 the Basic Agreement on the Establishmentof ASEAN Preferential Tariffs was concluded, but a decade later only about 5% oftrade between members was covered by this system. (Members had beenpermitted to exclude �sensitive� sectors, a let-out clause that a subsequentagreement in 1987 only slightly curtailed.)
Plans for a proper ASEAN free-trade area (AFTA) were unveiled in 1992, withthe aim of achieving this by 2008. A common effective preferential tariff (CEPT)scheme was applied in 1993, providing for the gradual reduction of tariffs onintra-ASEAN trade in certain goods over a number of years. Again, however,member states could exclude �sensitive� items, limiting progress. A new AFTAprogramme, with a wider spread of products covered, was launched in 1994.During the mid-1990s the timescale for implementing the programme wassteadily tightened, with the aim being to reduce tariffs on most goods to below5% by 2000. A limited AFTA, between the original five members of ASEAN andBrunei and involving a reduction on tariffs on intra-ASEAN trade to between 0%and 5%, came into operation on January 1st 2002. (Recent joiners have beenallowed more time.)
The 1997-98 regional financial crisis exposed ASEAN�s failings in a brutal fashion.The organisation was unable to stop the regional currency devaluations, or toalleviate the subsequent economic hardship. A Statement on Bold Measures,released at end-1998, was exactly the opposite of what the title implied.Unfolding events in Indonesia then moved the focus on to the organisation�ssecurity plans. ASEAN members� commitment to the principle ofnon-interference in the internal affairs of other members complicated theresponse to the East Timor crisis. (Some members did eventually participate in
the multinational force that oversaw the territory�s transition to independencefrom Indonesia, but not under ASEAN auspices.)
On the economic front, ASEAN�s slow progress towards AFTA has encouragedsome of its members, notably Singapore, to opt instead for bilateral trade pacts.Singapore�s bilateral trade agreement with New Zealand in 2000 promptedprotests from other ASEAN members, but the island state is pursuing similaragreements with other countries, including the US, and in 2002 concluded anagreement with Australia. (It is unlikely that this approach will prove universallyapplicable, as the absence of an agricultural sector in Singapore makes it mucheasier for it to negotiate with trading partners with heavily protected primarysectors.) A decision in 2001 by various ASEAN members to set up bilateralcurrency-swap arrangements to protect against currency volatility is limited inscope, and does not presage further ASEAN economic collaboration.
The organisation�s political hopes could be severely tested in the next few years.Changing governments in member states could undermine any remainingpretence about political consensus in the region. On the security front, theASEAN Regional Forums (ARFs�which bring together the ASEAN ministers offoreign affairs with those of other countries, notably China) are likely to remainjust talking shops, with little impact on changing geopolitical trends.
Sources of information
Borneo Bulletin (daily), Kuala Belait
Brunei Yearbook (annual), Kuala Belait
Department of Information, Brunei Darussalam Newsletter (fortnightly), BandarSeri Begawan
Negara Brunei Darussalam: National Development Committee, Ministry ofDevelopment, Seventh National Development Plan, 1996-2000, Bandar SeriBegawan, 1997
Statistics Division, Economic Planning Unit, Ministry of Finance, BruneiDarussalam Statistical Yearbook (annual), Bandar Seri Begawan
Statistics Division, Economic Planning Unit, Ministry of Finance, Census ofPopulation, 1991, 1992
Statistics Division, Economic Planning Unit, Ministry of Finance, DemographicSituation and Population Projections, 1991-2011, 1994
Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ
International Monetary Fund, Brunei Darussalam: Recent Economic Developments,IMF Staff Country Report No. 99/19, April 1999, Washington, DC
G Braighlinn, Ideological Innovation under Monarchy: Aspects of LegitimationActivity in Contemporary Brunei, VU University Press, Amsterdam, 1992
R Heeks, Small enterprise development and the �Dutch Disease� in a small economy:the case of Brunei, IDPM Discussion Paper No. 56, April 1998, Institute ofDevelopment Policy & Management, University of Manchester
R Kershaw, Monarchy in South-East Asia: the Faces of Tradition in Transition,Routledge, London, 2000
D S Ranjit Singh, Brunei, 1839-1983: The Problem of Political Survival, OxfordUniversity Press, Singapore, 1994
G Saunders, A History of Brunei, Oxford University Press, Kuala Lumpur, 1994
Tourism Development Division, Ministry of Industry and Primary Resources,Explore Brunei: A Visitor�s Guide, Bandar Seri Begawan, 1998
Sources: Ministry of Finance, Brunei Darussalam Statistical Yearbook; Brunei Darussalam Key Indicators; Brunei Yearbook 2000, Department of Economic Planning and Development
Reference table 4
National energy statistics1996 1997 1998 1999 2000
