Trade Agreements Boost Productivity and Growth, Contributing to Malaysia's Successful Development, World Bank Says

June 30, 2016

KUALA LUMPUR, June 30, 2016—Malaysia’s economy remains resilient, with GDP projected to grow by 4.4 percent in 2016 and 4.5 percent in 2017, according to new economic analysis from the World Bank. The outlook reflects a gradual deceleration in private consumption in Malaysia due to softening in the labor market and continued adjustment to fiscal consolidation.

Private investment is also expected to slow down as commodity prices and global economic growth remain subdued, according to the World Bank’s Malaysia Economic Monitor, launched today.

The report notes that key risks facing the Malaysian economy stem from commodity price instability and uncertainty over the growth trajectory in the global economy and its impact on Malaysia's exports.

The Malaysia Economic Monitor includes a special focus on the strategic relevance of trade agreements for Malaysia’s successful development. The implementation of new regional trade agreements can help Malaysia implement key economic reforms needed to accelerate the country’s transition to high-income status.

Malaysia is now engaging in a new generation of regional agreements including the Regional Cooperation Economic Partnership (RCEP), the Trans-Pacific Partnership (TPP) and the European Union Free Trade Agreement (EUFTA). These agreements can help attract investment, spur innovation and technological upgrading, and further open up market access for Malaysia’s exports of goods and services. They can also bring benefits through reforms in new areas that were not included in past agreements, such as competition policy, government procurement, investment-state disputes, and investment policies.

“The new generation of trade agreements can provide the needed impetus to boost Malaysia's economy to greater heights,” says Dato' Sri Mustapa Mohamed, Minister of International Trade and Industry“The 11th Malaysia Plan emphasizes competitiveness and productivity as important ingredients to raise the standard of living of Malaysians. These trade agreements can open up market access for goods and services, facilitate new types of foreign direct investment, encourage more competition, provide greater access to skills and technology, and create more and better jobs for Malaysian workers.”

“Although trade agreements can benefit the overall economy, they could potentially impact unskilled workers and businesses that are less competitive. They also expose SMEs to new challenges,” says Datuk Abdul Rahman Dahlan, Economic Minister in the Prime Minister’s Department“Workers’ skills will need to be upgraded, and the labor force will need to move from the sectors with less potential for growth to sectors with more potential.  SMEs, which account for 97 percent of firms but 17.8 percent of exports, will not automatically gain.  It will be critical to maintain programs that will support labor and SMEs such as through training, easing labor mobility, promoting innovation and entrepreneurship, and expanding linkages between SMEs and large domestic and foreign firms.”

The World Bank report says that the new trade agreements can advance Malaysia’s reform agenda in four key areas:

Services: Malaysia still trails many countries in East Asia in terms of the contribution of services to GDP and exports. An efficient services market can enhance Malaysia’s competitiveness.

Investment: Improved investment policies can help attract a new wave of FDI that supports economic diversification. The new trade agreements provide additional investment safeguards for domestic firms investing abroad.

Competition: A more open and level playing field in the domestic economy facilitates the entry of new firms, helps productive companies grow, and promotes innovation and job creation.

Small and Medium Enterprises (SMEs): SMEs in Malaysia represent 97.3 percent of firms and accounted for 35.9 percent of GDP in 2015, but account for only 17.8 percent of exports. They are substantially less productive than large firms. It will be critical to address the constraints SMEs face in order to raise productivity and reap the benefits of emerging trade opportunities.

“With new trade agreements, Malaysia can accelerate reforms to support its transition to high income status,” says Ulrich Zachau, World Bank Country Director for Malaysia. “Malaysia has the potential to make great strides towards high income status, by boosting the productivity of SMEs, bolstering competition across sectors, liberalizing services to further support exports, and attracting higher value-added foreign investment,”  he added.

The Malaysia Economic Monitor series provides an analytical perspective on the policy challenges facing Malaysia as it grows into a high-income economy. The series also represents an effort to reach out to a broad audience, including policymakers, private sector leaders, market participants, civil society and academia.

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