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FACULTY OF SCIENCE AND TECHNOLOGY

SEPTEMBER / 2012

BBEK1103

PRINCIPLES OF MICROECONOMICS

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PRINCIPLES OF MICROECONOMICS BBEK1103

System Economy Malaysia

Introduction

What does it means by economy? Basically, economy can be defined as a system that
manages the limited resources to fulfill the unlimited wants. Each and every single
country practices their own economy system. There are about five common economic
systems all over the world such as Capitalist Economic System, Socialist Economic
System, Communist Economic System, Mixed Economic System and Islamic Economic
System. Malaysia running the economy is based on Mixed Economy System. Mixed
Economy System is a combination between Capitalist and Socialist Economic System.
Following this system (Mixed Economy), both public and private sector is worked
together to achieve and develop a better economic system. Following this system, private
sector is free to create their own economic path. At the same time, they must follow the
guidance that had been set up by government. This scenario (the collaboration between
public and private sector) is the proved as a Mixed Economy System implementation.
This system also did not limit the interference of the private sector in mega project as
long as they follow the guidance that had been setup by government. At the same time,
the private sector also been allocated some incentive to move forward their business. As
example, IJM Construction company. This is a private company that develops a mega
construction project in Malaysia. But they still been tight with guidelines and rules such
as tax-funded, subsidized, state own factor, autonomy over personal finance and some
other various laws. This paper will be explain more on the evaluation on Malaysia
Economic System and rational of the system in terms of government intervention and
resources allocation.

Evaluation On Malaysias Economic System

Evaluation of the Economy System can be determined from the advantage and
disadvantage of the system itself. (Vinish, 2011) through Lets Learn Website mentioning
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PRINCIPLES OF MICROECONOMICS BBEK1103

that there are 3 main advantages for mix economy system such as the country will have
experience to run both socialist and capitalist nature as a result of private and public
sector strategy. Another advantage is the situation of less inequality where this advantage
could balance the economic growth. The third advantage is the freedom of individual to
run a business and gain the profit. But at the same time the government placed some
responsibility for the companies to contribute towards the welfare or society. One
example on the advantage of the mix economy is UMW Toyota Company. UMW Toyota
is a private company that selling vehicle in Malaysia widely. Even though there are
private company but due to mix economy system that had been practice in Malaysia, they
must collaborate with government bodies who called PNB (Permodalan Nasional Berhad)
as a partner.
(Vinish,2011) Also share two disadvantages of the mix economy system. First issue is
related to the society. Since the society welfare is more important in mixed economy,
government has decided that the resources is more important in production of those good
compare to producing the goods or service. Due to this there will be a waste in resources
due to over production of the goods. This condition only will be happen if the goods are
unable to sell. Another disadvantage is related to the bureaucratic and favoritism issue.
With this two main issue in the organization especially in public sector, it become
difficult to private sector to follow. Example on vehicle production company. Due to
welfare society demand the vehicle manufacturer will produce the vehicle even thought
there are no demand. If there are no bureaucratic issue maybe the private sector could
plan on the vehicle production depending on market demand.
Another evaluation on the Malaysia Mixed Economy System performance that can be as
a reference is GDP (Gross Domestic Product). From (Wikipedia, 2012) mention that
GDP is the market value of all officially recognized final goods and services produced
within a country in a given period of time. Table 1 shown the Malaysia GDP
performance.

PRINCIPLES OF MICROECONOMICS BBEK1103

In 1983, the introduction on Privatization Policy increase the country economic. The
purpose of this policies is to incorporated economic concept between public and private
sector. At the same time this incorporated will accelerate the economic growth and
improve the anticipation the bumiputera in private sector. As refer to Diagram 1 above,
the economic start the growth from 1970 where the economic policies been introduce and
keep increase pass through 1980 after the Look East Policies been introduce. But at 1983
where the privatization polices been introduce the economic dropped for two years. They
take two years to control back the economy. As refer to the graph, staring around 1987,
the economy hike the GDP extremely. And as a result, there are around 280 Billion US
recorded as of 2011.
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Another evaluation that could be consider to judge on the Malaysia Economic System is
based on the sector privatized project distribution from 1983-2011. Refer to Diagram 2
(Malaysia Economic Planning Unit 2012), total project involve by private sector are 538
project with 10 divided sector. The highest number is came from construction project
which are 18.5% from total project. Followed by Transportation, Storage and
Communication for 13% and Manufacturing with same percentage. Where minimum
percentage ratio is about 3.7% which fall under mining and quarrying. Looking forward to
all project shown on the Diagram 2 it shown that almost all area had had been privatized.
This situation will easily accelerate the economy growth with wider coverage around all
business sector.

PRINCIPLES OF MICROECONOMICS BBEK1103

Rational Of Malaysias Economic System On Government Intervention

Government Intervention purpose is to take price determination away from market and
consumers (IPING,2010). A study been conducted by Ralph Arthur Simpson in 2005
shared that, the Malaysia government use the indication NEP (New Economic Policy) as
a method of intervention in private sector. The purpose of NEP is to get the Quality
Lifestyle Among Malaysia through three main factor. First factor is high income, second
factor is inclusiveness and the third factor is sustainability. Basically the intervention by
government purposely to accelerate the Malaysian Economy and at the same time to
decrease the poverty of Malaysian. There are many rational areas or method that
government could interferes in private sector. I will explain more on next paragraph.
Taxation is one of the tools that help to govern a country. As in Malaysia Mixed
Economy System, the taxation will be collect from the private sector to develop the
country. Refer to UMT student studies in 2007 shown that government are strongly
depend to direct tax revenue inclusive the companies tax. There are direct tax and indirect
tax that implemented in Malaysia. Below are the tax collection result for Malaysia from
1990s 2012s.

PRINCIPLES OF MICROECONOMICS BBEK1103

Above graph shown the trend of increasing of tax collection from the tax payee. It shown
that the company tax is the biggest contribution to the total tax result. And in Indirect
Taxes, the Sales Tax and exercise tax duties are the biggest contributor. This intervention
is rational for government to collect tax as mention by (John Kay,1986) mention that the
rational of tax by government is to raise revenue which it could leave us no criteria for
discriminating between both parties. Taking example in one of private company in
Malaysia which is UMW Toyota. The Toyota distributor in Malaysia paying a big
amount of tax to the government to bring in Toyota vehicle from other country such as
Japan, Thailand or even Indonesia.
Another intervention that been introduced by government on this economic system is
BLR (Based Landing Rate) system. BLR is a minimum interest that been set or
calculated by the Central Bank of Malaysia. The BLR applicable with the adjustment
from the interest that been provided by the bank. This system is helping the people in
reducing the interest rate for the loan that they made. As example, upon purchasing a
house, the people required or need to pay the interest up to 6%, but as been set up by
Bank Negara of Malaysia the BLR interest is -2%. With this situation, the loaner only
required to pay the interest as high as 4% only. With this situation the housing economic
progress could growth with the people able to purchase a new house. Through this
scheme, the private company (in this case bank that operates in Malaysia such as HSBC,
CIMB, Maybank, Hong Leong and etc) together with Bank Negara of Malaysia helping
increase the people to purchase house. Through this, it create a liquidity economic flow
due to purchase and selling.
Another way of government intervention through banking system or Bank Negara of
Malaysia is about the foreign exchange. The foreign exchange rate is control by the Bank
Negara of Malaysia. Other banking in Malaysia will or must follow the rate that had been
set by central bank. Refer to Diagram 4 on the statistic of foreign workers in Malaysia.

PRINCIPLES OF MICROECONOMICS BBEK1103

Based on above graph (diagram 4) shown that the numbers of foreign workers is
increases year by year. This condition also shown the good trend of economic growth in
Malaysia. Due to increases of foreign workers in Malaysia concurrently the foreign
exchange flow in Malaysia will also increase. At the same time, the tourism sector also
will giving an impact due to stable condition of foreign exchange. Through tourism agent
company who bring tourist in Malaysia it simultaneously increase the foreign exchange
amount.

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The graph on the Diagram 5 is extracted from Tourism of Malaysia corporate site shown
that the increase of tourist into Malaysia from 1998 to 2011. With this increasing
numbers of tourist in Million, we can see the amount of receipt in Billion into Malaysia
Economic sector also increase. The tourism sector in Malaysia mainly been handle or
organize by private sector. As we can see a lot of package has been introduce during
MATTA fair which could increase the tourism sector development. The advertising in the
internet helping the international tourist to easily book and enjoy the tourist package that
available. Tourist and foreign workers are two main sources that will give impact to the
money exchange rate.
Another concept or system that been used by government to interfere in the private sector
is through the establishment of the GLCs (Government-Linked Company). GLC means a
private company that having few percentages of shares belongs to government. The
purpose is to provide the guidance and boost up the economic factor simultaneously. As
example, the PNB (Permodalan Nasional Berhad) is a private company which
incorporated on March 1978. Therefore all private company under the PNB falls and also
linked to the government rules and regulation. As example the company of UMW is
linked under the PNB. With this linked, UMW and all company under UMW is force to
follow and support government economic plan. (Lau and Tong, 2008), studied has found
that contrary to the adverse public perception of GLCs in Malaysia, government
intervention improves firm value which provide preliminary evidence on the
effectiveness of the ownership and control structure of Malaysian GLCs in creating the
firm value. With this evidence it shown that, the government intervention through GLCs
to the private sector is increase the economic growth of Malaysia. Another example of
GLS company is Petronas. With the fluctuate oil price in the world Petronas with
assistance from Malaysia government handle the economic price in Malaysia effectively.
I believe if there are no government intervention in Petronas, Malaysian people will feel
the suffer of the oil/fuel fluctuation price. The oil/fuel price been control through subsidy
that provided by government. Compare to other country, that has no subsidy system, their
people will face the world fluctuation oil/fuel price. This intervention help the people and
simultaneously keep the stability of Malaysian economic.
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PRINCIPLES OF MICROECONOMICS BBEK1103

Rational of Malaysias Economic System On Resources Allocation

The rational is mainly to control the resources from not being over used in order to
sustain the economic performance. The resources is the main area that need be prioritized
in any development. Without resources the country or company has nothing to be invest
or nothing to be develop. The resources allocation usually been setup and allocated
during national budget presentation annually. Then from the budget allocation only can
run all the plan, transformation and others in order to ensure the economic growth as
required.
Malaysia Budget is annual Prime Minister presentation on next year Malaysia Economic
plan. The presentation will cover all aspect of national development from education,
economic, welfare, financial, development and others. From this presentation, the people
may know what is government next year plan and direction of the economic growth. At
the same time, private sector also must take this opportunity to understand the budget and
create the proper business plan to jive the national plan and budget. Taking example on
2013 Malaysian Budget that been presented by YAB Dato Seri Mohd Najib Tun Haji
Abdul Razak the Prime Minister of Malaysia. From the National Economic 2013 on
Diagram 6, it shown that specific of 27.4% of the budget is allocated for private usage
and also 8.4% is for investment in private sector only. While the public sector usage takes
only 7.1% and the public investment is only 6.0%. The other 7.4% is for export services,
while the remaining 43.7% for export.

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From the National Economic 2013, then the National Government Budget 2013 been
allocated. From the diagram 7, two pie chart for the fund source and another one is on the
allocation of the fund source. Basically both diagram 6 and diagram 7 are the main
reference on the overall budget that been introduced or allocated.
Continue to the budget result, government introduced national development plan. Based
on Economic Plan Unit (EPU), there are several plan for economic growth. Those plan is
been used to control the resources in Malaysia. The annual development plan is about the
Malaysia Planned. For 10th Malaysia Planned, it contain the Government Transformation
Programmed, New Economic Model which based on high income, inclusiveness and
sustainability. Another planned is New Economic Model. Inside this model, it contain
eight Strategic Initiative Reform that covered important sector such as economic,
government, labor organization, education and others. This strategic plan purposely to
achieve the Malaysia 2020 as advance country to be realistic. Another economic
development plan that been introduced is Government Transformation Programmed
(GTP). Two purpose of GTP is to transform the government to become more effective in
delivering service and responsibility of the success to the people. And another purpose is
to drive the Malaysian become advance community, united and fair with higher living
standard. Another economic development plan is Economic Transformation Programmed
(ETP). All this plan will be based on some policies such as Vision 2020, New Economic
Policies, Malaysia Corporatization Policies, Privatization Policies, Human Resources
Development and other. All this plan purposely to arrange the resources available such as
financial, petroleum, natural and human resources.

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Conclusion

As conclusion, Malaysia runs the country by using the mixed economy system where
public sector involves in the private sector in driven the economy. This system encourage
the economy growth effectively where the business is run by the private sector where the
government provide the guidelines and support. The result of this system create a good
result of economic where it ensure the liquidity of the economic flow run smoothly
without any difficulties. While the intervention of the government in private sector
provide more benefit and shown the improvement on the development and economic
achievement. From the result we can see that the intervention of government is rational
enough in this economic system and where both parties having a win win situation. With
a support and direction from government through Malaysia Budget, New Economic
Policies, Malaysia Planned, Government Transformation Programmed and other several
policies such as Privatization Policies, Malaysia Corporation Policies and others policies
ensuring the rational of how government allocate the resources to full fill the people
needs and at the same time achieve the advance country of Malaysia by year 2020.
2642 words

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REFERENCES
1 Economy Of Malaysia. (2012). [Online]. Available:
http://en.wikipedia.org/wiki/Economy_of_Malaysia.
[2012, November 9].

2 IPINS (2012). The Purpose Of Market Intervention. [Online]. Available:

http://www.epinula.com/2012/09/12/the-purpose-of-market-intervention/.
[2012, November 9].

3 Simpson, R.A. (2005). Government Intervention In The Malaysian Economy, 19701990 : Lesson For South Africa. [Online]. Available:
http://etd.uwc.ac.za/usrfiles/modules/etd/docs/etd_init_6005_1177061493.pdf.
[2012, November 9].

4 Malaysia. Malaysia Economic Council Advisor. Economic Planning Unit. (2010).

Modal Baru Ekonomi Untuk Malaysia Bahagian Akhir. Putrajaya: Percetakan Nasional
Malaysia Berhad.

5 Loganathan, et al. (2007). Have Taxes Led Government Expenditure In Malaysia?

Journal of International Management Studies, 1, 99-113.

6 Selected Social Statistic, Series 10. (2009). [Online]. Available:

http://www.statistics.gov.my/portal/download_Labour/files/BPTMS/PST-Siri10.pdf
[2012, November 10].

7 Lau, Y.W. (2008). Are Malaysian Government-Linked Companies (GLCs) Creating

Value? Journal of International Applied Economics and Management Letters. [Online].
Available: http://econ.upm.edu.my/iaeml/vol1no1/bab02.pdf [2012, November 11].

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