RESTRICTED
WORLD TRADE WT/TPR/S/31
3November 1997
ORGANIZATION(97-4766)
TRADE POLICY REVIEW
MALAYSIA
Report bytheSecretariat
Thisreport, prepared forthesecond Trade Policy Review ofMalaysia, hasbeendrawn
upbytheWTO Secretariat onitsownresponsibility. TheSecretariat has,asrequired
bytheAgreement Establishing theTrade Policy Review Mechanism (Annex 3ofthe
MarrakeshAgreementEstablishingtheWorldTradeOrganization),soughtclarification
from theGovernment ofMalaysia onitstrade policies andpractices.
Document WT/TPR/G/31 contains thepolicy statement submitted bytheGovernment
ofMalaysia.
Note: Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting
oftheTrade Policy Review Body onMalaysia.Malaysia WT/TPR/S/31
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS x
(1) Recent Economic Performance x
(2) Trade Policy Formulation xi
(3) Trade andRelated Structural Policies xi
(i) Border measures xi
(ii) Internal measures xii
(4) Trade Policies bySector xiii
(5) Prospects xiv
(6) The1998 Budget xv
I. THE ECONOMIC AND TRADE ENVIRONMENT 1
(1) Introduction 1
(2) Major Features oftheMalaysian Economy anditsRecent Performance 2
(3) Recent Economic Developments 9
(i) Fiscal policy 9
(ii) Monetary policy 10
(iii) Exchange ratepolicy 11
(iv) Balance ofpayments 11
(4) Composition andDirection ofTrade 16
(i) Composition ofmerchandise trade 18
(ii) Direction ofmerchandise trade 18
II. INSTITUTIONAL DIMENSIONS OFTRADE POLICY MAKING 20
(1) Overview 20
(2) Internal Trade Policy Making 21
(i) Institutional structure 21
(ii) Trade policy objectives 24
(iii) Advisory andreview processes 24WT/TPR/S/31
Page ivTrade Policy Review
Page
(3) External Trade Policy Making 26
(i) Multilateral arrangements 27
(ii) Regional arrangements 28
(iii) Bilateral trade andinvestment arrangements bytrading partner 31
Annex AII.1 Planning intheExecutive Branch 34
III. TRADE POLICIES AND PRACTICES BYMEASURE 36
(1) Overview 36
(2) Measures Directly Affecting Imports 39
(i) Registration, customs valuation andprocedures 39
(ii) Tariffs 40
(iii) Import prohibitions andimport licensing 49
(iv) Anti-dumping andcountervailing legislation andmeasures 53
(v) Other measures 55
(3) Measures Directly Affecting Exports 56
(i) Registration, customs valuation andconversion ofexport
receipt requirements 56
(ii) Export prohibitions andlicensing requirements 57
(iii) Export duties andother levies 58
(iv) Duty andtaxconcessions 60
(v) Export finance andinsurance 61
(vi) Export promotion andmarketing assistance 62
(4) Internal Measures 64
(i) Registration andlicensing ofcompanies andprofessionals 64
(ii) Incentives 67
(iii) Intellectual property rights 72
(iv) Standards andtechnical requirements 78
(v) Government procurement, state-owned enterprises and
privatization 81
(vi) Competition policy andrelated issues 86
Annex III.1 Timeframes specified inMalaysia 'sAnti-dumping andCountervailing
Measures Legislation andRegulations 88
Annex III.2 Funds targeted atsmall andmedium-sized enterprises 90Malaysia WT/TPR/S/31
Page v
Page
IV. TRADE POLICIES BYSECTOR 91
(1) Overview 91
(2) Primary Sector 92
(i) Main features 92
(ii) Policy objectives intheagricultural sector 94
(iii) Main policy instruments intheagricultural sector 95
(iv) Policies targeted atthepaddy andricesector 97
(3) Manufacturing 99
(i) Main features 99
(ii) Textiles andclothing 101
(iii) Automobiles andtheir parts 103
(4) Services 107
(i) Overview 107
(ii) Financial services 109
(iii) Telecommunications 119
(iv) Transportation 124
(v) International tourism 128
(vi) Professional services 130
REFERENCES 132WT/TPR/S/31
Page viTrade Policy Review
CHARTS
Page
I. THE ECONOMIC AND TRADE ENVIRONMENT
I.1 Trade ingoods andnon-factor services asshares ofGDP, 1990-96 2
I.2 Growth trends ofcapital intensity, productivity andtotal factor productivity, 1989-96 4
I.3 Selected indicators ofmacroeconomic developments, 1992-96 6
I.4 Contribution ofsupply components togrowth, 1992-96 8
I.5 Merchandise andservices account balance, 1990-96 12
I.6 FDI, long- andshort-term capital flow, 1992-96 13
I.7 Inward foreign direct investment inmanufacturing, 1992-96 15
I.8 Outward direct investment bydestination, 1992-96 16
I.9 Product composition ofMalaysia 'strade, 1992 and1996 17
I.10 Merchandise trade bymain origin anddestination, 1996 and1996 19
III. TRADE POLICIES AND PRACTICES BYMEASURE
III.1 Average MFN tariffs byISIC group, 1988, 1993 and1997 42
III.2 Average MFN andbound tariffs, byISIC group 1997 45
III.3 Average preferential tariffs byISIC group, 1997 and2003 47
III.4 Import licensing, byISIC group, 1995 51
IV. TRADE POLICIES BYSECTOR
IV.1 Trade inagricultural products, byproduct, 1992 and1995 93
IV.2 Trade inmanufacturing products, byproduct, 1992 and1995 100Malaysia WT/TPR/S/31
Page vii
TABLES
Page
I. THE ECONOMIC AND TRADE ENVIRONMENT
I.1 Basic economic andsocial indicators, 1990-96 1
I.2 Economic performance, 1990-96 3
I.3 Sectoral distribution ofGDP, 1990-96 8
II. INSTITUTIONAL DIMENSIONS OFTRADE POLICY MAKING
II.1 Main trade-related functions ofselected ministries andgovernment agencies/statutory
authorities, 1997 23
III. TRADE POLICIES AND PRACTICES BYMEASURE
III.1 Structure ofMalaysia 'sMFN andAFTA tariffs, selected years 38
III.2 Import andexport registration requirements inMalaysia, 1997 39
III.3 Clearance timebytheCustoms Department 40
III.4 Simple MFN andAFTA tariff averages bystage ofprocessing, selected years 43
III.5 Products granted tariff protection upon recommendations bytheSpecial
Advisory Committee onTariffs, 1993-96 46
III.6 Allocation ofimport licences forproducts subject totariff quota 52
III.7 Anti-dumping andcountervailing investigations andmeasures taken byMalaysia,
1January 1990-31 December 1996 54
III.8 Vendor programmes undertaken byselected privatized companies, 1991-95 56
III.9 Export duties onMalaysian palm oil,1997 58
III.10 Exports from EPZs, 1990-96 60
III.11 Anti-dumping andcountervailing dutyactions taken against Malaysian exports 64
III.12 Taxincentive indicators, 1992-96 68
III.13 Semi-public andpublic-sector advisory andreview bodies (intellectual
property rights), 1997 73
III.14 International payments andreceipts foruseofintellectual property rights,
1991-96 76
III.15 Number oftechnology transfer agreementy byrates ofroyalty payment,
inselected industry groups, 1993-96 77
III.16 Indicators ofstandards development inMalaysia, 1992-96 79
III.17 Certification ofcompanies, byquality system andsector, April 1997 80
III.18 Overview ofgovernment procurement, 1991-97 82
III.19 Financial position ofNFPEs, 1991-96 84
IV. TRADE POLICIES BYSECTOR
IV.1 Production ofselected agricultural commodities andtheir useofland,
1990, 1995 and2000 92
IV.2 Selected agricultural product groups subject tospecific duties 95
IV.3 Overview ofdomestic support measures 97
IV.4 Domestic production andimports ofrice, 1992-97 98
IV.5 Overview ofdevelopments inthetextile andclothing sector, 1990-96 101WT/TPR/S/31
Page viiiTrade Policy Review
Page
IV.6 Structure ofMalaysia 'sMFN andAFTA tariffs, selected years 102
IV.7 Overview oftheautomobile sector, 1990-96 104
IV.8 Government support fortheautomotive industry inMalaysia 105
IV.9 Local-content targets fortheautomobile sector, 1992-96 107
IV.10 Share intotalassets ofthefinancial system byinstitution, 1970-96 109
IV.11 Performance oftheMalaysian banking system, 1990-95 111
IV.12 Overview oftheMalaysian insurance sector, 1990-96 113
IV.13 Distribution ofpaid-up capital ofMalaysian-incorporated insurers, 1992-96 114
IV.14 Malaysian reinsurance premiums, 1990-96 115
IV.15 Telecommunications services statistics, 1991-96 120
IV.16 Basic telecommunications licences allocated, 1997 123
IV.17 Traffic handled atMalaysian airports, 1990-2000 125
IV.18 Number ofships calling atMalaysian ports andvolume ofcargo handled, 1990-200 126
IV.19 Ships registered, 1990-95 127
IV.20 Overview oftourist services exports, 1990-96 128Malaysia WT/TPR/S/31
Page ix
APPENDIX TABLES
Page
I. THE ECONOMIC AND TRADE ENVIRONMENT
I.1 Exports bygroups ofproducts, 1992-96 137
I.2 Imports bygroups ofproducts, 1992-96 138
I.3 Exports bydestination, 1992-95 139
I.4 Imports byorigin, 1992-96 140
II. INSTITUTIONAL DIMENSIONS OFTRADE POLICY MAKING
AII.1 Overview ofselected trade-related legislation 141
AII.2 Status ofselected notification requirements totheWTO, 30June 1997 143
AII.3 WTO disputes involving Malaysia, 1January 1995 -30June 1997 145
AII.4 Malaysia 'sBilateral Trade Agreement, August 1997 146
AII.5 Malaysia 'sInvestment Guarantee Agreements, July1997 147
AII.6 Malaysia 'sBilateral Payments Arrangements/Agreements, October 1996 148
AII.7 Malaysia 'sDouble Taxation Agreements, April 1997 149
III. TRADE POLICIES AND PRACTICES BYMEASURE
AIII.1 Simple average MFN andpreferential tariffs byHSChapter, 1988, 1993, 1997 and2003 150
AIII.2 Tariff quotas included inMalaysia 'sWTO Schedule XXXIX 153
AIII.3 Import dutycollection, 1995 and1996 155
AIII.4 Products subject toimport licensing requirements, andlicensing authority, 1997 156
AIII.5 Products subject toexport licensing requirements, andlicensing authority, 1997 159
AIII.6 Exports covered under thecredit insurance provided byMECIB, 1992-96 161
AIII.7 Malaysia 'sexports receiving GSPtreatment, byproduct category andtrading partner,
1993-96 162
AIII.8 Investments inthemanufacturing sector bytaxincentive category, 1999-96 163
AIII.9 Actions taken under theCopyright Act1987, 1987-97 164
AIII.10 Country oforigin ofowners ofpatent andutility innovation granted,
October 1986 -December 1996 166
AIII.11 Trade mark registrations, 1992-96 167
AIII.12 Actions taken under theTrade Descriptions Act1972, 1973-97 169
AIII.13 Malaysia 'snotifications ofdraft Malaysian standards inaccordance withArticle 10.6
oftheAgreement onTechnical Barriers toTrade, January 1995 -March 1997 170
AIII.14 Non-financial public enterprises (NFPEs), 1996 171
IV. TRADE POLICY BYSECTOR
AIV.1 Malaysia 'smost-favoured-nation tariff rates, byISIC category, 1997 172
AIV.2 Agricultural production, 1990-96 ('000tonnes unless otherwise indicated) 176
AIV.3 Advisory andreview bodies covering agricultural policies 177
AIV.4 Overview ofMalaysia 'smining sector, 1989-93 178
AIV.5 Performance ofselected manufacturing sectors, most recent yearavailable 179
AIV.6 Investment incentives, factor movements, technological developments andindustry
concentration bymanufacturing sector, 1996 180
AIV.7 Utilization rates ofMalaysia exports under quota oftheWTO Agreement on
Textiles andClothing, 1993-96 181
AIV.8 Overview ofselected service sectors, 1989-92 and1994 183WT/TPR/S/31
Page xTrade Policy Review
SUMMARY OBSERVATIONS
1. Malaysia has achieved impressive
growthandcontinueditseconomic
transformation since theprevious review ofits
trade policies, under GATT in1993. These
trends arelargely attributable tothepursuit of
open trade policies andcontinuing highrates
ofinvestment. During thereview period,
exports andimports ofgoods andnon-factor
services averaged 90and91percentofGDP.
Malaysia hascutitsimport tariffs byalmost one
halfsince 1993, reducing protection formost
agricultural and manufactured goods.
Nevertheless, highlevels oftariff protection
remain insomeagricultural sub-sectors aswell
asintheautomobile industry. Investment
averaged 40percentofGDPduring theperiod
1992-96; aconsiderable share came from
abroad, especially inmanufacturing, where
more than halfofallfirms'equity isnow
foreign-owned. Whereas foreign direct
investment (FDI) policies inmanufacturing are
generally liberal, and investment inthe
multi-mediaandothertechnologically-advanced
service sub-sectors hasbeenfullyliberalized,
restrictions remain onforeign investors 'access
tomuch oftheservices sector, thuscurtailing
competition and impairing thepotential
efficiency ofthatsector.
2. Likeother countries ofthesub-region,
Malaysia hasbeen hitbythefinancial crisis
originating withThailand inmid-1997. The
underlying strength oftheeconomy hasmeant
thattheeffects ofthecrisis havebeensomewhat
lessserious forMalaysia, which hasindeed
contributed tothefinancial relief package for
Thailand. However, questions ariseconcerning
thescope anddirection oftrade measures taken
intherecent Budget.
(1) Recent Economic Performance
3. With realGDP growing ataverage
annual rates ofapproximately 8.6percent,
unemployment below 3percent, inflation
declining to3percentin1996andlowexternal
debt, Malaysia 'smacroeconomic performancesince theprevious TPRhasbeen impressive.
Malaysia hasalsobeenatpains toensure that
thebenefits ofgrowth areshared equitably
among different social andethnic groups.
4. Notwithstanding this outstanding
performance, theMalaysian economy facestwo
major challenges tofuture growth. First,
labour, particularly skilled labour, hasbecome
increasingly scarce. Insofarasthescarcity
results innominal wage increases above gains
inlabour productivity, itwould erode the
competitiveness ofMalaysian industry and
contribute toinflationary pressures. Thelack
ofskilled labour mayalsohinder theabsorption
ofnewtechniques embodied innewcapital and
thusinhibit growth intotalfactor productivity
(TFP). Whereas inthepasttheauthorities have
dealt withthelabour shortage bypromoting
capital-intensive industries through investment
incentives andrelying onunskilled immigrant
labour inagriculture andconstruction, greater
emphasis isnowplaced oninvestment inhuman
capital.
5. Secondly, Malaysia 'srecent growth has
largely beenbased onincreases inthevolume,
rather thantheefficient allocation, ofcapital;
hence, total factor productivity growth has
undergone amarked slowdown. Despite the
external (spill-over) benefits usually associated
with FDI, including theacquisition ofnew
technologies,managerialexpertiseandlearning-
by-doing, TFPgrowth averaged 0.9percent
annually fortheperiod 1991-1996 compared to
anannual average of2.9percentin1987-1990.
Iftherateofimprovement inTFPintheearlier
period hadbeenmaintained, thesame rateof
GDPgrowthcouldhavebeenaccomplishedwith
considerably lessinvestment.
6. Afurther macroeconomic challenge
facing theMalaysian Government isthe
investment-savings gapandtheassociated
current account deficit. Gross national savings,
although averaging 33percentofGDP during
1992-1996, fellconsiderably short ofdomesticMalaysia WT/TPR/S/31
Page xi
investment; withthebudget roughly inbalance,
the7percentage point gaphasbeen largely
made upbyanetinflow offoreign direct
investment (FDI). Thecounterpart ofthegap
isacurrent account deficit alsoaveraging
around 7percentofGDP, andreaching over
10percentin1995, alevelthatgaveserious
concern totheauthorities. Withtightmonetary
policy, thedeficit wascutto5.2percentin
1996andisexpected todecline further in1997.
(2) Trade Policy Formulation
7. TheGovernment 'sdeclared long-term
vision forMalaysia istobecome afully
developed nation by2020. Themedium- and
short-term objectives oftrade andinvestment
policies arepublished inperiodic industrial
plans andtheannual budget. Theauthorities
donotpublish any evaluations ofthe
effectiveness ofspecific policy instruments, such
astaxincentives, inachieving policy objectives
oroftherelationship between therevenue loss
from each measure andtheinvestment that
would nothavebeenundertaken intheabsence
oftheincentive, thepossible misallocation of
resources resulting fromtheincentive, orthe
netwelfare gains orlosses toconsumers.
Although business hasasubstantial consultative
roleinpolicy-making, consumer groups donot
appear tomake anyformal input. Inthe
absence ofanyconvincing evidence tothe
contrary, therefore, thecost-effectiveness of
Malaysia 'sactive industrial policy might well
bequestioned.
8. Both asamember ofASEAN and
individually, Malaysia regards theWTO asat
thecoreofitsexternal trade policy making.
Under theMarrakesh Agreement, Malaysia has
reduced itsimport tariffs byroughly one-half
during theperiod under review; ithasmade
substantial commitments under theGATS
Agreement andisintroducing newlegislation
required bytheTRIPS Agreement ahead of
deadlines. Malaysia hasalso, byandlarge,
made notifications ontime, usedtheDispute
Settlement Mechanism actively andco-operated
fullyinpreparing thisTrade Policy Review.These elements areillustrative ofitsstrong
commitment totheWTO mechanisms.
9. Atthesametime,ASEAN provides both
apreferential trading area andamajor
outward-lookingregionalforumwhereMalaysia
cancoordinate policy with itsimmediate
neighbours. TheAPEC process, through "open
regionalism"andthepursuitofIndividualAction
Plans, involves further development ofpolicies
withregional trading partners. ASEAN and
APEC alsoplayimportant roles inpreparing
member States fordiscussion ofnewtopics that
mayberaised intheWTO.
(3) Trade andRelated Structural Policies
10. Trade and trade-related policy
instruments aremajor features oftheMalaysian
Government 'sactive industrial policy,
implemented inclose collaboration withthe
business sector. Policy involves border
measuressuchastariffs,non-automaticlicensing
procedures, quantitative restrictions andanti-
dumping actions, together with internal
measures suchasincentives, regulations and
preferential government procurement.
(i) Border measures
11. Tariffshavebeenliberalized
substantially since theprevious review. The
average applied MFN tariff ratehasdeclined
from15.2percentin1993 to8.1percentin
1997, and aspart ofMalaysia 'sWTO
commitments,thecoverageoftariffbindingshas
increased from under onepercenttoalmost
twothirds oftarifflines. Furthermore, whereas
only13percentoftarifflineswereexempt from
import dutyin1993, overhalfofalllinesnow
bearduty-free applied rates. There is,however,
substantialflexibilityforMalaysiatoraisetariffs
within ceiling bindings. Ontheother hand,
some ratesremain wellover100percent. The
maintenance ofsome 500specific, mixed and
alternative duties conceals veryhighadvalorem
rates; forexample, roughly 100specific duties
involved rates whose average advalorem
equivalent was145percent.WT/TPR/S/31
Page xiiTrade Policy Review
12. Inaccordance withitscommitments
under theASEAN Free Trade Area (AFTA)
Agreement, Malaysia hassubstantially reduced
tariffs onimports fromitsAFTA partners. It
isalsocommitted toreducing tariffs onimports
ofpractically allmanufactures, including
automotive products, toamaximum of5per
centby2003. AsAFTA tariffs arereduced
ahead ofMFN tariffs, imports from ASEAN
countries thusreceive asubstantial margin of
preference. However, itappears thatmany
MFN tariffs arealsobeing reduced inparallel
withAFTA tariffs, tolimitthetrade diverting
impact ofsuchpreferences. Itthusseems that
Malaysia 'sAFTA commitments maydrive its
MFN liberalization, albeit withatimelag,
during which ASEAN countries receive
preferential access toMalaysia 'smarket.
13. Import licensing isthemajor non-tariff
measure, affecting some17percentofalltariff
lines, principally forestry and logging,
agricultural and mineral items, and the
automobile sector. Mostlicences appear tobe
granted automatically orpredictably upon
fulfilment ofcertain criteria. Import quotas are
applied tocompletely-built-up motor vehicles;
coffee beans andround cabbages arealso
restricted under import licensing.
14. AlthoughtheMalaysianauthoritieshave
yettochange theiranti-dumping legislation so
thatitaccords fullywithWTO rules, onlytwo
such measures currently apply. Malaysia 's
exporters also face anti-dumping and
countervailing actions incertain partner
markets. Tosome degree, these arejustified
bypartners asseeking tooffset "unfair"
assistance received byexporters from the
Malaysian Government oralackofcompetition
inMalaysia 'sdomestic market.
15. Export promotion measures andexport
levies alsoplayapartinMalaysia 'sindustrial
policy. Exports areencouraged byexemptions
ordrawbacks forimport duties andother
indirect taxes, aswellasinternal incentives and
government-sponsored trade information
initiatives. Apparently, such promotionalmeasures are partly designed tooffset
disincentives arising fromother policies, such
asimport tariffs levied oninputs usedingoods
forexport and"cascading" salestaxes, which,
unlike aVAT, tendtodiscriminate against
exports. Atthesame time, taxes andother
levies aswellaslicensing arrangements are
applied tocertain exports, thustending to
discourage theexport ofthegoods affected and
reduce theirdomestic prices. Thisconstitutes
anindirect subsidy todomestic users ofsuch
goods. Theauthorities justify someexport taxes
andlevies, including those onlogs, onthe
grounds thattheyareintended totakeinto
account theenvironmental damage caused by
theproduction process. However, totheextent
thatthisisthecase, production levies would be
amore efficient way ofcorrecting the
environmental externality thanexport duties.
Thus, although such instruments mayserve
legitimate objectives, thesame objectives may
beachieved more efficiently byalternative
measures.
(ii) Internal measures
16. AcentralfeatureofMalaysia'sindustrial
policy isdiscouragement oflabour-intensive
activities andthepromotion ofcapital-intensive
processes suchastheautomation oflow-skill
industries andthedevelopment andacquisition
ofadvanced technologies. Foreign direct
investment insuch activities isactively
encouraged.
17. Anarray oftaxandnon-tax incentives
exists; some aregranted toallsectors, while
others areaimed atspecific firms orindustries.
Incentives havealsobeendesigned toencourage
participation bytheBumiputra community in
investments aswellasthedevelopment ofsmall
businesses. Thegranting ofsuchincentives is
administered bytheMalaysian Industrial
DevelopmentAuthority(MIDA),the
Government 'sprincipal "one-stop" agency for
thepromotion andco-ordination ofindustrial
development. Incentives are,withonenotable
exception concerning reduced sales taxes on
"national"cars,grantedonaMalaysia WT/TPR/S/31
Page xiii
non-discriminatory basis todomestically- and
foreign-owned enterprises. Asaconsequence,
foreign-owned firms accounted formore than
twothirds ofthevalue ofinvestment qualifying
forPioneer Status andtheInvestment Tax
Allowance during theperiod 1992-1996.
18. While the Malaysian authorities
appeared (prior tothe1998 Budget) tobe
reviewing theuseofincentives withaviewto
making themmore selective, theoverall utility
ofinvestment incentives maybequestioned.
These measures mayhaveanadverse effect not
justonresource allocation, andthustotalfactor
productivity, butalsoonthefiscal balance,
thereby reducing national savings, widening the
savings-investment gap,andexacerbating the
current account deficit. Estimates oftheannual
costs oftaxincentives interms ofrevenue
forgone arenotavailable. However, judging
from information provided bytheMalaysian
authorities, suchcostsmaybesubstantial; for
example, theReinvestment Allowance alone cost
roughlyRM1billionannuallyinforgoneincome
taxrevenues during 1995-96. Suchincentives
mayalsocontributetoa"beggar-thy-neighbour"
situation inwhich other countries react by
offering incentives oftheir own, justasthe
Malaysian Government mayhaveresponded to
other countries 'incentives.
19. TheMalaysian Government attaches
importance totheprotection ofintellectual
property asatool ofindustrial policy.
Legislativeprotectionforpatents,copyrightsand
trademarks isintheprocess ofrevision to
conform withtheTRIPS Agreement; although
Malaysia hasformally invoked thefive-year
grace period fordeveloping countries under the
agreement, thislegislation isexpected toenter
intoforce by1998 atthelatest.
20. Malaysia isnotaparty tothe
Plurilateral Agreement on Government
Procurement. Incontrast togeneral
regulations, licensing requirements and
incentives, Malaysian government procurement
expressly favours local suppliers ofgoods and
services through specified preferences andinformal local-content policies. Inaddition,
selected state-owned enterprises arerequired
tofollow similar practices. Such preferences
provide assistance tothefavoured firms; butby
increasing thecosttotheGovernment andstate-
owned enterprises ofprocuring goods and
services, they impair economic efficiency.
However, despite these preferences, foreign
partners havebeenawarded alarge share of
government contracts.
21. Through stateownership ofenterprises,
theGovernment isinvolved notjustinthe
procurement ofgoods, services andinputs, but
alsointheirsupply. Inorder tofoster economic
efficiency, however, somestate-owned firmsare
allowed greater autonomy, including freedom
from public procurement regulations while
others havebeenprivatized. Privatization has
made asignificant contribution toeconomic
growth andpublic revenue. Foreign investors
have been invited toparticipate insome
privatization exercises, while theyhave also
been allowed toinvest inMalaysian listed
companies uptoamaximum of25percentof
equity.
22. Malaysiahasnocompetitionlaws.This
absence (particularly coupled withthedrive to
privatization) mayinsomecircumstances actas
anadditional form ofassistance todomestic
producers bysheltering themfromdomestic and
foreign competition. Thisistheoutcome ofa
situation inwhich trade anddomestic resource
allocation aredistorted notsomuch by
government action, butrather itsinability to
takeaction against anti-competitive private
practices. Aswith border and internal
measures, suchprotection isobtained atthe
expense bothofother domestic producers who,
asaconsequence, facehigher prices fortheir
inputs, andofMalaysian consumers. While
freedom toraise prices forcertain essential
products islimited byprice controls, such
controls may constitute afurther potential
distortion tocompetition.
(4) Trade Policies bySectorWT/TPR/S/31
Page xivTrade Policy Review
23. Trade and trade-related measures,
individually orincombination, tendtoaffect
industries andevenfirms inthesame industry
differently, producing "winners" (the net
beneficiaries) andrelative "losers" (industries
orfirmsthatcannot benefit fromsuchmeasures
orareadversely affected bythem). InMalaysia,
withtheexception ofafewproducts, agriculture
receives littleprotection, andbenefits fromthe
supply oflow-skilled immigrant labour. By
contrast, relatively hightariffs, combined with
animport quota onimported automobiles and
sales taxreduction applicable tothenational
car,directly favour manufacturers ofthelatter,
notjusttothedetriment ofother domestically-
manufactured orimported cars, butalsoatthe
expenseofothersectors,suchasagricultureand
other manufacturing industries, thatreceive
lower protection. Likewise, restrictions in
service sectors, suchasrefusal togrant new
licencestoprivateprovidersof
telecommunications services, ortheprohibition
ofestablishment ofnew banks orofthe
expansion offoreign bank branches, reduce
competition andefficiency inthedomestic
market.
24. Theultimate losers fromsuchmeasures
areconsumers; moreover, protective measures
applied toonesector (particularly inputs like
banking ortelecommunications) affect others
indirectly. Ontheother hand, taxandnon-tax
incentives orsubsidies accorded tofirms
producing goods andservices inonesector
reduce notonlythecostsofthose firms, butalso
thecosts offirms elsewhere forwhom those
goods andservices areinputs. Even a
seemingly general measure, such asan
investment orR&D incentive, will affect
industries andfirms differently, depending on
theircapital andR&D intensities. Itwould be
surprising ifthearray ofmeasures currently
usedinMalaysia didnotsignificantly influence
theallocation ofresources among andwithin
sectors. Intheabsence ofsufficiently large
social benefits, theoutcome would beless
efficient domestic allocation ofresources and
lower productivity intheeconomy asawhole.(5) Prospects
25. Totheextentthatsavingsandinvestment
inMalaysia remain close tothehigh rates
experienced during the1990s, anditsopenness
totrade and attractiveness toFDI are
maintained, theunderlying outlook forthe
economy appears healthy, despite therecent
disappointing paceoftotalfactor productivity
improvement andnotwithstanding therecent
turbulence intheregion. Future productivity
andgrowth would beenhanced bytheincreased
emphasisbeingplacedondevelopmentofhuman
capital; andtheincreased openness ofthe
economytotradeingoodsandservicesresulting
from theimplementation oftheliberalization
measures envisaged intheUruguay Round
agreements will foster competition and
specialization. Growth andproductivity willbe
further enhanced if,asenvisaged, regional
liberalization measures under theASEAN Free
TradeAgreementandwithinAPECareextended
toallother WTO Members onanMFNfooting.
26. Notwithstanding thisoptimistic overall
economic outlook, Malaysia does facesome
macroeconomic andstructural challenges tothe
maintenance ofitsrapid economic growth.
Malaysia'spro-activeindustrialpolicy,involving
large amounts ofpublic investment in
infrastructure andtheprovision ofgenerous
incentives topromote private investment in
specificsectorsmaywellhaveledtosub-optimal
allocation ofthecapital stock. Ifcapital were
allocated more efficiently, thesame rateof
output growth could bemaintained withalower
rateofinvestment, bringing thelatter moreinto
linewithgross national savings.
27. Continuing trade liberalization would
obviously contribute tomore efficient useof
resources: specific measures might include
parallelimplementationofAFTAandMFNtariff
cuts, implementation ofamore competitive
tendering andbidding process forpublic
infrastructure projects, thecurtailment of
investment (and other) incentives andthe
relaxation, ifnotremoval, ofrestrictions on
foreign ownership inservice sectors. Many ofMalaysia WT/TPR/S/31
Page xv
thesemeasureswouldalsoassisttheGovernment
incontrolling thefiscal balance andgivescope
either foracross-the-board cutsintaxratesor
forhigher expenditure inmore essential areas,
such asthedevelopment ofhuman capital,
where thesocial returns arearguably higher.
Anyimprovement inthefiscal balance, together
withanarrowing ofthegapbetween investment
andsavings, would also tend toreduce
Malaysia 'scurrent account deficit; itwould,
inaddition, alleviate pressure touseborder or
non-border measures torestrain imports or
encourageexportsofspecificcategoriesofgoods
andservices.
(6) The1998 Budget
28. The1998 Budget wasunveiled on
17October 1997, afterthemain body ofthis
report wasdrafted. While noting thestrength
ofeconomic fundamentals, amajor focus was
placed onreducing thecurrent account deficit
through, inter alia, apackage ofmeasures
aimed atreducing imports andincreasing
exports ofgoods andservices. Thepackage
included increases inimport duties onselected
consumer goods, including carsandanumber
ofconsumerdurables,onconstructionmaterials
andheavy machinery used inconstruction;
imports ofsuch machinery were alsotobe
subject toMITI'sapproval, given only if
machinery isnotavailable locally. Thepackage
also contained income taxexemptions for
exporting companies inmanufacturing and
selected agriculture andservices, withthescale
oftheexemptions directly related toincreases
inexport values andthevalue-added content of
exported goods andservices.
29. Atthesame time, theGovernment
re-emphasised itscommitment toderegulation
andliberalization, particularly inthefinancial
sector: measures were introduced toextend
foreign access torealestate purchases and
develop thecapital market, andMalaysia 's
commitment totheWTO financial services
negotiations wasreaffirmed, withparticular
reference toliberalization oftheinsurance and
brokerage industries. Other features ofthebudget wereconfirmation ofthepostponement
ofseveral public works projects, acutinthe
corporate taxratefrom 30to28percent,
measures aimed atincreasing national savings
andmeasures designed tocurb credit. The
budget isprojected toraise revenue and
expenditure by1.9percentand1.7percent,
respectively,therebyslightlyincreasingthefiscal
surplus; growth isexpected toslowtoaround
7percentin1997.
30. TheBudget hasadded several new
measures tothewide array ofincentives
availableinMalaysia.Thetwopercentagepoint
reduction inthecorporate taxrate has,
admittedly, slightly reduced thevalue ofsome
tax incentives, particularly accelerated
depreciation allowances, andbrings therate
closer tothatofSingapore. Itwould appear,
however, thattheMalaysian Government is
seeking toreduce thecurrent account deficit as
much byadopting restrictive trade measures as
bydirectly addressing thefundamental
macroeconomic cause ofthedeficit, namely the
gapbetween investment andsavings.
31. Thetrade control measures contained
intheBudget aredirected selectively atgoods
andnon-factor services. Thedeficit inthese
areas isverysmall (0.9percentofGDP in
1996). Theslowing oftheeconomy andthe
depreciation oftheringgit since thebeginning
ofJuly1997should, inanycase, independently
tend todiscourage imports andencourage
exports. Given theunderlying strength of
Malaysia 'seconomy andthedecline already
seeninthecurrent account deficit, itistobe
hoped thatsuchselective measures willbeof
short duration.