Third, the extensive financial reforms and development of the domestic financial markets since the Asian financial crisis have significantly strengthened Asia’s financial systems to better manage the more volatile capital flows. In addition, rigorous surveillance is being undertaken. This has allowed several economies to introduce preemptive measures to preserve monetary and financial stability. The near term outlook for emerging Asia going into 2011 remains positive. For Malaysia, despite slower external demand, the overall growth is expected to remain strong, supported by the continued expansion in private domestic demand. Favourable employment conditions, firm commodity prices and an accommodative policy environment will continue to underpin growth in private consumption. Meanwhile, the positive outlook on the domestic-oriented sectors and the recently announced economic transformation programme has improved the  BIS Review 146/2010  1  investment climate. Intra regional trade is also expected to continue to provide support to the growth and development process. Transition to high value-added high income economy Beyond the near term horizon, the Malaysian economy is currently at a significant juncture in its development. The economic future of our country depends on the success in our transition to becoming a high value-added economy. For more than five decades, Malaysia has demonstrated its economic flexibility to adjust to the changing environment and to continuously enter into new areas of competitive advantage.

The ability to continue to do this as we advance forward into the future will however, become more challenging amidst the rapidly changing global environment, characterised by increased competition and a higher degree of global and regional economic and financial integration. Fundamentally, the successful transition of Malaysia towards a high value-added, high income economy will depend on several critical factors. The first is to achieve an orderly shift towards new areas of growth and new areas of comparative advantage. This transformation requires all sectors of the economy to be increasingly involved in higher value added economic activity. In the manufacturing sector, existing industries need to move up the value chain. This will be complemented by knowledge-intensive services sectors, such as information and communication technology (ICT), education and health. While multinationals and large domestic corporations will remain important in these sectors, the contribution of small and medium enterprises (SMEs) have an important role in supporting these new growth areas. The second critical factor is that productivity improvements will become a critical determinant of our future growth prospects. Continuous increases in productivity characterised by greater innovation and efficiency in production and business processes, are vital to achieve this transformation. Indeed, such productivity improvements are taking place in the financial sector. The comprehensive efforts in capacity building and institutional development in the early part of this decade have resulted in the opportunity to achieve scale, and thus allow for increased investment in technology and in people. Increased competition also facilitate this trend.