For ASEAN, this challenge will involve countries in the region to identify areas of comparative advantage and leverage extensively on the complementarities that the rise of China and India present. For Malaysia, enhancing our competitiveness and positioning ourselves much higher in the global value-added production chain will be critical. Malaysia – agenda for sustained economic growth The full impact of the global recession was felt in Malaysia in the first quarter of 2009 when the economy contracted by 6.2%. Since then, timely counter-cyclical fiscal and monetary policy responses, together with a sound financial sector have contributed significantly to improving domestic economic conditions. In the third quarter, real year-on-year GDP contraction slowed to 1.2%. Of significance, the economy had registered two consecutive quarters of quarter-on-quarter growth, growing by 4.8% and 5.7% in the second quarter and third quarter respectively. Domestic demand has been the key driver of these improvements. Recent indicators have suggested that a more broad-based recovery is gathering momentum. Better labour market conditions, improving private sector confidence and continued access to financing have supported the increasing strength of domestic activity. Prospects are that year on year GDP in the fourth quarter will show positive growth. The recovery is expected to gather some strength in 2010. The economy will be driven primarily by domestic demand, with private expenditure contributing a growing share while the gradual recovery in external demand will provide a further support to growth.

Hence, the farmers would concentrate on producing more of carrots and less of cabbages. But, when an economy is hit by inflation, all the prices would rise simultaneously, so both carrots and cabbages seem to be equally profitable. This would confuse the producers who would now be unable to make any choice between the two products. Hence, the much desired relative price change does not occur, when an economy has been hit by inflation. Instead, the absolute prices start to change and such changes do not provide the price signals for allocating resources. Fifth, continued inflation distorts the balance sheets of companies, especially the balance sheets of financial institutions. Companies may record profits in nominal terms, but a large part of such profits are eroded in real terms by inflation. When profits are adjusted for inflation, companies would find that their performance has not been so spectacular as has been depicted by the amount of rupees they have earned. In fact, their real position has pushed them backward to a lower level. Sixth, inflation very forcefully hits the vulnerable groups with a weaker bargaining power. Such categories include housewives, students, pensioners and workers whose salaries are not linked to inflation. It would lead to continuous agitation by these groups creating social and political dissension. The country, instead of using its resources for investing in long term growth generating projects, would have to spend its energy and resources for solving such social issues. Thus, inflation is the unrivalled public enemy number one.