Malaysian Economy

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ASSIGNMENT ON MALAYSIAN ECONOMY AND RMK 8&9

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<p>INTRODUCTIONS What is economics? In general, economics is defined as the choices made on how resources are utilized or allocated. According to Robin (1935, in Hillebrant 1993), economics is a scientific study of peoples behavior in relationship to scarce resources that have various uses.In other words, economics is the study of how humans and society make a choice on the resources that are becoming scarce day by day (Khairani Ahmad,2009) Construction economics is related to human needs for protection, comfort, and finding a suitable shelter to live in. It must guarantee the effective use of resources in the industry in addition to increasing construction work. "Construction Economics is the construction Project to study of how individuals and groups make decisions with limited resources as to best satisfy client's wants, needs, and desires". (wiki answers) It is obvious that the main objective of economic practitioners is the allocation of scarce resources whereas that of construction economics practitioners is to fulfill basic human needs. Traditionally, a building economists can be regarded as an adviser that gives advise and views to his clients to get the best value for their money.</p> <p>1|Page</p> <p>Trends of the Malaysian Gross Domestic Product (GDP) for the last 35 years</p> <p>The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. According to Peter Kennedy (2000) it represents the total dollar value of all goods and services produced during a year. It is conventionally measured as the precent rate of increse in real gross domectic product, or GDP.As economic growth is measured as the annual percent change of National income it has all the advantaages and drawbacks of that level variable. The construction industry in Malaysia and national economic is interelated which is the presence of a lot of construction activities indicate that the national economy is growing whereas a reduction in construction means the national economy is depressed. Table 1: Growth of GDP (1976-2010)</p> <p>Year 1977 1978 14 1979 12 1980 1981 8 1982 6 1983 2 1984 0 1985 -4 1986 1987 1988 1989 1990 1991-6 4 10</p> <p>Growth of GDP (%) 7.56 7.56 9.35 7.30 6.90 5.90 6.30 7.80</p> <p>Year</p> <p>Growth of GDP (%) 8.30 9.20 9.50</p> <p>Year 2007 2008 2009 2010</p> <p>Growth of GDP (%) 6.48 4.81 -1.64 7.19</p> <p>1992 7.80 Growthof G P (% D ) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006</p> <p>8.60 7.70 -4.80 5.40 8.30 7.90Growth of GDP (% )</p> <p>-2 197619781980198219841986198819901992199419961998200020022004200620082010</p> <p>-1.10 1.20 5.40 8.90 9.20 9.70 8.70</p> <p>4.10 5.20 6.00 5.30 6.00</p> <p>2|Page</p> <p>By looking at the trends, it is illustrated that when the national economy growth is on the rise, the growth of the construction industry is doing better than the national economy. In contrast, when the national economy is having a recession, the growth of the construction industry will be even worse. The construction industry is regarded as one of the industries that are responsive to any changes in the national economy. When the recession takes place in the national economy, the construction industry is one of the first industries to experience its effect. The number of construction activities will be decreased. When the economy is getting better, the construction industry is one of the industries take a long time to recover.</p> <p>3|Page</p> <p>Growth of GD and constructionindustry P25 20 15 10 5 0 -5 -10 -15 -20 -25 -30</p> <p>-10 Services -20</p> <p>-30</p> <p>0 9 1 9 1 2 9 1 3 9 1 4 9 1 5 9 1 6 9 1 7 9 1 8 9 1 1 0 2 0 2 3 0 2 4 0 2 5 0 2 6 0 2 7 0 2 8 0 2 9 0 2 1 0 2 1 0 2 1 0 2</p> <p>0 8 9 1 8 9 1 2 8 9 1 3 8 9 1 4 8 9 1 5 8 9 1 6 8 9 1 7 8 9 1 8 9 1 8 9 1 0 9 1 9 1 2 9 1 3 9 1 4 9 1 5 9 1 6 9 1 7 9 1 8 9 1 9 1 0 2 1 0 2 0 2 3 0 2 4 0 2 5 0 2 6 0 2 7 0 2 8 0 2Growth of GDP (% ) Contribution of construction industry to GDP (% ) Growth of construction industry (% )</p> <p>Figure 2: Graph of GDP, CI and Contribution of CI and GDP</p> <p>30</p> <p>20 Agriculture, forestryand fishing 10 Mining and Quarrying Manufacturing Construction</p> <p>0</p> <p>4|Page</p> <p>Gross Domestic Product by Kind of Economic Activity at Constant 2000 Prices (Rm Million) 1990- 2012</p> <p>Construction Sector The construction industry constitutes an important element of the Malaysian economy. Its strength and capability to host of economic sectors and supports to the social development of the country through the provision of basic infrastructure. The growth of the construction sector recovered after experiencing three consecutive years of decline, recording a major recovered in the year 1999 at growth of -5.6% (1998 : -24.0%). In 2009, the global economy had to pace itself against slow economic growth, including Malaysia. However, the Construction Sector was the only sector that recorded a positive growth during every quarter of 2009. We can attribute this trend to the proactive implementation agenda of the 9th Malaysia Plan, the two Stimulus Packages amounting to RM67 billion as well as the relative stability of building material prices. The Malaysian construction industry is generally separated into two areas. One area is general construction, which comprises residential construction, non-residential construction and civil engineering construction. The second area is special trade works, which comprises activities of metal works, electrical works, plumbing, sewerage and sanitary works, refrigeration and air-conditioning works, painting works, carpentry, tiling and flooring works and glass works. The construction industry makes up an important part of the Malaysian economy due to the amount of industry linked to it such as those for basic metal products and electrical machinery. Hence, the construction industry could be described as a substantial economic driver for Malaysia. Agriculture Sector The agricultural sector (agriculture, forestry and fishery) grew at the moderate rate of 2.2% in 2007. This sector was supported by food related activities with a value added growth of 4.9% (2006 : 6.8%). The slow performance of the industry main crop such as crude palm oil due to the productions declining cycle, heavy rain which consistenly interrupted the cycle,5|Page</p> <p>heavy rain , dry spells and also the continuos reduction of planting area. Nonetheless, the positive growth in the industrys main crop in 2007 were due to the significant increase in crude palm oil prices, rubber prices increase and also by the declining of the logging which is reduction demand from the Japan and conservation efforts. Agriculture is still an important export earne. Malaysia is the world's largest producer of palm oil lead by FELDA, accounting for almost half of the world's production. In the past, the country also was the world's largest producer of rubber, but in the early 1990s it was overtaken by Thailand and Indonesia. Malaysia remains the world's fourth-largest producer of cocoa. Nevertheless, the share of agriculture in the GDP declined from 29 percent in 1970 to 12 percent in 1998.</p> <p>6|Page</p> <p>Economic Cycle Of Construction Sector Vs. The National Gdp Economic Cycle Of Construction Sector The construction boom in Malaysia started in the early 1990s in conjunction with the development of huge projects. The Government has launched Vision 2020 to envision that Malaysia will be a fully industrialised country by the year 2020. Towards this goal, the government has invested heavily in modernising the infrastructure of the Kuala Lumpur metropolitan area. The modernisation is designed to propel Malaysia into the digital age and position it as a hub for high technology businesses in Southeast Asia. The construction industry reached its peak 1995 where the GDP of construction industry hit an amazing 17.3 percent. That rate of development was equivalent to the developed countries. During the period from 1994 to 1997, the construction industry GDP averaged at 14 percent.During the regional economic crisis in 1997-1998, output of the industry experienced a bust cycle with a sharp drop in output. In 1998, output of the industry contracted by 23 percent, after a robust and double-digit growth rate (Bank Negara Malaysia 2003). This was the worst slump for the construction industry. While GDP grew at an average rate of 5.2 percent from 1999 to 2004, the construction industry stagnated, recording an average growth of 0.4 percent over the same period. Output for the construction industry hovered around the RM 7 billion mark, but steadily contracted as a share of GDP, from 3.6 percent in 1999 to 2.9 percent in 2004. Its been estimated that a 10 percent increase in the construction industry's in productivity would result in a 2.5 percent improvement in GDP (Stoeckel and Quirke, 1992) and that the construction industry represents about 10 percent of the GDP for most countries (Olomolaiye et al.,1998). From 2000 to 2007, GDP grew at an average rate of 5.46% while the construction industry stagnated, recording an average growth of 0.7% over the same period. Output for the construction sector hovered around the RM 7 billion mark, but steadily shrank as a share of GDP, from 3.3% in 2000 to 2.5% in 2007 (refer to table 1).</p> <p>7|Page</p> <p>In RM - Millions 1987 prices GDP Year Construction Sector Output</p> <p>GDP Growth (%)</p> <p>Construction sector contribution to</p> <p>Construction Sector Growth (%)</p> <p>GDP (%) 1999 192,794 6,922 5.8 3.6 -5.6 2000 209,365 6,996 8.3 3.3 1.0 2001 210,480 7,159 0.4 3.4 2.3 2002 219,309 7,275 4.1 3.3 2.3 2003 231,674 7,417 5.3 3.2 1.9 2004 247,880 7,276 7.0 2.9 -1.9 2005 262,175 7,133 5.2 2.9 -1.6 2006 277,673 7,097 5.9 2.7 -0.5 2007 294,373 7,310 6.0 2.5 3.0 Source: Economic Reports, 2003-04, 2005-06, Ministry of Finance,Bank Negara Annual Report 2006 Table 1: Malaysian Construction Industry and the Economy</p> <p>A decline in the number of large-scale infrastructure projects is one of the major immediate causes for the construction industry slowdown of recent years. The industry was buoyed by major projects initiated by the Government in the early and mid-1990s four of these projects alone contributed an estimated RM 600 billion in jobs (nearly ten times 2004 industry output) to the construction industry. Since the completion of these major projects approximately five years ago, there have been no new large-scale projects announced by the government, see Table 2.</p> <p>8|Page</p> <p>4th Sectors (in RM Million) Plan (19811985) 28,042 9,973 7,494 811</p> <p>5th Plan (19861989 ) 22,886 8,764 2,527 1,123</p> <p>6th Plan (19901995 ) 27,712 13,555 10,987 2,451 54,705</p> <p>7th Plan (19961999 ) 47,172 31,284 11,644 8,937 99,037</p> <p>8th Plan (20002005 ) 65,446 69,377 22,042 13,135 170,000</p> <p>9th Plan (20062010 ) 89,886 74,954 21,203 13,957 200,000 281,144 207,907 75,897 40,414 605,362 Total</p> <p>Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia</p> <p>Economic Social Security General Administration</p> <p>Total 46,320 35,300 th th Source : 4 to 9 Malaysia Plan</p> <p>Table 2 : Federal Government Development Allocation / Expenditure, 1981-2010</p> <p>Another reason for the slowdown of the construction industry is return of a cyclical downturn in the business cycle that affects current performance. Based on the historical statistics, the Malaysian construction industry has consistently been the smallest contributing sector to the economy, contributing on average 3% to the total GDP. Its contribution to GDP is less than 15 times smaller than that of the services sector and less than eight times smaller than that of the manufacturing sector, see Table 3. Even when compared to neighbouring countries, the contribution of the Malaysian construction industry to the nations GDP is much lower as shown in Table 4.</p> <p>9|Page</p> <p>IN PERCENTAGE GDP (RM Mill. 1987 prices) Services Sector Manufacturing Sector Agriculture, Livestock,</p> <p>1999 192,794 54.3 30.0</p> <p>2000</p> <p>2001</p> <p>2002 219,309 57.0 30.1</p> <p>2003 231,674 57.6 30.8</p> <p>2004 247,880 57.1 31.8 8.3 7.1 2.9</p> <p>209,365 210,480 53.4 33.4 56.4 30.2</p> <p>Forestry, and Fishing Sector 9.4 8.4 8.7 8.4 8.7 Mining and Quarrying sector 7.2 6.9 7.6 7.2 7.2 Construction Sector 3.6 3.3 3.4 3.3 3.2 Sources : Malaysian Economic Report 1999-2004, MOF, BNM Annual Report 2004 Table 3 : Contribution to GDP by sector</p> <p>National GDP</p> <p>10 | P a g e</p> <p>Malaysia's economic record has been one of Asia's best. Real gross domestic product (GDP) grew by an average of 6.5% per year from 1957 to 2005. Performance peaked in the early 1980s through the mid-1990s, as the economy experienced sustained rapid growth averaging almost 8% annually. Malaysia struggled economically during the 1997-1998 Asian financial crisis and applied several valuable lessons to its economic management strategies that contributed to the economys resilience to the 2008-2009 global financial crisis. GDP contracted 1.7% in 2009 compared to 4.6% growth in 2008, but has since rebounded, and is expected to be around 7% in 2010. In Malaysia, the Gross Domestic Product (GDP) in Malaysia expanded 2.8 percent in the second quarter of 2011 over the previous quarter. Historically, from 2000 until 2011, Malaysia's average quarterly GDP Growth was 1.17 percent reaching an historical high of 5.90 percent in September of 2009 and a record low of -7.60 percent in March of 2009. Malaysia is a rapidly developing economy in Asia. Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials into an emerging multisector economy. The Government of Malaysia is continuing efforts to boost domestic demand to wean the economy off of its dependence on exports. Nevertheless, exports of particularly of electronics, remain a significant driver of the economy. Economic growth momentum will probably moderate from 2011 onwards arising from a weaker exports outlook. Further implementation of ETP projects and Budget 2012 handouts will boost domestic demand, but unlikely to offset underperformance in net exports. Against this background, MIER downgrades 2011 GDP growth rate to 4.6 percent year-on-year. For 2012, MIER revises the GDP growth forecast to 5.0 percent.</p> <p>11 | P a g e</p> <p>Malaysia GDP Growth Rate (Jan 2007- Nov 2011)</p> <p>GDP Growth of the Malaysian Economy vs. Construction Industry: 1974 - 2004</p> <p>Construction Gross Domestic Product Output is low compared to the others Gross Domestic Product (GDP) means the total money value during a year of all production that has been take place inside a specific territory. Construction industry in the12 | P a g e</p> <p>economy in term of gross domestic product is the total value for all organizations and process from the aspect of purchasing of materials and services from other organizations. The construction industry in Malaysia is seen as the economic growth engine and can reflect the national economic situation. The presence of a lot of construction activities indicate that the national economy is growing. In order for the nation's economy to prosper, the construction industry has to be developed f...</p>