MODULE 2

Course: Developmental Economics

Instructor: Ms. Mehwish Ghulam Ali
Country: Malaysia

Submitted by:
Muhammad Saleem Nasir
Faria Ahmed
Aaqib Nazim
Akmal Nadeem
Ahsan Akbar
Maham Hussain

05/10/13

Content

1. Overview of Malaysia
2. Rostows Stages of Growth
3. Lewis Model & Malaysia
4. Structural Change in Malaysia
5. The Market Friendly Approach
6. Absolute & Relative Poverty in Malaysia
7. PPP vs. Market Exchange Rate-Malaysia
8. References

Overview of Malaysia
The Federation of Malaysia was formed in 1957 and according to recent statistics of 2010, it
had a population of 28.33 million of which 22.6 million people are living on the Peninsula while
the rest on the Malaysian Borneo. There are 13 states that make up 3 federal territories.
Malaysia is a multi religious and a multi ethnic country with a majority Muslim population.
Malaysia has shown rapid development over the years and has now become one of the major
players in the international market where it is an exporter of electrical appliances, palm oil,
natural gas and electronic parts. Previously it was the producer of two primary products, i.e.
rubber and tin. However with the passage of time Malaysia has shown significant improvement
in its manufacturing sector and there has been a decline in the activities in Malaysias
agricultural sector, proving the fact that the Malaysian economy has been modernized. The
share of agricultural sector has declined from 30.8 percent in 1970 to 12.2 percent in 1997
while that of the manufacturing sector has gone up from 13.9 percent to 35.5 percent over the
same time period. The establishment of many multinational companies has also contributed
towards this rapid development.

Rostows Stages of Growth

In applying Rostows Linear Growth Model, we can easily determine that Malaysia falls under
the Drive to Maturity stage. With a current Gross National Income of USD 8770 per capita
(2011) and a 5.8% average GDP growth rate for the last two decades, Malaysia is classified as an
upper-middle income economy. Rostow identifies that a country enters the drive to maturity
stage when it diversifies its production base. Not only has Malaysia diversified its industrial
sector, the countrys exports also consist of value added goods such as electronic goods and
electrics.
Another criterion for being classified as being in the Drive to Maturity stage is having a well
developed Health and Education Sector. Malaysia has been extremely successful in the
eradication of poverty. In 1970, the poverty rate was 49.3% and in just over 40 years, the
poverty rate fell to 1.7% in 2012. At the same time, in an effort to meet the Millennium
Development Goals Malaysia has improved the living conditions of its citizens. In 2012, 99% of
the households had access to 24 hr electricity supply and 94% have access to clean water. In
terms of primary education, enrollment rate was 96% in 2012.
It will however take time for Malaysia to enter into the Mass Consumptions stage since the
country still faces serious economic issues such as the disparity in income levels especially

between its 3 federal territories. At the same time the urban settings have benefited much
more than the rural areas of the country.

Lewis Model & Malaysia

The Lewis Growth Model by Arthur Lewis is an economic growth model based on the premise
that development can be achieved by transfer of labor in an economy that is dualist in nature.
The model divides the economy in two sectors, namely the modern and traditional sectors or
the commercial and non-commercial sectors.
Lewis creates the foundation of his model keeping in view the idea that economically will
eventually develop by the transfer of traditional labor into the modern sector economy.
Secondly, this model keeps the wages equal to the average product of labor. The main driver of
economic development achieved from this model is the concept that if increase in labor will
allow the modern sector to save more from the increase in output then it will result in an
increased ability of the modern sector to invest more in capital acquisition which will eventually
result in more labor being absorbed from the traditional sector.
The model is based on a few assumptions which cannot be overlooked in times of globalization
today. The first one of these assumptions is that there is always an abundance and surplus of
labor resulting in unlimited and non-exhaustive supply of labor for the modern sector to
absorb. The second assumption made by Lewis is that there is an unhindered transfer of labor
from the traditional to the modern territory. It does not take into account the trade unions in
the industrialized sector and the socio-political influence on the modern economy (Islam, 2008).
In Malaysia, a very small percentage of the labor from traditional economy is employed for
high-end wages in the modern sector economy. This has resulted in a rise in inequality
however, this will slowly subside as the economic transition between traditional and modern
economy takes place, hypothetically. Until around half the labor force of the traditional
economy is included in the modern economy, the labor income inequality will be on a rise
(Hassain, 2004).
The economic transition in Malaysia will be successful once the modern economy will further
delve into investments and capital accumulation. As these are the drivers of the modern
economy, once the modern economy flourishes, it becomes more able to absorb further labor
from the traditional sector into its own modern sector economy.

Structural Change in Malaysia

Malaysia is a perfect example of a country that has experienced a structural change over a
period of time. Malaysia achieved independence in 1957 and started off as a low income
economy, moved on to industrial production of rubber and palm oil. Since their exports
increased in these industries it lead to physical and human capital accumulation which thereby
lead Malaysia to achieve a structural change in their economy per say. However, we need to
note an important point, 20% of the workforce in Malaysia has emigrated from China and India
which means that the Malaysian economy has absorbed the foreign workforce very well into
their economy. This implies that perhaps the current skill level of employees in Malaysia is not
as good as that supplied by other countries i.e. China and India. Even though their primary
school enrolment rate is 96% which gives off a picture that such a large population is school
going but this also shows that Malaysia does not have a very good secondary and university
education system meeting the demands of the Industry thereby the demand for a foreign
workforce. To conclude, Malaysia needs to strengthen its Secondary and University education
even more in order to achieve greater physical accumulation which would make the country
prosper even more.1

Market friendly approach

Malaysia is a very open economy and it proves that the government has over the time created
opportunities in the local market for businesses and industries to prosper. One example of this
is the Get Malaysia Business Online program which aims to get 50,000 businesses online by
helping them develop their websites. This comes under the e-government initiative in which
the government wants to provide cost effective internet solutions to the businesses in Malaysia
so that they can thrive even further. 20% of the businesses in Malaysia claimed that they had
suffered losses because of crime. Another issue which hinders business growth is corruption
and 20% of the businesses reported that they had given some sort of a bribe to the public
sector to get things done. As a result, these are the top two national key result areas under the
Government Transformation Program.
Malaysia understands that since 99% of the businesses in Malaysia classify as SMEs as a result
they have the Economic Transformation Program which is a forum in which the public sector
has a dialogue with the business representatives. This means that the market friendly approach
applies to Malaysia. This is so prevalent in the Malaysian economy that 20% of the workforce in

Malaysia has emigrated from India and China to work in Malaysia because of the availability of
employment opportunities in Malaysia that demand skilled labour force. 23

Absolute & Relative Poverty in Malaysia

Malaysia has been one of the most dynamic nations in the region; it has the record of amazing
growth in economic development and reduction in poverty over the last few decades. If we had
to talk precisely about the poverty in Malaysia, they have done a phenomenal job to eradicate
it. Hardcore poverty has been eradicated in Malaysia since 2010. The average income in
Malaysia rose from RM 264 (1970) to RM 5000 (2012), the rise in figure says a lot about the
standard of living in Malaysia. The Overall poverty incidence declined from 49.3% (1970) to
1.7% (2012); urban poverty from 21.3% (1970) to 1.1% (2012); and rural poverty from 58.7%
(1970) to 3.4% (2012). The HDI is a summary measure for assessing long-term progress in three
basic dimensions of human development: a long and healthy life, access to knowledge and a
decent standard of living. The HDI for Malaysia as of 2012 was 0.769.

This means that it is ranked 64 out of 187 countries in the world. Malaysias 2012 HDI of 0.769
is above the average of 0.758 for countries in the high human development category and above

the average of 0.683 for countries in East Asia and Pacific. The measurement of absolute
poverty in Malaysia is called as Poverty Line Income (PLI). PLI is an income approach where it
based on the gross monthly income household income. According to PLI, absolute poverty is
where the households gross income below the PLI. The Eradication of Poverty in Malaysia was
largely because it was included in the National Economical Plan (NEP). Poverty eradication
programs were implemented alongside development plans and financial allocations for them
were made in all the Malaysia Plans. Another way to measure poverty in Malaysia is the
Multidimensional Poverty Index (MPI). This is used to complement the PLI. This also emphasizes
on the human dimensions to augment capability and mobilize human capital. Malaysia can now
declare victory against poverty.
Though poverty remains both in terms of specific geographies and particular communities.
Special programs are being taken into consideration to address poverty on a sustainable basis,
especially in terms of providing income providing opportunities. Since the face of poverty is no
longer purely a rural phenomenon, specific interventions will also be targeted towards the
urban poor, such as through micro credit schemes. These are the plans which Malaysia will
implement for further eradication of poverty.

This reduction in poverty level is also an indicator of better and quality living standards in the
country. This level of reduction in poverty has been primarily because of the subsidies given to
the needy and reasons like:
1.
2.
3.
4.
5.

Increase in the Small and Medium size enterprises

Improvement in literacy
Improvement in education and student welfare
Creation of quality schools
Increase in the supply of Merit goods

Few other proposed measures of reducing poverty in Malaysia include vocational training of
people who belong to rural areas since they are the ones who represent a major chunk of the
labor workforce. Also initiatives taken up by many sole traders should be encouraged and they
should be backed up by the government as well as they should be provided with the necessary
finance, resources and a good business environment to initiate their business and allow it to
flourish.

GINI coefficient:
The graph below shows that Malaysias GINI coefficient was 0.46 in 2009 (latest statistics
available), which shows that the level of inequality in Malaysia is substantial but not too high. A

GINI coefficient in the range of 0.5-0.8 is considered high. Despite the extremely negligible
absolute poverty level, inequality is not surprising since there is income disparity between the
Malaysian Peninsula and the other 2 federal territories of the country. Clearly the handsome
growth figures that have been associated with Malaysia over the past 20 years have not
translated equally throughout the country.

LORENZ Curve:
The Lorenz curve is obtained by plotting percentage of cumulative income against percentage
of cumulative population. On X axis we plot the % cumulative population and on Y axis we plot
% cumulative income. The Lorenz curve tells us about the level of inequality.

The above Lorenz curve depicts the case of Malaysia. Since the GINI coefficient is 0.46, this
means that inequality is around 50%. This is shown in the above graph by the curve which is
following a path that is going through the centre of the triangle. The Area A is almost equal to
area B. Therefore A/(A+B)=0.46 (GINI coefficient of 2009).

PPP vs. Market Exchange Rate-Malaysia

Purchasing power parity means that purchasing power across nations should be same
regardless of whatever currency they use. Purchasing power parity rate can be taken out by the
following formulae:

S=P1/P2
Where:
P1: currency 1
P2: currency 2
S: purchasing power parity
We usually find the purchasing power parity rate by dividing the local currency by US dollar for
a better comparison. We compare the prices of basket of goods which are consumed by an
average household.
Malaysias purchasing power parity rate is 0.62. Its market exchange rate in 2013 was
1MYR=0.314. This can also be written as 1US$=3.18MYR. If we look at the purchasing power
parity exchange rate, it comes as 1US$=1.61MYR. This means that Malaysian currency is
undervalued when compared to US $ as PPP is less than the market exchange rate. To say it in
simpler terms Malaysian people pay 3.18MYR to get 1US$ but according to purchasing power
parity exchange rate they should pay 1.61MYR to get 1 US$.
We can also take the BIG MAC INDEX example to get a better understanding. The price of Big
Mac in Malaysia is 7.35MYR where as the price of Big Mac in United States is $4.20. The
purchasing power parity rate can be taken out by following method:
7.35/4.20=1.75
The market exchange rate is 1US$=3.14MYR which also means that Malaysian currency is 44%
undervalued.

The GDP of a country can be taken out according to purchasing power parity and market
exchange rate. The GDP (PPP) is greater than actual GDP for most of the cases (especially
developing countries). For example Pakistans GDP in local currency is 1000PKR. According to
market exchange rate GDP is 1000/105=$9.5. For Pakistans case its purchasing power parity
exchange rate is less than market exchange rate. Lets assume PPP exchange rate is half of
market exchange rate than its GDP according to PPP will be 1000/52.5=$19 GDP.
Malaysias GDP (PPP) in 2012 was $492 billion whereas its actual GDP in 2012 was $303.53
billion.

References

Overview of Malaysia
1. "Malaysia Overview." The World Bank. N.p., n.d. Web. 05 Oct. 2013.
<http://www.worldbank.org/en/country/malaysia/overview>.
2. "Malaysia." Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. N.p.,
n.d. Web. 05 Oct. 2013. <http://www.heritage.org/index/country/malaysia>.
3. Ariff, Mohamed. "THE MALAYSIAN ECONOMIC EXPERIENCE AND ITS RELEVANCE FOR
THE OIC MEMBER COUNTRIES." N.p., 1 Nov. 1998. Web. 05 Oct. 2013.
<http://www.irti.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IR
TI/CM/downloads/IES_Articles/Vol%2061..Mohamed%20Ariff..THE%20MALAYSIAN%20ECONOMIC%20EXPERIENCE%20AND%20
ITS%20RELEVANCE.pdf>.

Rostows Stages of Growth

1. "Malaysia Overview." The World Bank. N.p., n.d. Web. 05 Oct. 2013.
<http://www.worldbank.org/en/country/malaysia/overview>.
2. "Brief Announcement on Malaysias Experiences in Meeting the Millennium
Development Goals (MDGs) For the ECOSOC Implementation Forum." ECOSOC Annual
Ministerial Review - Implementation Forum. N.p., 3 July 2013. Web. 5 Oct. 2013.
<http://www.un.org/en/ecosoc/julyhls/pdf13/imp_forum_malaysia.pdf>.

Lewis Model & Malaysia

1. Islam, N., 2008. Lewis Growth Model and Chinas Industrialization. Working Paper
Series, 2(17), P.168.
2. Hassain, A.A.G., 2004. Growth, Structural Change and Regional Inequality in Malaysia.
Illustrated. Ashgate publications, Ltd.

Structural Change in Malaysia & Market Friendly Approach

1. "Malaysia Overview." The World Bank. N.p., n.d. Web. 05 Oct. 2013.
<http://www.worldbank.org/en/country/malaysia/overview>.

2. "Malaysia: Business Environment Index 2012." Asia Foundation. N.p., n.d. Web. 5 Oct.
2013. <http://asiafoundation.org/resources/pdfs/BEIFinalReportcovers.pdf>.
3. "NEW ECONOMIC MODEL FOR MALAYSIA PART 1." N.p., n.d. Web. 5 Oct. 2013.
<http://www.epu.gov.my/epu-theme/pdf/nem.pdf>.
Absolute & Relative Poverty in Malaysia
1. Multidimensional poverty approach for Malaysia, Datuk Dr. Rahamat Bivi binti Yufsoff
2. Poverty Reduction Policies in Malaysia: Trends, Strategies and Challenges, Zulkarnain A.
Hatta1 & Isahaque Ali
3. "GINI Index in Malaysia." TRADING ECONOMICS. N.p., n.d. Web. 05 Oct. 2013.
<http://www.tradingeconomics.com/malaysia/gini-index-wb-data.html>.

PPP vs. Market Exchange Rate-Malaysia

1. "Malaysia GDP (purchasing Power Parity)." Index Mundi. N.p., n.d. Web. 05 Oct.
2013.
<http://www.indexmundi.com/malaysia/gdp_(purchasing_power_parity).html>.
2. "Malaysia GDP." TRADING ECONOMICS. N.p., n.d. Web. 05 Oct. 2013.
<http://www.tradingeconomics.com/malaysia/gdp>.
3. "2012 Big Mac Index." Big Mac Index 2013. N.p., 12 Jan. 2013. Web. 5 Oct. 2013.
<http://bigmacindex.org/2012-big-mac-index.html>.
4. "PPP Conversion Factor (GDP) to Market Exchange Rate Ratio in Malaysia." TRADING
ECONOMICS.
N.p.,
n.d.
Web.
05
Oct.
2013.
<http://www.tradingeconomics.com/malaysia/ppp-conversion-factor-gdp-tomarket-exchange-rate-ratio-wb-data.html>.
5. "USD to MYR Exchange Rate." Bloomberg.com. Bloomberg, n.d. Web. 05 Oct. 2013.
<http://www.bloomberg.com/quote/USDMYR:CUR>.