MALAYSIA: INDEX OF ECONOMIC FREEDOM

MALAYSIA
Rank: 48
Regional Rank: 8 of 30

Malaysia's economy is 65.8 percent free, according to our 2007 assessment, which makes it the world's 48th freest economy. Its overall score is 2.1 percentage points higher than last year, partially reflecting new methodological detail. Malaysia is ranked 8th freest out of 30 countries in the Asia–Pacific region, and its overall score is higher than the regional average.

Malaysia enjoys high levels of fiscal freedom, monetary freedom, trade freedom, and labor freedom. Both the top income tax rate and the top corporate tax rate are moderate, and overall tax revenue is relatively low as a percentage of GDP. Inflation is minor, and the government does not widely distort market prices with direct subsidies. The tariff rate is fairly low, and the government has been working to eliminate some of the non-tariff barriers that impede trade. A highly flexible labor sector with simple employment procedures and no minimum wage helps businesses to stay competitive.

Malaysia suffers from weak investment freedom and weak financial freedom. Despite efforts to liberalize procedures, foreign investment is deterred by such impediments as limited voting shares in companies, enforced hiring of ethnic Malays, and case-by-case government preinvestment approval. Malaysia's financial sector is fairly well developed, but it is also subject to significant government interference and some restrictions on foreign involvement.

Background:

Malaysia's ruling political party, the United Malays National Organization, has held power in a 14-party coalition called Barisan National since 1957. Prime Minister Abdullah Badawi is expected to remain in power until the next election in 2009. Services and industry are the mainstays of the economy and provide the vast majority of employment opportunities. The Office of the U.S. Trade Representative announced on March 8, 2006, that it would initiate negotiations with Malaysia for a free trade agreement. Negotiating a comprehensive agreement is expected to be challenging for both sides.

Business Freedom - 68.6%

Starting a business takes an average of 30 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license can be difficult, but closing a business is relatively easy. The overall freedom to start, operate, and close a business is relatively well protected by the national regulatory environment.

Trade Freedom - 71.8%

Malaysia's weighted average tariff rate was 4.1 percent in 2003. The government has made progress in liberalizing the trade regime, but non-automatic import licensing, import bans, burdensome regulations and standards, export licensing, non-transparent import tax rules, export subsidies, weak protection of intellectual property rights, restrictive government procurement rules, and services market access barriers add to the cost of trade. Consequently, an additional 20 percent is deducted from Malaysia's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom - 87.8%

Malaysia has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 28 percent. The government has announced that it will reduce individual and corporate tax rates when introducing a value-added tax (VAT). Other taxes include a capital gains tax and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 16 percent.

Freedom from Government - 79.8%

Total government expenditures in Malaysia, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 26.5 percent of GDP, and the government received 11.5 percent of its revenues from state-owned enterprises and government ownership of property.

Monetary Freedom - 80.0%

Inflation in Malaysia is relatively low, averaging 2.5 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. Most prices are determined in the market, but the government influences certain prices through state-owned enterprises; controls the prices of petroleum products, steel, cement, wheat flour, sugar, milk, bread, and chicken meat; and usually sets ceiling prices for an extended list of essential foods during major holidays. Consequently, an additional 10 percent is deducted from Malaysia's monetary freedom score to account for these policies.

Investment Freedom - 40.0%

Foreign investment rules have been eased over the years, but foreign investors still face such restrictions as limited voting shares, prior approval, and mandatory hiring of ethnic Malays. In September 2005, the government eased restrictions for domestic residents to buy foreign-listed securities and for foreigners to sell shares in the domestic market. Residents and non-residents may hold foreign exchange accounts, but government approval is required in many cases. Nearly all capital transactions are prohibited, are subject to restrictions, or require government approval.

Financial Freedom - 40.0%

Malaysia's financial sector is relatively well developed but subject to extensive government intervention. Of the 29 commercial banks operating as of September 2005, 10 were domestically owned and 13 were foreign-owned. Six Islamic banks (five domestic and one foreign) account for over 10 percent of baking assets. The government owns a majority of Malaysia's two largest local commercial banks. Foreign equity in banks is restricted, with participation in commercial banking limited to a maximum of 30 percent. The government influences the allocation of credit. There are several offshore banks, insurance companies, and other financial institutions. Numerous restrictions apply to the insurance industry, including restrictions on expatriate employment and foreign equity. Foreigners may trade in securities and derivatives, but foreign participation in stockbrokerages and trust management companies is restricted.

Property Rights - 50.0%

Private property is protected in Malaysia, but the judiciary is subject to political influence. Corporate lawsuits take over a year to file. Cases are generally handled in a satisfactory manner, although many firms include a mandatory arbitration clause in their contracts.

Freedom from Corruption - 51.0%

Corruption is perceived as present. Malaysia ranks 39th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.

Labor Freedom - 89.5%

The labor market operates under flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not difficult. The government restricts the number of expatriates that foreign and domestic firms may hire. Malaysia does not have a national minimum wage.

Quick Facts

• Population: 24.9 million
• GDP (PPP): $255.8 billion; 7.1% growth in 2004; 5.2% 5-yr. comp. ann. growth; $10,276 per capita
• Unemployment: 3.6%
• Inflation (CPI): 1.5%
• FDI (net inflow): $2.6 billion
• Official Development Assistance: $447 million (0.2% from the U.S.)
• External Debt: $52.1 billion
• Exports: $118.6 billion
  Primarily electronic equipment, petroleum, liquefied natural gas, wood, wood products, palm oil, rubber, textiles, chemicals
• Imports: $96.8 billion
  Primarily electronics, machinery, petroleum products, plastics, vehicles, iron and steel products, chemicals