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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

1/ Malaysian government estimates
2/ Converted at annual average exchange rates
3/ Calculated in ringgit to avoid exchange rate changes
4/ 1996 data to August only
5/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.

1. General Policy Framework

Malaysia has a relatively open, market-oriented economy which has exhibited sustained growth and increasing diversification since the country's independence in 1957. Following an economic slowdown from 1985 to 1987 with negative real GDP growth of 1.1 percent in 1985, the economy has continued to boom with an average annual real GDP growth of over 8 percent, led by strong performance in both foreign and domestic investment and in manufactured exports. In 1996, real GDP growth is expected to slow to 8.2 percent after reaching 9.5 percent in 1995. Malaysia plans to pursue a moderately restrictive fiscal policy and a tight monetary policy in order to attempt to reduce the persistent current account deficit.

While the government since 1986 has scaled back its role as a producer of goods and services, it continues to hold equity stakes in a wide range of privatized domestic companies, including telecommunications, aviation, shipping and seaport ventures. Government hospitals and post offices are in various stages of privatization. The construction of infrastructure projects has been increasingly delegated to the private sector. Major infrastructure projects underway include development of a Multimedia Super Corridor, construction of a new administrative capital, and completion of the new Kuala Lumpur International Airport.

Malaysia maintains relatively low trade barriers in most sectors but uses tariffs to protect some industries such as motor vehicles. The government has consistently moved to reduce the overall tariff level over time. Malaysia has been an active participant in multilateral and regional trade fora such as the World Trade Organization and Asia-Pacific Economic Cooperation. The government encourages direct foreign investment, especially in export-oriented manufacturing and high-tech industries, but retains considerable discretionary authority over individual investments. In some sectors it has used this authority to restrict the percentage of foreign equity or encouraged foreign firms to enter into joint ventures with local partners. Foreign firms are active in the electronics, petroleum, textiles, chemical, and electrical machinery sectors.

Fiscal Policy: The government follows a conservative fiscal policy and has generated a surplus in its accounts, excluding public enterprises, for the last four years. The 1997 budget is intended to move the economy to a more moderate growth rate to ease the pressures on the external balance. The maximum personal income tax rate was reduced in the 1996 budget to 30 percent (the same as the corporate rate) from its previous 32 percent level.

Monetary Policy: Monetary policy is aimed at controlling inflation while providing adequate liquidity to stimulate economic growth. Monetary aggregates are controlled by the central bank through open market operations, occasional changes in reserve requirements, and influence over banking sector interest rates.

2. Exchange Rate Policy

Malaysia has a substantially open foreign exchange regime. The stated policy of Bank Negara (the central bank) is to maintain a stable exchange rate which reflects the Malaysian ringgit's underlying value. The value of the ringgit generally tracks against a trade-weighted basket of currencies in which the U.S. dollar has a large weighting. Bank Negara intervenes in the foreign exchange market to smooth out fluctuations and discourage speculation. The ringgit has strengthened from a level of RM2.7 per dollar (between 1989 and March 1994) to RM2.5 per dollar (in November 1996).

Most foreign transactions including repatriation of capital and remittance of profits are permitted, but some restrictions apply. Foreign currency accounts are not generally allowed except for exporters (who must hold their foreign currency accounts with "Tier 1" banks and maintain overnight balances of $1-5 million) and resident individuals who need foreign currency for educational or employment purposes (foreign currency accounts limited to $100,000).

3. Structural Policies

Pricing Policies: Most prices are market-determined, but controls are maintained on certain key goods, such as fuel, public utilities, cement, motor vehicles, rice, flour, sugar and tobacco.

Tax Policies: Tax policy is geared toward raising government revenue and discouraging consumption of "luxury" items. Income taxes, both corporate and individual, comprise 40 percent of government revenue with indirect taxes, export and import duties, excise taxes, sales taxes, service taxes and other taxes accounting for another 38.9 percent. The remainder of government revenue comes largely from dividends generated by state-owned enterprises and petroleum taxes. In the 1997 budget, 260 selected products, including cosmetics and paper products, were exempted from payment of sales taxes.

Regulatory Policies: The Government encourages export-oriented foreign direct investment but places restrictions on foreign investments aimed more at the domestic market. Currently, no equity condition is imposed on foreign manufacturing companies which export at least 80 percent of output. For companies exporting 51 percent to 79 percent of output, foreign equity is allowed up to 79 percent. For companies exporting 20 percent to 50 percent of output, foreign equity up to 51 percent is allowed. In October 1996, the government announced that high-technology and information technology companies which establish in the Multimedia Super Corridor will be given attractive tax incentives.

Standards: Malaysia has extensive standards and labeling requirements, but these appear to be implemented in an objective, nondiscriminatory fashion. Food product labels must provide ingredients, expiry dates and, if imported, the name of the importer. Electrical equipment must be approved by the Ministry of International Trade and Industry, telecommunications equipment must be "type approved" by the Department of Telecommunications, and aviation equipment must be approved by the Department of Civil Aviation. Pharmaceuticals must be registered with the Ministry of Health. In addition, the Standards and Industrial Research Institute of Malaysia (SIRIM) provides quality and other standards approvals.

4. Debt Management Policies

Malaysia has strong credit ratings in international financial markets, and its public and private companies have no difficulty accessing funds. Malaysia's medium and long term foreign debt (both public and private sector) is expected to stand at $28.7 billion at the end of 1996, about 29 percent of GDP. Malaysia's debt service ratio declined from a peak of 18.9 percent of gross export earnings in 1986 to 5.9 percent in 1995.

5. Significant Barriers To U.S. Exports

Introduction: Tariffs are the main instrument used by the Malaysian government to regulate imports, but import licenses are also used. Although duties on a trade-weighted basis average less than 10 percent, the rates for tariff lines where there is significant local production are often higher. Malaysia's 1997 budget increased duty rates of 5 percent to 20 percent on selected heavy equipment, manufacturing inputs, and hotel supplies to promote domestic sourcing and to address domestic concerns about Malaysia's chronic current account deficit. Import licenses are required for a small range of goods, e.g., automobiles, meat, and tobacco.

Import restrictions on motor vehicles: Malaysia maintains high tariffs (often approaching 200 percent ad valorem) and local content restrictions on imported motor vehicles and motor vehicle parts. These restrictions have severely hampered the ability of U.S. firms to penetrate the Malaysian market. The government has announced that local content restrictions will be phased out by the year 2000 to comply with WTO commitments.

Import restrictions on tobacco and cigarettes: To encourage greater use of local tobacco in cigarettes and to maintain high domestic leaf prices, the government levies import duties of RM50 ($20) per kilogram, plus five percent ad valorem on unprocessed tobacco. The greatest impact of this policy, however, appears to fall on cheaper, lower quality leaf from non-U.S. suppliers. Additionally, an import quota for flue-cured tobacco forces local cigarette manufacturers to buy up all the locally produced, generally low-quality tobacco. Tax rates on cigarettes of RM162 ($64.8) per kilogram dampen demand for U.S. exports.

Telecommunications: Foreign companies are restricted to 30 percent equity ownership of telecommunications companies operating in Malaysia. The government is not issuing new licenses in this sector.

Duties on high value food products: Duties for processed and high value products, such as canned fruit, snack foods, and many other processed foods, range between 20 and 30 percent.

Plastic resins: In December 1993, tariffs on plastic resins were increased for a five year period from 2 to 30 percent (for non-ASEAN countries) and from 1 to 15 percent (for ASEAN countries). In 1994 the government also instituted a five-year restrictive import licensing system.

Protective tariffs for kraft paper: In April 1994 the government raised tariffs on several categories of imported kraft paper (used in making cardboard boxes) to between 20 and 30 percent. These tariff increases are to be phased out over a maximum of five years and are subject to review every two years.

Tariff quota for chicken parts: Chicken imports are regulated by a tariff-rate quota. Even in-quota amounts are restricted through licensing and sanitary controls. In addition, there are prohibitions against imports from slaughterhouses that have not been certified by Malaysian authorities as "halal" (meeting Islamic requirements).

Rice import policy: The sole authorized importer is a government corporation (BERNAS) with the responsibility of ensuring purchase of the domestic crop and wide power to regulate imports.

Services barriers: Most services sectors are highly protected. Foreign professional services providers are generally not allowed to practice in Malaysia. Television advertisements must be produced principally in Malaysia with Malaysian performers, although exceptions are sometimes granted. Wholly-owned U.S. travel agencies, air courier services, motion picture and record distribution companies are permitted.

Banking: No new licenses are being granted to either local or foreign banks. Foreign banks must operate as locally-controlled subsidiaries. Foreign-controlled companies are required to obtain 60 percent of their local credit from Malaysian banks.

Insurance: Foreign equity in new insurance companies is limited to a minority stake. However, there are nine existing insurance companies, excluding reinsurers, which are 100 percent foreign-owned (one U.S.) and another eight have foreign equity in excess of 50 percent. New legislation will require local incorporation of all insurance companies.

Securities: Foreigners may hold up to 49 percent of the equity in a stockbroking firm. Currently there are 11 stockbroking firms which have foreign ownership and 20 representative offices of foreign brokerage firms. Fund management companies may be 100 percent foreign-owned if they provide services only to foreign investors, but are limited to 70 percent foreign ownership if they provide services to both foreign and local investors.

Government Procurement: Malaysian Government policy requires countertrade provisions on government tenders above RM1 million ($400,000). Below RM1 million, countertrade is welcomed and even encouraged but not required. Incentives exist for local procurement. Many smaller civil construction projects (RM50 million or less) are restricted to local firms.

6. Export Subsidy Policies

Malaysia offers several export allowances. Under the Export Credit Refinancing (ECR) scheme operated by the Central Bank, commercial banks and other lenders provide financing to exporters at an interest rate of 6 percent for both postshipment and preshipment credit. Malaysia also provides tax incentives to exporters, including double deduction of expenses for overseas advertising and travel, supply of free samples abroad, export promotion, overseas sales offices, and research on export markets.

7. Protection of U.S. Intellectual Property

Malaysia is a member of the World Intellectual Property Organization (WIPO), the Berne Convention for the protection of literary and artistic works, and the Paris Convention for the protection of industrial property. Malaysia provides copyright protection to all works (including video tapes, audio material, and computer software) published in Berne Convention member countries regardless of when the works were first published in Malaysia. Police and legal authorities are responsive to requests from U.S. firms for investigation and prosecution of copyright infringement cases, though pirated videotapes and computer software continue to be widely available. Trademark infringement and patent protection have not been serious problem areas in Malaysia for U.S. companies.

8. Worker Rights

a. The Right of Association: By law most workers have the right to engage in trade union activity, and approximately 10 percent of the work force are members of trade unions. Exceptions are certain categories of workers labeled "confidential" and "managerial and executives," as well as police and defense officials. Government policy discourages the formation of national unions in the electronics sector, but allows in-house unions.

b. The Right to Organize and Bargain Collectively: Collective bargaining is the norm in Malaysian industries where workers are organized. However, collective bargaining rights are effectively restricted by compulsory arbitration requirements.

c. Prohibition of Force or Compulsory Labor: There is no evidence that forced or compulsory labor occurs in Malaysia for either Malaysian or foreign workers.

d. Minimum Age for Employment of Children: No child under the age of 14 may be engaged in any employment except light work in a family enterprise or in public entertainment, work performed for the government in a school or training institution, or employment as an approved apprentice. In addition, regulations prohibit children from working more than 6 hours per day, more than 6 days per week, or at night. However, there have been reports of widespread employment of children below the age of 14 working full-time on plantations.

e. Acceptable Conditions of Work: Working conditions are generally on a par with industrialized country standards. The Occupational Safety and Health Act covers all economic sectors except the maritime sector and the military. Other laws provide for retirement programs, disability and workman's compensation benefits. No comprehensive national minimum wage legislation exists, but certain classes of workers are covered by minimum wage laws. Plantation and construction work is increasingly being done by contract foreign workers whose working conditions are often inferior to those of direct hire workers.

f. Rights in Sectors with U.S. Investment: The largest concentration of U.S. investment in Malaysia is in the petroleum sector, including offshore oil and gas production, refining and marketing. Pay and benefits are considered excellent. The second largest concentration of U.S. investment is in the electronics sector, especially the manufacture of components, such as semiconductor chips and various discrete devices. Wages and benefits are among the best in Malaysian manufacturing. Twenty U.S. electronic component manufacturers operate 17 plants in Malaysia, employing more than 51,000 Malaysian workers.

(1) Suppressed to avoid disclosing data of individual companies.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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