Prosper-Thy-Neighbour Policies: Malaysia´ s Contributions after the Asian Financial Crisis

Abstract

I. Introduction The emergence of the Asian financial crisis in 1997 and its subsequent negative impact on Malaysia's economy in 1998 disrupted the decade-long sterling economic growth that the country had enjoyed prior to the crisis. Although the economy recovered quickly in 1999, there were numerous external and internal challenges that have confronted it since then. Externally, the catastrophe of September 11 and global downturn in 2001/2002 as well as the emergence of health risks associated with the Sudden and Acute Respiratory Syndrome (SARS) and the avian flu in 2003, the tsunami in 2004, and escalating oil prices in 2005/2006 all posed different challenges to Malaysia's small, open economy. Internally, steering the country to the next stage of require a continuous search for a balance between further liberalization and the needs of the country. While the former is dictated by the size of Malaysia's relatively small domestic economy, the latter also includes the restructuring of society according to ethnic considerations and goals as encapsulated in the New Economic Policy (NEP). In spite of its own struggles with development, Malaysia is mindful that poor neighbours can be a source of problems which may spill over its borders, thereby undermining the peace and prosperity of the country (Mahathir 1997, p. 2). Hence, during his tenure as Prime Minister, Tun Mahathir advocated the use of prosper-thy-neighbour policies or policies that seek to assist neighbouring countries to develop together with Malaysia. Post Mahathir, the continued use of this policy is very much in line with ASEAN's Vision 2020 that envisaged ASEAN as a community of caring societies where there would be equitable access to opportunities for total human development and in which the gap among member economies would be reduced even as members forged closer economic integration (ASEAN 1997 as cited in UNDP 2004, p. 124). Based on this Vision, the Initiative for ASEAN Integration (IAI) was adopted at the Fourth Informal Summit in 2000 in order to narrow the gap within ASEAN by assisting the new members--Cambodia, Laos, Myanmar, and Vietnam (or the CLMV countries)--to participate fully in regional economic integration. This plan was subsequently formally adopted at the ASEAN Ministerial Meeting in 2001 in its Hanoi Declaration on Narrowing the Development Gap for Closer ASEAN Integration. This paper is organized as follows: after the introduction, an assessment of the major reforms in the financial and the manufacturing sectors is presented in section II. The update on the Malaysian economy is followed by a comparison of the economic performance and human of Malaysia with that of the ASEAN-10 in section III in order to ascertain the extent of the gap between Malaysia and the other member countries. Malaysia's contributions to the IAI programmes are evaluated in section IV while section V draws some policy implications based on the analysis in the earlier sections. The conclusion in section VI summarizes the main findings of this paper. II. Post-Crisis Malaysian Financial and Manufacturing Sector II.1 Financial Sector Since the crisis was essentially a financial crisis, the focus of this section will be on the main reforms in the financial sector. Malaysia's financial sector is highly diversified and among the most advanced in the ASEAN region, with banks accounting for two-thirds of the sector in terms of assets, and non-bank financial intermediaries for one-third. There is an offshore financial sector in the province of Labuan that is the Labuan Offshore Financial Centre. After recovering from the Asian financial crisis, Bank Negara Malaysia (BNM), or the central bank, stepped up its financial reforms through the implementation of the Financial Sector Master Plan (FSMP, 2001-2010), which was launched in 2001. The FSMP has three phases; in the first phase, it focused on the building of domestic banking capacity. …