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The Great Recession and Developing Countries
the crisis with limited fiscal space, which in turn limited its fiscal stimulus options. Nonetheless, a sustained implementation of the country’s New Economic Model (NEM) could return it to its pre-2008 growth trajectory. Ultimately, Malaysia’s medium-term growth prospects will hinge on the recovery of its private investment and productivity improvements. We begin by looking at Malaysia’s pre-2008 growth experience and its relationship to the global economy. We then assess the immediate impact of the crisis and the Malaysian government’s policy response and consider the country’s medium-term prospects.
Malaysian Precrisis Growth Malaysia’s openness to the global economy is reflected in the fact that the value of its trade is equivalent to 200 percent of its GDP and that 45 percent of its exports are electrical and electronics (E&E) components and products whose main markets are the United States and Europe. This external orientation and broad openness to trade, however, increases the country’s vulnerability to external shocks. Indeed, Malaysia’s economic growth has been greatly undermined by virtually all of the global crises of the past 35 years (figure 7.1). The 1974 oil crisis hurt the Malaysia economy as the country was not yet a net oil exporter. In 1986, the collapse in commodity prices severely hurt the country’s main exports, including rubber and tin. After the 1986 crisis, Malaysia diversified its manufactured exports to a range of products by attracting a substantial inflow of foreign direct investment (FDI). At the same time, Malaysia launched several large infrastructure projects such as the North-South Expressway to improve connectivity between major cities. Malaysia has been vulnerable to various external shocks. But it was the 1997–98 Asian financial crisis, which started in Thailand and spread throughout the region, which had the most dramatic impact on Malaysian economic growth. The government took several drastic measures to contain the crisis, including depreciating the currency, fixing the exchange rate at 3.8 ringgit (RM) to the U.S. dollar, and imposing capital controls while rejecting a program of structural adjustment supported by the International Monetary Fund (IMF). The government also restructured and recapitalized banks. However, in 2001, the bursting of