Malaysia: Prospects Depend on Fiscal Discipline, Investor Confidence
34 percent in 1990 to 48 percent in 1998, dropped to 41.8 percent in 2001. Since 2001, the saving rate has remained at about 40 percent. The saving-investment balance therefore remains high given the larger drop in investment. It may be that capital accumulation has reached the decreasing returns phase, in which case, it is unlikely to ever return to its precrisis level. But there could be some more structural barriers to investment. There are unfortunately very few studies on why private investment has not recovered in Malaysia, see Tuah and Zeufack (2009) for a survey. Guimaraes and Unteroberdoerster (2006) suggest that besides macroeconomic conditions, a shift in investors’ perceptions, which may have been triggered by the crisis itself or by prolonged overinvestment, appears to have contributed to the sharp decline in private investment in recent years. A study by Ang (2008) using data from 1960–2005 suggests that a drop in aggregate output, higher real user cost of capital and macroeconomic uncertainty have negatively impacted private investment. Tuah and Zeufack (2009) highlight the complementarity between public investment in infrastructure and private investment and the role of political and policy uncertainties. In a region where most countries compete for the same pool of FDI, the differential in corporate income tax with neighboring countries might have led some firms to settle in Singapore for example, lowering FDI flows to Malaysia.2 An alternative explanation of Malaysia’s poor investment performance is the political economy of the pre–2008 crisis period. The political transition between Prime Ministers Tun Mahathir and Tun Badawi in 2004 led to increased political and policy uncertainty. In order to differentiate himself from his powerful and charismatic predecessor, Badawi froze several infrastructure projects, alienating the private sector and creating a rift with Mahathir. As a result, the country entered a political and policy uncertainty phase that led to the resignation of Badawi in 2009. Also, it is possible that the reinforcement of affirmative action policies favoring the Bumiputera3 under the Badawi Administration led the domestic investment community, most of whom is ethnic Chinese, to adopt a wait and see attitude or seek investment opportunities abroad. Contributions to GDP Growth. Since the 1997 crisis, private consumption
has replaced investment as the main growth driver, with its contribution to growth surging to 93 percent in 2008—from only 32 percent in 2002
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