Distortions to Agricultural Incentives in Malaysia Prema-chandra Athukorala and Loke Wai-Heng Australian National University [email protected]University of Malaya [email protected]Agricultural Distortions Research Project Working Paper xx, October 2006
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Agricultural Distortions Research Project Working Paper xx, October 2006
This is a product of a research project on Distortions to Agricultural Incentives, under the leadership of Kym Anderson of the World Bank’s Development Research Group. The authors are grateful for helpful comments from workshop participants and for funding from World Bank Trust Funds provided by the governments of Ireland, Japan, the Netherlands (BNPP) and the United Kingdom (DfID).
This Working Paper series is designed to promptly disseminate the findings of work in progress for comment before they are finalized. The views expressed are the authors’ alone and not necessarily those of the World Bank and its Executive Directors, nor the countries they represent, nor of the institutions providing funds for this research project.
Distortions to Agricultural Incentives in Malaysia
Prema-chandra Athukorala and Loke Wai-Heng
Introduction and summary
Malaysia is notable among developing countries for its long-standing commitment to
maintaining a relative open trade policy regime. Malaysia never relied heavily on
quantitative restrictions and other forms of non-tariff protection, and tariffs on both
domestic manufacturing and agriculture continued to remain low relative to other
developing countries. Although tariffs on some manufactured goods were substantially
increased and some were brought under QRs in the first half of 1980s as part of a state-
led heavy industrialization strategy and in the immediate aftermaths of the 1997-98
economic crisis to support some domestic industries in face of massive domestic
economic contraction, these measures were reversed and further tariff cuts were
undertake in the ensuing years.
Unlike its counterparts in many other countries, the Malaysian government
persistently eschewed direct procurement of agricultural output through government
marketing boards or directly influencing export prices in any other ways. Export duties
on the two major primary commodities, rubber and palm oil, continued to remain a major
source of government revenue of until the mid-1980s. However, export taxes were
periodically adjusted in line with world price trends in order to keep the producer prices
by and large stable over time and ploughed back a significant share of this revenue into
well-designed and efficiently implemented replanting schemes and productivity
enhancing research in these industries. Over the past two decades export duties on rubber
and palm oil have come down drastically, but these traditional export industries have
2
been under persistent domestic cost pressure arising from rapid structural transformation
of the economy through successful global integration.
Production of paddy/ricethe staple food of the country and the principal
domestic food cropstands out as the single most assisted economic activity in the
country. In the immediate post-war years, assistance to this crop was introduced by the
colonial government on food-security grounds. After independence, and particularly
since embarking on the New Economic Policy (a sweeping affirmative action policy
package) in 1970, paddy has become an increasingly sensitive ‘political crop’. While
achieving food self sufficiency has continued to remain a ‘moving target’ in the
successive development plans, protecting paddy farmers (who are predominantly Malay
and concentrated in relatively economically backward states) remain by far the dominant
force behind continuing protection. Producers of subsidiary crops, horticultural products,
livestock and fishing have been operating under a virtually free trade regime throughout
with the exception of quantitative restrictions on the importation of round cabbages.
High-value (processed) food products have begum to emerge as an important dynamic
export line over the past two decades.
The purpose of this paper is two-fold, (a) to provide an analytical narrative of the
nature and evolution of trade and the related accompanying policies impacting on
domestic agriculture, with a focus on the underlying political economy, and (b) to
examine the degree and changing patterns of incentives to domestic agriculture
encompassing both direct (sector specific) incentives and indirect incentives emanating
from economy-wide policies. The analysis will be undertaken against the backdrop of
the on-going process of rapid structural transformation of the economy over the past three
decades. As an integral part of the analysis, an attempt will be made to delineate the
implications, over and above that of the policy-induced incentives, of the process of
structural transformation for the long-term viability of the traditional plantation crops and
new opportunities for agricultural output expansion in subsidiary food crop sector.
The study covers the period from 1965 (the earliest year after independence (in
1957) to 2004 with emphasis four major products natural rubber, pal oil and cocoa, and
paddy/rice. The first three are exportable while and fourth, the mail staple product of the
country is a pure importable. The four products together accounted for nearly 65% of
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total agricultural GDP over the past five years. Paucity of data does not permit further
expansion of the commodity coverage. But this is unlike to pose a problem in analysing
overall incentives to agricultural production because the policy almost of the other
agricultural products have been facing virtually free trade conditions throughout the
period under study. In addition to providing inputs to the global agricultural trade policy
analysis of the World Bank multi-country research project on Distortions to Agricultural
Incentives in Developing Countries, this study aims to inform the contemporary
Malaysian debate on the future direction of national development policy as it relates to
domestic agriculture.
The structure of the paper is as follows: The following section provides and
overview of growth and structural changes in the Malaysian economy during the post
independence era (since 1957), with emphasis on the relative importance of the
agricultural sector in the economy and trends and compositional shifts in agricultural
output and trade. This is followed by a surveys the evolution of agricultural trade policy
during the post-independence era (since 1957) against the backdrop of the overall
national development strategy and macroeconomic policy and paying attention to
political-economy considerations underpinning policy directions. The next section,
which forms the analytical core of the paper, proves an analysis of the extent and patterns
of direct and indirect distortions to incentives faced by domestic agriculture using a set of
incentive indicators specifically constructed for this study. The final section contains a
summary of the key findings and policy inferences.
Agriculture in the Malaysian Economy
Growth trends
At the time of independence in 1957, Malaysian was a classic example of an export
economy (a la’ Levin 1960), an economy in which the modern sector concentrated in
primary production for export dominated the entire organization of production. Natural
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rubber directly accounted for 25% of GDP with the second largest export, tin, and
accounting for 5% (Meernam 1979). In addition, a host of activities in the services
sector, embracing trade, transport and finance, were dependent on the export sector.
Production patterns exhibited only limited changes until about the mid 1970s. Structural
changes since then, in particulate from the late 1980s’, brought about by the expansion of
export-oriented manufacturing and related modern sector activities have been dramatic.
The share of agriculture in GDP declined to 19.1% by the late 1980s and then the
plummeted to 8.5% in 2005 (Table 1 and Figure 1).
In the early 1970s agriculture directly absorbed over a half of total labour
deployment in the country. This share had declined to 13.7% by 2005. The contraction
in the relative importance of agriculture in total labour absorption has been particularly
market over the past two decades (Table1, Figure 1). Despite this dramatic structural
transition, promoting employment opportunities in the rural economy (roughly equivalent
to the agricultural sector) has continued to remain an important focus of the successive
10-year development plans of the country particularly because of the related delicate
ethnic dimension. Over 90% of the agricultural labour force belonging to the politically
powerful and economically relatively weak Malay community. The incidence of poverty
in the rural economy is still high (11% in 2003) compared to 2.2% in the urban sector and
a national average of 6%. About 44% of the population is in the age groups of 55 years
or above (compared to a national average of 30%), while only 25% was in the age group
of 15% to 40% (national average 35%) (Government of Malaysia 2006a).
Over the past three decades or so, the agricultural sector has been under consistent
pressure from the ‘resource pull’ effects emanating from rapid structural changes in the
economy (Athukorala and Manning 1999, Barlow and Jayasuriya 1987). Widening urban-
rural wage differentials and the natural aversion of young to engage in agricultural
pursuits have propelled rural to urban labour migration, causing widespread labour
shortages in the rural economy and putting pressure on agricultural wages. The area
under traditional plantation crops has begun to shrink in semi-urban areas because of the
dispersal across the peninsula of industrial centres and the resultant increased demand for
land for residential and industrial expansion. In face of severe shortage of local labour
agricultural producers, firstly plantation companies, and more recently small-holder
5
producers of cash crop as well as paddy, have begun to rely increasingly on foreign
workers. The estimated foreign labour force in Malaysia increased from about a half a
million in the mid-1980s to 1.8 million (23% of the total labour force) by 2003, and about
half of these workers were in the agricultural sector (Athukorala 2006a). The dependence
on foreign labour is particularly high in the rubber industry, given the relatively high
labour intensity of both cultivation and harvesting. However, the relatively more capital
intensive palm oil industry has also begun to depend increasingly on foreign workers
because fresh fruit bunch harvesting is still conducted manually. According to a recent
survey the Malayan Agricultural Producers Association of the total labour force in private
sector plantations in Peninsular Malaysia, 37% are foreign workers and this ration is as
high as 80% in East Malaysia (Khoo and Chandramohan, 2002).
Structural changes: plantation (cash) crops
Rubber was the preferred crop of the foreign-owned estate sector throughout the colonial
period from the 1890s (Barlow 1978). Oil palm was first commercially planted in 1917,
but remained a relatively minor crop until mid-1950s. During the ensuing three decades
palm oil has proved to be profitable in comparison to rubber and expanded in the
plantation sector at the expense of the latter. The government policy relating to the
plantation sector dramatically shifted the emphasis from rubber to palm oil and supported
its expansion by allowing the use of rubber replanting grants for replanting rubber land
with oil palm. Moreover, the government itself played a vigorous role in the expansion
of oil palm by embarking on a large resettlement effort (especially though the Federal
Land Development Authority, FELDA) in which oil palm came to be the ‘crop of choice’
(Plectcher 1991).1 Malaysia's success in promoting palm oil exports was further aided by
inappropriate agricultural and economy-wide policies of traditional palm oil exporting
countries in Africa (MacBean 1989, Athukorala 1991). Cocoa began a gain importance as a
alternative crop in the plantation sector from about the early 1970s. However, from about
1 By 1984, FELDA accounted for 28.4% of the 1.3 million ha under oil palm. The annual rate of growth of FELDA’s oil pal hectares was 35% during 1861-84 and 76% during 1961-70, a rate six times that of the estate sector over the same period (, p 625). .
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the mid-1980s the area under cultivation of cocoa began to contract sharply because of
protracted low world prices of cocoa beans.
As already noted, from about the late 1980s the plantation sector has been under
severe strain arising from the resource pull effects emanating from rapid structural
changes in the economy. The resource pull effect fell more severely on rubber and cocoa
industries whose cultivation and harvesting processes are more labour intensive
compared to oil palm. To make matters worse world prices for these two products also
continued to remain unfavourable compared red to palm oil. At the end of the crop cycle
many plantation companies as well as small-holders partly replanted rubber land with less
labour intensive crops, in particular oil palm, utilizing other land for housing and for
industry. Many Malaysian rubber estate companies first tried to face labour shortages by
employed foreign workers and then used their technology and managerial know-how to
invests in other neighbouring countries (in particular) Indonesia and the Philippines)
where wages and cost of land war relatively lower. Smallholders too went on tapping
rubber with hired migrants, although their higher price elasticity of supply meant outputs
declined greatly during the low output prices of the early 1990s (Barlow 1997, p 599).
Despite the natural cushion provided by the relative capital intensity of production and
also relatively favourable price trend, palm oil sector also soon began to feel the pinch of
resource full effects in recent years and many large plantation companies have begun to
shift investment to the neighbouring land and labour abundant countries.
Table 2 summarises data on the area under cultivation, production and the yield
per Ha of the three main plantation crops. The area under cultivation of rubber which
increased from 1664 thousand hectares during 1960-64 to 1577 during 1975-79, declined
persistently since then reaching 1319 in 2000-04. Rubber output has closely followed
this trend. In the case of palm oil, the area under cultivation has increased continuously
from a mere 66 hectares during 1960-64 to 3759 during 2000-04, but the rate of
expansion has declined persistently from the early 1990s. In both industries, the
expansion of output has been faster than that of area under cultivation, reflecting the
widespread use of new high-yielding varieties and improved cultivation practices. From
the late 1990s, rubber and palm oil industries have begun to benefit from increased world
demand, particularly from China, and the resultant favourable price trends. Palm oil
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industry has also benefited in recent years from the tight world supply of edible oils and
facts, which pushed up palm oil prices. These favourable demand-side factors have been
reflected notable increase in the production of both rubber and palm oil. 2 In the case of
rubber the supply response to favourable prices has taken the form of increased cropping
intensity; in a context of persistent decline in the area under cultivation. By contrast, in
the case of palm oil, the area under cultivation too has shown some mild positive
response. Both production and the area under cultivation of cocoa has declined
persistently since the early 1990s. Yield per hectare in palm oil has increased
persistently throughout. In rubber the yield increased notably in the 1960s and 1970s,
followed by a virtual stagnation since then. In fact, the stability of rubber yield during
the latter period has largely come from contraction in the area under cultivation (implying
abandoning of marginal plantations with poor yield) in face of persistent decline in the
total output. Over the years, the small-holder share of total rubber land has increased
persistently from 50% in 1960 to 93% in 2004.
The relatively more capital intensive oil palm industry is dominated by large
plantations, notwithstanding some increase in the share of small holding over time (Table
3). It is important to note that the bulk of land areas classified as small-holding in this
data tabulation are in fact owned by farmers who participate in large government-run
plantation schemes. Smallholders who did not participate in these schemes accounted for
around 8% of the planted hectare. In fact, the estate dominance is a unique feature of the
palm oil industry in Malaysia (and in Indonesia); in other parts of the world, smallholder
production of palm oil is important in many parts of the world (Pletcher 1991)
Structural changes: food crops
Rice farming, nearly all of it wet paddy, is the major source of income for rural
households in the states of the north and east in the peninsula Malaysia and some parts of
East Malaysia. At the time of independence, about three-fourths of the native peasant
producers (predominantly rice growers and fishermen) were Malays, about 90% of rice
growers were Malays, and about one-third of the economically active Malay mail 2 Production of rubber and crude palm oil increased at average annual rates of 3.9% and 6.7% during 2000-5 Government of Malaysia 2006b, pp. 50-51).
8
population were in this peasant sector (Meerman 1979). This ethnic dimension of rice
farming had persisted during the ensuing years, making paddy a highly sensitive political
crop.
Nearly half of the peasant cultivators grow some rice. The area under cultivation
of paddy increased from 493 thousand hectares in 1960-64 to 749 in 1970-74 and
remained around 700 thousand hectares since then. Paddy production increased
persistently from the early 1960s to up to about the mid 1990s, due mostly to increase in
the area under cultivate until the early 1970s and subsequently increase in the yield per
hectare. Paddy producers were significantly aided by government sponsored irrigation
schemes which permitted double cropping, and the introduction of high-yielding
varieties and consolidation of padi smallholdings through group farming concept in the
eight granary areas, and direct assistant to farmers in the form of price support and price,
credit and fertiliser subsidies (See below). By 2005 (the end of the 8th Malaysia Plan
period), almost all farming operations in the major padi growing areas were fully
mechanized. As a result, the labour input per hectare declined from 47 worker days in
1995 to 15 worker day in 2000 (Government of Malaysia 2001, p 214). At the time of
independence (in 1957) about 45% of all rice consumed in Malaysia was imported. By
from about the mid 1970s, around 90% of the rice consumed locally has been produced
domestically.
From about the mid 1990s, rice production has stagnated followed by a mild, but
persistent decline in more recent years. The area under cultivation has persistently
declined. The yield per hectare recorded a continuous increase, but this has come largely
from the decline in the area under cultivation in face of stagnating or total declining
output. As in the case of the plantation crops, paddy farming has been under pressure
because of labour shortages resulting from rural to urban labour migration and the ageing
of the farming community (Ahmad and Tawang 1999). It seems that continuing massive
government support has been of little avail in supporting paddy farming in a context of
massive concretionary pressure emanating from ongoing structural adjustment in the
economy at large.
A noteworthy development over the past one-and-a-half decades in non-
plantation agriculture has been the rapid growth of the subsidiary food crops – fruits,
9
vegetables, fish and livestock at a faster rate than paddy ( Government of Malaysia
2006a, p 51). While there has been some increase in export of these ‘high value’ food
products, the production expansion so far has been predominantly domestic demand
derived. With rapid income growth in the modern sector of the economy and the high
income elasticity of demand high value food products compared to rice the relative
importance of the subsidiary food sector is bound to increase rapidly in years to come.
Table 4 provides data on the composition of agricultural production (value added)
in the Malaysian economy. The data are plotted in Figure 2. The dominance of the
plantation crop sector in Malaysian agriculture has eroded persistently from 73% in the
early 1970s to 53.2% during 2000-05. Within this sector there has been a palpable shift
in output composition away from rubber and towards palm oil. Cocoa accounted for
around 10% of total agricultural GDP from the mid-1970s to early 1990, but had declined
precipitously since then reaching negligible levels by the turn of the 20th Century. The
combined share of food crops, which remained around 28% in the 1960s and 1970s,
increased sharply during the ensuing years reaching 46.8% in 2000-05. Within this
sector, the relative importance of paddy has declined sharply over the past two decades,
reflecting a palpable compositional shift towards livestock, fisheries and other subsidiary
food crops (mainly fruits and vegetable).
Agricultural trade
Dramatic shifts in the domestic production structure has closely mirrored in export patterns.
The combined share of agricultural products in total merchandise exports declined from
57.5% (39% when timber/wood exports are excluded) in 1970-74 to 9.6% (8%) by 2000-04
(Table 5). Among agricultural products (excluding timer/wood), the share of rubber
declined persistently from 62.4% in 1970-74 to 9.7% in 2000-04. This was mirrored in an
increase in the share of palm oil from 23.9% to 41.6%.
Malaysia’s share in total world exports of natural rubber declined from 42% in the
late 1970s to around 20% by 2004, by which time it was the third largest exporter in the
world after loosing its to Thailand and Indonesia in the late 1980s (Figure 3). In world
crude palm oil exports, Malaysia remained the largest exporter accounting for a share in
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total world exports of 65% to 80% from the mid-1970s to late 1990s. Over the past five
years Indonesia has been the world’s largest of crude palm oil exporter (accounting for
over 50% of total world exports) thanks to massive investment relocation their by
Malaysian plantation companies in face of mounting domestic cost pressure.
A noteworthy development in the export structure of Malaysia over the past two
decades has been the emergence of processed food as a dynamic export line in the export
structures of Indonesia. The average annual growth rate of processed food exports from
Malaysia increased from 5% in 1985-99 to 19% during 2000-04. The share of processed
food in total agricultural exports from Malaysia increased from 8.7% in 1970-74 to
15.6% in 1985-89 and then to 31.6% in 2000-04 (Table 5). Rapid expansion of processed
food compared with the traditional food products (coffee, tea, sugar, cocoa and so on) has
been a universal phenomenon in world trade over the past two decades (Athukorala and
Jayasuriya 2003).3 Malaysia’s recently relative performance in this lucrative growth area,
while impressive by its own past performance, has lagged behind that of many other
counties (in particular Thailand) with similar agricultural resource endowments
(Athukorala 2006b). An interesting issue, which deserves deeper analysis, is whether
Malaysia’s highly interventionist paddy-sector support policy has constrained shift in
agricultural resources into these new dynamic product lines.
2. Policy Context
3 Powerful forces on both demand and supply sides have underpinned this structural shift. On the demand side, ‘internationalisation of food habits’ - the increased importance of imported processed items in consumption patterns in developed countries as well as among large sections of the populace in many developing countries - appeared to have played a key role. Factors such as international migration, the communications revolution and international tourism have contributed to this phenomenon. This significant demand-side impetus seems to have been supported by important supply-side developments such as improvements in food technology, refrigeration facilities and transportation that have made various processed food products, which are generally highly perishable, internationally tradable. Indonesia is well placed to benefit from this structural shift in world food trade is given its rich agricultural resource base, and ample availability of labour (because food processing/packaging for exports is a highly labour intensive).
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Key policy trends
The prognoses of development prospects for Malaysia (then the Federation of Malaya)4 at
the time of transition to independence in 1957 were at best mixed. On the positive side,
Malaysia's per capita income was on a par with Hong Kong and Taiwan and higher than
other countries in East Asia save Japan. Although the rate of population increase was
already rapid, the highly favourable ratio of land and other natural resources to total
population offered great potential to raise income per head. The colonial inheritance
included well-developed infrastructure, an efficient administrative mechanism and a
thriving primary export sector with considerable potential for expansion.
The mobilisation of this developmental potential for building the new independent
Malaysian economy had to be done under conflicting challenges posed by a plural society
inherited from the colonial past. At the time, the native Malays, who accounted for 52
percent of the population, dominated politics, but were relatively poor, and were involved
mostly in low-productive agricultural activities. The ethnic Chinese (37 percent of the
population) enjoyed greater economic power and dominated most of the modern-sector
activities, but they did not match the ethnic solidarity or political power of the Malay. 5
While ethnic divisions weakened the national fabric, the machinery of government was
fragile and the democratic political leadership remained untested. In this context, there
was little room for optimism regarding the development policies that might be expected
from the newly elected government (World Bank 1955). All in all, challenges of
development for Malaysia were generally considered more problematic compared to a
number of other countries newly emerged from the colonial era - in particular India,
Pakistan, Ghana, Kenya, and Burma.6
4 The Federation of Malaya, comprising 11 states in the Malay Peninsula secured independence from Britain on 31 August 1957. Sabah, Sarawak and Singapore joined Malaya to form Malaysia on 16 September 1963. Singapore left the federation in August 1965. 5 The emergence of these three identifiable and mutually exclusive ethnic groups as distinct, self conscious groups stemmed in substantial part from the exigencies and priorities of the British colonial policies (Gnguli 1997, p. 235).
6 In the famous Rosentein-Rodan (1961) growth trajectory up to 1976 for sixty-six of to-days developing countries Malaysia was classified ( together with South Korea, Taiwan, Singapore, Thailand and Indonesia) in the 'low-growth' category.
12
The early years of independence up to the mid 1960s, Malaysian national
development policy was much in line with the traditional liberal notions of the limited
state. Public command of economic resources in these early years was low, and the
prevailing economic policies conservative. The policy thrust was basically to continue
with the colonial open-door policy stance relating to trade and industry, while attempting
to redress ethnic and regional economic imbalances through rural development schemes
and the provision of social and physical infrastructure (Snodgrass 1980).
As in many other developing countries, industrialisation through import
substitution was a key emphasis of the Malaysian development strategy during this
period. However, Malaysian policy makers, unlike their counterparts in other countries,
Malaysia eschewed ‘forced’ industrialisation through direct import restrictions and the
establishment of state-owned industrial enterprises (Lim 1992).7 Moderate tariff
protection was by and large the key instrument used in encouraging new investment in
manufacturing. The average tariff rate in 1965 was estimated at a mere 13 per cent and
very few industries enjoyed nominal tariffs of more than 30 per cent and non-tariff
barriers were almost non-existent (Powel 1971, Lin 1984).
The racial riots in Kuala Lumpur in 1969 brought about a dramatic shift in
development policy along ethnic lines. The leadership of the ruling National Front
concluded that the striking discrepancies in wealth must be rapidly eliminated, in part
though public activity, if Malaysia were to evolve into an integrated community. Its two
basic goals were (1) the eradication of poverty by raising income levels and increasing
opportunities for all Malaysians, irrespective of race, and (2) the rapid reordering of the
society to correct economic imbalances, so as to reduce, and eventually eliminate, the
identification of race with economic function (Government of Malaysia, 1971, p. 1). In
the language of NEP, an increasing share of GNP to Malays was not however to be at the
cost of other citizens belonging to the other ethnic groups. Given the delicate ethnic
composition of the ruling coalition, economic equality was to be fostered primarily
through increasing employment and devising a mechanism to ensure that a greater share
7 In a recent comprehensive study of the patterns and chronology of trade policy reforms during the postwar era, Sachs and Warner (1995, Table 1) identify Malaysia as one of the eight developing countries whose trade regimes remained open throughout the post-Second World War period.
13
of newly created assets accrues to the Malay. Redistribution of existing assets was
anathema. Neither expropriation, foreign or local, nor nationalization, nor land reform
was considered in the NEP (Ness 1967, Snodgrass 1980, Ganguli 2003).
Given the crucial role played by foreign-owned companies in the production and
marketing of plantation crops, the Malaysian government took care to pursue a
favourable and unambiguous policy stance toward direct foreign investment. Transferring
a progressively large share of these companies to the nationals was a declared policy. But
the government always made it clear that the transfer of ownership would be through
formal share trading rather than through arbitrary expropriation (Mynt 1984, Fletcher
1991).
There was a heavy emphasis on the promotion of heavy industries through direct
government involvement in the first half of 1980s, as part of the ‘look East’ policy of Dr
Mahathir who became Prime Minister in 1981. The symbol of the selective industrial
policy was the Proton (the Malaysian national car) project, a joint venture of HICOM and
the Mitsubishi Corporation in Japan. By 1987, there were 867 corporate public
enterprises in Malaysia, more than a third of which were in manufacturing. Tariffs on a
wide range of manufactured goods were substantially increased in the first half of 1980s
as part of the heavy-industrialisation move. Nevertheless, there was no significant
reliance of quantitative import restrictions (Athukorala and Menon 1999).
The economic crisis during 1985-87, which originated in a combination of budget
deficits caused by the heavy industrialisation move and adverse trends in prices of
Malaysia's major export products, put an end to the state-led heavy industrialisation push.
The crisis management policy package placed greater emphasis on the role of the private
sector and strengthening the conditions for export-oriented industrialisation through
greater participation of FDI. The structural adjustment reform package introduced in
response to the crisis involved a gradual process of privatisation and restructuring of
state-owned enterprises. By the early 1990s state-ownership in manufacturing was
limited only to some politically sensitive ventures in automobile manufacturing (the
Proton project), petrochemical, iron and steel and cement industries. Reforms in the later
1980s also involved significant tariff reductions and removal of quantitative import
restrictions. Some of the tariff increases introduced in the first half of the 1980s were
14
reversed and further tariff cuts were introduced as part of market-oriented reforms in the
late 1980s.
Malaysia’s policy response to the recent (1997-98) financial crisis involved some
notable departure from persistent trade liberalisation over the previous decade
(Athukorala 2003). The 1998 Budget speech announced increase in import duties on
automobiles, vans and motorcycles from 30-200 per cent to 40-300 per cent for CBU
(completely built-up) and 4-42 per cent to 30-80 per cent for CKD (completely knocked
down) motor cars and for construction equipment from 0-35 per cent to 5-50 per cent. In
addition, a number of heavy and construction equipment, hot and cold rolled flat products
of iron or non-alloy steel, ephedrine and its salts, chemical products, certain electrical
household goods were brought under non-automatic import licensing. The declared
purpose of these measures was to bring down the current account deficit, but cushioning
local producers (including the national car producer, Proton) against domestic demand
contraction was obviously a key motivating factor. There was, however, no notable
retreat from the country’s long-standing commitment to a highly open trade regime.
The average applied import duty rate (total duty collection as a percentage of total
merchandise exports) is plotted in Figure 4. Despite recent tariff increases the average
effective rate has declined persistently. The underlying tariff structure is far from
uniform, however. The domestic automobile market is heavily protected through both
tariff and non-tariff measures. At Chapter (2-digit) level of the Harmonized System (HS)
of tariff, the average nominal tariff on automobile is 30.2 per cent while all the other tariff
rates are around or below 20 per cent.8 The overall tariff structure in Malaysia is heavily
cascading ‘cascading’ in nature; tariffs are generally higher on final goods than on
production inputs (intermediate and capital goods (Athukorala 2005).
Malaysia has bound only 65% of its tariff lines as part of its WTO commitments.
Moreover, the bound rates are much higher than the applied MFN rates (WTO 2002)9.
Both these features of the tariff structure have provides the government with scope to
8 Tariff rates reported in this paper unless otherwise stated are from Malaysia’s latest (2003) tariff schedule available in the Asia Pacific Economic Co-operation (APEC) Secretariat online database. 9 In 2002, the simple averages bound, unbound, and applied tariff rates were 19%, 35% and 9.2% respectively. All agricultural tariff lenes were bound, but on average at much higher levels compared to manufacturing tariffs.
15
raise applied tariffs (as was done in 1998), imparting a degree of uncertainty to applied
tariffs. There are no import quotas in Malaysia and the existing import prohibitions are
limited only to those implemented for national security reasons. By the mid-1990s, only
a 4.5 per cent of all tariff lines had non-ad-valorem tariffs, and this declined further to 0.7
per cent by 2002 because of the further rationalisation of the tariff structure following the
singeing of the WTO Agreement in 1995. There are no tariff quotas or variable import
levies (Athukorala 2002). By 2000 the coverage ration on non-tariff barriers in import
trade (unweighted percentage)10 amounted to 2.3%, down from 3.7% in the mid-1990s.
Despite recent tariff increases, Malaysia’s average tariff rate is relatively low (both in
terms of the simple average and import-weighted average) by the regional standards.
However, the degree of dispersion of tariff in Malaysia (measured by the coefficient of
variation) is relatively high because of high tariff peaks relating to a few product lines,
motor vehicles in particular (Athukorala 2005).
Agricultural trade policy: plantation crops
Duties on the two major primary export commodities, rubber and palm oil, were a major
source of government revenue until the mid-1980s. But, duty rates were adjusted in line
with world price trends in order to keep the producer prices stable over time. Export
duties were sharply reduced from about the mid-1980s in a context where the viability of
these industries were under persistent, severe strain because of labour shortages and
rising wages propelled by dramatic structural changes in the economy under export-ed
industrialisation (Ariff and Semudram 1990; Chunanuntathum et al. 1990). Reduction of
export duties was aided by tax buoyancy in a rapidly growing economy and increasing
government revenue from petroleum exports.
The import duty rates on rubber and palm oil, which increased persistently in the
1960s and 1970s, have declined persistently over the past two decades (Table 6). During
2000-04 the average annual duty rate was 4.7% on rubber and 1.1% on palm only. The
higher duty rate on rubber compared to palm oil was because of the additional duty (cess)
still levied in order finance rubber replanting scheme. Duties (in the range of 5% to 10%)
10 Calculated as percentage of import value of HS6 tariff lines affected by NTBs in total imports
16
are levied on specific grades of crude palm oil with a view to promoting further domestic
processing. By the dawn of the New Millennium, only a few other primary products,
(such as some forest products and crude oil) were subject to export duties. By the dawn
of the New Millennium, only a few products (some forest products and crude oil) were
subject to export duties. Total export duty contributed to mere 2% total government
revenue (Government of Malaysia 2006b).
As the structural changes in the economy begun to severely impede the long-term
viability of the palpation crops, the conventional trade policy and direct government
support in the form of funding research and replanting schemes have by and large lost
their relevance in supporting the plantation sector. Consequently, in recent years policy
attentions has been shifting towards new issues such as forging linkages of the
agricultural sectors with the rapidly gowning manufacturing, improvement in
productivity and efficiency, and assisting plantation companies to relocate in other
countries where factor market conditions still enable profitable production. Relaxing
restrictions on labour importations, both formally and informally (that is by turning blind
eye on illicit it migration) has also become an important short-tem measure to assist
reducing labour market pressure (Athukorala 2006a)
Agricultural trade policy: food crops
Production of paddy/rice has remained the single most assisted crop in Malaysia ever
since the guaranteed price scheme was introduced by colonial government in 1949
(This section is to be expanded based on the RER estimates plotted in Figure 5.
A key point to emerge from the discussion is that the RER for the export crop sector
(RER-AG) has been behaving quite differently from the overall RER (denoted RER-TP)
reflecting ongoing structural transformation of the economy. Notwithstanding some
periodic depreciation triggered by increases in world prices, the RER for the plantation
sector has appreciated persistently over the past two-and-a-half decade)
Trends and patterns of agricultural incentives
This section provides an analysis of the changing extent and patterns of direct and
indirect distortions to incentives faced by domestic agriculture in Malaysia using the
methodology developed by Anderson et al. (2006). The analysis is based on 6 main
indicators of incentives:
Nominal rate of assistance for the five products under study (NTA)
Average rate of assistance for the five products (NTAT)
Direct rate of assistance to total domestic agriculture (DRA)
Total rate of assistance to agriculture (TRA)
Agricultural bias in policies affecting tradable production (ABT)
The nominal rate of assistance (NRA) – the most commonly used measure of in
incentives – is simply the difference between the domestic price and international price
expressed as a ratio of the latter. NRAT is the weighted average of NRA of individual
19
products, where the weights are the share of each product in their combined value added
of the five products. DRA is obtained by multiplying NRA-T by the combined share of
the five products in total agricultural GDP. In other words, DRA is simply the weighted-
average NRA estimated by assumption11, zero protection to all agricultural products not
covered in NRA estimation, where the weights are the share of each product in total
agricultural value added. Total rate of assistance to agricultural (TRA) is calculated as
DRA net of direct rate of assistance to non-agricultural traded goods (DRA). The latter is
estimated by multiplying the implicit duty rate on non-agricultural products (total tariff
revenue from non-agricultural imports divided by the value of non-agricultural imports)
by the non-agricultural share of tradable GDP. In estimating tradable GDP we follow
Goldstein and Officer (1979) and treat considered construction, utilities and all services
in national accounts (at the two digit level) as non-tradables.
The detailed estimates of incentives are reported in Tables A-1 and A-2 in the
Statistical Appendix. They are summarised in the form of five-year averages in Table 7.
DRA, TRA, and ABT series are plotted in Figure 6. The estimated NRA series for each
of the five products, together with the related domestic and border price series are
depicted in Figure 7.
Before turning to analysing the estimates, it is important to bear in mid two
important limitations of the estimates which we were not able to avoid because of data
unavailability. First, in the case of the three plantation crops, we have ignored potential
differences between border (reference) prices and domestic prices arising from qualify
differences. This would have possibly infused an underestimation bias into our
calculations. Secondly, in all cases we have assumed complete pass-trough of changes in
producer (wholesale) prices into farm-gate prices, potentially resulting in an upward bias
in estimates. These limitations are however important only in comparing the level on
incentives among products or across countries at a given point in time. They are unlikely
to distort inferences based on inter-temporal comparison (changes in incentives over
time) because the magnitude of the bias is unlikely to be time variant. It is also important
to note that the TRA estimates, by the very nature of the estimation method, do not fully
11 This is not an unrealistic assumption; there is no evidence of significant government interventions/policy distortions impacting on any of the products not covered by our estimates.
20
capture distortions to agricultural incentives arising from changes in tariffs on tradable
inputs. Given the cascading nature of Malaysia’s tariff structure, this is a potentially
important source of downward bias in TRA estimates (Athukorala 2006c).
To consider first the estimate for the enture agricultural sector, total rate of
assiatant (TRA) continued to remain negative during 1960-82, but its magnitude was
declining persistently over the years (Figure 6, Table 7). The annual average TRA
during 1980-84 was -3.25 compared to -12.86 in 1960-64. From then on TRA remained
positive, but the magnitude declined persistely becoming near zero (0.68) by 2000-04.
These chnages are clealry rflected in the overall agricultural bias in policies affecting
tradables agriculture (ABT). BTA increased from 88.0% during 1960-64 to 96.9% in
1980-84 and further to 100.7% in 2000-04. In sum, the overall incentive structure
impacting on Malaysia agriculture has persistently moved towards neutrality during the
priod under study. The overall incentive bias had vertunally disappeared by the dawn of
the New Millenium. (However, as we will see below this agrregate picture conceils
excessively high assistant provided to to paddy farmrs).
This move toward neutrality has come from chneges in both both the direct rate of
assitant to agriculture (DRA) and the direct rate of assistant to non-agricultural tradables
(DRN). DRA continued to decline upto the mid 1970s reflecting increase in export
duties on the plantation crops which overwhelmed significant positive assistance to the
paddy sector. Since then persistent decline in the export tax rate was powerful enough to
generate a persistelt decline, notwithstanding high nonimal protection accorded to the
paddy sector. Interestingly this transformation occurred in a context of a faster deline in
the share of the three export crops in agricultural GDP relative to that of paddy. DRN,
which recorded a mild decine for 7.5% in 1960-64 to 5.2 in 6.5% in 1975-79, plummeted
from then on reaching 0.92% in 2000-04. Both direct tariff cuts and rapid expansion of
the export-orineted manufacturing which enjoy dury free status for all imported inputs
unded in the production process contributed to this decline. Disaggregate data (not
reported here for brevety) show that the latter continued to act as a much more powerful
force compared to the former. Of the total change in TRA between 1960-64 and 2004-
04, nearly 80% came from decline in DRA. However, as the export deties had already
come down to rather low levels, from about the mid 1980s decline in DRN has acted as
21
the relatively more powerful force behind the move towards neutrality of agricultural
incentives; of the change in TRA between 1985-89 and 2000-04, over 70% came from
the decline is DRN.
NRA estimates for the individual commodities point to broadly similar patterns in
changes in incentives faced by the two major plantaion products- rubber and oil palm
(Table 7 and Figure 7). In both cases, NRA was negative throughout but the absulte
magnitude has been declining sharply over the pt two decades reflecting cuts in export
dutis. However, with the exception of some years in the 1970s, the degee of negative
incentive to palm oil industry was much lower in magnitude compared to that for
rubbber. For the entire period of 1960-2004, the annual average NRA for palm oil was
-7.5 compred to -11.5 for rubber. NRA for palm oil increased from -15.0 % in the
second half on 19970s to -3.19 in 1985-89 and then to -1.1% during 2000-04. The
corresponding change in NRA for rubber was from -22.5% to -8.7% and to -4.7%.
Given the fact that fortunes of both products have been predominently determined by
domestic resorce-full effects arising from reapid structural adjustment in the wider
economy, the remainly relatively high negative assistance to rubber compared to palm oil
remains a puzzeling feature of the structure of incentives in Malaysia. Cocoa was never
taxed heavilly as it was always considered a minor export crop. NRA for this product
varied between 1.2% to 2.3% from the mid-1960s to mid-1990s and has become zero
from then.
Among the four products under study, paddy/rice is notable for persistently high
assistance. The NRA for paddy/rice which in the 1960s and 1970s remained arround an
average level of 8.5% with high degree of annual flutuations, reached 39.2 in 1975-79
following an unward adjustment in the guaranteed minuimum pric (GMP). It then
reached a peak of 158 following the introduction of the price subsidy (over and above
the GMP). Over the past two-and-a-half decades, NRA for paddy has varied in the range
of 50% to 135%. The average annual NRA during 2000-04 was 71.0%, up from 57.4%
during 1995-99. The disaggregated data show that the farm-gate price of paddy continued
to remain high with only periodic upward shifts resulting from increases in GMP and the
price subsidy (Figure 7d). In this context, year-to-year variations in NRA has
prodominently come from changes in the reference (border) price (Figure 7b). For
22
instance, the dramatic decline in NRA from 127.2% in 1990-94 to 57.4% during 1995-99
was brought about by sharp decline in world rice prices between these two sub-period.
The NRA then increased to 71.0 reflecting some recovery in world prices.
Finally, a comparison of the weighted-average NRA for the three exportables
(rubber, palm oil and cocoa) with that for the importable (which in this case is solely
represented by paddy) points to a persistent bias in agricultural incentives in favor of
import-competing, as against export-oriented, production, although the bias has declined
significantly over the years thanks to sharp reductions of export duties (Table 7 ). Based
on similar estimates for the period 1960-1982, Jenkins and Lai (1991) inferred that
excessive protection accorerd to paddy farmers had a negative effect on the expansion of
export agriculture. This infrence does not seems valid for the period from about the late
1980s; continus deterioration in profitability of export-oriented agriculture as well as
paddy production are predomeinetly rooted in the oigoing process of strutural
transformation of the wider economy. However, as already noted, heavy assistance to
paddy producers is presumably a major source of distortion within the food-crop sector
which constraint resource reallocation from th strutually-weak paddy sector to high-value
food production, for both the domestic and export markets.
Concluding remarks
Malaysia stands out among developing countries for its long-standing commitment to
maintaining a relatively open trade and investment policy regime. Malaysia has
persistently eschewed heavily on quantitative restrictions and other forms of non-tariff
protection. Tariffs on both domestic manufacturing and agriculture continued to remain
low relative to other developing countries. The export taxes, which were an important
source government revenue unto about the mid 1980s, reduced over the years since then
as the plantation sector begun to experience severe cost pressure emanating from rapid
growth and structural change under export-led industrialisation. The average level of
import tariffs also has come down significantly over the years, notwithstanding periodic
23
upward adjustment of some tariffs and the especial cases of continuing excessive
protection of the automotive industry. This record of persistent commitment to openness
is particularly remarkable it entirely reflects unilateral and voluntary policy choices, not a
result of influence by a major trading partner (as in the case of Taiwan, for example),
conditionally imposed donor agencies multilateral negotiations under the auspices of the
GATT/WTO.
However, there are notable anomalies in the incentive structure that encourage
channelling of resources into unproductive activity. In particular, the tariff structure is
characterised by a dualistic pattern in which export-oriented production takes place under
virtual free trade regime side by side with a predominantly domestic market oriented
production, both in manufacturing and agriculture, assisted by tariff protection. It is also
characterised by a high degree of dispersion of tariff rates because of high tariff peaks
relating to a few product lines, increased reliance on non-automatic import licensing to
regulate imports of a significant number of products which directly compete with
domestic production by public sector enterprises. This significant departure from
neutrality implies ample room for policy discretion, rather than pure economic
considerations, in influencing resource allocation in the economy.
Excessive assistance given to paddy farmers remains a major distortion in
agricultural incentives in Malaysia. In addition to the obvious welfare implications, this
anomaly presumably hinders the diversification of domestic agriculture into new dynamic
product line. Give the ongoing process of dramatic structural transformation of the
economy which has ushered in an era of massive urban-t-rural labour migration and cost
pressure on traditional agriculture, the case for protecting paddy farmers on self-
sufficiency grounds has lost its relevance. However, outright dismantling of assistance
remains virtually a non-option because of the obvious political-economy considerations.
But, there is a strong case for replacing the existing complicated and costly incentives
with outright income support to the farmers. The fiscal burden involved is unlikely to be
very high because the agricultural labour force has been rapidly depleting and the
incidence of rural poverty, though relatively high by the national standard, has been
declining. This is an issue which certainly deserves for further systematic analysis.
24
References
Ahmad, T.M.A.T. and T. Tawang (1999), ‘Effects of Trade Liberalization on Agriculture
in Malaysia: Commodity Aspects’, CGPRT Centre Working Paper 46,
Bangkok: UN/ESCAP.
Anderson, K., W. Martin, D. Sandri and E. Valenzuela (2006), “Methodology for
Measuring Distortions to Agricultural Incentives”, Agricultural Distortions
Research Project Working Paper 02, World Bank, Washington DC, August.
Ariff, M. (1991), The Malaysian Economy: Pacific Connections. Kuala Lumpur: Oxford
University Press.
Ariff, M. and M. Semurdram (1990) ‘Malaysia’, pp. 23-55 in S. Page (ed.), Trade,
Finance and Developing Countries, London: Harvester Wheatsheaf.
Athukorala, P. (1991), ‘An Analysis of Demand and Supply Factors in Agricultural
Exports from Developing Asian Countries’, Weltwirtschaftliches Archiv 127(4):
764-91.
Athukorala, P. (2001), Crisis and Recovery in Malaysia: The Role of Capital Controls,
Cheltenham: Edward Elgar.
Athukorala, P. (2002) ‘Malaysian Trade Policy and the WTO Trade Policy Review 2001’,
World Economy 25(9): 1299-1317.
Athukorala, P. (2005), ‘Trade Policy in Malaysia: Liberalization Process, Structure of
Protection, and Reform Agenda’, ASEAN Economic Bulletin 22(1): 19-34.
Athukorala, P. (2006b) ‘Post-Crisis Export Performance: The Indonesian Experience in
Regional Perspective’, Bulletin of Indonesian Economic Studies 42(2), 177-211.
Athukorala, P. (2006b), ‘International Labour Migration in East Asia: Trends, Patterns
and Policy Issues’, Asian-Pacific Economic Literature 20(1): 18-39.
Athukorala, P. and S.K. Jayasuriya (2003), ‘Food Safety Issues, Trade and WTO Rules: A
developing Country Perspective’, World Economy 26(9): 141-162.
Athukorala, Prema-chandra and Chris Manning (1999), Structural Change and
International Migration in East Asia: Adjusting to Labour Scarcity, Melbourne
and Oxford: Oxford University Press.
25
Athukorala, Prema-chandra and Jayant Menon (1999), ‘Outward Orientation and
Economic Performance: The Malaysian Experience’, World Economy 22(8):
1119-39.
Athukorala, P and P.G. Warr (2002) ‘Vulnerability to a Currency Crisis: Lessons from the Asian Experience’, World Economy, Vol..25, No. 1, pp. 33-57.
Barlow, Colin (1978), The Natural Rubber Industry: Its Development, Technology, and
Economy in Malaysia, Kuala Lumpur: Oxford University Press.
Barlow, Colin (1997), ‘Growth, Structural Change and Plantation Tree Crops: the Case of
Rubber’, World Development 25(10): 1589-1607.
Barlow, Colin and Sisira Jayasuriya (1987) ‘Structural Change and its Impact on
Traditional Agricultural Sectors of Rapidly Developing Countries: the Case of
Source: Compiled from various published planning documents (Ten Year Plans and Mid-term Reviews) published by the Economic Planning Agency, Kuala Lumpur.
30
Table 5: Agricultural Exports from Malaysia: Share in Total Merchandise Exports, Composition of Agricultural exports, and World Market Share
Source: Based on data compiled from various published planning documents (Ten Year Plans and Mid-term Reviews) published by the Economic Planning Agency, Kuala Lumpur.
33
Figure 3: Malaysia’s World Export Share of Natural Rubber, Cocoa and Crude Palm Oil Exports, 1978-2004
0
10
20
30
40
50
60
70
80
90
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Wor
ld m
arke
t sha
re (%
)
RubberCocoaPalm oil
Source: Based on data compiled from Department of Statistics, Statistical Yearbook 2002 and Bank Negara Malaysia, Monthly Statistical Bulletin database.
1 Total duty collection as a percentage of total merchandise imports (excluding re-exports)Source: Bank Negara Malaysia, Monthly Statistical Bulletin, Kuala Lumpur (various issues)
34
Figure 5: Malaysia: Real Exchange Rate, 1980-2005 (1990 = 100)
-100
-50
0
50
100
150
1970
1975
1980
1985
1990
1995
2000
2005
RER,
199
0 =
100
(nor
mal
ised
at th
e m
ean)
RER-TP RER-TAE
Note: 1. Normalized at the mean.Legend: RER-TP Real exchange rate for tradable; RER-PE Real exchange rate for
traditional agricultural exports (rubber, palm oil and cocoa)
Source: Appendix Table A-3
Figure 6: Incentives to Agriculture in Malaysia: Indices of Direct Rate of Assistance (DRA), Total Rate of Assistance (TRA) (left scale) and Agricultural Bias in Incentives to Trabadble production (ABT) (right scale), 1965-2004 ( percent)
-25
-20
-15
-10
-5
0
5
10
15
20
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
DA
R a
nd T
RA
(%)
0
20
40
60
80
100
120
AB
T (%
)
DRA TRA BAT
Source: Appendix Table A-2
35
Figure 7: Malaysia: Prices and NRAs for primary products, 1960 to 20051
(a) Rubber
0
500
1000
1500
2000
250019
60
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Pirc
e, R
M p
er M
T
-35
-30
-25
-20
-15
-10
-5
0
NRA
(%)
Domestic price Border price NRP
(b) Palm Oil
0
100
200
300
400
500
600
700
800
900
1000
1100
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Pric
e, R
M p
er M
T
-30
-25
-20
-15
-10
-5
0
NRA
(%)
Domestic price Border price NTA
36
(c ) Cocoa
0
500
1000
1500
2000
2500
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
Pric
e RM
per
MT
-10
-8
-6
-4
-2
0
2
NRA
(%)
Domestic price Border price NTA
(d) Paddy/rice
0
50
100
150
200
250
300
350
400
450
500
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Pric
e, M
R pe
r MT
-50
0
50
100
150
200
250
300
NRA
(%)
Domestic price Border price NRA
Source: Appendix Table A-1
37
Statistical Appendix
Table A1: Malaysia: Prices and NRAs for primary products, 1960 to 2005Rubber Crude Palm Oil Cocoa Paddy/riceDP BP NRA DP BP NRA DP BP NRA DP BP NRA
NRA-T Weighted-average Nominal rate of assistance to the five agricultural products covered in the estimation
DRA Direct rate of assistance to agriculture (estimated by assuming zero NRA for the products not covered in the estimation)
DRN Direct rate of assistance to non-agricultural productionTRA Total rate of assistance to agriculture (= DRA – DRN)ABT Agricultural bias in policies affecting tradables (= (1+DRA)/(1+DRN)
Source: Authors’ spreadsheet using methodology from Anderson et al. (2006)
41
0
1
2
3
4
5
6
7
8
9
10
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Gro
wth
(%)
0
5
10
15
20
25
30
35
40
Agri.
sha
re in
GDP
(%
)
GDP growth (left scale)
Agri. Growth (left scale)
Agri. Share in GDP (right scale)
Table A3: Malaysia: Exchange Rates (RM/US$)Official rate Black market rate Real exchange rate (RER)
= [NER*WPI]/DPIWhere, NER and WPI are respectively trade-weighted nominal exchange rate (domestic-currency price of foreign currency) and trade-weighted wholesale price indices for the ten major trading partner countries, and DPI is the Vietnamese GDP deflator. Trade weight used in compiling NER and WPI relate to the year 2000. By construct, an increase in RER reflects real depreciation.
2. RER-TAE Real exchange rate for traditional agricultural exports (rubber, palm oil and cocoa)
= [NER*EP]/DPIWhere, EP is export price index for rubber, palm oil and cocoa estimates as weighted-average of FOD price of each product (export value shares are used as variable weights) and the other variables are as defined in Note 1.
--- Data not available.
Source: Official rate: International Monetary Fund, International Financial Statistics (IFS) database. Black-market rate: International Currency Yearbook (various issues)RER: estimated using data extracted from IFS database and Bank Negara Malaysia, Monthly Bulletin of Statistics (for export data for traditional agricultural exports)