MALAYSIAN ECONOMY

MALAYSIAN ECONOMY

QUESTION 1

MALAYSIAN GOVERNMENT EMBARKED ON THE PRIVATIZATION PROGRAM (CLO1)

INTRODUCTION

Over the last few decades, governments have vigorously and increasingly embraced state-owned enterprises’ Privatization by shifting responsibility from the state to the private sector (Cook and Uchida, 2003). Privatization notably gained the attention of many countries, including Malaysia, as a strategy for development. Instead, more considerable attention was paid in prior studies that attempt to understand and examine the influence of Privatization on economic growth in different countries.

In 1969, the Malaysian Government adopted a New Economic Policy, which aimed to reduce poverty. For that, many public enterprises were formed as instruments to achieve a redistribution of income within Malaysian society in favor of all communities, including Bumiputera. Between the 1970s and 1980s, the Malaysian economy was significantly dominated by public sector entities because many public enterprises were created to promote the Bumiputera community’s participation in the marketplace and achieve socioeconomic objectives of the New Economic Policy.

As government intervention in economy increases, the size and the scope of the public sector grew, which led to a corresponding increase in the public sector’s expenditure and debts over Gross Domestic Product (GDP). Malaysia recorded a government debt equivalent to 80.74% in 1990 of the country’s GDP1. The exceptionally high expenditures and liabilities caused by the expansion of the public sector, coupled with the world economic recession in the early 1980s, had resulted in a dramatic decline in Malaysia’s commercial growth rate from 6.3% in 1983 to – 1.1% in 1985 (Taasim and Yusoff, 2014).

As a result, the Malaysian Government was forced to look at its public spending and implement ways to optimize it. Embracing Privatization appeared to be the most appropriate and suitable solution to solve the problem at hand. Privatization is defined as transferring ownership of an entity or business operations from the state ownership.

To the privately owned entity (Bakar et al., 2016). In March 1983, the Malaysian Prime Minister announced the Government’s intention to embark on a privatization policy in line with the Malaysia Incorporated Policy, hoping that the Government’s financial burden could be alleviated.

CONTENT – REASON ( ADVANTAGES )

Privatization involves selling state-owned assets to the private sector. It is argued the private sector tends to run a business more efficiently because of the profit motive. However, critics argue private firms can exploit their monopoly power and ignore more extensive social costs. Privatization is often achieved by listing the new private company on the stock market. In the 1980s and 1990s, the UK privatized many previously state-owned industries such as BP, BT, British Airways, electricity companies, gas companies, and rail networks.

Arguments for and against Privatization

Potential benefits of Privatization

1. Improved efficiency

The main argument for Privatization is that private companies have a profit incentive to cut costs and be more efficient. If you work for Government-run industry managers, do not usually share in any profits. However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient. Since Privatization, companies such as BT and British Airways have shown degrees of improved efficiency and higher profitability.

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2. Lack of political interference

It is argued governments make poor economic managers. They are motivated by political pressures rather than sound financial and business sense. For example, a state enterprise may employ surplus workers who are inefficient. The Government may be reluctant to eliminate the workers because of the negative publicity involved in job losses. Therefore, state-owned enterprises often employ too many workers increasing inefficiency.

3. Short term view

A government many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements, which will benefit the firm in a long time because they are more concerned about projects that give a benefit before the election. It is easier to cut public sector investment than frontline services like healthcare.

4. Shareholders

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient, then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure, and so it is easier for them to be incompetent.

5. Increased competition

Often, Privatization of state-owned monopolies occurs alongside deregulation – i.e., policies to allow more firms to enter the industry and increase its competitiveness. It is this increase in competition that can be the most significant spur to improve inefficiency. For example, there is now more competition in telecoms and the distribution of gas and electricity.

• However, Privatization doesn’t necessarily increase competition; it depends on the nature of the market. E.g., there is no competition in tap water because it is a natural There is also very little competition within the rail industry.

6. The Government will raise revenue from the

Selling state-owned assets to the private sector raised significant sums for the UK government in the 1980s. However, this is a one-off benefit. It also means we lose out on future dividends from the profits of public companies.

DISADVANTAGES OF PRIVATISATION

1. Natural monopoly

A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very high fixed costs. Therefore there is no scope for having competition amongst several firms. Thus, in this case, Privatization would just create a private monopoly that might seek to set higher prices than exploit consumers. Therefore it is better to have a public trust than a private monopoly that can use the consumer.

2. Public interest

Many industries perform an essential public service, e.g., health care, education, and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in health care, it is feared privatizing health care would mean a higher priority is given to profit rather than patient care. Also, in an industry like health care, arguably, we don’t need a profit motive to improve standards. When doctors treat patients, they are unlikely to try harder if they get a bonus.

3. The Government loses out on potential dividends.

Many of the privatized companies in the UK are quite profitable. This means the Government misses out on their dividends, instead of going to wealthy shareholders.

4. The problem of regulating private monopolies.

Privatization creates private monopolies, such as water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still a need for government regulation, similar to under state ownership.

5. Fragmentation of industries

In the UK, rail privatization led to breaking up the rail network into infrastructure and train operating companies. This led to areas where it was unclear who had responsibility. For example, the Hatfield rail crash was blamed on no one taking responsibility for safety. Different rail companies have increased the complexity of rail tickets.

6. Short-termism of firms

The Government is also motivated by short-term pressures, which is something private firms may do. To please shareholders, they may seek to increase short term profits and avoid investing in long term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatized companies are trying to use existing plants rather than invest in new ones.

Evaluation of privatisation

• It depends on the industry in question. A production like telecoms is a typical industry where the incentive of profit can help increase efficiency. However, if you apply it to health care or public transport sectors, the profit motive is less
• It depends on the quality of regulation. Do regulators make the privatized firms meet specific standards of service and keep prices low?
• Is the market contestable and competitive? Creating a private monopoly may harm consumer interests, but there is enormous scope for efficiency savings if the market is highly competitive.
• Can you create incentives in a nationalized firm? For example, performance-related pay could replace the profit

QUALITY OF ANALYSIS – CITATION

Privatization in Malaysia the Malaysian Government’s intention towards Privatization emerged in the 1980s through the establishment of Malaysian Incorporated Policy by the then Prime Minister, Dato’ Seri Dr. Mahathir bin Mohamad. The initial objective was to alleviate the financial burden of the Malaysian Government amidst the implementation of the New Economic Policy (NEP), which in turn, was aimed at reducing poverty and eliminate inter-ethnic disparities. The massive amount of Government’s debt in the wake of establishing an increasing number of public enterprises drove the Government to transfer public enterprises to private ownership.

Thus, the public sector was no longer the prime engine of growth for economic development. The privatization program in Malaysia has significantly impacted its economic reform agenda. It has changed the structure of incentives, reduced government interventions, improved monitoring of public enterprises’ activities, and introduced competition. Hence, Privatization has contributed to higher microeconomic efficiency levels and fostered sustained economic growth (Tan, 2007). Nevertheless, studies had also shown that Malaysia’s privatization programs might not be all the success stories. Pockets of failure existed, mainly due to the lack of improvement in the needed institutional process.

Specifically, the privatization policy’s aims of reducing the government financial burdens, increasing efficiency of the privatized firms as well as enhancing the country’s economic growth have not been fully achieved albeit that its New Economy Policy target of increasing Bumiputera share acquisitions was met (Nambiar, 2009; Masruri, 1996).

Privatization has fallen out of favor in many countries because the underlying political factors have not been well understood. It considers why developing countries such as Malaysia might want to embark on Privatization, the factors that lead to policy failure, and what is needed to make it work.

SKILLS – DATA/ DIAGRAM

Privatized Projects in Malaysia (1983-2015) Table 1 displays the accumulated number of privatized projects made up of new privatized projects and existing privatized projects each year from 2009 to 2015. The number of new projects being privatized each year had been steadily increasing since 1990 and reached 165 in 2010. It is worth noting that the name saw a sharp drop to just 25 in 2011. This significant reduction in the privatized projects might affect a setback in the ruling parties’ general election performance in 2008, considering a lagging impact on the privatization policy making and execution. In the 2008 general election, the ruling coalition did not win a two-thirds super-majority in the Malaysian Parliament.

Based on the Property Rights theory, the form of ownership is the official explanation for public-owned organizations’ varying performance and privatized organizations. The shift of ownership from Government to private sector translates into management’s motive to contribute to the organization in order to create value and profits. The efficient and effective corporate control consistently increases firms’ productivity and, thus, increases the ability to take up more projects.

Table 1: Total Number of Privatized Projects in Malaysia

Future Research Many research studies point to the growing trend of Privatization globally in achieving economic development. Further works can be done to have a more in-depth and comprehensive analysis of privatization impacts in all aspects of Malaysian.

Economy, be it at the macro or micro level. For instance, the latest data related to privatization achievement in Malaysia can be collected from the Economic Planning Unit (EPU), Bank Negara Malaysia, International Monetary Fund (IMF), and World Development Report for further interpretation.

Future research can also be undertaken to look into the roles of institutional changes and practices concerning the attainment of the privatization program’s full benefits. Several major privatization failures in Malaysia can be case-studied in the context of the existing institutional framework that they were operating in.

PREPAREDNESS – EXTRA – DISADVANTAGES

Disadvantage: Less Transparency

One crucial disadvantage to recognize is the opportunities for bribery and corruption that come with Privatization. Typically, private companies are less transparent than government offices, and this reduced transparency paired with a drive for profit can be a breeding ground for corruption.

Disadvantage: Inflexibility

There is also the issue of inflexibility that can come with Privatization. Typically, governments sign lengthy contracts with private service providers. These contracts can span for decades, locking residents into one service provider for lifetimes. Although a private company might make itself attractive to win a contract, its service can take a quality nosedive once it’s in place, and its consumers are complacent.

Disadvantage: Higher Costs to Consumers

Although Privatization is usually promoted because it will reduce consumers’ costs and drive prices up, according to the non-profit consumer advocacy group, Food & Water Watch’s proposed private water service for Milwaukee would cost residents 59 percent more than they were paying for public water service.

CONCLUSION

Malaysia’s privatization policy implementation reached its height in the 1990s when the then prime minister announced his Vision 2020 in February 1991 to achieve developed country status by 2020. In the same year, the Government issued its Privatization Master-plan, including a Privatization Action Plan. Malaysia’s vision of 2020 was imperative to ensure the onward economic development of the country since 1990. To achieve the aspiration of view 2020, Malaysia needed to be transformed into a form of dynamism and productivity. Realizing the fact that Privatization would result in a higher level of economic growth in Malaysia, robust privatization programs were actively undertaken to create a private sector-led economy.

The Government’s business role could be rationalized by continuously increasing Privatization and establishing a facilitation fund for the fully-private sector, public-private partnerships (PPPs), and government-linked companies (GLCs). From a macroeconomic perspective, Privatization provided a platform that opened up unprecedented international business opportunities. Privatized entities were exposed to an increased number of international trade and foreign investments, which at the same time, increased Malaysia’s foreign direct investment inflows. Privately-owned enterprises were allowed to implement their way of conducting business without much intervention from the Government in their daily business operations.

QUESTION 2

THE CAUSE OF INEQUALITY IN INCOME DISTRIBUTION IN MALAYSIA. (CLO2)

INTRODUCTION

ASEAN  was preceded by an organization formed on   31   July   1961   called the Association of Southeast Asia (ASA), a group consisting of Thailand, the Philippines, and the Federation of Malaya. ASEAN itself was created on 8 August 1967, when the foreign ministers of five countries: Indonesia, Malaysia, the Philippines, Singapore, and Thailand, signed the ASEAN Declaration. A country with multiple ethnicities and religions offers insights on economic policy design for improving social cohesion. In much of the developing world, economic power is mostly concentrated in a “market-dominant” ethnic minority. The classic case is southeast Asia, where the Chinese, usually a tiny proportion of the population, enjoy an overwhelmingly dominant economic position. In Malaysia, the average Chinese household had 1.9 times as much wealth as the Bumiputera.

In a recent paper, we provide a valuable piece to the literature by taking Malaysia as an example and analyzing the evolution of income inequality among different ethnic groups. Most importantly, as the racial issue has long been a fixture in Malaysian politics, by studying the impact of Malaysia’s long-standing affirmative action policies on income distribution, we hope to provide insights on economic policy design for mitigating ethnic tensions and improving social cohesion in Malaysia and other countries facing the same issue.

One reason for optimism over inequality in Thailand is that awareness of the problem is far higher. In Thailand, the whole world now pays serious attention to the issue as a fundamental problem afflicting modern humanity. Inequality is more than a money matter. Inequality is unethical. It crushes the fundamental principle that every person should have equal opportunities. It is also the root cause of many structural problems in Thai society. The lack of social and political stability, the low quality of democracy, the flesh trade and human trafficking, crime, corruption … you name it. These social evils are different manifestations of structural problems that share the same root cause — inequality.

CONTENT – CAUSES ( REASON )

The Government, intervention under the New Economic, Policy has successfully generated economic growth and development of the country in general, and in the event, of the Malay ethnic group in particular. Government, the intervention that begins in the 1970s, has significantly reduced poverty, particularly poverty amongst the Malay ethnic group. Furthermore, the overall income inequality and inter-ethnic and rural-urban inequality have also declined since the middle of 1970 to 1990. Since 1990 however, even though poverty has fallen further, income inequality has started to rise.

Besides, there emerges a new dimension of inequality, which is intra- ethnic inequality. This paper argues that intra-ethnic inequality, particularly intra-Malay inequality, poses a significant challenge to Malaysian policymakers. The reason is that government intervention under the New Economic Policy is articulated in ethnicity’s political rhetoric. It appears to be coherent in addressing poverty amongst the Malays when the majority of them were in debt.

The New Economic Policy has significantly reduced, poverty amongst, the Malay, and there now exists a new problem of Sintra-Malay inequality. The existence of intra-Malay difference suggests that more profound division amongst the Malay community has emerged, implying that there developed diverse and conflicting interests within the Malay community, itself. Continued use of ethnicity as the foundation of economic policy is no longer coherent. Hence, it could only be undertaken with the risk of more significant discontent, paradoxically amongst the Malay community. In such a situation, Government, an intervention articulated in the political rhetoric of ethnicity, would.

QUALITY OF ANALYSIS

Several policies have been introduced by the Malaysian Government to reduce the income inequality among the citizens. This study examines the changes in income inequality based on three different indices: Gini, Atkinson, and generalized entropy, using the household income data available from the surveys conducted in 2007, 2009, 2012, and 2014. Modification for each index is employed by taking sample weights into account for better measurement. Lorenz curves are fitted to the data to describe how household income groups’ incomes are distributed over time. All the indices show a decreasing trend from 2007 to 2014, indicating an overall income distribution improvement. The proportions of income earned by the low-income groups have increased from 14.25% in 2007 to 16.28% in 2014 after taking economic pie from the higher income group while the middle class remains unchanged.

Income inequality is a matter of concern in any society. This issue is of interest to be discussed, particularly for developing countries such as Malaysia, since high-income inequality could be detrimental to the economic growth (De Dominicis et al. 2008; Qin et al. 2009). Castelló-Climent (2010) has argued that both income and human capital inequality can harm economic growth in low and middle-income countries. Castilla (2012) has found that two subjective well-being indicators, income satisfaction and income adequacy, are positively correlated with society’s absolute income

level.

The income disparity in a society can be observed based on the different patterns of society members’ expenditures. Fisher et al. (2015) have shown that expenditure inequality is affected by income inequality. The high-income groups are more likely to spend more in absolute terms than the middle and lower-income groups, even though in general, each community intends to maintain a stable standard of living by avoiding excessive spending in the daily life.

SKILLS– DATA/ DIAGRAM/ EXPENDITURES

1. Evolution of income inequality

Figure 1. Income shares: top 1 percent Malaysia vs. top 1 percent in other countries (pretax national income)

Notes: Distribution of pretax national income (before all taxes and transfers, except pensions and unemployment insurance) among adults. Equal-split-adults series (income of married couples divided by two).). Imputed rent is included in fiscal pretax income and pretax national income series.

Figure 2. Income shares: top 10 percent Malaysia vs. top 10 percent other countries (pretax national income)

Notes: Distribution of pretax national income (before all taxes and transfers, except pensions and unemployment insurance) among adults. Equal-split-adults series (income of married couples divided by two).). Imputed rent is included in fiscal pretax income and pretax national income series.

Figures one and Figure 2 compare our Malaysian DINA top income series with the DINA series recently computed for the US (Piketty, Saez and Zucman, 2018), France (Garbinti,

Goupille and Piketty, 2018) and China (Piketty, Yang, and Zucman, 2019). These series use the same methodology as the one applied in this paper: they all attempt to combine information obtained from national accounts, surveys, and economic data to estimate the distribution of pretax national income (including undistributed profits and other tax-exempt capital income) among equal-split adults.

In 2002, Malaysia’s inequality level was extremely high: its top 1 percent income share was 19 percent. The corresponding number for the top 10 percent was 44 percent, which is higher than those of the US and substantially higher than those of China. However, while we observe a trend of increasing inequality after 2002 in the US and China, Malaysia’s difference has decreased. By 2014, we see that income inequality in Malaysia is much lower than it is in the US and similar to China’s level, but still significantly higher than France’s level.

Malaysia has performed very successfully in recent years compared to other emerging market countries, with a rapid catching-up towards living standards prevailing in OECD countries. Malaysia’s 2017 per capita GDP (about USD 27 000 in 2011 PPP prices) was close to two-thirds of the OECD average (Figure 1). Thanks to the diversification of export products and improved macroeconomic prudence, Malaysia’s resilience to external shocks has strengthened. The country’s Eleventh Five-year Plan (2016-20) set a target of achieving high-income country status by 2020 while ensuring inclusive and sustainable growth. The Mid-Term Review of the Eleventh Plan, announced in October 2018, postponed the target year to 2024 due to recent macroeconomic developments. To achieve the planned target requires maintaining the pace of growth and focusing on productivity gains. High-quality growth requires further efforts towards social inclusiveness and environmental protection.

CONCLUSION

Government action, such as implementing specific policies, is one solution to reduce income inequality (World Bank 2000). Concerning this idea, through national policies, Malaysia’s Government has introduced strategies to reduce income inequality. Since Malaya gained its independence in 1957, the Government has always been concerned with income inequality.

To conclude the findings of this paper, Malaysia’s growth for the period of 2002-2014 included significant and relatively egalitarian (among different ethnic groups) growth in the middle 40 percent and the bottom 50 percent and a substantial divergence among the Bumiputera, Chinese and Indians in the top 1 percent and top 10 percent. Thereby, Malaysia’s growth features an inclusive redistribution between income classes and a combination of affirmative action policy and the free flow of capital(ism).

QUESTION 3

PROBLEM    OF   INFLATION    AND    UNEMPLOYMENT    IN MALAYSIA (CLO3)

INTRODUCTION

ASEAN, in full Association of  Southeast  Asian  Nations, international organization established                                by           the           governments           of Indonesia, Malaysia, the Philippines, Singapore, and Thailand in 1967 to accelerate economic growth, social progress, and cultural development and to promote peace and security in Southeast  Asia. Brunei joined in 1984, followed by Vietnam in  1995, Laos and Myanmar in  1997,  and Cambodia in 1999. The ASEAN region has more than 600 million and covers a total area of 1.7 million square miles (4.5 million square km). ASEAN replaced the Association of South East Asia (ASA), formed by the Philippines, Thailand, and the Federation of Malaya (now part of Malaysia) in 1961. Under the banner of cooperative peace and shared prosperity, ASEAN’s chief projects center on economic cooperation, the promotion of trade among ASEAN countries and between ASEAN members and the rest of the world, and programs for joint research and technical assistance among member governments.

In 1958, William Phillips published his seminal paper entitled “The Relationship between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom 1861 – 1957”. According to Phillips, there existed a strong negative association between unemployment and inflation during the observation period. This trade-off relationship discovered by Phillips is now known as the “Phillips Curve.” Despite some criticisms of the Phillips Curve’s basic tenets, the hypothesis remains one of the essential foundations for macroeconomics. Since 1958 till the present time, numerous academic inquiries have been made on the relationship between unemployment and inflation in various countries. As Hart (2003, p.108) observed, “The Phillips curve still plays a prominent role in macroeconomic theory and associated empirical work.”

The concept of labor demand and supply. If labor demand is higher than labor supply, the excessive demand for labor can put upward pressure on the wage rate, which will cause high inflation in the country. In this situation, it would be easy for workers to find employment, and the unemployment rate would remain low. By contrast, if labor supply exceeds labor demand, the surplus of labor supply would push the wages down, which would result in a lower inflation rate in the country. Simultaneously, with the excessive labor supply, it would be difficult for workers to find a job, and unemployment would be high. During the years of economic boom, companies would increase their production volumes by employing more workers. During these economic upturns, low unemployment would co-exist with high inflation. On the other hand, companies would try to decrease their production volumes during economic recessions by reducing the number of workforces. In such a situation, high unemployment would be accompanied by low inflation.

CONTENT – EFFECT OF THE INFLATION AND UNEMPLOYMENT

The Phillips Curve Related to Aggregate Demand

The Phillips curve shows the inverse trade-off between rates of inflation and rates of unemployment. If unemployment is high, inflation will be low; if unemployment is low, the rise will be high.

The Phillips curve and aggregate demand share similar components. The Phillips curve is the relationship between inflation, which affects the price level aspect of aggregate demand, and unemployment, which is dependent on the real output portion of aggregate demand. Consequently, it is not far-fetched to say that the Phillips curve and aggregate demand are closely related.

To see the connection more clearly, consider the example illustrated by. Let’s assume that aggregate supply, AS, is stationary, and that aggregate demand starts with the curve, AD₁. There are an initial equilibrium price level and real GDP output at point A. Now, imagine increasing aggregate demand, causing the curve to shift right to curves AD₂ through AD4. As total demand increases, unemployment decreases as more workers are hired, real GDP output increases, and the price level increases; this situation describes a demand-pull inflation scenario.

As more workers are hired, unemployment decreases. Moreover, the price level increases, leading to improvements in inflation. These two factors are captured as equivalent movements along the Phillips curve from points A to D. At the initial equilibrium point A in the aggregate demand and supply graph, there are a corresponding inflation rate and unemployment rate represented by point A in the Phillips curve graph. There is a similar point in the Phillips curve for every new equilibrium point (points B, C, and D) in the aggregate figure. This illustrates an important point: changes in total demand cause movements along the Phillips curve.

Income inequality is an extreme disparity of income distributions with a high concentration of income, usually in the hands of a small percentage of a population. When income inequality occurs, there is a large gap between one population segment’s wealth compared to another. There can be varying types of income disparity segregations and analysis used to understand income inequality.

QUALITY OF ANALYSIS

Unemployment Rate and Inflation Rate in Malaysia Unemployment rate in Malaysia was above 5 percent in the 1970s (see Figure 1). At the beginning of the following decade, i.e., in 1981 and 1982, it fell below the 5 percent level. From 1983, the unemployment rate kept increasing until it reached a peak of 8.7 percent in 1987. Starting from 1988, the reverse trend was in evidence. Due to the country’s economic boom, the unemployment rate was shrinking, and, in 1997, it amounted to 2.6 percent. From 1998 to 2004, Malaysia’s unemployment rate remained at a moderate level of approximately 3.5 percent.

Figure 1 Unemployment and Inflation in Malaysia (1975 – 2004)

As to the inflation rate, there have been more significant fluctuations between 1975 and 2004 compared to the country’s unemployment rate over the same period (see Figure 1). In the second half of the 1970s, the inflation rate was approximately 40 MJBE Vol. 1, No. 1, June 2014 ISSN 2289-6856 Unemployment and Inflation in Malaysia: Evidence from Error Correction Model 4 percent. In 1980, it reached 6.6 percent and further increased to 9.7 percent in 1981.

Beginning in 1982, the inflation rate kept decreasing until it amounted to less than 1 percent in 1986. In the first half of the 1990s, the Inflationcountry’s Inflation remained stable at approximately 4 percent. The Asian economic crisis that started in 1997 triggered inflation.

The rate in Malaysia, which reached 5.2 percent in 1998. Between 2000 and 2004, there was some stabilization in the inflation rate fluctuations, and the inflation rate remained at approximate

• It should be noted that between 1975 and 2004, both the inflation rate and the unemployment rate in Malaysia were relatively low. Thus, the average annual inflation rate was 3.37 percent, while the average unemployment was 4.76 percent.

PREPAREDNESS – EXTRA – EFFECT

Inflation is a situation when too much money also chases a few goods and services.

Inflation is measured by the Consumer Price Index(CPI).

Therefore, there is an imbalance between the money supply and the Gross Domestic Product (GDP). There are many types of inflation, like demand-pull Inflation, cost-push Inflation, supply-side Inflation. But the increase can be divided into two broad classes:

1. Open inflation – when the price level in an economy rises continuously and
2. Repressed inflation – when the economy suffers from inflation without any apparent rise in

According to Keynes, Inflation is an imbalance between the aggregate demand and aggregate supply of goods and services. Therefore, if the aggregate demand exceeds the aggregate supply, then the prices keep rising.

Causes of Inflation

• Primary Causes
• Increase in Public Spending
• Deficit Financing of Government Spending
• Increased Velocity of Circulation
• Population Growth
• Hoarding
• Genuine Shortage
• Exports
• Trade Unions
• Tax Reduction
• The imposition of Indirect Taxes
• Price-rise in the International Markets

Having understood the inflation meaning, let’s take a quick look at the factors that cause inflation.

CONCLUSION

Malaysia encounters an economic problem like inflation. Inflation occurs when the price level of goods and services rises on a period. Weakens the purchasing power of the population because each monetary unit buys only fewer products and services. One way to solve this issue is that the Government encourages people to spend more on goods and services and start investing. The spending and investment aid the economy and benefit the people themself. If people don’t start investing and spending, their money will be worthless in the future. This is a two-sided beneficial situation for the nation. Besides that, the second challenge faced by Malaysia is the increasing unemployment rate. Unemployed individuals are mostly fresh graduates, according to the country. This situation can be categorized in frictional unemployment. According to research,  we know that the main reason that causes the occurrence of unemployment is a lack of social and communication skills.

REFERENCES

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3. Abdul-Hakim, Roslan. (2001). Income Inequality, Poverty, and Development Policy in Malaysia.
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