BOOSTING TRADE COMPETITIVENESS
Following the review of near-term developments and outlook, the thematic chapter of this Economic Monitor analyzes structural trends in trade competitiveness.
Trade competitiveness is measured as Malaysia’s ability to grow its exports and the domestic value-added embodied within them, leveraging foreign demand and knowledge to support its transformation to a high income nation.
Nearly 60 percent of value-added produced in Malaysia was ultimately consumed by foreigners in 2009 – one of the highest shares in the world.
The share of Malaysia’s GDP consumed in foreign markets includes the value-added of exporting firms and also of suppliers to export-oriented industries. Thus the actual significance of external demand to the Malaysian economy is higher than it appears from net exports (22 percent of GDP) or the output from externally-oriented industries (38 percent of GDP).
The export engine appears to have been faltering since before the Global Financial Crisis.
The share of exports of goods and services in Malaysia’s GDP declined by nearly 30 percentage points between 2005 and 2013. Unlike Thailand, Vietnam and Korea, which saw market shares expand, Malaysia’s share shrunk from 1.35 to 1.22 percent in that period. However, Malaysian exports have included a higher portion of domestic value-added, mitigating the impact of the decline in gross shares.
The decline in exports has been concentrated in Malaysia’s core export product segment – E&E products.
E&E exports as a share of GDP declined from about 38 percent between 2002 and 2004 to 18 percent in 2013, and Malaysia’s market share in the period declined from 5.25 percent to 3.74 percent of global E&E exports. Meanwhile, exports of commodities, and commodity-related manufactures such as petrochemicals expanded, but not enough to compensate the decline in E&E exports.
The domestic value-added of Malaysian E&E exports is relatively low due to limited domestic linkages.
Malaysia remains an integral part of the E&E global value chain, but at 44 percent the share of valueadded in exports is relatively low. This is partly due to limited domestic linkages. Compared to other countries, the contribution from domestic intermediaries to the value-added of exports is only 7 percent in Malaysia compared to 31 percent in Korea. This finding is supported by analysis of enterprise survey data, which finds that multinationals in Malaysia source less than 40 percent of their inputs from domestic firms compared to 46 percent in Vietnam and 82 percent in China.
Exports of services have also lagged and remain an area of significant potential.
Malaysia has few services-exporting firms and at 12 percent of GDP services exports are below what would be expected for a country at its level of income.
‘Behind the borders’ restrictions hinders export growth and limits linkages between domestic providers and export-oriented industries.
Although the Government has recently embarked on a liberalization of services sectors, many are still relatively restrictive as measured by the World Bank’s Services Trade. Restrictiveness index and assessment of the burden of non-tariff measures. Professional and transport services are more restrictive on average than most countries in East Asia for example. A restrictive domestic environment reduces incentives for exporting, and for exporting firms to buy more domestic value-added. Barriers are not limited to ownership restrictions, but extend to licensing and regulations that limit domestic competition.
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