​

Malaysia is one of the most open economies in the world, with a trade to GDP ratio averaging over 130 percent since 2010. Malaysia has successfully diversified its economy from agriculture and commodity-based to one that now plays host to robust manufacturing and services sectors, which has propelled it to become a leading exporter of electrical appliances, electronic parts and components.

​

Intervention
 

The energy and trade sectors have played an essential role in the growth of the Malaysian economy. The establishment of PETRONAS in 1974 has helped to strengthen the energy resource development in the country, with the combined oil, gas and energy sectors representing 19 percent of GDP in 2009. To sustain its current position as one of the most competitive and successful countries in the world, the successful implementation of the Economic Transformation Programme (ETP) is crucial. Millennium Institute, in partnership with the Ministry of Economic Affairs conducted a comprehensive integrated assessment of the interventions planned and needed in the energy and trade sectors to coherently and effectively support national development.

​​

Key Policy Insights and Recommendations
 

• Oil and gas subsidy removal. While energy price subsidies support cost reductions and improve short term competitiveness (positive effect), in the medium and longer term, subsidies reduce the incentive to invest in energy efficiency and innovation (negative effect). Further, with the current economic structure being largely based on low cost manufacturing, a lock-in effect has been created, making it more difficult for producers to profit from improvements in infrastructure and education. As a result, a mismatch across sectors is becoming more evident, exposing the country to a critical risk at a juncture in which domestic energy supply has likely reached its peak.
   

• Energy efficiency improvement. Energy efficiency should be improved with a dual goal to reduce the impact of increasing energy prices (especially in the case of the removal of subsidies), and to improve longer-term competitiveness for manufacturers and reduce energy costs for households.
   

• Renewable energy power generation. The penetration of renewables in power generation should be increased to diversify the energy supply mix, reducing exposure to fossil fuels and creating cost reduction opportunities in the medium and longer term. Also, renewable energy, when the power generating capacity is manufactured locally, creates a considerable amount of additional jobs when compared to thermal power generation. Several policies exist to stimulate demand (incentives, such as feed-in tariffs, tax rebates, mandates and targets), and supply –although supply is already present in Malaysia.
   

• Flexible agreements for gas exports. Acknowledging that terminal investments and costs for transporting/importing gas would be the same, a full phase out of subsidies would make so that importing or using domestically produced gas would have no impact on consumption or domestic prices. If the amount produced is sold at market price, also the profitability of production would be the same. On the other hand, concerning energy security, it would be preferred to reduce exports according to the overall trend of decline of national output, to potentially maintain reserves until the early 2020s and reduce the economic risk related to imports.
   

• Infrastructure investment. Port cargo, air cargo and passenger and broadband connectivity are important investments aimed at supporting improvements in industrial and services productivity, on top of creating employment. Interventions in these areas will both support domestic production, as well as increase international competitiveness, supporting the integration of local talent in the economy. The expansion of infrastructure, especially when aimed at energy efficiency and technological development, may need to be adjusted over time, to make use of several policies that would leverage private as well as public investment.
   

• Education investment and practices. Investments in tertiary education should be planned to increase the intake rate and graduation especially in science, technology, engineering and mathematics (STEM) to support the economic transformation. If other investments are successful, and the economy grows as projected, highly skilled workforce will needed in a variety of sectors. Higher emphasis on education, in the context of national development, also indicates a transition to higher value manufacturing and services, with employment generation being more concentrated in specialty areas where Malaysians already excel, but do not find suitable domestic employment opportunities.
   

• Research and Development. Investments in R&D are critical to support the transition to higher value production and services, and to make use of the investments made in the education sector and retain local human capital. These investments will have to target sectors that hold promise to deliver of the economic transformation strategy, or support sectors (such energy intensive manufacturing sectors) that would particularly suffer from higher energy prices, having an impact on profit margins and competitiveness.
   

• Free Trade Agreement. The definition of an FTA targeting access to market is advised to create synergies with investments in infrastructure and education, effectively making use of improvements in competitiveness from the domestic supply side. An FTA should be tailored around specific needs and opportunities related to the sectors that can promote the economic transformation, with emphasis on technology transfer. Existing sectors, in which Malaysia already excel in low cost and effective production, could also be included in the agreement, as public and private investments would likely soon be shifted towards new sectors, making access to market a good factor supporting traditional sectors. An FTA, in concert with improved competitiveness and strong growth is also very likely to increase foreign direct investment.