2009 Index of Economic Freedom

Quick Facts

Population:

• 26.1 million

GDP (PPP):

• $327.4 billion
• 5.9% growth
• 5.8% 5-year compound annual growth
• $12536 per capita

Unemployment:

• 3.2%

Inflation (CPI):

• 2.1%

FDI Inflow:

• $6.1 billion

Malaysia's economic freedom score is 64.6, making its economy the 58th freest in the 2009 Index. Its score is 0.7 point better than last year, largely reflecting slight improvements in trade freedom and business freedom. Malaysia is ranked 9th out of 41 countries in the Asia–Pacific region.

The Malaysian economy has continued its steady economic growth over the past five years, and ongoing reform measures, including a recent tax cut, have enhanced the overall business climate. Malaysia scores above the world average in eight of the 10 economic freedoms. The labor sector is relatively flexible, with simple employment procedures and no minimum wage. The top income and corporate tax rates are moderate, and the overall tax burden is low as a percentage of GDP. Monetary stability is relatively well maintained. The tariff rate is low, although non-tariff barriers still limit overall trade freedom.

Despite efforts to liberalize and improve the investment climate, overall progress has been slow. The financial sector is fairly well developed but subject to government interference and some restrictions on foreign involvement. Other institutional challenges to overall economic freedom include corruption and a judiciary that remains vulnerable to political influence.

Background Back to the top

Malaysia is a constitutional monarchy but has been ruled since independence in 1957 by the United Malays National Organization. Huge electoral inroads made by the opposition coalition, led by the People's Justice Party, in March 2008 were largely due to popular dissatisfaction with pro-Malay affirmative action programs and widespread corruption. Prime Minister Abdullah Ahmad Badawi has liberalized the economy slowly, but government ownership in such key sectors as banking, automobiles, and airlines remains high. Malaysia is a leading exporter of electronics and information technology products, and its industries range from agricultural goods to automobiles.

Business Freedom 70.8 Back to the top

The overall freedom to conduct a business is somewhat limited by Malaysia's regulatory environment. Starting a business takes an average of 13 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 18 procedures and 225 days. Bankruptcy proceedings are relatively straightforward.

Trade Freedom 78.2 Back to the top

Malaysia's weighted average tariff rate was 3.4 percent in 2006. Some high tariffs, import and export taxes, import restrictions, high services market access barriers, import and export licensing, non-transparent regulations and standards, non-transparent government procurement, export subsidies, and weak protection of intellectual property rights add to the cost of trade. Fifteen points were deducted from Malaysia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 83.0 Back to the top

Malaysia has moderate tax rates. The top individual income tax rate is 28 percent. The corporate tax rate has been reduced to 26 percent and will be further reduced to 25 percent in 2009. Other taxes include a capital gains tax and a vehicle tax. Under a single-tier tax system that became effective on January 1, 2008, dividend income is exempt from income tax. In the most recent year, overall tax revenue as a percentage of GDP was 15.5 percent.

Government Size 81.4 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 24.9 percent of GDP. Energy and food subsidies constitute nearly 10 percent of total operating expenditures.

Monetary Freedom79.9 Back to the top

Inflation is low, averaging 2.6 percent between 2005 and 2007. Most prices are determined in the market, but the government influences certain prices through state-owned enterprises; controls the prices of petroleum products, steel, cement, wheat flour, sugar, milk, bread, and chicken; and usually sets ceiling prices for a list of essential foods during major holidays. Ten points were deducted from Malaysia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Foreign investment is welcome in certain sectors, but there are significant restraints. Foreigners may own 100 percent of certain kinds of new companies, but a 30 percent stake in existing firms must be Malay-owned, and foreign ownership is capped in most sectors. Certain kinds of investment are screened, though commercial operations can begin before approval. Regulations are burdensome and non-transparent. Residents and non-residents may hold foreign exchange accounts, subject in many cases to government approval. Nearly all capital transactions are prohibited, subject to restrictions, or require government approval. Ownership of agricultural land is restricted to Malaysians.

Financial Freedom40.0 Back to the top

Despite considerable transformation, the state still interferes in Malaysia's financial sector. Supervision of the banking system is more efficient, and non-performing loans have decreased. Mergers among local banks have been encouraged to increase overall competitiveness, and there are nine local banks. The central bank licenses and regulates banks. Islamic banking, based on Sharia law forbidding interest payment in favor of profit sharing, accounts for around 12 percent of total banking assets. With its International Islamic Financial Centre initiative launched in 2006, Malaysia aims to be a leader in Islamic banking, and four foreign Islamic banks now operate in Malaysia. Foreign firms' overall participation in the financial sector remains restricted. Equity participation is limited to 30 percent for commercial banks and confined to 49 percent for investment banks and Islamic banks. Insurance companies are subject to restrictions on expatriate employment and foreign equity.

Property Rights50.0 Back to the top

Private property is protected, but the judiciary is subject to political influence. Corporate lawsuits take over a year to file, and many contracts include a mandatory arbitration clause. The International Intellectual Property Association estimates 2005 piracy-related industry losses at $147.3 million. The manufacture and sale of counterfeit products have led to serious losses for producers of consumer products and pharmaceuticals.

Freedom From Corruption51.0 Back to the top

Corruption is perceived as present. Malaysia ranks 43rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Bribery is a criminal act, but perceptions of widespread corruption and cronyism persist.

Labor Freedom71.5 Back to the top

Relatively flexible labor regulations could be further improved to enhance employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee remains difficult and costly. There is no national minimum wage, and restrictions on the number of work hours are flexible.