Abstract

I am very pleased to be here this morning to officiate the opening of the International Monetary Fund Seminar Program for Non-Officials. As co-host, I would like to take this opportunity, on behalf of Bank Negara Malaysia, to extend a warm welcome to all participants and observers, particularly those of you who are visiting Malaysia for the first time. I note from the program that you have a heavy agenda before you. Nevertheless, I do hope you will take some time off to see what you can of our country and to enjoy our Malaysian hospitality.

I am very pleased to be here this morning to officiate the opening of the International Monetary Fund Seminar Program for Non-Officials. As co-host, I would like to take this opportunity, on behalf of Bank Negara Malaysia, to extend a warm welcome to all participants and observers, particularly those of you who are visiting Malaysia for the first time. I note from the program that you have a heavy agenda before you. Nevertheless, I do hope you will take some time off to see what you can of our country and to enjoy our Malaysian hospitality.

The theme for this seminar, namely, “Strategies for Structural Adjustment: The Experience of Southeast Asia” presents enormous scope for thoughtful discussion. In the course of the next few days, we can all look forward to a lively exchange of experiences among the Southeast Asian representatives, matched by well-informed intervention from our experts from the Fund.

Southeast Asia represents one of the most dynamic growth centers in the world today. The region has already produced one newly industrializing economy—Singapore—with several more on the way. Despite apparent differences in terms of economic structure, population size, and social and political environment, the region has consistently demonstrated an ability to sustain economic growth at a creditable rate, even in the face of global recession. Indeed, Southeast Asia is renowned for its success in weathering the storms and vagaries of an ever-changing world economy. And, as the region contemplates the challenges of an increasingly difficult world trading environment in the next decade, this seminar presents an excellent forum for the exchange of ideas and for the sharing of one another's experiences.

Looking back, we all wonder about the underlying thrust of structural adjustment strategies in Southeast Asia. Why did they succeed when many others failed? I hope this seminar will be able to dwell on valuable experiences in the recent past within this region and shed some light on this matter. As food for thought, I would like to share briefly with you Malaysia's recent experience in voluntary structural adjustment.

In the thirty odd years since the country's independence in 1957, Malaysians have traditionally enjoyed rapid economic growth, with per capita income rising from a mere $200 in 1957 to nearly $1,900 by 1988. The crunch came in 1981–82, with the onset of the global recession and the debt crisis. Despite a well-diversified economic base, Malaysia, like so many other export-oriented countries, was not spared the contractionary effects of the worst world recession since the Great Depression. During the initial downturn, the Government resorted heavily to traditional Keynesian measures to “ride out the recession,” under the impression (which later proved false) that the world recession would be short-lived. While fiscal pump-priming helped to return a respectable growth averaging about 6.4 percent annually in 1981–82, the toll was heavy. Within a span of three years, the federal government's fiscal deficit deteriorated from 8 percent of GNP in 1979 to nearly 18 percent in 1982. The prospects then were for a further worsening of the fiscal position in view of the deflation of world growth and trade. Equally daunting was the corresponding deterioration in the balance of payments. The deficit in the current account of the balance of payments, which was only about 1 percent of GNP in 1980, surged to 14 percent by 1982. In order to finance these deficits, our external debt increased sharply from only $4.5 billion in 1980 to nearly $10.5 billion by 1982, equivalent to 41 percent of GNP. Although still modest by international comparison, it was far too high by Malaysian standards.

By the middle of 1982, it was clear that the rapid increase in government spending was not sustainable, particularly at a time when the global economy was on the retreat. Once this was recognized, the Government was determined to tighten its belt, reorientate its priorities, and move back to the path of sustainable growth with stability. A multiyear economic adjustment program was initiated in late 1982 to significantly reduce the size of public sector expenditure. Many tough but necessary measures were implemented to cut government spending and rationalize the operations of public enterprises, including privatization. Subsidy programs were cut back significantly and a moratorium was imposed on civil-service wage increases. As government spending was reduced, the emphasis of public policy shifted toward the promotion of private sector activity as the main engine of growth. Central to the Government's strategy to promote private investment was the provision of generous tax incentives, the liberalization of restrictive laws and practices, and the deregulation of cumbersome rules and regulations. In effect, the Government was determined to reduce the cost of doing business in Malaysia and to ensure that private entrepreneurs were adequately rewarded for their efforts. Measures were also initiated to provide the necessary infrastructure and create a business climate conducive to private investment activity and the taking of risks.

The adjustments were as tough as they were painful. But through perseverence, the Government has since managed to turn things around. The facts speak for themselves: by the end of 1985, the federal budget deficit had been reduced from 18 percent to 6 percent of GNP; and the balance of payments deficit from 14 percent to 2.1 percent of GNP. For an economy so accustomed to receiving strong government stimulus to sustain growth, the sharp fiscal retrenchment had certainly contributed to deflationary effects on the economy. This was one price we were willing to pay, for without adjustment, the escalating twin deficits would have been clearly unsustainable. Indeed, we were right there on target in terms of adjustment efforts when, as luck would have it, the economy was confronted with yet another formidable challenge in the mid-1980s. The second collapse in commodity prices across the board in 1985 sent the economy into a tailspin; economic growth was negative for the first time in recent history.

It is, I think, to the Government's credit that it remained fully committed to its structural adjustment program, however painful in the short run. These events are now behind us. The economy has been on the recovery path since late 1986 and by the end of 1988, growth had accelerated to nearly 9 percent in real terms, a record not achieved since 1979. To some extent, the strong recovery was stimulated by a pickup in world demand as well as higher commodity prices, which contributed to a record surplus in the current account of the balance of payments to the tune of more than $2.5 billion, or 8.5 percent of GNP in 1987. The current account of the federal government also turned around to record a small surplus in 1988, a year ahead of schedule.

Admittedly, structural transformation in any country is difficult to achieve. By the same token, the adjustment process in Malaysia is by no means completed. The process of transforming the economy from one that is highly dependent on government spending to one that relies more and more on private sector initiative and enterprise will necessarily take time. What matters, however, is that the commitment toward economic efficiency and prudent economic management will continue well into the future. As a result, stronger foundations have already been built, and the economy is now poised for sustainable growth with stability in the longer term.

Enough said about Malaysia's experience in structural adjustment. Over the next few days, you will have an opportunity to exchange views and learn from one another's experiences about some of the critical elements underlying all successful adjustment strategies. Judging from the papers tabled for discussion, I am optimistic that your deliberations will prove to be both stimulating and fruitful.

On this note, I now have great pleasure in declaring open the International Monetary Fund and Bank Negara Malaysia Seminar on “Strategies for Structural Adjustment: The Experience of Southeast Asia.”