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TITLE:  MALAYSIA ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE


                             MALAYSIA

                     Key Economic Indicators
      (Millions of Malaysian ringgit unless otherwise noted)

                                  1991      1992       1993a/
Income, Production,
 and Employment

GNP (Current prices)              123,548   140,267   159,043
Real GNP Growth (pct.)               11.5      13.5      13.4
Real GDP (1978 prices)             86,332    93,071   100,475
Real GDP Growth (pct.)                8.7       7.8       8.0
By Sector:
 Agriculture                       14,795    15,432    15,895
 Manufacturing                     24,307    26,859    30,216
 Mining and Petroleum               7,952     8,088     7,991
 Utilities                          1,697     1,931     2,153
 Construction                       3,250     3,615     4,013
 Whole and retail trade            10,091    11,165    12,315
 Financial Services                 8,733     9,607    10,664
 Government Services                8,964     9,466     9,892
 Other Services                     1,831     1,977     2,125
Real Per Cap. GDP ('78 bps)         4,747     5,002     5,275
Labor Force (000s)                  7,247     7,441     7,646
Unemployment Rate (pct.)              4.3       4.1       3.0


Money and Prices

Money Supply (M2) b/               96,092   114,481   122,316
Prime Rate (pct.) b/                  9.5       9.5       8.2
Klibor (12 month) b/                 8.78      8.05      6.57
Nat. Savings/GNP (pct.)              28.0      32.6      35.4
Investment/GNP (pct.)                25.3      34.2      22.8
Inflation (CPI)                       4.4       4.7       3.8
Exchange Rate (avg. MR/$)            2.75      2.55      2.57


Balance of Payments and Trade

Merchandise Exports                92,220   100,910   116,979
  Exports to U.S. (FAS) c/         16,780    20,984    23,400
Merchandise Imports                90,771    92,311   103,752
  Imports from U.S. (CV) c/        10,725    11,122    14,700
Services (Net)                    -13,058   -12,958   -12,876
Current Account                   -11,507    -4,200       511
Merchandise Trade Balance           1,449     8,599    13,227
  Trade Balance With U.S.           6,055     9,862     8,700
Aid from U.S.                         1.5       1.5         0
Foreign Debt                       43,787    42,661    47,192
-- Public Sector                   37,075    32,323    34,614
-- Private Sector                   6,712    10,338    12,578
Debt Service Payments d/            7,166     4,742     4,541
Debt Service Ratio (pct.)             6.2       5.7       5.2
Official Net Reserves              30,444    47,194    57,000


Notes:

a/ Malaysian government estimates.
b/ 1993 Data to October only.
c/ Embassy estimates based on DOC data.
d/ Excluding prepayments



1.  General Policy Framework

    Malaysia has a relatively open, market-oriented economy. 
Since independence in 1957, the Malaysian economy has shown
sustained growth and has diversified away from the twin pillars
of the colonial economy: tin and rubber.  Real GDP growth
averaged six to eight percent from 1964-1984.  In 1985-1986,
the collapse of commodity prices led to Malaysia's worst
recession since independence with real GDP growth a negative
one percent and nominal GNP falling 11 percent.  Since then,
the economy has rebounded, led by strong growth in both foreign
and domestic investment and manufactured goods exports with
real GDP growing at an average of over eight percent.  In 1994,
real GDP growth is expected to be around 8.2 percent. 
Malaysia's 1994 federal budget, tabled in Parliament October
29, 1993, introduced a number of significant tariff and fiscal
policy changes, which took effect immediately.

    The government plays a diminishing role in the Malaysian
economy, both as a producer of goods and services, and as a
regulator.  The government or government-owned entities
dominate a number of sectors, particularly plantations and
financial institutions.  Through the National Equity
Corporation, the government has equity stakes (generally
minority stakes) in a wide range of domestic companies.  These
entities are rarely monopolies;  instead, they are one
(generally the largest) player among several competitors in a
given sector.  Since 1986, the government has begun
privatization of many entities, including telecommunications,
the national electricity company, the national airline and the
government shipping firm.  The Penang Port, the government
Medical Stores and the government motor pool have already been
earmarked for privatization.

    Malaysia encourages direct foreign investment, particularly
in export-oriented manufacturing and products of higher
technology.  Multinational corporations control a substantial
share of the manufacturing sector.  U.S. and Japanese firms
dominate the production of electronic components (Malaysia is
the world's third largest producer of integrated circuits),
consumer electronics, and electrical goods.  Foreign investors
also play an important role in petroleum, textiles, vehicle
assembly, steel, cement, rubber products, and electrical
machinery.

    Fiscal Policy:  The government operates a prudent and
conservative fiscal policy, with a surplus in its operating
account.  With the intention of improving the investment
climate, the government reduced the corporate income tax by two
percent from 34 percent to 32 percent in the 1994 budget.

    This tax will be further reduced to 30 percent the 
following year.  In addition, the government extended and
increased the rate of reinvestment allowance from 40 percent to
50 percent for all companies for an indefinite period.

    Monetary Policy:  Malaysian monetary policy is aimed at
controlling price increases while providing adequate liquidity
to stimulate economic growth.  Monetary aggregates are
controlled by the Central Bank through its influence over
interest rates in the banking sector, open market operations
and, occasionally, changes in reserve requirements.


2.  Exchange Rate Policy

    Malaysia has a substantially open foreign exchange regime. 
The Malaysian currency, the ringgit (MR), floats against the
U.S. dollar.  Bank Negara (the Central Bank) does not
specifically peg the ringgit, but does intervene in the foreign
exchange market to smooth out fluctuations and discourage
speculation in ringgit.  It generally tracks the ringgit's
value against a trade-weighted basket of currencies in which
the U.S. dollar has a large weighting.  Bank Negara's stated
policy is to maintain a stable exchange rate which reflects the
currency's true underlying value rather than to manipulate the
rate to boost exports.  Following a three-year period when the
dollar-ringgit rate traded in a narrow range (MR2.70-MR2.75 per
US$), the ringgit rose rapidly during the first two months of
1992 to MR2.50 per US$, and then again settled in a narrow
range around 2.55.

    Payments, including repatriation of capital and remittance
of profits, are freely permitted.  Payments to countries
outside Malaysia may be made in any foreign currency other than
the Israeli shekel.  No permission is required for payments in
foreign currency up to MR10,000 (approximately US$3,984). 
Individual foreign exchange transactions above RM10,000 require
an exchange control license.  For transactions up to RM10
million (US$3.9 million), the license is obtained upon
completion of a simple reporting form.  This form can be
approved by any commercial bank without reference to the
controller of foreign exchange (part of Bank Negara) provided
certain conditions are met.  An individual transaction in
excess of MR10 million requires the approval of the controller.


3.  Structural Policies

    Pricing policies:  Most prices in Malaysia's economy are
market-determined but the government controls prices of some
key goods, notably fuel, public utilities, motor vehicles,
rice, flour, sugar and tobacco.  Tariffs overall average about
ten percent on a trade weighted basis and import licenses are
required only for a small range of sensitive items.  In 1993,
the federal government lowered or eliminated tariffs on over
600 items in an attempt to defuse domestic inflation, and will
take similar action for the same reason on over 500 items in
1994.  In the agricultural sector, however, restrictive tariffs
and non-tariff barriers distort trade to a certain extent.  For
example, the government sets above-world-market farm gate
prices for rice and tobacco to encourage domestic production
and to boost depressed rural incomes.  Despite this price 
incentive, the government must import large quantities of rice
and use the profits from reselling the cheaper imports to
offset losses from the sale of domestic rice at retail prices
that are fixed below domestic farm prices.  In the case of
tobacco, the government presses cigarette manufacturers to use
a higher proportion of locally grown tobacco.  Imports of
tobacco are restrained by high import duties and controlled by
the government via the issuance of import licenses.

    Tax policies:  Income taxes, both corporate and individual,
are the largest single source of revenue for the government
accounting for 39.5 percent of government revenue in 1993. 
Indirect taxes, comprising export and import duties, excise
taxes, sales taxes, service taxes and other taxes accounted for
35 percent of government revenue in 1993.  The remainder of
government revenue comes largely from profits of state-owned
enterprises and the petroleum tax.  As of 1994, the government
will reduce the income tax rate on petroleum companies from 45
to 40 percent, and lower the export tax on crude oil from 25 to
20 percent.  Implementation of Malaysia's sales tax effectively
discriminates against imported food products because it is
collected on all imported food at port of entry while competing
domestic foods often escape taxation.  However, the government
stepped up efforts in 1993 to fine domestic producers that
evade sales taxes.

    Regulatory policies:  The government encourages foreign and
local private investment.  Currently, a foreign investor can
hold 100 percent of the equity of a Malaysian subsidiary if it
exports at least half of its output, has at least 50 percent
value-added domestically (or, failing that, has MR50 million --
about US$20 million -- in foreign-funded assets), and does not
produce items that compete with those now being made for the
local market.

    For companies exporting less than 50 percent of output,
foreign equity is generally limited to a 51 percent share. 
Since the mid-1980s foreign investors have been able to buy a
maximum of 30 percent equity in firms in the insurance and
banking sectors.


4.  Debt Management Policies

    Malaysia has one of the best foreign debt profiles in the
non-industrial world.  Malaysia's medium- and long-term foreign
debt is expected to stand at MR47.2 billion (US$18.7 billion)
at the end of 1993, about 28.3 percent of GDP.  Malaysia's debt
service ratio declined from a peak of 18.9 percent of gross
exports in 1986 to 5.7 percent in 1992 and is expected to
decline to 5.2 percent by the end of 1993.


5.  Significant Barriers To U.S. Exports

    High import tariffs on tobacco:  To encourage greater use
of local tobacco in cigarettes and to maintain high domestic
leaf prices, the government levies heavy import tariffs.  The
present import duty for unmanufactured tobacco is MR50 (US$20)
per kilogram, plus five percent ad valorem.  While this policy
reduces significantly leaf imports, the high tariffs appear to
have the greatest impact on the cheaper, lower quality leaf
from suppliers other than the United States.  Since the duty on
imported leaf tobacco does not vary by quality, it is more
economical to import high-grade U.S. leaf to blend with lower
quality domestic tobacco.  In 1992, the government first
proposed an import quota of 1.5 million kilograms for
flue-cured tobacco.  The quota was subsequently raised to 2.5
million kilograms.  In 1993, the government appears to have
relaxed its quota as cigarette manufacturers received approval
for licenses to import all the tobacco they requested-- about
2.92 million kilograms.  Cigarettes are taxed at a rate of
MR162 ($64.8) per kilogram.

    Heavy import duties on certain high value food products: 
Duties for processed and high value products, such as canned
fruit, snack foods, and many other processed foods, range
between 20 and 30 percent.  In the 1994 budget, import duties
on fresh fruit and food items are  reduced to between 10 and 30
percent.

    High import duties on alcoholic beverages:  The tariffs on
all alcoholic beverages remain unchanged in the 1994 budget
(after sharp increases in the 1993 budget).  Duties of wine and
beer remain at MR228 (US$91.2) per decaliter and MR74 (US$29.6)
per decaliter respectively.

    Discriminatory sales tax:  Malaysia's sales tax is a single
stage tax levied on locally produced goods ex-factory and on
imported goods at the point of entry, rather than at the retail
level as in the United States.  Some foodstuffs are exempted.

    Ban on imports of chicken parts:  In 1983, the government
effectively closed Peninsular Malaysia to imports of chicken
parts by ceasing to issue veterinary import permits.  The ban
was implemented because the European Economic Community
allegedly was dumping chicken parts into the Malaysian market. 
Until January of 1991, the East Malaysian states of Sabah and
Sarawak maintained separate import regimes for poultry products
which permitted the import of U.S. chicken.  Now, however,
similar bans have been implemented in those states as well. 
Since the implementation of the ban, a significant domestic
poultry industry has developed and Malaysia now exports
relatively large quantities of live poultry and poultry meat to
countries such as Singapore and Japan.

    Discriminatory rice import policy:  Because subsidized
local production satisfies only part of domestic demand, the
National Rice Authority (LPN) imports substantial quantities of
rice.  LPN is also the sole legal importer of rice.  Purchases
generally are made on the government-to-government basis
characteristic of some other Asian countries, notably
Thailand.  This government-to-government transaction structure
places private U.S. suppliers at a considerable disadvantage. 
A proposal to "corporatize" LPN is still being considered after
years of debate.

    Import licenses:  Malaysia makes limited use of import
licensing.  In the few sectors subject to licenses, i.e.,
requiring approved permits, U.S. exports have not been
significantly impaired.  Some technical licenses (e.g., for 
electrical products and telephone equipment) exist, but they
are administered fairly and do not appear to constitute
non-tariff barriers.

    Services barriers:  Malaysia protects most service
sectors.  Foreign lawyers, architects, etc., are generally not
allowed to practice in Malaysia.  Television advertisements
must be largely produced in Malaysia with Malaysian performers
unless an exception is obtained.  However, wholly-owned U.S.
travel agencies, air courier services, motion picture and
record distribution companies are permitted.

    Financial services:  Banking, insurance and stockbroking
are all subject to government regulation which limits foreign
participation.  Local as well as foreign banks are currently
not permitted to open new branches or establish off-site
automated teller machines.  Foreign-controlled companies are
required to obtain 60 percent of their local credit from local
banks.  Despite these restrictions, foreign banks account for
more than 25 percent of commercial bank assets.  No new
insurance or banking licenses are being granted.  Foreign
shareholdings in insurance companies are limited to 30 percent
without government approval.  However, the two largest
insurance companies are 100 percent foreign owned (one
American) and dominate the life insurance market, but there are
pressures on these firms to divest.  The government has
announced that foreigners may hold up to 49 percent of the
equity of a stockbroking firm and said it would consider
requests for majority foreign ownership.

    Standards:  Malaysia has extensive standards and labelling
requirements, but these appear to be implemented in an
objective, nondiscriminatory fashion.  Food product labels must
provide ingredients, expiration dates and, if imported, the
name of the importer.  Electrical equipment must be approved by
the Ministry of International Trade and Industry,
telecommunications equipment must be "type approved" by the
Department of Telecommunications.  Pharmaceuticals must be
registered with the Ministry of Health.  In addition, the
Standards and Industrial Research Institute of Malaysia (SIRIM)
provides quality and other standards approvals.

    Government procurement:  Malaysian government policy
requires counter-trade provisions on government tenders above
MR1 million.  Below MR1 million, counter-trade is welcomed and
even encouraged, but not required.  (Most government tenders
require that counter-trade be offered as an alternative.) 
Incentives exist for local procurement.  Many smaller civil
construction projects (MR50 million or less) are restricted to
local firms.


6.  Export Subsidy Policies

    Malaysia offers several export subsidies.  The most
important is the Export Credit Refinancing (ECR) scheme
operated by the Central Bank.  Under the ECR, commercial banks
and other lenders provide financing to exporters at an interest
rate of seven percent.  The government offers low-cost
(subsidized) export credit schemes designed for developing 
countries importing Malaysian palm oil.  So far, only Pakistan
and Algeria have signed agreements for credit facilities of
$150 million and $50 million, respectively.

    Malaysia also provides tax incentives to exporters,
including double deduction for expenses for:

-  overseas advertising and travel;
-  supply of free samples abroad;
-  promotion of exports;
-  maintaining sales offices overseas; and,
-  export market research.


7.  Protection of U.S. Intellectual Property

    Malaysia is a member of the World Intellectual Property
Organization and, as of October 1, 1990, the Bern Convention
for the Protection of Literary and Artistic Works and the Paris
Convention for the Protection of Industrial Property.

    The Trade Description Act of 1976, the Patent Act of 1983,
the Copyright Act of 1987, and the Copyright (Amendment) Act of
1990 have greatly strengthened protection for intellectual
property in Malaysia.  Under the Copyright (Amendment) Act of
1990 - and the accompanying accession to the Bern Convention-
Malaysia now provides copyright protection to all works (inter
alia video tapes, audio material, and computer software)
published in countries that are members of the Bern Convention
regardless of when the works are first published in Malaysia.

    Patents registered in Malaysia generally have a duration of
15 years but may have a longer duration under certain
circumstances.  A person who has neither his domicile nor
residence in Malaysia may not proceed before the patent
registration office or institute a suit except through a local
patent agent.  With regard to trademarks, "where any person has
registered or applied for protection of any trademark in any
foreign state designated by the Malaysian government, such
person shall be entitled to registration of this trademark in
Malaysia provided that application for registration is made
within six months from the date of registration in the foreign
state concerned."  Trademark infringement is not a problem in
Malaysia for U.S. companies.  Patent protection is also good.


8.  Worker Rights

    a.   Right of Association

    Unions may organize work places, bargain collectively with
an employer, form federations, and join international
organizations.  The Trade Unions Act's definition of a trade
union restricts it to representing workers in a "particular
trade, occupation, or industry or within any similar trades,
occupations, or industries."  The Director General of Trade
Unions has considerable latitude in deciding whether or not to
register a trade union, and the power to withdraw the
registration of a trade union.  A trade union for which
registration has been refused, withdrawn or cancelled is
considered an unlawful association.  Strikes are legal and 
relatively few (12 strikes in the first half of 1993).  
Government policy limits the formation of unions in the
electronics sector to in-house unions.

    In 1993 the AFL-CIO filed a petition to remove GSP benefits
from Malaysia.  Issues raised in the petition are being
evaluated in light of information provided by the Government of
Malaysia in order to assess whether a full review is
warranted.  As yet, no determination has been made on whether
the petition will be accepted.

    b.   Right to Organize and Bargain Collectively

    Collective bargaining is the norm in Malaysian industries
where workers are organized.  Malaysia's system of conciliation
and arbitration seeks to promote negotiation and settlement of
issues without industrial action.  Malaysian law, especially
the Industrial Relations Act, effectively restricts collective
bargaining rights through compulsory arbitration.  Enterprises
granted "pioneer" status are protected from union demands for
terms of employment exceeding those specified in the Employment
Act of 1955 during the period of their pioneer status (normally
five years).  The restriction does not apply to wages or
benefits not covered by the Employment Act.

    c.   Prohibition of Forced or Compulsory Labor

    Malaysia adheres to International Labor Organization (ILO)
Convention 29 prohibiting forced or compulsory labor.  Malaysia
has effective legal sanctions against such abuses.  The ILO has
in the past criticized Malaysia for laws dating from the
pre-independence period that require prisoners and Internal
Security Act (ISA) detainees to work.  Malaysia states that its
current constitution, which prohibits forced labor, takes
precedence over these individual outdated laws.  In reaction to
ILO criticism, Malaysia renounced ILO Convention 105 on forced
labor.

    d.   Minimum Age for Employment of Children

    Employment of children is covered by the Children and Young
Persons (Employment) Act of 1966, which stipulates that no
child under the age of 14 may be engaged in any employment
except light work in a family enterprise or in public
entertainment, work performed by the government in a school or
training institution, or employment as an approved apprentice. 
Effectively enforced laws prohibit children from working more
than six hours per day, more than six days per week, or at
night.

    e.   Acceptable Conditions of Work

    The Employment Act of 1955 sets working conditions, most of
which are at least on a par with standards in industrialized
countries.  Minimum standards of occupational health and safety
are set by law and enforced by the Ministry of Human
Resources.  Other laws provide for retirement programs and
disability and workman's compensation benefits.  No
comprehensive national minimum wage legislation exists, but
certain classes of workers are covered by minimum wage laws. 
By local standards, Malaysian wages and benefits provide a
decent standard of living for workers and their families. 
Plantation and construction work is increasingly being done by
contract foreign workers.  Working conditions for contract
workers often are significantly below those of direct hire
workers.  In addition, many of the immigrant workers,
particularly illegal ones, may not have access to Malaysia's
system of labor adjudication.  The Malaysian government has
moved to legalize illegal immigrant workers in plantations,
largely to prevent the exploitation of these workers.

    f.   Rights in Sectors with U.S. Investment

    The largest U.S. investment in Malaysia is in the petroleum
sector.  Exxon has two subsidiaries operating in Malaysia. 
Esso Production Malaysia Incorporated (EPMI), which is 100
percent owned by Exxon, handles offshore oil and gas
production.  Esso Malaysia, which is 65 percent owned by Exxon
and 35 percent by a range of Malaysian individuals and
institutions, refines and markets oil products in Malaysia. 
Employees at both companies are represented by the National
Union of Petroleum and Chemical Industry Workers (NUPCIW),
which has negotiated collective agreements with management. 
Some EPMI employees have broken away from the NUPCIW and formed
a separate in-house union.  Pay and benefits at both companies
are well above the Malaysian norm.

    The second largest concentration of American investment in
Malaysia is in the electronics sector, especially the
manufacture of components, such as semiconductor chips and
various discrete devices.  (Electronic components are
Malaysia's largest single manufactured export.)  Wages and
benefits are among the best in Malaysian manufacturing. 
Fifteen American electronic components manufacturers operate 19
plants in Malaysia, employing more than 37,000 Malaysian
workers.  None of the American-owned electronics plants is
unionized.

    Although there is no legal prohibition against organizing
unions in the electronics industry, government policy
effectively discouraged any unionization in this sector until
1988.  Malaysian trade union law limits a union to organizing
workers in a single industry or related industry.  The Director
General of Trade Unions ruled in the 1970s that the Electrical
Industry Workers Union (EIWU) could not organize workers in the
electronics sector, as the two industries are different.  Other
attempts to organize a national union for the electronics
industry failed on similar grounds during the 1980s.

    In September 1988, the government announced that it would
permit in-house unions to be organized in the electronics
sector.  A National Electronics Industry Workers Union (NEIWU)
was formed, but was denied registration on the grounds that it
sought to represent workers in both the electronics and
electrical industries.  The government registered several
in-house unions in the electronics sector during the late 1980s
and early 1990s.  At present, workers at six non-American
electronics companies are represented by in-house unions.


         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (Millions of U.S. dollars)

Category                                    Amount

Petroleum                                               513
Total Manufacturing                                     747
    Food & Kindred Products                     9
    Chemicals and Allied Products              77
    Metals, Primary & Fabricated                6
    Machinery, except Electrical             -125
    Electric & Electronic Equipment           654
    Transportation Equipment                    0
    Other Manufacturing                       126
Wholesale Trade                                         106
Banking                                                  91
Finance and Insurance                                   233
Services                                                  1
Other Industries                                         23

TOTAL ALL INDUSTRIES                                  1,714


(D)-Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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