Malaysia. Country Profile 2007

Country Profile 2007 Malaysia This Country Profile is a reference work, analysing the country s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit s Country Reports analyse current trends and provide a two-year forecast. The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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THE PHILIPPINES Balabac Strait Sematan Kuching Sibu Simanggang Balambangan Banggi SOUTH CHINA SEA Kudat SULU SEA Kota Kinabalu Ranu Sandakan Miri BRUNEI Labuan Is. Brunei Bay Beaufort Tenom SABAH Lahad Datu R a g n e Tawau Semporna C r o c k e r PERLIS Alur Setar Kangar THAILAND KEDAH Tumpat Kota Baharu SOUTH CHINA SEA PENANG Georgetown Parit Buntai Perai Taiping Batu Gajah Teluk Anson Bagan Datuk PERAK Ipoh Tapah KELANTAN Kuala Kerai MALAYSIA Kuala Lipis TERENGGANU PAHANG Kuala Terengganu Dungun Chukai Kuantan Strait of Malacca SELANGOR Petaling Jaya Kelang Temerloh aya KUALA LUMPUR NEGERI SEMBILAN Putrajaya Seremban Segamat MALACCA Melaka JOHOR Muar Kluang Mersing Tioman Is. INDONESIA Batu Pahat Johor Baharu SINGAPORE 0 km 100 200 0 miles 50 100 150 0 km 100 200 300 0 miles 50 100 150 The Economist Intelligence Unit Limited 2007 Main railway Main road International boundary Administrative boundary Main airport Capital Major town Other town November 2007 Bintulu CELEBES SEA SARAWAK INDONESIA

Comparative economic indicators, 2006 Gross domestic product (US$ bn) Gross domestic product per head (US$ '000) South Korea Singapore Taiwan Hong Kong Indonesia South Korea Thailand Taiwan Hong Kong Malaysia Malaysia Thailand Singapore Indonesia Philippines Philippines Vietnam Vietnam 0 200 400 600 800 1,000 Sources: Economist Intelligence Unit estimates; national sources. 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Sources: Economist Intelligence Unit estimates; national sources. Vietnam Gross domestic product (% change, year on year) Indonesia Consumer prices (% change, year on year) Singapore Vietnam Hong Kong Philippines Malaysia Thailand Indonesia Malaysia Philippines South Korea Thailand Hong Kong South Korea Singapore Taiwan 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Sources: Economist Intelligence Unit estimates; national sources. Taiwan 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Sources: Economist Intelligence Unit estimates; national sources. Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 1 Contents Malaysia 3 Basic data 4 Politics 4 Political background 6 Recent political developments 9 Constitution, institutions and administration 10 Political forces 12 International relations and defence 15 Resources and infrastructure 15 Population 16 Education 16 Health 17 Natural resources and the environment 18 Transport, communications and the Internet 19 Energy provision 20 The economy 20 Economic structure 21 Economic policy 23 Economic performance 25 Regional trends 26 Economic sectors 26 Agriculture 27 Mining and semi-processing 28 Manufacturing 29 Construction 29 Financial services 31 Other services 32 The external sector 32 Trade in goods 33 Invisibles and the current account 34 Capital flows and foreign debt 34 Foreign reserves and the exchange rate 36 Regional overview 36 Membership of organisations 38 Appendices 38 Sources of information 39 Reference tables 39 Population 39 Labour force 40 Transport statistics 40 Energy production The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

2 Malaysia 41 Consolidated public-sector finances 41 Money supply 41 Interest rates 42 Gross domestic product 42 Real gross domestic product by expenditure 43 Gross domestic product by sector 43 Prices and earnings 43 Minerals production 44 Manufacturing production 44 Banking statistics 44 Stockmarket indicators 45 Main composition of trade 45 Main trading partners 45 Balance of payments, IMF series 46 External debt, World Bank series 46 Official development assistance 47 Foreign reserves 47 Exchange rates Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 3 Malaysia Basic data Total area Population Main towns Climate Weather in Kuala Lumpur (altitude 39 metres) Languages Measures 330,113 sq km 27.2m (2007 mid-year government estimate) Population in!000 (2004) Kuala Lumpur (capital) 1,580 Johor Baharu 724 Klang 632 Ipoh 624 Petaling Jaya 476 Tropical Hottest months, April and May, 23-33 C (average daily minimum and maximum); coldest month, December, 22-32 C; driest month, July, 99 mm average rainfall; wettest month, April, 292 mm average rainfall Malay (the official language); main other languages: Chinese (Min Nan, Hakka, Mandarin and Min Dong), English, Tamil, Iban (in Sarawak), Banjar (in Sabah). There are 140 languages spoken in Malaysia (peninsular Malaysia 40, Sabah 54, Sarawak 46) Malaysia uses the metric system but some British weights and measures are still in use. Local measures include: 1 pikul=25 gantang=100 katis=60.48 kg 1 koyan=40 pikul=2.419 tonnes Currency Time Public holidays, 2007 Ringgit or Malaysian dollar (M$, or RM)=100 sen (cents). Average exchange rates in 2006: M$3.67:US$1; M$6.75: 1. On July 21st 2005 the central bank abandoned the fixed exchange-rate system, which pegged the ringgit to the US dollar at M$3.8:US$1, for a managed float against a trade-weighted basket of currencies. Exchange rates at end-october 2007: M$3.35:US$1; M$6.87: 1 Peninsula: 7 hours ahead of GMT; Sabah and Sarawak: 8 hours ahead of GMT January 1st (New Year!s Day); January 20th (Awal Muharam); February 18th and 19th (Chinese New Year); March 31st (the Prophet Mohammed s birthday); May 1st (Labour Day); May 31st (Vesak day); June 5th (the king s birthday); August 31st (National Day); October 13th and 14th (Hari Raya Puasa); November 9th (Deepavali); December 20th and 21st (Hari Raya Qurban); December 25th (Christmas Day) The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

4 Malaysia Politics Fundamental to the understanding of Malaysia s political development is an appreciation of its geographical, ethnic and cultural diversity. Political parties are largely based on ethnicity, locality or religion. Basic themes of post-war political history are the maintenance of racial harmony, positive discrimination in favour of the bumiputera ( sons of the soil "ethnic Malays and other indigenous peoples) and friction between Islamic parties and the government. Since independence in 1957, Malaysia has been ruled by coalition governments dominated by the principal Malay party, the United Malays National Organisation (UMNO). Political background Malaysia under British influence British colonial policy was the major formative influence on Malaysia. From the late 18th century, British influence was gradually extended across the Malay peninsula and North Borneo. The colonial administration encouraged (and sponsored) the arrival of immigrants from southern China and southern India to work in tin mines and on rubber plantations. As the region developed into a commodity exporter, it remained administratively fragmented, with internal government largely under local control. By the 1930s, Malaysia consisted of the Straits Settlements (Malacca, Penang and Singapore), the Federated Malay States (Selangor, Perak, Negeri Sembilan and Pahang) and the unfederated states (Kedah, Perlis, Kelantan, Terengganu and Johor), as well as North Borneo (Sabah) and Sarawak. After the second world war, the restored British colonial system sought to create a more integrated territory, a more cohesive society and a stronger central government. The ethnic Chinese were in the majority on the Malayan peninsula, including Singapore. The new Malayan Union (1946-48) soon collapsed as a result of opposition from the Malay rulers to a loss of sovereignty and proposed citizenship for non-malays. Relations between the different ethnic groups, especially between the Malays and the Chinese, have remained a highly sensitive issue in Malaysian political life. After the second world war, many of the ethnic Chinese sympathised with the communist revolution in China. A guerrilla war was started by the largely ethnic-chinese Malayan Communist Party, leading to the declaration of a state of emergency in 1948, which did not officially come to an end until 1960. One of the measures used by the colonial regime to suppress the insurrection was detention without trial, a practice that successive Malaysian governments have continued to employ. The emergency was to cast a long shadow over Malaysian politics. Independence was proclaimed in 1957 Rapid progress towards full independence"which was proclaimed in 1957"and the establishment of democracy in a pluralist society formed part of the anti-insurgency strategy. The successor of the Malayan Union, the Federation of Malaya (1948-63), passed some powers back to the states. Singapore, with its largely Chinese population, was excluded from both arrangements. The Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 5 political framework that emerged reflected Malaysia s ethnic variety. UMNO was formed in 1946, and the Malaysian Chinese Association and the Malayan Indian Congress were founded in 1949. These three parties formed the Alliance in 1952 and have remained the core of post-independence governments. The Federation of Malaysia was formed in 1963 The 1969 race riots were a political watershed British decolonisation policy continued to shape the country after independence. Sarawak, Sabah and Singapore were added to the peninsula-based federation in 1963 to form a new Federation of Malaysia, with the North Borneo territories offsetting the preponderance of ethnic-chinese citizens resulting from Singapore s membership. Brunei refused to join the federation because of a disagreement over the position of the sultan and the control of oil resources. When Singapore withdrew from the federation in 1965, there was a decisive switch in political power towards the ethnic Malays and the central government in Kuala Lumpur. Losses for UMNO in the 1969 general election stirred up anti-chinese sentiment and provoked serious race riots, in which many Chinese were killed. The riots were a political and economic turning point. In the crisis that followed, parliamentary government was suspended for 21 months. The Alliance that had ruled since independence was replaced by a broader-based coalition, the Barisan Nasional (BN, National Front). With minor changes in its composition, the BN has ruled Malaysia ever since. After the riots the BN government instituted a 20-year New Economic Policy (NEP), a programme of positive discrimination aimed at reducing interracial tensions by improving the incomes and economic weight of the bumiputera. The National Development Policy (NDP), which followed the NEP after 1990, relaxed some of the positive discrimination measures that favoured the bumiputera. An extended period of strong economic growth until 1998 made it possible to raise the status of the bumiputera and avoid serious intercommunal conflict. A decisive shift towards more authoritarian government occurred in 1987, when there was a serious split in UMNO in which Mahathir Mohamad, who had been party president and prime minister since 1981, nearly lost power. Dr Mahathir responded by consolidating his power within UMNO and making it difficult to challenge an incumbent leader. In response to the government losing a number of cases in the High Court, the constitution was changed, and by 1988 the judiciary had been stripped of much of its independence, leaving little check on the government s exercise of power. Decision-making became highly concentrated around Dr Mahathir and an expanded prime minister!s department. The 1997-98 Asian crisis leads to calls for political reform The 1997-98 Asian financial crisis plunged Malaysia into a severe economic downturn, but also exposed corruption within UMNO. Calls for political reform and a change in leadership intensified, especially among younger UMNO politicians. The deputy prime minister, Anwar Ibrahim, became the focal point of the reformasi (reform) movement. In September 1998 Mr Anwar was dismissed from the government, expelled from UMNO and later jailed for a total of 15 years on charges of obstruction of justice, sodomy and corruption. The dubious treatment of Dr Mahathir s heir-apparent upset UMNO s The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

6 Malaysia traditional supporters. In the November 1999 general election, UMNO lost its Malay majority but the BN nonetheless retained its two-thirds majority in parliament, owing to the continued support of the ethnic Chinese. The main beneficiary was the conservative Malay-based Islamic party, Parti Islam sa- Malaysia (PAS). Creeping Islamisation begins to divide the nation To counteract the influence of PAS, UMNO stepped up its policy of favouring and promoting Islam. The position that only sharia courts can decide about Islamic issues was enshrined in the constitution in 1988. In September 2001 Dr Mahathir declared that Malaysia was already an Islamic state, reacting to the pledge made by PAS to set up an Islamic state should it gain power. The constitution only gives Islam the status of official religion and grants freedom to practise one!s religion. Sharia law continued to encroach steadily upon the civil area, upsetting non-muslims, who form some 40% of the population, and many progressive Malays. Although there was a crackdown on Islamist extremism after the September 11th 2001 terrorist attacks on the US, the war in Iraq has helped to boost Islamisation. Recent political developments Dr Mahathir retired in October 2003, after 22 years of strong leadership as prime minister and UMNO president. His successor, Abdullah Badawi, called an election on March 21st 2004. The polls were preceded by anti-corruption measures and promises of further action that attracted strong public approval. The BN gained a spectacular election victory, winning nine-tenths of the available 219 parliamentary seats, the coalition s best-ever result. UMNO recovered the majority support of Malay voters, while PAS lost control of the state of Terengganu. Mr Abdullah proves to be a weak leader Religious and racial tensions rise Mr Abdullah failed to build a strong power base after his election victory. His leadership has been weak and policy has drifted. Many of the prime minister!s candidates for key posts within UMNO were defeated at the first post-election party congress in 2004, which was heavily tainted by bribery. A further sign of Mr Abdullah!s weakness was UMNO!s vote in July 2005 to strengthen the bumiputera policies. Another example of Mr Abdullah!s weak leadership came in November 2006, when he failed to halt the display of racism and Islamic zeal at the party congress, which upset the Chinese and Indian parties, the two senior partners of the BN. The fight against corruption has been an empty promise: no high-level politicians or civil servants have been prosecuted. While more tolerant of dissent and criticism, Mr Abdullah has been unable to control growing religious and racial tensions. Creeping Islamisation, religious intolerance and racial prejudice alarmed non-muslim ministers in the BN cabinet to such an extent that, in an unprecedented move, they called on the prime minister in January 2006 to defend the rights of the religious minorities. However, the request was withdrawn after loud protests from Malay and Islamic organisations and the media. During 2006 the government began to tighten its control over the media, especially on subjects such as Islam and race. Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 7 In mid-2007 it clamped down on Internet critics, who regularly expose corruption scandals in government circles. Dr Mahathir!s mounting dissatisfaction with his successor finally led in August 2006 to a call for his replacement. Divisions deepened with revelations of past and present scandals. Dr Mahathir!s challenge threw UMNO into disarray but Mr Abdullah, with his powers of incumbency, was never at risk. Dr Mahathir!s failing health also cut short his campaign. Parliamentary forces (no. of seats) 1995 1999 2004 Barisan Nasional (BN, National Front) 162 148 198 United Malays National Organisation (UMNO) 88 71 109 Malaysian Chinese Association (MCA) 30 29 31 Malaysian Indian Congress (MIC) 6 7 9 Gerakan Rakyat Malaysia (GRM) 7 6 10 People s Progressive Party (PPP) 0 0 1 Parti Pesaka Bumiputera Bersatu (PBB) 13 10 11 Sarawak United Peoples Party (SUPP) 6 8 6 Parti Bansa Dayak Sarawak (PBDS) 4 6 6 Sabah Progressive Party (SAPP) 0 2 2 Parti Bersatu Sabah (PBS)a 4 Liberal Democratic Party (LDP) 0 1 Parti Bersatu Rakyat Sabah (PBRS)b 1 Sarawak National Party (SNAP)c 4 4 United Pasokmomogun Kadazandusan Murut Organisation (UPKO)b 4 3 4 Sarawak Progressive Democratic Party (SPDP)d 4 BN Direct 0 1 0 Oppositione 42 20 Parti Islam sa-malaysia (PAS) 7 27 7 Keadilan PRMf 5 1 Democratic Action Party (DAP) 9 10 12 Parti Bersatu Sabah (PBS)a 8 3 Parti Melayu Semangat 46 (S46)g 6 Independent 0 0 1 Total 192 193 219 a PBS rejoined the BN in 2001. b UPKO and PBRS are splinter parties of PBS, which left the BN in 1990. c SNAP was forced to leave the BN in 2002. d SPDP was formed by former SNAP members. e PAS, DAP and Keadilan contested the 1999 as a coalition, the Barisan Alternatif (BA); DAP left the BA in September 2001. f The Parti Keadilan Nasional merged in December 2002 with Gerakan Rakyat Malaysia (GRM). g Reunited with UMNO in 1996. Source: The Star. The DAP is the largest opposition party The last election had a devastating effect on the opposition alliance, the Barisan Alternatif (BA, Alternative Front), which consists of PAS and the Parti Keadilan Rakyat (PKR), the party led by Wan Azizah Ismail, the wife of the former deputy prime minister, Anwar Ibrahim. The mainly ethnic-chinese left-wing DAP"which left the BA in September 2001, protesting at the intention of PAS to found an Islamic state"became the largest opposition party. Mr Anwar was released from prison in September 2004, after his conviction for sodomy was quashed, but did not return fully to national politics until April 2007. In May 2007 he had to withdraw from the election for PKR president, after the The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

8 Malaysia government threatened to send him back to jail. Owing to an earlier conviction for corruption, Mr Anwar is disqualified from standing for public office until April 2008. It is widely assumed that a general election will be called before that date. Important recent events October 2003 Mahathir Mohamad retires after 22 years of strong leadership and is succeeded by his deputy, Abdullah Badawi. March 2004 The Barisan Nasional (BN, National Front) wins its largest-ever election victory with an anti-corruption agenda, thrashing the Parti Islam sa-malaysia (PAS), which loses control of Terengganu, and reducing the Parti Keadilan Rakyat (PKR) to a single seat. September 2004 The High Court overturns the conviction for sodomy of the former deputy prime minister, Anwar Ibrahim, who is set free after serving nearly six years for corruption. Corruption thrives at the United Malays National Organisation (UMNO) party elections, in which many of Mr Abdullah!s candidates are defeated. July 2005 UMNO s annual congress votes to renew the system of Malay privileges; Mr Abdullah plays down its significance to his non-bumiputera coalition partners. January 2006 Non-Muslim ministers in the BN cabinet call on Mr Abdullah to defend the rights of religious minorities. August 2006 Dr Mahathir calls on UMNO to replace Mr Abdullah as party leader. November 2006 The televised UMNO general assembly shocks the other BN parties with its display of racism and Islamic zeal, threatening violence if they dared question the special status of Islam and Malays. April 2007 The former deputy prime minister, Anwar Ibrahim, returns to national politics. But after threats that he might be jailed, Mr Anwar pulls out of the election for president of the opposition PKR, leaving the party in disarray. August 2007 Malaysia celebrates 50 years of independence amid displays of national unity. Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 9 Constitution, institutions and administration A federal constitutional monarchy The federal parliament The states executive councils The independence of the judiciary has been curbed Islam is the official religion Malaysia is a federal, constitutional monarchy within the Commonwealth. The federation consists of 13 states (11 in peninsular Malaysia, plus Sarawak and Sabah). In addition, there are three federal territories"kuala Lumpur, Labuan island, and the federal administrative capital, Putrajaya. The position of king (yang di-pertuan agung, meaning supreme ruler ) is largely ceremonial and is rotated every five years. The nine-strong Conference of Rulers of the states of the peninsula, excluding Malacca and Penang (the sultans of Kedah, Perak, Johor, Selangor, Pahang, Terengganu and Kelantan; the yang dipertuan besar, or supreme minister, of Negeri Sembilan; and the raja of Perlis) elects one of its number to serve as king. Each ruler is also the leader of the Islamic faith in his state. The federal parliament consists of an upper chamber, the Senate or Dewan Negara (Council of the Nation), which has 70 members, 44 of whom are appointed by the king and 13 pairs are elected by the state legislatures, and a lower chamber, the House of Representatives or Dewan Rakyat (Council of the People), directly elected by universal suffrage, with 219 seats. The lower house has long been a rubber stamp for the BN, and little real debate on draft legislation or issues takes place there. Although Mr Abdullah has introduced measures to stimulate greater parliamentary participation, little has changed. Each of the 13 states in the Federation has an Executive Council dealing with non-federal matters under a menteri besar (chief minister), who is answerable to elected state assemblies. The constitutional head of each state government is either one of the traditional rulers or (in Penang, Malacca, Sabah and Sarawak) a state governor appointed by the king on the advice of the federal government. Federal territories are administered directly by the federal government. The Malaysian judicial system still resembles the UK system inherited from the colonial period. The independence of the judiciary was effectively curbed by Dr Mahathir in 1987-88 in response to a court ruling declaring the April 1987 UMNO leadership elections invalid. The High Court was stripped of the power of judicial review and the separation of executive and judicial power was terminated. Judges were given a code of conduct, the breaching of which could result in dismissal. In the years that followed the powers of the executive were increased further. The legal framework leaves little room for the judiciary to reassert its independence. The acquittal of Mr Anwar, on the charge for sodomy, in September 2004 did not mark a willingness by Mr Abdullah to allow the judiciary greater independence. In September 2001, to counter criticism from PAS, Dr Mahathir stated that Malaysia was already an Islamic state. This raised fear among the non- Muslim 40% of the population and remained a controversial subject. The constitution says that Islam is the official religion, but other religions are free to be practised. During the past two decades the government has actively promoted and favoured Islam. Islamic or sharia law is enforced at a state rather The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

10 Malaysia than federal level, and applies only to Muslims. Ethnic Malays are by definition Muslim. Apostasy or deviation from the established (Sunni) Muslim faith is likely to be punished by sharia courts. Continuing Islamisation means that conflicts between sharia law and human rights principles, enshrined in the federal constitution, are increasing. Racial discrimination in administration After the May 1969 race riots, the government decided to marginalise Chinese and Indians in the civil and armed services. A few non-malays have been promoted to high ranks of office, but the careers of the majority of non-malays are strictly circumscribed unless they become Muslim. Political forces The BN coalition is dominated by UMNO The opposition is weak and divided Race is the major defining feature of the political system: all major political parties are organised along racial lines. Malaysia has been ruled by coalition governments since independence, but in reality the BN coalition is totally dominated by UMNO and is unlikely to lose power. UMNO controls the Election Commission, which supervises elections and checks electoral rolls, and the redrawing of constituency boundaries. Because of rock-solid support for the BN in Sarawak and Sabah, the BN coalition seems almost impossible to dislodge. UMNO, the party of Malay nationalists in the colonial period, remains the most important of the Malay parties. In the March 2004 election it regained the majority support of the Malay section of the population, which it had lost in the 1999 election. The president of UMNO invariably serves as the prime minister and UMNO members hold the deputy prime minister and key cabinet posts. Elections to the UMNO supreme council determine the leadership succession. The party voting system makes it difficult to challenge an incumbent leader but encourages bribery for other positions. UMNO!s position within the BN coalition is disproportionate to the number of votes it attracts (only 35.9% of votes cast in March 2004). This reflects the subservient position of the Chinese parties (the Malaysian Chinese Association, or MCA, and the Parti Gerakan Rakyat Malaysia, or Gerakan) and the Indian party (Malaysian Indian Congress, or MIC), which goes back to independence in 1957. Chinese and Indian community leaders accepted the notion of Malay special rights and the special status of Islam in exchange for citizenship. PAS is the alternative to UMNO for the Malay population. It is an ultraconservative Islamic party and a haven for Malay protest votes, offering a greater devotion to Islam and possibly also a stronger commitment to Malay nationalism than UMNO. From its inception, PAS has intended to set up an Islamic state and introduce Islamic law. Its intention of creating an Islamic state presents a major obstacle to the building of a coalition of opposition forces. PAS is allied to the PKR in an opposition alliance, the Barisan Alternatif, or BA. The PKR has continued with the political reform agenda that started with the 1998 reformasi demonstrations, but its members have become increasingly disillusioned with their de facto leader, Mr Anwar. After the March 2004 election the PKR was left with only one seat. The left-of-centre, largely ethnic- Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 11 Chinese DAP is the largest opposition party. Although low in parliamentary seats, the opposition gathered 34% of the vote in the 2004 election, down from 40% in 1999. Political structure is fossilised The entitlement of the bumiputera to special rights is laid down in the constitution. UMNO regularly warns other parties not to question Malay special privileges, the position of Islam or relations between the different races; those who do will be accused of sedition. The political system has remained stuck in this mode for over 50 years. But the gap between the races has widened noticeably over the past decade. Residents continue to define themselves in the first place by race, rather than by a Malaysian identity. Key political figures Abdullah Ahmad Badawi Prime minister and president of the United Malays National Organisation (UMNO). Mr Abdullah, an Islamic studies graduate, has had limited success in fighting corruption. Lacking the charisma and strong power base of his predecessor, Mahathir Mohamad, disappointment is growing over his ineffectiveness and failure to fulfil promises. Najib Razak Deputy prime minister and UMNO s deputy president, defence minister and son of a former prime minister. A rival to Mr Abdullah, but political scandals may stop him from challenging the prime minister in the future. Mahathir Mohamad Prime minister and president of UMNO for 22 years until October 2003. He is the principal architect of the economic advancement of the Malay community and the rapid industrial growth of Malaysia. Dr Mahathir became increasingly critical of his successor, but lacked the power to arrange his replacement. Anwar Ibrahim Former deputy prime minister, dismissed in 1998 and jailed for abuse of power and sodomy. Mr Anwar was released in September 2004 after his sodomy conviction was overturned. However, owing to an earlier conviction for corruption he is unable to stand for public office until April 2008. As an advocate of political reform and a possible bridge between UMNO and ultra-conservative Islam, he remains a powerful political influence and a possible future prime minister. Khairy Jamaluddin The son-in-law of the prime minister and deputy head of UMNO Youth, who is believed to control access to Mr Abdullah and the distribution of many government contracts. The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

12 Malaysia International relations and defence Foreign relations have improved under Mr Abdullah Under Mr Abdullah, Malaysia s diplomatic relations have begun to reflect economic interests more closely than under Dr Mahathir, who irritated some Western governments with his controversial opinions. Malaysia remains a champion of the interests of the developing world and a defender of the interests of the Islamic world. Membership of the Association of South-East Asian Nations (ASEAN) remains central to Malaysia s foreign policy. Greater economic integration, through bilateral trade agreements, is also leading to closer relations with its largest trading partners. Malaysia!s relations with Singapore, the US and Australia have warmed notably. Co-operation and an emphasis on mutual interests rather than constant bickering now characterises relations with Singapore, although several longstanding disagreements remain unresolved. Malaysia works closely with the US in the fight against international terrorism but remains critical of US intervention in Iraq. The strongest improvement is in relations with Australia (which Dr Mahathir refused to visit during his tenure as prime minister). Islamic militancy is souring relations with Thailand There is an increasing chance of territorial disputes Malaysia is part of the Five Power Defence Arrangement Relations with Indonesia, Malaysia!s largest provider of foreign labour, are generally good, despite Indonesia!s poor record of dealing with terrorist threats within its borders, illegal immigration and air pollution from forest fires. Islamic militancy among the 3m ethnic Malays in southern Thailand, and the heavyhanded response of the Thai army, continues to sour relations between the two countries. Given the proliferation of trade agreements concluded or being negotiated" either multilaterally in Asia or bilaterally, for instance the free-trade agreement with the US, Malaysia!s largest export market"economic diplomacy is playing a larger role. But growing competition for energy resources in Asia has increased the chances of territorial disputes. Malaysia has border disagreements with Indonesia, Singapore, the Philippines and China. In 2002 Malaysia restarted the modernisation of the armed forces that was derailed by the Asian economic crisis. The intention is to develop an all-round modern conventional capability, with enhanced maritime security, from what was originally a counter-insurgency force. Malaysia, together with Singapore, the UK, Australia and New Zealand, is a member of the Five Power Defence Arrangement, which provides for co-operation and consultation in case of attack. Malaysia co-operates on border security with its neighbours. According to the defence minister, Najib Razak, Malaysia s primary security threat is internal; counter-terrorism and urban warfare capabilities are being developed to deal with violent extremism. In 2004 Malaysia started a limited obligatory national service, although mainly as a nation-building exercise. Defence spending growth is slowing as major equipment purchases are being delivered. Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 13 Military forces, 2007 Malaysia Thailand Indonesia Army Personnel 80,000 190,000 233, 000 Main battle tanks - 333 - Navy Personnel 14,000 70,600 45, 000 Frigates 4 10 12 Submarines - - 2 Air force Personnel 15,000 46,000 24,000 Combat aircraft 63 165 94 Source: International Institute for Strategic Studies, The Military Balance 2007. Security risk The security risk to foreign companies operating in Malaysia is real but moderate. There have been no terror attacks on Malaysian soil and there have been no security scares in recent years. The most serious regional attacks have taken place in neighbouring Indonesia: the bombings in Bali in October 2002, of the Jakarta Marriott hotel in August 2003 and of the Australian embassy in Jakarta in September 2004. A militant Islamist group, Jemaah Islamiah (JI), which is linked to the al-qaida international terror network, has been blamed for the attacks. JI acts as a central coordinator for radical groups across the South-east Asian region, as it works towards its goal of establishing an Islamist state embracing Malaysia, Indonesia, Singapore, Brunei and the southern Philippines. In September 2002 Singapore foiled a series of planned terrorist attacks on foreign targets, private companies and embassies; the terrorists intended to destabilise the governments of Singapore and Malaysia and foment ethnic strife between the Chinese and Malays. During 2004 there were security scares involving the US and Australian embassies in the capital, Kuala Lumpur. During April and May 2006 police in eastern Sabah arrested 12 members, including six Malaysians, of the Indonesia-based militant group, Darul Islam, who were alleged to have links with the Bali bombers. The Malaysian government has blamed Indonesians for inspiring Islamic militancy in Malaysia. However, international investigations of Islamist terrorism have made it clear that for many years Malaysia was considered a safe haven by Islamic extremists. The Malaysian branch of JI is Kumpulan Mujahidin Malaysia (KMM, Malaysian Mujahideen Group). By end-october 2006, 60 Islamic militants were being held under the Internal Security Act, which allows for a two-year detention period that can be renewed indefinitely. To fight terrorism effectively, the countries of the region have begun to co-operate closely, involving the US and Australia. In 2003 a co-ordinating regional counterterrorism centre was opened in Kuala Lumpur. A major concern is the vulnerability to piracy and terrorist attacks of shipping in the Malacca Strait, through which onethird of global trade and one-half of the world s oil supplies pass each year. In July 2004 Singapore, Indonesia and Malaysia started co-ordinated patrols. In July 2006 The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

14 Malaysia Malaysia signed a mutual legal assistance treaty with the US to facilitate criminal investigations, including into corruption and terrorism. Social unrest The major long-term risk to business comes from a return of economic and political conditions that could lead to an outbreak of racial violence. Tensions persist below the surface between the majority Malays, on the one hand, and the minority ethnic Chinese and Indian populations, on the other. In the most serious post-war racial conflict, in 1969, divisions within the Malay majority led to the scapegoating of the ethnic Chinese, hundreds of whom were killed in riots. Any attempt to reduce the privileges of the bumiputera (ethnic Malays and other indigenous peoples) could stoke Malay resentment. An even more sensitive issue is religion; a growing feeling on the part of Muslims that the position of Islam is being undermined may cause unrest. Nonetheless, the short-term risk of large-scale racial violence appears low. Large-scale demonstrations against the government and the ruling United Malays National Organisation (UMNO) were last held in 1998, when the deposed deputy prime minister, Anwar Ibrahim, led reformasi (reform) demonstrations. A prolonged campaign of large-scale public protests is unlikely, even though most traditional means of protest remain blocked. This is in part because of the widespread awareness within Malaysia that it is heavily dependent on foreign direct investment, and the opposition is unlikely to target foreign businesses specifically. Armed conflict The risk of armed conflict affecting business is low. Sporadic Islamist violence has occurred in recent years. There are no no-go areas in Malaysia, and the government remains very much in control of the country. It is unlikely that Islamist extremists could develop the ability to stage an armed conflict. Islamic militancy in southern Thailand, where the population is mainly of Malay origin, poses no direct threat to Malaysian security but strains relations with Thailand. Organised crime Malaysia is, in general, a fairly safe country. Violent crime, kidnapping and extortion are rare, although they have attracted more publicity in recent years. Organised crime is seldom a threat to foreign business. Foreigners are, however, often the target of pickpockets, burglars, car break-ins and purse-snatching. Credit-card fraud is a growing problem. Chinese criminal gangs, or triads, do operate in Malaysia but their activities do not usually attract much publicity. Illegal activities by organised Malaysian groups that are most frequently mentioned by law-enforcement agencies are piracy"the illegal copying and distribution of CDs and DVDs"as well as creditcard counterfeiting and drug trafficking. Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 15 Resources and infrastructure Population The Malaysian population is estimated by the government to have reached 27.2m by mid-2007, up by around 2% compared with the year-earlier period. The annual average rate of growth was 2% in 2003-07, somewhat slower than the 2.5% a year registered in 1998-2002. Around 80% of the population lives in peninsular Malaysia. The rate of growth will continue to be fastest in Malaysia s more developed states. Population, mid-2006 m % of total Total 26.64 100.0 Malaysian 24.80 93.0 Bumiputera 16.40 61.6 Chinese 6.22 23.3 Indian 1.86 7.0 Others 0.32 1.2 Non-Malaysian 1.84 6.9 Age structure 0-14 8.63 32.4 15-64 16.86 63.3 65+ 1.15 4.3 Life expectancy, total (yrs) Male 71.8 - Female 76.3 - Source: Department of Statistics, Yearbook of Statistics 2006. Growth rates vary between the main ethnic groups Rates of population growth vary considerably between the main ethnic groups, probably owing to differences in geographical location, income levels and cultural factors. In 2002-06 the annual average rates of growth of the bumiputera (ethnic Malays and other indigenous peoples), Chinese and Indian communities were 2.3%, 1.3% and 1.5% respectively. The Chinese, long urbanised and enjoying higher average incomes, have smaller families; the Malay urban population is growing, but the majority of families remain in rural areas. Income inequality has increased in recent years, especially within the bumiputera population group; the Gini-coefficient (a key measure of inequality) for Malaysia as a whole rose from 0.452 in 1999 to 0.462 in 2004, but from 0.433 to 0.452 for bumiputera. There remains a significant income disparity between the Chinese and bumiputera. The politically sensitive income disparity ratio stood at 1:1.64 in 2004, slightly lower than the ratio of 1:1.74 recorded in 1999, but this is still high. The income disparity ratio between bumiputera and Indians narrowed from 1:136 in 1999 to 1:1.27 in 2004. Poverty is predominantly rural, concentrated among bumiputera and to a lesser extent Indians. Mean monthly gross household income increased from M$2,472 (US$650) in 1999 to M$3,249 in 2004, an average growth rate of 5.6% a year, according to official data. The mean monthly income of urban households stood at M$3,956 in 2004, and that of rural households at M$1,875. The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

16 Malaysia Malaysia continues to attract immigrant workers Malaysia has, throughout its history, been a country of immigrants. In late 2007 foreign residents numbered 2m or 7.4% of the population, but there were probably another 1m illegal immigrants, attracted to Malaysia by the availability of work. The government, believing illegal immigrants are a threat to public order, organises regular campaigns to expel them. Given Malaysia!s porous borders, corruption among officials and high unemployment, the campaigns have little effect on deterring this type of migration and regularly cause economic disruption. Official plans to reduce the economy!s dependence on low-skilled labour may have more effect in the longer term. Education The government places great emphasis on education, which is the largest item in the federal budget. The aim is to provide a world-class quality education system. Primary education is compulsory for all Malaysian children. Primary and secondary education is free for students aged 7-17 in the public school system (which includes national-type schools teaching in Mandarin and Tamil). Malaysia has a literacy rate of 93%. Over 97% of seven-year-olds are enrolled in the public school system. The private fee-paying sector plays an important role only in higher education. There are public examinations at the end of the primary level (at age 12), the lower secondary level (usually at 17) and the higher secondary level (at 19). Malay and English are compulsory subjects. The matriculation exam at the end of the higher secondary level gives access to Malaysian public universities. In 2005 there were 731,698 students enrolled in 630 private- and public-sector colleges and universities. There were 71 tertiary education institutions in the public sector and 559 in the private sector, but more than 53% of the total number of students attended public institutions. The international rating of Malaysian universities has declined in recent years. Sending pupils abroad was especially popular before the Asian financial crisis, but this has been reduced by twinning arrangements with foreign universities. A large number of private and public colleges also offer vocational and skill-based education and training. State assistance mostly takes the form of soft loans, repayable when students graduate and take paid employment. University entrance is in theory based on merit but is in practice biased towards the children of bumiputera. Employers frequently complain about the low quality of Malay graduates. As a result, science and mathematics have been taught in English since 2003, but this is currently under review. After independence in 1957 the role of English was systematically reduced for Malay-nationalist reasons. Health The public healthcare system is under strain Malaysia provides an integrated and comprehensive system of public and private healthcare services but the system is under serious strain. For many years the government has underfunded public healthcare, which is suffering from long waiting lists and an outflow of senior staff, largely because of low remuneration. The private sector has filled the gap. With greater prosperity and Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007

Malaysia 17 increased demand for medical services, health policy is shifting towards more preventative medicine, tighter cost controls and higher private contributions. The government is considering setting up a national health fund with contrib.- utions linked to different levels of services, while maintaining free access to medical services for the poor, especially in rural areas. There is an extensive network of primary healthcare services. In the public sector there were more than 200 mobile teams, 800 health clinics, 1,900 rural clinics and 122 hospitals across Malaysia in 2005. The total capacity of hospitals stood at 30,121 beds. The private sector has more hospitals (at 222 in 2005), but they are much smaller, with a total of just 10,794 beds. In 2005 the number of registered doctors stood at 20,105, up from 15,619 in 2000, with just over 50% of them working in the public sector. Only a minority of Malaysians are believed to be able to afford private medicine. Clean water, safe food and sanitary disposal of waste are generally available. But there are wide geographical variations: health indicators for Sabah, Sarawak and some predominantly rural states on the Malayan peninsula are well below average. According to national statistics, Malaysia is estimated to have spent around 3.6% of GDP in 2006 on healthcare, divided roughly equally between the government and the private sector. This is low compared with the World Health Organisation!s recommendation of 5-8% of GDP. Growth in government healthcare spending has continued to trail overall public spending. Rather than building more hospitals and clinics, the government is upgrading and enhancing existing services and facilities under the Ninth Malaysia Plan 2006-10 (9MP). The plan envisages large increases in development spending on health facilities in 2007 and especially in 2008. Natural resources and the environment Plantation crops still have an important economic role Malaysia has a tropical climate. Its economic development was dominated by the cultivation of plantation crops, such as natural rubber and palm oil, as well as by tin mining. Malaysia remains an important centre of tin refining, supplementing its declining domestic mine output with imported concentrates. Malaysia is the world!s third-largest natural rubber producer, after Thailand and Indonesia. High commodity prices have bolstered production in the last three years. Malaysia is the world s largest producer of palm oil; output continues to expand as international demand grows for dietary reasons and, in recent years especially, as a substitute for mineral oil. More than half of Malaysia is still covered in tropical forest and swamps. Malaysia remains one of the world s leading producers of tropical saw logs. Controls on tree-felling by loggers continue to be flouted, but output is gradually declining. Controls are now linked to replanting, usually with commercial crops, and forestry resources are, at least in theory, managed on a sustainable basis. The diversity and complexity of Malaysia!s ecosystem is particularly rich. Nonetheless, there has been serious environmental degradation as a result of uncontrolled logging, industrial development, expansion of palm oil plantations and urbanisation. A regular annual occurrence and threat to public health is haze, which is caused by forest fires in Indonesia. The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

18 Malaysia Malaysia still has large reserves of crude oil and gas Crude oil and natural gas are the most important primary products. Both oil and natural gas are extracted from two main areas in the South China Sea, off Terengganu and Sabah. Malaysia is, by international standards, a small producer of crude oil but a large manufacturer of natural gas. According to an industry body based in France, the International Group of Liquefied Natural Gas Importers, Malaysia was the world!s second-largest exporter of liquefied natural gas (LNG) in 2006 after Qatar. At current usage rates, reserves of crude oil will last for 21 years and natural gas for 34 years. The other main minerals produced are copper, iron ore, bauxite, coal and gold. Industrial minerals mined are clay, kaolin, silica, limestone, barite, phosphates and stone. Transport, communications and the Internet Investments in infrastructure have resumed Aggressive expansion of port capacity continues Telecommunications Malaysia s physical infrastructure compares favourably with that of most other countries in the region. Substantial investment during the boom years by the private and public sector was interrupted by the 1997-98 financial crisis. Investment has since resumed and another surge is taking place under the Ninth Malaysia Plan (9MP). By 2005 the national road network stood at 87,025 km. Malaysia has made considerable progress in the creation of a more integrated, efficient and reliable urban transport system. But traffic congestion is getting worse, especially in Kuala Lumpur, despite the promotion of public transport. An express railway links Kuala Lumpur to Kuala Lumpur International Airport (KLIA), connecting to an urban rail system and monorail network, which also serves the administrative capital, Putrajaya. KLIA, a spectacular modern airport that was opened in June 1998 with a capacity of 25m passengers a year, has been expanded and now includes a terminal dedicated to serving low-cost airlines. A bullet train link between Kuala Lumpur and Singapore is under consideration. Malaysia is determined to become the regional hub for air transport, which has expanded strongly since the start of a budget airline, Air Asia. There are 117 regional airports, covering the whole of Malaysia, of which 38 have paved runways. Malaysia s ports handled 369m tonnes in 2005, up from 224m tonnes in 2000, an increase of 65% over the period. Growth was the result of a rise in containerised and liquid bulk cargo, but also of diversion of traffic from the Port of Singapore (POS). Strong expansion is continuing on the central west coast at Port Klang (for conventional cargo), as well as at the Port of Tanjung Pelepas (PTP), for containerised traffic, in Johor in direct competition with POS. Planned port capacity by 2010 is 570m tonnes, a 29% rise compared with 2005, after a 36% increase in the preceding five years. Malaysia is determined to become the preferred regional transshipment point. State-owned Telekom Malaysia plays a central role in telecommunications: it is the dominant provider in the (declining) market for fixed-line services and an important operator of mobile services; five companies compete in each market section. By mid-2007 the number of fixed-line telephones had dropped to 16 for every 100 people. Telekom is the central provider of the fibre-optic communications infrastructure. Cellular services have continued to grow rapidly. Tariff Country Profile 2007 www.eiu.com The Economist Intelligence Unit Limited 2007