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3 types of macroeconomic policies that can solve economic issues

3 types of macroeconomic policies that can solve economic issues

Macroeconomic policy aims to provide a stable economic environment that is conducive to fostering strong and sustainable economic growth. A government can use different types of macroeconomic policies to solve the issues in the economy. Among them, fiscal policy, monetary policy and supply-side economic policies are considered as major macroeconomic policies that can solve economic problems.

In this article, I will consider how Malaysia can use fiscal policy, monetary policy, and supply-side economic policies to solve the problems in the economy.

Economic overview of Malaysia

Among the countries in Southeast Asia, Malaysia has the fourth biggest economy and it has been ranked as the thirty-fifth largest economy in the world. Also, the Malaysian economy has been recognized as the 27th most competitive economy in the world, concurring with the data of the Global Competitiveness Report 2019. Also, in the previous era, Malaysia was famous as a raw material exporter. Now it owns a more diversified economy with 54 percent contribution from the service sector to the GDP and 25 percent contribution from the industrial sector to the GDP. Also, the value of exports plays a significant role in the economy.

Issues & Challenges were faced by the Malaysian economy

So as an economist, I can say that without any doubt, the Malaysian economy is one of the most important economic hubs of the world economy. But there are some issues in the Malaysian economy which connected with not achieving economic targets as economists predicted.

Economists hoped that by the year 2020, the GDP of Malaysia will be eighth as much as the GDP of the year 1990. Also, they hoped that by the year 2020, Malaysia will become a developed economy. But still (by the year 2020) Malaysia is a developing economy in the world and it could not achieve the GDP target of the economists. Furthermore, according to the vision of Malaysia 2020, the economy should reach a 7% GDP growth rate. But actually, in 2020, Malaysia’s economic performance contracted 5.6 per cent as compared to 4.4 per cent in the preceding year (Department of Statistics Malaysia Official Portal, 202

1.Triggers for the low economic growth rate

We can identify several special triggers that caused the low economic growth of Malaysia They are, Asian Financial Crisis (1997 – 1998), Global Economic Crisis (2008 – 2009), attacks for the palm oil industry, higher energy consumption and COVID-19 pandemic. Let’s consider separately how these trajectories impacted the Malaysian economy.

2. Asian Financial Crisis (1997 – 1998)

Asian Financial crisis in other words “Asian Contagion” was a scenario of currency depreciation in most Asian countries. This was begun the Thailand currency market in the summer of 1997. So, the Malaysian economy also was badly impacted by the Asian Financial Crisis. At the end of the year 1997, share market price in Malaysia had been fallen from more than 50 percent. By August 1998, the economy of Malaysia was in a recession. (Athukorala, 2010).

3. Global Economic Crisis (2008 – 2009)

Global Economic Crisis (2008-2009) began because of the European and American house loan market and it badly impacted the whole world economy. So, between the period of the year 2007 and the year 2009, the value of the Malaysian companies’ shares has been straightly decreased.  (Athukorala, 2010).

4. Attacks for the palm oil industry

The next most influential factor for the lower economic growth in Malaysia is the attacks for the palm oil industry. Malaysia is the world’s second-largest exporter in the palm oil industry while the first exporter is Indonesia. So that oil palm exports account for a very large proportion of Malaysian export capacity. But within the previous few years, there was a significant attack on the palm oil industry. According to the “Prime Minister Tun Dr. Mahathir Mohamad” negative promotion programs that were conducted by the anti-palm oil campaigners and non-governmental organizations in Western countries is the most influential factor for the fallen down of the oil palm industry Malaysia. (Yusof, 2019).

5. Higher energy consumption

As an economist and nature lover, I can see a big issue in the energy sector of Malaysia. As an upper-middle-income country, energy consumption per person in Malaysia is very high. Other upper-middle-income countries, such as Brazil, China, and Turkey consume less energy compared with Malaysia. According to the reports in the year of 2015, Malaysia has consumed 23,425 kilotons of oil for transportation purposes. It accounted for 45.2% of the total energy consumption. When the talk about the Malaysian industrial sector, also it has consumed 13,989 kilotons which accounted for 27.0% of the total energy demand. Another most influential sector is the residential and commercial sectors. It has consumed 7,559 kilotons, that is equal to 14.6% of the total energy consumption. The higher energy consumption is also a major reason for the Malaysian economy’s slow growth since the energy sector accounts for a very high cost in every year. Also, there is a negative effect on nature because of the higher usage of resources and higher environmental pollution.

6. COVID 19 pandemic

Now also the world economy is in the most critical situation because of the COVID 19 virus. Most countries have recorded negative economic growth rates for the year 2020. In 2020, Malaysia’s economic performance contracted 5.6 per cent as compared to 4.4 per cent in the preceding year (Department of Statistics Malaysia Official Portal, 2022). But the effects of this pandemic will not remain only within year 2020. It will badly affect the Malaysian economy for many years.

3 types of macroeconomic policies to solve the economic issues in Malaysia

According to the above particular situations, we can identify why Malaysian economists and the government could not achieve their targets as they wished. Economic policies are the different ways of government interventions by setting fiscal policy, monetary policy, labor market, and so on. Most factors of the economic policies align with the fiscal policy and monetary policy. So, there should be new economic policies to keep the economy efficient and growing. As an economist in Malaysia, I have accountability to give my contribution to that procedure. According to my vision, we can apply several specific macroeconomic policies to become a developed nation. As example, I will explain Fiscal policy and Monetary policy as the demand-side macroeconomic policies and make modifications in the labor market and privatization as the supply-side economic policies. I will describe them separately.

1. Fiscal policy

Fiscal policy means the manipulation of government expenditures, tax policy, and debts with the intention of economic intervention. The government should follow expansionary fiscal policy with increasing government expenditure and decreasing tax implementation. Then aggregate demand for goods and services will be increased and ultimately equilibrium output of the economy will be up worded. John Maynard Keynes also expressed his opinion advocate this theory.  According to Keynes when the economy is in crisis, the government should spend more money to give jobs for the people who are unemployed and should increase production. Because of this, the government can increase the output of the country and the income of people. Then people will buy the output using their income. Ultimately the economy will be recovered. To see more about the fiscal policy, kindly click here.

2. Monetary policy

The next macroeconomic policy is monetary policy.  Monetary policy is, controlling the money supply of an economy with the intention of economic sustainability. The most important tool of the monetary policy is the interest rate. So if the Malaysian government can decrease the interest rate, it will induce investors to borrow more money and invest in their businesses. When the investment increases, distinctly that will increase the economy’s income level. To, see more about the monetary policy, kindly click here.

3. Supply-side economic policies

There are two major types of supply-side macroeconomic policies. They are free-market supply-side economic policies and interventionist supply-side economic policies. Free market supply-side economic policies are used to increase the efficiency and competitiveness of the free market while interventionist supply-side economic policies are used by the government to remove the free market failures. To see more about the supply side economic policies, kindly click here.

We can some examples for supply side economic policies as follows.

Modifications in the labour market

The third economic policy that I recommend is the make modifications in the labor market. Make the changes by removing the inefficiencies of the labor supply and demand is called the modifications in the labor market. As examples, we can say improve the competitiveness in the labor market, remove the oppressive laws, rules, and regulations in the labor market, increase the training and inductions programs for the different labor categories, and so on. If the Malaysian government can give more attention to the labor market modifications, they can develop a very efficient and skilled labor force that can contribute to increasing the national income level.

Privatization

The last policy is privatization. Privatization means that, transfer the ownership of government businesses to the private sector or transfer the management to the private sector holding the ownership with government. If the Malaysian government ready to increase the privatization of the businesses, they will achieve benefits such as minimize capital scarcity, increase the quality of the goods, minimize government autonomy, increase competitiveness and remove the political influences toward the business organizations. Here also the ultimate effect is the increase of the equilibrium income level of the Malaysian economy.

These policies complement each other. When government do modifications to the labor market, labors will become very skilled. Then government can increase the output by utilizing labor in to the production and giving salaries to them. This will increase government expenditure. But also, government income will be increased because of the higher production. Furthermore, when government increase the privatization and decrease the interest rates, it will induce the private sector businesses and further increase the output level of Malaysia.

Also as mentioned above Malaysia has higher energy consumption than other upper-middle-income countries which Malaysia should take actions to minimize. The government of Malaysia should give special attention to the higher energy consumption problem of the country. According to the reports, now also the government has taken some energy efficiency policies such as “Iskandar Malaysia” has developed a “Low-Carbon Society Blueprint”. Also “Putrajaya” wishes to become a “Green City” by the year 2025.  But there should be furthermore actions to be energy efficient.

Conclusion

Economists hoped that by the year 2020, Malaysia will become a developed economy. But that was not achieved. If the government aligns with the above macroeconomic policies, Malaysia will become a developed nation by 2030 with a higher GDP growth rate. Also, not only the government but also every citizen in the country should concern about this matter seriously and all of us should give our support to the government.

Reference list

Athukorala, P.-C. (2010). Working Papers in Trade and Development Malaysian Economy in Three Crises.

Yusof, A. (2019). Malaysia seeks intervention from WTO on palm oil issue | New Straits Times. [online] NST Online. Available at: https://www.nst.com.my/business/2019/11/540062/malaysia-seeks-intervention-wto-palm-oil-issue. [Accessed 7 Aug. 2020].

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