Harrod Domar Model

I. ECONOMIC DEVELOPMENTS

1. The Malaysian economic growth averaged 5.5% in the four years between the last trade policy review in December 2001 and the present review in January 2006.

2. The period during which the previous review took place was against the background of the 1997 Asian financial crisis. Real GDP growth which was 0.3% in 2001, increased to 4.4% in 2002, 5.4% in 2003 and 7.1% in 2004. Third quarter 2005 growth was 5.3% and for the year as a whole, growth is expected to be 5% due to the overall global slowdown.

3. Since the last review, the Malaysian economy has faced a number of challenges, including the global slowdown in 2001, the SARS outbreak in 2003, and the recent oil price hikes of 2004/2005. Measures have been put in place to strengthen the economy, particularly in enhancing domestic demand, to overcome an unpredictable external environment. Fiscal and monetary policies were also put in place to stimulate domestic demand-led growth. These placed the economy on a sustainable growth path in the last 4 years.

4. The measures include policies that focused on generating higher value-added activities in the manufacturing and services sectors, encouragement of more active participation of the private sector and emphasising the development of human capital. The Malaysian economy has since experienced more broad-based domestic-demand led growth, while greater diversity in export income and trading markets should gradually reduce over-dependence on traditional external sources of growth.

5. Overall, the present growth of the Malaysian economy has been increasingly characterised by broad-based expansion in economic activities, with growth emanating from both domestic demand and external sources. Several stimulus packages implemented in 2002 and 2003 led to higher domestic demand growth of 7.5% in 2004. Domestic demand growth in 2005 is expected to remain strong at 6.9%, led by higher private investment expenditure as well as private...