SOUTH KOREA

and electronic manufacturing. Workers in these industrial sectors enjoy the same legal rights of association and collective bargaining as workers in other industries. Manpower shortages are forcing labor-intensive industries to improve wages and working conditions, or move offshore. Working conditions at U.S.-invested plants are for the most part better than Korean plants.

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

Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3

MALAYSIA

Key Economic Indicators

(In Millions of Malaysian Ringgits (M$) Unless Noted)

Balance of Payments and Trade (Thousands M$)

Malaysia has a relatively open, market-oriented economy. Since independence in 1957, the economy has shown sustained growth and has diversified away from the twin pillars of the colonial economy: tin and rubber. Real GDP growth averaged 6-8 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 1 percent and nominal GNP falling 11 percent. Since then, the economy has rebounded, led by strong growth in manufactured goods exports. In 1991, real GDP growth is estimated to have been approximately 8.6 percent. Malaysia's 1992 budget, tabled in Parliament November 1, 1991, introduced a number of significant tariff and investment incentive changes, described below, which are expected to go into effect upon routine passage of the budget bill.

The government plays a large role in the 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 banking. Through the National Equity Corporation, the government has equity stakes (generally minority stakes) in a wide range of domestic companies. In all, government-controlled entities may account for one-third of the economy. 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 to move towards corporatization and eventual privatization of many entities, including telecommunications, ports, a major highway, and the national electricity board.

Malaysia encourages direct foreign investment, particularly in export-oriented manufacturing. 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 generally conservative fiscal policy, with a surplus in its operating account. The capital budget is in deficit financed by government bonds largely sold in the domestic market. In recent years the government has been prepaying its foreign debt, but this year has taken on new debt in order to maintain a presence in foreign capital markets.

Monetary policy: Malaysian monetary policy is designed to control price increases while providing adequate liquidity to stimulate economic growth. Monetary aggregates are controlled

MALAYSIA

by the central bank through its influence over interest rates in the banking sector, changes in reserve requirements and, occasionally, open market operations.

Malaysia has a substantially open foreign exchange regime. The Malaysian currency, the ringgit (M$), 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. It generally tracks the ringgit's value against a trade-weighted basket of currencies in which the U.S. dollar is believed to have a large weighting. Bank Negara's 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. In 1990 and 1991 the ringgit was traded within a fairly narrow band against the U.S. dollar, ranging from M$2.67 (April 1989) to M$2.75 (January 1991) per U.S. dollar.

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 currencies of Israel and South Africa. No permission is required for payments in foreign currency up to M$10,000 (approximately US$3,600). Individual foreign exchange transactions above M$10,000 require an exchange control license. For transactions up to M$10 million (US$3.6 million), the license is obtained upon completion of a simple reporting form which is 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 M$10 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 15 percent on a trade weighted basis and import licenses are required only for a small range of sensitive items. In the agricultural sector, however, restrictive tariffs and nontariff barriers distort trade significantly. 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 and imports of tobacco are restrained by high import duties. Since price-supported domestic tobacco is not competitive in export markets, the government also obliges tobacco product manufacturers to purchase and store excess supplies of tobacco when local

MALAYSIA

output exceeds established production quotas.

Tax Policies: Income tax, both corporate and individual, was the largest source of revenue for the government, accounting for 34.3 percent of government revenue in 1990. Indirect taxes, comprising export and import duties, excise taxes, sales taxes, service taxes and other taxes accounted for 36.8 percent of government revenue in 1990. The remainder of government revenue comes largely from profits of state-owned enterprises and the petroleum tax. 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. The proposed 1992 Budget significantly raised import duties on cigarettes and alcohol.

Regulatory Policies: The government encourages foreign and local private investment. Liberalized guidelines on foreign equity participation apply to new investments for which application is made between October 1, 1986 and December 31, 1991. Currently, a foreign investor can hold 100 percent of the equity of a Malaysian subsidiary by either (1) exporting 50 percent or more of output (including sales to Free Trade Zones or Licensed Manufacturing Warehouses) or (2) employing 350 or more full-time Malaysian workers. In addition, the company's products cannot compete with products already produced locally for the domestic market.

For companies exporting 80 percent or more of their output, foreign investors may hold up to 100 percent equity irrespective of whether or not the company's products compete with products presently being manufactured locally for the domestic market. For companies exporting less than 50 percent of output, certain foreign equity limits apply based on the percentage that is exported. New investment in the insurance and banking sectors may be up to 30 percent foreign equity in existing enterprises. Theoretically, foreign investment in a new enterprise is limited to 49 percent, but no new banking or insurance licenses are being issued.

4. Debt Management Policies

Malaysia anticipates a M$494 million foreign exchange gain resulting from an appreciation of the ringgit vis-a-vis other currencies in 1991. This gain, coupled with a slower rate of increase in debt accumulation, is estimated to have improved the ratio of federal government debt to GNP from 86.4 percent at the end of 1990 to about 80.2 percent by the end of