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ANALISIS Jilid 3, Bil. 1 & 2 Jun/Disember 1988

Fiscal Policy and Structural Adjustment: The Malaysian Case
Ismail Mohd. Salleh & Ragayah Hj. Mat Zin
Universiti Kebangsaan Malaysia
Introduction Ɩ Full Text
The aims of this paper are two-fold: first, the paper attempts to examine the factors which have led to the malaise of the Malaysian economy at the end of the 1970s and beginning of the 1980s; and second, to analyse the effectiveness of the fiscal adjustments that have been undertaken to cure these ills. The paper also provides some possible policy directions.
Between 1970 and 1980, Malaysia’s annual growth in real GNP was the fourth highest in Asia (see able 1). However, this blissful picture was about to change at the close of the last decade and "the seeds to the present difficulties might perhaps have been sown during this period (Jaafar 1987, p.5)
First, the second oil price shock of 1979 left in its wake a sharply changed international environment. In particular, there awakened serious apprehensions regarding international trade and financial flows which necessarily affected a country's ability to earn external revenues, service debts and finance domestic investment. While Malaysia, being a net exporter of oil, was not burdened by an increase in the value of energy imports, she suffered in other ways. Demand in western markets had fallen off owning to the recession triggered by the oil price shock, which led to the severe crash in prices of primary exports in the external markets (see Table 2). In addition the developed countries' concern with rising unemployment encourages protectionist policies which made it difficult to export manufactured products.
The second source of change comes in the form of greater government involvement in the economy, which rose steadily in the 1970s, and accelerated sharply in the early 1980s. This is reflected in the ratio of public total expenditure to GNP which increased from 29.2% in 1970 to 39.9% in 1979, and to a peak of 58.4% in 1981 (see Table 3). The growth in the Malaysian public sector in relation to other countries is shown Table 4.

Malaysian Government Expenditure: An Analysis of Pattern and Probable Distribution Impact
Nasaruddin Arshad
Universiti Utara Malaysia
Zulkifly Hj. Mustapha
Universiti Kebangsaan Malaysia
Introduction Ɩ Full Text
In most economies, governments have taken an increasingly active role in influencing the level of aggregate economic activity. Two policy options always at the disposal of the governments, namely monetary and fiscal policies. While monetary policies are related to the management and control of money supply, money demand and interest rates, fiscal policies are concerned with public revenue and expenditure. Both policies, although independent in nature, work hand-in-hand in determining the overall performance of an economy.
While acknowledging the importance of the monetary policies, this paper focusses on the fiscal policies only with specific attention given to the public expenditure aspect. For Malaysia, government expenditure has been a significant fiscal policy instrument in the operations and management of the economy. The pattern and trend in the expenditure has influenced greatly the growth of the Malaysian's economy.
For the past two decades public expenditure in Malaysia has been growing at rapid rates. In 1985, it constitutes some 37 percent of the GDP as contrast to only 26 percent in 1966. Given such a high proportion of the public expenditure, one would agree that the government plays a crucial role in influencing resource allocation of the country. It also implies that if government expenditure is inefficient, a large amount of resources is wasted and taxes are unnecessarily high.

Is Malaysla Going Supply-Side?
Nungsari Ahmad Radhi
Universiti Utara Malaysia
Introduction Ɩ Full Text
Malaysia's economic planners may have not deliberately implemented policies with a dogmatic philosophical adherence to supply-side economics. Even if they had done so, some of the policies implemented which parallels supply-side economics as preached and practised by the Reagan and Tatcher Administrations for example, may have been out of fiscal necessity rather than a reflection of the prevailing philosophy of the Mahathir Administration. Whatever the case may be, it is evident that there have been significant aspects of supply-side economics in some of the policies introduced especially since the ‘recession’ years.
The Mahathir Administration inherited an economy which was and has been strong for the last decade, but one which was beginning to show signs of tiredness. The years 1981 and 1982 began to show signs of slowdown in the economy, initially through the weakening of Malaysia's major commodity prices which was mainly due to increasing recessionary pressures in industrialized economies.
This slack in demand affected the primary industries and resulted in a chain reaction. Construction, a thriving sector in the economy throughout the 1970s was badly affected. The eventual collapse of housing and construction affected the financial sector which was itself overexposed. A study of policy reactions reveals an interesting pattern. There was a switch in policy orientation from 1984 onwards; a set of policy was formulated and implemented in anticipation of a downturn, but a different set was actually used in dealing with it. The pro market orientation after 1984 presents an interesting opportunity for the examination of the underlying contributing factors.

Tax Incentives and its Implications on Investment in Malaysia
Ahmad Noor Bin Said
Malaysian Industrial, Development Authority
Introduction Ɩ Full Text
This paper touches on two aspects, the first on the general framework of tax incentives currently available and second, on the tax implications on investment in Malaysia. Since independence, the government has realised that to effectively promote industrialisation a necessary environment must be created. With this in mind, in the 1950’s, when the Government first launched its first economic plan, the Government allocated $1 15.8 million or 2.5% of the total public development expenditure for industrial and mining development. This allocation has steadily increased over the subsequent five year plans and under the Fifth Malaysia Plan (1986 - l m , $3,149.65 million or 4.56% of the total public development expenditure during the plan period. A positive step towards accelerating industrial development then was the establishment of industrial estates, with the first one in the new satellite town of Petaling Jaya. At the same time, infrastructure facilities were up graded.

Unanticipated Money, Price Level, and Output in Malaysia
Mohammed bin Yusuff
Universiti Pertanian Malaysia
Introduction Ɩ Full Text
The question of public policy is always a sensitive issue since it involves the society at large while a number of policy actions may be in conflicting with the goals of the society. Nowadays, we have three major schools of thought in economics with regard to the most appropriate macroeconomics stabilization policy actions in order to balance the aggregate demand and the aggregate supply. They are the Keynesians, the monetarists, and the new classical economists. The Keynesians believe that fiscal policy is the most appropriate policy for stabilization while the monetarists argue that monetary policy is more effective. The new classical economists, on the other hand, argue that the anticipated government demand management policies are all ineffective stabilization policies.
Recent empirical evidence in Malaysia supports the view that money affects the price level and real output (Yusuff, 1978a). But the study did do not distinguish between anticipated money and anticipated money supply, we therefore do not know whether the anticipated portion or the unanticipated portion which affects the real output.
This paper is an attempt, although in a very simple manner, to assess empirically the contention of the new classists that only the unanticipated money growth affects the real variables, in this case, it is the real output. The organization of this paper is as follows. The first section deals with an introductory remark about the three major schools of thought in economics. The second section will highlight the controversies between the Keynesians and the monetarists with regard to the demand management policies. Since the emphasis of this paper is on money and real output, therefore, the transmission mechanisms through which money affects aggregate demand and thus output is discussed at length in section three, while section four analyses the basic contention of the new classical economists, their assumptions, and the reasons why anticipated government management policies are not effective. In section five, a model is formulated to test the new classical economics hypothesis that only the unanticipated money growth affects the real variable, in this case the real output and that anticipated money growth will affect only the nominal variable, that is the price level. The conclusions of the paper is given in the final section.

Financial Dualism in Malaysia : A Survey
Jessica Lee Kim Gek
Universiti Utara Malaysia
Introduction Ɩ Full Text
There is nothing fundamentally new about the dual money market in less developed and underdeveloped countries. Discussions of both the so-called organized and unorganized money market concerned largely with role of both the rural and urban financial institutions in providing short-term credits to the borrowers, particularly to the rural economy of today.
As our economy grows and the activities within it take on new and more varied forms, the financial institution's mechanism which serves it, must likewise grow in range, diversity and specialization. Over the recent years, there has already been a high degree of integrations of financial institutions such as central bank, commercial banks, insurance companies and industrial finance companies operating in the urban sector. However. there is not any overall integration in the system as a whole, yet. The opposite of an integrated system in this sense would be the large number of heterogenous agencies (like village moneylenders, chettiars, indigenous bankers, pawnbrokers, traders, merchants, landlords, shopkeepers, friends and relatives) which are categorized under the unorganized sector.
These agencies standing and methods of doing business are so different that each tends to have its own special group of customers, the rates charged being such as might be agreed upon in bilateral deals and very largely in ignorance of what might be charged or offered elsewhere in the economy. In the organized sector, however, improved communications and the forces of competition both operate to preclude this tendency. Nevertheless, approximations to it can also be found in some parts of India, Chile, Burma, Africa and even Malaysia where in the unorganized sector, such relations are not uncommon.
In the light of the foregoing considerations for this paper, we will first examine in section I1 the characteristic features of both the organized and unorganized money market in less developed countries (LDCs). Attention will also be given particularly to the problems and consequences of an imperfect rural credit market.
Section III reviews the determination of the rural interest rate and hence the economic, as opposed to the institutionalist, argument for the high rural interest rates will be discussed. The review of relevant empirical literature on the structure and level of interest rates for both the organized and the unorganized sectors in LDCs will be the main topic in section IV. In section V, an attempt will be made to analyse the potentialities and limitations of the Malaysian dual money market in stimulating integration and fostering the growth of the right sort of environment that benefits the people and the nation as a whole. Governmental efforts and other solutions to overcome the contemporary problems in the unorganized sector and its policy implications towards futureeconomic development in Malaysia will be the essential topic in Section VI. A summary of the conclusion will bring us to the final section of this paper.

The Demand for Currency and Demand Deposits in Malaysia: An Empirical Evidence
Muzaffar Shah Habibullah & Roslan A. Ghaffar
Universiti Pertanian Malaysia
Introduction Ɩ Full Text
For most of the years since independent the focus of monetary policy, has been on the money stock, M1, as an indicator or guide to monetary policy (Quarterly Economic Bulletin, 1985, pp. 122). his has happened despite the experience of rapid growth and innovations in the financial sector1. These structural changes or innovations in the financial system have significant implications on money demand, one of which is on its stability (Judd and Scadding, 1982).
The objective of this study is to determine empirically the factors affecting the demand for the monetary components of M1. This is important given the concern of the Central Bank in recent years on the behaviour and the stability of M1 as a policy tool following the rapid growth and innovations in the financial sector, where a shift out of currency holdings and demand deposits into interest-bearing deposits has been noted (Economic Report, 1985, pp. 109). As a result, the role of money M1 as an indicator for monetary policy purposes can be questioned.
This paper is divided into five sections. In section two, some background on financial development in Malaysia will be discussed, and models used in this study will be presented in section three. Results of regression analyses will be reported in section four, and the final section contains some conclusions.

Islamic Perspectives on Monetary and Fiscal Policies and Their Implications for Economic Developments
A.H.M. Sadeq
Islamic International University Malaysia
Introduction Ɩ Full Text
The basic objective of the Islamic code of life is human welfare which, at the national level, the government has been made responsible to supervise and help realize through deliberate policies and efforts. In the economic field, the government is to guarantee basic needs of all the citizens, help and supervise full employment of all the resources, ensure implementation of Islamic norms and values in factor pricing and transfer payments which lead to an equitable distribution of income and wealth, and thus play a positive and important role in economic development of the Islamic economy.
All these involve appropriate economic policies on the part of the government. The two major and broad categories of policy measures at its disposal are the monetary and fiscal policies. Monetary policy refers to the control of the supply of money, its availability, its pricing, and the direction of its use by applying appropriate monetary tools in order to achieve certain policy objectives. On the other hand, fiscal policy refers to the manipulation of the relevant sources of government revenues including taxes and the direction and size of government expenditure by using fiscal tools in order to materialize policy goals of the economy.
This paper deals with the objectives and instruments of monetary and fiscal policies and their implications for economic development. It has five sections. Section 2 discusses the objectives of monetary and fiscal policies of an Islamic economy. The development implications of monetary policy along with its tools are discussed in Section 3. Section 4 deals with the instruments and development implications of fiscal policy. A final section summarises and concludes the paper.
The basic assumptions of the model underlying the paper are as follows. First, the government is committed to establish Islam at all levels and, accordingly it plays it positive and Hisba (supervisory) roles in the economy including the collection and disbursement of zakat. Second, interest is abolished from the financial system, and the banking transactions are mainly equity based. Third, the economy consists of three sectors, namely, the consumers, the producers and the government, which may again be divided into different sub-sectors. For example, the producers may be of several kinds, including, the Mudaraba participants (sleeping partners by contributing investible surplus) and Musharaka participants (active participants with both capital and entrepreneurship) in the production process. Again each of these sectors may have two sub-sectors: altruistic and non-altruistic. Fourth, the economic agents follow the Islamic ethics of economics and business either voluntarily or involuntarily.1

The Role of Islamic Fiscal Policy for a Self-Reliant and Just Development: A Macro-Perspective
Ataul Huq
International Islamic University
Introduction Ɩ Full Text
The Islamic fiscal policy as opposed to modem fiscal policy is expected to mobilise and allocate community’s resources through tax-expenditure programmes in such a way that each and every individual member of the community receives the treatment based on Ad-Adl wal-Ihsan. Unlike the modem fiscal policy geared to attaining maximum social advantage solely through physical capital, the Islamic fiscal policy must aim at the desired objectives of growth with distributive justice involving complete full employment and stability by putting equal emphasis on physical as well as human capital. Under the modem fiscal system, the Pre-occupation with material development made possible with mechanism of capital accumulation and investment regardless of moral and spiritual development for the world hereafter has contributed to devising a fiscal mechanism the benefits of which are unequally shared by the different members of the society. While the vast majority bear either directly or indirectly the substantial proportion of the burdens, the few privileged enjoy the lion's share of the fruits of government's tax-expenditure programmes. The various instruments used by government to mobilise financial resources and the different government functionaries to administer them have, infact, given birth to a highly Centralised Structure of development. The failure to recognise the potentials of human capital or what we call the vast army of unemployed has forced the resource poor highly populated countries to opt for mobilising scarce capital from external sources only at the cost of a self-reliant : type of development1 capable of dealing with any shocks be it mililary, economic, political, social and moral. The Contemporary world phenomena as manifest through the perpetual and gross violations of human justice by the western super powers bear enough testimony to this. In view of what has been stated this paper examines the role of Islamic fiscal policy that is capable of achieving not only the desired objectives of full employment, stability and growth of conventional fiscal policy but also of ensuring a self-reliant and just development with more emphasis on non1 conventional as opposed to conventional resources,2 the need for financialsupport structure suitable for local community organisations as apposed toconventional dependence on external capital and finally the ability to create self-generating indigenous capital.

A Comparative Study of the Malaysian Financial and Economic Policies in Islamic Perspectives, 1970-85
Masud Alam Choudhury
University of Sydney, Nova Scotia
Uzir Abdul Malik
Universiti Utara Malaysia
Introduction Ɩ Full Text
The estimated equations of Islamic general economic equilibrium for the Malaysian economy, for the period 1970-85, will now be examined in view of the actual changes that have taken place in Malaysia for the stated period. We shall then study the related policy issues and the potential for policy development in Islamic perspectives.
The general forms of the estimated equations were found to reinforce the theoretical structure of the Islamic macro-economic system developed in an earlier work. By the same token the Keynesian element of the Islamic macroeconomic system were found to hold in our estimated model system. However, a critical examination on the stability of the IIS and ILM curves showed low levels of reliability on the estimated slopes of these curves expressed in the log-linear forms. The unstable nature of the slopes of IIS-equation was also reflected in the variable interrelationships within the expenditure sector equation; that is, as shown among income, investment and profit rate variables in their log-linear forms. Likewise, in the case of ILM-equation, the monetary sector equilibrium was found to be unstable. While such cases of instability, shown by the possible ambiguity of the slopes of 11s-ILM-equations, are consistent both with the Keynesian general equilibrium system and the Islamic macro-economic equilibrium, they must be interpreted now in relation to the actual economic changes in the Malaysian economy for the period 1970-85.

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