ECO211 Macroeconomics

Economic Transformation Plan (ETP) has

attracted RM220b in investments



Prepared for: Mrs. Khaizie Sazima Binti Ahmad
Prepared by:
Name: Nur Artika Binti Mahat
No. Matrix: 2012896134
Class: MAC 110 (4C)

Answers all the questions following:
1. Based on an article above, what are the investments has proven successful in Economic
Transformation Plan (ETP) 2010?

i. The investments from 195 projects launched under the National Economic Key Areas
(NKEA).
ii. Set sights attracting 13 large multinationals to base their operations in Kuala Lumpur.
iii. Six international trading companies, with a projected minimum total turnover of
US$600 million (RM2.1 billion) could establish their operations in the country.

2. From the above article, what the advantages from the investment RM220b has attracted by
ETP?

i. Created 435,000 jobs
ii. Contributed RM144 billion to the country's gross national income (GNI).

3. Investment is the second component of Aggregate Demand consists of two types of
investment.
From an article above, State type of investment and briefly explains?

i. The type of investment is induced investment
- Induced investment is a kind of investment which has a positive relationship with
the level of national income. For an example of induced investment is expenditure on
developments in the pipeline to support the nation's pursuit to become the centre for
global operations, services and trading. When the level of income increases, induced
investment will also increase and vice versa.

4. As mentioned an article above, efficient tax collection that imposed by government as
stronger revenue to narrowing the income disparity. What are other four (4) objectives of
taxation?
i. Income.
-Taxes are the most important source of income for the government and the
government uses the taxes collected to finance its expenditure.
ii. Reduction of harmful consumption.
- Taxation is imposed on goods such as cigarettes and alcohol in order to restrain
people from consuming these. Higher taxes are imposed on these goods to make them
expensive.
iii. Regulation of Foreign Trade.
- Taxes are levied on imported goods to protect local industries or infant industries.
iv. Conservation of resources.
- Taxes also imposed on goods such as coal and petroleum so as to increase their
prices and discourage exports.

5. Based on the above article, how fiscal policy control unemployment Malaysia in order to
target fiscal deficit through investment?

Measure to control by fiscal policy:
i. Control by decrease in taxes
- To control unemployment, the government reduces the general burden of taxation
on the community. A reduction in excise duty, sales tax, service tax and other types of
taxes will increase the consumption expenses of the people. A reduction in business
and corporate tax will promote an increase in investment, and thus employment will
increase.
ii. Control increase in government expenditure.
- Increase in government expenditure will directly affect aggregate demand. For
example, the salary of civil servants creates more development projects which may
reduce unemployment.





Answers all the questions following:
1. Based on an article above, what are the investments has proven successful in Economic
Transformation Plan (ETP) 2010?

iv. The investments from 195 projects launched under the National Economic Key Areas
(NKEA).
v. Set sights attracting 13 large multinationals to base their operations in Kuala Lumpur.
vi. Six international trading companies, with a projected minimum total turnover of
US$600 million (RM2.1 billion) could establish their operations in the country.

2. From an article, what the advantages from the investment RM220b has attracted by ETP?

iii. Created 435,000 jobs
iv. Contributed RM144 billion to the country's gross national income (GNI).

3. Investment is the second component of Aggregate Demand consists of two types of
investment. From an article, State type of investment and briefly explains?

ii. The type of investment is induced investment
- Induced investment is a kind of investment which has a positive relationship with
the level of national income. For an example of induced investment is expenditure on
developments in the pipeline to support the nation's pursuit to become the centre for
global operations, services and trading. When the level of income increases, induced
investment will also increase and vice versa.

4. As mentioned an article above, efficient tax collection that imposed by government as
stronger revenue to narrowing the income disparity. What are other four (4) objectives of
taxation?
v. Income.
-Taxes are the most important source of income for the government and the
government uses the taxes collected to finance its expenditure.
vi. Reduction of harmful consumption.
- Taxation is imposed on goods such as cigarettes and alcohol in order to restrain
people from consuming these. Higher taxes are imposed on these goods to make them
expensive.
vii. Regulation of Foreign Trade.
- Taxes are levied on imported goods to protect local industries or infant industries.
viii. Conservation of resources.
- Taxes also imposed on goods such as coal and petroleum so as to increase their
prices and discourage exports.

5. What types of fiscal policy practiced by a government and how to control by using fiscal
policy?

i. The government may practice expansionary fiscal policies through taxation and
public expenditure.

Measure to control by fiscal policy:
iii. Control by decrease in taxes
- To control unemployment, the government reduces the general burden of taxation
on the community. A reduction in excise duty, sales tax, service tax and other types of
taxes will increase the consumption expenses of the people. A reduction in business
and corporate tax will promote an increase in in investment, and thus employment
will increase.
iv. Control increase in government expenditure.
- Increase in government expenditure will directly affect aggregate demand. For
example, the salary of civil servants creates more development projects which may
reduce unemployment.

6. In your opinion,



The Economic Transformation Programme (ETP) is a program to propel Malaysia to the
level of other high-income nations by lifting Malaysia's per capita income from RM1,702 per
month (US$6,700) in2009 to at least RM3,810 (US$15,000) per month in 2020.
[3]
It aims to do
this by growing the economy by an average of 6% during the period via private-sector-led
growth, with the government gradually playing a lesser, more catalytic, role. A key pillar
of Prime Minister Najib Tun Razak's strategy to hold onto Putrajaya,
[4]
it is managed
by PEMANDU (Performance Management and Delivery Unit), an agency under thePrime
Minister's Department. To achieve the required GNI growth of 6% per annum, the government is
shifting Malaysia towards a service-based economy, with the services sector contribution
growing from 58% in 2009 to 65% by 2020.
2. National Key Economic Areas (NKEAs): The Economic Transformation Programme
(ETP) focuses on 12 National Key Economic Areas (NKEAs), led by the private sector, with the
government primarily playing the role of a facilitator. The 12 NKEAs cover 11 industries and
one geographical territory:
1. Oil, gas, and energy;
2. Palm oil;
3. Financial services;
4. Tourism;
5. Business Services;
6. Electronics and electrical;
7. Wholesale and retail;
8. Education;
9. Healthcare;
10. Communications content and
infrastructure;
11. Agriculture;
12. Greater Kuala Lumpur-Klang
Valley.

These NKEAs were identified by 350 participants from the private sector and 150 participants
from the government via an 8-week lab, following a "Thousand Person Workshop" held in
May 2010. More than 600 syndication meetings were held during the lab period. 92% of the
funding will come from the private sector, with public sector investment being used as a catalyst
to spark private sector participation. 131 entry point projects (EPPs), as well as other other
business opportunities, have also been identified under each NKEA. A new ETP Unit
under PEMANDU has been tasked to monitor and report progress to government leaders, the
business community, and the public.

3. Criticism: The Economic Transformation Programme (ETP) projected a total investment of
RM1.4 trillion (US$444 billion) for the 131 "transformative projects". Out of this amount:
[5]

60% is expected to come from the private sector;
32% from government-linked companies (GLCs); and
8% from the government.

Based on this projection, the expected investment for the government-linked companies (GLCs)
alone would be RM454 billion (US$142 billion) over the period from 2010 to2020. This works
out to about RM50 billion a year. Democratic Action Party (DAP) publicity chief, Tony Pua,
questioned whether the Economic Transformation Programme (ETP) has any remote chance of
success, given that the GLCs are in no position to do so. He said: "The combined market
capitalization of [the top 20 GLCs (G20)] is only RM266 billion, but we are actually expecting
them to invest an amount that is nearly double their current size over the next few years. It is
akin to a person attempting to digest food double his weight within a short period of time!"
[5]
On
top of that, many of these GLCs are having their own set of financial problems, e.g.:
Sime Darby's follies in the energy sector;
Tenaga Nasional facing tricky cash flow issues; and
Malaysia Airlines (MAS) and Proton struggling wth their turnaround plans.

PEMANDU had countered Tony Pua's conclusion by claiming that the latter had not considered
the non-listed government-linked companies (GLCs). To this, Tony Pua pointed out that the only
unlisted GLCs of note arePetronas and Felda, and that even taking these 2 GLCs into
consideration, an RM50 million investment per year for 9 years is still inconceivable.
Thus far, Prime Minister Najib Tun Razak and PEMANDU has yet to explain how the GLCs are
expected to invest a whopping RM454 billion, or how the private sector is going to pour out
RM850 billion, over the specified period.Tony Pua added that the best way to convince
Malaysians that the projected figures are indeed viable would be to provide a breakdown of the
investment commitments by individual GLCs on the 131 projects.
4. REFSA statement on 20 March 2013: Research for Social Advancement (REFSA), a not-
for-profit research institute, released the following statement on 20 March 2013, in response to
Prime Minister Najib Tun Razak's announcement of his administration's achievements, ahead of
the 13th general elections:
[6]


We are dismayed to find perception manipulation and deception still surrounds the
Economic Transformation Programme (ETP). The mainstream media today is full of praise
and claims of excellent performance and transformation. This is exactly the opposite of the
true picture. Today, REFSA draws attention to 3 points:
1. Real national income growth has been pedestrian at under 5% per year, well below the
6% targeted by the ETP. PEMANDU is manipulating perception by trumpeting nominal
GNI (Gross National Income) numbers, which include inflation, and in US$, which are
irrelevant to the vast majority of Malaysians;
2. PEMANDU still cannot get its basic math and data right. It said (nominal) GNI per
capita hit US$9,970 in 2012, but also said it was RM30,809 and the exchange rate was
RM3.058:US$1. However, at that exchange rate, RM30,809 is equivalent to
US$10,075. It is shocking that this high-powered unit cannot even get the basics
correct;
3. Based on Department of Statistics data, nominal GNI per capita grew an average of just
7.4% per year from 2009 to 2012, which is less than the 8.2% per year average growth
rate registered from 2001 to 2010. PEMANDU and the ETP came into force in 2010. In
short, the ETP and PEMANDU have failed to increase our GNI per capita above its
long term growth trajectory.
Failed: Reaching the target to grow national income by 6% per year
"Propelling Malaysia towards becoming a high-income developed nation" as promised by
the ETP requires Gross National Income (GNI) to grow by 6% per year. PEMANDU gave
much prominence to this 6% per year growth target in its "A Roadmap for Malaysia" report
that launched the ETP with much fanfare in 2010.
However, the just published 2012 Annual Report of the ETP makes not a single reference to
the fact that the ETP failed to meet this crucial 6% per year growth target last year. The fact
is, real GNI grew by a pedestrian 4.3% in 2012, well below PEMANDU's aspirations and
even lower than the 4.9% recorded in 2011.
Whatever happened to the 6% growth target trumpeted by the ETP on its launch?
Research for Social Advancement (REFSA)











Fiscal policy, government spending
The public sector, which involves government spending, revenue raising, and borrowing, has a
crucial role to play in any mixed economy.
The purpose of government expenditure
Government spends money for a variety of reasons, including:
1. To supply goods and services that the private sector would fail to do, such
as public goods, including defence, roads and bridges; merit goods, such as hospitals
and schools; and welfare payments and benefits, including unemployment and disability
benefit.
2. To achieve supply-side improvements in the macro-economy, such as spending
on education and training to improve labour productivity.
3. To reduce the negative effects of externalities, such as pollution controls.
4. To subsidise industries which may need financial support, and which is not
available from the private sector. For example, transport infrastructure projects are
unlikely to attract private finance, unless the public sector provides some of the high-risk
finance, as in the case of the UKs Private Finance Initiative PFI. During 2009, the UK
government provided huge subsidies to the UK banking sector to help deal with
the financial crisis. Agriculture is also an industry which receives large government
subsidies. See: CAP.
5. To help redistribute income and achieve more equity.
6. To inject extra spending into the macro-economy, to help achieve increases
in aggregate demand and economic activity. Such a stimulus is part of discretionary
fiscal policy.
Local government is extremely important in terms of the administration of spending. For
example, spending on the NHS and oneducation are administered locally, though local
authorities. Approximately 75% of all public spending is by central government, and 25% is by
local government.
Video
Central and local government (public sector) spending
Using public spending to stimulate economic activity has been a key option for successive
governments since the 1930s when British economist, John Maynard Keynes, argued that public
spending should be increased when private spending and investment were inadequate. There are
two types of spending:
1. Current spending, which is expenditure on wages and raw materials. Current
spending is short term and has to be renewed each year.
2. Capital spending, which is spending on physical assets like roads, bridges,
hospital buildings and equipment. Capital spending is long term as it does not have to be
renewed each year - it is also called spending on social capital.
Where does the spending go?
The main areas of UK government spending in 2008, which totalled 575b, were:
1. Social protection
2. Health
3. Education
4. Public order and safety
5. Defence
UK Public Spending by DepartmentSource: ONS 2012Debt interest, 31.3Health, 118.3Social
protection, 223.4Education, 88.6Housing, 16.2Environment, 10.9Transport, 22.7Public order,
96.5Defence, 37.7Debt interestHealthSocial
protectionEducationHousingEnvironmentTransportPublic orderDefence
Types of fiscal policy
Fiscal policy is the deliberate adjustment of government spending, borrowing or taxation to help
achieve desirable economic objectives. It works by changing the level or composition
of aggregate demand (AD).
There are two types of fiscal policy, discretionary and automatic.
1. Discretionary policy refers to policies that are implemented through one-off
policy changes.
2. Automatic stabilisation, where the economy can be stabilised by processes called
fiscal drag and fiscal boost.
Central government borrowing
Government must borrow if its revenue is insufficient to pay for expenditure - a situation called
a fiscal deficit. Borrowing, which can be short term or long term, involves selling
government bonds or bills. Bonds are long term securities that pay a fixed rate of return over a
long period until maturity, and are bought by financial institutions looking for a safe return.
Treasury bills are issued into the money markets to help raise short term cash, and last only 90
days, whereupon they are repaid.
Local government borrowing
If the revenue from the council tax and central government support is insufficient to meet
spending commitments, local authorities can also borrow by issuing bonds. Only around 25% of
local authority spending is financed by local revenue raising, 75% coming from central
government and by borrowing. (Source: Local Government Association)
Public Sector Net Borrowing
If the borrowing requirements of both central and local government is combined, the amount of
borrowing required is called the public sector net borrowing (PSNB). The need to borrow varies
considerably with the business cycle.
During periods of economic growth, tax yields rise and spending on welfare payments fall,
pushing the public finances towards a surplus. During periods of economic slowdown, tax yields
fall and welfare payments rise, pushing the economy towards a fiscal deficit.
In 2009, the government introduced a new measure of public sector borrowing, called Public
Sector Net Borrowing Ex(PSNBEx). This measure excludes payments to the financial sector to
ease the credit crisis.
See: Public Sector Net Borrowing Ex (www.statistics.gov.uk)
See: The 2010 Budget
The Chancellors golden rules for borrowing
The Chancellors golden rules for sustainable investment are firstly, to balance the books over a
trade cycle, and secondly, only to borrow to fund capital projects, such as road building.
Borrowing, and the financial crisis
According to the Institute for Fiscal Studies (IFS), the central government net borrowing
requirement in 2009, of approximately 150b, was almost double initial estimates. The main
reason for this overshoot was the rescue package for the banking sector, following the
global financial crisis.
This package included:
1. 37b for recapitalisation of the main banks, RBS, Lloyds and HBOS.
2. 21b to the Bank of England to help refinance the financial services sector.
Source: I FS, 2009
Fiscal deficits and the National Debt
Fiscal deficits occur when the revenue received by a government is less than spending during a
financial year. These deficits will create the need to borrow by selling government securities -
bills and bonds.
What is the national debt?
The national debt is the cumulative amount of annual borrowing that occurs when government
spending is greater than revenue.
National debt
Hypothetical
example to
illustrate how the
b 2005 2006 2007 2008
national debt is
calculated. Government
Spending
500 550 600 650
Revenues 480 520 560 600
Borrowing 20 30 40 50
National
Debt
20 50 90 140


What causes a rising national debt?
A rising national debt can happen when tax revenues fall and government spending rises as the
economy slows down or goes into recession, or when householders and firms spend less, so less
VAT is collected, and householders and firm receive less income, so revenues from income taxes
fall.
UK debt
198019811982198319841985198619871988198919901991199219931994199519961997199819
992000200120022003200420052006200720082009201020112012UK Public Debt as a % of
GDP1980 - 2012 - Source: Treasury-2%0%2%4%6%8%10%3%-1%-
1%0%1%2%2%1%3%3%3%6%5%5%4%3%1%0%0%-1%-
1%0%2%3%3%3%2%3%6%9%8%5%Years
The advantages of discretionary public spending as a fiscal tool
Public spending can stimulate the macro-economy
Public expenditure can be used to help stimulate the macro-economy at times of low and
negative growth. This works by increasing the level of aggregate demand, and can compensate
for failings in other components of aggregate demand, such as a fall in household spending on
consumer goods and firms spending on capital goods. It can also be used to
complementmonetary policy or when monetary policy has proved ineffective. This could be the
case when interest rates are already low, but the economy still needs stimulating, as occurred
throughout the advanced economies following the financial crisis and consequent global
recession.
Public spending can improve the infrastructure of an economy
If the spending is on capital items, then infrastructure can be developed, which can help improve
competitiveness and economic growth. Infrastructure projects are usually far too expensive for
the private sector to tackle on its own.
Public spending can generate positive externalities
Spending on infrastructure, healthcare, and education also provides an external benefit to the rest
of the economy which can have long run effects in comparison with reductions in interest rates,
which are often short-term.
Public spending can be targeted
Public spending can be targeted to achieve a wide range of specific economic objectives, such as
reducing unemployment, achieving more equity, road building, action against poverty, and re-
building city centres.
The disadvantages of public spending
Time lags
There may be a considerable time-lag between spending and the benefits that arise. For example,
a decision to increase spending on education will take many months and maybe years to
implement, and many years or decades to see the full benefits. Indeed, the full benefits may
never be measured and recorded because of information failure.
Public spending can be inflationary
In trying to promote growth or reduce unemployment government spending can be inflationary,
especially if the government has to borrow from the financial markets or if the spending is rising
too quickly, as might occur if public sector pay increases without an efficiency gains. Monetarist
economists, such as Milton Friedman, are anti-fiscal in their approach to demand management,
preferring to regulate aggregate demand by controlling the quantity of money in circulation.
Government spending, they argue, in inherently inflationary, so the best role for government,
also suggested by the New-classical economists, is to improve supply-side performance,
especially labour productivity. New-classical economists, such as Robert Lucas, highlight what
see as the general failure of government to influence consumer behaviour. Markets tend to clear
effectively if left alone, hence a government should not interfere in the working of markets. If
government does interference, say by increasing spending, and this is expected, then people will
expect an inflationary effect, and will bargain for higher wages. The increase in wages shifts the
AS curve to the left, with no gain in aggregate output. If people understand how policy operates,
its effect on the real economy will be much weaker.
In what often appears a rather odd assertion, new-Classical economists argue that demand
management only works when it is unanticipated by firms and households. The New-classical
approach is highly critical of relying on past events to predict the future. If policy-makers rely
exclusively on gathering and using past statistics, they are unlikely to make very accurate
predictions. They argue that the only way to influence economic performance in the long run is
by improving the conditions of supply rather than trying to create economic growth by increasing
demand.
Public spending can generate a debt burden
Borrowing to fund spending will add to the national debt and can create an excessive debt
burden for future generations.
Trade-offs
There is a potential trade off between unemployment and inflation, first analysed by A.W.
Phillips in the 1950s. If the aim of public spending is to create jobs, there is the strong possibility
that prices will be driven-up, and any growth in jobs will only be temporary as the economy
quickly readjusts to the previous level of unemployment.
Crowding out
Crowding-out theory is closely associated with the economists Bacon and Eltis, who looked at
the apparent de-industrialisation of the UK economy during the 1960s and 1970s. Crowding out
can be defined at the process of squeezing out the privately owned manufacturing sector by the
expansion of the public sector. It is argued that crowding out occurs because of the inherent
scarcity of financial and real resources. The more the (inefficient) public sector uses scarce
resources, the less resources are available for the more efficient and productive private sector.
Bacon and Eltis identified two types of crowding out.
Financial crowding out - if the public sector expands and needs to borrow from
the financial sector interest rates may be driven up. This leads to a reduction in private
sector investment.
Resource , or physical, crowding out - in a similar way, as the public sector
expands there is an increase in the demand for other resources which drives up their
price, including wages and rents hence the private sector suffers.
Source: Bacon, R, and Eltis, W, 1976: Britain's Economic Problem - too few producers,
McMillan
Political constraints
A major constraint to government spending across the EU is membership of the Stability and
Growth Pact which limits government borrowing to no more than 3% of national income in any
one year, and accumulated public debt should not exceed 60% of the value of national income.
The purpose of the Stability Pact was to prevent euro area countries weakening the value of the
Euro by printing money, which occurs when governments borrow from the money markets. In
the late 1990s, the UK Chancellor imposed a different constraint that borrowing is acceptable if
it funds capital, rather than current public sector spending the so-called golden rules. However,
by 2006 a large number of EU countries had exceeded the debt limits laid down in the Stability
Pact.
Greek debts
In 2011, Greece needed a massive bail-out from other members of the euro area to cope with
debts which the IMF estimated were some 165% of GDP (for 2011).
AustraliaSwedenDenmarkFinlandNorwaySpainAustriaUKGermanyFranceUSAPortugalIrelandIt
alyGreeceJapanInternational Central Government DebtSource:IMF
20110%60%120%180%240%300%23%36%44%50%55%67%72%81%83%87%100%106%109
%121%166%233%
See: Fiscal stabilisers and discretionary tax policy









7. Based on an article, increase in government revenue of 14% from 2010 to 2012. What is the
source government revenue and classified the type of revenue?

i. Tax Revenue.
- Tax is compulsory contribution on by an individual or a firm to the government to
be used in the common interest of all. Tax is a contribution to the revenue of the
government so that the government can provide the necessary administrative services
to govern the country.
Direct tax revenue includes individual income tax, companies income tax, petroleum
income tax, stamp duties, real property gains tax and other income taxes. Next,
indirect tax includes import duties, exercise duties, sales tax, gaming tax and etc.
ii. Progressive taxes.
- A progressive tax is a kind of tax whose rate increases as income increases. The
higher the taxable income, the higher the tax rate charged.