Transport and trade facilitation in malaysia and lessons for vietnam

Lessons learnt from transport and trade facilitation in Malaysia...51 CHAPTER 3: SUGGESTIONS TO DEVELOP TRANSPORT TO FACILITATE TRADE IN VIETNAM FROM 2015 TO 2020 BASED ON EXPERIENCES OF

TABLE OF CONTENT

LIST OF ABBREVIATIONS iv

LIST OF TABLES v

LIST OF FIGURES vi

INTRODUCTION 1

CHAPTER 1: GENERAL THEORY OF TRANSPORT AND TRADE FACILITATION 5

1.1 Overview of trade facilitation 5

1.1.1 Definition of trade facilitation 5

1.1.2 Benefits of trade facilitation 8

1.1.3 Issues of trade facilitation 9

1.2 Regional and international policies on trade facilitation

1 3 1.2.1 Policy framework 13

1.2.2 Regional and international organizations working on trade facilitation 14

1.2.3 International policies and strategies related to trade facilitation 20

1.3 Key performance indicators of trade facilitations 2 2 1.3.1 Logistics Performance Index (LPI) 22

1.3.2 Global Competitiveness Index (GCI) 24

1.3.3 Enabling Trade Index (ETI) 25

1.3.4 Global Connectedness Index (GCI – DHL) 25

1.3.5 Other indicators 26

CHAPTER 2: CURRENT STATUS OF THE DEVELOPMENT OF TRANSPORT TO FACILITATE TRADE IN MALAYSIA IN THE PERIOD 2005 - 2014 27

2.1 Overview of Malaysia’s economy 27

2.1.1 Geographic location and political situation of Malaysia 27

2.1.2 Economic situation of Malaysia 29

2.1.3 Foreign trade of Malaysia 30

2.1.4 Malaysia’s inward foreign direct investment 33

2.2 Overview of Malaysia government’s operation of transport and trade facilitation 34

2.2.1 Management of trade sector 34

2.2.2 Customs and other border agencies 35

2.2.3 Management of transport sector 35

2.2.4 Malaysia’s plans on investing in transport and logistics 36

2.2.5 Malaysia’s participation in international transport conventions and agreements 37

2.3 Malaysia’s indicators of trade facilitation 38

2.4 Transport infrastructure in Malaysia 40

2.4.1 Road infrastructure and network 40

2.4.2 Railway infrastructure and network 41

2.4.3 Maritime and ports infrastructure and network 42

2.4.4 Airport infrastructure and network 43

2.4.5 Inland waterway infrastructure and network 45

2.5 Transport corridors and international supply chains in Malaysia 45

2.5.1 Priority transport corridors 45

2.5.2 International supply chains integration 46

2.6 Transport and logistics services in Malaysia 46

2.6.1 Road freight transport services 46

2.6.2 Railway freight transport services 47

2.6.3 Maritime transport and port services 47

2.6.4 Air freight transport services 48

2.6.5 Inland waterway freight services 49

2.6.6 Freight forwarding and warehousing services 50

2.6.7 Express freight and postal services 50

2.7 Lessons learnt from transport and trade facilitation in Malaysia 51

CHAPTER 3: SUGGESTIONS TO DEVELOP TRANSPORT TO FACILITATE TRADE IN VIETNAM FROM 2015 TO 2020 BASED ON EXPERIENCES OF MALAYSIA 54

3.1 Vietnam’s practice of transport operation to facilitate trade in the period 2005 – 2014 54

3.1.1 Overview of Vietnam’s economic situation 54

3.1.2 Indicators of trade facilitation in Vietnam 58

3.1.3 Transport infrastructure in Vietnam 62

3.1.4 Transport corridors in Vietnam 68

3.1.5 Provision of logistics services in Vietnam 70

3.2 Government’s perspectives of transport and trade facilitation from 2015 to 2020

7 1 3.2.1 National dimensions 71

3.2.2 Organizational framework 72

3.2.3 Sectoral strategies 73

3.3 Recommendations to develop transport for trade facilitation in Vietnam based on experiences of Malaysia

7 4 3.3.1 Recommendation for transport infrastructure 75

3.3.2 Recommendation for transport corridors and international supply chains 76 3.3.3 Recommendation for mechanism of managing trade facilitation activities 77

3.3.4 Recommendation for transport and logistics services 78

CONCLUSION 80

LIST OF REFERENCES 82

APPENDIXES 88

LIST OF ABBREVIATIONS

APEC Asia-Pacific Economic Cooperation

ASEAN Asia-Pacific Economic Cooperation

ASEM Asia – European Meeting

ETI Enabling Trade Index

FDI Foreign direct investment

GATT General Agreement on Tariffs and Trade

GCI Global Competitiveness Index

GSO General Statistics Office of Vietnam

ITC International Trade Center

IWT Inland waterway transport

KLIA Kuala Lumpur International Airport

KTMB Keretapi Tanah Melayu Berhad

LPI Logistic Performance Index

LRT Light rail transit

MITI Ministry of International Trade and Industry, MalaysiaMOIT Ministry of Industry and Trade, Vietnam

MOT Ministry of Transport, Vietnam

OECD Organization for Economic Co-operation and DevelopmentPPP Public – Private Partnership

TEU Twenty-foot equivalent unit

UN COMTRADE United Nations Commodity Trade Statistics DatabaseUNCTAD United Nations Conference on Trade and DevelopmentUNECE United Nations Economic Commission for Europe

USD United State Dollar

VNRA Vietnam National Railway Administration

WTO World Trade Organization

LIST OF TABLES

Table 1.1 Some Asiafacilitation organization’s achievements in trade 20

Table 1.2 Detailed issues of transportation and logistics servicespolicies / strategies 22Table 2.1 Top 5 exported products of Malaysia in 2012 - 2013 32Table 2.2 Top 5 imported products of Malaysia in 2012 - 2013 32Table 2.3 FDI inflows of some ASEAN nations (2008 - 2013) 34Table 2.4 LPI score and rank of some ASEAN nations (2007 - 2014) 38Table 2.5 ETI score and rank of some ASEAN nations (2010 - 2014) 40Table 2.6 Recent and upcoming PPP projects in Malaysia (2011 -2015) 53

Table 3.1 Top 10 highest value exporting products of Vietnam (2008- 2013) 57Table 3.2 ETI and some of its components of Vietnam (2009 - 2014) 61Table 3.3 Transport infrastructure score and ranking of Vietnam andMalaysia 61

Table 3.4 Proportion of freight volume by type of transport inVietnam from 2005 to 2013 62Table 3.5 Vietnam main seaport characteristics, 2010 65

LIST OF FIGURES

Figure 1.1 Three Pillars of Trade Logistics and Facilitation 10Figure 1.2 Structure of policy framework for trade facilitation 13

Figure 2.1 Malaysia’s GDP growth from 1995 to 2014 (%) 29Figure 2.2 Malaysia's foreign trade value and trade balance (2005 -2014) 31

Figure 2.3 LPI dimensions of Malaysia and some other ASEANnations (2014) 39Figure 2.4 LPI overperformers and underperformers 39Figure 3.1 Vietnam’s GDP growth from 1995 to 2015 (%) 55Figure 3.2 Vietnam’s foreign trade value and trade balance (2003 - 56

2013)Figure 3.3 Vietnam’s Major Exports and Imports, by Country of 58

Origin/Destination, 2013Figure 3.4 LPI and its dimensions score of Vietnam (2007 - 2014) 59Figure 3.5 LPI and its dimensions rank of Vietnam (2007 - 2014) 60

1 Study background

Recently, joining more and more regional and international organizations,expanding diplomatic relations and making bilateral and multilateral cooperationagreements with various countries and territories have brought a plenty ofopportunities for countries, especially for the developing ones The biggestadvantage coming along with trade liberalization is that domestic firms are morelikely to expand their business to international market, which means growth inexporting volume However, the domestic firms may hardly take all advantagesfrom international trade liberalization if their countries fail to facilitate trade sector

In Vietnam, despite the fact that trade activities recently have been positivelycontributing to the economic growth with focus on exporting goods that we havecomparative advantages in producing, the limitations in trade facilitation have stillacted as burden for the development Some milestones had significantly greateffects to export situation of Vietnam, such as: Vietnam became a member ofASEAN Free Trade Area (AFTA) in 1996; the bilateral trade between the U.S andVietnam has developed rapidly after the signing of the U.S – Vietnam BilateralTrade Agreement (BTA) in 2001; Vietnam became a member of WTO in 2007 andupcoming are various potential agreements such as ASEAN - Japan Free TradeAgreement, Trans-Pacific Strategic Economic Partnership Agreement (TPP),Vietnam - EU Free Trade Agreement and most importantly, ASEAN EconomicCommunity (AEC) These events brought promising future to our tradeliberalization and force the exporting volume to rise

What trade liberation has brought to the world economy is remarkable, but itwill be exploited soon Consequently, Vietnam’s competitiveness in exporting couldnot be maintained strong and may not inactively respond in time to the changes ininternational market if we only based on the advantages of those affairs There hasbeen extreme reduce in tariffs, with some kinds of goods the tariff is a mere of justover 0% In addition, the quota for many products has been eliminated It is evidentthat trade facilitation will help to boost our competitiveness, to launch freshinitiatives in new sectors and to take advantage of all chances given by trade

liberation Hence, the policy makers of Vietnam need to solve the questions: tofacilitate trade, we should start from where and by which way?

Despite locating in the South East Asia region, and having various geographic,political and social characteristics as our nation, Malaysia is at higher level ofeconomic development Mastering in creating a set of solutions to facilitate trade,Malaysia would definitely show valuable experiences and be a typical model forVietnam in terms of building up and developing a country comprehensively

Regarding the mentioned background, in order to improve our competitiveness

in exporting and take advantage of opportunities offered by trade liberation, theissue of creating facilitation as a stable factor of development in trade should bepaid appropriate attention The issue requires policy maker of Vietnam have a clearand comprehensive view on every related issues, and learn from other countries thathave been successful on making economic environment convenient, especiallyMalaysia Realizing the essence, urgency of the topic and also possible positiveoutcome that might be produced during developing the transportation system with

purpose of facilitating trade as the Malaysian has done, the topic “Transport and Trade facilitation in Malaysia and lessons for Vietnam” has been chosen for my

graduation thesis at Hanoi Foreign Trade University

2 Literature review

As analyzed above, due to the fact that trade liberation has provided us with alot of opportunities, there have been many academic researches aiming atinvestigating its impacts to the economic situation, as well as producingrecommendation to find the best way to improve Vietnam’s ability to expand ourexporting market Meanwhile, the topic of trade facilitation has appeared lately andremained quite new It inarguably deserves more serious concerns from scientists.During the time this thesis is written, there have been a few academicmaterials assessing either transportation situation or trade facilitation in Malaysiaand Vietnam Needless to say, they are quite informative and worth for reference

Report of World Bank (WB) in 2013 named “Trade Facilitation, Value Creation, and Competitiveness: Policy Implications for Vietnam’s Economic Growth”

highlighted the 3 key dimensions of trade facilitation with focus on physical

characteristics of trade flows Another report of WB that went into details of many

aspects in creating trade facilitation named “Facilitating Trade through Competitive, Low Carbon Transport: The Case for Vietnam’s Inland and Coastal Waterways” wrote about the intervention of inland and coastal waterways

infrastructure together with relevant policies, theirs benefits and prospect in the

future “Trade facilitation: Malaysia's experience” by WTO is not less informative

than the 2 papers before as it pointed out what Malaysian did to facilitate trademainly depending on adjusting customs and procedures However, it seemed hard tofind anyone with deep investigation in Malaysia transportation and tradefacilitation As Malaysia and Vietnam are both in South East Asia region and shareseveral similarities, it could be better if there was paper considering this issue ofMalaysia and have a connection/comparison with Vietnam

3 Purpose of the thesis

The thesis details actual practices of developing transportation system tofacilitate trade in Malaysia in the recent 10 years then analyze the problem inVietnam within the same period of time Depending Malaysian’s experience,possible coordination among sectors and ministries would be considered so as torecommend feasible suggestions for Vietnam to build up, adjust and maintain thetransport infrastructure to facilitate trade better

4 Research methodologies

In order to investigating in trade facilitation, the theoretical systems ofreputable international organizations, especially the theory and regulations of WTO,have been used as basis of the thesis Moreover, the readers will find various sets ofdata to be quoted and combined in the content; those may come from the statisticaldata or reports of organizations like UN COMTRADE, WB Using that data helps tomake critical comparison, draw logical conclusion and get lessons learned fromMalaysia Additionally, other methods such as inductive method, qualitative methodand theoretical method will also be used

5 The subject and scope of the thesis

The subject of the thesis is trade facilitation in Malaysia, focusing on thechanges in the effects of transport infrastructure and logistics services Combining

with the practices in Vietnam, the feasibility of solutions will be examined at themoments and give some recommendations for the development of transport inpreference to support trade facilitation.

The scope of the thesis: as it is impossible to cover all elements of tradefacilitation, the thesis will specify one of them: transport infrastructure in the recent

10 years (from 2005)

6 Structure of the thesis

This thesis is divided into 3 chapters:

- Chapter 1: General theory of transport and trade facilitation

- Chapter 2: Current status of the development of transport to facilitate trade

in Malaysia in the period 2005 - 2014

- Chapter 3: Suggestions to develop transport to facilitate trade in Vietnam

from 2015 to 2020 based on experiences of Malaysia

CHAPTER 1: GENERAL THEORY OF TRANSPORT AND TRADE FACILITATION1.1 Overview of trade facilitation

1.1.1 Definition of trade facilitation

The majority of the world has been successful in reducing tariffs andeliminating commercial quotas in the recent few decades, which partially contribute

to the trend of globalization, especially in terms of international commerce Therehave been a enormous expansion and stronger connections within the internationalsupply chains and international value chains between highly developed countries,developing ones and the others who are in the way of transforming This leads to thegreater demand in supply sources all over the world and, consequently, the growth

in materials/ goods distribution Together with the flourish of e-commerce, theseabove factors has been putting governments under pressures that requiresregulations to be changed to suit with the overall movements of the development ofthe world economy and manage its operation better This demand roots in the reasonthat most of the obstacles with international business nowadays do not lie in tariff orquota, but in the lack of transparency of regulations and customs rules intransportation system, which cause the increase in both time and cost to do businesstransaction and decrease the effectiveness of the economy

The World Bank (2005) claimed that “Trade facilitation is imperative for development” Indeed, investment in activities aiming at facilitating trade is

essential in order to have sustainable development It is evident that tradefacilitation has played a key role in the development of economy in each country,and of the whole world in general, as it helps goods and services be deliveredpunctually with a lower cost, so it also helps to boost the competitiveness of eacheconomy Based on that, countries can take advantages of every single chancesbrought by trade linearization It is believed that unless countries, especially thosedeveloping, make appropriate investments on port and road systems, improve theeffectiveness in customs management and so on, they will fail to seize thoseopportunities

Being aware of the significance of facilitating trade at the beginning of 20thcentury, WTO members agreed that trade facilitation should be treated as one of themain issues to be considered Trade facilitation was first analyzed in details in the

1996 Ministerial conference which took place in Singapore The topic has receivedmore and more concerns from not only authorities but also entrepreneurs all overthe world afterwards In many agreements latter such as ACV, PSI, ROO, ILP, TBT,SPS and so on, there were some terms working on the simplification of tradeprocedures, which initially reflected the spirit of trade facilitation However, theseremained quite simple and aimed only at cutting red tapes which, in the past, wasused by various in order to protect domestic industry against external one Not untilDecember 2013 did the WTO members come up with the final agreement about this

global issue, which was named “The Agreement on Trade Facilitation” It was

part of a wilder Bali package which is the outcome of the Ministerial Conference inBali, Indonesia

According to ITC (2013): “There is no commonly – used definition of trade facilitation” In other words, it is easy to find a lot of ways to approach to this term.

Some originated from trustful sources could be as follows

In “The Agreement on Trade Facilitation”, WTO (2003) defined trade

facilitation as “the simplification and harmonization of international trade procedures” with trade procedures being “the activities, practices and formalities involved in collecting, presenting, communications and processing data required for the movement of goods in international trade” The Trade

Facilitation Agreement comprises of provisions for expediting the movement,release and clearance of goods, including goods in transit Not only arrangingmeasures for effective cooperation between customs and other appropriategovernments on trade facilitation and customs compliance problem, it also containsprovisions for technical support and capacity building in this section

For United Nations Economic Commission for Europe (UNECE) and its UNCentre for Trade Facilitation and Electronic Business (UN/CEFACT), tradefacilitation is “the simplification, standardization and harmonization of proceduresand associated information flows required to move goods from seller to buyer and

to make payment”; in which: simplification could be understood as process of

“eliminating all unnecessary elements and duplications in trade formalities,processes and procedures”, standardization could be seen as “the process ofeliminating all unnecessary elements and duplications in trade formalities, processesand procedures” and standardization is the process of “alignment of nationalprocedures, operations and documents with international conventions, standards andpractices” Such a definition implies that not only the physical transit of goods isessential in a supply chain, but also the associated information flows What is more,

it includes, at the same time, all governmental agencies that intervene in themovement of goods, and different commercial entities that conduct business andmove the goods This is in accordance with discussions on the issue ongoing at theWTO at that time

Besides, World Bank (WB, 2006) claimed that “as the first generation of tradereforms, trade facilitation consists mainly of easing of border restrictions tomerchandize trade and liberalization of foreign exchange markets, have been or arebeing implemented by the majority of developing countries” It is becoming obviousthat their successful integration into the world economy increasingly depends on therealization of a series of complex, behind-border measures that fall under theheading of trade facilitation Broadly defined, these measures include anything frominstitutional and regulatory reform to customs and port efficiency and are inherentlyfar more intricate and costly to implement

In addition, other international organizations have once come up with theunderstanding of trade facilitation, such as UNCTACD, APEC and so on (see more

in the appendix 1) While the WTO’s definition above has been used as basis forWTO’s negotiation afterwards, the one of APEC might be broader as itencompasses also customs, transportation, goods transit, bank and insurance,business and telecommunications Despite the diversity in the definition of tradefacilitation, it is evident that those all demand the higher level of simplification andharmonization in import – export process and transparency in trade regulations andoperation They also target at minimizing the complexity and reducing cost duringdoing business by using many methods

In short, the term “trade facilitation” within this thesis refers to the

adjustments in policy or procedures whose purpose is to cut down the cost and time

in goods transportation within a country or internationally, excluding tariffs, non –trade barriers and import quotas

1.1.2 Benefits of trade facilitation

Generally, all parties shall receive benefits in the event of favorable tradefacilitation From the perspective of each country, it is obvious that the simpler thetransactions process, the greater amount of goods to be traded, consequently themore tax coming to the pocket of the government In addition to this, a higher level

of effectiveness and transparency in providing public services will help authoritiesmaintain a higher level of confidence and restrain fraud and eruption to make suregovernment’s income shall not be lost Moreover, trade facilitation will boost thecompetitiveness strengths of the economy, especially in terms of exporting, hencecontribute to the growth of the economy and attract more foreign investment Fromthe perspective of enterprise community, thanks to trade facilitation, it takes muchless time for the freight to reach customers, which lead to a great fall in cost ofinventory, transporting and others that might arise during the dead time That bringsmore competitive advantages to the business, especially one specializing inproviding support services Besides these, due to the consistency and integrity inpublic services of the government like customs procedures or border managements,businesses can spend less time on paper work From the perspectives of customers,they are free from a great deal of cost due to cumbersome procedure or thelikelihood of late delivery

Benefits brought about by trade facilitation could be observed at nationwide orinternational level For country management, minimizing delay and unnecessarycosts are both positive for attracting foreign investment, assistance for the economyand creating more jobs World Bank (2012) shows that time to export goods fromdeveloping countries is 3 times higher than that from developed one The number ofsteps in exporting goods from developing countries is numerous, with many moresignatures to be collected than those in developed one According to Organizationfor Economic Co-operation and Development (OECD, 2011) in a research named

“Trade cost: What have we learned”, one day decrease in time spent at sea couldincrease trade by about 4.5% for each country So here come 4 main benefits forcountries, especially developing ones, to facilitate trade:

- Enhance competitive advantages in trade

- Invite foreign direct investment (FDI)

- Encourage small and medium enterprises to join international trade

- Accelerate the pace of economic growth

For regional or international management, the benefits of trade facilitation areundeniable For example, a recent WB research (Helble and Wilson, 2012) on aideffectiveness finds that 1 dollar of aid for trade facilitation translates into 70 dollars

in exports for recipients Another example is the APEC region: reforms in countriesthat perform below the regional average could increase intra-APEC trade by USDbillion 245 (UNECE, 2010)

1.1.3 Issues of trade facilitation

As being analyzed above, trade facilitation aims at reduce time, cost andimprove the reliability during doing business transaction However, until now, noassumption has been officially proved yet to indicate the sources of tradefacilitation Alberto Perez and John Wilson (WB, 2010) claimed that measuresleading to trade facilitation might be referred by 2 dimensions: one investing inphysical (or hard) infrastructure (highway, railway, port, information technology)and the other focusing on regulatory reform (or soft infrastructure: the transparencyand effectiveness of customs, border agencies; business environments and otherinstitutions)

In order to have trade facilitation, each country should think about thefollowing suggestions:

- Improve transportation services (including, but not limit to: transport infrastructure, freight services)

- Review legislation on trade

- Restructure supply chains

Those suggestions are displayed in figure 1.1 below, referred to as 3 pillars

Figure 1.1: Three Pillars of Trade Logistics and Facilitation

Source: WB, Trade Facilitation, Value Creation, and Competitiveness: Policy Implications for Vietnam’s Economic Growth, 2013, p.20 The last pointed has

been taken into consideration by UNECE (2013) as acrucial component in transportation, or exactly, a step in Buy-Ship-Pay model ofUN/CEFACT In their opinion, adopting a supply chain perspective makes itpossible to view and understand all possible processes and the inter-linkagesbetween them It provides the framework to logically connect different actors,procedures and requirements in one picture of the trade environment Inemphasizing the dependencies, it becomes clear that improvements are realizedthroughout the chain but changes in one area can easily be offset by stalemates inothers

1.1.3.1 Transportation and logistics services

Logistics is the management of the flow of goods between the point of originand the point of consumption in order to meet some requirements, of customers orcorporations (Sunil Chopra and Peter Meindl, 2007, p.34) The resources managed

in logistics can include physical as well as abstract items The logistics of physicalitems usually involves the integration of information flow, material handling,production, packaging, inventory, transportation, warehousing, and often security

Domestic transportation is usually on the road, while international one mainly takesplace on air or sea Additionally, this element includes services, equipments andinfrastructure to link between different kinds of transport services (especiallycommon in multimodal transport) Railway stations, seaports and cargo yard areused for transit goods in domestic transport, while seaports and airports suit withthat purposes of international transport.

It should be noted that this element also contains non-transport logisticsservices The most popular is cargo warehousing, along with other services offered

at warehouse like packaging, marking, inventory management, assembling Anotherone that might be involved by banks (with insurance or trade finance) is completingcustoms procedures Needless to say, the effectiveness of logistics services depends

on the quality of infrastructure and the diversity of services provided bygovernments and private businesses

Time and cost are the two factors used to measure the effectiveness oftransportation and logistics services Sometimes, logistics key performanceindicators (KPIs) also help to assess the ability to connect in transportation andcustomers’ satisfaction

In order to approach to trade facilitation, it should be highlighted that: Firstly,research on the issue should not only limit to congestion, but ought to includelogistics services performed in that infrastructure Secondly, the cooperationbetween government agencies and private business is a must to enhance theeffectiveness of logistics services in trade Well-planned infrastructure andtransportation system help decrease the time and cost in goods transport Insummary, improvements in transportation to facilitate trade can be gauged throughtime, cost and the level of uncertainty (or reliability) The table demonstratingimpact of improvements in transport infrastructure and logistics services could befound in the the appendix 2

1.1.3.2 Trade regulatory procedures

Legislation on trade consists of all procedures and services related to goodstransport passing through borders It contains the collection of tariffs, theperformance of agreements, the restrictions of purchasing some particular kinds of

goods that might harms human health or community security and so on There areseveral reasons leading to the long time in following a procedure: cumbersomebureaucracy, inconsistent custom, lack of transparency in information, the absence

of information and communication technology

Obviously, essential adjustments should be taken place to simplify tradeprocedures, manage better the officials and have ground for trade facilitation

1.1.3.3 Restructuring supply chain organizations

The third factor to affect trade facilitation is the way to organize supply chain,

or in other word, restructuring the supply chains As being analyzed before, one ofvarious targets of trade facilitation is to reduce cost in transport, so restructuring thesupply chain can increase value added activities for domestic firms, minimize cost

of business support services and other ones that may arise during supply chainssuch as cost of goods sold, cost of manufacturing

As intermediate products cross borders many times before being assembledinto a final good, logistics costs are key for export competitiveness The EnablingTrade: Valuing Growth Opportunities program, conducted by the World EconomicForum, the World Bank and Bain & Co in 2012, indicated that reducing supplychain barriers could increase global gross domestic product (GDP) by USD 2.6trillion, around 5% This estimate relies on countries improving just two key areas

of trade facilitation – border administration and transport and communicationsinfrastructure – halfway to global best practice A less ambitious scenario, that ofimprovement halfway to regional best practice, would already lead to a global GDPboost of approximately USD 1.5 trillion, or 2.6% The highest relative GDP gainsare focused in Africa and South-East Asia

More recent and deeper investigation of supply chain planning – both in globalmultinationals and companies which are not yet exporting but would like to –reveals a new focus Just as the reform drive shifted from tariff reduction to bordermanagement concerns, the new emphasis is on modularity and reliability behind theborder Both experienced and budding exporters are keen to be able to set up theirsourcing and distribution systems in a harmonized way across countries Ongoingresearch indicates that the key to this may be to convince officials in domestically

focused ministries and industries that trade facilitation should be part of theirportfolio of concerns, rather than someone else’s problem.

1.2 Regional and international policies on trade facilitation

1.2.1 Policy framework

The previous section has listed 3 things contributing to trade facilitation:transportation systems and logistics services, trade procedures and restructuringsupply chain However, a policy framework is still in need to direct and control the

3 factors mentioned above A policy framework refers to both regional andinternational policies, which are deemed to be soft infrastructure and play a key role

in coordinating trading and transporting goods and logistics services

Figure 1.2: Structure of policy framework for trade facilitation

Source: National Committee for International Economic Cooperation, 2011 cited in WB, 2013, p.36

The upper figure illustrates the components of a policy framework

At the top of the triangle lie macroeconomic policies and strategies targeting at trade facilitation or going together with international agreements of trade promotion

which the nation participated in Basically, such policies and agreements shallnavigate nationwide strategies of trade facilitation Moreover, there are also policiescompatible with some particular regions or provinces, which help plan furtherprograms or projects promoting local economy.

In the middle of the triangle lie several institutions including both organizationalstructure (government agencies, official associations) and legal framework (law andlegislation) Its purpose is to govern fair competition in trade by facilitating theeconomy and implement the policies or strategies in the upper part

- Organizational structure refers to a collection of management agencies

in charge of trade facilitation at a high level and organizations whichare due to adhere the regulations mentioned in legal framework

- Legal framework refers to law and legislation governing trade, businessactivities, transport management, logistics development and building upinfrastructure

At the bottom of the triangle lie trade competitiveness and transportationactivities Once again, those 3 factors appearing here are including transport andlogistics services, trade regulatory procedures and supply chain development

Synchronous cooperation of 3 parts of the triangle will surely increase tradecompetitiveness of any nation Trade competitiveness and facilitations activitiesshould be conducted within legal framework and organizational structure to satisfythe demand of national policies/strategies and follow international agreements.Smooth operation could be achieved as long as there is coordination betweengovernment and private sector

1.2.2 Regional and international organizations working on trade

facilitation

Any country desiring to develop one (or more) of 3 pillars of trade logisticsand facilitation needs well-planned organizational structure and legal framework asthe basis to fulfill the policies/strategies (the top priority – at the top of the triangle).Such organizational structure and legal framework must, firstly, not cause anyconflicts against any international agreements signed by the country itself, whichare created and controlled by regional or international organizations What they try

to do are:

- Developing and administering international conventions and

agreements on trade facilitation

- Developing relevant recommendations, guidelines, standards and other instruments

- Providing relevant technical assistance and capacity building to

developing and transition economies

- Providing a platform for discussion of trade facilitation matters

Some organizations play key role all over the world on this issue They are:

1.2.2.1 World Trade Organization (WTO)

While there was no single agreement specifically focusing on a legalframework for measures relating to trade facilitation, WTO agreements coveredsome aspects of it

The Customs Valuation Agreement and the Agreement on Rules of Originwere both complementary General Agreement on Tariffs and Trade (GATT)agreements relating to the classification and valuation of goods for dispatchpurposes The Agreement on Pre-shipment Inspection (WTO, 1994) seeks toestablish regulations for conducting the pre-shipment inspection Some sources alsobelieve that the Agreement on Technical Barriers to Trade (TBT) of the GATT 1994(WTO, 1994) also has an impact on trade facilitation This agreement includedregulations for the adoption of technical regulations and standards, and conformityassessment so that these regulations did not become obstacles to trade A similarapproach was adopted to establish the Agreement on the Application of Sanitary andPhytosanitary Measures (SPS) In Articles V, VIII and X of GATT 1994 (WTO,1994), other regulations on trade facilitation are presented At the WTO MinisterialMeeting held in Singapore in 1996, trade facilitation was officially included in theagenda for the next round of trade negotiations This round started officially inDoha in 2001 as the Doha Development, and still has been continuing Innegotiations WCO trade facilitation, WTO members seek to draft a new legalframework for trade facilitation

The crucial foundation for trade facilitation agreement was believed to lie inArticles V, VIII and X GATT 1994 These articles provided written rules that hadarisen since 1947 and covering:

- Article V - Freedom of transit

- Article VIII - Fees and formalities connected with importation and exportation

- Article X - Publication and administration of trade regulations

These articles were successful at capturing the basic idea of what tradefacilitation is about The process carried out in the Negotiating Group on TradeFacilitation (NGTF) has been reviewed whether those articles are sufficient topromote trade facilitation through efficient border management and effectivedomestic procedures The compulsory clarification and improvement of them hasbeen based on proposals by WTO Member States

1.2.2.2 United Nation Economic Commission for Europe, with United Nations Centre for Trade Facilitation and Electronic Business (UNECE with UN/CEFACT)

One of the UNECE's most prioritized concerns toward trade activities is tradefacilitation and e-commerce Within the UN system, UNECE is perceived as a focalpoint in those areas In 1960, its was a team was established by UNECE to work onthe the issue all over the world, which was named Working Party No 4, then wasreplaced by the United Nations Center for Trade Facilitation and ElectronicBusiness (UN/CEFACT) Its slogan is “Simple, Transparent and Effective Processesfor Global Commerce” Recently, one of its more widely known recommendations

is on Single Windows for export and import information submission (UNECERec.33) UNECE is also a co-founder of the United Nations Network of Experts forPaperless Trade in Asia and the Pacific (UNNExT)

The objective of the UNECE in the area of trade facilitation and e-commerce

is to assist countries and their institutions to develop their knowledge of facilitatingnational and international transactions, improve national competitiveness and theirparticipation in global markets through the simplification and harmonization ofprocesses, procedures and information flows In general, it operates to:

- Support and strengthen the capacity of national institutions for trade facilitation through advisory services and workshops.

- Help set up national single windows for exportation - importation and information and its operation

- Analyze and streamline business processes to eliminate barriers and enhance business efficiency

- Support the replacement of electronic alternatives to paper documents

of the international supply chain

- Support business transactions without paper work

UN/CEFACT is a subsidiary body of the Intergovernmental Commission forTrade of the UNECE It is governed by a bureau consisting of a President and Vice-Presidents who oversees the management of the UN/CEFACT They formed aglobal representation of experts from intergovernmental organizations, countryauthorities and the business community

Up until now, UN/CEFACT has published:

- Technical standards, such as specifications illustrating how to develop one or more commercial standards and / or recommendations

- Commercial standards, such as specifications that provide relevantregulations, guidelines and/or principles within the framework of tradefacilitation and e – commerce

- Recommendations on trade facilitation that formally guide publicauthorities, the private sector and the business community

1.2.2.3 World Bank (WB)

The WB’s trade facilitation tasks concentrate on cutting down the costsassociated with transporting goods and services along international supply chain interms of money, time or reliability It connects the poverty to international markets

by reducing trade costs or upgrading their employment, income and consumptionopportunities, thereby contributing to the World Bank Group’s central mission ofpoverty reduction

Priorities for trade facilitation and logistics include:

- Trade finance

- Improving trade corridors and regional trade facilitation frameworks.

- Enhancing the effectiveness of border management, including customs,police, health, quarantine, agriculture, immigration and standardsagencies

- Promoting markets for logistics services

The WB has spent a great amount of budget on its institutional reform projectsand financing of trade infrastructure A series of diagnostic and implementation toolwere established by WB to help reformers to design and implement trade facilitationinitiatives Furthermore, it has been widely known as one of the world’s mosttrustful sources of trade-related data and knowledge, technical assistance,project/donor coordination, advisory services, research, and provides supports forvarious external partnerships and global advocacy efforts

1.2.2.4 Other organizations

The 3 organizations above (WTO, UNECE, and WB) have been recognizedfor their enormous contribution to trade facilitation In addition, other internationalorganizations have their own contributions into the policy framework of tradefacilitation

The UN Economic Commission for Asia and the Pacific (UNESCAP) is a UN’s

regional commissions which was set up at the same time with OEEC, and is theregional development arm for the Asia-Pacific region Regarding trade facilitation,

it supports countries by:

- Promoting simplification, harmonization and standardization of

business processes to reduce costs and the time of transaction

- Facilitating trade and investment, particularly trade finance and trade online

- Enhancing the implementation of trade facilitation environment in the ESCAP region

ESCAP also runs projects for building up capacity, conducts researches,organizes intergovernmental meetings, and provides advisory services to its memberstates ESCAP has established, in cooperation with UNECE, the United NationsNetwork of Experts for Paperless Trade in Asia and the Pacific (UNNExT)

for capacity building in the area of trade facilitation and non-paper trade, takingadvantage of the world-class expertise that exists in the region.

In addition, ESCAP encourages research on trade facilitation through the Pacific Network for research and commercial training (ArtNet) and provides anopen platform for regional dialogue on trade facilitation among regionalstakeholders by organizing the Asia Pacific Annual Forum in facilitating (APTFF),

Asia-in collaboration with the Asian Development Bank (ADB)

The Organization for Economic Co-operation and Development (OECD),

which had been initially the Organization for Economic Co-operation from 1947,was formed in 1961 It desires to "promote policies that will improve the economicand social well-being of people around the world" (OECD, 2005) It welcomes allcountries and territories and currently has 34 members, ranging from Europe toNorth and South America OECD’s trade department has conducted variousquantitative economic researches trade facilitation in terms of costs and benefits.Another function of OECD is to plan cooperation for its members and assess theimplementation between them (peer review)

The International Trade Center (ITC) has been jointly managed by WTO and

UN which totally concentrates on increasing exports from economies in transitionand developing countries Its current program called “Trade Facilitation ProgrammeStrategy” (TFPS), in the period between 2002 and 2015, sets target at boosting thecompetitiveness of the private area through improvements in export capacity,downgrade of transaction costs and strengthening regional integration using tradefacilitation methods The application of the TFPS covers two main areas:

- Advising small and medium enterprises on exporting, in accordance with transit, border and customs formalities

- Strengthening private sector capacity in the area of trade facilitationand trade logistics services so that exporters comply with internationalrequirements

Generally, in the Asia Pacific region, or the South East Asia area in particular, trade facilitation activities are mandated to follow agreements of regional

organizations, such as ASEAN, APEC or ASEM Summaries of those could befound in the table underneath.

Table 1.1: Some Asia organization’s achievements in trade facilitation

ASEAN has made different agreements and executed some

Association program to facilitate trade, such as:

- ASEAN trade in goods agreements (ATIGA)

2 Economic tariff barrier, investments …

Cooperation - APEC Trade Facilitation Action Plan (TFAP) 1st phrase:(APEC) 2002 – 2006; 2nd phrase: 2007 – 2010 (to decrease transaction

cost)Asia – - Trade Facilitation Action Plan of ASEM focuses on areas (

3 Europe less than 15 of ASEAN’s)

Meeting - ASEM non – discrimination principles (used within its

(ASEM) members)

Source: Author

1.2.3 International policies and strategies related to trade facilitation

Through the most recent century, it is a series of conventions that worktogether and make a solid legal framework for international commerce Without theappearance of such conventions, it would be extremely hard, or even impossible, tocreate and coordinate effectively a wide range of trade facilitation activities

Below are some imperative conventions having relations with or impact ontrade facilitations:

- Chicago Convention on International Civil Aviation, 1944

- Convention on Facilitation of International Maritime Traffic, 1965 (FAL Convention, 1965)

- Convention on International Transport of Goods Under Cover of TIR Carnets, 1975 (TIR Convention, 1975)

- International Convention on the Harmonization of Frontier Controls of Goods, 1982

- Harmonized Commodity Description and Coding System, 1988 (HS Convention, 1988)

- WTO agreement on customs valuation, 1994

- Convention for the Unification of Certain Rules for International

Carriage by Air, 1999 (Montreal Convention, 1999)

- Protocol of amendment to the International Convention on thesimplification and harmonization of customs procedures, 1999 (RevisedKyoto Convention, 1999)

- United Nations convention on the use of electronic communications ininternational contracts 2005 (Convention on electronic

communications, 2005)

- WTO Trade Facilitation Agreement, 2013

It should be highlighted that among those agreements/conventions/protocols,the last one – WTO Trade Facilitation Agreement, 2013 has direct effect on tradefacilitation activities recently

In the modern and globalized world where trade barriers are going to beremoved day by day, all countries prefer exportation to importation as they areaware that the more exporting contracts conducted, the more wealth their nationswill absorb As a result, trade linearization is becoming a core part of internationaltrade promotion orientation and trade facilitation is paid more attention from botheconomists and policy makers There will surely more and more forums andconference regarding this issue in the future, with expectation to new initiative atdifferent levels (local, regional or international)

The following table shows detailed issues which policies/strategies oftransportation and logistics services working on:

Table 1.2: Detailed issues of transportation and logistics services policies / strategies

Road transportationDomestic transportation Railway

Road transportationTransaction and Combination of methodscoordination Logistics services

Source: WB, Trade Facilitation, Value Creation, and Competitiveness: Policy Implications for Vietnam’s Economic Growth, 2013 It could be realized that

there has been a connection between transportinfrastructures, logistics services and trade facilitation The development oftransportation in central area, main corridors and international entrance is a goodsource for trade facilitation In other words, an appropriate investment intoinfrastructure and logistics services is needed to facilitate trade better

1.3 Key performance indicators of trade facilitations

It is extremely important to analyze key performance indicators in assessingtrade facilitation experiences in a particular country and giving recommendations.This section will go into detail 4 key indicators related to trade facilitation activitiesand brief on some other ones

1.3.1 Logistics Performance Index (LPI)

The Logistics Рerformance Index (LРI) is an interactive and comрarative toolwhose рurрose is to helр nations realize the challenges and chances they have todeal with in their рerformance on trade logistics and which imрrovement they canmade Uр to 2014, the LРI allows more than 150 countries to make comрarison

The LРI is based on a worldwide survey of oрerators on the ground, includingexрress carriers and global freight forwarders, рroviding assessment of the logistics

“friendliness” of the countries in which they run business and their counterрarts.They combine meticulous рreрaration about the countries in which they work withqualitative evaluation of other countries where they do business with andexрeriences of global logistics environment Quantitative data suррlementsfeedback from oрerators on the рerformance of key comрonents of the logisticschain in the рartner nation

Consisting of quantitative and qualitative measures, LРI helрs build uрlogistics friendliness for those countries It measures рerformance along thelogistics suррly chain within a country and therefore offers two differentрersрectives: domestic and international

Domestic LРI рrovides both quantitative and qualitative assessments of a

country by logistics exрerts working inside it It includes detailed information oninstitutions, the core logistics рrocesses, рerformance cost and time data andlogistics environment

International LРI uses six key dimensions to comрare countries' рerformance

and also disрlays the derived overall LРI index The scorecard allows benchmarkwith the world (to disрlay world's best рerformer) and with the income or regiongrouр (with the oрtion to disрlay the income grouр’s or region’s best рerformer) onthose indicators and the overall index The 6 key dimensions are:

- Custоms: Efficiency оf the clearance рrоcess by bоrder cоntrоlagencies (i.e., sрeed, simрlicity and рredictability оf fоrmalities),including custоms

- Infrastructure: Quality оf trade and transроrt related infrastructure (e.g.:infоrmatiоn technоlоgy, роrts, rоads, railrоads)

- Shiрments: Ease оf рreрaring cоmрetitive shiрments in terms оf рrice

- Cоmрetence and quality оf lоgistics services

- Tracking and tracing: Ability tо trace and track cоnsignments

- Timeliness: Whether shiрments reach роrt оf discharge at the schedule time оf destinatiоn оr nоt

Figure 1.3: Six key dimensions of LPI

Source: WB, Connecting to compete, 2014, p.7 The scorecards illustrate

comparative performance—the dimensions demonstrate a scale from 1 (the

lowest) to 5 (the highest), relevant to the possiblecomparison groups—of all countries (world), region and income groups

1.3.2 Global Competitiveness Index (GCI)

Global Competitiveness Index has been a core part of “GlobalCompetitiveness Report” conducted by World Economic Forum (WEF) Its firstedition was in 2004 Having based on the Growth Development Index and BusinessCompetitiveness Index in the past, it succeeded at combining both macro andmicroeconomic aspects in to sole indicator

The most recent edition of this report published in 2014 benchmarked thecompetitiveness ability of nearly 150 countries with in-depth investigation into thedrivers of their effectiveness and wealth The term “competitiveness” wasunderstood as “the set of institutions, policies and factors that determine the level ofproductivity of a country” (WEF, 2014) The report acts as the most valuableevaluation of national competitiveness in comparison with other nations, providing

a background for policy dialogue among government, enterprises and citizens aboutthe required actions to improve nation’s wealth The level of effectiveness, in turn,controls the amount of capital that can be earned by an economy In the edition, GCIsuggested that country with higher level of innovation and citizens having higherlevel of vocational skills are motivated much better in terms of economic growth Italso implied that cooperation among leaders of government, enterprises and society

is required to address the burden after economic crisis and head to sustainablegrowth

The different aspects of GCI are captured in 4 pillars: inflation rate, corruptionlabor skills and infrastructure

1.3.3 Enabling Trade Index (ETI)

Enabling Trade Index has been the heart of “Global Enabling Trade Report”, aaccomplishment of World Economic Forum The report was first published in 2008and worked on more than 100 emerging countries Having built from trustfulinformation and data of various international organizations like WTO, WB, UN, itsindex assesses the services, policies and factors that facilitate the trade in goodsacross borders through 4 central areas: business environment, border administration,communications infrastructure and transport, market access

1.3.4 Global Connectedness Index (GCI – DHL)

DHL Global Connectedness Index was created by Steven Altman and PankajGhemawat of DHL (German logistics corporation) in 2011 to analyzes trends ininformation, capital, trade, and people flows crossing border It shows a specializedanalysis of the extent of globalization state around the world The report containingDHL Global Connected Index is published on a yearly basis It works on the depth(the frequency and the volume of good traded between that country with the others),breadth (how many partner countries that a particular one have business relationwith), and directionality (how easy it is for other countries to do business with) Thelatest edition just came to public in 2014, which updated the prompt recovery of theeconomy for all damages incurred during crisis in the period between 2007 and

2010 However, trade depth was maintained last year, so it still remains a burden forglobal connectivity Holland and Europe was regarded at the top connected country

and region consecutively Ranking the majority of nations around the world, GCI –DHL serves as the right arm for researchers and investors to have a clear view ofpotential economies, hence made a good advice/decision on places to invest At thesame time, authorities also have a tool to point out their plus and minus point interms of economics connectivity.

be better to add in a few specialized indicators as below:

- Liner Shipping Connectivity Index (LSCI): was first published in 2003

CHAPTER 2: CURRENT STATUS OF THE DEVELOPMENT

OF TRANSPORT TO FACILITATE TRADE IN MALAYSIA

IN THE PERIOD 2005 - 20142.1 Overview of Malaysia’s economy

2.1.1 Geographic location and political situation of Malaysia

2.1.1.1 History and geographic location of Malaysia

From the end of 18th to the next century, the United Kingdom had foundedcolonies and dominions in the area of South East Asia near Pacific Ocean, whichwere later invaded by Japan from 1942 to World War II The territories governed byEngland on the Malay Peninsula then established the Federation of Malaya in 1948,which has no longer been colony since 1957 As the East Malaysian states ofSarawak and Sabah and the former British colonies of Singapore merged into theFederation in 1963, it is time Malaysia was born However, the country then had tofight against Indonesian’s intension to dominate, Philippine’s claim of Sabah andSingapore’s splitting from the Federation

Malaysia is located in middle South East Asia and shares borders withSingapore at south, Thailand at north and Indonesia at south and west It comprises

of two main parts: the first one is Peninsular Malaysia and the other is the states of Sabah and Sarawak to the north of the island of Borneo, which lie across the

South China Sea The former is an area of forested mountain ranges ranging fromthe north to the south, on either side of which situates low-lying coastal plains Thecoastline length is roughly about 1,900km

The coast to the west includes mudflats and mangrove swamps which splitinto bays and inlets In the west, while the unsheltered east coast consists of tranquilbeaches backed by dense jungle, the plains have been cleared and cultivated Themain islands are Langkawi (a archipelago of 99 sub-islands), Penang and Pangkoroff the west coast; and Tioman, Redang, Kapas, Perhentian and Rawa off the eastcoast In Malaysian Borneo, Sarawak has alluvial and, in places, swampy coastalplains with rivers penetrating the jungle-covered hills and mountains of the interior

Sabah has a narrow coastal plain which gives way to mountains and jungle MountKinabalu whose height is 4,094m, has been acknowledged as the top of Malaysia.

2.1.1.2 Political situation and foreign relations of Malaysia

Malaysia is a country of constitutional monarchy federal election System ofgovernment modeled close to the Westminster parliamentary system, a legacy of Britishcolonial rule Yang di-Pertuan Agong is the head of state, or usually known as the

"King" King was elected by a 5-year term from next nine episodes of the monarchyMalay states The rest four states have nominally head of governors, but not involve inrecruiting According to unofficial agreement, Sultan will position by rotatingmonarchy holds nine states, the role of the monarch largely ceremonial since changes

to the constitution in 1994 Legislative power is split among state and federallegislatures Executive authority is given to the Cabinet headed by Prime Minister.Malaysia is a one of the founders of the ASEAN, Organization of IslamicCooperation (OIC), and also participates in many international organizations such asthe UN Economic Cooperation forum Asia - Pacific, and the non-Aligned Movement(NAM) In the past, Malaysia served as chairman of ASEAN, OIC, and NAM forseveral times Kuala Lumpur was the venue for the East Asia Summit in 2005

Malaysia has been successful in maintaining diplomatic relations with othermembers of ASEAN like Vietnam, Indonesia, the Philippines, Singapore, Laos,Cambodia, Myanmar, Brunei and Thailand At the moment, Malaysian embassies havebeen placed in all ASEAN countries as well as other ones and helped the nation getalong with neighbors In addition, the relations of Malaysia with important partnerssuch as European Union (EU), United States and Japan began to flourish

It could be generally concluded that Malaysia is a country of stable politics.The nation has been managed by a democratically-elected coalition which alwayssticks closely with development plan of its economy A lot of appropriate measures,particularly the Economic Transformation Program (ETP), have been designed forthe Government pledge implement on the suitable policies and provide enoughsupport for the establishment of a ideal environment for investment and business.This is to guarantee the investors that Malaysian government firm yet flexibleenough to address their needs

2.1.2 Economic situation of Malaysia

Malaysia has a state – oriented and quite open market economy, which isrelatively new in terms of industrialization The state plays a key yet decreasing role

in navigating economic activities through macroeconomic policies Malaysia'seconomy was considered as one of the most competitive market in Asia in the lastfinancial year 2014 – 2015 The economy was ranked 6th in Asia region and 20th onthe worldwide basis, that means even higher rank than that of South Korea, Franceand Australia (The World Economic Forum, 2014) GDP PPP of Malaysia’seconomy in 2014 was USD 746.821 billion, which was left behind by 2 otherASEAN members: Indonesia and Thailand A quick comparison shall help usunderstand the growth speed of Malaysia: The PPP GDP was USD 383.6 billion,which was just a half of the figure in 2014, and the PPP per capita GDP was USD8,100, which was around one third that in 2014

Figure 2.1: Malaysia’s GDP growth from 1995 to 2014 (%)

a productive raw materials supplier (tin and rubber) since the end of 1960s, at the

moment Malaysia has a diversified economy and has been a leader

in terms of export volume of electrical appliances and relevant components, naturalgas and palm oil Seriously suffering from Asian financial crisis in 1997/8, Malaysiaquickly recovered and maintained the growth rate of above 5.5 % from 2000 to

2008 Once again, the nation was affected by the global financial crisis in

the following year but had an immediate recovery right then In 2014, GDP growthwas measured at 6%.

Together with remarkable growth, poverty was shown to have positive signs asthe proportion of the poor in Malaysian society declining from 49.3 % in 1970 to1.0 % in 2014 Meanwhile, inequality in society reflecting through citizen incomewas quite high For example, the Gini coefficient of income inequality of Malaysiareached 0.4 in 2014, in comparison with 0.31 and 0.33 in the South Korea andJapan The stability of Malaysia's short term financial standpoint over the medium-term relies on the execution of structural changes to help abilities and rivalry insidethe economy, alongside the monetary advancements in Malaysia's fare markets andpatterns in worldwide oil and gas markets The fastened usage of profit upgradingchanges to build the nature of human capital and make more rivalry in the economywill be a solution for Malaysia to secure an enduring spot among the positions ofhigh-wage economies The country is making every effort to tackle the problems.New Economic Model (NEM), which is a project to bring the country to highincome level by 2020 but still makes sure growth is inclusive and sustainable, cameinto effect in 2010 The NEM incorporates various changes to accomplish monetarydevelopment that is fundamentally determined by the private area and forcesMalaysian’s economy into higher level

2.1.3 Foreign trade of Malaysia

International trade value of Malaysia experienced remarkable increase in therecent decade with total trade value rising from RM 969 billion in 2005 (RM 536billion exporting, RM 433 importing) to more than RM 1.45 trillion in 2014 (RM

766 billion exporting, RM 683 billion importing) More importantly, Malaysia hasbeen good at maintaining the status of trade surplus by pushing exporting more thanimporting value throughout the period In the previous year, its trade balancereached RM 83 billion, just half of that figure right before global crisis in 2008 (RM

143 billion) In general, both import and export value tends to go up in the future.Figure 2.2 describes the changes in foreign trade value in the recent decade

Figure 2.2: Malaysia’s foreign trade value and trade balance (2005 - 2014)

0 70

0 60

0 50

0 40

0 30

0 20

0 10

0 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Year

Source: Author (based on data of Department of Statistics Malaysia, 2015)

The following 2 tables show top 5 exported (table 2.1) and imported (table2.2) products which had the highest value in foreign trade record of Malaysia Top 5

in exportation include: electrical equipments which account for more than one forth

of total value; fuel and oil (one fifth of total value); machinery, nuclear reactors,boiler (more than 10% value); agricultural products (animals and vegetables) andrubbers, which account Similar to exportation, top 5 in importation also have:electrical equipments; fuel and oil; machinery, nuclear reactors, boiler whichtogether contribute more than half of total value to importation The 2 others are:vehicles (not tramway and railway) and plastics

Table 2.1: Top 5 exported products of Malaysia in 2012 – 2013

(USD billion) in 2012 (%) (USD billion) in 2013 (%)

Table 2.2: Top 5 imported products of Malaysia in 2012 – 2013

Product label Value in 2012 (USD billion) in 2012 (%) Proportion Value in 2013 (USD billion) in 2013 (%) Proportion

2.1.4 Malaysia’s inward foreign direct investment

Malaysia has been considered as a potential destination for foreign directinvestment (FDI) The Malaysian policy environment for FDI inflows in theprimary and secondary sectors has generally been liberated Ministry ofinternational trade and industry (MITI) is the leading governmental organizationwhose function is to evaluate and approve inward FDI, together with investmentincentives, since the execution of the Promotion of Investment Act of 1986.Malaysian Industrial Development Authority (MIDA), which is MITI’s sub-organization, is the central promotional agency that has been instrumental inattracting FDI inflows to Malaysia In spite of the liberalization efforts under bothWorld Trade Organization initiatives and ASEAN Free Trade Area (AFTA), recenttrends reflect a decrease in coming FDI flows into the country Except for the globaldownturn, causes of the collapse in inward FDI lie in intensive competition,especially from other emerging markets, for FDI Another factor that added to thecompetition for FDI inflows was the transformation from capital-intensive toknowledge-based industry of Malaysia, which took place while lacking of humanresources and technological capabilities Slower development in manufacturingvalue added at the level of 2.2% per year from 2006 to 2010 and a severe fall ininward FDI in 2009 have again made the government to reconsider its FDI policies.Inward FDI of Malaysia collapsed in 2009 as exports declined seriously FDIexperienced its worst downturn of 81% in that year when Malaysia could notremain in top 10 Asia’s FDI destinations Furthermore, Malaysia attracted much lessamount of FDI in 2009 compared to that of other ANSEAN countries likeIndonesia, Thailand and Singapore (table 2.3) The private investment in Malaysia

in the period 2006 – 2010 was calculated at USD 108 billion, which was share byprivate domestic investment (72%) and inward FDI (28%) (Putrajaya, 2010, p.37).Except for the global recession, the remarkable decrease in FDI inflows could bearisen from two main factors In recent years, inward FDI has increasingly flowedinto higher value added services sectors such as financial and shared services, whichare believed to situate outside Malaysia The scale of investment in manufacturing,Malaysia’s key recipient sector of FDI, is more than in services, which is more