Malaysia: Does counting GDP count when it comes to development?

Malaysia: Does counting GDP count when it comes to development?

Photo: Bigstock/Amlan Mathur

The recent debate on whether it makes more sense to measure Gross Domestic Product (GDP) in Ringgit or in Dollars is a healthy one. It reflects a sound interest by many segments of Malaysian society in statistics that measure economic development and how it changes people’s living standards. This is the fundamental question: what does GDP really mean in the daily life of Malaysians. There are sound arguments on both sides and, in a way, both are right, depending on what perspective is taken.
In the World Bank, we use different ways of measuring GDP depending on what kind of comparison we would like to make. For the most part, and when it comes to measuring how the living standards of Malaysians are changing over time it makes sense to calculate incomes, production or spending in ringgit terms. In doing so, we correct for the effects of inflation by adjusting nominal changes into real terms, to capture real change over time – be it quarter by quarter, or year by year. In other words, we develop a real GDP estimate that is linked to constant prices from a base year, and therefore capture real growth in income over time, removing the impact of inflation. In this case, it does not matter if this is done in Ringgit, Dollars, bushels of wheat or any other unit of account. This allows us to have a clear picture of real changes over time.
However, it is important that we not lose sight of the fact that in practice, prices are constantly changing across the economy for fundamental reasons other than inflation. For instance, this could be a change in the supply of a Malaysian export or the demand for it, which pushes real prices up and down. These are important changes to look at, and reflect real changes in the country. It is the same with looking at the exchange rate, which is just another price.
Now, Malaysian companies and manufacturers who trade internationally will rightly worry about how their costs (especially the costs of inputs they must import) and sales (especially their exports) change due to movements in the exchange rate. If their profit margins drop because their dollar-denominated imported inputs are more expensive with the higher exchange rate to the dollar, they may feel that the country’s strong GDP growth statistics mean little. The same thing applies to Malaysian parents whose children study abroad, and who must spend more ringgit to meet the same educational expenses they had last year.
These are legitimate concerns, but not ones that can be resolved by changing the way we measure GDP. Rather, we should focus not on changing the estimate, but rather by looking at the large number of factors impacting the exchange rate – many of which are outside of the control of policymakers.
At this point, it should be noted that in some cases, it does make sense to measure GDP in US dollars. This applies in cases where we need to compare Malaysia with other countries, say for example either the size of the economy, or the share of the population living below the local poverty line. To do this we need to convert into a common measurement. This could be any currency, but in practice it is usually the US Dollar.
However, the real question is whether GDP is a useful measure of development, irrespective of whether it is denominated in ringgit or in US dollar. Malaysia has set itself the goal of becoming a high-income economy within a generation. In purely mathematical terms, this means reaching a specific threshold. In the World Bank, we consider countries to be “high income” if they have a GNI (Gross National Income, a measure close to GDP) of at least US$ 12,235 per capita in 2018. We use the “Atlas method” which means we take a three-year average exchange rate adjusted for inflation to lessen the effect of fluctuations and abrupt changes.
However, this is just one indicator of progress. The true nature of a successful and prosperous nation cannot be distilled into one number, whether GDP, GNI or whatever. Malaysia’s true prosperity is to be reflected in the productivity of its human capital, in the opportunities facing Small and Medium Enterprises (SMEs) to grow, flourish and even fail, and in an economy where entrepreneurs and risk-takers face level playing fields and equal chances to succeed, and to fail.
Finally, and perhaps most importantly, measuring growth in GDP or GNI in per capita terms – no matter what the currency – is just an average. It’s a useful tool, but one that tells us very little about who is benefitting from growth and how wealth and prosperity is shared across the population. Is GDP growth being shared by all? Are the incomes of the highest and lowest earners converging or moving apart? This is of equal importance for policymakers, who concern themselves not only with triggering growth, but also its dispersion across regions and segments of the population.
Capturing this type of development requires counting a lot more than just one number. So, the real question should be: Is GDP growth enough?
A version of this blog appeared in The Star

by · Monday, 18 September 2017 · Malaysia
How Islamic finance is helping fuel Malaysia’s green growth

How Islamic finance is helping fuel Malaysia’s green growth

Photo: bigstock/ f9photos

Income growth is not the sole aim of economic development. An equally important, albeit harder to quantify objective is a sense of progress for the entire community, and a confidence that prosperity is sustainable and shared equitably across society for the long term.  

Inclusive and sustainable development looks beyond GDP growth and can strengthen nations for generations to come.   However rising income inequality has impeded social mobility, increased social tensions, and undermined effective governance in many countries in recent decades.  In the World Bank Group, we are firmly committed to our twin goals of helping reduce the number of people living in extreme poverty, and to promoting shared prosperity, particularly among the bottom 40 percent of the population. 

Investments in infrastructure are essential for meeting both goals. Whether it be by connecting farmers to markets or by providing families with electricity and clean water, infrastructure investments can transform lives for the better. However, analysts estimate that developing countries require between US$1.7 trillion annually in infrastructure investment just to keep up with the rate of growth, while actual investment pledged each year is closer to US$880 billion – far short of the region’s needs. 

To close this huge infrastructure gap, we need more options for investment financing. It would be better yet if these options adhere to our principles of sustainable development, particularly given the specter of climate change. A tall order, but not impossible. 

Recently, with support from the World Bank, Malaysia launched a new initiative that addresses both these principles: financing sustainable, climate-resilient growth. 

When Islamic finance shot to prominence in 2008, performing well even during the global downturn, the investment community started taking notice. Though representing a tiny portion of the global financial market, growth of Islamic finance has been rapid. By 2015, the industry had surpassed US$1.88 trillion in size and its banking assets had doubled in merely four years. 

Islamic finance may just provide that extra helping hand to deliver more infrastructure to emerging markets and developing economies. 

Central to the premise is the sukuk, a bond that generates returns to investors without infringing Islamic ‘shariah’ principles, which prohibits the payment of interest. Given that the Islamic capital market is still relatively small, sovereign and quasi-sovereign sukuk can be used to finance infrastructure projects that can facilitate further inflows of private capital. Project-specific sukuk, instead of general-purpose sukuk, may be particularly helpful in bolstering infrastructure financing. 

In parallel, another development pioneered by the World Bank Group – ‘green bonds’ – is also making headway. Since 2008, the World Bank has issued US$10 billion in bonds through our green bond program for climate-sensitive investments, and has brought greater transparency and clarity to issuers and investors by participating in the crafting of the Green Bond Principles (voluntary guidelines framing the issuance of green bonds) and by setting best market practice for reporting on the use of proceeds. New issuances in the global market are expected to exceed $120 billion in 2017.   

Enter Malaysia with its innovative ‘green sukuk’ initiative, which will channel sukuk for climate-friendly investments, thus helping close the gap for both infrastructure and green finance.  

Malaysia is already a global leader in leveraging Islamic finance for infrastructure development, issuing more than 60 percent of the world’s infrastructure sukuk. Now the country’s regulators are taking one step further and using investments to achieving a public good. Launched this July with the issuance by a Malaysian company of MYR 250 million (about US$59 million) in bonds to finance a 50-megawatt solar photovoltaic plant, the ‘green sukuk’ is a bold new tool for development. 

The framework underlying this instrument is the result of collaboration between the Securities Commission of Malaysia, the Malaysian Central Bank and the World Bank Group. This was envisioned when Malaysia and the World Bank Group celebrated 58 years of partnership with the formal opening of our Global Knowledge and Research Hub in Malaysia in 2016.  

The ‘green sukuk’ is one of various corporate fixed-income securities of this type coming out of Malaysia. We hope that many similar issuances will follow, in Malaysia and in other countries, and that innovative green financing becomes the norm, not the exception. This development would take us one step closer towards our goal of sustainable and inclusive growth. 

A version of this blog appears in the South China Morning Post.

by · Friday, 15 September 2017 · China, Malaysia

A visit to rural Malaysia

The project focused on the major rural poor, the rice smallholders, and addressed two of the constraints in achieving an income above poverty level: …

by · Sunday, 10 September 2017 · Malaysia, Philippines

A visit to rural Malaysia

The project focused on the major rural poor, the rice smallholders, and addressed two of the constraints in achieving an income above poverty level: …

by · Sunday, 10 September 2017 · Malaysia, Philippines

A visit to rural Malaysia

The project focused on the major rural poor, the rice smallholders, and addressed two of the constraints in achieving an income above poverty level: …

by · Sunday, 10 September 2017 · Malaysia, Philippines

World Bank commits $1.4-b loans

World Bank country director for Brunei, Malaysia, the Philippines and Thailand Mara Warwick said Mindanao accounted for 36 percent of all poverty in …

by · Friday, 1 September 2017 · Brunei, Malaysia, Philippines, Thailand
Protecting Poor Thai Families from Economic Hardship

Protecting Poor Thai Families from Economic Hardship

An elderly man waits for medicine at a hospital counter in Thailand. Photo: Trinn Suwannapha/World Bank

Thailand recently announced that it will put into action a national social assistance program for poor families. Such a program can help reduce poverty significantly. It would also move Thailand into the growing ranks of middle-income countries, such as China, Malaysia, Brazil, Turkey and the Philippines, that provide the poor with a ‘safety net’.

This week, the cabinet approved a package worth around 42 billion baht to finance cash allowances for the poorest and other subsidies for almost 12 million low-income families. For many poor families in Thailand, regular social assistance means their children being able to finish school or not going to bed hungry. For farmers, regular social assistance can help cushion the impact of natural disasters such as floods and droughts, which can wipe away a lifetime of savings.

Global evidence suggests that regular cash transfers can enable poor families to meet basic needs such as food, healthcare and education, and that they continue to work just as hard. Such studies have addressed concerns in many countries that cash transfers are mere handouts that encourage complacency. They have shown instead that a helping hand improves nutritional and educational outcomes, and the capacity of individuals and communities to cope with shocks, ultimately resulting in lower poverty and inequality.

But, according to the recently published World Bank Thailand Systematic Country Diagnostic, accurate targeting is key. An effective and efficient social assistance program consistently and reliably identifies those who need support the most.

Here is where challenges set in. With work in the informal sector so prevalent in Thailand, verifying household incomes can be difficult. Experience from other countries can help.  

Where self-declared income may not be reliable, other information such as land and vehicle ownership status, educational levels of adults, and presence of household members with disabilities can be useful. Different countries screen these non-income indicators in different ways. Some simply tally the other welfare indicators for each family, while others do a more complex calculation of how important each factor is in predicting if a family is poor. Whatever the approach, countries often supplement such information with community-based validation to take advantage of local knowledge. Thailand is using such an approach, with information on employment status, property ownership and savings to help determine who is low income.

Developing countries also use “social registries” to cross-check indicators of household welfare. These data platforms allow cross-checking of household welfare indicators, ranging from land and car ownership to social security participation, and are used by multiple public programs as a common source of information.

The most comprehensive social registries include not only program beneficiaries, but the larger population. Pakistan includes around 90 percent of its population in its social registry. The Philippines and Chile respectively include 75 percent in their databases. Turkey cross-checks against approximately 28 public databases to confirm the accuracy of information about a family.

Multiple agencies refer to the social registries to determine eligibility for their programs. In many countries, the registries serve many initiatives: some 80 programs in Chile, over 50 in Philippines, and approximately 30 in Colombia, Pakistan and Brazil.

Thailand is now taking steps to establish its own social registry, beginning with the database of low-income families and consolidating dozens of welfare schemes. As the government embarks on this journey, it is already helped by an important foundation: the national ID system. Last year, the national ID system helped the government to eliminate over 650,000 ineligible beneficiaries who were already benefiting from agriculture schemes or who held cash and property that disqualified them from being considered poor. The system is also building on the government’s e-payment system to improve efficiency and convenience.

This is an exciting time for Thailand, as it seeks to establish a social protection system that is more suited to the needs and expectations of an upper middle-income country. The task is not a straightforward one. There will be competing pressures for public resources, challenges in program design and delivery, and new needs for cross-agency coordination.

But that step in the right direction has been taken. Thailand has enabled the building of a social protection system that can better serve all its citizens, and help the country towards its goal of further reducing poverty.

A version of this blog appeared in the Bangkok Post.

by · Thursday, 31 August 2017 · China, Malaysia, Pakistan, Philippines, Thailand, Turkey
Regulating agribusinesses: What are the trends in developing East Asia?

Regulating agribusinesses: What are the trends in developing East Asia?

The pace of economic development throughout developing East Asia has been unprecedented. Despite the effect of the 1997-98 financial crisis, poverty rates in the region have been consistently declining.
Agriculture played a key role by driving growth in the early stages of industrialization. It also contributed to reducing rural poverty by including smallholders into modern food markets and creating jobs in agriculture. Nonetheless, poverty in developing East Asia is still overwhelmingly rural, reflecting a mismatch between agriculture’s shares of GDP and employment.

Agriculture’s weight in growth and poverty.
Source: Authors’ calculations based on WDI data.

As incomes rise and countries urbanize, the composition of domestic food expenditure is shifting from staples to meat, horticulture and processed foods. Thus, while today’s East Asian developing economies transform, the nature of their agricultural sectors is also changing.

Regulation can affect the speed of such transformation and determine the pathways of agricultural development in the years to come. It is a key business environment component due to its impact on costs, risks and barriers to competition in the agricultural value chain. Agricultural production has unique dimensions through which it interacts with relevant laws and regulations. These include agricultural inputs such as seed and fertilizer, and access to finance and markets. By setting the right regulatory framework, governments can help increase the competitiveness of farmers and agribusinesses, enabling them to integrate into regional and global markets.

Measuring regulations

The World Bank Group’s Enabling the Business of Agriculture (EBA) project measures regulatory good practices and transaction costs affecting agribusinesses. EBA indicators cover a range of regulatory domains pertaining to seed, fertilizer, agricultural machinery, water, access to markets, finance, transport, information and communication technology (ICT). For each of these areas EBA indicators provide an aggregate picture of how supportive regulation is for agribusinesses. A newly released policy note analyzes seven East Asia and Pacific countries including Cambodia, Lao PDR, Malaysia, Myanmar, Thailand, the Philippines, and Vietnam.

EBA indicators assess regulation on two complementary dimensions. On the one hand, legal indicators reflect the number of regulatory good practices that countries enact to correct market failures. This may include, for example, plant protection regulations or labelling requirements for fertilizers. On the other hand, efficiency indicators measure the transaction costs regulations impose on businesses such as time and cost to register a tractor or obtain a trucking license.

Most regulatory constraints to agricultural development in East Asian economies pertain to the legal dimension, where the region scores second to last.

Figure 1. EBA Scores by Region
Source: EBA data
Note: OECD- High income OECD countries, LAC – Latin America & Caribbean, ECA- Europe & Central Asia,
MENA-Middle East & North Africa, EAP –
East Asia & Pacific, SSA-Sub-Saharan Africa, SA- South Asia.

Country-level scores highlight the diversity of agricultural regulation in East Asia, with Vietnam displaying the most supportive framework. This is reflected in Vietnam’s good regulatory practices such as allowing water permit transfers among farmers and abolishing quotas on cross-border transport licenses. Moreover, it is supported by efficient systems. For example, it requires only 15 days to register a chemical fertilizer product in Vietnam, which is the second best performance across the 62 countries covered by EBA—chemical fertilizer registration is fastest in Uruguay. In contrast, Myanmar displays the least supportive regulatory framework, with particularly weak laws on plant protection and pest control and a lack of rules on tractor standards and water permits.

Figure 2. EBA Scores by Country

Source: EBA data
Benchmarking regulatory frameworks in East Asian economies through the EBA indicators suggests few general trends. First, these countries tend to perform better on efficiency than on legal components. Second, most countries over perform the global average on fertilizer regulations but fail to do so when it comes to regulating other agricultural inputs such as water. Third, access to markets and finance regulations are two areas where regulation in the region need substantial improvement.

Rising incomes and urbanization in East Asia are shifting the composition of domestic food expenditure from basic and unprocessed staple foods to meat, horticulture and processed foods. To take full advantage of these emerging trade opportunities policy makers should seize the opportunity to support agribusinesses with effective regulations.


by · Wednesday, 16 August 2017 · Cambodia, Malaysia, Myanmar, Philippines, Thailand, Vietnam
Transforming microfinance through digital technology in Malaysia

Transforming microfinance through digital technology in Malaysia

Dato’ Seri Dr. Ahmad Zahid Hamidi, Deputy Prime Minister of Malaysia, launching the Virtual Teller Machine (VTM) at the National Savings Bank. Digital technologies such as the VTM are now changing the way microfinance works. Photo: The Star

Today, smartphones are used by more than half the world. By 2020, this number will reach 6.1 billion. Mobile-based digital technology presents a huge opportunity to enhance financial inclusion for the two billion individuals and 200 million micro, small and medium enterprises (MSMEs) in emerging economies that still lack access to basic savings and credit services.
In Malaysia, while 92% of adults have a basic bank account, the financing gap for MSMEs remain. Globally and in Malaysia, even those who have access to financial services often pay high fees for a relatively limited range of financial offerings.

At the Global Symposium on Microfinance in Kuala Lumpur, jointly organized by the World Bank Group and Bank Negara Malaysia, more than 35 experts from financial service providers, tech companies and leaders in microfinance attended to reflect on the microfinance achievements of the last four decades, and to develop a better understanding of how Microfinance Institutions (MFIs) can be part of a digital financial system that is evolving through technology.

Some of the key lessons from the Symposium include:

1. Customer centricity

Digital technology and data allow financial service providers to more effectively serve the financially excluded with a “customer-centric” approach. Using specialized algorithms, providers can analyze information on a customer’s mobile telephone (e.g. frequency and amount of airtime top-up) and non-traditional data (e.g. social media profiles) to develop the credit profile of a client when they make lending decisions. These digital footprints help financial service providers interact better with customers, and provides a range of financial products and services based on a deeper understanding of their financial needs.

2. Reducing operational risk

For microfinance institutions, the use of digital channels can mitigate cash risk and increase operational efficiency. Current microfinance lending models are cash-intensive, and this exposes the institution and customer to cash risk, such as during storage and transit, which incurs additional costs. As such, time that could have been used more productively is spent managing this risk. Through digital technology, clients have the flexibility to repay loans through their mobile phones, avoiding the risks of cash-in-transit.

3. New business models

Mobile banking supports new business models through mobile technology and data analytics in credit scoring, decision and underwriting processes. However, implementation has been led by mobile network operators, and to some extent large commercial banks and a small number of new cashless microfinance institutions. While traditional institutes are known for their expertise in clients’ needs, they must adapt and develop more capacity to stay competitive and relevant to take advantage of mobile banking services or those that are soon to become available in their countries.

Additionally, crowdfunding can improve access to finance for unserved and underserved borrowers which creates cheaper, community-based financial products, and facilitates access to digital investments for people with limited options to receive financial returns on their savings.

4. Partnerships and collaboration

There is a need for a range of different financial service providers, be it banks and non-banks (telecommunications companies or fintechs). Just like Uber and Airbnb, which transformed the transportation and hotel industries, innovation in algorithm-based credit risk assessment, psychometrics testing and crowdfunding platforms are bound to change the financial services industry.

5. Building trust

Microfinance institutions and fintechs face similar challenges in building trust around new digital financial services, and ensuring reliable and stable service delivery takes time. The latter is often limited by poor telecommunications and energy infrastructure, especially in remote areas. Providers should establish communication channels and complaint resolution mechanisms which can address customers’ risk perceptions. Using approaches like assisted digitization (step-by-step demonstrations of processes that show transactions in passbooks or receipts) to help the client transition to digital financial services should also be considered.

6. Consumer protection

Clients of new digital technologies may face new risks ranging from poor customer recourse mechanisms, fraud, data privacy and security breach, service unavailability, hidden fees, discrimination, insolvency to unauthorized ads. It will be critical for financial service providers to meet user expectations in order to achieve financial inclusion.

Digital technology has emerged as an important driver of innovation, competitiveness and growth in microfinance. By leveraging the nearly ubiquitous growth of mobile phones, digitization can reduce cost, increase efficiency and allow financial service providers to reach new clients. By developing an inclusive and sustainable digital financial ecosystem through substantial investment, skilled resources, adequate infrastructure, agile processes, and a conducive regulatory environment, it can foster more widespread adoption and usage.

by · Thursday, 3 August 2017 · Malaysia
Malaysia launches the world’s first green Islamic bond

Malaysia launches the world’s first green Islamic bond

The green sukuk, or Islamic bond, is a big step forward to fill gaps in green financing. Proceeds are used to fund environmentally sustainable infrastructure projects such as solar farms in Malaysia.
Photo: Aisyaqilumar/bigstock

Climate change is expected to hit developing countries the hardest. Its potential effects on temperatures, precipitation patterns, sea levels, and frequency of weather-related disasters pose risks for agriculture, food, and water supplies. At stake are recent gains in the fight against poverty, hunger and disease, and the lives and livelihoods of people in developing countries.
World Bank green bonds help raise awareness among investors and the financial community about how developing countries can take action on climate change. We are advising governments on the development of green bond markets based on our own experience of issuing green bonds and the knowledge we have due to our position as a market leader in this space.
Last year, the World Bank Group Global Knowledge and Research Hub joined a Technical Working Group with Bank Negara Malaysia and the Securities Commission supporting the Malaysia Green Finance Program, leveraging from our experience and expertise in green financing. The program aims to encourage investments in green or sustainable projects through the development of green Islamic finance markets initially in Malaysia, and subsequently, in the ASEAN region.
Today, the program has supported the launch of the first green sukuk in the world on June 27, 2017. The sukuk is a green Islamic bond where the proceeds are used to fund a specific environmentally sustainable infrastructure project, such as the construction of renewable energy generation facility.
Green sukuk have the potential to further broaden this market as well as to help bridge the gap between the conventional and Islamic financial worlds. The sukuk should be attractive to conventional investors if they offer reasonable risk-adjusted returns and are properly marketed. A sukuk that meets those criteria and provides funding for an environmentally sustainable project could be particularly attractive to environment-focused investors for two principal reasons.
First, sukuk provide investors with a high degree of certainty that their money will be used for a specific purpose. In order to comply with the underlying Shari’ah principles, the funds raised through the issue of a sukuk must be applied to investment in identifiable assets or ventures. Therefore, if a sukuk is structured to provide funds for a specified infrastructure project, such as a renewable energy project, there is little chance the investors’ money will be diverted and used for another purpose.
Second, many more environment-focused investment products exist on the equity side of the capital markets than on the fixed income side. Since most environmentally sustainable investors want to know precisely how their money will be used, bonds that are general obligations of an issuer have limited appeal unless all of the activities of the issuer meet the investor’s environmental standards. Sukuk, which are most similar to a conventional fixed income security, could help fill the fixed income supply gap for environmental investors to the extent the proceeds of a sukuk are earmarked for a particular environmentally beneficial purpose.
The Global Knowledge and Research Hub has been partnering with public and private institutions in Malaysia and elsewhere to develop modern and integrated financial services and markets. It is through this partnership that the new green Islamic finance initiative has been spearheaded, and will contribute a new and innovative financial product that can be used throughout the world.

by · Monday, 31 July 2017 · Malaysia