chapter  3
39 Pages

The Malaysian economy and its financial system

In order to set the stage for the later analyses, this chapter provides an overview of the Malaysian economy and the development of its financial system from a historical perspective. The chapter focuses on a number of key ‘stylized facts’ about the Malaysian economy which have a direct bearing on the subject at hand. Firstly, Malaysia is a relatively small but high growth economy which relies heavily on international trade for its growth dynamics. Secondly, throughout the post-independence era Malaysia has maintained a relatively open foreign trade and investment regime. The rapid growth of the economy has had much to do with its openness and trade orientation. Thirdly, during most of the period under study, Malaysia has maintained an impressive track record of pursuing prudential macroeconomic policies. The central bank has been able to maintain price stability in the economy where inflation has always been very well-managed, except during period of external shocks, such as oil crises. Fourthly, with the exception of the racial riots in 1969, Malaysia has been able to enjoy a stable political environment.