Regions and Countries

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p. 9 of 18 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Infrastructure B. Social Impact of the Crisis and Government Response C. Governance Dimensions of ADB Operations D. Gender Dimensions of ADB Operations E. Private Sector Operations IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Malaysia : III. Sector Strategies

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B. Social Impact of the Crisis and Government Response

1. Social Impact of the Crisis

35. The economic downturn had a negative effect on Government efforts to reduce the incidence of poverty. With economic contraction, unemployment increased and income-earning opportunities declined. The drop in share prices and the value of property had a negative wealth effect, affecting consumers. Pay cuts and price increases reduced the capacity of wage earners to transfer remittances to the rural areas. The rising costs of education at the tertiary level and health care affected the supply and demand of services available, as well as the quality of the supply of such services.

36. Unemployment⁸ in 1998 increased to 3.9 percent from 2.6 percent in 1997, affecting workers mostly in urban areas. The incidence of poverty also increased (see para. 14). The relatively small increase in unemployment can be explained in part by the flexibility and mobility of the labor force and repatriation of a sizeable number of foreign workers. Although inflation increased, particularly food prices, effective price control measures prevented hoarding and price overshoots which would have reduced household income and increased poverty.

37. In rural areas, the crisis-induced rising costs of inputs only partly affected the cost of agriculture outputs. Instead, adverse weather conditions reduced the cultivated area and yields, while labor shortages pushed price levels up. In 1998, declines in the crude palm oil production by 8.3 percent and natural rubber production by 8.8 percent, resulted mostly from yield reduction. This was due to a number of reasons, mainly, dry weather. In the case of crude palm oil, the decline in production was also due to lower yields, arising from the downturn on the biological yield cycle of the oil palm trees. Natural rubber production was affected by continued slackening of global demand against ample inventories. In contrast, particularly affected by the crisis, were sawn logs and cocoa. The decline in sawn-log production was the sharpest. It mainly resulted from weaker demand, from the Asia Pacific region mostly from crisis-affected countries. In some areas, adverse weather conditions were a compounding factor.⁹ As for cocoa, production declined for the eighth year in a row, caused by rising costs of labor and agricultural inputs, and the severe drought.

38. Labor retrenchment in manufacturing arising from the crisis was partly mopped up by expanding opportunities in manufacturing sectors and by the termination or non-renewal of foreign workers’ contracts. In the absence of unemployment benefits, employers were encouraged to avoid exacerbating unemployment by providing partial salary and wage reductions, reduced number of working hours and training. Government financial intervention was limited to strengthening the safety nets in areas mostly affecting the poor, by ensuring that budget shares for social services in 1998 remained approximately at their 1997 levels. Public expenditure on poverty reduction programs was protected in real terms.

2. Social Safety Nets

39. Social safety nets in Malaysia are comparatively well structured but they could be strengthened. Strong economic growth, virtually full employment before the crisis and family solidarity so far provided informal assistance and security to those vulnerable to economic distress, i.e., those requiring the support of a social safety net. At the beginning of the crisis, traditional family ties, especially in rural areas, were expected to provide a substantial part of the resources and new job opportunities required to cope with the crisis. Moreover, the Government also expected the market to adjust according to evolving comparative advantage. Hence, the Government’s objective was to monitor developments and improve the regulatory framework, to ensure the provision of what it considered to be essential social benefits and to limit its direct financial assistance to the needs of the poor.

40. In order to mitigate the effects of the crisis on the poor and low-income groups the Government reallocated the budget to support the social sectors and set up targeted programs. Budget resources were redistributed so as to retain the original 1998 budget allocation for the Development Program for the Hardcore Poor (PPRT) and limit cuts to the 1998 budget of ministries providing social, rural development, and agriculture programs mainly targeted on the poor and low-income groups. Micro-credit funds were set up to promote income generating activities and job opportunities were created for the low-income segments of the population, including the most vulnerable groups through public works.

41. A major Government concern since the beginning of the crisis, has been the preservation of the widely acknowledged gains achieved in health and education. Upgrading human resources has long been a fundamental long-term economic challenge for the improvement of Malaysia’s international competitiveness as the pressure on public expenditure intensified with the crisis. In the health sector, the combined decline of household income and increased cost of medical supplies had a detrimental effect on the utilization of the private sector health services, particularly in urban areas, as the populace shifted to an increased use of public health service. This could reverse the trend in the improvement of key social indicators achieved in the last decade.

42. The Government has moved to address the social impact of the crisis. Subsidies are expected to mitigate the impact of the crisis in the primary and secondary school levels. In higher education, the Government increased the allocation for the National Higher Education Loan Fund to cater to more students, thus enabling them to access higher education in public and private institutions. Students from low-income groups will also be eligible for the maximum loan that covers tuition fees, books, subsistence and other allowances. In the health sector, the measures adopted by the Government focused on reducing costs by rationalizing the utilization of resources and on providing partly or fully subsidized treatment, depending on the income level of beneficiaries.

43. The Government has also given high priority to ensuring continued supply of skilled labor to meet the rising level of skills demand by knowledge-based and high technology industries, despite the effects of the crisis. To this end, measures were adopted to improve the skills-delivery system. Institutional and other reforms were initiated to enhance the efficiency of the skills-delivery program and increase labor market flexibility. These measures include improved labor market regulations and information systems.

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