Chapter 6

GOVERNMENT SECTOR
Agenda:
¨ Role of Government in an economy

¨ Government’s Income and Expenditure

¤ Direct Income
¤ Indirect Income
¤ Operational Expenditure
¤ Developmental Expenditure
¤ Borrowings (Internal & External)

¨ Government Economic Plans:

¤ Long term plan
¤ Medium term plan
¤ Short term plan

¨ Government Policies
¤ Monetary Policy
¤ Fiscal Policy
Introduction
¨ Roles of Government
Ø Maintaining political and economic stability in the country
Ø Protect the public interest at large
Ø Encourage a stable economic growth
Ø Reducing market failure

¨ Generally there are 3 types of economic system

¤ Capitalist market
¤ Command market

¤ Mixed market

¨ Malaysia is practicing the mixed market where both the government and private
sectors play an active role in ensuring the growth of the country.

¨ Government intervention is mainly via policies which meant to stabilize the economy
and achieving quality living of standard of the citizens.
Definition
¨ Capitalist market – private property ownership exists; individuals and
companies are allowed to compete for their own economic gain; and free
market forces determine the prices of goods and services. Capitalists
believe that markets are efficient and should thus function without
interference, and the role of the state is to regulate and protect.

¨ Command market - An economy where supply and price are regulated by

the government rather than market forces. Government planners decide
which goods and services are produced and how they are distributed. The
former Soviet Union was an example of a command economy. Also called a
centrally planned economy.

¨ A mixed economy is that kind of economy where both the public and
private sector own, allocate and control factors of production.
¨ A mixed economy means that part of the economy is left to the free market,
and part of it is run by the government.
¨ Most countries in the world are examples
Cont..
¨ The Malaysian government is an active player not only thru
economic policies but also its cooperation with private sectors
in running the economy of the country.

¨ Some of the examples include TM, MAS, Petronas, TNB and

etc.

¨ The main aim of government intervention in the economy is to

maintain the equal income distribution among the citizens
Economic Planning Policies
¨ Long term plan – Outline Perspective Plan (OPP1 – OPP3)
¤ New Economic Policy (NEP) – 20 years
¤ National Development Policy (NDP)
¤ National Vision Policy (NVP)

¨ Medium Term Plan – Five Years Development Plan (1st MP – 12th MP)

¨ Short Term Plan – Annual Budget (every years – Annual Budget)- budget 2021

¨ Other economic policies:

¤ New Economic Model
¤ Vision 2020
¤ Look East Policy
¤ Privatization Policy
¤ Corporatization Policy
¤ National Automotive Policy
Federal government budget

¨ The estimated income and expenditure for the next fiscal

year.

¨ It tells where the government money comes and where it goes.

¨ The national budget is normally presented in the month of

October
Types of budget policy

¨ Balanced budget: policy where expenditure equals revenue.

¨ Surplus budget: revenue is more than expenditure.

¨ Deficit budget: expenditure is more than revenue

 Government Revenue
¨ Tax – is a financial charge imposed on an individual or legal entity
by the government and compulsory payment associated with certain
activities

¨ Direct taxes: burden cannot be shifted to another party. Major source

of government revenue in developed countries. Eg. Corporate tax &
personal income tax.

¨ Indirect taxes: the burden can be shifted to another party. Most

developing countries depend on indirect taxes for revenue. Eg.
Export/import duties, sales and services tax.

¨ Non-tax revenue and borrowing: governments gets its revenue from

other sources; license, permit, rent, interest, sales of government
goods and services.
Types of tax:

¨ Regressive tax: Low tax rate as income increases. At low-income level,

the tax rate is high, and the rate will decline as income increase.
Example fixed tax, indirect tax. It is based on the price of goods.

¨ Proportionate tax: tax rate is fixed at various level of income.

Although the rate is fixed but the amount to be paid as tax will
increase. Example, companies tax in Malaysia is fixed at 35%
although the profit earns will differ from time to time. Tax rate is fixed
(eg: GST – 6%, Service Tax – 6%, Service Charge 10%)

¨ Progressive tax: tax rate increase when there is increased in income

level - income tax
Government Expenditure

¨ Operating expenditure: classified into 2 categories

¨ (1) Operating expenditure based on

objects

¨ (2) Operating expenditure based on

sectors
Operating expenditure
Operating expenditure based
on objects:
¨ salaries of federal
government employees
¨ pensions
¨ supplies and services
¨ scholarships and loans,
subsidies
¨ grants and transfer to state
government
Operating expenditure
based on sectors:
¨ defense and safety
¨ social services; education,
health, housing
¨ agricultural and rural
development
¨ public facilities - transport
¨ trade and communication
Development expenditure:

¨ Capital expenditure that will enhance the population socio-

economic level. Usually the capital expenditure made by
government lower than operating expenditure

- infrastructure, agriculture and rural

- education, health and housing
- defense and internal security
- general and administration
- contingency reserves
Factors influencing the expenditure made by government

1) The total amount of revenue earns

¨ The total of tax received will determine the size of

government expenditure.

¨ The bigger revenue earn, the bigger amount of funds to

be located for expenditure.
 Cont…
2) Economic objectives to be achieved

¨ Under depression condition,

government will increase their expenditure to reduce the
unemployment rate. Usually government will used deficit budget.
During the period of recession, government used more resources to
the extent of borrowing

¨ Under inflation,
government will usually reduced its expenditure and formulate a
surplus budget. Government will tax more, encourage people to
save – gov take out the money from people to reduce the
purchasing power or no demand for certain goods
Cont…

3) Political and security concern:

¨ Political motive will usually determine the level of expenditure.

Before public voting day, government will usually increase
expenditure usually for developmental purposes to gain
public support.

¨ Government also will increase expenditure at the time when

other countries are threatening national security. More fund
will be allocated in preparing national army, buy weapon, etc
Government Policies

¨ There are many policies that government implements in ensuring

the stability of the country’s economy. Two major policies are:

¨ 1) Fiscal Policy

¨ Government policy using taxation and government expenditure

to achieve full employment.

¨ Refers to the rate of taxation and level of government spending

- It is the deliberate adjustment of government revenue and
expenditure for the purpose of obtaining greater economic
stability.
Objectives of fiscal policy

¨ To manage the economy efficiently.

¨ To achieve high economic growth.

¨ To raise the general level of real income and aggregate

demand.

¨ To redistribute income and resources efficiently.

- To distribute resources equally or reasonable depends needs &

situation.
- Tax the rich and distribute to the poor people through fiscal policy
- Fair and equitable distribution of income – income tax, zakat etc
¨ 2) Monetary Policy

¨ Government policy using money supply and interest rate to

achieve full employment.

¨ Affects the supply of money and the rate of interest

¨ Government use monetary and fiscal policy to achieve goals

for output and employment growth and price stability.
Objectives of monetary policy

¨ To maintain the value of money at all times

¨ To manage the economy efficiently

¨ To maintain the general price stability

¨ To maintain the level of market interest rates

- The overall goal of monetary policy is to ensure price stability

- The growth process will continue through price stability
Cont..

¨ During recession, with slow or negative growth, high

unemployment, government reduce interest rate,
expand bank credit, decrease tax rates and increase
government spending.

¨ During inflation, government increased interest rate,

decreased government expenditures and wage-price
control to reduce spending.
National Debt

¨ National debt can be defined as the country’s

borrowing, both internal and external for the capital
expenditure.

¨ The borrowing comes from the public sector, the

Federal Government, Non-Financial Public Enterprise
and the private sector.

¨ Loan taken by government from various sources for

funding or financing public programs or activities
1. Internal Borrowings

¨ Short-term borrowing

¨ Sources are from public and internal financial institution

¨ The major sources of the government’s domestic borrowings
come from the selling of treasury bills, government securities
and other investment certificates.
¨ Borrowing from Commercial Bank, Central Bank, Government
securities; Federal Government, Statutory Bodies - Bank
Negara Malaysia, Malaysian Industrial
Development Authority (MIDA), Securities
Commission, Malaysian Communications and Multimedia
Commission (MCMC) and Companies Commission of Malaysia),
Employees Provident Fund (EPF), etc…
2. External Borrowing

¨ Long-term borrowing

¨ The major sources of external loans come from the World

Bank, IMF, Asia Development Bank, and from developed
countries like USA and Japan.

¨ No government can live without borrowing in running &

operating development & administration activities. Other
than that to cover deficits & continue development or
mega projects – MRT
Malaysia Plan

¨ Every 5 years
¨ Eg: 11th MP, 12th MP etc
¨ With main thrust and objectives
¨ To achieve well being of rakyat
¨ Many programs and agenda – increased quality of life
End of chapter 6

Tq
¨ Tq…..
¨ End of chapter 6
 Chapter 7
INTERNATIONAL TRADE
 INTERNATIONAL TRADE

q Open economy:

q Closed economy:
 Open Economy

¨ Dealings or transact with other countries

¨ Eg: Malaysia with China

¨ Except Israel
Closed Economy

¨ Does not transact with other countries

¨ Eg: China

¨ North Korea and Cuba

Cont’d…..

¨ The openness of the Malaysian economy is due to the

over- dependence on the foreign sector

¨ Especially in trade, capital and technology after

British introduced rubber and tin for the export market

¨ Since 1931, our export from rubber and tin consist

80% of the total export and it contributes 68% from
the total income
1. WHAT is International Trade?
2. WHY is International Trade?
3. HOW to calculate International trade?
Why?
¨ Why do we export our goods and services to other
countries?

¨ Why do we import goods and services from other

countries?
What is International Trade?

¨ International Trade is usually referred to the

exchange of goods, and services across
international borders or territories.
 BENEFITS FROM INTERNATIONAL TRADE

¨ To get goods not produce within country

¨ To get benefit/profit from specialization

¨ Every country able to used more goods compare if it is

produce outside the country

¨ Expand the local industries’ market

¨ New technology imposed and increase the local

productivity level
To get goods not produce within country

¨ Malaysia it self – we can see in our country, there

are a lot of products that not produced in our
country, but still available for consumption in
Malaysia

¨ Eg; cloths, luxury car, fruits etc

To get benefit/profit from specialization

¨ Countries involves in international trade will produce

large quantity to cater for domestic use and for the
export purpose.

¨ Therefore, the country will become a specialist in

this product

¨ Eg; Japan with electronic goods and cars

Every country able to used more goods compare if it is
produce outside the country

¨ Consumer are given a lot of choices to satisfy their

needs and wants.

¨ Eg; one may choose any brand of cars either local

made of imported based on budget and taste
Expand the local industries’ market
¨ Local firms especially the SME can benefit from
international trade.

¨ Many SMEs in Malaysia are supplying and

exporting parts to many countries due to the
existence of international trade.
INTERNATIONAL TRADE –
MALAYSIAN EXPERIENCED/HISTORY

¨ Before and early independence

(1947-1965)

¨ 1990s – today/current
 Before and early independence (1947-1965)

¨ Agricultural commodities - (rubber, tin, iron, metal)

are the main contributor to the export activity

¨ Foods, manufactured goods, raw material – the

main products being imported – economic
development.
1990 - current
¨ Important to the national economic development

¨ Manufacturing goods - (foods, cloth, mining

industries, metal, electric and electronic
appliances) contribute highest in the export activity
(US, Japan)

¨ Agricultural goods to be exported declined -

(rubber, palm oil, tin, cocoa) but liquid petrol and
other petroleum output still remain at the higher
level of demand from the foreign countries.
Cont…
¨ The import activity has declined

¨ Imported electronic and electric appliances declined

- only focus on the machines and the transportation
equipment

¨ Consumer products exported increase - especially

rice, flour, sugar, milk industries/product – due to the
abolishment of import duties

¨ Focus on service sectors especially tourism and

financial sector
¨ Malaysia’s international trade experienced
tremendous growth throughout the last 3 decades
and it plays a large role in Malaysian economy.

¨ Malaysia has managed to maintain a positive trade

balance, exporting more goods than it imports even
during the recession in 1997 and 1998.
IMPLICATIONS ON INTERNATIONAL TRADE

¡ Depend on foreign trade, financial and

technology

¡ Affected export earning: when the developed

countries demand for Malaysia product declined,
it affected the volume of our exports. The decline
in the volume and price of rubber and other
commodities affected the export earnings.
Cont…
¡ Deficit in the current account and balance of
payment: When our export earnings from primary
commodities declined and on the other hand the
price of imports increased, it caused deficit in the
current account.

¡ When the value of import is greater than the export,

it will cause deficit in the current account and
balance of payment. These deficits have forced the
country to raise even higher amounts of loans.
 Cont’d…..
¡ Implication on output: due to the decrease in
demand for our exports, the growth rate of the
primary products slowed down.

¡ Implication on the economic growth: Affected the

GDP

¡ Implication on income: national income increase

or decrease

¡ Price of commodities is unstable – depends on

current/condition economic
Free trade:

¨ International trade system that gives opportunity for

a country to implement trade without barriers

¨ Free trade is the flow of goods between countries

without restrictions or special taxes

¨ No tax and rules imposed on import and export

activities.
Trade barriers

¨ Government policy that has been formulated to

control or to tax the goods and services

¨ Restrictions to protect domestic producers from

foreign competition
 Tariff Barriers
Tariff - (also called customs duties)
¨ Tax against import products.
¨ Ad-valorem tariff, import tax based on the price of the
imported goods (eg. 50% on the price of goods).
¨ Specific tariff, fixed imported goods tax although the price of
the goods changed (RM20 for every unit of imported goods).

Non-tariff barriers
¨ Steps taken by government to protect and giving priority to the

local products.
Quota
Maximum quantity of output that can be imported within certain duration
of time, eg. A year. Not increase the national income.

Embargo
The strongest limit on trade. A law that bars trade with another country.
Eg. Malaysia imposes trade embargo against Israel

Foreign exchange control

Monetary policy to control import activities. No loan facilities provided
for the import activity or by controlling the foreign money (e.g. selling the
foreign money with higher price from the formal exchange rate).
Cont…
¨ Incentives and subsidies
government provides a lot of incentives and subsidies
to local firms with the objective to support their
survival in the industry while improving their
competitive advantage in the international market.

some of the incentives given are income tax

exemptions, loan facilities, business contacts and
networks.

for subsidies – gov provides loans, technology,

knowledge etc.
Reason for protectionism policies

i. To protect infant industries from foreign competition

ii. Revenue sources

iii. Improved employment and the Balance of Payment

iv. Anti-dumping

v. To reduce the influence of trade on consumer tastes

To protect infant industries from foreign
competition

§ Increasing return to scale. A new firm in a new

industry has many disadvantages.

§ It must train specialized management and labor,

learn new techniques, create or enter markets,
and cope with the diseconomies of small-scale
production.

§ Tariff protection gives a new firm time to expand

output to the point of lowest long-run average
cost.
 Cont’d…..
¨ Revenue sources: tariffs are often major source of
revenue especially in young nations with limited ability to
raise direct taxes.

¨ Antidumping: dumping is selling a product cheaper

abroad than at home – a foreign country is supplying
cheap imports favorable to consumers.
- If the foreign supplier is dumping as a temporary
stage in a price war to drive home producers out of
business and to establish a monopoly, a country may be
justified in levying the tariff.
Cont…
¨ To reduce the influence of trade on consumer tastes
- multinational companies may influence the
consumer taste through their advertising and other
forms of promotion.

- this has to be reduced through trade

restrictions.
 Balance of payments (BOP)

Definition:

¨ Account statement that contains the transaction and

the flow of money between one country to another
country.

¨ When trade occurs between Malaysia and other

countries, many types of financial transactions are
recorded
What is BOP?
¨ A bookkeeping record of all the international
transactions between a country and other countries
during a given period of time

¨ It records the value of a nations’ spending inflows and

outflows made by individuals, firms and government

¨ BOP can be categorized into two accounts:

Ø Current account
Ø Capital account
Current Account

¨ Comprises of merchandise exports and imports (goods

account) and receipts and payments in respect of services
rendered to and received from abroad (services account)

¨ Largest part of the current account is Balance of Trade

(BOT)

¨ The balance between import and export of good and

services is called the current account balance
The statement structure Current Account

¨ Export and import of tangible goods: output from the agricultural,

manufacturing, mining and others sectors. Positive trade balance is
where the export value exceeds the import values.

¨ Export and import of intangible goods. E.g. insurance from the

export or import of tangible goods, incomes from investment (profit,
interest on capital, and dividend).

¨ Transfer of payment: aid or official development assistance,

includes development grants or loans made at confessional financial
terms by official agencies.
Capital Account
¨ It records payment flows for financial capital such as real
estate, corporate stocks, bonds, government securities
and other debt instruments

¨ Its record the inflow and outflow of funds into & out of
country. Its consist of the net capital transfer (acquisitions
of fixed asset) & net investment flow (for investment
purpose). The balance between both, called capital
account balance.

¨ Eg: when Japanese investors buy farm land in Kedah,

there is an inflow of ringgit into Malaysia
¡ Long Term Capital:
§ Official loans: borrowing and payment between countries
§ Private investment: direct capital (e.g. purchasing of
share, long term savings in foreign money).

¡ Short term capital

§ Commercial bank: CIMB, Public Bank, Malayan Bank
§ Other financial institution: EPF, Tabung Haji, PNB

¡ Change in central bank reserves

– Bank Negara
¨ Tq for today….

¨ End of chapter 7