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Malaysia’s Digital Economy – A New Driver of Development

Challenge

The Government of Malaysia recognized the opportunity, and challenge, provided by the digital economy to serve as a new driver of growth for the economy as well as a new source of fiscal revenue. The Bank Group was asked to provide independent analysis as to how Malaysia could best meet this challenge.

By leveraging the internet, smartphones, big data, the internet of things, artificial intelligence, and other technologies, Malaysia can increase productivity, spur innovation, and improve livelihoods. Digital technologies can drive economic growth in Malaysia through three channels. First, they can promote inclusion by enabling existing firms and entrepreneurs to serve markets that are currently underserved. Second, they can lower costs and increase efficiency for existing firms and entrepreneurs to make them more competitive. And third, they can encourage innovation and scale economies, allowing entirely new forms of business and entrepreneurship to emerge.

Approach

The analysis began with an assessment of digital adoption using the framework from the World Development Report, with an emphasis on how businesses are using—but failing to fully exploit—digital technologies to communicate with customers, market goods, and meet other core business functions. A discussion of the ICT infrastructure on which the digital economy is built, including persistent challenges related to the affordability and quality of fixed broadband internet access that arise from high prices, market concentration, and an underperforming regulatory regime followed. The program also looked at the promise and challenges of digital entrepreneurship in Malaysia, highlighting the central role of government initiatives to date and what is required to fully empower the private sector. The final piece explored options for taxing the digital economy, including the impact of recent reforms to international standards.

The program covered an important set of policy issues that Malaysia faces with respect to digital technologies. The program also involved the production and organization of a wide-range of activities over a two year period from original research, to analyses of trends in digital adoption, connectivity, entrepreneurship and taxation; to numerous knowledge-sharing events including conferences, training workshops and policy impact challenge events.

Finally, the task team was twice invited to brief the Prime Minister and Cabinet on findings and policy recommendations for action.

Results

As a result of Bank Group advice, Malaysia’s Government is already making major reforms in these areas and starting to see results in terms of improved market outcomes and changes in consumer behavior. The program has helped lay not just the foundations for sustainable growth in Malaysia, but also provided valuable lessons and insights for policymakers in other countries around the world—an important agenda for the World Bank Group Malaysia Hub.

Reforms implemented to the regulatory regime for telecoms have seen the costs of fixed broadband halve and speeds double since end 2018. Most visibly, they have caused a shift in consumer demand towards faster internet connections with the number of ultra-fast (>100Mbps) broadband connections increasing eight-fold during 2019 as a result of increased competition in the previously under-performing fixed broadband sector.

Malaysia is among the first developing countries to extend indirect taxation to imported digital services provided by non-resident suppliers (collecting an estimated US$100 million in new revenues during 2020), pushing the development frontier not just in Malaysia but in other countries helping to balance growth of the digital economy while safeguarding public sector revenues.

Further, in 2020 the State of Penang adopted another key policy recommendation of the report, legislating that broadband internet should be treated as a utility in the same way that water and electricity is treated for new infrastructure development.

Bank Group Contribution

The activity was financed by the Government of Malaysia under the Reimbursable Advisory Services program.

Partners

The Malaysia Digital Economy Project was championed by the Malaysian Ministry of Finance,. Other key partners included the Economic Planning Unit, Malaysia’s Central Bank, the Malaysia Digital Economy Corporation and the Malaysian Communications and Multimedia Commission. Significant outreach and policy dialogue also took place at the local/state level.

Moving Forward

Lessons from the Malaysia Digital Economy report, which was among the first country-level digital economy diagnostic analyses in the Bank, have been replicated and shared in many other regions. The overall approach has been emulated in a number of other country studies in Philippines and Thailand, to name a few, and the approach piloted on taxing the digital economy was later extended into a standard Bank guidance note that has now been applied in a significant number of other country contexts.

Beneficiaries

Policy dialogue related to this report contributed to the achievement of economy-wide reforms that have impacted 32 million Malaysians, through faster and lower cost broadband internet, and through the safeguarding of public sector revenue collection.


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