Malaysia has throughout its history benefited immensely from its economic integration with the global economy. Our integration has been extensive and evolving with the changing global environment. Our participation has been in the form of trade, investment, financial flows, strategic alliances, cross border mergers and acquisitions, internationalization of businesses, mobility of the workforce and through international and regional co-operation. There are a growing number of activities that have a global context, resulting in increased international inter-linkages. In this environment, Malaysia has always been able to engineer transformations to shift to new areas of comparative advantage and to create new enabling environments for new international alliances, thereby allowing investors to increasingly share in the opportunities and the rewards that arise from them.

Malaysia has always had a dynamic economic structure that has been adapting to the changing global conditions as they occur, thus resulting in changes in the nature and degree of our global integration. For Malaysia, trade forms the largest part of our economy with the volume of trade exceeding 200% of Gross Domestic Product (GDP). Similarly, Malaysia's share of global investment flows has also been significant. Between 1988 and 1997, Malaysia received foreign direct investment (FDI) averaging 7.7% of GDP annually, one of the highest ratios in the world. Even in the period 1998-2004, notwithstanding the shift in the patterns of FDI inflows, Malaysia continued to receive FDI amounting to 5.9% of GDP, indicating that the nation remained as an attractive investment destination. These inflows have benefited the country, not only in terms of the income stream they generate but also from the transfer of technology and skills to Malaysians.

Coupled with the growth in the volume of trade, the list of goods and, increasingly, services that can be traded across borders have also expanded. Advances in technology, especially communications and transportation, have made it possible to trade in a wider range of products and services, making the old economic division of tradables and non-tradables less clear than before.

Unlike previously, when exports comprised low-valued added goods or primary commodities, there is a pronounced change in the pattern of trade today. A marked feature of the trade and development pattern today is the extent to which developing countries are trading with each other and forming deeper and stronger economic linkages. To some extent, this is due to the extraordinary demand for capital, technology and raw materials arising from the rapid growth and development in China and India. However, a major contributing factor is also the geographical dispersion of the global supply chain by private foreign investors, allowing most nations to participate more actively in the global economy.
The expansion of global markets and the larger variety of tradeable goods and services is a beneficial development for open market, trade-oriented economies such as Malaysia. It provides access to new markets, improves the variety of goods and services available for consumption and investment and improves economic efficiency. The process of greater integration into the world trading system is reflected in Malaysia's direction of trade. In 1998, 20.8% of Malaysia's trade was with the United States. In 2004, the US remained our most important trading partner, but its share has declined to 16.8%. In the region, China and India in particular, have become increasingly important. The increased integration of more nations into the global trading system has been mutually reinforcing for open economies such as Malaysia.

Changes in technology have also increased the opportunities for international integration. For instance, business process outsourcing, which is an economic activity that did not exist a few years ago, is now a USD10-billion business with potential for rapid growth. Malaysia, with its early investment in its physical infrastructure and its multilingual skilled workforce, is considered one of the most competitive locations for this new business and is thus well positioned to meet the demands of this industry. Similarly, the improvements in refrigeration and transportation technology have seen rapid growth in many areas in the agriculture and biotechnology sectors. Other areas that have the potential for rapid growth include tourism, training and education, health tourism, design and development, contract and customized manufacturing and financial services.
The trend of sustained flows of FDI into the region is expected to continue, with Malaysia expected to remain a prime recipient. In 2004, gross inflows of FDI amounted to RM24.4 billion. More importantly, the nature of the flows has also changed, with the services sector accounting for an increasingly larger share of investment. These flows, which are inherently smaller in value terms, have the potential to generate greater value added and export proceeds, thereby raising the efficiency of investment in the country.

Malaysia is also promoting greater regional and inter-regional integration by taking steps to intensify economic linkages with our neighbours, with the major economies in Asia and in other regions. Malaysia is already part of the ASEAN Free Trade Area, a huge market of almost half a billion people. In addition, free trade agreements are being negotiated with Japan, China, Korea and India. Looking further, Malaysia has already initiated efforts to foster trade and investment ties with other potential partners, including the Middle East.

Enhancing resilience to achieve sustainable growth
While the greater global integration brings increased risks to vulnerabilities and the challenge of greater competition on balance, it also brings increased opportunities in Malaysia both for domestic and foreign interests. Economic resilience refers to the inherent capacity of an economy to sustain growth, manage risks and adapt to changes. In today's global economy, resilience is multifaceted, encompassing conditions in markets for inputs, factors, goods and services and the financial markets. A resilient economy therefore is also characterized by market participants who can adapt to changes and who can withstand the economic cycle. Given this confluence of recent global and regional trends and its potential implications on Malaysia's growth and development, economic policy has therefore been focused on ensuring that the economy's resilience is sustained.

The first pillar of resilience is to ensure that macroeconomic fundamentals are sustained as they provide the platform for the efficient transmission of market signals, which allows for better decision-making by investors and consumers. Malaysia has a track record of having sustained stability over the long term by ensuring the internal and external conditions of the economy remain in balance. As Malaysia's internal balance has remained close to equilibrium on average, the nation has benefited from a low and stable inflation rate. For most of our history, inflation has been below 4% and in the 5-year period 2000-04, the rate has been even lower to less than 2%. In spite of strong commodity and the energy prices, inflation in relative terms in 2005 has remained modest. While rising costs may result in higher prices in the near term, it is expected to moderate in the latter part of the year. The outlook will essentially depend on costs in particular, energy costs that has continued to remain high. This is however, being partially mitigated with continued capacity expansion taking place. On the external front, the current account remains in surplus, which together with inflows of long-term capital have resulted in international reserves increasing to USD74.9 billion at the end of May. Malaysia's external debt has also declined to 43.9% of GNP, with the bulk consisting of medium- and long-term debt, reflecting prudent public sector debt management.

Secondly, Malaysia has a well-diversified economic structure, with balanced growth experienced in all economic sectors. Nearly all sectors including the manufacturing services and agriculture sectors have contributed to growth in the first quarter, allowing Malaysia to take advantage of positive developments in a several markets while minimizing risks. As noted earlier, regional markets have complemented traditional trading partners in sustaining growth. Domestic demand has also become increasingly important and now accounts for a greater proportion of growth, allowing growth to emanate from multiple sources.

Malaysia has for three consecutive years experienced solid and robust expansion with above average growth in the region. The economy also benefited from strong domestic demand that was reinforced by high growth in external demand. Of interest is the sustainability of these trends. Being integrated with the world economy, growth will demand on developments in the global environment. The higher petroleum prices, while having a less of a direct impact, if prolonged can be expected to have a dampening effect on the economies of our major trading partners. In addition, the global performance of the electronic sector will have implications on the manufacturing sector. Strong domestic demand and robust performance of the services and agriculture sectors will contribute to the growth outlook.

The financial system continues to strengthen and remain strong. Access to financing has been a significant factor supporting the private sector driven growth. Bank lending remains robust and funds raised from the domestic capital market have become an important source of financing. The Central Bank has taken the opportunity of the strengthened position of the economy and the financial system to introduce liberalisation measures in the financial system. Foreign exchange administration rules have been liberalized to enhance the business environment and facilitate efficiency in transactions involving foreign exchange. Also, foreign participation in raising domestic currency bonds in our capital market in now permitted. Multi-lateral agencies and multi-national corporations may issue Ringgit denominated debt in our domestic bond market. Three multi-lateral development agencies have now taken advantage of this initiative.

The Financial Sector as an Enabler and A Source of Growth
The financial stability is a key pillar of resilience and a pre-requisite to sustained growth. In Malaysia the financial sector stability achieved has allowed the sector to become a key enabler of Malaysia's growth and development.

Going forward, the financial sector is expected to have an even greater role in the economy. Firstly, following the capacity-building measures instituted under the Financial Sector and the Capital Markets Master Plans, the sector has been strengthened and achieved an improved efficiency level. Together with a regulatory environment that encourages greater innovation while maintaining stability, Malaysian banks and financial institutions have ventured into more innovative business lines. The financial institutions have also facilitated the expansion of regional and global presence of Malaysian companies. Banks have also ventured beyond domestic borders including to the Middle East. While some of this progress has been driven by specific strategies outlined in the Master Plans, for the most part it has been market-driven.

This includes the development of Islamic banking and financial services in Malaysia. Islamic banking is not new to Malaysia, with the first Islamic bank beginning operations more than two decades ago. Nevertheless, the strongest growth has been observed in the recent five years. Conventional banks, including foreign banks that operate Islamic windows are now able to transform these operations into Islamic subsidiaries. There is also now a greater array of instruments offered. Shariah-compliant papers were issued by the Government, allowing the development of Islamic money and capital markets. The Government's efforts to develop the market have not merely been confined to ringgit-denominated instruments. By issuing Shariah-compliant foreign currency-denominated debt and later by allowing foreign issuers to tap the Malaysian capital markets, the development of Islamic finance has been accelerated. This culminated with the issue of three Islamic banking licences to fully foreign-owned financial groups from the Middle East in 2004 in order to enhance the development of Islamic banking in Malaysia. In addition, these new financial links would contribute towards the growing trade and investment links between Malaysia and the countries in the Middle East, connecting two regions that previously have had little direct economic contact.

Further transformation of our financial sector took place in March with the creation of a new class of financial intermediaries, the investment banks. These institutions would be subject to more liberal ownership limits, with up to 49% of their shareholding allowed to be in foreign interests. Similarly, the Securities Commission announced the further liberalisation of the broking and fund management industry, allowing five fully foreign-owned brokers from the United States, Europe and Australia to operate in Malaysia. To further strengthen regional linkages, Bursa Malaysia is in discussions with the Singapore Exchange to improve cross-border trading capacities. This has resulted in further global integration that will facilitate economic integration.

Malaysia: Bridging Regions
The major global trends occurring present challenges to policymakers, corporations and the domestic community at large but it also present opportunities. These trends are not only beneficial to Malaysia but allows Malaysia to present opportunities to our trade partners and investors to participate collaboratively for mutual benefits. The increasingly deep and broad economic ties with our regional partners, the abiding strength of the links with traditional markets and investors and the potential in the new partnerships being forged among OIC countries presents opportunities to both Malaysian companies and the workforce. Using Malaysia as a base and exploiting the nexus of factors that would drive growth and development in the coming years, it is now possible to contemplate deeper links that can only lead to greater shared prosperity.