economic history of malaysia
John
H. Drabble, University of Sydney, Australia
General
Background
The Federation of Malaysia (see
map), formed in 1963, originally consisted of Malaya, Singapore, Sarawak and
Sabah. Due to internal political tensions Singapore was obliged to leave in
1965. Malaya is now known as Peninsular Malaysia, and the two other territories
on the island of Borneo as East Malaysia. Prior to 1963 these territories were
under British rule for varying periods from the late eighteenth century. Malaya
gained independence in 1957, Sarawak and Sabah (the latter known previously as
British North Borneo) in 1963, and Singapore full independence in 1965. These
territories lie between 2 and 6 degrees north of the equator. The terrain
consists of extensive coastal plains backed by mountainous interiors. The soils
are not naturally fertile but the humid tropical climate subject to monsoonal weather
patterns creates good conditions for plant growth. Historically much of the
region was covered in dense rainforest (jungle), though much of this has been
removed for commercial purposes over the last century leading to extensive soil
erosion and silting of the rivers which run from the interiors to the coast.
SINGAPORE
The present government is a
parliamentary system at the federal level (located in Kuala Lumpur, Peninsular
Malaysia) and at the state level, based on periodic general elections. Each Peninsular
state (except Penang and Melaka) has a traditional Malay ruler, the Sultan, one
of whom is elected as paramount ruler of Malaysia (Yang dipertuan Agung)
for a five-year term.
The population at the end of the
twentieth century approximated 22 million and is ethnically diverse, consisting
of 57 percent Malays and other indigenous peoples (collectively known as bumiputera),
24 percent Chinese, 7 percent Indians and the balance “others” (including a
high proportion of non-citizen Asians, e.g., Indonesians, Bangladeshis,
Filipinos) (Andaya and Andaya, 2001, 3-4)
Significance
as a Case Study in Economic Development
Malaysia is generally regarded as
one of the most successful non-western countries to have achieved a relatively
smooth transition to modern economic growth over the last century or so. Since
the late nineteenth century it has been a major supplier of primary products to
the industrialized countries; tin, rubber, palm oil, timber, oil, liquified
natural gas, etc.
However, since about 1970 the leading
sector in development has been a range of export-oriented manufacturing
industries such as textiles, electrical and electronic goods, rubber products
etc. Government policy has generally accorded a central role to foreign
capital, while at the same time working towards more substantial participation
for domestic, especially bumiputera, capital and enterprise. By 1990 the
country had largely met the criteria for a Newly-Industrialized Country (NIC)
status (30 percent of exports to consist of manufactured goods). While the
Asian economic crisis of 1997-98 slowed growth temporarily, the current plan,
titled Vision 2020, aims to achieve “a fully developed industrialized economy
by that date. This will require an annual growth rate in real GDP of 7 percent”
(Far Eastern Economic Review, Nov. 6, 2003). Malaysia is perhaps the
best example of a country in which the economic roles and interests of various
racial groups have been pragmatically managed in the long-term without
significant loss of growth momentum, despite the ongoing presence of
inter-ethnic tensions which have occasionally manifested in violence, notably
in 1969 (see below).
The
Premodern Economy
Malaysia has a long history of
internationally valued exports, being known from the early centuries A.D. as a
source of gold, tin and exotics such as birds’ feathers, edible birds’ nests,
aromatic woods, tree resins etc. The commercial importance of the area was
enhanced by its strategic position athwart the seaborne trade routes from the
Indian Ocean to East Asia. Merchants from both these regions, Arabs, Indians
and Chinese regularly visited. Some became domiciled in ports such as Melaka
[formerly Malacca], the location of one of the earliest local sultanates
(c.1402 A.D.) and a focal point for both local and international trade.
From the early sixteenth century the
area was increasingly penetrated by European trading interests, first the
Portuguese (from 1511), then the Dutch East India Company [VOC](1602) in
competition with the English East India Company [EIC] (1600) for the trade in
pepper and various spices. By the late eighteenth century the VOC was dominant
in the Indonesian region while the EIC acquired bases in Malaysia, beginning
with Penang (1786), Singapore (1819) and Melaka (1824). These were major
staging posts in the growing trade with China and also served as footholds from
which to expand British control into the Malay Peninsula (from 1870), and
northwest Borneo (Sarawak from 1841 and North Borneo from 1882). Over these
centuries there was an increasing inflow of migrants from China attracted by
the opportunities in trade and as a wage labor force for the burgeoning
production of export commodities such as gold and tin. The indigenous people
also engaged in commercial production (rice, tin), but remained basically
within a subsistence economy and were reluctant to offer themselves as
permanent wage labor. Overall, production in the premodern economy was
relatively small in volume and technologically undeveloped. The capitalist
sector, already foreign dominated, was still in its infancy (Drabble, 2000).
The
Transition to Capitalist Production
The nineteenth century witnessed an
enormous expansion in world trade which, between 1815 and 1914, grew on average
at 4-5 percent a year compared to 1 percent in the preceding hundred years. The
driving force came from the Industrial Revolution in the West which saw the
innovation of large scale factory production of manufactured goods made
possible by technological advances, accompanied by more efficient
communications (e.g., railways, cars, trucks, steamships, international canals
[Suez 1869, Panama 1914], telegraphs) which speeded up and greatly lowered the
cost of long distance trade. Industrializing countries required ever-larger
supplies of raw materials as well as foodstuffs for their growing populations.
Regions such as Malaysia with ample supplies of virgin land and relative
proximity to trade routes were well placed to respond to this demand. What was
lacking was an adequate supply of capital and wage labor. In both aspects, the
deficiency was supplied largely from foreign sources.
As expanding British power brought
stability to the region, Chinese migrants started to arrive in large numbers
with Singapore quickly becoming the major point of entry. Most arrived with few
funds but those able to amass profits from trade (including opium) used these
to finance ventures in agriculture and mining, especially in the neighboring
Malay Peninsula. Crops such as pepper, gambier, tapioca, sugar and coffee were
produced for export to markets in Asia (e.g. China), and later to the West
after 1850 when Britain moved toward a policy of free trade. These crops were
labor, not capital, intensive and in some cases quickly exhausted soil
fertility and required periodic movement to virgin land (Jackson, 1968).
Tin
Besides ample land, the Malay
Peninsula also contained substantial deposits of tin. International demand for
tin rose progressively in the nineteenth century due to the discovery of a more
efficient method for producing tinplate (for canned food). At the same time
deposits in major suppliers such as Cornwall (England) had been largely worked
out, thus opening an opportunity for new producers. Traditionally tin had been
mined by Malays from ore deposits close to the surface. Difficulties with
flooding limited the depth of mining; furthermore their activity was seasonal.
From the 1840s the discovery of large deposits in the Peninsula states of Perak
and Selangor attracted large numbers of Chinese migrants who dominated the
industry in the nineteenth century bringing new technology which improved ore
recovery and water control, facilitating mining to greater depths. By the end
of the century Malayan tin exports (at approximately 52,000 metric tons)
supplied just over half the world output. Singapore was a major center for
smelting (refining) the ore into ingots. Tin mining also attracted attention
from European, mainly British, investors who again introduced new technology –
such as high-pressure hoses to wash out the ore, the steam pump and, from 1912,
the bucket dredge floating in its own pond, which could operate to even deeper
levels. These innovations required substantial capital for which the chosen
vehicle was the public joint stock company, usually registered in Britain.
Since no major new ore deposits were found, the emphasis was on increased
efficiency in production. European operators, again employing mostly Chinese
wage labor, enjoyed a technical advantage here and by 1929 accounted for 61
percent of Malayan output (Wong Lin Ken, 1965; Yip Yat Hoong, 1969).
Rubber
While tin mining brought
considerable prosperity, it was a non-renewable resource. In the early
twentieth century it was the agricultural sector which came to the forefront.
The crops mentioned previously had boomed briefly but were hard pressed to
survive severe price swings and the pests and diseases that were endemic in
tropical agriculture. The cultivation of rubber-yielding trees became
commercially attractive as a raw material for new industries in the West,
notably for tires for the booming automobile industry especially in the U.S.
Previously rubber had come from scattered trees growing wild in the jungles of
South America with production only expandable at rising marginal costs.
Cultivation on estates generated economies of scale. In the 1870s the British
government organized the transport of specimens of the tree Hevea
Brasiliensis from Brazil to colonies in the East, notably Ceylon and
Singapore. There the trees flourished and after initial hesitancy over the five
years needed for the trees to reach productive age, planters Chinese and
European rushed to invest. The boom reached vast proportions as the rubber
price reached record heights in 1910 (see Fig.1). Average values fell
thereafter but investors were heavily committed and planting continued (also in
the neighboring Netherlands Indies [Indonesia]). By 1921 the rubber acreage in
Malaysia (mostly in the Peninsula) had reached 935 000 hectares (about 1.34
million acres) or some 55 percent of the total in South and Southeast Asia
while output stood at 50 percent of world production.
Fig.1. Average London Rubber Prices, 1905-41 (current
values)
As a result of this boom, rubber
quickly surpassed tin as Malaysia’s main export product, a position that it was
to hold until 1980. A distinctive feature of the industry was that the
technology of extracting the rubber latex from the trees (called tapping) by an
incision with a special knife, and its manufacture into various grades of sheet
known as raw or plantation rubber, was easily adopted by a wide range of
producers. The larger estates, mainly British-owned, were financed (as in the
case of tin mining) through British-registered public joint stock companies.
For example, between 1903 and 1912 some 260 companies were registered to
operate in Malaya. Chinese planters for the most part preferred to form private
partnerships to operate estates which were on average smaller. Finally, there
were the smallholdings (under 40 hectares or 100 acres) of which those at the
lower end of the range (2 hectares/5 acres or less) were predominantly owned by
indigenous Malays who found growing and selling rubber more profitable than
subsistence (rice) farming. These smallholders did not need much capital since
their equipment was rudimentary and labor came either from within their family
or in the form of share-tappers who received a proportion (say 50 percent) of
the output. In Malaya in 1921 roughly 60 percent of the planted area was
estates (75 percent European-owned) and 40 percent smallholdings (Drabble,
1991, 1).
The workforce for the estates
consisted of migrants. British estates depended mainly on migrants from India,
brought in under government auspices with fares paid and accommodation
provided. Chinese business looked to the “coolie trade” from South China, with
expenses advanced that migrants had subsequently to pay off. The flow of
immigration was directly related to economic conditions in Malaysia. For
example arrivals of Indians averaged 61 000 a year between 1900 and 1920.
Substantial numbers also came from the Netherlands Indies.
Thus far, most capitalist enterprise
was located in Malaya. Sarawak and British North Borneo had a similar range of
mining and agricultural industries in the 19th century. However,
their geographical location slightly away from the main trade route (see map)
and the rugged internal terrain costly for transport made them less attractive
to foreign investment. However, the discovery of oil by a subsidiary of Royal
Dutch-Shell starting production from 1907 put Sarawak more prominently in the
business of exports. As in Malaya, the labor force came largely from immigrants
from China and to a lesser extent Java.
The growth in production for export
in Malaysia was facilitated by development of an infrastructure of roads,
railways, ports (e.g. Penang, Singapore) and telecommunications under the
auspices of the colonial governments, though again this was considerably more
advanced in Malaya (Amarjit Kaur, 1985, 1998)
The
Creation of a Plural Society
By the 1920s the large inflows of
migrants had created a multi-ethnic population of the type which the British
scholar, J.S. Furnivall (1948) described as a plural society in which the
different racial groups live side by side under a single political
administration but, apart from economic transactions, do not interact with each
other either socially or culturally. Though the original intention of many
migrants was to come for only a limited period (say 3-5 years), save money and
then return home, a growing number were staying longer, having children and
becoming permanently domiciled in Malaysia. The economic developments described
in the previous section were unevenly located, for example, in Malaya the bulk
of the tin mines and rubber estates were located along the west coast of the
Peninsula. In the boom-times, such was the size of the immigrant inflows that
in certain areas they far outnumbered the indigenous Malays. In social and
cultural terms Indians and Chinese recreated the institutions, hierarchies and
linguistic usage of their countries of origin. This was particularly so in the
case of the Chinese. Not only did they predominate in major commercial centers
such as Penang, Singapore, and Kuching, but they controlled local trade in the
smaller towns and villages through a network of small shops (kedai) and
dealerships that served as a pipeline along which export goods like rubber went
out and in return imported manufactured goods were brought in for sale. In
addition Chinese owned considerable mining and agricultural land. This created
a distribution of wealth and division of labor in which economic power and
function were directly related to race. In this situation lay the seeds of
growing discontent among bumiputera that they were losing their
ancestral inheritance (land) and becoming economically marginalized. As long as
British colonial rule continued the various ethnic groups looked primarily to
government to protect their interests and maintain peaceable relations. An
example of colonial paternalism was the designation from 1913 of certain lands
in Malaya as Malay Reservations in which only indigenous people could own and
deal in property (Lim Teck Ghee, 1977).
Benefits
and Drawbacks of an Export Economy
Prior to World War II the
international economy was divided very broadly into the northern and southern
hemispheres. The former contained most of the industrialized manufacturing
countries and the latter the principal sources of foodstuffs and raw materials.
The commodity exchange between the spheres was known as the Old International
Division of Labor (OIDL). Malaysia’s place in this system was as a leading
exporter of raw materials (tin, rubber, timber, oil, etc.) and an importer of
manufactures. Since relatively little processing was done on the former prior
to export, most of the value-added component in the final product accrued to
foreign manufacturers, e.g. rubber tire manufacturers in the U.S.
It is clear from this situation that
Malaysia depended heavily on earnings from exports of primary commodities to
maintain the standard of living. Rice had to be imported (mainly from Burma and
Thailand) because domestic production supplied on average only 40 percent of
total needs. As long as export prices were high (for example during the rubber
boom previously mentioned), the volume of imports remained ample. Profits to
capital and good smallholder incomes supported an expanding economy. There are
no official data for Malaysian national income prior to World War II, but some
comparative estimates are given in Table 1 which indicate that Malayan Gross
Domestic Product (GDP) per person was easily the leader in the Southeast and
East Asian region by the late 1920s.
Table
1
GDP per Capita: Selected Asian Countries, 1900-1990
(in 1985 international dollars)
GDP per Capita: Selected Asian Countries, 1900-1990
(in 1985 international dollars)
1900
|
1929
|
1950
|
1973
|
1990
|
|
Malaya/Malaysia1
|
6002
|
1910
|
1828
|
3088
|
5775
|
Singapore
|
-
|
-
|
22763
|
5372
|
14441
|
Burma
|
523
|
651
|
304
|
446
|
562
|
Thailand
|
594
|
623
|
652
|
1559
|
3694
|
Indonesia
|
617
|
1009
|
727
|
1253
|
2118
|
Philippines
|
735
|
1106
|
943
|
1629
|
1934
|
South Korea
|
568
|
945
|
565
|
1782
|
6012
|
Japan
|
724
|
1192
|
1208
|
7133
|
13197
|
Notes: Malaya to 19731;
Guesstimate2; 19603
Source: van der Eng (1994).
However, the international economy
was subject to strong fluctuations. The levels of activity in the
industrialized countries, especially the U.S., were the determining factors
here. Almost immediately following World War I there was a depression from 1919-22.
Strong growth in the mid and late-1920s was followed by the Great Depression
(1929-32). As industrial output slumped, primary product prices fell even more
heavily. For example, in 1932 rubber sold on the London market for about one
one-hundredth of the peak price in 1910 (Fig.1). The effects on export earnings
were very severe; in Malaysia’s case between 1929 and 1932 these dropped by 73
percent (Malaya), 60 percent (Sarawak) and 50 percent (North Borneo). The
aggregate value of imports fell on average by 60 percent. Estates dismissed
labor and since there was no social security, many workers had to return to
their country of origin. Smallholder incomes dropped heavily and many who had
taken out high-interest secured loans in more prosperous times were unable to
service these and faced the loss of their land.
The colonial government attempted to
counteract this vulnerability to economic swings by instituting schemes to
restore commodity prices to profitable levels. For the rubber industry this
involved two periods of mandatory restriction of exports to reduce world stocks
and thus exert upward pressure on market prices. The first of these (named the
Stevenson scheme after its originator) lasted from 1 October 1922- 1 November
1928, and the second (the International Rubber Regulation Agreement) from 1
June 1934-1941. Tin exports were similarly restricted from 1931-41. While these
measures did succeed in raising world prices, the inequitable treatment of
Asian as against European producers in both industries has been debated. The
protective policy has also been blamed for “freezing” the structure of the
Malaysian economy and hindering further development, for instance into
manufacturing industry (Lim Teck Ghee, 1977; Drabble, 1991).
Why
No Industrialization?
Malaysia had very few secondary
industries before World War II. The little that did appear was connected mainly
with the processing of the primary exports, rubber and tin, together with
limited production of manufactured goods for the domestic market (e.g. bread,
biscuits, beverages, cigarettes and various building materials). Much of this
activity was Chinese-owned and located in Singapore (Huff, 1994). Among the
reasons advanced are; the small size of the domestic market, the relatively
high wage levels in Singapore which made products uncompetitive as exports, and
a culture dominated by British trading firms which favored commerce over
industry. Overshadowing all these was the dominance of primary production. When
commodity prices were high, there was little incentive for investors, European
or Asian, to move into other sectors. Conversely, when these prices fell
capital and credit dried up, while incomes contracted, thus lessening effective
demand for manufactures. W.G. Huff (2002) has argued that, prior to World War
II, “there was, in fact, never a good time to embark on industrialization in
Malaya.”
War
Time 1942-45: The Japanese Occupation
During the Japanese occupation years
of World War II, the export of primary products was limited to the relatively
small amounts required for the Japanese economy. This led to the abandonment of
large areas of rubber and the closure of many mines, the latter progressively
affected by a shortage of spare parts for machinery. Businesses, especially
those Chinese-owned, were taken over and reassigned to Japanese interests. Rice
imports fell heavily and thus the population devoted a large part of their
efforts to producing enough food to stay alive. Large numbers of laborers (many
of whom died) were conscripted to work on military projects such as
construction of the Thai-Burma railroad. Overall the war period saw the
dislocation of the export economy, widespread destruction of the infrastructure
(roads, bridges etc.) and a decline in standards of public health. It also saw
a rise in inter-ethnic tensions due to the harsh treatment meted out by the
Japanese to some groups, notably the Chinese, compared to a more favorable
attitude towards the indigenous peoples among whom (Malays particularly) there
was a growing sense of ethnic nationalism (Drabble, 2000).
Postwar
Reconstruction and Independence
The returning British colonial
rulers had two priorities after 1945; to rebuild the export economy as it had
been under the OIDL (see above), and to rationalize the fragmented administrative
structure (see General Background). The first was accomplished by the late
1940s with estates and mines refurbished, production restarted once the labor
force had been brought back and adequate rice imports regained. The second was
a complex and delicate political process which resulted in the formation of the
Federation of Malaya (1948) from which Singapore, with its predominantly
Chinese population (about 75%), was kept separate. In Borneo in 1946 the state
of Sarawak, which had been a private kingdom of the English Brooke family
(so-called “White Rajas”) since 1841, and North Borneo, administered by the
British North Borneo Company from 1881, were both transferred to direct rule
from Britain. However, independence was clearly on the horizon and in Malaya
tensions continued with the guerrilla campaign (called the “Emergency”) waged
by the Malayan Communist Party (membership largely Chinese) from 1948-60 to
force out the British and set up a Malayan Peoples’ Republic. This failed and
in 1957 the Malayan Federation gained independence (Merdeka) under a
“bargain” by which the Malays would hold political paramountcy while others,
notably Chinese and Indians, were given citizenship and the freedom to pursue
their economic interests. The bargain was institutionalized as the Alliance,
later renamed the National Front (Barisan Nasional) which remains the
dominant political grouping. In 1963 the Federation of Malaysia was formed in
which the bumiputera population was sufficient in total to offset the
high proportion of Chinese arising from the short-lived inclusion of Singapore
(Andaya and Andaya, 2001).
Towards
the Formation of a National Economy
Postwar two long-term problems came
to the forefront. These were (a) the political fragmentation (see above) which
had long prevented a centralized approach to economic development, coupled with
control from Britain which gave primacy to imperial as opposed to local
interests and (b) excessive dependence on a small range of primary products
(notably rubber and tin) which prewar experience had shown to be an unstable
basis for the economy.
The first of these was addressed
partly through the political rearrangements outlined in the previous section,
with the economic aspects buttressed by a report from a mission to Malaya from
the International Bank for Reconstruction and Development (IBRD) in 1954. The
report argued that Malaya “is now a distinct national economy.” A further
mission in 1963 urged “closer economic cooperation between the prospective
Malaysia[n] territories” (cited in Drabble, 2000, 161, 176). The rationale for
the Federation was that Singapore would serve as the initial center of
industrialization, with Malaya, Sabah and Sarawak following at a pace
determined by local conditions.
The second problem centered on
economic diversification. The IBRD reports just noted advocated building up a
range of secondary industries to meet a larger portion of the domestic demand
for manufactures, i.e. import-substitution industrialization (ISI). In the
interim dependence on primary products would perforce continue.
The
Adoption of Planning
In the postwar world the development
plan (usually a Five-Year Plan) was widely adopted by Less-Developed Countries
(LDCs) to set directions, targets and estimated costs. Each of the Malaysian
territories had plans during the 1950s. Malaya was the first to get
industrialization of the ISI type under way. The Pioneer Industries Ordinance
(1958) offered inducements such as five-year tax holidays, guarantees (to
foreign investors) of freedom to repatriate profits and capital etc. A modest
degree of tariff protection was granted. The main types of goods produced were
consumer items such as batteries, paints, tires, and pharmaceuticals. Just over
half the capital invested came from abroad, with neighboring Singapore in the
lead. When Singapore exited the federation in 1965, Malaysia’s fledgling
industrialization plans assumed greater significance although foreign investors
complained of stifling bureaucracy retarding their projects.
Primary production, however, was
still the major economic activity and here the problem was rejuvenation of the
leading industries, rubber in particular. New capital investment in rubber had
slowed since the 1920s, and the bulk of the existing trees were nearing the end
of their economic life. The best prospect for rejuvenation lay in cutting down
the old trees and replanting the land with new varieties capable of raising
output per acre/hectare by a factor of three or four. However, the new trees
required seven years to mature. Corporately owned estates could replant
progressively, but smallholders could not face such a prolonged loss of income
without support. To encourage replanting, the government offered grants to
owners, financed by a special duty on rubber exports. The process was a lengthy
one and it was the 1980s before replanting was substantially complete.
Moreover, many estates elected to switch over to a new crop, oil palms (a
product used primarily in foodstuffs), which offered quicker returns. Progress
was swift and by the 1960s Malaysia was supplying 20 percent of world demand
for this commodity.
Another priority at this time
consisted of programs to improve the standard of living of the indigenous
peoples, most of whom lived in the rural areas. The main instrument was land
development, with schemes to open up large areas (say 100,000 acres or 40 000
hectares) which were then subdivided into 10 acre/4 hectare blocks for
distribution to small farmers from overcrowded regions who were either short of
land or had none at all. Financial assistance (repayable) was provided to cover
housing and living costs until the holdings became productive. Rubber and oil
palms were the main commercial crops planted. Steps were also taken to increase
the domestic production of rice to lessen the historical dependence on imports.
In the primary sector Malaysia’s
range of products was increased from the 1960s by a rapid increase in the
export of hardwood timber, mostly in the form of (unprocessed) saw-logs. The
markets were mainly in East Asia and Australasia. Here the largely untapped
resources of Sabah and Sarawak came to the fore, but the rapid rate of
exploitation led by the late twentieth century to damaging effects on both the
environment (extensive deforestation, soil-loss, silting, changed weather
patterns), and the traditional hunter-gatherer way of life of forest-dwellers
(decrease in wild-life, fish, etc.). Other development projects such as the
building of dams for hydroelectric power also had adverse consequences in all
these respects (Amarjit Kaur, 1998; Drabble, 2000; Hong, 1987).
A further major addition to primary
exports came from the discovery of large deposits of oil and natural gas in
East Malaysia, and off the east coast of the Peninsula from the 1970s. Gas was exported
in liquified form (LNG), and was also used domestically as a substitute for
oil. At peak values in 1982, petroleum and LNG provided around 29 percent of
Malaysian export earnings but had declined to 18 percent by 1988.
Industrialization
and the New Economic Policy 1970-90
The program of industrialization
aimed primarily at the domestic market (ISI) lost impetus in the late 1960s as
foreign investors, particularly from Britain switched attention elsewhere. An
important factor here was the outbreak of civil disturbances in May 1969,
following a federal election in which political parties in the Peninsula
(largely non-bumiputera in membership) opposed to the Alliance did
unexpectedly well. This brought to a head tensions, which had been rising
during the 1960s over issues such as the use of the national language, Malay (Bahasa
Malaysia) as the main instructional medium in education. There was also
discontent among Peninsular Malays that the economic fruits since independence
had gone mostly to non-Malays, notably the Chinese. The outcome was severe
inter-ethnic rioting centered in the federal capital, Kuala Lumpur, which led
to the suspension of parliamentary government for two years and the
implementation of the New Economic Policy (NEP).
The main aim of the NEP was a
restructuring of the Malaysian economy over two decades, 1970-90 with the
following aims:
- to redistribute corporate equity so that the bumiputera share would rise from around 2 percent to 30 percent. The share of other Malaysians would increase marginally from 35 to 40 percent, while that of foreigners would fall from 63 percent to 30 percent.
- to eliminate the close link between race and economic function (a legacy of the colonial era) and restructure employment so that that the bumiputera share in each sector would reflect more accurately their proportion of the total population (roughly 55 percent). In 1970 this group had about two-thirds of jobs in the primary sector where incomes were generally lowest, but only 30 percent in the secondary sector. In high-income middle class occupations (e.g. professions, management) the share was only 13 percent.
- To eradicate poverty irrespective of race. In 1970 just under half of all households in Peninsular Malaysia had incomes below the official poverty line. Malays accounted for about 75 percent of these.
The principle underlying these aims
was that the redistribution would not result in any one group losing in
absolute terms. Rather it would be achieved through the process of economic
growth, i.e. the economy would get bigger (more investment, more jobs, etc.).
While the primary sector would continue to receive developmental aid under the
successive Five Year Plans, the main emphasis was a switch to export-oriented
industrialization (EOI) with Malaysia seeking a share in global markets for
manufactured goods. Free Trade Zones (FTZs) were set up in places such as
Penang where production was carried on with the undertaking that the output
would be exported. Firms locating there received concessions such as duty-free
imports of raw materials and capital goods, and tax concessions, aimed at
primarily at foreign investors who were also attracted by Malaysia’s good
facilities, relatively low wages and docile trade unions. A range of industries
grew up; textiles, rubber and food products, chemicals, telecommunications
equipment, electrical and electronic machinery/appliances, car assembly and
some heavy industries, iron and steel. As with ISI, much of the capital and
technology was foreign, for example the Japanese firm Mitsubishi was a partner
in a venture to set up a plant to assemble a Malaysian national car, the
Proton, from mostly imported components (Drabble, 2000).
Results
of the NEP
Table 2 below shows the outcome of
the NEP in the categories outlined above.
Table
2
Restructuring under the NEP, 1970-90
Restructuring under the NEP, 1970-90
1970
|
1990
|
|||||
Wealth
Ownership (%)
|
Bumiputera
|
2.0
|
20.3
|
|||
Other Malaysians
|
34.6
|
54.6
|
||||
Foreigners
|
63.4
|
25.1
|
||||
Employment
(%) of total workers in each sector |
||||||
Primary
sector (agriculture, mineral
extraction, forest products and fishing) |
Bumiputera
|
67.6
|
[61.0]*
|
71.2
|
[36.7]*
|
|
Others
|
32.4
|
28.8
|
||||
Secondary
sector
(manufacturing and construction) |
Bumiputera
|
30.8
|
[14.6]*
|
48.0
|
[26.3]*
|
|
Others
|
69.2
|
52.0
|
||||
Tertiary
sector (services)
|
Bumiputera
|
37.9
|
[24.4]*
|
51.0
|
[36.9]*
|
|
Others
|
62.1
|
49.0
|
Note: [ ]* is the proportion of the
ethnic group thus employed. The “others” category has not been disaggregated by
race to avoid undue complexity.
Source: Drabble, 2000, Table 10.9.
Source: Drabble, 2000, Table 10.9.
Section (a) shows that, overall,
foreign ownership fell substantially more than planned, while that of “Other
Malaysians” rose well above the target. Bumiputera ownership appears to
have stopped well short of the 30 percent mark. However, other evidence suggests
that in certain sectors such as agriculture/mining (35.7%) and
banking/insurance (49.7%) bumiputera ownership of shares in publicly
listed companies had already attained a level well beyond the target. Section
(b) indicates that while bumiputera employment share in primary
production increased slightly (due mainly to the land schemes), as a proportion
of that ethnic group it declined sharply, while rising markedly in both the
secondary and tertiary sectors. In middle class employment the share rose to 27
percent.
As regards the proportion of
households below the poverty line, in broad terms the incidence in Malaysia
fell from approximately 49 percent in 1970 to 17 percent in 1990, but with
large regional variations between the Peninsula (15%), Sarawak (21 %) and Sabah
(34%) (Drabble, 2000, Table 13.5). All ethnic groups registered big falls, but
on average the non-bumiputera still enjoyed the lowest incidence of
poverty. By 2002 the overall level had fallen to only 4 percent.
The restructuring of the Malaysian
economy under the NEP is very clear when we look at the changes in composition
of the Gross Domestic Product (GDP) in Table 3 below.
Table
3
Structural Change in GDP 1970-90 (% shares)
Structural Change in GDP 1970-90 (% shares)
Year
|
Primary
|
Secondary
|
Tertiary
|
1970
|
44.3
|
18.3
|
37.4
|
1990
|
28.1
|
30.2
|
41.7
|
Source: Malaysian Government, 1991, Table 3-2.
Over these three decades Malaysia
accomplished a transition from a primary product-dependent economy to one in
which manufacturing industry had emerged as the leading growth sector. Rubber
and tin, which accounted for 54.3 percent of Malaysian export value in 1970,
declined sharply in relative terms to a mere 4.9 percent in 1990 (Crouch, 1996,
222).
Factors
in the structural shift
The post-independence state played a
leading role in the transformation. The transition from British rule was
smooth. Apart from the disturbances in 1969 government maintained a firm
control over the administrative machinery. Malaysia’s Five Year Development
plans were a model for the developing world. Foreign capital was accorded a
central role, though subject to the requirements of the NEP. At the same time
these requirements discouraged domestic investors, the Chinese especially, to
some extent (Jesudason, 1989).
Development was helped by major
improvements in education and health. Enrolments at the primary school level
reached approximately 90 percent by the 1970s, and at the secondary level 59
percent of potential by 1987. Increased female enrolments, up from 39 percent
to 58 percent of potential from 1975 to 1991, were a notable feature, as was
the participation of women in the workforce which rose to just over 45 percent
of total employment by 1986/7. In the tertiary sector the number of
universities increased from one to seven between 1969 and 1990 and numerous
technical and vocational colleges opened. Bumiputera enrolments soared
as a result of the NEP policy of redistribution (which included ethnic quotas
and government scholarships). However, tertiary enrolments totaled only 7
percent of the age group by 1987. There was an “educational-occupation
mismatch,” with graduates (bumiputera especially) preferring jobs in
government, and consequent shortfalls against strong demand for engineers,
research scientists, technicians and the like. Better living conditions (more
homes with piped water and more rural clinics, for example) led to substantial
falls in infant mortality, improved public health and longer life-expectancy,
especially in Peninsular Malaysia (Drabble, 2000, 248, 284-6).
The quality of national leadership
was a crucial factor. This was particularly so during the NEP. The leading
figure here was Dr Mahathir Mohamad, Malaysian Prime Minister from 1981-2003.
While supporting the NEP aim through positive discrimination to give bumiputera
an economic stake in the country commensurate with their indigenous status and
share in the population, he nevertheless emphasized that this should ultimately
lead them to a more modern outlook and ability to compete with the other races
in the country, the Chinese especially (see Khoo Boo Teik, 1995). There were,
however, some paradoxes here. Mahathir was a meritocrat in principle, but in
practice this period saw the spread of “money politics” (another expression for
patronage) in Malaysia. In common with many other countries Malaysia embarked
on a policy of privatization of public assets, notably in transportation (e.g.
Malaysian Airlines), utilities (e.g. electricity supply) and communications
(e.g. television). This was done not through an open process of competitive tendering
but rather by a “nebulous ‘first come, first served’ principle” (Jomo, 1995, 8)
which saw ownership pass directly to politically well-connected businessmen,
mainly bumiputera, at relatively low valuations.
The
New Development Policy
Positive action to promote bumiputera
interests did not end with the NEP in 1990, this was followed in 1991 by the
New Development Policy (NDP), which emphasized assistance only to
“Bumiputera with potential, commitment and good track records” (Malaysian
Government, 1991, 17) rather than the previous blanket measures to redistribute
wealth and employment. In turn the NDP was part of a longer-term program known
as Vision 2020. The aim here is to turn Malaysia into a fully industrialized
country and to quadruple per capita income by the year 2020. This will require
the country to continue ascending the technological “ladder” from low- to
high-tech types of industrial production, with a corresponding increase in the
intensity of capital investment and greater retention of value-added (i.e. the
value added to raw materials in the production process) by Malaysian producers.
The Malaysian economy continued to
boom at historically unprecedented rates of 8-9 percent a year for much of the
1990s (see next section). There was heavy expenditure on infrastructure, for
example extensive building in Kuala Lumpur such as the Twin Towers (currently
the highest buildings in the world). The volume of manufactured exports,
notably electronic goods and electronic components increased rapidly.
Asian
Financial Crisis, 1997-98
The Asian financial crisis
originated in heavy international currency speculation leading to major slumps
in exchange rates beginning with the Thai baht in May 1997, spreading rapidly
throughout East and Southeast Asia and severely affecting the banking and
finance sectors. The Malaysian ringgit exchange rate fell from RM 2.42 to 4.88
to the U.S. dollar by January 1998. There was a heavy outflow of foreign
capital. To counter the crisis the International Monetary Fund (IMF) recommended
austerity changes to fiscal and monetary policies. Some countries (Thailand,
South Korea, and Indonesia) reluctantly adopted these. The Malaysian government
refused and implemented independent measures; the ringgitbecame non-convertible
externally and was pegged at RM 3.80 to the US dollar, while foreign capital
repatriated before staying at least twelve months was subject to substantial
levies. Despite international criticism these actions stabilized the domestic
situation quite effectively, restoring net growth (see next section) especially
compared to neighboring Indonesia.
Rates
of Economic Growth
Malaysia’s economic growth in
comparative perspective from 1960-90 is set out in Table 4 below.
Table
4
Asia-Pacific Region: Growth of Real GDP (annual average percent)
Asia-Pacific Region: Growth of Real GDP (annual average percent)
1960-69
|
1971-80
|
1981-89
|
|
Japan
|
10.9
|
5.0
|
4.0
|
Asian “Tigers”
|
|||
Hong Kong
|
10.0
|
9.5
|
7.2
|
South Korea
|
8.5
|
8.7
|
9.3
|
Singapore
|
8.9
|
9.0
|
6.9
|
Taiwan
|
11.6
|
9.7
|
8.1
|
ASEAN-4
|
|||
Indonesia
|
3.5
|
7.9
|
5.2
|
Malaysia
|
6.5
|
8.0
|
5.4
|
Philippines
|
4.9
|
6.2
|
1.7
|
Thailand
|
8.3
|
9.9
|
7.1
|
Source: Drabble, 2000, Table
10.2; figures for Japan are for 1960-70, 1971-80, and 1981-90.
The data show that Japan, the
dominant Asian economy for much of this period, progressively slowed by the
1990s (see below). The four leading Newly Industrialized Countries (Asian
“Tigers” as they were called) followed EOF strategies and achieved very high
rates of growth. Among the four ASEAN (Association of Southeast Asian Nations
formed 1967) members, again all adopting EOI policies, Thailand stood out
followed closely by Malaysia. Reference to Table 1 above shows that by 1990
Malaysia, while still among the leaders in GDP per head, had slipped relative
to the “Tigers.”
These economies, joined by China,
continued growth into the 1990s at such high rates (Malaysia averaged around 8
percent a year) that the term “Asian miracle” became a common method of
description. The exception was Japan which encountered major problems with
structural change and an over-extended banking system. Post-crisis the
countries of the region have started recovery but at differing rates. The
Malaysian economy contracted by nearly 7 percent in 1998, recovered to 8
percent growth in 2000, slipped again to under 1 percent in 2001 and has since
stabilized at between 4 and 5 percent growth in 2002-04.
The new Malaysian Prime Minister
(since October 2003), Abdullah Ahmad Badawi, plans to shift the emphasis in
development to smaller, less-costly infrastructure projects and to break the
previous dominance of “money politics.” Foreign direct investment will still be
sought but priority will be given to nurturing the domestic manufacturing
sector.
Further improvements in education
will remain a key factor (Far Eastern Economic Review, Nov.6, 2003).
Overview
Malaysia owes its successful
historical economic record to a number of factors. Geographically it lies close
to major world trade routes bringing early exposure to the international
economy. The sparse indigenous population and labor force has been supplemented
by immigrants, mainly from neighboring Asian countries with many becoming
permanently domiciled. The economy has always been exceptionally open to
external influences such as globalization. Foreign capital has played a major
role throughout. Governments, colonial and national, have aimed at managing the
structure of the economy while maintaining inter-ethnic stability. Since about
1960 the economy has benefited from extensive restructuring with sustained
growth of exports from both the primary and secondary sectors, thus gaining a
double impetus.
However, on a less positive
assessment, the country has so far exchanged dependence on a limited range of
primary products (e.g. tin and rubber) for dependence on an equally limited
range of manufactured goods, notably electronics and electronic components (59
percent of exports in 2002). These industries are facing increasing competition
from lower-wage countries, especially India and China. Within Malaysia the
distribution of secondary industry is unbalanced, currently heavily favoring
the Peninsula. Sabah and Sarawak are still heavily dependent on primary
products (timber, oil, LNG). There is an urgent need to continue the search for
new industries in which Malaysia can enjoy a comparative advantage in world
markets, not least because inter-ethnic harmony depends heavily on the
continuance of economic prosperity.
Select
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General
Studies
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Andaya, L.Y. and Andaya, B.W. A History
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Huff, W.G. The Economic Growth of
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Industries/Transport
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Amarjit Kaur. Bridge and Barrier:
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Drabble, J.H. Rubber in Malaya
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Drabble, J.H. Malayan Rubber: The
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New
Economic Policy
Jesudason, J.V. Ethnicity and the
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Jomo, K.S., editor. Privatizing
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Ethnic
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Chew, Daniel. Chinese Pioneers on
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Gullick, J.M. Malay Society in
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Hong, Evelyne. Natives of
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Economic
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Far Eastern Economic Review. Hong Kong. An excellent weekly overview of current
regional affairs.
Malaysian Government. The Second
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Citation: Drabble, John. “The Economic History of Malaysia”. EH.Net
Encyclopedia, edited by Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/economic-history-of-malaysia/
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