DEVELOPMENT AND ECONOMIC RISE OF MODERN MALAYSIA

DEVELOPMENT AND ECONOMIC RISE OF MODERN MALAYSIA

Cheah Boon Kheng of the National University of Singapore wrote: Malaya’s economy until the formation of Malaysia in 1963 was well - managed, achieving each year either a balanced budget, or budgets with available surpluses. Its finances were fundamentally sound, and when compared with other countries its economy was said to be ‘outright enviable,’ according to one specialist. 27 Malaysia, in its turn, embarked on the construction of massive infrastructures in the rural areas under its five - year development plans. Malaysia sustained an average economic growth of 8.00 percent from 1975 to 1995. Malaysia’s GDP nearly quadrupled from US$ 27 billion in 1981 to US$ 100 billion in 2001, while annual per capita income rose from less than US$ 2000 in 1981 to about US$ 4500 in 2001. Malaysia also reduced poverty to 7 percent in 2001 from around 50 percent in 1970. [Source: Cheah Boon Kheng, National University of Singapore, New Zealand Journal of Asian Studies 11, 1 (June 2009): 132]

In 1970, 75 percent of Malaysians living below the poverty line were Malays, the majority of Malays were still rural workers, and Malays were still largely excluded from the modern economy. The government’s response was the New Economic Policy of 1971, which was to be implemented through a series of four five-year plans from 1971 to 1990. The plan had two objectives: the elimination of poverty, particularly rural poverty, and the elimination of the identification between race and prosperity. This latter policy was understood to mean a decisive shift in economic power from the Chinese to the Malays, who until then made up only 5 percent of the professional class. [Source: Wikipedia]

Poverty was tackled through an agricultural policy which resettled 250,000 Malays on newly cleared farmland, more investment in rural infrastructure, and the creation of free trade zones in rural areas to create new manufacturing jobs. Little was done to improve the living standards of the low-paid workers in plantation agriculture, although this group steadily declined as a proportion of the workforce. By 1990 the poorest parts of Malaysia were rural Sabah and Sarawak, which lagged significantly behind the rest of the country. During the 1970s and ‘80s rural poverty did decline, particularly in the Malayan Peninsula, but critics of the government’s policy contend that this was mainly due to the growth of overall national prosperity (due in large part to the discovery of important oil and gas reserves) and migration of rural people to the cities rather than to state intervention. These years saw rapid growth in Malaysian cities, particularly Kuala Lumpur, which became a magnet for immigration both from rural Malaya and from poorer neighbours such as Indonesia, Bangladesh, Thailand and the Philippines. Urban poverty became a problem for the first time, with shanty towns growing up around the cities.

The second arm of government policy, driven mainly by Mahathir first as Education Minister and then as Prime Minister, was the transfer of economic power to the Malays. Mahathir greatly expanded the number of secondary schools and universities throughout the country, and enforced the policy of teaching in Malay rather than English. This had the effect of creating a large new Malay professional class. It also created an unofficial barrier against Chinese access to higher education, since few Chinese are sufficiently fluent in Malay to study at Malay-language universities. Chinese families therefore sent their children to universities in Singapore, Australia, Britain or the United States – by 2000, for example, 60,000 Malaysians held degrees from Australian universities. This had the unintended consequence of exposing large numbers of Malaysians to life in Western countries, creating a new source of discontent. Mahathir also greatly expanded educational opportunities for Malay women – by 2000 half of all university students were women.

To find jobs for all these new Malay graduates, the government created several agencies for intervention in the economy. The most important of these were PERNAS (National Corporation Ltd.), Petronas (National Petroleum Ltd.), and HICOM (Heavy Industry Corporation of Malaysia), which not only directly employed many Malays but also invested in growing areas of the economy to create new technical and administrative jobs which were preferentially allocated to Malays. As a result, the share of Malay equity in the economy rose from 1.5 percent in 1969 to 20.3 percent in 1990, and the percentage of businesses of all kinds owned by Malays rose from 39 percent to 68 percent. This latter figure was deceptive because many businesses that appeared to be Malay-owned were still indirectly controlled by Chinese, but there is no doubt that the Malay share of the economy considerably increased. The Chinese remained disproportionately powerful in Malaysian economic life, but by 2000 the distinction between Chinese and Malay business was fading as many new corporations, particularly in growth sectors such as information technology, were owned and managed by people from both ethnic groups.

Malaysia’s rapid economic progress since 1970, which was only temporarily disrupted by the Asian financial crisis of 1997, has not been matched by change in Malaysian politics. The repressive measures passed in 1970 remain in place. Malaysia has had regular elections since 1974, and although campaigning is reasonably free at election time, it is in effect a one-party state, with the UMNO-controlled National Front usually winning nearly all the seats, while the DAP wins some Chinese urban seats and the PAS some rural Malay ones. Since the DAP and the PAS have diametrically opposed policies, they have been unable to form an effective opposition coalition. There is almost no criticism of the government in the media and public protest remains severely restricted. The ISA continues to be used to silence dissidents, and the members of the UMNO youth movement are deployed to physically intimidate opponents.

Early Prime Ministers of Malaysia and Their Policies

Tunku Abdul Rahman Putra (1903-1990) was the leader of Malaysia's independence movement and the country's first prime minister. Known as Bapa Malaysia and the 20th son of the Sultan of Kedah, he the first premier of the Federation in 1957 and the premier of Malaysia in 1963. He negotiated independence with the British and maneuvered Malaysia through the bitter Konfrontasi with Indonesia over the absorption of Sabah and Sarawak. He resigned in 1970 after the Malay-Chinese riots in 1969. He was very critical of Mahathir, who he accused of being too authoritarian. Tunku Abdul Rahman studied in London after World War II.

Tun Abdul Razak was Malaysia’s second prime minister. He served from 1970 to 1976. He is regarded as the “Father of Development.” Tun Hussein Onn was Malaysia’s third prime minister. He served from 1976 until he retired in 1981. In 1971 Parliament reconvened, and a new government coalition, the National Front (Barisan Nasional), took office. This included UMNO, the MCA, the MIC, the much weakened Gerakan, and regional parties in Sabah and Sarawak. The DAP was left outside as the only significant opposition party. The PAS also joined the Front but was expelled in 1977.

Cheah Boon Kheng of the National University of Singapore wrote: With the departure of Tunku Abdul Rahman from office in 1971, his successor Tun Abdul Razak’s administration saw Malay political primacy in the ascendancy, the Malay language enforced more vigorously in education and in the public domain. Razak’s New Economic Policy (NEP) was vigorously implemented in favour of Malays. [Source: Cheah Boon Kheng, National University of Singapore, New Zealand Journal of Asian Studies 11, 1 (June 2009): 132]

There was a period of centralized rule from 1969 to 1972. In 1972 UMNO created a partnership with the Pan-Malaysia Islamic Party (PAS) to reduce intra-Malay political differences and also renewed ties with the MCA, which had left the Alliance prior to the Kuala Lumpur riots. This broader, interracial coalition changed its moniker to the National Front (Barisan Nasional—BN) and won large majorities in the 1974 federal and state elections. Throughout the 1970s and 1980s, BN administrations succeeded in increasing the power of the federal government relative to the state governments, often by forcing out of office independent-minded state chief ministers who were perceived as presenting a threat to national unity and ethnic accord. The BN also promoted educational policies designed for ethnic Malays and adopted aggressive measures to address economic inequalities experienced by Malays. [Source: Library of Congress, 2006]

Abdul Razak held office until his death in 1976. He was succeeded by Datuk Hussein Onn, the son of UMNO’s founder Onn Jaafar, and then by Tun Dr Mahathir bin Mohamad, who had been Education Minister since 1981, and who held power for 22 years. During these years policies were put in place which led to the rapid transformation of Malaysia’s economy and society, such as the controversial New Economic Policy, which was intended to increase proportionally the share of the economic "pie" of the bumiputras ("indigenous people", which includes the majority Malays, but not always the indigenous population) as compared to other ethnic groups—was launched by Prime Minister Tun Abdul Razak. Malaysia has since maintained a delicate ethno-political balance, with a system of government that has attempted to combine overall economic development with political and economic policies that promote equitable participation of all races. [Source: Wikipedia]

First Phase of Development in Malaysia: Exporter of Raw Materials

Malaysia had the fastest growing economy in Southeast Asia in the 1970s and 80s. In the 1970s, Malaysia was a young country with dependant on exporting raw materials such as timber, rubber, tin and palm oil. In 1970, commodities accounted for 70 percent of Malaysia's exports, while manufactured goods accounted for less than 30 percent.

Resource-based industries in Malaysia have included rubber, timber, tin, palm oil, cocoa, silica, sand and clay. In the 1970s, Malaysia had a significant unemployment problem. Young workers lined to get jobs on rubber and palm oil plantations.

John H. Drabble of the University of Sydney wrote: “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. [Source: John H. Drabble, University of Sydney, Australia \+\]

“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. \+\

Development and Economic Rise of Modern Malaysia

In 1970, 75 percent of Malaysians living below the poverty line were Malays, the majority of Malays were still rural workers, and Malays were still largely excluded from the modern economy. The government’s response was the New Economic Policy of 1971, which was to be implemented through a series of four five-year plans from 1971 to 1990. The plan had two objectives: the elimination of poverty, particularly rural poverty, and the elimination of the identification between race and prosperity. This latter policy was understood to mean a decisive shift in economic power from the Chinese to the Malays, who until then made up only 5 percent of the professional class. [Source: Wikipedia]

Poverty was tackled through an agricultural policy which resettled 250,000 Malays on newly cleared farmland, more investment in rural infrastructure, and the creation of free trade zones in rural areas to create new manufacturing jobs. Little was done to improve the living standards of the low-paid workers in plantation agriculture, although this group steadily declined as a proportion of the workforce. By 1990 the poorest parts of Malaysia were rural Sabah and Sarawak, which lagged significantly behind the rest of the country. During the 1970s and ‘80s rural poverty did decline, particularly in the Malayan Peninsula, but critics of the government’s policy contend that this was mainly due to the growth of overall national prosperity (due in large part to the discovery of important oil and gas reserves) and migration of rural people to the cities rather than to state intervention. These years saw rapid growth in Malaysian cities, particularly Kuala Lumpur, which became a magnet for immigration both from rural Malaya and from poorer neighbours such as Indonesia, Bangladesh, Thailand and the Philippines. Urban poverty became a problem for the first time, with shanty towns growing up around the cities.

The second arm of government policy, driven mainly by Mahathir first as Education Minister and then as Prime Minister, was the transfer of economic power to the Malays. Mahathir greatly expanded the number of secondary schools and universities throughout the country, and enforced the policy of teaching in Malay rather than English. This had the effect of creating a large new Malay professional class. It also created an unofficial barrier against Chinese access to higher education, since few Chinese are sufficiently fluent in Malay to study at Malay-language universities. Chinese families therefore sent their children to universities in Singapore, Australia, Britain or the United States – by 2000, for example, 60,000 Malaysians held degrees from Australian universities. This had the unintended consequence of exposing large numbers of Malaysians to life in Western countries, creating a new source of discontent. Mahathir also greatly expanded educational opportunities for Malay women – by 2000 half of all university students were women.

To find jobs for all these new Malay graduates, the government created several agencies for intervention in the economy. The most important of these were PERNAS (National Corporation Ltd.), Petronas (National Petroleum Ltd.), and HICOM (Heavy Industry Corporation of Malaysia), which not only directly employed many Malays but also invested in growing areas of the economy to create new technical and administrative jobs which were preferentially allocated to Malays. As a result, the share of Malay equity in the economy rose from 1.5 percent in 1969 to 20.3 percent in 1990, and the percentage of businesses of all kinds owned by Malays rose from 39 percent to 68 percent. This latter figure was deceptive because many businesses that appeared to be Malay-owned were still indirectly controlled by Chinese, but there is no doubt that the Malay share of the economy considerably increased. The Chinese remained disproportionately powerful in Malaysian economic life, but by 2000 the distinction between Chinese and Malay business was fading as many new corporations, particularly in growth sectors such as information technology, were owned and managed by people from both ethnic groups.

Malaysia’s rapid economic progress since 1970, which was only temporarily disrupted by the Asian financial crisis of 1997, has not been matched by change in Malaysian politics. The repressive measures passed in 1970 remain in place. Malaysia has had regular elections since 1974, and although campaigning is reasonably free at election time, it is in effect a one-party state, with the UMNO-controlled National Front usually winning nearly all the seats, while the DAP wins some Chinese urban seats and the PAS some rural Malay ones. Since the DAP and the PAS have diametrically opposed policies, they have been unable to form an effective opposition coalition. There is almost no criticism of the government in the media and public protest remains severely restricted. The ISA continues to be used to silence dissidents, and the members of the UMNO youth movement are deployed to physically intimidate opponents.

New Economic Policy: Malaysia’s Affirmative Action Plan

The New Economic Policy (NEP) is an affirmative action plan implemented in the 1970s in response to the ethic riots of 1969 to counter the economic dominance of the country's ethnic Chinese minority and improve economic position of naive Malays. The policy has helped indigenous Bumiputras (native Malays, literally "sons of the soil") improve their positions by giving them preferential treatment in education, business and government, and setting quotas that limited the number of Chinese and Indians in universities and public jobs. Malays were given preferences in housing, bank loans, business contracts and government licenses.

The policy is backed by a special clause in the Constitution guaranteeing preferential treatment for Malays. It imposes a 30-percent bumiputra equity quota for publicly listed companies and gives bumiputras discounts on such things as houses and cars. Money is provided by banks and investment firms to Malays and indigenous people to start businesses. Businesses are required to have a bumiputra partner, who would hold at least a 30 percent equity stake.

The policy was adopted when Abdul Razak, the father of current Prime Minister Najib, was Prime Minister. Shamim Adam of Bloomberg wrote: “ The 1969 riots started in part because the Malays felt the Chinese controlled the economy. To raise the share of national wealth held by Malays and indigenous groups to at least 30 percent, Najib's father crafted a policy that gave them cheaper housing as well as priority for college enrollment, government contracts, and shares of publicly traded companies. For the most part, the pro-Malay policy has kept the peace. "Malaysia has done very well, and affirmative action was a strong contributor to the stability that allowed for such development," says Masahide Hoshi, a director at Phalanx Capital Management HK in Hong Kong. "However, these same policies could impede Malaysia in the long term.[Source: Shamim Adam, Bloomberg, September 09, 2010]

The policy worked quite well for the Malays. Over they years Malays have taken over many business run in the past by Chinese and Malays prospered without destroying Chinese business. By the 1990s, Malays controlled the nation's major businesses and achieved more prosperity while it seemed relatively few Chinese and Indians resented the quotas. One minister of Chinese descent told National Geographic, "I've been quite critical of some specific cases when Chinese people got blatantly unfair treatment. But the situation we had at the end of the sixties, where the distribution of wealth was so skewed—it couldn't last. It made for an inherently unstable society. Because of NEP, there is less racial resentment now, and more a feeling of Us—you know, Us Malaysians."

The Malay privileges stem from a "national social contract," drawn up by various races at the time of independence in 1957, which put the majority community on a higher footing in exchange for sharing political power with minorities and giving them citizenship. According to Associated Press: “Today the policy is considered by most Malays as their birthright. No notable politician of any race has ever suggested scrapping it for fear of alienating Malays. [Source: Associated Press, August 6, 2005]

Criticism of the New Economic Policy

Many people feel the New Economic Policy has outlived its usefulness. The Malays have made great advances and are no longer a marginalized people like they were when the policy was adopted in 1970. According to Associated Press : “The policy is widely acknowledged to be only a moderate success, benefiting largely a few Malay elite and taking away from others the incentive to excel. Although Malays form 60 percent of the country's 26 million population, they control only 19 percent of the corporate equity and most of the country's wealth is in the hands of the Chinese. Indians are about 7 percent and are at the bottom rung of the economic ladder.

Thomas Fuller wrote in York Times: “The government's apparently indefinite extension of an affirmative action program for the Malays, a policy that has been in place since 1971, has stirred impatience among the country's Chinese and Indians. Terence Gomez, a Malaysian academic who has written widely about Malaysian politics and the ethnic Chinese, and who is now a research coordinator at the United Nations Research Institute for Social Development in Geneva, says the notion that one race should have supremacy is an anachronism in a country where ethnic identities are becoming less important in everyday life. "The idea of being Malay or being Chinese or Indian is not something that is part of their daily thinking or discourse," Gomez said. The political elite, he said, "seems to be caught in a time warp."[Source: Thomas Fuller, New York Times, December 13, 2006 \\\]

“The government says the affirmative action program is still needed to narrow the overall income gap between the Chinese and Malays, the original justification for the policy. But determining which race has the highest ownership levels in the country is also now a point of contention, involving disputes over how assets should be calculated.” \\\

John Burton wrote in the Financial Times, “There has been a debate whether the policy should remain in place since it is seen as obstacle to Malaysia's international competitiveness. A study by a local think tank suggested that Malays had exceeded the government's goal of owning 30 percent of domestic businesses, which called into question the continuation of the affirmative action policy. The government this week revealed its own statistics on Malay corporate ownership, saying the Malays owned 37 percent of listed companies but only 24 percent of all registered companies. [Source: By John Burton, Financial Times, November 9, 2006]

“Economists warn that the NEP represents a barrier to improving Malaysia’s economic efficiency when the country is facing increased competition for foreign investment from regional rivals such as Vietnam. Mr Abdullah has sought to ease some affirmative action provisions in response to those concerns. But when he announced last year that the government would waive such rules for a new economic zone near Singapore, he was criticised by hardliners in his own United Malays National Organisation, Malaysia’s dominant party.” [Source: John Burton, Financial Times, January 9, 2008]

Economic Results of the New Economic Policy 1970-90

John H. Drabble of the University of Sydney wrote: “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). [Source: John H. Drabble, University of Sydney, Australia \+\]

The main aim of the NEP was a restructuring of the Malaysian economy over two decades, 1970-90 with the following aims: 1) 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. 2) 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. 3) 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).

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Malaysia Tourism Promotion Board, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated June 2015

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