ECONOMIC HISTORY OF MALAYSIA

ECONOMIC HISTORY OF MALAYSIA

In its early years of independence, Malaysia was primarily an agricultural country with rubber as its main product. In the 1950s and 60, one third of the world’s natural rubber cam from Malaysia, mostly in plantations on peninsular Malaysia. Around 700,000 tons of rubber was produced a year. It accounted for half of the country’s export earnings.

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

“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. \+\

GDP per Capita: Selected Asian Countries, 1900-1990 (in 1985 international dollars, 1900, 1929, 1950, 1973, 1990): A) Malaya/Malaysia1, 6002, 1910, 1828, 3088, 5775; B) Singapore, -, -, 22763, 5372, 14441; C) Burma, 523, 651, 304, 446, 562; D) Thailand, 594, 623, 652, 1559, 3694; E) Indonesia, 617, 1009, 727, 1253, 2118; F) Philippines, 735, 1106, 943, 1629, 1934; G) South Korea, 568, 945, 565, 1782, 6012; H) Japan, 724, 1192, 1208, 7133, 13197. Source: van der Eng (1994).

Premodern Economy of Malaysia

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

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 Malacca (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).

Transition to Capitalist Production in Malaysia

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

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 in Malaysia

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

“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 in Malaysia

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

“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 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) \+\

Migrants and the Malaysian Economy Before World War II

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

“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. \+\

“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). \+\

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."

Economy of Malaysia During World War II and Afterwards

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

“The returning British colonial rulers had two priorities after 1945; to rebuild the export economy as it had been under the OIDL, and to rationalize the fragmented administrative structure. 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 percent), 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). \+\

“Postwar two long-term problems came to the forefront. These were (a) the political fragmentation 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.” \+\

Malaysian Economy After Independence in 195

7John H. Drabble of the University of Sydney wrote: “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).[Source: John H. Drabble, University of Sydney, Australia \+\]

During the past 30 years or so Malaysian economy has evolved from an agricultural one based on a few products—namely oil, natural gas, rubber and palm oil—to one largely based on information technology and exports. Malaysia has succeeded despite being too small to compete in the cheap labor market with Indonesia, Vietnam and China and being a step behind the Tiger counties like Korea and Taiwan.

Malaysia’s “Look East Policy” looked to Japan rather than the West for inspiration and invested heavily in public health, and saw GNPs soar, family size shrink and lifespan lengthen. Malaysia had an average of 6.5 percent growth from 1957 to 2005.

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).

Wealth Ownership ( percent): Bumiputera in 1970: 2.0 percent; 20.3 percent in 1990. Other Malaysians: 34.6 percent in 1970; 54.6 percent in 1990. Foreigners: 63.4 percent in 1970; 25.1 percent in 1990.

Employment ( percent) of total workers in each sector: A) Primary sector (agriculture, mineral extraction, forest products and fishing): Bumiputera: ,67.6 [61.0]* percent in 1970; 71.2 ,[36.7]* percent in 1990; Others: 32.4 percent in 1970; 28.8 percent in 1990. B) Secondary sector (manufacturing and construction): Bumiputera: 30.8 [14.6]* percent in 1970; 48.0 ,[26.3]* percent in 1990. Others: 69.2 percent in 1970; 52.0 percent in 1990. C) Tertiary sector (services): Bumiputera 37.9 ,[24.4]* percent in 1970; 51.0 ,[36.9]* percent in 1990. Others: 62.1 percent in 1970; 49 percent in 1990.

The data above 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 percent) and banking/insurance (49.7 percent) bumiputera ownership of shares in publicly listed companies had already attained a level well beyond the target. 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 percent), Sarawak (21 percent) and Sabah (34 percent) (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). Structural Change in GDP 1970-90 ( percent shares):1970: Primary (agriculture, forestry, fishing): 44.3 percent; Secondary (manufacturing, construction): 18.3 percent; Tertiary (services): 37.4 percent. 1990: 1970: Primary (agriculture, forestry, fishing): 28.1 percent; Secondary (manufacturing, construction): 30.2 percent; Tertiary (services): 41.7 percent. [Source: Malaysian Government, 1991]

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. 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. \+\

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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