Saturday, March 22, 2008

The story of Malaysia and its economic development

When we gained our independence, we ranked among the poorest countries in the world. Now, we are classified as a high human development index nation. Our nominal per capita income is RM20,900 – a 26 fold increase from the time of Merdeka.” Abdullah Ahmad Badawi (2007)

Above is the Prime Minister of Malaysia, Abdullah Ahmad Badawi’s speech for Malaysian 50th Merdeka celebration. Since Malaysia achieved its independence in 1957, the economy has gone through ups and downs. Nevertheless, the country celebrated its golden jubilee independence in a happy mood, proud of what has been achieved so far and what will the nation achieve in near future. In year 2007, Malaysia has its first angkasawan (astronaut). The name of Air Asia, Malaysian internationally renowned budget airline appearing vividly as sponsor of the referees in the world most followed English Premier League as well as the advertising in Old Trafford, home of Manchester United football club. Nicol David, a Malaysian become the world number one in squash and subsequently honored as the inaugural Asian Sportswomen of the Year. Petronas twin towers were once the tallest building in the world. Malaysia was one of the so-called Asian Tigers economies that have achieved consecutive years of high growth that dubbed as the Asian Miracle. Despite the Asian financial crisis setback, Malaysia rebounded very fast with its brave capital control policy that was heavily criticized at the beginning of the implementation but later being complimented as “brilliant”. Other brilliant achievements included low unemployment rate, low inflation and high literacy rate. Hence, there is no doubt that Malaysiaku Gemilang, the theme for its 50th year independent celebration. There might be no doubt for anyone to conclude that Malaysia has economic growth and development but questions still remain as whether Malaysia should has done better giving its blessing with natural resources, good weather and free of natural disaster like earthquake or volcano. Malaysia barely has 12 years to reach its day of reckoning the Vision 2020 to become a developed industrial nation. Will Malaysia realized its vision then? So, let rewinds the time clock to examine what Malaysia has achieved to bring it here as today and whether what has been achieved is enough to carry Malaysia to fulfill its vision to become a developed industrial nation by year 2020. Metaphorically, Malaysia is like half way crossing a river, having gone so far from one side of the riverbank but still have a long swim ahead to reach the other side of the river. With globalization current forcing in, Malaysia cannot afford to just try to stay afloat in the middle of the river but yet may have already exhausted itself, leaving insufficient energy to finish crossing the river. That is the story of Malaysia and its economic development.

Prior to independent, Malaysian economy has been heavy reliance on tin mining and rubber plantation. Malaysia, then known as Malay Peninsula contained substantial deposits of tin. In the nineteenth century, world demand for tin rose 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 Malaysia as a new major producer. The discovery of large deposits in the Peninsula states of Perak and Selangor in the 1840s attracted large numbers of Chinese migrants. By the end of the century Malayan tin exports supplied just over half the world output at approximately 52,000 metric tons. Despite rich in tin, the country seems benefit little as tin mining industry was dominated by European capital, especially colonial British. Thoburn (1970: 28) reported that percentage of Malaysian ownership in Malaysian-incorporated and United Kingdom-incorporated tin dredging companies in Malaysia is 56.3% and 20.0% respectively. Total Malaysian ownership in both Malaysian-incorporated and United Kingdom-incorporated tin dredging companies in Malaysia is 35.1%. Hence, question remains that will Malaysia be much developed if the tin mining industry was dominated by the locals? Perhaps, maybe because of the greed of the colonial power and foreign capitalists that cause excessive mining, tin in the Malay Peninsula was fast exhausted. Since the Paley Report in 1953 claimed that Malaysia’s tin reserves of tin will exhaust round year 1980s, the government started to look for alternative source of economics growth.

Besides tin mining, agricultural sector especially rubber planting is a very important source of growth in Malaysian colonial era, as illustrated in Table 2.1. Rubber trees planted in Malaysia are originated from the specimens of the tree Hevea Brasiliensis from Brazil introduced by British. Barlow (1985: 57) claimed that rubber expansion in Malaysia began on estates, being stimulated by very high prices and enabled by capital and management from Europe with labour from South India. It was soon followed by a parallel development on independent rubber shareholdings, as both Malay farmers and immigrant Chinese workers perceived the high income to be earned from the new crop. Rubber price rose until around year 1910 where it reached an average of RM9.70 per kg. Average values fell thereafter but the area of rubber plantation in Malaysia grew rapidly up to 1930. Besides price factor, various reasons contribute to the rise and fall of rubber plantation sector. Suitable local weather, investment from British and new technology of extracting the rubber latex from the trees (called tapping) by an incision with a special knife expedite the rise of rubber production. Meanwhile, Malaysia replaced rubber with palm oil and manufacturing as source of growth due to manufacturing sector has higher value-added, rise in rubber production cost as well as increased in substitution competition from synthetic rubber. During 1950s in Malaysia, there were growing labour shortage and consequent rise in real price of labour in rubber plantation sector as rubber is a labour intensive crop.

Table 2.1: Exports of Major commodities, Malaysia 1950 – 81 (% of Annual Totals)





Crude petroleum








Sawn logs and timber





Machines and transport




Palm oil and kernel





Tin and tin concentrates





Manufactures food



Food and others





Totals: (in percentage)





(in RM million, nominal)





Note: a Figures for 1950 and 1960 are net exports. Figures for 1972 and 1981 are gross export. Source: Barlow (1985: 60)

Fading tin and rubber industries pave way for major structural transformation from heavy reliance on tin mining and rubber plantation to an industrial based economy. Malaysia started off industrialization with import-substitution industrialization (ISI) for light industry from 1958 to 1968, followed by simultaneous export-oriented industrialization (EOI) for light industry and import-substitution for heavy industry. Among the focuses of import substitution for consumer goods include food industries, perfumes & cosmetic, automobiles and bicycles producing industries. Petroleum & coal, animal feeds, textiles, leather products & paper products were among intermediate goods being promoted under Malaysian ISI. Meanwhile, EOI focused on consumer goods such as wearing material, soaps & cleansing detergents and medicinal & pharmaceutical products while promoting several import substitution intermediate goods for export purposes like petroleum & coal, paints & varnishes, non-metallic minerals and textile manufactures. Despite proud achievement of Malaysian ISI and EOI development, there are still some development issues to be pondered. Jomo & Edwards (1993) highlighted several problems of Malaysian ISI. For example, with the ISI policy, rent seeking become widespread in Malaysia. Companies prepared to lobby Malaysian politician and offer them directorships on the boards of subsidiary companies in Malaysia in return for protection from competition. Thus, there is no pressure on the companies to seek out exports. This meant that, for industries subject to economies of scale, production was limited to a small domestic market and was therefore high cost of production. The import substitution tended to be limited to final consumer goods, with protection being higher on those goods. This increased the consumer goods prices and results in inflation. The majority of the import-substituting industries were set up by foreign-owned companies. Thus, not only did protection give rise to high profit to them at the expanse of domestic consumers, but the profit accrued to foreign companies were more likely to be remitted out of the countries. There was a regional concentration of industry. This bias towards consumer goods and domestic market while geographically, bias towards large town on west coast of the Peninsula. After incorporated into the Federation in 1963, East Malaysia (Sabah and Sarawak) paid higher prices for protected manufactured goods while getting few of the industrialization benefits. Besides, most of the industrialization efforts, especially the development of heavy industries in Malaysia were kicked off using the big push approach through Heavy Industrial Corporation of Malaysia (HICOM), a government funded agency. Such an approach has caused high financial and administrative burden to the government. Hence, in 1983, Malaysian then Prime Minister, Mahathir Mohamad announced the government’s intention to embark on a privatization policy to ease public sector involvement in the economy. However, the privatization in Malaysia has resulted in both success and failure.

The progress of Malaysian economy is highly influenced by three critical factors namely public delivery system, foreign direct investments and financial markets. It is believed that the poor public delivery system has caused the slow down of the Malaysian’s economy development progress. As a result, Prime Minister, Abdullah Badawi, in year 2007, has wisely instructed the public services and government-link companies to increase their efficiency level. In addition, foreign direct investments (FDI) are important as they can contribute both financial and human capitals to the economy in Malaysia. Special efforts and incentives were made to attract foreign multinational to locate their offshore assembly operations in Malaysia. Investor-favored policy such as Promotion of Investments Act 1986 and the gazette of Free Trade Zone Act on September 5, 1991 acted as important FDI pull factors. Since 2006, five special economic corridors/regions have been launched, namely Iskandar Development Region (IDR), Northern Corridor Economic Region (NCER), Eastern Corridor Economic Region (ECER), Sabah Development Corridor (SDC) and Sarawak Corridor of Renewable Energy (SCORE). Initial responses from investors seem excellent as various memorandums to invest in these corridors/regions were reported. Hence, does this indicate that Malaysia is still very competitive foreign investment destination? Is there any doubt for Malaysia to be a developed industrial nation soon?

Well, one may find different answers in different situation and different answers from different sources. In good times, human seems live in paradise and never think of potential trouble or potential weaknesses. For example, before the Asian crisis in 1997/98, good economic growth and continuous uptrend rallies of Malaysian stock market prompted analysts to report positive outlook for almost everything. During the 12th Malaysian General Election, the ruling coalition claimed Malaysian economy is in excellent health but the opposition coalition claimed otherwise. For example, the Star Online (Feb 27, 2008) carried a report quoting outgoing Chief Minister of Penang state assuring that Penang would continue to attract foreign investments while dispelled talk about MNCs losing confidence in the state. In March 2, 2008, malaysiakini (Beh 2008) reported that the Penang state government had asked the federal government to offer a RM1 billion project to Motorola in a desperate attempt to stop the American telecommunications giant from pulling out of the state. The battle in the just concluded 12th Malaysian General Election also saw the battle between “mainstream media” and the so-called “alternative media”, both sources may carry different perspectives on Malaysian economy.

In view of these, Blog Center for Malaysia Studies would like to invite the public to give opinions regarding the achievement of Malaysia in term of economy. Is Malaysian economy in good health or otherwise? Should Malaysia have done better?


Abdullah Ahmad Badawi. (2007). Full speech by Umno president Datuk Seri Abdullah Ahmad Badawi. Source: Access date: 24 December 2007.

Barlow C. (1985). Institutional and policy implications of economic change: Malaysian rubber 1950 – 1985. Kajian Ekonomi Malaysia. Vol. 22 (2): 57 – 76.

Beh, Yih Li. 2008. Letter: Penang 'bribed' Motorola to stay. Source: Access date: 23 March 2008.

Jomo, K.S. & Edwards, C. (1993). Malaysian industrialization in historical perspective. In Jomo, K.S. (ed). 1993. Industrializing Malaysia: Policy, performance, prospect. London: Routledge: 14 – 39.

The Star Online. 2008. Koh: Penang will continue to attract investments. Source: Access date: 23 March 2008.

Thoburn, J.T. (1970). Ownership of shares in UK-incorporated public rubber planting and tin dredging companies in Malaysia. Kajian Ekonomi Malaysia. Vol. 7 (2): 26 – 29.