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Economic History of Malaysia

John H. Drabble, University of Sydney, Australia

General Background
The Federation of Malaysia (see map), formed in 1963, originally consisted of Malaya,
Singapore, Sarawak and Sabah. Due to internal political tensions Singapore was obliged to leave
in 1965. Malaya is now known as Peninsular Malaysia, and the two other territories on the island
of Borneo as East Malaysia. Prior to 1963 these territories were under British rule for varying
periods from the late eighteenth century. Malaya gained independence in 1957, Sarawak and
Sabah (the latter known previously as British North Borneo) in 1963, and Singapore full
independence in 1965. These territories lie between 2 and 6 degrees north of the equator. The
terrain consists of extensive coastal plains backed by mountainous interiors. The soils are not
naturally fertile but the humid tropical climate subject to monsoonal weather patterns creates
good conditions for plant growth. Historically much of the region was covered in dense
rainforest (jungle), though much of this has been removed for commercial purposes over the last
century leading to extensive soil erosion and silting of the rivers which run from the interiors to
the coast.

The present government is a parliamentary system at the federal level (located in Kuala Lumpur,
Peninsular Malaysia) and at the state level, based on periodic general elections. Each Peninsular
state (except Penang and Melaka) has a traditional Malay ruler, the Sultan, one of whom is
elected as paramount ruler of Malaysia (Yang dipertuan Agung) for a five-year term.
The population at the end of the twentieth century approximated 22 million and is ethnically
diverse, consisting of 57 percent Malays and other indigenous peoples (collectively known
as bumiputera), 24 percent Chinese, 7 percent Indians and the balance others (including a high
proportion of non-citizen Asians, e.g., Indonesians, Bangladeshis, Filipinos) (Andaya and
Andaya, 2001, 3-4)
Significance as a Case Study in Economic Development
Malaysia is generally regarded as one of the most successful non-western countries to have
achieved a relatively smooth transition to modern economic growth over the last century or so.
Since the late nineteenth century it has been a major supplier of primary products to the
industrialized countries; tin, rubber, palm oil, timber, oil, liquified natural gas, etc.
However, since about 1970 the leading sector in development has been a range of exportoriented 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 interethnic tensions which have occasionally manifested in violence, notably in 1969 (see below).
The Premodern Economy
Malaysia has a long history of internationally valued exports, being known from the early
centuries A.D. as a source of gold, tin and exotics such as birds feathers, edible birds nests,
aromatic woods, tree resins etc. The commercial importance of the area was enhanced by its
strategic position athwart the seaborne trade routes from the Indian Ocean to East Asia.
Merchants from both these regions, Arabs, Indians and Chinese regularly visited. Some became
domiciled in ports such as Melaka [formerly Malacca], the location of one of the earliest local
sultanates (c.1402 A.D.) and a focal point for both local and international trade.
From the early sixteenth century the area was increasingly penetrated by European trading
interests, first the Portuguese (from 1511), then the Dutch East India Company [VOC](1602) in
competition with the English East India Company [EIC] (1600) for the trade in pepper and
various spices. By the late eighteenth century the VOC was dominant in the Indonesian region
while the EIC acquired bases in Malaysia, beginning with Penang (1786), Singapore (1819) and
Melaka (1824). These were major staging posts in the growing trade with China and also served
as footholds from which to expand British control into the Malay Peninsula (from 1870), and
northwest Borneo (Sarawak from 1841 and North Borneo from 1882). Over these centuries there
was an increasing inflow of migrants from China attracted by the opportunities in trade and as a
wage labor force for the burgeoning production of export commodities such as gold and tin. The
indigenous people also engaged in commercial production (rice, tin), but remained basically
within a subsistence economy and were reluctant to offer themselves as permanent wage labor.
Overall, production in the premodern economy was relatively small in volume and
technologically undeveloped. The capitalist sector, already foreign dominated, was still in its
infancy (Drabble, 2000).
The Transition to Capitalist Production
The nineteenth century witnessed an enormous expansion in world trade which, between 1815
and 1914, grew on average at 4-5 percent a year compared to 1 percent in the preceding hundred
years. The driving force came from the Industrial Revolution in the West which saw the
innovation of large scale factory production of manufactured goods made possible by
technological advances, accompanied by more efficient communications (e.g., railways, cars,
trucks, steamships, international canals [Suez 1869, Panama 1914], telegraphs) which speeded
up and greatly lowered the cost of long distance trade. Industrializing countries required everlarger supplies of raw materials as well as foodstuffs for their growing populations. Regions such
as Malaysia with ample supplies of virgin land and relative proximity to trade routes were well
placed to respond to this demand. What was lacking was an adequate supply of capital and wage
labor. In both aspects, the deficiency was supplied largely from foreign sources.
As expanding British power brought stability to the region, Chinese migrants started to arrive in
large numbers with Singapore quickly becoming the major point of entry. Most arrived with few
funds but those able to amass profits from trade (including opium) used these to finance ventures
in agriculture and mining, especially in the neighboring Malay Peninsula. Crops such as pepper,
gambier, tapioca, sugar and coffee were produced for export to markets in Asia (e.g. China), and

later to the West after 1850 when Britain moved toward a policy of free trade. These crops were
labor, not capital, intensive and in some cases quickly exhausted soil fertility and required
periodic movement to virgin land (Jackson, 1968).
Besides ample land, the Malay Peninsula also contained substantial deposits of tin. International
demand for tin rose progressively in the nineteenth century due to the discovery of a more
efficient method for producing tinplate (for canned food). At the same time deposits in major
suppliers such as Cornwall (England) had been largely worked out, thus opening an opportunity
for new producers. Traditionally tin had been mined by Malays from ore deposits close to the
surface. Difficulties with flooding limited the depth of mining; furthermore their activity was
seasonal. From the 1840s the discovery of large deposits in the Peninsula states of Perak and
Selangor attracted large numbers of Chinese migrants who dominated the industry in the
nineteenth century bringing new technology which improved ore recovery and water control,
facilitating mining to greater depths. By the end of the century Malayan tin exports (at
approximately 52,000 metric tons) supplied just over half the world output. Singapore was a
major center for smelting (refining) the ore into ingots. Tin mining also attracted attention from
European, mainly British, investors who again introduced new technology such as highpressure 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).
While tin mining brought considerable prosperity, it was a non-renewable resource. In the early
twentieth century it was the agricultural sector which came to the forefront. The crops mentioned
previously had boomed briefly but were hard pressed to survive severe price swings and the
pests and diseases that were endemic in tropical agriculture. The cultivation of rubber-yielding
trees became commercially attractive as a raw material for new industries in the West, notably
for tires for the booming automobile industry especially in the U.S. Previously rubber had come
from scattered trees growing wild in the jungles of South America with production only
expandable at rising marginal costs. Cultivation on estates generated economies of scale. In the
1870s the British government organized the transport of specimens of the tree Hevea
Brasiliensis from Brazil to colonies in the East, notably Ceylon and Singapore. There the trees
flourished and after initial hesitancy over the five years needed for the trees to reach productive
age, planters Chinese and European rushed to invest. The boom reached vast proportions as the
rubber price reached record heights in 1910 (see Fig.1). Average values fell thereafter but
investors were heavily committed and planting continued (also in the neighboring Netherlands
Indies [Indonesia]). By 1921 the rubber acreage in Malaysia (mostly in the Peninsula) had
reached 935 000 hectares (about 1.34 million acres) or some 55 percent of the total in South and
Southeast Asia while output stood at 50 percent of world production.
Fig.1. Average London Rubber Prices, 1905-41 (current values)

As a result of this boom, rubber quickly surpassed tin as Malaysias main export product, a
position that it was to hold until 1980. A distinctive feature of the industry was that the
technology of extracting the rubber latex from the trees (called tapping) by an incision with a
special knife, and its manufacture into various grades of sheet known as raw or plantation rubber,
was easily adopted by a wide range of producers. The larger estates, mainly British-owned, were
financed (as in the case of tin mining) through British-registered public joint stock companies.
For example, between 1903 and 1912 some 260 companies were registered to operate in Malaya.
Chinese planters for the most part preferred to form private partnerships to operate estates which
were on average smaller. Finally, there were the smallholdings (under 40 hectares or 100 acres)
of which those at the lower end of the range (2 hectares/5 acres or less) were predominantly
owned by indigenous Malays who found growing and selling rubber more profitable than
subsistence (rice) farming. These smallholders did not need much capital since their equipment
was rudimentary and labor came either from within their family or in the form of share-tappers
who received a proportion (say 50 percent) of the output. In Malaya in 1921 roughly 60 percent
of the planted area was estates (75 percent European-owned) and 40 percent smallholdings
(Drabble, 1991, 1).
The workforce for the estates consisted of migrants. British estates depended mainly on migrants
from India, brought in under government auspices with fares paid and accommodation provided.
Chinese business looked to the coolie trade from South China, with expenses advanced that
migrants had subsequently to pay off. The flow of immigration was directly related to economic
conditions in Malaysia. For example arrivals of Indians averaged 61 000 a year between 1900
and 1920. Substantial numbers also came from the Netherlands Indies.
Thus far, most capitalist enterprise was located in Malaya. Sarawak and British North Borneo
had a similar range of mining and agricultural industries in the 19th century. However, their
geographical location slightly away from the main trade route (see map) and the rugged internal
terrain costly for transport made them less attractive to foreign investment. However, the
discovery of oil by a subsidiary of Royal Dutch-Shell starting production from 1907 put Sarawak
more prominently in the business of exports. As in Malaya, the labor force came largely from
immigrants from China and to a lesser extent Java.
The growth in production for export in Malaysia was facilitated by development of an
infrastructure of roads, railways, ports (e.g. Penang, Singapore) and telecommunications under
the auspices of the colonial governments, though again this was considerably more advanced in
Malaya (Amarjit Kaur, 1985, 1998)
The Creation of a Plural Society
By the 1920s the large inflows of migrants had created a multi-ethnic population of the type
which the British scholar, J.S. Furnivall (1948) described as a plural society in which the
different racial groups live side by side under a single political administration but, apart from
economic transactions, do not interact with each other either socially or culturally. Though the
original intention of many migrants was to come for only a limited period (say 3-5 years), save
money and then return home, a growing number were staying longer, having children and
becoming permanently domiciled in Malaysia. The economic developments described in the
previous section were unevenly located, for example, in Malaya the bulk of the tin mines and
rubber estates were located along the west coast of the Peninsula. In the boom-times, such was
the size of the immigrant inflows that in certain areas they far outnumbered the indigenous

Malays. In social and cultural terms Indians and Chinese recreated the institutions, hierarchies
and linguistic usage of their countries of origin. This was particularly so in the case of the
Chinese. Not only did they predominate in major commercial centers such as Penang, Singapore,
and Kuching, but they controlled local trade in the smaller towns and villages through a network
of small shops (kedai) and dealerships that served as a pipeline along which export goods like
rubber went out and in return imported manufactured goods were brought in for sale. In addition
Chinese owned considerable mining and agricultural land. This created a distribution of wealth
and division of labor in which economic power and function were directly related to race. In this
situation lay the seeds of growing discontent among bumiputera that they were losing their
ancestral inheritance (land) and becoming economically marginalized. As long as British
colonial rule continued the various ethnic groups looked primarily to government to protect their
interests and maintain peaceable relations. An example of colonial paternalism was the
designation from 1913 of certain lands in Malaya as Malay Reservations in which only
indigenous people could own and deal in property (Lim Teck Ghee, 1977).
Benefits and Drawbacks of an Export Economy
Prior to World War II the international economy was divided very broadly into the northern and
southern hemispheres. The former contained most of the industrialized manufacturing countries
and the latter the principal sources of foodstuffs and raw materials. The commodity exchange
between the spheres was known as the Old International Division of Labor (OIDL). Malaysias
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.
(in 1985 international dollars)




1900 1929 1950 1973 1990

Malaya/Malaysia 6002 1910 1828 3088 5775
22763 5372 14441
523 651 304 446 562
594 623 652 1559 3694
617 1009 727 1253 2118
735 1106 943 1629 1934
South Korea
568 945 565 1782 6012


724 1192 1208 7133 13197
Notes: Malaya to 1973 ; Guesstimate ; 19603

Source: van der Eng (1994).

However, the international economy was subject to strong fluctuations. The levels of activity in
the industrialized countries, especially the U.S., were the determining factors here. Almost
immediately following World War I there was a depression from 1919-22. Strong growth in the
mid and late-1920s was followed by the Great Depression (1929-32). As industrial output
slumped, primary product prices fell even more heavily. For example, in 1932 rubber sold on the
London market for about one one-hundredth of the peak price in 1910 (Fig.1). The effects on
export earnings were very severe; in Malaysias case between 1929 and 1932 these dropped by
73 percent (Malaya), 60 percent (Sarawak) and 50 percent (North Borneo). The aggregate value
of imports fell on average by 60 percent. Estates dismissed labor and since there was no social
security, many workers had to return to their country of origin. Smallholder incomes dropped
heavily and many who had taken out high-interest secured loans in more prosperous times were
unable to service these and faced the loss of their land.
The colonial government attempted to counteract this vulnerability to economic swings by
instituting schemes to restore commodity prices to profitable levels. For the rubber industry this
involved two periods of mandatory restriction of exports to reduce world stocks and thus exert
upward pressure on market prices. The first of these (named the Stevenson scheme after its
originator) lasted from 1 October 1922- 1 November 1928, and the second (the International
Rubber Regulation Agreement) from 1 June 1934-1941. Tin exports were similarly restricted
from 1931-41. While these measures did succeed in raising world prices, the inequitable
treatment of Asian as against European producers in both industries has been debated. The
protective policy has also been blamed for freezing the structure of the Malaysian economy
and hindering further development, for instance into manufacturing industry (Lim Teck Ghee,
1977; Drabble, 1991).
Why No Industrialization?
Malaysia had very few secondary industries before World War II. The little that did appear was
connected mainly with the processing of the primary exports, rubber and tin, together with
limited production of manufactured goods for the domestic market (e.g. bread, biscuits,
beverages, cigarettes and various building materials). Much of this activity was Chinese-owned
and located in Singapore (Huff, 1994). Among the reasons advanced are; the small size of the
domestic market, the relatively high wage levels in Singapore which made products
uncompetitive as exports, and a culture dominated by British trading firms which favored
commerce over industry. Overshadowing all these was the dominance of primary production.
When commodity prices were high, there was little incentive for investors, European or Asian, to
move into other sectors. Conversely, when these prices fell capital and credit dried up, while
incomes contracted, thus lessening effective demand for manufactures. W.G. Huff (2002) has
argued that, prior to World War II, there was, in fact, never a good time to embark on
industrialization in Malaya.
War Time 1942-45: The Japanese Occupation

During the Japanese occupation years of World War II, the export of primary products was
limited to the relatively small amounts required for the Japanese economy. This led to the
abandonment of large areas of rubber and the closure of many mines, the latter progressively
affected by a shortage of spare parts for machinery. Businesses, especially those Chinese-owned,
were taken over and reassigned to Japanese interests. Rice imports fell heavily and thus the
population devoted a large part of their efforts to producing enough food to stay alive. Large
numbers of laborers (many of whom died) were conscripted to work on military projects such as
construction of the Thai-Burma railroad. Overall the war period saw the dislocation of the export
economy, widespread destruction of the infrastructure (roads, bridges etc.) and a decline in
standards of public health. It also saw a rise in inter-ethnic tensions due to the harsh treatment
meted out by the Japanese to some groups, notably the Chinese, compared to a more favorable
attitude towards the indigenous peoples among whom (Malays particularly) there was a growing
sense of ethnic nationalism (Drabble, 2000).
Postwar Reconstruction and Independence
The returning British colonial rulers had two priorities after 1945; to rebuild the export economy
as it had been under the OIDL (see above), and to rationalize the fragmented administrative
structure (see General Background). The first was accomplished by the late 1940s with estates
and mines refurbished, production restarted once the labor force had been brought back and
adequate rice imports regained. The second was a complex and delicate political process which
resulted in the formation of the Federation of Malaya (1948) from which Singapore, with its
predominantly Chinese population (about 75%), was kept separate. In Borneo in 1946 the state
of Sarawak, which had been a private kingdom of the English Brooke family (so-called White
Rajas) since 1841, and North Borneo, administered by the British North Borneo Company from
1881, were both transferred to direct rule from Britain. However, independence was clearly on
the horizon and in Malaya tensions continued with the guerrilla campaign (called the
Emergency) waged by the Malayan Communist Party (membership largely Chinese) from
1948-60 to force out the British and set up a Malayan Peoples Republic. This failed and in 1957
the Malayan Federation gained independence (Merdeka) under a bargain by which the Malays
would hold political paramountcy while others, notably Chinese and Indians, were given
citizenship and the freedom to pursue their economic interests. The bargain was institutionalized
as the Alliance, later renamed the National Front (Barisan Nasional) which remains the
dominant political grouping. In 1963 the Federation of Malaysia was formed in which
the bumiputera population was sufficient in total to offset the high proportion of Chinese arising
from the short-lived inclusion of Singapore (Andaya and Andaya, 2001).
Towards the Formation of a National Economy
Postwar two long-term problems came to the forefront. These were (a) the political
fragmentation (see above) which had long prevented a centralized approach to economic
development, coupled with control from Britain which gave primacy to imperial as opposed to
local interests and (b) excessive dependence on a small range of primary products (notably
rubber and tin) which prewar experience had shown to be an unstable basis for the economy.
The first of these was addressed partly through the political rearrangements outlined in the
previous section, with the economic aspects buttressed by a report from a mission to Malaya
from the International Bank for Reconstruction and Development (IBRD) in 1954. The report
argued that Malaya is now a distinct national economy. A further mission in 1963 urged

closer economic cooperation between the prospective Malaysia[n] territories (cited in Drabble,
2000, 161, 176). The rationale for the Federation was that Singapore would serve as the initial
center of industrialization, with Malaya, Sabah and Sarawak following at a pace determined by
local conditions.
The second problem centered on economic diversification. The IBRD reports just noted
advocated building up a range of secondary industries to meet a larger portion of the domestic
demand for manufactures, i.e. import-substitution industrialization (ISI). In the interim
dependence on primary products would perforce continue.
The Adoption of Planning
In the postwar world the development plan (usually a Five-Year Plan) was widely adopted by
Less-Developed Countries (LDCs) to set directions, targets and estimated costs. Each of the
Malaysian territories had plans during the 1950s. Malaya was the first to get industrialization of
the ISI type under way. The Pioneer Industries Ordinance (1958) offered inducements such as
five-year tax holidays, guarantees (to foreign investors) of freedom to repatriate profits and
capital etc. A modest degree of tariff protection was granted. The main types of goods produced
were consumer items such as batteries, paints, tires, and pharmaceuticals. Just over half the
capital invested came from abroad, with neighboring Singapore in the lead. When Singapore
exited the federation in 1965, Malaysias fledgling industrialization plans assumed greater
significance although foreign investors complained of stifling bureaucracy retarding their
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 Malaysias range of products was increased from the 1960s by a rapid
increase in the export of hardwood timber, mostly in the form of (unprocessed) saw-logs. The
markets were mainly in East Asia and Australasia. Here the largely untapped resources of Sabah

and Sarawak came to the fore, but the rapid rate of exploitation led by the late twentieth century
to damaging effects on both the environment (extensive deforestation, soil-loss, silting, changed
weather patterns), and the traditional hunter-gatherer way of life of forest-dwellers (decrease in
wild-life, fish, etc.). Other development projects such as the building of dams for hydroelectric
power also had adverse consequences in all these respects (Amarjit Kaur, 1998; Drabble, 2000;
Hong, 1987).
A further major addition to primary exports came from the discovery of large deposits of oil and
natural gas in East Malaysia, and off the east coast of the Peninsula from the 1970s. Gas was
exported in liquified form (LNG), and was also used domestically as a substitute for oil. At peak
values in 1982, petroleum and LNG provided around 29 percent of Malaysian export earnings
but had declined to 18 percent by 1988.
Industrialization and the New Economic Policy 1970-90
The program of industrialization aimed primarily at the domestic market (ISI) lost impetus in the
late 1960s as foreign investors, particularly from Britain switched attention elsewhere. An
important factor here was the outbreak of civil disturbances in May 1969, following a federal
election in which political parties in the Peninsula (largely non-bumiputera in membership)
opposed to the Alliance did unexpectedly well. This brought to a head tensions, which had been
rising during the 1960s over issues such as the use of the national language, Malay (Bahasa
Malaysia) as the main instructional medium in education. There was also discontent among
Peninsular Malays that the economic fruits since independence had gone mostly to non-Malays,
notably the Chinese. The outcome was severe inter-ethnic rioting centered in the federal capital,
Kuala Lumpur, which led to the suspension of parliamentary government for two years and the
implementation of the New Economic Policy (NEP).
The main aim of the NEP was a restructuring of the Malaysian economy over two decades,
1970-90 with the following aims:



to redistribute corporate equity so that the bumiputera share would rise from around 2 percent to
30 percent. The share of other Malaysians would increase marginally from 35 to 40 percent,
while that of foreigners would fall from 63 percent to 30 percent.
to eliminate the close link between race and economic function (a legacy of the colonial era) and
restructure employment so that that the bumiputera share in each sector would reflect more
accurately their proportion of the total population (roughly 55 percent). In 1970 this group had
about two-thirds of jobs in the primary sector where incomes were generally lowest, but only 30
percent in the secondary sector. In high-income middle class occupations (e.g. professions,
management) the share was only 13 percent.
To eradicate poverty irrespective of race. In 1970 just under half of all households in Peninsular
Malaysia had incomes below the official poverty line. Malays accounted for about 75 percent of
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 Malaysias good facilities, relatively low wages and docile trade unions. A range of
industries grew up; textiles, rubber and food products, chemicals, telecommunications
equipment, electrical and electronic machinery/appliances, car assembly and some heavy
industries, iron and steel. As with ISI, much of the capital and technology was foreign, for
example the Japanese firm Mitsubishi was a partner in a venture to set up a plant to assemble a
Malaysian national car, the Proton, from mostly imported components (Drabble, 2000).
Results of the NEP
Table 2 below shows the outcome of the NEP in the categories outlined above.
Restructuring under the NEP, 1970-90

Other Malaysians 34.6
Wealth Ownership (%)
67.6 [61.0]* 71.2 [36.7]*
Primary sector (agriculture, mineral Bumiputera
Employment extraction, forest products and fishing) Others
30.8 [14.6]* 48.0 [26.3]*
sector Bumiputera
(%) of total Secondary
(manufacturing and construction)
37.9 [24.4]* 51.0 [36.9]*
Tertiary sector (services)
Note: [ ]* is the proportion of the ethnic group thus employed. The others category has not
Source: Drabble, 2000, Table 10.9.
Section (a) shows that, overall, foreign ownership fell substantially more than planned, while that
of Other Malaysians rose well above the target. Bumiputera ownership appears to have
stopped well short of the 30 percent mark. However, other evidence suggests that in certain
(49.7%) bumiputera ownership of shares in publicly listed companies had already attained a
level well beyond the target. Section (b) indicates that while bumiputera employment share in
primary production increased slightly (due mainly to the land schemes), as a proportion of that
ethnic group it declined sharply, while rising markedly in both the secondary and tertiary sectors.
In middle class employment the share rose to 27 percent.
As regards the proportion of households below the poverty line, in broad terms the incidence in
Malaysia fell from approximately 49 percent in 1970 to 17 percent in 1990, but with large
regional variations between the Peninsula (15%), Sarawak (21 %) and Sabah (34%) (Drabble,
2000, Table 13.5). All ethnic groups registered big falls, but on average the non-bumiputera still
enjoyed the lowest incidence of poverty. By 2002 the overall level had fallen to only 4 percent.

The restructuring of the Malaysian economy under the NEP is very clear when we look at the
changes in composition of the Gross Domestic Product (GDP) in Table 3 below.
Structural Change in GDP 1970-90 (% shares)
Year Primary Secondary
1970 44.3
1990 28.1
Source: Malaysian Government, 1991, Table 3-2.


Over these three decades Malaysia accomplished a transition from a primary product-dependent
economy to one in which manufacturing industry had emerged as the leading growth sector.
Rubber and tin, which accounted for 54.3 percent of Malaysian export value in 1970, declined
sharply in relative terms to a mere 4.9 percent in 1990 (Crouch, 1996, 222).
Factors in the structural shift
The post-independence state played a leading role in the transformation. The transition from
British rule was smooth. Apart from the disturbances in 1969 government maintained a firm
control over the administrative machinery. Malaysias Five Year Development plans were a
model for the developing world. Foreign capital was accorded a central role, though subject to
the requirements of the NEP. At the same time these requirements discouraged domestic
investors, the Chinese especially, to some extent (Jesudason, 1989).
Development was helped by major improvements in education and health. Enrolments at the
primary school level reached approximately 90 percent by the 1970s, and at the secondary level
59 percent of potential by 1987. Increased female enrolments, up from 39 percent to 58 percent
of potential from 1975 to 1991, were a notable feature, as was the participation of women in the
workforce which rose to just over 45 percent of total employment by 1986/7. In the tertiary
sector the number of universities increased from one to seven between 1969 and 1990 and
numerous technical and vocational colleges opened. Bumiputera enrolments soared as a result of
the NEP policy of redistribution (which included ethnic quotas and government scholarships).
However, tertiary enrolments totaled only 7 percent of the age group by 1987. There was an
educational-occupation mismatch, with graduates (bumiputera especially) preferring jobs in
government, and consequent shortfalls against strong demand for engineers, research scientists,
technicians and the like. Better living conditions (more homes with piped water and more rural
clinics, for example) led to substantial falls in infant mortality, improved public health and
longer life-expectancy, especially in Peninsular Malaysia (Drabble, 2000, 248, 284-6).
The quality of national leadership was a crucial factor. This was particularly so during the NEP.
The leading figure here was Dr Mahathir Mohamad, Malaysian Prime Minister from 1981-2003.
While supporting the NEP aim through positive discrimination to give bumiputera an economic
stake in the country commensurate with their indigenous status and share in the population, he
nevertheless emphasized that this should ultimately lead them to a more modern outlook and
ability to compete with the other races in the country, the Chinese especially (see Khoo Boo
Teik, 1995). There were, however, some paradoxes here. Mahathir was a meritocrat in principle,
but in practice this period saw the spread of money politics (another expression for patronage)
in Malaysia. In common with many other countries Malaysia embarked on a policy of
privatization of public assets, notably in transportation (e.g. Malaysian Airlines), utilities (e.g.

electricity supply) and communications (e.g. television). This was done not through an open
process of competitive tendering but rather by a nebulous first come, first served principle
(Jomo, 1995, 8) which saw ownership pass directly to politically well-connected businessmen,
mainly bumiputera, at relatively low valuations.
The New Development Policy
Positive action to promote bumiputera interests did not end with the NEP in 1990, this was
followed in 1991 by the New Development Policy (NDP), which emphasized assistance only to
Bumiputera with potential, commitment and good track records (Malaysian Government,
1991, 17) rather than the previous blanket measures to redistribute wealth and employment. In
turn the NDP was part of a longer-term program known as Vision 2020. The aim here is to turn
Malaysia into a fully industrialized country and to quadruple per capita income by the year 2020.
This will require the country to continue ascending the technological ladder from low- to hightech types of industrial production, with a corresponding increase in the intensity of capital
investment and greater retention of value-added (i.e. the value added to raw materials in the
production process) by Malaysian producers.
The Malaysian economy continued to boom at historically unprecedented rates of 8-9 percent a
year for much of the 1990s (see next section). There was heavy expenditure on infrastructure, for
example extensive building in Kuala Lumpur such as the Twin Towers (currently the highest
buildings in the world). The volume of manufactured exports, notably electronic goods and
electronic components increased rapidly.
Asian Financial Crisis, 1997-98
The Asian financial crisis originated in heavy international currency speculation leading to major
slumps in exchange rates beginning with the Thai baht in May 1997, spreading rapidly
throughout East and Southeast Asia and severely affecting the banking and finance sectors. The
Malaysian ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar by January 1998.
There was a heavy outflow of foreign capital. To counter the crisis the International Monetary
Fund (IMF) recommended austerity changes to fiscal and monetary policies. Some countries
(Thailand, South Korea, and Indonesia) reluctantly adopted these. The Malaysian government
refused and implemented independent measures; the ringgitbecame non-convertible externally
and was pegged at RM 3.80 to the US dollar, while foreign capital repatriated before staying at
least twelve months was subject to substantial levies. Despite international criticism these actions
stabilized the domestic situation quite effectively, restoring net growth (see next section)
especially compared to neighboring Indonesia.
Rates of Economic Growth
Malaysias economic growth in comparative perspective from 1960-90 is set out in Table 4
Asia-Pacific Region: Growth of Real GDP (annual average percent)
Asian Tigers

1960-69 1971-80 1981-89


Hong Kong
South Korea
Source: Drabble, 2000, Table 10.2; figures for Japan are for 1960-70, 1971-80, and 1981-90.
The data show that Japan, the dominant Asian economy for much of this period, progressively
slowed by the 1990s (see below). The four leading Newly Industrialized Countries (Asian
Tigers as they were called) followed EOF strategies and achieved very high rates of growth.
Among the four ASEAN (Association of Southeast Asian Nations formed 1967) members, again
all adopting EOI policies, Thailand stood out followed closely by Malaysia. Reference to Table 1
above shows that by 1990 Malaysia, while still among the leaders in GDP per head, had slipped
relative to the Tigers.
These economies, joined by China, continued growth into the 1990s at such high rates (Malaysia
averaged around 8 percent a year) that the term Asian miracle became a common method of
description. The exception was Japan which encountered major problems with structural change
and an over-extended banking system. Post-crisis the countries of the region have started
recovery but at differing rates. The Malaysian economy contracted by nearly 7 percent in 1998,
recovered to 8 percent growth in 2000, slipped again to under 1 percent in 2001 and has since
stabilized at between 4 and 5 percent growth in 2002-04.
The new Malaysian Prime Minister (since October 2003), Abdullah Ahmad Badawi, plans to
shift the emphasis in development to smaller, less-costly infrastructure projects and to break the
previous dominance of money politics. Foreign direct investment will still be sought but
priority will be given to nurturing the domestic manufacturing sector.
Further improvements in education will remain a key factor (Far Eastern Economic
Review, Nov.6, 2003).
Malaysia owes its successful historical economic record to a number of factors. Geographically it
lies close to major world trade routes bringing early exposure to the international economy. The
sparse indigenous population and labor force has been supplemented by immigrants, mainly
from neighboring Asian countries with many becoming permanently domiciled. The economy
has always been exceptionally open to external influences such as globalization. Foreign capital
has played a major role throughout. Governments, colonial and national, have aimed at managing
the structure of the economy while maintaining inter-ethnic stability. Since about 1960 the
economy has benefited from extensive restructuring with sustained growth of exports from both
the primary and secondary sectors, thus gaining a double impetus.
However, on a less positive assessment, the country has so far exchanged dependence on a
limited range of primary products (e.g. tin and rubber) for dependence on an equally limited

range of manufactured goods, notably electronics and electronic components (59 percent of
exports in 2002). These industries are facing increasing competition from lower-wage countries,
especially India and China. Within Malaysia the distribution of secondary industry is
unbalanced, currently heavily favoring the Peninsula. Sabah and Sarawak are still heavily
dependent on primary products (timber, oil, LNG). There is an urgent need to continue the search
for new industries in which Malaysia can enjoy a comparative advantage in world markets, not
least because inter-ethnic harmony depends heavily on the continuance of economic prosperity.
Select Bibliography
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New Economic Policy
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Jomo, K.S., editor. Privatizing Malaysia: Rents, Rhetoric, Realities. Boulder, CO: Westview
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Khoo Boo Teik. Paradoxes of Mahathirism: An Intellectual Biography of Mahathir
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Ethnic Communities
Chew, Daniel. Chinese Pioneers on the Sarawak Frontier, 1841-1941. Kuala Lumpur: Oxford
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Economic Growth
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Government Printer, 1991.
Van der Eng, Pierre. Assessing Economic Growth and the Standard of Living in Asia 18701990. Milan, Eleventh International Economic History Congress, 1994.
Citation: Drabble, John. The Economic History of Malaysia. EH.Net Encyclopedia, edited by
Robert Whaples. July 31, 2004. URL http://eh.net/encyclopedia/economic-history-of-malaysia/