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 Chapter 3

From Tin to Petroleum

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 Learning Objectives

 The economic arguments on extractive industries

 The importance of two key extractive industries in
Malaysian development
 The mechanisms through which extractive industries
impact the economy
 What government policies can be adopted to
increase the development benefits of mineral
extraction

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 INTRODUCTION

 Tin had been the country’s primary driver of economic growth

and was the dominant export until 1900s (when rubber became
important).
 tin remained one of the pillars of the export economy and
considered as an important export until 1970s when
manufacturing exports became important.
 After the global oil crisis of the 1970s, when most developing
countries were faced with a massive increase in the cost of their
net imports of oil, Malaysia was in the fortunate position of
rapidly developing its petroleum industry.
 Petroleum production in developing countries, on the other
hand, provides foreign exchange, generating employment
opportunities.
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 THE TIN INDUSTRY AND
MALAYSIA DEVELOPMENT
 Over the course of the late 19th century, tin became
the country’s largest export, and the country in turn
became the world’s largest exporter of tin (see
Figure 3.1).
 The development of the tin industry was closely
associated with immigrants from southern China.
 In the 1960s and 1970s, when the price of tin rose
to historically high levels in real terms to consumers
as shown in Figure 3.1, Malaysia and the South
East Asia producers – Indonesia and Thailand –
found themselves enjoying high profits.
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 Figure 3.1 Real price of tin, 1860–2008

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 THE TIN INDUSTRY AND
MALAYSIA DEVELOPMENT
 these good times came to an end in the 1980s. Sharply
increased supply from China and massive increase in
output from a new producer, Brazil, caused great
downward pressure on world prices.
 The International Tin Agreement (ITA) unable to sustain
high prices in the face of such strains, collapsed in a
spectacular financial default in 1985.
 By 1990, Malaysian tin mine production was collapsing
and output had more than halved compared to 1980.
 By the late 2000s it had fallen to negligible level, only
about 1% of world tin mine output in 2008
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 EARLY DEVELOPMENT OF TIN

 although tin had been mined in Malaya for centuries for uses
such as the making of pewter, the stimulus for the expansion of
mine out came from the growth in demand from western countries
industrializing rapidly in the mid and late 19th century generating
new uses, particularly, tinplate.
 the expansion of tin output in Malaya dated from the discovery
of the Larut tin field in the west coast state of Perak in around
1850 and a subsequent influx of Chinese miners, who pushed out
of business such indigenous Malay miners as had been operating
previously.
Further major discoveries of tin followed: in the Kinta Valley
around town of Ipoh in Perak and in Selangor in the area Kuala
Lumpur.
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 DEVELOPMENT EFFECTS OF
TIN
 Tin mining provided stimulus to the early
development of power production, in the form of
electricity for dredging and (later) petroleum refining
for gravel pumping.
 Electricity generation started in 1928 and in the late
1930s tin mining accounted for 30% of its total sales
in the two main tin mining states of Selangor and
Perak. Even in the 1970s mining accounted for a
quarter of the purchases of the Malaysian petroleum
products industry, established in 1960.

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 DEVELOPMENT EFFECTS OF
TIN
 Another interesting linkage is railway development in
the late19th and early 20th centuries. The railway
system originally linked the tin mines to the ports
and a national railway was started by joining these
lines up.
 It facilitated not only the development of originally
mining towns such as Kuala Lumpur, but also aided
the development or agricultural exports particularly
rubber.

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 DEVELOPMENT EFFECT OF
TIN
 Geography played important role in tin’s
development effects too. In Malaysia tin mining was
concentrated in the two west coast states of Perak
and Selangor, near areas of population and
following development.
 In Malaysia, the employment opportunities for tin
mining workers especially skilled workers, were also
greater because of tin’s positioning near other forms
of economic activity. Hence wages and labor
conditions tended to be better.

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 PETROLEUM AND MALAYSIAN
DEVELOPMENT
 The Miri oilfield in Sarawak – part of Malaysia since 1963 –
started production in 1910, developed by Shell.
 Coinciding happily with the aftermath of the 1973 – 1974 oil price
rises caused by the OPEC, petroleum production began offshore
from the east coast of peninsular Malaysia in mid-1970s.
 By 1980, with high oil prices, petroleum was generating almost
24% of Malaysia exports, more than double those of tin.
 In addition, petroleum gas production started in the early 1980s.
In 2008 exports of crude petroleum, petroleum products and LNG
(liquid natural gas) accounted for 17% of Malaysia’s total exports,
more than rubber, palm oil and timber.

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 DEVELOPMENT EFFECTS OF
PETROLEUM
 Exports of crude petroleum and LNG were
approximately equal in value.
 Malaysia became the world’s third largest exporter
of natural gas. Malaysia has remained outside
OPEC, but has consulted with OPEC members on
occasion about limiting production.
 By the late 1990s, 58% of Malaysia’s petroleum
output was coming from peninsular Malaysia, 28%
from Sarawak and 14% from Sabah.

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 DEVELOPMENT EFFECTS OF
PETROLEUM
 In petroleum, only limited impacts on development can
be expected via employment and final demand linkage
from the workforce
 In 2000, petroleum contributed about 25% of all
Malaysian federal government revenue, and with
higher world oil prices in the late 2000, this had risen
to nearly 40% in 2006, 2007 and 2008.
 Oil industry has been the country’s largest recipient of
foreign investment

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 DEVELOPMENT EFFECTS OF
PETROLEUM
 The taxes contribution to the government become important
too. The high (40%) contributions of oil revenues to the federal
government’s total revenue have taken the form of petroleum
income taxes, oil and gas royalties, petroleum export duties,
sales taxes and dividends paid by PETRONAS.
 Malaysia has National Depletion Policy to limit production in
order to conserve its oil and gas reserves. Based on the
National Depletion Policy, Malaysi’a oil reserves have a life of
21 years and natural gas 34 years.
 To spread the benefits of production of petroleum, the
government provides subsidies to retailers to protect the public
from high oil prices.

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 end
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