GROWTH AND TRANSFORMATION OF THE MALAYSIAN ECONOMY*) 

Oleh: Assoc. Prof. Sadono Sukirno. -- Pengajar di Fakultas Ekonomi University of Malaya, Malaysia.

 

Pendahuluan

Malaysia is still considered to be a developing country but can be expected to be one of the countries that will be included as industrialized countries in the next few decades. This is due to the rapid growth that has taken place in the country since the early 1950s. As in many developing countries, at the time prior to independence in 1957, the level of living in Malaysia was relatively low. More important, its economic structure and activity gave little prospects for rapid development in the near future. Realizing this, the newly independent government embarked on a development strategy with the following objectives:

i.                   to strengthen the existing economic activities that were concentrated on the production of primary commodities; and

ii.                   to diversity the economy by stimulating the development of the industrial sector.

Over the years changes had been made in the implementation of these two basic policies, with a view of increasing the efficient implementation of the above development strategy.

Political stability, efficient and clean administration, strict policy to maintain price stability, strong determination to implement the development policy and global economic environments that help boost Malaysian exports collectively responsible for the present level of development achieved by Malaysia. Today the level of living enjoyed by the average Malaysian is far higher than at the time when the country achieved her independence.

The purpose of this paper is to explain the nature of economic growth and structural transformation experienced by Malaysia since her independence in the second half of the 1950s. In line with this objective this paper will discuss the main features of the development policies and the nature of the economic growth process since that period. Basically the analysis will explain the pace of growth during the last four decades, and the sectors or economic activities mainly responsible for the development that has taken place. The discussion in this paper will cover the following topics:

  1. Economic growth during the colonial period.
  2. The early policy of structural transformation and its impacts on the growth of the economy between 1957-1970.
  3. The New Economic Policy and the growth of the Malaysian economy between 1971-1986.
  4. Economic growth and structural transformation between 1987-1997.
  5. Inflation in Malaysia.

 

Economic Development During The Colonial Period 

When Malaysian gained her independence in 1957, the country was considered to be one of the relatively prosperous countries in Asia. The level of her per capita incomes at the time of independence was the third highest in Asia, after Japan and Singapore –and it was higher than the per capita incomes in South Korea and Taiwan.

The relatively high level of development in the pre-independence period was due to the resource-based development, namely tin-mining and rubber cultivation, that had taken place since the end of the 19th century. As early as the 1850s the private sector had started to develop the tin-mining industry. Small private producers, mainly owned by Chinese, and big corporations owned by European companies were attracted to develop the industry as a result of a strong demand of the product in the industrialized countries. Until the 1970s Malaysia was the largest tin producing country in the world.

Rubber cultivation was started to be undertaken more seriously since the development of the automobile industry. Rubber was mainly demanded to produce tires and with the rapid growth of the automobile industry, rubber cultivation expanded rapidly since the 1910s. Before the Second World War Malaysia become the second largest rubber producer in the world –behind her neighboring country, Indonesia. By 1956 Malaysia took over the position of the largest rubber producer.

The world economic depression since the end of the 1920s and the Second World War adversely affected the development of the two industries. Since tin and rubber were mainly exported to the industrial countries, the Depression and the war significantly reduced their demand. As a result many corporations and small-scale operators in the two industries had to cease their operations and the producing facilities and the cultivated areas were badly neglected in the 1930s and the early 1940s.

After the Second World War, when the British again took control of its colony in Southeast Asia, attempts were made to revive the two industries. The tin mining operators and firms were encouraged to revive their activities and tin exports started to rise again. In the rubber industry sector, where the trees had become very old and unproductive, efforts were made to encourage replanting. The revival of these two industries contributed significantly to the development of Malaysia between the end of the Second World War and the time when Malaysia gained her independence in 1957.

The importance of the tin and rubber industry in the Malaysian economy can clearly be seen from their contributions to exports, and to GDP as shown on Table 1. Based on the data a few conclusions can be drawn.

Firstly, between 1947-1957 the economy did not grow continuously, and this can be observed from the fluctuation of the value of GDP (declined between 1947-1949, grew rapidly in 1950 and 1951, recession in 1952 and 1953, and grew slowly between 1954 and 1957). The relatively poor performance of the economy during that period was mainly due to the adverse effect of the export sector –which contributed between 31.5 percent to 63.0 percent of GDP at that period. Only in 1950-1951 the economy grew very rapidly and this was the direct result of the sharp increase of the price of rubber during the Korean War. Secondly, the export sector had been very important in the Malaysian economy before independence. The value of exports, as indicated earlier, was between 31.5 percent to 63.0 percent of GDP. Thirdly, the two commodities –namely rubber and tin- contributed significantly to total exports. In most years the contribution was more than one-third of total exports. During the Korean War their contribution was more than half of total exports.

From the above analysis it is clear that the revival of the rubber and tin industries played a very important role in the progress achieved by Malaysia in the years between the end of the Second World War and independence. Despite of their important role, there had been a growing realization that future development of the country could not be relied on the development of the two industries. Experience in the past –before as well as after the Depression and the Second World War –clearly indicated that;

i.                     Prices of primary commodities -including rubber and tin, fluctuated widely from time to time and these fluctuation adversely affected the growth performance of the entire economy.

ii.                   In the long run the terms of trade of commodity exports tended to decline and as a result more volume of exports were needed to finance the same value of imports.

Realizing these trends the colonial government and the leaders of the newly independent nation were convinced that future growth of the country could not be based on the sole development of the two productive activities.

In accordance with this realization the policy of diversification, namely to promote the development of other economic activities, were actively pursued. At the same time it was also realized that the two activities –especially rubber planting and other activities closely related to it –could not be neglected as they still played a very important role to generate export earnings, to provide income and to provide employment both in rural as well as urban areas. Hence, even before the country gained her independence, a number of measures and incentives were undertaken to strengthen the development of the two industries, especially the rubber industry. Of these measures and incentives, the most important was a provision to provide financial grants to estates (rubber plantations own by corporations) as well as smallholders (individual farmers who owned less than 40 hectares) to replant their rubber holdings. This policy was initiated in the early 1950s.

 

Development in The Early Years of Independence (1957-1970)

Leaders of the newly independence government were very committed in their objective to implement the diversification policy as well as the strengthening of the existing activities, especially to modernize the rubber planting industry.

Malay is the dominant ethnic group in Malaysia. At the time when the country gained their independence, the majority of the Malays lived in rural areas and mainly engaged in agricultural activities. Their two main crops were rubber and paddy (the plant that produce rice). These activities and other activities in traditional agriculture and fisheries provided very low incomes. Faced with this problem the government was very committed in the efforts to develop the rural areas. Realizing that a sizable portion of the rural people directly or indirectly involved in the rubber growing and processing activities, a more determined efforts were carried out to develop the smallholder rubber industry. In line with this determination the following steps were undertaken. Firstly, a more vigorous action and funds were provided to encourage replanting and new planting of rubber in the smallholding sector. An agency was established to administer the replanting programme since the early 1950s. Eventually this agency was transformed into a public agency now known as RISDA (Rubber Industry Smallholder Development Authority). Secondly, more agencies were established to strengthen the effort to speed up the development process in the rural areas, including agencies to modernize the rubber industry. Another two agencies established to strengthen the policy to modernize the smallholder rubber industry were FELDA (Federal Land Development Authority) and FELCRA (Federal Land Consolidation and Rehabilitation Authority). FELDA has been entrusted to provide agricultural land for landless rural population by developing virgin jungles into large-scale and plantation type agricultural development schemes planted with rubber and oil palm. Initially the land schemes were planted with rubber but eventually oil palm become the more important crop (because of its shorter gestation period and higher income/profitability). FELCRA has been entrusted with the development of idle land near existing villages.

Physically, the above policy exerted a considerable impact on the replanting and the production of rubber in the 1960s. In the estate sector, in 1951 almost 2 million acres were planted with rubber and only about 32 percent were planted with high-yielding trees. In 1970, the area under the estate sector was reduced to 1.6 million acres (the rest was mainly converted to oil palm planting) but almost 90 percent were planted with high-yielding trees. In the smallholding sector the area planted with rubber increased from 1.6 million acres in 1951 to 2.6 million acres in 1970 and about two-third of the old rubber areas were replanted.

The replanting and new planting boosted rubber production in the 1960s. the level of rubber output increased from merely 0.6 million tons in 1951, to 0.7 million tons in 1960 and to 1.2 million tons in 1970. at its peak, rubber production reached 1.6 million tons in the middle of the 1970s.

Unfortunately, the rapid increase of rubber production in the 1960s was not followed by stable prices in the world market. Instead rubber prices experienced a declining trend in the 1960s and as a result the value of rubber exports declined from RM2 billion in 1960, to RM1.46 billion in 1965 and RM1.72 billion in 1970. Subsequently, its role in the total value of exports continuously declined. In 1960, the value of Malaysian exports was almost RM4.0 billion and this means about 50 percent of the export value was contributed by rubber. In 1970, the value of Malaysian exports was RM5.16 billion –a higher level compared to the export value in 1960. This trend reduce the role of rubber to exports to only one-third of the total export value in 1970.

Apart from the rigorous policy to develop the rural area, more attention was given to the development of the industrial sector. To achieve this objective various measures were undertaken by the Federal Government as well as the State Governments. The policy to develop the industrial sectors can be grouped into the following measures: (i) to develop general infrastructures such as improving the road-network, improving the sea-port and airport facilities, and to enhance communication and energy capacities; (ii) to provide fiscal and financial incentives both to local and foreign investors; (iii) to provide land areas for the development of industries and to develop industrial estates and free-trade zones areas; and (iv) to expand educational facilities so that more skilled and educated manpower could be provided.

The above policy had an important role in slowly expanding the role of the industrial sector in the economy. In 1947 the industrial sector contributed only 5.7 percent to GDP and out of this, rubber processing contributed 3.9 percent. This means, other manufacturing only contributed 1.8 percent to GDP. In 1957 the industrial sector contributed 6.3 percent to GDP and this comprised of 3.0 percent from rubber processing and 3.3 percent from other manufacturing. As a result of the policy to promote the development of the industrial sector mentioned above, the role of the industrial sector grew steadily between 1957-1970. in 1960 its contribution had increase to 9.0 percent of GDP and by 1970 the contribution had reached 12.2 percent. The expanding contribution of the industrial sector to the economy was due to its rapid growth. Its average growth between 1960-1965 was 11.1 percent and between 1966-1970 was 9.9 percent.

 

The New Economy Policy (Development in the 1970s and early 1980s) 

Until the early 1970s the rural sector reminded to be the most important sector in the economy. As can be seen from the role of the industrial sector mentioned earlier, it can be concluded that its role was still small (only 12.2 percent in 1970). In contrast, the contribution of agriculture to GDP was about 30 percent in 1970. in term of employment, 52 percent of the labor force worked in the agriculture sector in 1970. in the same year about 25 percent of the labor force engaged in activities related to rubber production and processing. This indicates that about half of the rural population was involved in rubber industry. We have noted that although productivity and production had increased significantly in the 1960s, the prices of rubber consistently showed a declining trend during the decade and offset any progress gained by the increase in production and productivity. Other agriculture activities did not provide as much income as in the rubber sector. Thus, in general we could say that despite of the effort to modernize agriculture and especially traditional agriculture and the perennial crop sector (such as rubber), agriculture remained to be unable to provide higher income and better employment to the majority of the rural population.

The urban sector managed to grow faster. The industrial sector increased its share to GDP from RM 0.45 billion in 1960 to RM 1.31 billion in 1970 or an increase of almost three times during the decade. At the same period the share of agriculture increased from RM 1.98 billion to RM 3.43 billion, an increase of only about 1.73 times. From this simple comparison, it is easy to see that there had been a growing disparities between the rural and the industrial sectors during the 1960s.

In addition to this growing disparity, the unemployment problem was getting worse in 1960s. In 1960 the average annual growth of the economy between 1960-65 was about 6.4 percent and slightly reduced to 6.0 percent between 1966-70. Despite of this, the rate of unemployment increased. In 1960, the rate of unemployment was 6.0 but by 1970 it has increased to 6.5 percent.

The two developments, namely the growing disparities between the rural and industrial sectors and the inability of the government to reduce unemployment, created an unhealthy social development and after the election in 1969 ethnic clashes erupted in Kuala Lumpur, the capital city of Malaysia. This episode dramatically changed the approach taken by the government to develop the country since the Second Five-Year Malaysia Plan (1970-75). The government remain committed to pursue the earlier development strategy of strengthening the sector and diversifying the economy by expanding the role of the modern sector – especially the industrial sector. This development strategy will be undertaken simultaneously with an effort to balance the benefit of development to all races in the society. Such policy means that the government would undertake stronger measures to increase the participation of the Malays in modern economic activities. This policy is known as The New Economic Policy. The following quotations from the Second Malaysia Plan provide a general idea about the objective of the New Economic Policy:

1.             The policies and programmes of the Second Malaysia Plan are designed to restructure Malaysian society in order to correct the imbalances in income distribution, employment and ownership and control of wealth......

2.             The strategy is founded on the philosophy of active participation, not on disruptive redistribution. It works in an ever expanding economy in which the growing volume of goods and services is enjoyed by all groups in the Malaysian society.......in a manner which contributed to national unity.

Based on the above quotations we can say that basically the aim of the New Economic Policy had been to continue with the pursuance of rapid economic growth but would ensure that the fruits of development should be equally distributed.

In the 1970s, as in the colonial period, the Malaysian economy remained to be very dependent on the commodity exports. However, as a result of diversification policy and the development of demand in world market, Malaysian commodity exports became more varied. The diversification of commodity exports and the rapid expansion they achieved between1970 to 1985 contributed significantly to the development of the economy during that period. Table 2 summarizes the major exported commodities, their role to total exports and the ratio of total exports to GDP.

The figures in the table indicate that the ratio of export to GDP increased between 1970-85. Between 1970 to 1975 the role declined slightly (from 42.6 percent to 41.3 percent) but increased markedly between 1975-80 (from 41.3 percent to 54.8 percent). In 1985 the exports to GDP ratio was 49.4 percent. The figures also indicate that export grew more rapidly in the 1970-85 period in comparison to the 1960-70 period. Between 1960-70 export value increased only by about 31 percent. In contrast, between 1970-80 exports increased from RM 5.2 billion to RM 28.2 billion, an increase of more than 5 times. By 1985 the value of total exports have reached RM 38.4 billion.

The rapid expansion of exports between 1970-85 was mainly due to the expansion of commodity exports. In 1960 if was dominated by rubber (about 88 percent of total exports of 5 commodities: rubber, palm oil, timber, petroleum, and natural gas). Over the years the commodity exports become more diversified, as can be observed from the figures on Table 2. By 1985 rubber only contributed about 13 percent of the total export value of the 5 commodities.

The rapid expansion of the export sector, especially commodity exports, had contributed significantly to the more rapid growth of the economy between 1970-85. Table 3 shows the annual growth rate of the economy between 1970-85. Between 1971-75 the average annual growth of GDP reached almost 7 percent and between 1976-80 the annual average exceeded 7 percent. Between 1981-85 the economy did not perform as good as in the 1970s. Recession took place in 1985 and in 1986 the economy grew only by 1.2 percent.

Although between 1970-80 Malaysia achieved a more rapid growth than in the past, the employment situation did not improve significantly. Unemployment rate remained about 5 percent of the labor force. In the first half of the 1980s, despite of the relatively rapid growth of the economy, the unemployment slowly worsened and the rate of unemployment became more serious during the recession in 1985-86. In the early 1986 the rate of unemployment reached 7.9 percent.

 

The Golden Years of Malaysian Development (1987-1997) 

Malaysia achieved a very rapid pace of development between 1987-97, as shown in the growth rate data in Table 4. Since 1988 the growth rates were always above 8 percent and in certain years they exceeded 9 percent. The only exception was in 1992 when the growth rate was 7.8 percent. As a result of the rapid pace of development the rate of unemployment continued to decline, and the per capita income of Malaysia increased significantly. The value of GDP in real terms increased from RM 60.9 billion in 1987 to RM 141.1 billion in 1997, meaning it increased to 2.3 times within a decade. The rate of unemployment declined from 7.9 percent in 1987 to less than 3 percent in 1997. By 1992 Malaysia achieved full employment for the first time.

What is the source of this rapid growth? Again as in the past, exports was the engine of Malaysian economic growth. By 1990, the value of Malaysian exports has reached RM 77.5 billion or double the level in 1986. In 1997 the value of Malaysian exports exceeded RM 200 billion, meaning in slightly more than 10 years, between 1987-97, the Malaysian export value has become more then 5 times its original level.

In contrast to the growth of exports in the past, since 1986 the rapid rise of exports did not come from the expansion of commodity exports. Now the expansion has been generated by the rapid growth of the export of industrial products. Export of manufactured goods started its modest beginning in 1960s, when Malaysia began her effort toward more rapid industrial development. In 1970 the value of Malaysian industrial products exports was only slightly more than one billion Ringgit, and constituted only a small proportion of the total value exports. A more rapid expansion of industrial product exports occurred in 1970s. The value of their exports increased to RM 6.3 billion in 1980 and to RM 12.5 billion in 1985. By 1996 the value of export of industrial products has reached almost RM 160 billion and in 2000 it is estimated to reach more than RM 208 billion. Table 5 shows the breakdown and the value of export of industrial products in 1985 and 2000. The table clearly shows that the remarkable expansion of industrial products exports were mainly the result of the rapid expansion of electrical and electronic products. The value of this export was RM 6.5 billion in 1985 and constituted of 52 percent of the total manufactured exports. In 1996, the export of electronic products reached RM 104.3 billion or almost two-third of the total export value of industrial product. By 2000 the exports of electrical and electronic products and machineries are expected to reach almost RM 149 billion.

As a result of the rapid expansion of industrial exports, the role of commodity exports in the total export value of Malaysia declined considerably. In 1970, about 75 percent of the total export value was generated by commodity exports. At present commodity exports constitute only about one-fourth of the value of total exports.

The success of the diversification policy and especially the rapid expansion of the growth of the manufacturing sector since the 1960s significantly transformed the nature of economic activity and employment in Malaysia. At the time of Malaysian independence in 1957 the agriculture sector contributed 43.3 percent to the total value of GDP. At the same year, the contribution of rubber industry to GDP was about one-fourth of the total GDP. The manufacturing sector only contributed 6.3 percent to GDP and out of this contribution, rubber processing alone produced 3.0 percent of GDP. In contrast, as can be seen from Table 6, the manufacturing sector has become the most important sector in the economy, contributing 35.5 percent of GDP in 1997. The role of agriculture declined considerably, only contributed 12.2 percent to GDP.

In 1997, the manufacturing sector employed 2.3 million people and this constitutes of 27.5 percent of the total employment. The agriculture sector employed 1.275 million people or only 15.2 percent of the total employment. Even in 1970, the employment structure was far different than the present. At that time about half of the employment was created by the agriculture sector and the rubber industry employed about one-fourth of the total employment.

 

Inflation in Malaysia 

In is interesting ti note that Malaysian rapid economic growth and structural transformation was accompanied by a relatively stable prices. In the 1960s the average annual rate of inflation was only one percent. In the 1970s, the rates of inflation in 1973 and 1974 were 10.5 percent and 17.4 respectively. These relatively rapid rates of inflation were the result of world inflation. In other years in 1970s the rates of inflation were relatively low. The average annual rate of inflation in 1970s was 5.4 percent. In the 1980s the average annual rate of inflation was 4.5 percent. In the 1990s the annual average was about the same as in the 1980s.

 

Yogyakarta, 7 September 2004

*) Disampaikan pada Seminar Bulanan PUSTEP-UGM ke-20.

 

 

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