Growth and Structural Change in the Malaysian Economy

Any serious consideration of the present should recognise its roots in the past. For living generations of Malaysians, growth has always been export-led. Yet the openness of the Malaysian economy — very open even by Third World standards — is not a natural condition, but rather a feature of the structural transformation it has undergone, especially since the British colonial period. Like that of many other ex-colonies, contemporary Malaysian history has also been complicated by developments of the colonial era; in a very profound sense, the Malaysian nation is a child, albeit a stepchild, of imperialism. And of course the shaping and reshaping of the Malaysian economy did not stop with Independence, but continues. Hence, the basic perspective in this volume views the present — including the recent past — as history in the making. It is always useful to begin considering contemporary issues from a historical perspective. To put the Malaysian economy in the 1980s in the proper light, it is worthwhile to review its formation.

The global character and deep roots of the economic difficulties experienced by Malaysia in the 1980s focused attention on two features of the world economy. It is increasingly acknowledged that the recent problems were not merely cyclical in nature, but were actually structural in origin as well. Conventional economic analysis has tended to portray the global economic downturns of the 1980s as the result of unavoidable temporary cyclical downturns — normal to the otherwise healthy world economic system — exacerbated by inappropriate government policy responses. This view obscures the systemic roots of such cyclical trends, and more importantly, the contradictions of the global economy, including tendencies towards stagnation, offset in the post-war period by an impressive long-term growth trend. Recessions then are the outcome of contradictions and imbalances during periods of buoyancy, and may in turn create some conditions for renewed upswings. Far from being automatic, however, the momentum of such upswings is greatly influenced by the historical circumstances in which they occur. Such a relationship between upswings and downturns is true not only for ordinary business cycles, but also for the longer, more protracted waves of growth and recession.

Malaya’s value to Britain as a colony and Malaysia’s impressive growth performance during the 1960s and 1970s are often associated with its success as an open economy emphasising export-led growth. There is, of course, much truth in these claims as the Malayan and Malaysian economies have grown tremendously on the basis of production for export, especially with the favourable international environment created by the post-war economic boom in the 1950s and 1960s and the commodity price boom of the 1970s. Developments in the 1980s, however, point to the emergence of a ‘changed world economy’ (Drucker, 1986) far more hostile to open economic policies and export-led growth strategies.

Malaysia’s rapid economic growth and industrialisation and the expansion of the public sector have had profound influences on employment especially during the dynamic 1970s. The structural transformation engendered has involved important changes to the socioeconomic composition of the population, also reflected in the distribution of income, wealth and economic welfare.

With the attainment of formal independence in August 1957, the Alliance, a coalition of the political élite from the three major ethnic groups, formally assumed state power and political jurisdiction over post-colonial Malaya. Not unlike other newly independent countries, the post-colonial government embarked upon a programme of economic development emphasising economic diversification and industrialisation. In preparing for this political transition, the British had ensured that the leftist forces who threatened their economic interests were curbed, while ethnic élites committed to protecting their interests were groomed to inherit state power in 1957. The basically capitalist development path for newly independent Malaya was thus assured. The legal framework and other capitalist institutions inherited from the colonial period were not only maintained, but strengthened and developed. The post-colonial government continued to promote free enterprise, while the economic interests of the ex-colonial power were protected and greater foreign investment inflows were encouraged. The nature of the post-colonial state thus ensured the development of Malaya along capitalist lines.

British colonial economic policies greatly shaped the nature and extent of industrial development in the colonies, including Malaya. By emphasising export-oriented primary commodity production and favouring British manufactured imports during the colonial era, local industry was largely confined to processing raw materials for export and manufacturing some items for local consumption, while the growth of other local industries was effectively discouraged by colonial policy.

With Independence on 31 August 1957, formal political authority was officially handed over the British to the Malayan political élite represented by the Alliance Party, led by Tunku Abdul Rahman. The Alliance — consisting of the United Malays National Organisation (UMNO), the Malayan Chinese Association (MCA) and the Malayan Indian Congress (MIC), represented the politically dominant Malay aristocratic and bureaucratic elements, Chinese business interests and the Indian middle class respectively. As part of the political compromise underlying the Alliance, the UMNO-led government was expected to continue to encourage the development of a Malay business community, already begun in the early 1950s through the Rural Industrial Development Authority (RIDA). In the first decade or so after Independence, the expansion of the Malay middle class mainly involved enhanced educational opportunities, recruitment quotas into the state machinery, and other types of ‘preferential treatment’. But as the Malay middle class grew, it began to demand even more support for further expansion, especially into the ‘commanding heights’ of big business. The Tunku’s Alliance government was increasingly considered insufficiently responsive to such demands, increasingly articulated by the so-called ‘Young Turks’ and ‘ultras’ within UMNO in the late 1960s.

In Malaysia, reference to the public sector in the economic literature usually refers to the federal government, the thirteen state governments and the federal territory authorities, city, municipal and town councils, and the non-financial public enterprises (NFPEs). The public sector is clearly dominated by the federal government, with the state governments having relatively limited roles because of legal and political constraints embodied in the federal constitution and imposed by the federal government. The NFPEs — previously known as off-budget agencies (OBAs) — have become increasingly important in recent years, being heavily involved in various commercial and industrial projects.

In early 1981, Dr Mahathir Mohamad took over as Prime Minister of Malaysia and president of UMNO. Mahathir’s ascension to national leadership coincided with the unfolding of various developments associated with the present crisis, most notably declining primary commodity prices and accelerated foreign borrowing. The increased expansion of public expenditure from 1980 to mid-1982 was not only counter-cyclical or reflationary in intent, but also attempted to make up for the shortfall in private investment.

Doubts about the usefulness, relevance and progressive potential of an alternative economic agenda more than three decades after Malayan Independence and a quarter of a century after the formation of Malaysia are underscored by the rapid economic growth achieved in much of the 1960s and 1970s with a ‘dependent’ economic strategy open to foreign investment and international trade, apparent acceptance of Western cultural hegemony and the widespread identification of nationalism in Malaysia with ethnic chauvinism of one type or other. However, careful examination of contemporary Malaysian economy, society and politics will underline urgent need for the popular democratic alternative especially for the elaboration of a more sustainable, balanced and equitable growth strategy. However, Malaysia’s development record and its position in the changing world economy necessitates some major revisions to the ‘traditional’ alternative economic agenda, especially a rejection of both the virtually autarkic proposals suggested by some dependency theorists, and the ‘industrialisation at any cost’ arguments advanced by those insensitive to the people’s living conditions, their environment and the long-term sustainability of growth.