Malaysia’s formidable economic transformation post independence
28 Aug 2023
From humble beginnings, Malaysia has diversified its economy, harnessed its natural resources and achieved remarkable milestones
SINCE gaining independence in 1957, Malaysia has effectively shifted its economy away from its initial reliance on agriculture and commodities to evolve into a nation with robust manufacturing and service sectors, turning into a major global player in the export of electrical appliances, parts and components.
In a World Bank report, Malaysia stood out as a highly open economy, consistently maintaining a trade-to-GDP ratio exceeding 130% since 2010, which has played a pivotal role in generating employment opportunities and fostering income growth, with roughly 40% of jobs in Malaysia associated with exports.
Following the challenges posed by the Asian financial crisis of 1997-98, Malaysia’s economy has experienced a positive trajectory, posting an average growth rate of 5.4% since 2010 and poised to complete its transformation from an upper middle-income economy to a high-income economy by 2024.
In the early 1960s, Malaysia’s economic landscape was far from promising, with a history marred by ethnic divisions and reliance on mining and agriculture. However, in the following decades, this South-East Asian nation has undergone a remarkable economic transformation that has turned it into a manufacturing powerhouse.
Taking a page from the success stories of the Asian Tigers — South Korea, Taiwan, Hong Kong and Singapore — Malaysia embarked on a journey to diversify its economy in the 1970s. The shift was significant as the nation moved away from its predominantly mining- and agriculture-based economy toward a multi-sector approach, fuelled by substantial investments especially from Japan, which helped develop heavy industries and turn Malaysia into an export-driven economy.
The results were impressive, with Malaysia consistently achieving over 7% GDP growth and maintaining low inflation throughout the 1980s and 1990s, and central planning played a crucial role in this economic evolution, with government expenditure frequently used to stimulate growth and invest in infrastructure projects.
However, one cannot discuss Malaysia’s economic journey without addressing the historical legacy of the British colonial rule, which divided the population into three ethnic groups — Malays, Chinese and Indians — in which the Malays predominantly engaged in agriculture, the Chinese dominated commerce and Indians pursued professional roles. This division was said to have created disparities in wealth and opportunities.
To address these disparities, Malaysia introduced affirmative action policies, most notably through the New Economic Policy (NEP), in response to racial riots in 1969, which aimed to eliminate the association of race with economic function and promote Malay entrepreneurship. While the policy’s success remains a subject of debate, it officially concluded in 1990, making way for the National Development Policy (NDP).
Between 1990 and 1996, Malaysia’s per capita income doubled due to the transition from an agricultural and resource-based economy to one centred on manufacturing. During this period, the nation’s economy expanded at an impressive rate of 8%, second only to China, with manufactured goods, including microchips and semiconductors, constituting 80% of exports.
Infrastructure development also received a significant boost during this time, positioning Malaysia as a model for economic reform that caught the attention of other nations.
Malaysia’s economic growth is projected to surpass that of Asean peers and developed nations over the next two years. Irhamy Valuers International CEO and founder Irhamy Ahmad said the key drivers behind this positive outlook include robust GDP Growth, thriving transition to Net Zero, trade prosperity and digital economy’s resurgence. (Irhamy Valuers International is a part of Juwai IQI.)
In a recent statement, he said Malaysia’s GDP growth is anticipated to reach 4.7% this year and a further 4.9% in 2024. Bank Negara Malaysia in July reiterated its projection of this year’s GDP growth between 4% and 5%.
Manufacturing, Export Leadership
Malaysia’s industrialisation drive, spearheaded by the “Look East Policy” in the 1980s, has been a cornerstone of the nation’s economic growth as the manufacturing sector, particularly electronics and electrical (E&E) appliances, automobiles and textiles, has flourished.
The establishment of industrial zones like the Penang Free Trade Zone and the Multimedia Super Corridor (MSC) has attracted foreign direct investment (FDI) and spurred economic growth.
In 1970, the major manufactured exports were chemical and petroleum products, food, beverages and tobacco, and wood products. By 1980, the three major manu- factured exports changed to E&E products; textile, clothing and footwear; and food, beverages and tobacco.
By the end of the 1980s, E&E machinery and appliances accounted for more than 50% of manufactured exports, followed by 10% textiles, clothing and footwear, and 8% chemical and petroleum products.
Palm Oil’s Contribution
Malaysia is one of the world’s largest producers and exporters of palm oil, and it has been a major contributor to the country’s economic growth and employment.
Malaysia’s palm oil exports have fuelled foreign exchange (forex) earnings and economic development in rural areas.
Before 1981, Malaysia struggled with a national average fresh fruit bunches (FFB) yield of less than 19 tonnes per hectare annually. To improve yields, labour-intensive and expensive hand-assisted pollination was necessary.
However, the game-changer for the Malaysian oil palm industry came in 1981 with the introduction of Elaeidobius kamerunicus weevils, a pollinating insect native to Cameroon, at the Mamor Estate in Kluang, Johor.
This introduction had a profound impact on Malaysia’s oil palm plantations, significantly increasing FFB yields per hectare and simultaneously reducing the cost of pollination. As a result, Malaysia’s palm oil production began to soar.
In tandem with the surge in palm oil production, palm oil exports also experienced substantial growth. In 1960, Malaysia exported less than 100,000 tonnes of palm oil and by 2016, this figure had surged to a staggering 16.05 million tonnes.
While early exports predominantly relied on Europe as the primary destination, Malaysia has diversified its export markets to encompass over 190 destinations worldwide. The expansion included regions such as the Indian subcontinent, West Asia, Africa and Asia.
Moreover, the nature of export products underwent a remarkable shift from being predominantly crude palm oil (CPO) to a diverse array of processed palm oil products, meeting the diverse demands of consumers.
Petroleum and Natural Gas
Over a century ago, in the year 1910, Malaysia took its first steps into the world of oil and gas (O&G) with the drilling of its inaugural oil well in Miri, Sarawak. Back then, this venture began modestly, yielding a mere 83 barrels per day (bbls/d).
However, this modest start would evolve into a significant industry, reaching a peak production of 15,000 bbls/d just two decades later. At the outset, it was Shell that embarked on this pioneering endeavour, becoming the sole company to undertake the drilling.
In the wake of Malaysia’s path to independence, the nation’s O&G sector came under the jurisdiction of the Petroleum Mining Act 1966 (Act 95) and introduced a concession system for upstream activities. Multinational corporations (MNCs) like Shell and Exxon were granted exclusive rights to explore and extract resources, in exchange for royalty payments and taxes contributed to the government.
As Malaysia progressed, the government recognised the importance of asserting national control over O&G development. Consequently, in 1974, the Petroleum Development Act was enacted, leading to the establishment of Malaysia’s national oil company, Petroliam Nasional Bhd (Petro- nas). This act conferred exclusive ownership rights over Malaysia’s O&G resources to Petronas and designated it as the principal regulatory authority for upstream activities.
Fast forward to the present day, and Malaysia has transformed into a significant hub for major O&G enterprises. Boasting over 400 O&G fields, it possesses the second-largest reserve in Asean and stands as the world’s third-largest exporter of liquefied natural gas (LNG).
Services Sector and Employment Dynamics
Employment holds a significant role in the livelihoods of many Malaysian households, with shifts in employment sectors mirroring changes in their fortunes.
Over the years, Malaysia has witnessed profound structural changes in its employment landscape, marking the country’s transition from an agrarian economy to one dominated by industry and services.
From the 1970s through the early 2000s, an increasing number of Malaysians found employment in the rapidly expanding industrial sectors. Concurrently, the services sector also witnessed growth as new service niches emerged to cater to the demands of the industrial economy.
During this period of substantial industrial and services employment growth, the proportion of Malaysians working in agriculture dwindled significantly, plummeting from 52.8% in 1970 to 16.7% in 2000. This decline persisted until 2015 when the agri- cultural sector’s employment share stood at just 12.5%.
Since 2000, the growth in the employment share of the industrial sector seems to have plateaued, while the services sector continues to expand, remaining on an upward trajectory to the present day.
Agricultural Policy Evolution
In the immediate post-independence period, the agricultural policy bore the imprint of colonial influences, particularly in its emphasis on industrial crops destined for export markets.
Vast tracts of forested land were opened up for the cultivation of palm oil and rubber, marking a significant shift in land use. By 1970, more than 123,000ha were dedicated to palm oil production, while another 131,500ha were allocated for rubber cultivation.
During this era, agriculture, primarily led by rubber and palm oil, stood as the linchpin of Malaya’s economy. It not only contributed substantially to the nation’s foreign exchange income but also played a role in capital formation and employment generation.
As Malaya evolved into Malaysia, the first national agricultural policy laid the groundwork for a more diversified and resilient agricultural sector. It sought to empower farmers, promote agricultural research and development, and leverage technology for increased yields.
Additionally, the policy placed a heightened emphasis on rural development, recognising that the well-being of the nation’s rural population was inter-twined with the success of its agricultural sector. In summary, Malaysia’s journey since independence showcases the nation’s resilience, adaptability and commitment to progress.
From humble beginnings, Malaysia has diversified its economy, harnessed its natural resources and achieved remarkable milestones and today, it stands tall as a sovereign nation, a testament to visionary leadership and unwavering determination in pursuit of prosperity.
Source: The Malaysian Reserve