Economic Policy, Growth and Inequality in Malaysia

A Historical Analysis 1900-2005

Tin Htoo Naing

QHA 050001

Asia-Europe Institute

University of Malaya

A historical focus on Malaysia’s economic development over the span of one century, 1900-2005.

A comparative analysis of the growth performance and socio-economic structure under the different policy regimes over a century.

A historical Analysis to ascertain the direct and indirect consequences of government policymaking on two key issues: economic growth and structural change, and spatial and social inequality.

Introduction

Objectives

To investigate the historical evolution of the country’s economy by employing economic theories and

models, and test growth and development theories by using historical knowledge and statistical

methods.

Three major tasks

(1) Reconstructing GDP estimates for the colonial period 1900-1939

(2) Analysing policy regimes, economic growth, and structural change

(3) Interpreting the sources of socio-economic development, regional specialization and social

stratification.

Research Methodologies:

(1) Employing System of National Accounts;

(2) Running regression and model testing;

(3) Examining SWOT (strength, weakness, opportunity and thread) of government policies

in regards with regional specialisations and social stratification.

Significance of the Study:

1. Geographical coverage of Malaya - In this study, geographical coverage of Malayarefers only to the entity of Malaya proper which is currently the major part of ModernMalaysia.

2. Historical GDP estimates by the production approach, Malaya, 1900-1939 - Thestudy has introduced a new database of Colonial GDP by industrial origins at constantterm.

3. A full-length study over the 20th century - This study develops a systematicquantitative analysis of the vital questions concerning the socioeconomic growthperformance in the long-term based on the new time series dataset of Malaysiapertaining over one hundred years, 1900-2005.

Literature Review

There are only a handful of studies on economic history of Malaysia covering the whole span of Britishrule and the post independence years due to the complete absence of long-run economic statistics suchas national income accounts for the period prior to the World War II (Raja Nazrin 2000: 1).

There are examples of comparative work on historical national accounts using SNA from other countrieswhich can illuminate the long-term growth performance and cyclical experience e.g. Stone 1972,Maddison 1995, 2001 and 2003; Hjerppe 1996; van Zanden 1997, S.Sivasubramonian 2000, Tirthankar2004.

In 2000, a new historical national accounts was constructed by Raja Nazrin and available as a pioneerwork on GDP estimates by the expenditure approach for the pre-WW II period 1895-1939. However,there is no single work available for GDP estimates by the output approach and income approach forthe period prior to 1947.

Among the other notable works on the Malayan/Malaysian economy, Economic Development ofModern Malaya by Lim Chong Yah (1967) would be the best-known attempt to cover the economy as awhole over a long period, roughly from 1874 to 1963. In this work, the geographic coverage of Malayawas somewhat different since a clear distinction between Malaya and Singapore was not made.

Drabble’s (2000) standard economic history offers a fairly descriptive narrative of the emergence ofmodernization in the country. It has been an informative assemblage of what actually happened alongthe path of economic success. However, it has also been criticized for lacking of attempt a systematicexplanation of the Malaysian historical experience utilizing economic theory.

A pioneer work by Raja Nazrin (2000) has been a masterpiece in this field since the work covers thewhole span of the 20th century and analysed the Malaysian history from economic growth perspectivesby applying historical national accounting system and econometric analytical tools.

Literature Review (Cont’d)

Some other specialist studies on the whole economy but covering relatively shorter period are: “theEconomy of Malaya‟ by Silcock (1963); “The Political Economy of Independent Malaya” by Silcock andFisk (1963); “Aspects of Malayan Economic Development, 1900-1940” by Kinney (1975); “the JapaneseOccupation of Malaya, 1941-1945” by Kratoska (1997); “Malaysia Development Pattern and Policy 1947-1971” by Rao (1950) and; “Economic Growth and Developments in West Malaysia, 1947-1970” by DavidLim (1974).

In the post-independence period, particularly since 1970, there are voluminous studies on every singleaspect at both macro and micro levels, including outstanding works on economic growth anddevelopment issues, which are too numerous to list comprehensively. Some of the well-researchedworks for instance are: Further Readings on Malaysian Economic Development by David Lim (1983);Impact of the New Economic Policy on Malaysian Economy by Paul Chan Tuck Hoong and Kenzo Horii(1986); The Malaysian Economy in Transition by Ambrin Buang (eds.) (1990); Growth and StructuralChange in the Malaysian Economy by K.S. Jomo (1990); Issues in Malaysian Development by SulaimanMahbob (1992); Malaysian Development Experience: Changes and Challenges by NIPA (1994); Malaysia’sEconomic Success by Ataul Huq Pramanik (1994); The Changing Phases of Malaysian Economy byOkposin et al. (1999); The Malaysian Journey: Progress in Diversity by Frank-Jürgen Richter and Thang D.Nguyen (ed.) (2004); Where to Malaysia? Can we achieve Vision 2020 on time? by Ramon V. Navaratnam(2006).

In this research, intensive use is made of statistics obtained from colonial documents, departmentalaccounts, production censuses and employment statistics from national and regional bodies. Theconceptual framework encompasses proximate growth accounting, as used by economists, and analysisof the deeper causal role of institutions and policies which characterizes analytical economic history ofMalaysia.

Key research questions

1. How has the history of colonial policymaking affected long-term economic outcomes?; do

historical structures have long-lasting effects and, if so, how long these effects last?; which

specific legacies of the colonial period are responsible for contemporary outcomes?

2. What are the patterns of economic growth and structural change in the Malayan/Malaysian

economy during the twentieth century?; did the stages of growth and policy paradigms of

Malaysia follow the stylized pattern of advanced countries adapted in growth literature? How

and to what extent have sectoral growths affected GDP in both long and short term under

different regimes?

3. How do we account for two major structural features of the Malayan/Malaysian economy?: a)

the divergent character of regional development, marked by significant spatial unevenness with

a resultant ‘core’ and ‘periphery’ pattern of development; b) the ethnicisation of both the

division of labour and the emerging class structure as occupation came to be closely associated

with ‘race’.

Reconstructing GDP estimates Malaya, 1900-1939

Gross Domestic Product by Industrial Origins, Malaya-1900-1939

Year Primary Sector Secondary Sector Tertiary Sector GDP

1900 76.91 9.10 48.47 134.48

1901 79.45 9.47 51.16 140.08

1902 79.94 8.88 52.72 141.54

1903 84.29 10.15 55.19 149.62

1904 86.74 11.52 55.20 153.47

1905 86.92 13.33 58.41 158.66

1906 86.74 14.52 59.67 160.93

1907 88.84 17.48 62.53 168.85

1908 95.74 17.78 63.53 177.05

1909 95.35 17.32 63.56 176.24

1910 100.17 24.27 64.44 188.87

1911 113.74 24.82 74.87 213.44

1912 135.95 31.13 83.21 250.29

1913 154.21 40.62 91.56 286.39

1914 164.42 36.21 96.24 296.86

1915 193.66 32.44 101.40 327.49

1916 228.21 31.60 103.28 363.09

1917 277.24 39.29 108.14 424.67

1918 257.84 32.44 117.95 408.24

1919 330.51 43.33 126.91 500.75

1920 301.05 43.87 157.91 502.83

1921 279.13 47.27 163.27 489.68

1922 356.05 52.02 165.02 573.09

1923 323.29 51.25 168.72 543.27

1924 296.20 47.68 175.35 519.23

1925 363.23 61.07 189.67 613.97

1926 451.04 74.88 217.89 743.81

1927 417.86 80.66 221.82 720.33

1928 496.07 94.10 247.28 837.44

1929 680.27 111.62 287.05 1,078.95

1930 669.89 101.31 286.02 1,057.22

1931 644.42 99.47 288.04 1,031.93

1932 612.31 90.30 266.47 969.09

1933 658.02 91.80 279.68 1,029.50

1934 704.92 98.02 301.17 1,104.11

1935 609.94 92.42 281.83 984.19

1936 625.52 96.58 302.57 1,024.67

1937 793.53 122.33 345.81 1,261.67

1938 610.98 104.43 330.47 1,045.87

1939 626.41 106.90 355.95 1,089.27

The economy of a nation is seen as a circular flow of goods (andservices) and money. The National Income (or Gross DomesticProduct) can be measured at different points in the flow of goodsand money, for instance, as the sum of the value added in eachsector of the economy (agriculture, industry, services) or, as thesum of all incomes earned from supplying factors of production(wages, rent and profits) or, finally as the sum of all expenditures(consumption and investment).

Therefore, GDP may be derived in three ways (viz. the productionapproach, the income approach and the expenditure approach)or combinations of them (UNHB 1986:1).

To my knowledge, the Malayan GDP was estimated by theexpenditure approach for the period 1895-1939 but no singlework for GDP estimates by the output approach and incomeapproach is available for the period prior to 1947. In this study,therefore, an alternative approach, the production (value added)approach is attempted.

The System of National Accounts (SNA) - a multi-purpose systemdesigned by the United Nations for economic analysis, growthmodeling and policy-making - will be implemented in this study tomeet international standards and guidelines for comparativepurposes.

Refining methodology itself, particularly concerning measurementand interpretation, has been another major field of research. Byand large, the outcome of this study provides a new dataset ofhistorical GDP estimates by industrial origins to serve as a basicindicator of macroeconomic performance over time.

(1914=100) S$ million

Forms of Regime, Philosophy and Policy Making in Malaysia, 1900-2005

Economic Performance of Malaysia, 1900-2005

Period Pattern of Growth

1900–1909 Initial stage of economic take-off

1910-1914 Rapid growth brought about by so-called

rubber boom

1915-1918 The World War I years

1919-1929 Rapid economic growth with short-life

economic booms

1930-1933 Economic gloom brought about by the Great

Depression

1934-1940 Economic recovery from the Great depression

1941-1945 Economic collapse under the Japanese

occupation

1946-1950 Short recovery phase from war damage

1951-1960 Economic Stagnation due to political

instability

1961-1970 Moderate Growth coincided with the

foundation of modern Malaysia

1971-1990 Rapid growth with redistributing and

restructuring economy

1991-2005 Fairly Rapid growth with inspiration of

developed economy.

Sectoral Composition of GDP in Malaysia, 1900-2005

Year Primary Sector Secondary Sector Tertiary Sector GDP

1900-1905 56 7 37 100

1906-1910 54 10 36 100

1911-1915 56 10 34 100

1916-1920 61 10 29 100

1921-1925 59 9 32 100

1926-1930 61 10 29 100

1931-1935 63 9 28 100

1936-1939 60 10 30 100

1900-1939 59 9 32 100

1947-1950 45 9 47 100

1951-1955 44 10 46 100

1956-1960 46 12 42 100

1961-1965 42 14 45 100

1966-1970 39 17 44 100

1947-1970 43 12 45 100

1971-1975 41 18 41 100

1976-1980 36 21 42 100

1981-1985 32 23 46 100

1986-1990 30 25 45 100

1991-1995 21 30 49 100

1996-2000 16 32 51 100

2001-2005 15 32 54 100

1971-2005 27 26 47 100

Per cent (%)

Rubber Plantation in Malaya by States (1921) Tin Mining in Malaya by States (1963)

Industrial Development Corridors and Investment Incentives Location , Malaysia

Peninsular Malaysia: Mean and Median Incomes, 1970-2004

($ per household per month in Current Prices)

Ethnic Group 1970 1973 1976 1979 1984 1990 1995 1999 2004

Malay Mean 172 242 345 513 852 940 1604 1984 2711

Median 120 163 233 332 581

Chinese Mean 394 534 787 1094 1502 1631 2890 3456 4437

Median 268 343 480 636 1024

Indian Mean 304 408 538 776 1094 1209 2140 2702 3456

Median 194 277 360 522 770

All Ethnic

Groups

Mean 264 362 514 763 1095 1167 2020 2473 3249

Median 166 227 313 449 723

Malaysia has successfully transformed itself from a peasant economy to an industrialising economy,

and has advanced core livelihoods from ‘traditional’ patterns to a full integration into capitalist modernity

during the course of the twentieth century.

Its abundant natural resources were the major factors underpinning this economic success, and a

stable political climate and a set of outward-oriented economic policies have helped Malaysia gain

reclassification as a newly industrialized developing economy.

This policy nexus has generally succeeded in maintaining a constructive interaction between the state

and the private sector by adopting proactive business policies and liberal market mechanisms.

The GDP grew eight-fold in the 40 years of colonial period prior to the WW II. The economy grew

about nine-fold in 35 years in the period 1971-2005. The extent of economic fluctuation in the period

before the Second World War was greater than after and the most recent period (1971-2005) has been

seen the highest sustained growth levels.

The economic policies were more concerned with accelerating economic growth at the expense of

growing regional and ethnic inequalities prior to 1970. The sources of inequality in the colonial period

were not only material but also psychological and ideological. Regional and ethnic inequality is rooted in

the colonial period and has not been overcome yet at present due mainly to historical continuity in the

ethos and ethics of each ethnic.

Research Findings

During the period 1971-2005, the government interventions under different policy regimes namely

NEP, NDP and NVP has been successful in generating economic growth and development of the economy

and however, in reducing income disparity among ethnic groups and regions has not been satisfied in

general.

Social and cultural value systems – realm of value, behaviour and belief - have powerful positive or

negative effects on inequality. These values together with the initial distribution of assets determined

the extent of inequality while the role of government may be relatively limited and stable.

When the economy reached a certain level of development, the role of government tends to be

larger than it was in the past and becomes progressively more important in dealing with inequality. The

holistic approaches are direct, indirect and integrated mechanisms.

The government’s direct and indirect interventionist approach has not been sufficiently well directed

and implemented to eradicate deep-seated inequalities. The direct or indirect approaches in policy

making, perhaps, reduce inequality to certain extent, but would not be able to optimize it – optimum

inequality refers to that the inequality by natural default, not by synthetic design.

A genuine integrationist approach to development is the only viable solution at the current stage of

development to embed a sustainable economy with the potential for equitable social outcomes.