Report No. 2685-MA FIL C ny

Malaysia FL COPYSelected Issues in Rural PovertyVolume II: Background Analysis

December 18, 1980

Country Programs DepartmentEast Asia and Pacific Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

Currency Unit - Ringgit

1 M$ = US$0.451 US$ = M$2.2

Average rate prevailing October 1978 - September 1979

LIST OF ACRONYMS

EPU - Economic Planning Unit

FAO - Food and Agriculture OrganizationFELCRA - Federal Land Consolidation and Rehabilitation AuthorityFELDA - Federal Land Development AuthorityFMP - Fourth Malaysia Plan

GMP - Guaranteed Minimum PriceHES - Household Expenditure SurveyKADA - Kelantan Agricultural Development AuthorityMADA - Muda Agricultural Development AuthorityMAJUIKAN - Fisheries Development Authority of MalaysiaMADRI - Malaysian Agricultural Research and Development InstituteMLR - Ministry of Land and Regional DevelopmentMRELB - Malaysian Rubber Exchange- and License BoardMTR - Mid-Term Review of the Third Malaysia PlanPLI - Poverty Line Income

RISDA - Rubber Industries Smallholder Development AuthorityRRIM - Rubber Research Institute of MalaysiaRRS - Ribbed Smoked Sheet

TMP - Third Malaysia Plan

USM - University Sains Malaysia

Fiscal YearJanuary 1 - December 31

FOR OFFICIAL USE ONLY

This report is based on the findings of a mission that visitedMalaysia in February/March 1979 and consisted of Kevin Young (missionleader), George Baldwin, and Alice Galenson. A draft of the report wasdiscussed with Government during March 1980. The report was finalized priorto the issue of the 1981 Malaysian budget. Therefore, the implications ofthe measures taken in the budget to reduce poverty are not discussed.

This document has a restricted distribution and may be used by recipients only in the performanec oftheir official duties. Its contents maly not otherwise be disclosed witlhout World Baiink authorization

MALAYSIA

SELECTED ISSUES IN RURAL POVERTY

TABLE OF CONTENTS

Page No.

VOLUME I - OVERVIEW

Introduction 1Past Performance and Current Poverty Levels 2Future Prospects 5Fiscal Option 12The Formulation and Implementation of Poverty Programs 19

VOLUME II - BACKGROUND ANALYSIS

1. RURAL POVERTY IN MALAYSIA: AN OVERVIEW I

A. Extent of Poverty IB. Progress Towards Reducing Poverty 10C. Government Poverty Reduction Strategy 15

2. POVERTY ALLEVIATION AMONG THREE MAJOR POVERTY GROUPS 23

A. Rubber Smallholders 23B. Padi Smallholders 42C. Fishermen 52D. Common Issues 60

3. ISSUES IN LAND USAGE 62

A. Land Availability and Development 62B. Land Development and Settler Selection 68C. Land Tenure and Consolidation 73

4. SYNOPSIS OF MAJOR RECOMMENDATIONS 79

ANNEXES

I. Poverty Line Incomes (PLIs) 84II Reweighting Official Poverty Diet 86

III. Household Calorie Consumption Implied by "1973Household Expenditure Survey" 88

IV. Estimation of Average Income Growth Among LowIncome Households 89

V. Composition of Rubber Smallholdings 98VI. Farm Budgets 101VII. Land Availability and Classification 109

VIII. Land Administration 121IX. Experiments in In-Situ Land Development 124X. National Poverty Task Force - Indicative Outline and

Terms of Reference 132

1. RURAL POVERTY IN MALAYSIA: AN OVERVIEW

A. EXTENT OF POVERTY

1.01 In 1978, the Government estimated that about 4 million persons,equivalent to 37% of the households in Peninsular Malaysia were in absolutepoverty (see Table 1.1). Two-thirds of these poor households are in theagricultural sector where the incidence of poverty is 55%. Within theagricultural sector, rubber and padi farmers comprise the majority /1 of thepoor households. All the official estimates of poverty are restricted toPeninsular Malaysia, owing to a lack of income survey data for Sabah andSarawak. Crude estimates by the Bank based on the value added by sector oforigin and employment distribution by sector indicate even higher (by about10-20%) levels of poverty in those states.

1.02 Even excluding Sabah and Sarawak however, the incidence of absolutepoverty in Malaysia appears somewhat high when viewed against Malaysia'sper capita GDP. For instance, countries in the same income range have areported rural poverty incidence of 35%, compared with an estimnate forMalaysia of 44% (see Table 1.2). Further, the lower middle income countries,with a per capita GDP less than half that of Malaysia, and an incomedistribution no worse than Malaysia's, have a reported incidence of absoluterural poverty of only 38%. Evidence of Malaysia's relative standing on anumber of social welfare indicators also casts doubt on the reported extent ofabsolute poverty (see Table 1.3). Malaysia's performance on many socialindicators is above the average for countries in the same income group. Forinstance, one good generalized measure of health conditions, the expectationlife at birth, stands at 67 years in Malaysia compared to 60 years forcountries in the same income groups. Similarly, the access of the ruralpopulation to safe water, excreta disposal, and electricity is significantlyhigher in Malaysia than for countries in the same income group.

1.03 A recent Bank nutrition report also found Malaysia comparativelywell-off. "Health and sanitation conditions in Malaysia are far better thanconditions in Cambodia, India, Indonesia, the Philippines, Nepal, Thailandand Viet Nam. About 70% of West Malaysians drink water that is potable byUS standards, and the incidence of gastrointestinal and respiratory diseasesremain well below that found elsewhere in the region. Severe clinicalforms of marasmus and kwashiorhor, which are present in large urban and

/1 The Third Malaysia Plan (TMP) and the Mid-Term Review estimate that therubber and padi sectors comprised 60% of poor households in agriculturein 1970, 1975 and 1978. Analysis of the 1973 llousehold ExpenditureSurvey (RES) by Visaria, "Incidence of Poverty and Characteristics ofthe Poor in Peninsular Malaysia, 1973," suggests that the share of thesetwo groups in 1973 was 75% of agricultural poverty. Part of thedifference may be due to different years of estimation and to the use ofdifferent poverty lines. Hlowever, it is not clear that all thediscrepancy be explained this way and a further analysis of thisdifference should prove interesting.

-2-

Table 1.1: EXTENT OF ABSOLUTE POVERTY, PENINSULAR MALAYSIA, 1978

Total Total poor Incidence Percentagehouseholds households of poverty among poor------- ('000) ------- (%)

AGRICULTURERubber smallholders 412.6 198.0 48.0 25.5Oil palm snallholders 18.7 1.0 5.4 0.1Coconut smallholders 34.2 15.0 43.9 1.9Padi farmers /a 149.5 110.6 74.0 14.3Other agriculture tb 165.9 121.1 73.0 15.6Fishermen 42.1 23.2 55.1 3.0

Estate workers 117.7 44.7 38.0 5.8

Subtotal 940.7 513.6 54.6 66.2

NONAGRICULTURE 1,182.3 262.7 22.2 33.8

Total 2,123.0 776.3 36.6 100.0

/a The incidence of poverty is based on the conditions prevailing in 1977.

/b The category includes agricultural households in urban areas, agriculturallabor and mixed farmers.

Source: llid-Term Review of the Third Malaysia Plan.

isolated rural areas in neighboring countries, have not been encounteredin Malaysia. According to FAO estinates, the calorie intake in 1974 was115% of requirements for West M4alaysia. In 1969-71 the protein intake forWest Malaysia was 54 gms per day." /1

1.04 Many of these apparent inconsistencies between Malaysia's relative

living standards and poverty incidence rest on shaky data and questionableassumptions of international comparability and could be dismissed on thesegrounds alone. However, these anomalies have resulted in fairly widespreadclaims that the extent of poverty in Malaysia is being exaggerated and,therefore, a re-examination of the estimated incidence of absolute poverty inMalaysia seems warranted.

/1 lialaysia Nutrition Brief draft, N. Abdulhadi, 2/11/77, p. 14.

-3-

Table 1.2: POVERTY INCOME COMPARISONS, 1977

Per % of ruralcapita population in

Country classification /a GNP absolute poverty(US$)

Low income 182 53.9Lower middle income 430 37.5Intermediate middle income 926 35.3

Malaysia 930 44.0

/a Low income (US$0-280 per capita in 1976);Lower middle income (US$281-350 per capita in 1976);Intermediate middle income (US$551-1,135 per capita in 1976);Upper middle income (US$1,136-2,500 per capita in 1976).

Note: The adjusted group averages for are population-weighted geometric means excluding the extremevalues of the indicator and the most populatedcountry in each group. Particular caution iswarranted in interpreting the estimate of ruralpoverty of 35.3% among intermediate middleincome countries which is based on only fivecountries with a combined population of only 20million. The estimate for lower middle incomecountries is more robust being based on theaverage of nine countries with a combinedpopulation of 166 million.

Source: World Development Report, 1979.

- 4 -

1.05 The Government has estimated poverty incidence by the usualprocedure of calculating a poverty line incorne (PLI) and then comparing it toactual income reported in income surveys to determine the number of householdswith incomes below the PLI. If the incidence of absolute poverty is indeedexaggerated, one possibility is that the PLI is too high. The PLI thatthe Government uses has been calculated on a household basis and is defined onthe basis of minimum subsistence per member. In particular, it defines anincome sufficient to purchase a minimum food basket to maintain a household ingood nutritional health and the minimum needs for clothing, householdmanagement, transport and communication./1

1.06 The dietary component is derived by estimating the cost ofpurchasing sufficient foocl to provide caloric requirements. The compositionof the food is based on the National Balance Sheets for Peninsular Malaysiafor 1970-1975. In addition, two 5% margins are added to allow for thepurchases of spices, coffee, etc. and for the possibility of extra energyneeds of the household head. The per capita calorie requirement used is 1982calories per day which is somewhat (10.3%) lower than the FAO estimatedrequirement for Asia of 2210. On this basis the 10% margin allowed isentirely accounted for. Since the composition of the diet however is basedat least partly on national rather than poverty norms /2, it is possible thatthe implied cost per calorie is significantly more than what a povertyhousehold would typically pay. To test this hypothesis, the poverty diet wasreweiahted based on the actual consumption pattern of low income families(monthly expenditures below M$200 per household). The details of thiscalculation are presented in Annex II. However, the major difference appearsto be an increased weight given to cereals as a source of calories from 65% /3in the Government-s estimate to 72% in the actual consumption of low incomehouseholds and a reduction in the share of calories from fruit and vegetables.Both of these changes would tend to reduce the cost of obtaining the requiredcalories. Uowever, this increase is offset to some extent by a larger weightgiven to meat which is excluded from the Government's official diet. The neteffect of these changes is not significant, with the cost of the actualpoverty diet only about 5% less than the official estimate. Given the largenumber of assumptions required for this comparison, this difference is notvery significant. It may be concluded therefore that the composition of theofficially estimated diet is a reasonable basis for estimating the cost of aminimum adequate diet, at 'least in terms of calorie requirements.

/1 A number of poverty lines have been estimated by Government. The PLIdiscussed in this chapter, unless otherwise noted, is the latestEconomic Planning Unit (EPU) estimate prepared in March 1978 "Estimationof Poverty Line Income 1977, Peninsular Malaysia." A presentation anddiscussion of the various poverty lines is contained in Annex I.

/2 The Government estimates also have taken into account diets ofdeveloping countries but it is not clear how these have beenincorporated.

/3 Including tapioca flour as a cereal.

Table 1.3: COMPARATIVF, SOCIAL IrIDICATORS /a

Low income Low mid- Inter mid- Higil mid-Unit Malaysia countries income income income

Per capita income US$ 930 182 430 926 1,749

IndicatorExpectation of life (total) yrs 67 49.3 54.7 60.2 65.6Access to safe water (rural) % 46 15.8 21.2 40.0 43.0

Access to excreta disposal rural % 43 3.5 27.7 22.5 33.2

Population per physician (total) persons 4,350 11,396 6,799 2,262 1,343

Access to electricity (rural) % 30 - 9.9 17.3 -

Child mortality rate (1-4) per 100 3 18.5 11.4 8.6 5.1

Enrollment ratioPrimary % 94 63.3 82.7 102.5 101.7

Secondary % 45 16.7 21.4 33.5 51.2

Income distributionincome of lowest 40% % 10.6 - 16.3 12.6 11.0income of top 20% % 56.6 _ 48.2 52.1 57.6

la 1977 or most recent estimate available.

Note: The adjusted group averages for each indicator are population-weighted geometric means exclu-ding the extreme values of thie indicator and the most populated country in each group.Coverage of countries among the indicators depends on availability of data and is not uniform.

Source: World Development Report 1979, Draft; World Bank Data File.

1.07 The fact that the cost of Malaysia's poverty food basket is signi-ficantly higher than in some neighboring countries appears to he due mainly tothe higher prices in Malaysia and to differences in national food habits,rather than to an excessively generous poverty diet. Thus the cost (in 1977prices) per kg of rice is estimated to be US$0.20 in Thailand, US$0.29 in thePhilippines, US$0.26 in Korea and US$0.33 in Malaysia.

1.08 The nonfood component of the official poverty line is based on theactual expenditure patterns of low income households as recorded in the 1973HES. There are a number of significant deficiencies in the manner in which thenonfood component was estimated. However, these deficiencies are basicallyoffsetting and a revised calculation based on the World Bank's methodologyresults in an almost identical estimate for the nonfood component./IThe basic reasonableness of the nonfood component is also evidenced by thefact that its size relative to the food component is approximately the sameas the average for other East Asian countries. For these reasons thereforethe nonfood component is judged to be a reasonable estimate for the povertyincome line.

1.09 A separate but related exercise was also undertaken to test whetherthe actual expenditures recorded in the 1973 HES would indicate that acalorie deficiency was actually being experienced by anything close to thenumber reported to be in poverty. The basis for this test is not only thatcaloric deficiency is generally regarded as a good statistical indicator ofthe extent of nutritional inadequacies in large populations but also becausethe method of measuring the poverty incidence in Malaysia implies that thepoverty population would all be experiencing a caloric deficiency. Thedetailed calculations of this exercise are summarized in Annex IV. Thesomewhat surprising result is that the HES data indicate a very substantialcaloric deficiency in the population. According to these calculations, some66% of households would have a significant caloric deficiency which impliesa substantially larger absolute poverty incidence than the officialestimates.

/1 The official estimates: (a) use preliminary expenditure data which aresignificantly higher than the final tabulations, (b) make no allowancefor the smaller family size of low income households used in theanalysis, and (c) uses the absolute value of expenditures recorded ratherthan their relative size in the overall expenditure pattern. While thesebiases taken separately are very substantial, taken together theycompletely offset each other so that a separate analysis using the WorldBank methodology yields M$84.60 per household per month compared to thegovernment estimate of M$84.32.

-7-

1.10 This conclusion is counterintuitive based on separate studies ofnutrition in Malaysia which were summarized above. Further, it is inconsis-t'ent with separate estimates undertaken by Chong/l that indicate an overallcaloric surplus over to requirements of some 9% instead of the average 11%deficit implied by the survey.

Table 1.4: EXTENT OF CALORIC DEFICIENCY BY HOUSEHOLD EXPENDITURE CLASS, 1973

Expenditure class % Actual calories/M$ per month Households required calories

0 - 49 3.8 5550 - 99 13.2 67100 - 149 16.2 75150 - 199 13.9 82200 - 299 19.0 87300 - 399 11.5 96400 - 499 7.6 101500 - 599 4.3 102600 - 699 2.9 104700 - 799 2.0 1ll800+ 5.5 116

Total 100 89

Source: Mission estimates based on 1973 RES (Dept.of Statistics) for Peninsular Malaysia.

1.11 One possibility that may explain these inconsistencies is that theincome and expenditure surveys are seriously understating actual incomes andexpenditures of the population. In fact, there is an increasing awareness ofthe likelihood of income understatement and other biases in such surveysgenerally. A recent Bank staff paper assessing the reliability of incomedistribution data from income surveys in Latin America concluded, "Aftertaking into account the sampling variability of surveys, differences intheir coverage and in the concepts of income measured, and possibleinaccuracies in the national accounts-based estimates, our results show thatthey considerably underestimate aggregate and mean household income: oftenby 10-20% of total household income; in several instances by 25%; and in a

/1 Y.H. Chong, "Nutrition Food Needs and Prospects of Supplies inRelation to Population Growth of Peninsular Malaysia," Division ofNutrition, Institute for Medical Research, Kuala Lumpur. Paperprepared for ESCAP/UN December 1977.

few cases by over 30%.."/I While no such analy.4is nas been undertaken forthe various Malaysian surveys, a crude comparison with the national accountssuggests a significant underestimate of income in the Malaysian surveys aswell (see Table 1.5).

Table 1.5: COME'ARTSON OF I?NCONE FROMt SUIRVEYS ANDNATIONAL ACCOUNTS

National accts./a Ratio surveySurvey income pers. income income/

per capita per capita national acct.rs 14$ X

1970 Post enumeration survey 587 782 75.1

1973 Household expenditur-esurvey (income) 812 i,196 67.9

1973 Household incomesurvey (income) 703 1,196 58.8

1973 Household expendituresurvey (expenditures) 686 810 /b 84.7

1976 Agricultuiral survey(income) 1,212 1,677 72.3

/a National accounts in Malaysia do not include a personal incomefigure. The 1970 estimate is taken from the 1970 Social AccountingMatrix (SAM) paper by Pyatt et a!. and the 1973 and 1976 estimates

are based on the 1970 SAM relationship between personal income and GDP.

/b Per capita private consumiption.

1.12 To complicate matters further the Altimir analysis indicates that

the degree of understatement is not uniform but varies according to income

source. "In general estimates of property income are higher in sunreys thanin national accounts which tend to undervalue this item. Survey figures forwages and salaries are in most cases consistent with national accounts.

/1 Oscar Altimir, "Income Distribution Estimates from Household Surveys andPopulation Censuses in Latin America: An assessment of Reliability"Uorld Bank Draft, October 31, 1977, p. 95.

- 9 -

Entrepreneurial income in the survey data is usually 25-50% below the compa-rable macroeconomic estimates." The net impact of this is to understateseriously the share of income going to the top decile. However, it isprobable that the incomes of the rural poor, which to a large extent would beclassified as entrepreneurial, are also understated.

1.13 Data from the 1973 Household Expenditure Survey /1 while not resol-ving this issue does allow us to gauge its magnitude. Using the officialpoverty line of M$188 (per month/household) for 1973, the survey data indicatethat 56% of agricultural households were in poverty. Assuming that incomesare understated, by varying degrees, it is possible to determine the extent towhich poverty is overstated. The results of this exercise as applied toagricultural households are summarized in Table 1.6. The somewhat surprisingresult is that even with substantial understatement of income, the incidenceof absolute poverty is still relatively high. Thus, assuming incomes of allhouseholds are understated by 25%, the incidence of poverty among agriculturalhouseholds declines only from 56% to 41%. Among all households the incidencewould decline from 36% to 25%.

1.14 At this time, however, the Altimir analysis has not proceeded farenough to justify specific adjustments in the income of various income groups.Thus we are left in a rather difficult position in knowing there is a problemwith the survey data but being unable to do anything about it. Moreover, theimplications of this go far beyond Malaysia. Because of the substantialinterest cLne 5ak has voiced about addressing the needs of the poor, theresolution of this question merits high priority. Because of the wealth ofincome distribution data in Ilalaysia that the Bank has access to, as well asthe existence of the social accounting matrix on Mlalaysia, Malaysia would bean excellent choice for an analysis of this issue.

1.15 In the interim, it is proposed that we continue to use the officialpoverty line and incidence on the understanding that they probably exaggeratethe problem of absolute poverty. One significant implication is that increa-sing attention should be given to the poorest of the poor (e.g., the bottomthird of agricultural households) who even assuming a large income understate-ment (e.g. of 35%) would clearly emerge in absolute poverty. This, of course,increases the difficulty in designing poverty programs since typically it ismuch more difficult to find ways to raise the incomes of the very poor. Suchan approach is contrary to the understandable tendency to write off thesegroups as hopeless and concentrate on those perceived to have the greatestpotential for effectively using assistance.

/1 The 1973 Hlousehold Expenditure Survey provides a good proxy for incomeand expenditures since real incomes for low-income agriculturalhouseholds were approximately equal in 1973 and 1978 (see Annex IV andthe subsequent discussion in the chapter).

- 1(0 -

Table 1.6: SENSITIVITY OF POVERTY TO INCOME UNDERSTATEMENT1973 - PENINSULAR MALAYSIA

Incidence of Absolute PovertyExtent of incoine Agricuiltural Nonagricultural Totalunderstatement (%) households households households

0 56.0 23.4 36.25 54.3 21.7 34.4

10 51.5 19.8 32.215 48.2 17.6 29.620 45.0 .5.6 27.125 41.4 13.6 24.730 37.6 11.8 21.935 34.0 10.3 19.6

Source: Mission estimates based on the 1972. Household Expenditure Survey.

1.16 A preliminary analysis of the "hard core poor in agrictultureshows the problem, in terms of incidence, to be greatest padi, fishermen andcoconut farmers, all of which have an incidence of hard-core poverty of45-50% (see Table 1.7). Looking at the geographical distribution ofhard-core poverty across agricultural subsectors and regions indicates that70% of the problem falls within three subsectors in three regions: rubbersmallholders in the East and North; padi farmers in the East, North andNortheast and fishermen in the East (see Table 1.8).

B. PROGRESS TOWARDS REDUCING POVERTY

1.17 According to official estimates in the Mid-Term Review (MTR) ofthe TMP the overall incidence of poverty in E'eninsular Malaysia has beenreduced from 49% in 1970 to 37% in 1978. In absolute terms the poorpopulation has been reduced only very slightly from 4.27 million to 4.19million persons during this period. As far as the agriculture sector isconcerned, the incidence has declined from 68% in 1970 to 55% in 1978, andthe number of poor people by 12% from 3.14 million to 2.77 million.

1.18 An analysis of how this reduction in incidence of poverty in agri-culture has been achieved would shed considerable light on the success ofvarious policies to reduce poverty. Unfortunately the mission did not haveaccess to the Government-s method of calculating the incidence of poverty sothat a full analysis, consistent with the official estimates, is not possible.Nonetheless a separate analysis of the average income growth of the variouslow-income group allows some rough conclusions to be drawn.

1.19 The details of this analysis are set out in Annex IV. Aggregateindices of income, for poor agricultural households, and its decomposition arepresented in Table 1.9.

Table 1.7: "IHARD CORE" /a POVERTY BY AGRICULTURAL SUBSECTOR (1973)

% of "hard core" households Incidence of "hardSubsector to total poor households core" poverty

Rubber 69.8 27.2Oil palm 71.1 21.7Coconut 87.5 45.7Padi 79.0 48.6Other agriculture 65.0 20.7Livestock 81.8 15.8Forestry 56.5 20.4Fishery 78.6 47.7

Total Agriculture 73.9 34.0

/a Households with incomes more than 35% below the official PLI.

Source: i4ission estimates based on the 1973 Household Expenditure Survey.

Table 1.8: DISTRIBUTION OF "HARD CORE" /a POVERTY HOUSEHOLDS BYAGRICULTURAL SUBSECTOPR AND REGION, 1973

(%)

Subsector/region Southwest South East North Northwest Total.

Rubber 5.3 4.7 11.5 10.5 6.6 38.6Oil palm 0.5 0.3 0.6 0.3 0.1 1.5Coconut 0.4 0.8 0.2 0.2 0.5 2.1Padi 0.2 0.2 11.1 10.3 18.6 40.4Other agriculture 1.4 1.1 1.0 0.6 1.1 5.2Livestock 0.1 0.1 0.0 0.2 0.2 0.6Forestry 0.2 0.1 0.6 0.1 0.1 1.1Fishery 1.9 0.4 5.7 0.3 1.5 9.8

Total 10.1 7.7 30.7 22.5 28.8 100.0

/a Households with incomes more than 35% below the official PLI.

Source: Mlission estimates based on the 1973 Household Expenditure Survey.

- 12 -

Table 1.9: DECOMPOSITION OF INCOME GROWTH OF LOW-INCOME AGRICULTURALHOUSEHOLDS 1960-1978 (1970=100)

% p.a.Indices 1960 1970 1975 1976 1978 1960-70 1970-78 1960-78

Total output 66.1 100.0 119.0 129.1 124.4 4.3 2.7 3.6Agricultural households 76.3 100.0 107.3 108.3 110.3 2.7 1.2 2.1Terms of trade 120.8 100.0 92.5 103.9 106.5 -1.9 0.8 -0.7Real income/household 104.6 100.0 102.6 123.9 120.6/a -0.4 2.4 0.8/a

Source: Annex IV.

/a If the real incomes of padi farmers were based on conditions expected toprevail in 1979 rather than 1978, when there was a serious drought, thenthe aggregate index would be 128.9 instead of 120.6 and growth during1960-78 would have been 1.2% instead of 0.8% p.a.

Note: While a technical derivation of these indices is presented in Annex V,it is worth noting here that these indices attempt to show the changein the real incorne of poor agricultural households. The basic proce-dure followed to achieve this objective was first to estimate for thevarious agricultural subsectors (i.e., padi, rubber, etc.) the changein real income per household based on estimated changes in each sub-sector s output, prices and number of households. The output indices,however, are calculated to reflect only changes in smallholder outputi.e. estate production in rubber and palm oil is excluded. Second,to arrive at the aggregate indices in Table 1.9 above, the subsectorindices were weighted according to the distribution of povertyhouseholds in 1970 and then aggregated. As a result, the growth ofoutput per household implied in Table 1.9 are significantly differentfrom the average growth of agricultural output per household thatwould be derived by dividing the change in total agriculture value-added by the change in agricultural households.

1.20 A number of interesting conclusions can be drawn from this analysis.The index of real income per household, which summarizes the average incomeperformance of low-income households in the agricultural sector, indicates asignificant improvement in the 1970s compared to the 1960s. In fact the indexshows that during the 1960s average real income fell by about 5%, and in the1970s increased by about 20%.

1.21 The performance in real income per household can be decomposed intothree factors: (a) growth in the number of households; (b) growth in output;and (c) changes in the terms of trade. During the 1960s the quitesubstantial growth in low-income smallholder output of 4.3% p.a. was more thanoffset by the substantial increase in the population of 2.8% p.a. and thelarge loss in the terms of trade confronting agricultural smallholders of-1.9% p.a. Thus despite quite successful programs to increase output among

- 13 -

smallholders in both rubber and padi, the position of low-income smallholdersin agriculture actually deteriorated because of the large terms of tradedecline, especially the major decline in the price of rubber, and because ofrapid growth of the rural population resulting fror the combination of highfertility and only small amounts of rural-urban migration. This pattern wassubstantially reversed in the 1970s. During that period total output grew byonly 2.7% p.a. However, there was an improvement in the terms of trade of0.8% p.a. while population growth in agriculture was held to only 1.2% p.a.due to substantial rural-urban migration.

1.22 An interesting implication of this analysis is the snare of benefitsfrom growth going to the poor. During this period 1960-70, per capita GDY intlalaysia grew at about 2.2%./1 Given that the incomes of the rural poorprobably declined by about 0.4% p.a. then the average incomes of the rest ofthe population would have grown at about 2.4% p.a., indicating a significantwidening in the distribution of income during the 196 0 s. This widening ofthe gap increased further in the 1970s. During the period 1970-78, theaverage real income of low-income agricultural households is estimated to haveincreased by 2.4% p.a. while the rest of the population probably increasedby about 5.2% p.a. Thus the distribution of the benefits of growth has beenskewed toward the better-off during the past two decades despite majorefforts of Government to achieve a more equitable distribution.

1.23 This analysis employs ntumerous assumptions and should certainly bequalified. A major limitation is that it relates average income growth,which,both within and among subsectors, is not necessarily typical./2 Thus the 2.4%average growth of low-income agricultural households during 1970-78 may becomposed of one group of households growing much more rapidly and anothergroup more slowly. For example, among padi farmers, those in the Muda regiondid much better than those in other parts of the country not benefittingfrom a major irrigation project. For that reason, this analysis cannot belinked directly to the Government's estimate of poverty incidence whichrelates only the number of households above or below a particular povertyincome line and which clearly may be consistent with a wide range of averageincome and rates.

1.24 The overall average growth of real income of 2.4% a year during the1970s, is a weighted average of the various agricultural subsectors and asmight be expected there was considerable spread in the performance of thesevarious subgroups. For the two major poverty subgroups, rubber and padismallholders, there was a substantial difference. During the 1960s, for

/1 While GDP per capita growth during this period was 3.3% p.a., the declinein the external terms of trade reduced the growth of GDY to 2.2% p.a.

/2 As the poverty gap analysis below (Table 1.10) shows, this analysis of lowincome agricultural households overstates what happened to the incomes ofthose who remained poor.

- 14 -

instance, the real income of padi smallholders increased by about 20% whilethat of rubber smallholders declined by about 20%. During the 1970s thispattern was reversed with rubber smallholders gaining by 29% and padifarmers declining by 24%. As a result, both groups in 1978, were close tothe level of real income prevailing in 1960, although there was considerablefluctuation within the period. A more detailed discussion of the performanceof these groups is discussed in Chapter 2 below. Hiowever, it should benoted that because of droughts in 1977 and 1978, the income was depressed in1978 and it may be an unrepresentative year and hence understate the realachievements for these groups. This is particularly true for padi farmerswho experienced a major decline in output in 1978, and it may be for thisreason that the official poverty estimates for 1978 in the MTR use 1977conditions for estimating poverty among padi farmers. Thus, if instead of1978, 1976 is taken as the terminal year, the performance of low-incomeagricultural households improves significantly.

1.25 An alternative perspective on the extent of poverty in tialaysia andthe progress made in reducing it is the size of the poverty gap - the differ-ence between the actual income of poverty households and the poverty incomeline. This approach yields some very interesting insights on Malaysia'spoverty problem that cannot be gained from the poverty incidence or incomegrowth approaches discussed above. Data limitations unfortunately confinethis analysis to the 1970-78 period.

1.26 One anomaly that this approach helps resolve is the relativelyhigh incidence of poverty in Malaysia compared to other countries with muchlower levels of per capita income. Thus although the incidence of poverty inMalaysia is estimated at 49% in 1970 compared to an estimate for India ofabout 52% in 1967-68, the size of the poverty gap in India relative to GDP isalmost twice as high as Malaysia's, indicating a much more serious problem./l

1.27 Aside from giving an insight into the relative extent of poverty,this approach puts the progress toward reducing poverty in a different pers-pective. Because of problems of comparability and consistency among the threesurveys, not too much significance should be read into small changes overtime. Nevertheless it shows a significantly worse income performance forthose who remained poor than the average performance of low-income agricul-tural households for the same period. Between 1970 and 1976 the averagehousehold income of a poor rural household increased by only about 7% comparedto the average increase of 24% estimated for low income agricultural house-holds. This anomaly can be explained by the concentration of the benefitsfrom public investment projects on a relatively limited number of households.Thus households benefitting from land development or large irrigation schemes,

/1 This comparison is based on a mission estimate of the poverty gap forIndia of 12% of GDP. This calculation is very rough however and is meantto give only the general order of magnitude rather than a specificcalculation of India's poverty gap.

- 15 -

achieved substantial increases and were generally pulled well out of poverty.For the rest, the large majority of poverty households, very little wasachieved.

1.28 Perhaps as significant as the trend in the absolute level of thepoverty income and the corresponding poverty gap, is the relative size of thepoverty gap. This provides a measure of how amenable the reduction of povertyis in the context of Malaysia-s resources. The poverty gap of all ruralhouseholds was equivalent to about 6.3% of GDP in 1970. By 1978, it isroughly estimated to have more than halved to 3.1% of GDP. From a policypoint of view, the size of the poverty gap relative to the Government'scontrol of resources may be more meaningful. Because of the expanding shareof government in the economy, the rural poverty gap as a proportion ofgovernment expenditures declined even more sharply. During the period1970-78, the rural poverty gap had declined from almost 25% to less than 10%of public expenditure. This implies that a perfectly focused program ofincome subsidies could eliminate absolute poverty among rural households inPeninsular Malaysia with less than 10% of public sector expenditures.

1.29 Thus while progress in reducing the absolute size of the poverty gaphas been limited, Malaysia is now in a much better position to reduce povertydirectly, if need be, by direct income transfers. Few other countries with anincidence of poverty comparable to Malaysia-s are likely to be in such anadantageous position. Of course, it would not be possible to design such aperfectly focussed program nor is it recommended that Malaysia buy itself outof poverty with a full income subsidy program. However, a more limited incomesubsidy program may be considered as a temporary measure to alleviate povertyamong poor households with few prospects for income growth via increases inproduction. These issues are discussed in greater detail below in thesections on rice price policy and rubber taxes and rubber replanting grant.This discussion is meant primarily to give a macro perspective to thepossibility and impact of larger direct income maintenance program.

C. GOVERNMENT POVERTY REDUCTION STRATEGY

1.30 As has been emphasized in previous reports, the principal means, setforth in the Government's plans, of reducing rural poverty is by absorbing therapidly growing rural labour force in higher income jobs in the industrial andservice sectors. Thus for the period 1970-90, the official targets forecast agrowth in agricultural households of only 0.3% p.a. compared to 5.4% p.a. fornon-agricultural households (see Table 1.11). This implies a net shift ofover 700,000 households out of agriculture during the 20-year period. Thistransfer of labor from low-income agriculture is to be achieved via rapidemployment growth in the higher income industrial and service sectors of theeconomy (see Table 1.12).

- 16 -

Table 1.10: POVERTY GAP PENINSULAR MALAYSIA(Values in Constant 1970 Prices)

1970 1973 1976 1978

Poverty households ('000) 792 761 776 776

Rural 706 665 664 682Urban 86 96 112 94

Average annual income of povertyhouseholds 1,258 1,510 1,397 N/ARural 1,232 1,448 1,320 1,289 /b

Urban 1,471 1,943 1,849 N/A

Poverty line annual income perhousehold 2,160 2,160 2,160 2,160

Poverty gap per household (M$) 902 650 763 N/ARural 928 713 840 871Urban 689 217 311 N/A

Aggregate poverty gap (million M$) 714 495 593 N/ARural 655 474 558 594Urban 59 21 35 N/A

Aggregate poverty gap as % of GDP /a 6.9 3.7 3.6 N/ARural 6.3 3.5 3.4 3.1

Urban 0.6 0.6 0.2 N/A

As % of public expenditures /a 24.8 12.6 10.4 N/ARural 22.8 12.0 9.8 8.4Urban 2.0 0.6 0.6 N/A

/a Peninsular Malaysia

/b If the level of padi production prevailing in 1977, instead of theabnormally low 1978 level, were used in the calculations to estimate theaverage increase in rural poverty incomes hetween 1976 and 1978, then the

average annual income of rural poverty households would be M$1,356 in 1978instead of M$1,289 and the rural poverty gap would be correspondinglyreduced.

Source: iMission estimates based on the 1970 Post Enumeration Survey, the 1973Household Expenditure Survey, partial and preliminary results of the1976 Agriculture Census, and estimates of the growtih of income oflow-income agriculture households as presented in Annex IV. Forreasons of consistency across years, the same poverty line, the

original TMP PLI of M$180 per household per month, is used for allyears. For 1978 this is technically incorrect since the number ofpoor households is based on the somewhat lower (10%) PLI used in theMid Term Review of the TMP. Compared to other years therefore theaggregate poverty gap in 1978 is somewhat understated. However,

compared to the prevailing concepts of poverty using the more refinedlower PLI the 1978 estimate aggregate poverty gap is somewhat over-

stated. Thus the estimate in this table is considered a reasonablecomprotnise.

- 17 -

Table 1.11: OFFICIAL POVERTY ESTIMATES 1970-90, PENINSULAR MALAYSIA

'000 Households % p.a.Est. actual Target1970 1978 1990 1970-90 1970-78 1978-90

Agriculture households 853 941 909 0.3 1.2 -0.3In poverty 582 514 242Above poverty 271 427 667

Nonagriculture households 753 1,182 2,162 5.4 5.8 5.2In poverty 210 263 272Above poverty 543 919 1,890

Total households 1,606 2,123 3,071 3.3 3.6 3.1In poverty 792 776 514Above poverty 814 1,347 2,557

Sources: Third Malaysia Plan and Mid-Term Review of TMP.

Table 1.12: OFFICIAL (REVISED) EMPLOYMENT PROJECTIONS, PENINSULAR MALAYSIA

'000 Persons % p.a.Est. actual Target1970 1978 1990 1970-90 1970-78 1978-90

Agriculture 1,406 1,542 1,778 1.2 1.2 1.2Industry & services 1,388 2,281 3,838 5.2 6.4 4.4

Total employment 2,794 3,823 5,616 3.6 4.0 3.3

Total labor force 3,035 4,112 5,855 3.3 3.9 3.0

Sources: 1970 estimates are from the TMP; 1978 estimates are from the MTR;1990 are revised estimates, by the mission, of the official 1990targets. The revision is based on the higher labor force growthrecorded between 1970 and 1978 than was projected in the TMP. TheMTR accordingly revised upwards the 1980 labor and employment pro-jections. Accordingly, the mission increased the labor force andemployment targets for 1990 by applying the official growth ratesfor 1980-90 to the officially revised 1980 base. On a sectoralbasis, the level of agricultural employment was left as is in orderto be consistent with the poverty projections (see Table 1.11) whichhave not been revised. The implied growth of industry and servicesector employment is derived as a residual.

- 18 -

1.31 Aside from reducing poverty in agriculture through the substantialtransfer of labor to other sectors, the planned reduction of poverty inagriculture would also result from increased opportunities in agriculture.Thus, the Plan projects an increase in the number of above-povertyhouseholds in agriculture by about 400,000 during 1970-90. While the Plandoes not precisely relate this specific increase in the number ofaoove-poverty households to specific investments in agriculture, it impliesthat these opportunities would arise almost entirely from public investmentsin land development and "in-situ" agriculture. The current rate of landdevelopment would account for about 250,000 of these additional 400,000households. The balance presumably would come from programs in "in-situ"agriculture.

1.32 Thus far the Government s numerical targets for reducing agricul-tural poverty have been almost exactly achieved. The overall incidence ofpoverty among agricultural households of 54.6% in 1978 is about where itshould be according to the Perspective Plan. Further the reduction in theincidence has been achieved largely via rapid growth of employmentopportunities outside of traditional agriculture. The officially estimatedgrowth of employment in industry and services of 6.4% p.a. during 1970-78 isan excellent performance. This higher than anticipated growth in employmentin industry and services was, however, almost completely taken Up by a higherthan anticipated labor force growth. As a result, it did not reduce theexpected rate of absorption of labor in agriculture of 1.2% p.a.

1.33 As discussed above, however, the incidence measurement of povertyonly gives some idea of the number who have crossed a particular income levelbut gives no indication of how those still in poverty fared. On the otherhand, the analysis of average income growth above shows that the averagegrowth of low-income agricultural households has been quite moderate, averag-ing only 2.4% p.a. during 1970-78. Further this average growth of agricul-tural incomes masks quite divergent trends for different agricultural subsec-tors (e.g. rubber vs. rice) and for individual households depending onwhether or not they were affected by government production programs (e.g.,irrigation, replanting of rubber etc.). Thus as we have seen above, forfamilies who remained in poverty there was very little improvement in theirincomes during the seventies. Clearly the impact of programs on povertyincomes is less than might have been anticipated. Nevertheless notinsignificant gains have been achieved in reducing the incidence of povertybecause of the ability of industry and services to absorb much of the growthof the rural labour force.

1.34 The question now is whether this strategy can be relied on to reducepoverty to the same extent in the future. While the very broad trends inemployment and the household poverty projections in Tables 1.11 and 1.12 areconsistent, a more detailed comparison shows up an important difference. Thusthe Plan implies that agricultural households during 1978-90 will decline by0.3% p.a. while agricultural employment is projected to grow by 1.2% p.a. Or,looked at from the other side, employment in industry and services is projec-ted to grow significantly more slowly than households in those sectors, 4.4%

- 19 -

p.a. compared to 5.2% p.a. One implication of these differences is thathousehold participation rates are increasing in agriculture and declining inother sectors. This is not stated in the Plan, however, and is a ratherunlikely hypothesis. Thus, it would appear either that the growth in employ-ment in industry and services would need to be higher than the officialtargets indicate or poverty reduction via labor transfer would be less thanprojected. If, for instance, employment growth in industry and services werenot increased, it would imply an additional 180,000 households in agriculturein 1990. Without further investment in agriculture this would imply an addi-tional 180,000 households in poverty and a poverty incidence of 41% comparedto a target of 27%.

1.35 These calculations indicate the need for a deeper analysis of therelationship between poverty reduction in rural areas and employment oppor-tunities in industry and services. The dynamics and details of how thismechanism of labor transfer works are not well understood. Thus it is notknown who is more likely to migrate to the urban areas - the rural elite orthe rural poor, nor what the impact is on those who remain in the rural areas.For instance, does it make additional land and other assets available to thenonmigrant population? Casual observation in fact suggests that migrants holdon to their land and thus limit benefits to nonmigrants. The impact ofmigration on age structure and hence on labor force participation rates andhousehold formation is also only vagely understood. Since this process is socrucial to poverty redress, a study which addresses these types of issuesdeserves high priority and should be considered in the context of the FourthMalaysia Plan.

1.36 Besides achieving a better understanding of this complex set ofrelationships, there is also the question of achieving the target growth inindustry and service employment which is predicated upon a long-term growthof manufacturing output of 12% p.a. Compared to Malaysia's past performancethis growth rate seems feasible yet there are a number of factors which maymake this difficult to achieve. This growth forecast assumes a continuedfavorable international environment which is now much less certain. The1979 World Development Report, for example, projects a decline in the annualgrowth rate of manufactured exports from developing countries from 12.7%during 1960-76 to 10.9% during 1976-90. Even this reduced growth assumes arecovery in industrialized countries growth in the 1980s to 4.2%, thatfurther increases in protection will be averted, and that bold policy reformsby the developing countries be instituted. However, in order to achieve theoverall manufacturing growth of 12% p.a., Malyasia's manufactured (non-traditional) exports would have to grow by about 17% a year. This impliesthat Malaysia obtain an ever increasing share of the developing countriesmanufactured export markets, from 1.5% in 1975 to 3.4% in 1990 a considerabletask. Finally, it is not yet clear if the climate among domestic investorshas recovered from the uncertainties generated by the introduction of theIndustrial Coordination Act in 1975.

1.37 It is beyond the scope of this report to assess Malaysia'smanufactured export prospects. However, even a cursory review suggests the

- 20 -

possibility of a less bouyant manufacturing sector. Sensitivity analysis ofalternative rates of manufacturing growth discussed in previous reports /1confirms the importance of the growth rate of manufacturing employment tothe Government's poverty strategy. Thus, for example, it was roughlyestimated that if manufacturing growth were only 8% p.a., the incidence ofpoverty in agriculture in 1990 would probably exceed 5Q% and ifmanufacturing growth were 10-11%, the incidence of poverty in agriculturewould be about 33%.

1.38 In view of the uncertainties of achieving the targeted growth ratefor manufacturing and its importance for poverty reduction goals, it might bewarranted for Government to pursue a contingency strategy as far as the publicdevelopment programD is concerned, in the event that industrial growth rate islower. The Mid-Term Review (MTR) of the TMP is a first major step in thatdirection. Because of substantial shortfalls in private investment and at thesame time, the stronger resource position of Government, the MTR proposes amajor increase in the public development program from M$18.6 million to M$32billion. Due to implementation constraints, the Government anticipates thatof this, M$25 billion will be disbursed - still a large increase over theoriginal plan. The total allocation for poverty redress amounts to $11.2billion, an increase of 56% over the original provision.

1.39 This substantial increase in the development program is an indica-tion of how seriously the Government takes its poverty and restructuringgoals. The message that financial resources are available to finance a largerprogram should now be abundantly clear to the implementing agencies. Theburden is now squarely on these agencies to come up with programs and projectscommensurate with this increased allocation. A real danger in this situationis that given the planning deficiencies of the implementing agencies, poorlyprepared projects will be undertaken in an effort to meet financial targets.In these circumstances, external agencies such as the World Bank, ADB and theUNDP can play an important role in helping agencies formulate larger and moreeffective poverty projects. The UNDP State and Rural Development Project, inparticular, is in an excellent position to assist in this effort.

1.40 However, the main burden of ensuring that these additional resourcesare spent effectively rests with Government. In this regard, action isrequired to strengthen the civil service. In the longer term proposals by theUNDP State and Rural Development to establish within the civil service aprofessional cadre of development officers merits support. More immediately,action to fill the numerous vacancies in the civil service particularly in keymanagerial and technical posts is required. This would undoubtedly implymaking greater use of the skills of non-Malays within the civil service or

greater use of consultants, both domestic and foreign, until the civil serviceis strengthened. To support this strengthening of the civil service as wellas to operate and maintain the larger development infrastructure implied by

/1 See "Malaysia: Growth and Equity in a Multiracial Society," World Bankdraft economic report on Malaysia, January 15, 1979 - Chapter 3.

- 21 -

the increased allocation, parallel attention will have to be given to currentexpenditures in the public sector. In this regard, the less than 5% increasein the allocation for current expenditures in the MTR would probably have tobe increased.

1.41 While the brunt of rural poverty eradication will have to be borneby increasing employment opportunities outside ariculture, the principal focusof government efforts should clearly continue to be on the existing ruralpoor. First, other than providing a conducive atmosphere, government haslimited impact on the performance of the industrial sector. Second,whatever the absorption rate by industry, poverty will continue to be a con-centrated in rural areas. Finally, even under the Government's optimisticscenario, over two million people in rural areas will still be in absolutepoverty in 1990. In this context, the problems, programs, and prospects forsome of the major rural groups in poverty are discussed in Chapters 2 and 3below.

1.42 From a macroeconomic point of view, the allocation of $11.2 billionfor poverty projects when viewed against a poverty gap of about $1.2 bil-lion /1 in current prices might lead one to conclude that the end of povertyis in sight in Malaysia. Surely an investment of $11 billion would yield atleast a 10% return! Unfortunately, Malaysia's poverty problem is not soeasily disposed of. First, the $11.2 billion is an allocation which almostcertainly will be underspent. A more reasonable estimate of actual expendi-tures would be about M$7.5 billion (i.e., about $1.5 billion p.a.). Of thetotal anti-poverty allocation, about a third would be spent on providing thepoor better access to such services as education, health, water and elec-tricity. Such investments are certainly warranted but are unlikely to augmentsignificantly the monetary income of the poor in the foreseeable future. Thisleaves about M$5 billion for investment in directly income generatingactivities for the poor. This investment, however, is not being spread evenlyamong the poor. On the contrary, the investment is heavily concentrated amonga small number of poor households and the resulting income gains would bringmany of the recipients well above the poverty level. Thus, about half or moreof the $5 billion would be spent on land development projects which assistonly a fraction of the total poor households. At the current rate of landdevelopment, about 20,000 families annually would be pulled out of poverty bythese projects - a not insignificant absolute number - but small in relationto the almost million households (including Sabah Sarawak) currently below thepoverty line. In summary, it is too simplistic to assume that the largeanti-poverty expenditures government is making will easily eradicate povertyin the near future. This is not in any way meant to criticize the amounts ofmoney Government is spending on poverty redress. Rather it is meant tohighlight the very difficult task of identifying and preparing projects thatwill provide large numbers of poor households a means of increasing their

/1 The estimated poverty gap of H$1.2 billion in 1978 is for all Malaysiaand includes rural and urban areas.

- 22 -

incomes through greater production. Because of the problems of focusingassistance on these households exclusively and the frequent result ofraising incomes well above poverty levels, elimination of Malaysia's povertygap will necessarily involve expenditures very much larger than is impliedby a 10% rate of return.

1.43 Before proceeding, however, it should be noted that the monitoringof the progress of various poverty groups deserves high priority. Oneunfortunate circumstance is that crucial information becomes available onlywith a considerable time lag. For instance, the results of the 1976Agricultural census probably will not be fully available until 1980. Thuspresent policies are based on either outdated information or on fairly crudeestimates based on the performance of various indicators as for instance thepoverty estimates for 1975 in the TMP, for 1978 in the MTR and variousestimates in this report. Further, there are serious questions ofcomparability of one survey with another so that establishing meaningfultrends is difficult. In order for Government to design properly itsantipoverty strategies and policies, there is a clear need for consistent,frequent, reliable data on poverty performance. In this regard, it iswarranted that the Department of Statistics in conjunction with the EPUdesign a data collection system which could provide annual data, withminimal time lag, on the progress of poverty households. This data systemshould report not only income, but also various social indicators of livingstandards. Even so, to carry out this task effectively, the Department ofStatistics would have to be strengthened, particularly with additionalprograms. To be feasible, of course, it is important that the system bebased on the minimum sized sample of households that is consistent withproviding a reasonable picture of progress.

- 23 -

2. POVERTY ALLEVIATION AMONG THREE MAJOR POVERTY GROUPS

Introduction

2.01 This chapter discusses three groups of poverty households accord-ing to their principal source of income, rubber, padi and fishing. In 1975,these three subsectors comprised two-thirds of the households in poverty inagriculture. In a number of respects this categorization is less thansatisfactory since few rural households derive their income from a singlecrop. Thus, while allowance is made in general terms for other sources ofincome, both farm and non-farm, no analysis is undertaken of these sources ofincome, and how they may be increased to supplement the incomes of poorfamilies. This is an important qualification to the analysis and conclusionsbut one that is unavoidable given the availability of existing data. The 1976Agriculture Survey is capable of providing the necessary data to remedy thislacuna and analysis of the survey results, currently being undertaken by theDepartment of Statistics, should be given high priority to distinguishing thevarious income sources of rural households.

A. RUBBER SMALLHOLDERS

2.02 The largest identifiable group of poor rural households inPeninsular Malaysia is rubber smallholders. According to the mid-termreview of the TMP, there were 198 thousand rubber smallholder householdsin poverty in 1978, comprising almost 40% of poverty households in agri-culture and 25% of poverty households nationally. The incidence of povertyamong this group is estimated at 48%.

2.03 While there has been some progress in reducing the incidence ofpoverty since 1970 when it was 65%, the extent of poverty still appears highin view of the substantial gains in output made by rubber smallholders inthe past. As Table 2.1 indicates, smallholder output more than tripledbetween 1960 and 1975, while estate output increased by only about 40%x.Further, most of this increase in smallholder output was due to an increasein yields rather than in area. Yields among smallholders grew during thisperiod by a remarkable 5.6% p.a. and reduced the gap between estate and small-holder yields from 59% in 1960 to 87% in 1975.

2.04 There are three principal reasons that explain this apparentanomaly of increased output together with persistent poverty. First, therehas been a major decline in the real price of rubber since 1960. As notedin Table 2.2, the terms of trade facing rubber smallholders fell precipi-tously between 1960 and 1970. Together with an increase in the number ofrubber smallholders, this more than offset the large gains in output andas a result average smallholders real incomes fell by about 20% between lP60and 1970. The recent recovery in prices has more than recouped this loss,and is consistent with the progress made in reducing the incidence ofpoverty between 1970 and 1978. Nevertheless, real average income amongsmallholders is only slightly (about 5%) higher today than it was in 1960and thus the continued high incidence of poverty is understandable.

Table 2.1: RUBBER ACREAGE, PRODUCTION, AND YIELDS, PENINSULARMALAYSIA, 1960-75 BY SMALLHOLDERS AND ESTATES,

Mature Acreage (AcresOOO) Production (MTOOO) Yields (tons/mature acres)Small- Small- Small- Smallholders as

Year Total Estates holders Total Estates holders Total Estates holders percent of estates

1960 2,968 1,405 1,563 696 420 276 .235 .299 .177 59

1970 3,300 1,346 1,954 1,215 621 594 .368 .461 .304 66

1375 3,363 1,308 2,055 1,417 599 818 .421 .458 .398 87

Growth rate (%) per annum:

1960-70 1.1 -0.4 2.3 5.7 4.0 8.0 4.6 4.4 5.6

1970-75 0.4 -0.6 1.0 3.1 -0.7 6.6 2.7 -0.1 5.5

1960-75 0.8 -0.4 1.8 4.9 2.4 7.5 4.0 2.9 5.6

Source: Department of Statistics, EPU.

- 25 -

2.05 Second, the average gains made by rubber smallholders may havebeen distributed very unequally. This is an important consideration inview of the fact that smallholdings range up to 100 acres and that holdingsbelow 5 acres comprise roughly two-thirds of households but only one-thirdof the area (see Table 2.3).

Table 2.2: INDICES OF AVERAGE INCOME, OUTPUT, AND PRICESOF RUBBER SMALLHOLDERS, 1960-78 (1970=100)

1960 1970 1975 1978

Real income per household 122.6 100.0 87.7 129.2Production per household 60.9 100.0 119.5 125.4Rubber price index 183.3 100.0 108.4 169.4Poverty basket price index 91.0 100.0 147.7 164.4Rubber smallholder terms of trade 201.4 100.0 73.4 103.0

Source: Mission estimates (see Annex IV).

2.06 There is no doubt that the replanting program of Government has donemuch to increase output and efficiency in the smallholder sector. By 1976,two-thirds of smallholder acreage registered with Rubber IndustriesSmallholder. Development Authority (RISDA) have been replanted. There isrelatively little information on replanting according to the size distributionof holdings. It is possible, however, that despite Government attempts toreach the smaller smallholders, replanting grants have tended to go to thelarger smallholders and that relatively few of the smaller, poorer holdershave benefited from the program. RISDA headquarters does not maintain recordson the size-distribution of holdings owned by those who have receivedreplanting grants (such information is available at RISDA's local offices, butnot in Kuala Lumpur).

2.07 As noted above, while almost two-thirds of the applicantsregistered with RISDA own less than 5 ac, two-thirds of all smallholder landis found in holdings of more than 5 ac. Since roughly two-thirds of allsmallholder acreage has been replanted with high-yielding stock, it ispossible that replanting has been heavily concentrated among the largerholdings (those above 5 ac). It would not be surprising if this were thecase: larger holdings can afford to spread replanting over two or morewaves, thereby minimizing the prolonged (6-7 year) loss of income whichreplanting requires. It is also crucial to realize that the replantinggrants are geared not to the maintenance of smallholder income during thelong immaturity period but only to the estimated cash outlays required (forcutting, uprooting and burning old trees; the purchase and planting of newstock; the cost of fertilizer and pesticides; and the cost of needed labor).When this fact is realized, one wonders how any of the poorest smallholderscan afford to replant. This issue is discussed in greater detail below.

- 26 -

Table 2.3: RISDA REGISTERED SMALLHOLDERS AND ACREAGEBY FARM SIZE AS AT DECEMBER 31, 1976

Farm Avg sizesize Registered Smallholders Registered Acreage of holding(ac) (000) (%) (000) (%) (ac)

0- 5 258 63 758 33 2.95- 6 44 11 249 11 5.76- 7 22 5 144 6 6.57- 8 16 4 119 5 7.48- 9 14 3 138 6 9.89- 10 16 4 154 7 9.6

10- 15 24 6 268 12 11.215- 30 12 3 235 10 19.630-100 4 1 206 9 51.5

Total 412 100 2,275 100 5.5

Source: RISDA.

2.08 The third reason explaining the high degree of poverty among rubbersmallholders is the small size of holdings. At current prices, about 5 acof rubber per household is required to earn an above poverty income./lHowever, of the 2.7 million ac of smallholdings in Peninsular Malaysia, 1.7million ac are owned and operated by 270,000 "unorganized" smallholder fami-lies (see Annex V for a detailed disaggregation of rubber smallholdings).This gives an average farm size per family of only 6 ac. The distribution ofthese is very skewed. For example, based upon RISDA's Registry, 63% of small-holders own less than 5 ac. Of this group, 74% are Malays with averageholdings of just over 2 ac. These latter 190,000 Malay smallholders with verysmall holdings comprise the bulk of the 198,000 rubber smallholders in povertyand constitute the core of the poverty problem among rubber smallholders.

2.09 The foregoing discussion of the reasons for the persistence ofpoverty among rubber smallholders gives an indication of the necessary direc-tion of policy to reduce poverty. Clearly, the core of any assistance programmust include:

(a) replanting of individual smallholdings with high yielding stockand provision of extension after tapping begins to help smallholdersmake the most of their improved stock;

/1 If it is assumed that about 30% of family income comes from sourcesother than rubber, then the required acreage of high yield rubber wouldbe 3.5 acres.

- 27 -

(b) enlargement of holdings that cannot provide above poverty incomes;

(c) replanting smallholdings with higher income crops to the extentfeasible; and

(d) financial programs designed to maximize the farm-gate price ofsmallholder rubber.

These objectives and the Government's role in promoting them are discussedin greater detail below.

Replanting and Extension

2.10 One of the principal government programs directed to rubber small-holders is RISDA's replanting, program and one of RISDA-s primary problemsis how to extend the traditional replanting program - which has alreadymanaged to cover two-thirds of the smallholding acreage outside the "organi-zed" smallholding category - to the remaining one-third of the smallholderacreage. This unreached residual contains the "hard core" of smallholderswho may be much more difficult to reach and who, for various reasons, mayshow little or no interest in having their holdings replanted.

2.11 Table 2.4 gives some perspective to the replanting program. Overallthe program calls for replanting some 1,260,000 ac between 1978 and 1992.RISDA estimates that the carrying through of replanting on this scale, plusimproved exploitation practices, could increase overall rubber smallholderyields by 35-48% by 1990.

Table 2.4: RUBBER SMALLHOLDINGS: EXTENT OF REPLANTING: 1978-92

-0 0 ac

a. Rubber land registered with RISDA (end 1976): 2,275of which replanted once: 1,540 (67%)of which never replanted: 735

b. Rubber land not registered and needing replanting: 250

c. Replanted land that will be due for a secondreplanting between 1978-92 (after 20 yearsof tapping) 690

d. Total land needing replanting for first orsecond time, 1978-92, after allowing for a25% shift out of rubber to other crops: 1,260

Source: RISDA

- 28 -

2.12 The principal mechanism of the replanting program is a system ofreplanting grants which was introduced in the 1950s. The amount of thereplanting grant has been raised several times during the past quartercentury, standing until recently at M$900/acre./l Of this, the Government wascontributing M$300 as subsidy out of general revenues, the balance comingfrom an export cess of 4-1/2 cents/lb. In late 1978, the Governmentapproved a further increase, to M$1,200/acre, for replanting - with rubber

only - on the first 10 ac:res (replanting of additional acreage, or withcrops other than rubber, would be at the old rate of M$900/acre).

2.13 Some indication of the ability of replanting to lift individualsmallholders' incomes above the poverty line is provided in Table 2.5. Atcurrent rubber prices and standard yield assumptions for high yieldingrubber, the average net return per acre is estimated to be M$665 during theyears 8 through 20. At this rate of return, it would require 4.8 ac to reach

the PLI of M$3,200 per family in 1979 prices. This is substantially more thanthe average holding of 2.9 ac of the poorest two-thirds of rubber smallholders(see Table 2.3). In order for this group to reach the poverty line outsideincome would have to contribute 40% of total income. This is somewhat higherthan Barlow-s /2 estimate of one-third contribution from nonrubber but isclose enough to suggest that replanting households with 3 ac could bring themclose to the poverty line income. There are two problems that have to beconsidered, however. First, as noted above about 47% of smallho]ders haveaverage holdings of only 2 ac. Replanting for this group can increase incomebut will not bring them out of poverty and supplemental measures will be

needed.

2.14 Second, there is a serious cash flow problem during the period of

immaturity which will be a disincentive for poor farmers to replant. At thepresent level of the replanting grant of M$1,200/ac, and assuming effective

intercropping, it is estimated that replanting will reduce a smallholders

income by about M$600/ac replanted during the period of immaturity. Also, low

yields during the first year of production would further reduce income by

about M$200/ac. Altogether, the income loss during the first eight yearswould be about M$800/ac. Given the initial low level of income of poor rubbersmallholders, this likely drop in income would cause serious hardship. It is,

therefore, recommended that the replanting grant be increased to about MS1,800

at least for smallholders with holdings of 3 ac or less. Also, it isrecommended that the leve:l of the replanting grant be revised annually, taking

into account changes in costs and rubber prices, with the objective of setting

the grant at a level that at least maintains current income.

/1 This is distributed in six payments spread over about 4-1/2 years. Afirst-year payment of M$300 is broken into a $70 payment after the felling

of old trees, $70 after burning the old trees, and the remaining $160 for

fertilizer, fencing, etc. after replanting. The second through sixth

payments ($120 each) are made annually, starting six months afterreplanting. These payments are, of course, multiplied by the number of

acres in each holding.

/2 Colin Berlow, "The National Rubber Industry, Its Development, Technology,

and Economy in Malaysia," Oxford University Press, 1978.

Table 2.5: RUBBER REPLANTING - CASH FLOW ANALYSIS

(M$ 1979) (per acre)

Total Avg

Year (Period of Maturity) period of Period of Production yrs

1 2 3 4 5 6 7 immaturity 8 9 10 11-13 14-15 16-19 20 8-20

ncome, Without Replanting (net) 220 220 220 220 220 220 220 1,540 220 220 220 220 220 220 220 220

.ncome With Replanting (net) 100 161 266 236 178 117 -140 918 11 250 368 574 663 722 633 665

Inflow 1,768

Replanting grant 420 180 180 160 140 120 - 1,200

Intercropping receipts (net) 41 156 156 128 87 - 568

Rubber receipts - - - - - - - - 89 325 443 649 738 797 708 590

OutflowInput cost - - - - - - - - 75 75 75 75 75 75 75 75

Replanting costs (excl. labor) 320 60 70 80 90 90 140 850 - - - - - - - -

Net change in income due to

replanting -120 -59 46 16 -42 -103 -360 -622 -209 30 148 354 443 502 413 445

Source: Mission estimates.

Assumptions:

(a) Rubber farm-gate price of M$0.59/lb based on prevailing world price of rubber at time of preappraisal of South Kelantan Rural

Development Project - Annex 6 - Draft.

(b) Low yield for existing rubber 500 lbs/ac implied by Barlow analysis. Operating costs (excluding labor) are estimated at Mc14.9/lb.

(c) Replanting grant of M$l,20C/ac.

(d) Intercropping ac is half: 1/4 ac with bananas; 1/8 ac with pineapple and 1/8 ac with annual crops. Cost and revenue estimates

taken from South Kelantan Preappraisal Report.

(e) Maximum yield of new rubber of 1,350 lb/ac.

- 30 -

2.15 Aside from the problem of maintaining income during the period ofimmaturity, income, there are numerous other problems which constrain RISDA'setfort to reach the smallest and poorest of the smallbolders. These holdingsare scattered and remote and lack infrastructure. The smallholders are oftenold and hence have little interest in long-term improvements in income. Thereis a growing shortage of family and hired labor for tapping in certain areas.The level of education is low, compounding the difficulty of convincingfarmers to cut their existing trees in the expectation of higher incomes sevenyears hence. The recent recovery in the price of rubber reduces the incentiveto replant compared to the 1960s and early 1970s. Many smallholders haveillegal holdings on state land and are unable to secure proper titles and/orto pay the necessary land premiums.

2.16 Squatters present a special problem that deserves more attention.RISDA's present policy of considering squatters as ineligible for assistanceis required by its charter. Squatter ineligibility probably excludes atleast 10% of all smallholding acreage from replanting; in some districts,the proportion would be much higher. The most straightforward policy wouldprobably be to persuade the land offices to issue some kind of title tosquatters who have occupied their land for some minimum length of time(e.g., 5-7 years) as evidlenced by their willingness to pay retroactivequit-rents and their willingness to apply for replanting grants and toprovide the labor for clearing the land. A ceiling could be set on the sizeof plot eligible for such legitimization. Such a policy would recognizethat squatters are unlikealy ever to be removed from their lands and thatsooner or later their status will have to be legitimized. In fact, some-thing of this sort has been worked out between RISDA and the State of Kedah.The latter has agreed in principle to issue titles to the squatters on pay-ment of the land tax. RI[SDA is prepared to lend squatters the amount oftheir premiums provided they meet RISDA's requirements and provided thestate gets a letter to this effect. While there remains the bureaucraticproblem of marrying the two together and solving the administrative bottle-necks in the state branches of the federal Survey Department and state landoffices, this approach provides a reasonable model for other states to adopt.

2.17 To reduce the unit cost of replanting through economies of scale,and overcome some of the smallholders' difficulties in taking advantage ofreplanting grants, RISDA has been promoting block replanting. Under blockreplanting, smallholders pool their holdings and receive shares on aproportional basis, a block manager is appointed by RISDA to oversee theoperation, and the required labor is engaged from among pardicipatingsmallholders who thus receive cash labor incomes that would otherwise havebeen paid contractors and other off-farm labor. When the new trees begin toyield, the block continues to be worked on a "mini-estate" basis withparticipants receiving a wage plus a share in earnings (it is not clear whathappens to land titles and the right to sell or bequeath to heirs). It isalso possible that not all the land in a block holding would be replanted atonce, thus maintaining some rubber production during the immaturity period.Block replanting is today being used for about 40% of RISDA's replantingprogram; it is not always easy or feasible to organize, however (e.g., it isnot always clear who owns some intra-block parcels; not all owners may

- 31 -

elect to participate, and participation is not compulsory). Indeed, one ofthe difficulties RISDA faces in organizing block replanting is the need tosecure approval from multiple owners. The use of compulsory powers to forceparticipation (perhaps only in cases where, e.g., two-thirds of all ownersare for it) should be considered. Felcra has apparently been able to obtainfull participation in similar schemes and an examination of their methodsmight be instructive.

2.18 Replanting is not the only way in which RISDA tries to improvesmallholder incomes. It has invested heavily in the creation of a network ofdistrict and local institutions designed to improve yields, to upgrade thequality of sheet produced by the smallholders'first-stage processing, and tosecure better prices through bulk marketing. RISDA is also trying to providecertain social benefits (e.g., nutrition education, sewing instruction, theestablishment of local retail shops in remote areas) designed to improve thesmallholders' quality of life. Some 75 Area Development Centers and about1,750 Smallholder Development Centers had been established by the end of 1978.These provide a base for the cadre of 3,200 extension agents and fieldinspectors which RISDA employs to implement its smallholder programs.

2.19 At present rubber smallholders receive advice and assistance fromRISDA extension staff only at the time of replanting and during the immaturityperiod while the replanting grant is still being paid out. No further helpis received after tapping begins, even though such help could undoubtedlyhelp spread cultural and tapping practices which would increase yields andreturns. At present, RISDA has only about half as many extension agents asneeded to provide the intensity of service which experts judge desirable.No "crash" program to build up the extension staff should be undertaken,however, until RISDA has first clarified its objectives and until the Govern-ment has decided whether to convert RISDA into a general-purpose agencycovering all smallholder crops or to continue it as an agency charged pri-marily with serving rubber smallholders.

2.20 The above listing of problems encountered by RISDA encourageshumility and provides some understanding, but it does not tell us anything

about the relative importance of these problems from either a national ordistrict point of view. To develop a better understanding of rubber small-holders RISDA conducted in 1976, a large national sample survey of rubbersmallholders. Much has been expected of this survey, but so far it has notyielded the data which had been hoped of it. There have been severe problemsin tabulating and computerizing the responses; although no tables have yetbecome available, it is expected that a considerable number will be issuedbefore the end of 1979. Some RISDA people are skeptical of the quality ofthe data and feel the results will be worth much less than originallyhoped. One RISDA department is even mounting its own independent samplesurvey to overcome what it regards as the deficiencies of the 1976 survey.The end of 1979 should also see the publication of the full results of the1976 Agricultural Census, the first large-scale updating of the valuable 1960Agricultural Census. It is entirely possible that the data in the Agricul-tural Census may throw more light on the characteristics of rubber small-holders than will be provided by the RISDA National Smallholders Survey.

- 32 -

Until these characteristics are known in much greater detail, and on adistrict-by-district basis, it will be difficult to judge how adequately

RISDA's various programs respond to the problems smallholders have.

2.21 In the meantime, RISDA is experimenting with one major local effortto develop a data-base and to design measures appropriate to the problemsrevealed by the nature of local smallholder characteristics. This localeffort is being conducted in the Baling District of Kedah State, where a

special survey of smallholders was conducted in 1973 the results of which areexpected to be published later this year. One central piece of informationintended to be established by such district surveys is an inventory ofholdings of rubber, by age and title status, which can be plotted 6n maps.Such information, together with data on the owners, can suggest what types ofprograms are most needed and most likely to work. The present "hunch" of

those closest to this experimental effort is that in-situ planting, coupledwith an intensified extension program, will emerge as the core RISDA programin many districts. But, whether the program will give more emphasis toindividual replanting or to the more-difficult-to-organize block schemes is anopen question. Indeed, it is not difficult to find knowledgeable Malaysiansand others who feel the lack of a strong sense of direction in RISDA. Offi-cials readily admit that the present is a period of program reassessment, areassessment still handicapped by a weak knowledge of the characteristics ofsmallholdings as well as smallholders.

2.22 The hesitation and lack of clear focus in RISDA's current programare reflected in the substantial shortfall in replantings during the first two

years of the TMP, when RISDA replanted only 49,000 ac and 47,000 ac as com-pared with the TVP target of 100,000 ac annually. For 1978 and 1979, RISDAhas set new replanting targets of 60,000 ac and 75,000 ac, respectively. Evenif the latter targets are achieved, it will still mean that during the firstfour years of the TMP only 46% of the acreage scheduled for replanting during

that period has been reached. No one can yet tell how strong an incentive

the recently approved higher replanting grants will provide for the smallsmallholders for whom they are designed. Since no good overall picture isavailable on the proportions and locations of replantings by size of holdings

one would think it useful and relatively easy to put together this data frominformation known to be available at RISDA's local offices. This would seemthe easiest way of finding out if the replanting program has ever succeededin reaching the smallest smallholders (those with less than 5 ac, say) whoaccount for great majority of those below the PLI.

2.23 Looming over this whole discussion of how to replant effectively

and increase the yields of the smallest of the rubber smallholders is the

generally agreed conclusion that individual replanting cannot meet theneeds of the large number of smallholders who operate farms smaller than3.5 acres./l In this context, it may make sense for RISDA to scale downits efforts to replant these smallholdings individually and concentrate on

shifting them out of rubber, or enlarging their holding through block newplanting or other means. These issues are discussed below.

/1 Acreage required to meet PLI with high yielding variety on assumption30% of family income is from non-rubber sources.

- 33 -

Acreage Expansion

2.24 RISDA is developing large tracts of newplantings on an estate model.To date, some 100,000 ac have been planted under this "block newplanting"program. These RISDA estates are not modeled on the FELDA pattern: the rubbersmallholders they are intended to benefit do not move onto the estates or"blocks," which are worked by daily-paid labor from nearby. The beneficiariesare smallholders who qualify for the newplanting grants but are unable to takeadvantage of those grants either because they cannot acquire such land orthere is none in their neighborhood. Since the beneficiaries do not resettleon the "blocks," their participation takes the form of shares in the profitsof the estates. But RISDA has not yet decided how the profits which are nowbeing accumulated are to be shared out; to date, therefore, the beneficiarysmallholders have only a paper claim to the benefits which are beinggenerated, and which are being held in trust for them until RISDA decides howbest to distribute them. Until payments begin, the acreage held in blocknewplantings will not provide the income-support needed to help participatingshareholders undertake replanting of their individual holdings outside theblocks. Thus far, therefore, this block new planting scheme has had littleimpact on poverty and needs a careful reassessment. Further, it is notclear that RISDA is the logical agency to implement such new plantingprograms; FELDA is a more appropriate agency to carry out block new planting,which is a land-development and settlement operation, something FELDA hasfar more experience in doing.

Alternatives to Rubber

2.25 Raising the incomes of the smaller, "hard core" smallholders is moredifficult than helping the larger smallholders who have been the primarybeneficiaries of replanting programs in the past. The best way to raise theincomes of the former may often be to shift them out of rubber. Indeed,this has been happening to an increasing degree. The proportion of landreplanted to nonrubber crops has increased from 3% in 1955 to 37% in 1975(cumulative figures were 5% replanted to nonrubber crops by 1960, 15% by1977). The analysis in Annex VII of this report indicates a number of cropswith potentially greater income prospects than rubber which no doubt areproving attractive to rubber smallholders.

2.26 It is entirely possible that smallholders may abandon rubber morerapidly than the productivity of remaining smallholders can be increased,leading to a net decline in smallholder rubber production. The 1978 increasein the replanting grant, which was limited to smallholders who replant withrubber, reflects the pull of Government objectives in somewhat differentdirections - protecting rubber production vs. raising smallholder incomes.The role of smallholder output in total Malaysian rubber production is depen-dent on Government policy towards preserving its share in world natural rubberoutput. This problem needs to be addressed more explicitly than has so farbeen the case, so that policy can be set with respect to the contributions tobe sought from both the estate and smallholder sectors. Until that largerquestion is settled, RISDA and other agencies will be unsure whether the goal

- 34 -

of rubber production or of poverty redressal should dominate in programs forrubber smallholders. Although the needed data are lacking, it may be possiblethat a policy geared to poverty. redressal will still result in an adequateoutput of smallholder rubber (from land on which rubber remains the mostprofitable crop).

Fiscal Adjustments

2.27 Rubber output is subject to three types of taxes and cesses: aprogressive export duty, a replanting cess, and a flat-rate research cess.All three payments are levied per unit of rubber produced or exported. Thesepayments are fixed for the cesses,but are progressive with respect to pricefor the export tax. These taxes are now so high that they offset governmentefforts to lift smallholder incomes above the PLI, either because they denyincome to growers which could significantly improve their net family returnsor because they significantly dampen incentives to increase efficiency orboth. Clearly these were unintended results of the rubber tax system. Theprogressivity of the export tax for example was intended as a countercyclicaldevice to capture part of the increased export earnings resulting from tempo-rarily high prices. It was not intended to increase the average tax burden,but, given the large long-run nominal increase in prices, this was what infact occurred during the 1970s.

2.28 Examination of the historical trend of rubber prices, taxes andfamily return vividly demonstrate this point. As Figure 1 and Table 2.6illustrate, there has been a substantial increase (31%) in the price of rubberin real terms during the last decade. HIowever, the progressive structure ofthe rubber tax caused an even larger increase (144%) in taxes, an increasewhich has absorbed over two thirds of this price increase. As a result, thenet return to the smallholder in real terms has increased hardly at all (11%).

2.29 Cognizant of the problem Government recently lowered the rubberexport tax. Even with this tax reform, however the burden on smallholdersremains considerable. Table 2.6 is a rough updating of Barlow's 1973calculations to illustrate the current situation. Based on an RSS 1 price ofM 129¢/lb, it is estimated that the family return (after deducting allnonlabor costs, taxes and cesses) is about 63¢/lb./l Taxes and cessestogether amount to 35¢/lb, over half of the smallholder family net returnfrom rubber. The largest element in this is the export tax which is about29¢/lb.

/1 Barlow, Colin, "The Natural Rubber Industry, Its Development,Technological Economy in Malaysia," Oxford University Press, 1978.

- 35 -

Table 2.6: AVERAGE PRICES RECEIVED BY POOR RUBBER StALLHOLDERS1970-80 ESTIMATED ACTUAL, 1985 AND 1990 PROJECTED

(Constant 1970 prices /a)mcts/lb

Export All non-laborPrice tax and costs and Net return

RSS1 /b cesses /c differential /d to household

1970 56.7 8.2 16.0 32.51971 45.4 6.9 19.3 19.21972 40.6 6.8 17.8 16.01973 64.5 10.4 18.6 35.51974 60.0 12.2 21.8 26.01975 43.7 6.5 16.5 20.71976 61.9 13.7 18.0 30.21977 60.2 13.6 16.6 30.01978 65.0 15.8 17.1 32.11979 76.7 24.7 18.0 34.01980 74.0 20.0 17.9 36.1

1985 78.2 27.2 16.6 34.41990 85.8 34.1 16.4 35.3

/a 1970-80 estimates deflated by the consumer price index. 1985 and 1990deflated by estimated increase in the international price index.

/b 1970-78 based on RSS1 price of rubber as presented in 1979/80 TreasuryReport; 1979 based on estimated price increase of RSS1 fob Bangkok of27.9% between 1978 and 1979; 1980, 1985 and 1990 based on World Bankprojected prices for RSS1. For 1985 and 1990 conversions to Malaysianringgit are made at the 1980 exchange rate.

/c 1970-78 export taxes based on actual tax receipts per pound of rubberexported; 1979 based on prevailing export tax schedule; 1980, 1985 and1990 based on new tax schedule announced in 1980 budget.

/d 1970-78 quality differential based on actual difference in price of RSS1and RSS4, 1979, 1980, 1985 and 1990 based on average quality differentialas percentage of RSS1 price during 1975-78 of 5.2%. RSS4 was used toreflect low quality rubber produced by poor rubber smallholders. Non-labor cost estimates based on Barlow's estimate for 1973 (see Barlowop. cit. Tables 7.7 and 7.8).

FIGURE 1AVERAGE PRICES OF RUBBER RECEIVED BY POOR RUBBER SMALLHOLDERS

ESTIMATED ACTUAL 1970-80, PROJECTED 1985 AND 1990(CONSTANT 1970 PRICES)

100 -

90 -

80 - ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~*PRICE FISS180 ** *''i'

70 * EXPORT TAXESe AND CESSES

C

T ~- - - - --- …-- - -- - -

50 * ,

L% % ** 8 8 s {NON-LABOR COSTS AND

B 40 - % '-% t QUALITY DIFFERENTIAL

20 - NETRETURNTO HOUSEHOLD

10-

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990

YEARS

Source: Table 2.6Vj ProJections are calculated at currently prevaIling tax schedule.

- 37 -

Table 2.7: ESTIMATED AVERAGE PERFORMANCE OF RUBBER SMALLHOLDERS 1980 /a

MQ/lb

Price RSS 1 f.o.b. 129.2Less quality differential 6.7

Export duty 29.4Research cess 1.0Replanting cess 4.5Marketing costs 10.2

Equals farm-gate price 77.4Less nonlabor costs 14.3Equals family profit 63.1

/a Mission estimates based on Barlow estimate of average performance of allsmallholdings in 1973 (Tables 7.7 and 7.8 of Barlow Study). Costs havebeen roughly updated on basis of inflation rate between 1973 and 1980.Export tax calculation based on revised export tax schedule announcedwith 1980'budget (Appendix II). Quality differential is assumed to be5.2% of RSS1 price which is the average differential during 1975-78.

2.30 While these taxes place a large burden on smallholders, twospecial features of the system make the burden on the poor even greater thanon better-off smallholders. First, because the tax is based on the price ofRSS1 quality rubber and poorer smallholders generally produce an inferiorquality of rubber, the tax is in fact a higher proportion of the farmgateprice received by the poor than by better-off smallholders and estates.Second, the poor have benefitted very little from the replanting cess sinceby and large they have not replanted. The replanting payments of poorsmallholders have therefore been generally used to finance replanting bybetter-off smallholders.

2.31 It is also clear that given the Government's commitment to povertyreduction, and that these results were completely unintended, elimination ofthis tax burden on the poor awaits only a practicable solution. Beforediscussing some alternative solutions, the basic tax magnitudes involved needto be kept in perspective. First, at current prices and production levels therubber export tax is estimated to be about M$1.1 billion and account for 10%of Federal Government revenues, clearly an important source of Governmentrevenue (see Table 2.8). Second, while estates and smallholders respectivelypay 40% and 60% of the rubber tax, the proportion paid by the large number ofpoor smallholders is only 7%, the equivalent of less than 1% of FederalGovernment revenues. Third, poor smallholders also account for only about 10%of the replanting and research cesses.

- 38 -

Table 2.8: ESTIMATED RUBBER TAXES AND CESSES, 1980

No. of Produc ---- Taxes -------------house- tion Export Replanting Research Totalhold (million tax cess cessunits lbs) ----------- (M$ million) …

Estates 1,774 /a 1,435 422 - 14 436

Smallholders ('000) 413 2,245 660 101 23 784Above poverty line 215 2,000 588 90 20 698Below poverty line 198 245 72 11 3 86

Total .. 3,680 1,082 101 37 1,220

Source: Mission estimates based on 1979/80 Treasury Report rubber productionand yield forecasts; 1980 rubber export tax schedule; f.o.b. RSSIprice of 129.2¢/lb; assumption of average holding of 2.5 acres ofmature rubber with yield of 500/lb per acre for poor rubbersmallholders.

/a Number of estates operating in 1978. Directory of Rubber Estates, RRI,1978.

2.32 The taxes are collected at point of export, when it is impossible todistinguish the source of the rubber and therefore to exempt certain classesof producers from paying them. If relief from the tax is to be granted to thepoor, two basic approaches would therefore appear feasible: (a) abolish theexport tax and cesses altogether and recoup part of the lost revenues throughan alternative tax on selected producers; or (b) leave the existing tax systemin place and establish a rebate system aimed at the poor. These two broadalternatives are discussed below but in general the tax rebate alternativelooks significantly more cost effective than the tax abolition alternative.It should also be emphasized that these are meant as illustrative proposals.Clearly more detailed calc:ulations based on the intricacies of the tax systemwould be required before implementing any specific change.

Tax Restructuring Alternative

2.33 Under this proposal the export tax and cesses would be abolishedor very substantially reduced and the lost revenues recouped at leastpartially, from other taxes that do not fall on the poor. The basis for thisproposal is that the incidence of the rubber taxes is borne largely by theproducer. Barlow, for instance, estimated that at 1972-73 prices, 90-95% ofthe export tax was paid by the producers. At current prices and tax rates andunder a reasonable range of assumptions of supply and demand elasticities, the

- 39 -

incidence borne by the producers ranges from 80-94%./l Some leakage tomiddlemen, however, would likely occur and reduce somewhat the ultimate impacton smallholders. Even allowing for some leakage, however, there wouldundoubtedly remain a significant increase in smallholder income. Some of thisleakage could probably be reduced by ensuring MARDEC passed the entireincrease back and through regulatory control of middlemen purchases by theMalaysian Rubber Exchange and License Board (MRELB). There are a number ofalternative ways Government could recoup at least part of the lost revenues.Even if no new taxes were introduced a not insignificant amount would berecovered through the personal and corporate income taxes. Since the taxreduction would represent a net increase in profits to the estates up to15%/2 would be recouped automatically through the corporate income tax. Anadditional amount would also be recouped through the personal income tax onthe additional incomes of larger smallholders.

2.34 Government could also consider introducing an additional tax onrubber estates. This could take the form of a tax on production or a supple-mentary profits tax as already exists on tin and timber producers. Thesetaxes could be administered jointly with the corporate income tax. The taxschedules could be designed to recoup approximately what the estates werepaying in export taxes. In this manner about 40% of the total rubber taxwould be recouped.

2.35 Tax Rebate Proposal. This proposal would leave the existing taxesin place and institute a system to rebate to the poor the total taxes paidon rubber production. This approach would minimize the disruption ingovernment revenues. The cost to government would include only the actualrebate and the administrative cost of delivering it. Together these shouldnot exceed M$100 million which is equivalent to less than 1% of FederalGovernment revenues. While this would be a permanent loss inrevenue there would be no danger of this escalating into a larger fiscalloss since, aside from administrative costs, the rebate would be fullyfunded by tax payments. Another major advantage of this approach is that itminimizes leakage and concentrates on getting ringgit to those most in need.

2.36 The principal issues or questons that need to be addressed are thefeasibility of delivering the rebate and the impact of the system on equityand incentives. One promising method of delivering the rebate would be tobase it on the rubber sale receipt which all middlemen are now required toissue upon purchase from smallholders. Upon presentation of the receipt,the eligible smallholder would be reimbursed for the tax equivalent paid onthe sale up to a pre-set maximum limit, the limit being set at, for example,

/1 Assuming the elasticities of supply range from 0.1 to 0.2 and demandfrom -1.0 to -2.0.

/2 Assumes a tax incidence borne by estates is 85% combined with the 40%corporate income and 5% development tax rates and the estate share ofrubber production of 40%.

- 40 -

the average level of production of a poor smallholder - around 1,250 lbs./lSmallholders would also have to be registered for eligibility and again thecut-off would be based on landholdings below some minimum size (e.g. 3 ac).Registration should be possible based on either RISDA's registry or theongoing registration of smallholders by the MRELB. The actual delivery of thesystem could be through RISDA or the Post Office Savings Bank. If the latterinstitution were used, rebates could in the first instance be deposited insavings accounts although immediate withdrawal should be allowed. If such asystem were established, it should be possible to keep the total rebate withinreasonable bounds, however, other issues would arise which might requiremodifying this basic approach.

2.37 First, the setting of an arbitrary cut-off for eligibility mayresult in considerable dissatisfaction for those just above the cut-off line.Second, the system would encourage those eligible not to expand theirholdings above the minimum size and also encourage others to divide theirholdings to increase the number of eligible smallholders from a given piece ofland. Third, the proposal to reimburse all tax payments up to a certain levelof production and beyond that to reimburse nothing would give poor incentivesto increase yields. Theses problems can be ameliorated by increasing thecomplexity and cost of the system. How complex the system should eventuallybe will depend upon how serious the above problems are felt to be.

2.38 One possible way to take account of some of these problems is tohave a graduated.tax re-iinbursement system and apply it to all registeredsmallholders. As an illustration consider the graduated rates in Table 2.9.If these rates were applied to all rubber smallholders the total cost of therebate would be 11$ 159 million. Of this approximately $68 million would go tothe estimated 198 thousand poor rubber smallholders, the balance of M$ 91million would go to other smallholders, most of whom would be relatively poor.The total cost would be significantly larger than a more restrictivesystem but would still be relatively small (only 1.5%) compared to totalgovernment revenues. Even a graduated system would have to deal withincentives given to further fragmentation of holdings. This might beovercome by establishing the list of eligible smallholders based on holdingsas of some fixed date and then only allowing a name to be added if it replacesan existing name.

/1 Assumes average holding of 2.5 acres and average yield of 500 lb/ac.

- 41 -

Table 2.9: ILLUSTRATIVE TAX REBATE SCHEDULE

Value of AggregatePercentage of rebate Households value oftaxes and cesses M$ per qualifying rebate

Production level rebated household ('000) M$ million

0 - 400 pounds 120% 144.4 413 60400- 800 pounds 80% 111.7 413 46800-1,200 pounds 60% 83.8 413 35

1,200-1,600 pounds 40% 55.7 215 121,600-2,000 pounds 20% 28.2 215 6

2,000 + pounds 0 0 -

Total 159

2.39 Cheating could of course take place under this tax proposal as underany other. The obvious area for cheating would be for smallholders producingabove 2,000 lbs to sell rubber to those producing less than 2,000 lbs and tosplit the rebate. The incentive for this would not be all that great howeversince the twice sold rubber would most likely only be rebated at the lowerrates of 40% and 20%. Furthermore, even if cheating were widespread, thetotal amount rebated would only increase by about 10% or M$17 million.

2.40 A Combination of Measures. Finally, Government might consider somecombination of the various measures discussed above. Thus it might implementthe following set of measures:

(a) a substantial reduction of the RSS1 tax rate;

(b) a slightly greater reduction in the export tax on lower qualitiesto remove discrimination against them;

(c) a tax rebate to the poor;

(d) additional taxes such as a supplemental profits tax on rubberestates;

(e) supplemental replanting grants to the poor to offset the replantingcess.

- 42 -

B. PADI SMALLHOLDERS

2.41 Padi farmers are the second largest identifiable agricultural groupin Peninsular Malaysia, comprising 150,000 households, or nearly 8% of allMalaysian households, and they have the highest incidence of poverty. Thefigures in Table 2.10 show the impact on real incomes over the last twodecades of increases in production and changes in the price of padi relativeto the prices faced by padi farmers as consumers. The real incomes of padifarmers increased substantially during the 1960s, and it is, therefore,surprising that the incidence of poverty was still 88% in 1970. By 1975, itfell to 77% due to sharp increases in the nominal fixed price for padi in 1973and 1974, as well as modest production increases. In the period 1975-78, thenominal price of padi did not change, and, although yields in the majorirrigation scheme rose by 1.8% p.a., a serious drought affected overallproduction, actual acreage was cut back, and real incomes fell to a levelbelow that of 1960. Estimates for 1979 show a substantial improvement,however, with a major rebound in production following the 1978 drought and asmall improvement in the terms of trade following an increase in theguaranteed padi price.

Table 2.10: INDICES OF PADI PRODUCTION, TERMS OF TRADE,AND REAL INCOME PER HOUSEHOLD, 1960-1979

(1970 = 100)

Padi production Padi terms Real incomeYear per household of trade per household

1960 72.3 109.6 79.31970 100.0 100.0 100.01975 110.9 110.0 122.01977 103.9 103.7 107.81978 77.0 98.8 76.01979 /a 114.4 100.9 115.3

/a Projections based on 1980 Treasury Report estimate of a 48.9%increase in rice production in Peninsular Malaysia in 1979.

Source: World Bank estimates (see Annex IV).

2.42 Two main factors are responsible for the continuing high incidenceof poverty among padi farmers: the small size of holdings and the low pro-ductivity of paddy relative to other crops. Estimates of net income peracre can vary widely, depending on yields, prices and expenditures oninputs, but in comparison with other crops, padi comes out behind many ofthe others even under double cropping (see Tables 1 and 2, Annex IX).

2.43 The rural poverty line in Peninsular Malaysia in 1977 was aboutM$3,000/household p.a. According to the figures in Annex VI, a single-cropping padi farmer with no outside income needed about 6 to 7 ac to achievesuch an income in 1977; but 90% of all single-cropping padi farmers have

- 43 -

holdings smaller than 6.5 ac. Even with nonpadi income providing half of thetotal, or with double-cropping, about 3 ac would be necesary to reach apoverty line income, and over half of all double-cropped padi holdings aresmaller than that. It is not surprising therefore that, given the legaldifficulties of switching from one crop to another increasing amounts of padiland are reported to lie uncultivated or that the average age of padi farmershas risen to over 50 as young people move away to find other opportunities.By comparison, even with no other sources of income, less than 2 ac of tobaccoor fish would be needed to reach the poverty line, less than 1.5 ac ofcabbage, potatoes, or tomatoes, and less than I ac of chillies, coffee orpepper. Thus it appears that given the relative prices in 1977, farmers withvery small holdings would have done better to cultivate any one of a number ofalternatives to padi or to cultivate padi in combination with some other crop.The situation is perhaps less clear for the future, since rice prices areprojected to increase relative to those of other crops, and large increases inMalaysia's production of some crops could cause their prices to fall.Nonetheless, some crops will continue to offer higher incomes than padi for atleast some farmers (Annex VI).

2.44 A number of factors discourage padi farmers from switching to moreprofitable crops. Some land is simply not suitable for other crops. Lackof necessary infrastructure and of knowledge about cultivation and marketingof new crops can also be a problem. An extreme case is that of oil palm,which could apparently be grown by smallholders on much existing padi landgiven adequate drainage. However, smallholder oil palm cultivation does notfall under any existing ministry or agricultural agency, outside of FELDA orFELCRA projects. Smallholders outside of these schemes have no way ofobtaining the necessary drainage facilities or the mills which are essentialfor quick processing of the fruit. In many cases, however, farmers arealready growing crops other than padi, either as an off-season crop or onnearby land. For these people, growing and marketing additional amountswould not present a problem.

2.45 Another factor restricting the choice of crops is the system ofland tenure in Malaysia, whereby land titles specify the crop to be grown,and any change requires permission from the State Land Office. Land taxesdepend on the crop being grown, so changes in crop mean a change in staterevenue. Perhaps for this reason, and perhaps also because of the govern-ment policy calling for self-sufficiency in rice, states have been reluctantto allow shifts away from padi, but even if they are willing to give per-mission, the process and waiting period required to obtain it may be enoughto discourage many farmers. The pattern of land tenure further complicatesthe problem, since title to a piece of land is often held by many people,and all of them must agree to any changes. Thus, it may often prove easierto abandon cultivation than to try a different crop or sell the land./l

/1 It may be the case that the law is not strictly enforced, particularlyin the case of annual crops. Farmers would be more reluctant to cutdown or plant tree crops without permission, since the time periodinvolved would make them much more likely to be caught.

- 44 -

2.46 Irrigation can also restrict the choice of crop, since thd floodingof tracts of land makes them useless for anything but padi. Because alllarge existing padi areas are now served by basis irrigation systems, farmerswho will get irrigation facilities in the future may have smaller holdingsand lower yields. In other words, they will be the more marginal padigrowers. Many of these people might do better with other more intensive

crops that could produce incomes over the poverty line on a very smallholding when padi would not (see Annex VI).

Government Programs

2.47 The Government-s three basic policy objectives with regard to riceare to increase the incomes of padi farmers, to achieve self-sufficiency,/1and to provide high quality and reasonably priced rice to consumers. Themain program designed to achieve all of these goals is the provision ofirrigation facilities for double cropping; other programs encourage the useof improved inputs and farming practices in order to raise productivity.

These programs contributed to the average annual growth in padi production of4.7% and in yields per crop per acre of 2.4% between 1955 and 1975./2

2.48 Irrigation. The largest program, and the one with the most easilymeasurable impact, provides drainage and irrigation facilities for both singleand double cropping. Through this program, which was allocated 13% of all

development expenditures on agriculture in the Third Plan, the proportion ofwet paddy land capable of being double-cropped rose from 2% in 1960 to 57% in1975 and to over 60% in 1978. Over 40% of the double cropped area is in theMuda Irrigation Project which increased annual yields by nearly 150% anddoubled the average incomes of approximately 50,000 families. Several suchlarge-scale irrigation projects have been undertaken - three of them accountfor half of Peninsular Malaysia's rice production - and most of the largeblocks of land suited for these projects have now been covered. Furtherexpansion of drainage and irrigation facilities will have to take place on a

smaller scale, as evidenced by the TMP target of an increase of 95,000 ac inthe area that can be double-cropped, compared to 280,000 ac in 1970-75.

2.49 The National Small-Scale Irrigation Project, initiated during theTMP, aims to increase the productivity and incomes of more than 60,000 small-

holders through the construction and rehabilitation of about 195 small irri-

gation schemes. Table 2.8 presents farm budgets for padi in three different

areas, both with and without the project. Annual net receipts without theproject range from M$264 to M$427 per acre, and with the project and double-

cropping they range from M$607 to M$803. The cost of these schemes is low

because relatively simple facilities are capable of providing the water

control necessary to improve substantially yields and incomes. However, the

/1 This objective is being reviewed by the Government, and there are

indications that it might be dropped.

/2 Production grew more rapidly than yields largely because of the increase

in cultivated area due to double-cropping.

- 45 -

average size of holding of the beneficiaries is only about 2 ac, so even

though the project will approximately double padi income most of the farmers

will remain in poverty (even allowing for nonpadi income).

2.50 It has been suggested that provision of irrigation facilities for

double-cropping may not always raise family incomes, although it undoubtedly

raises income derived from padi. Growing a second crop takes labor which

might earn more if employed elsewhere, and the compulsory flooding of land

that occurs in irrigated schemes eliminates the possibility of using the land

for other, possibly more productive, purposes. The last column of Table 2.11

shows "other income," or income earned outside the farm. The introduction of

a second crop reduces the amount of time availahle for off-farm employment,

Table 2.11: FARM BUDGETS, PADI /a(1977 M$ per acre)

NetExpendi- Net Man- receipts/ Other

Location Receipts/b tures/c receipts days man-day income

Kerandang Timur,TrengganuWithout project 313 49 /d 264 58 4.55 150

With Project 833 226 7e 607 75 8.09 150

Kota II, KedahWithout project 518 91 /f 427 38 11.54 405

With Project 1,147 344 T 803 59 13.61 345

Bendang Behrang,PerakWithout project 403 70 /h 333 34 9.79 202

With Project 1,110 322 7T 788 77 10.23 164

/a Conditions in year 10 of irrigation project, both without project

(single cropping) and with project (double cropping). Assumes farmers

own land./b Padi price = M$457/ton/c Excludes zakat (about 15% of gross receipts).

/d Includes $11 for hired labor.7e Includes $74 for hired labor.7T Includes $70 for hired labor.

/g Includes $161 for hired labor.7i Includes $12 for hired labor.7T Includes $101 for hired labor.

Source: Appraisal of the National Small-Scale Irrigation Project (#1523-MA),

March 21, 1977.

- 46

thereby reducing outside! income./l In the examples of Table 2.11, the rise inpadi income more than compensates for the fall in other income, so that totalfamily income increases with double cropping. This has been the case in otherirrigation schemes, such as Muda and Kemubu, where the rise in padi income ofaround 400% swamped declines of under 15% in other income. Nonetheless,evaluations of future irrigation schemes should continue to examine with carethe non-padi and off-farm income being earned without the project in order toestablish that the project would indeed raise incomes. This will be parti-cularly important as irrigation is focused on farmers with small padi holdingsoutside of the major irrigation areas, for whom non-padi income may besubstantial.

2.51 Increasing Yields. Raising incomes is a desirable goal, even thoughthey may remain below the poverty line. However, while irrigation facilitiescan lift incomes sharply, they do so only once, and further gains must rely onless dramatic measures. Several other programs are designed to raise yieldson existing padi land, and the scope for improvement in this area issignificant. Yields in some of the poorest padi areas of Malaysia are as lowas 0.5-0.7 tons/acre, whereas yields in the Muda region have reached about 1.6tons/acre per crop. Further improvements in the Muda area are expected toraise yields there to over 2 tons/ac, which is about 65% above the nationalaverage. These high yields are due in part to the superior fertility of soiland water control in the Muda area, but the wide range of yields observed inMalaysia results in large part results from different levels of inputs. Infact the biological potential of existing varieties may be over 2.5 tons/acre,but achievement of this level would not be economically feasible.

2.52 In field tests supervised by the Malaysian Agricultural Research andDevelopment Institute (MARDI), farmers using their own favorite varieties haveachieved yields of 1.5 tons/acre, or double the yields presently attained inmany areas. At least some of this potential could be captured through theeducation of padi farmers, but this program has been weak in the past. Theproblem appears to lie not only in a shortage of extension workers (the ratioof extension workers to iarm household is only about one half of what itshould be), but also in organizing them efficiently. Because agencies inMalaysia tend to be set up on a crop-by-crop basis, their extension workersare often specialized by crop, resulting in a situation where somefarmers receive visits from several agents while others receive none at all.Farmers outside the major padi farming areas may receive little advice ontheir padi, even though they may be assisted with other crops they grow.

2.53 Research by MARDI into higher yielding varieties is continuing andshould contribute regularly to increased yields. Because farmers often showsome reluctance to adopt new varieties and because obtaining potential yieldsdepends on proper usage, the introduction of new varieties should be accom-panied by intensified extension efforts.

/1 In the case of Kerandang Timur, adequate surplus family labor is availablefor padi and outside income does not fall.

- 47 -

2.54 Credit is necessary to enable many farmers to use adequate inputs,such as fertilizer. Bank Pertanian supplies credit, but only in the largepadi schemes. Padi farmers often have difficulty obtaining bank loans,since they have little collateral. The Farmers Organization Authority(FOA) also provides credit, usually in kind, but its effectiveness islimited by shortages of both staff and funds. The FOA is trying to organizefarmers cooperatives which would be managed by FOA officers and would havegreater access to credit than do individual farmers. Care should be takento ensure that farmers with very small holdings are included in thesecooperatives, for they are the ones with the least access to credit atpresent.

2.55 Padi Price Subsidies. Subsidizing the price of padi is a powerfulmeans of reducing poverty among padi farmers as has been demonstrated in Japanand Korea. Malaysia has had a padi price support system in operation for sometime although the primary rationale of the system appears to be to stabilizeincomes rather than to eradicate poverty. In this respect, the system seemsto have worked reasonably well./l

2.56 The question addressed here, however, is should farmers be sub-sidized and to what extent? Because of the very high incidence of povertyamong padi farmers, a price subsidy on rice output would appear as a potentinstrument for eliminating poverty. Further consideration, however, raisessome doubt as to how desirable this would be. Illustrative calculations (seeTable 2.12), for example, indicate that to increase the income of arepresentative poor padi household with one hectare of land up to the povertyline, the support price would have to be approximately doubled.

2.57 At the present production level of 2 million tons of padi, thiswould require a national subsidy of about 1.4 billion ringgit, equivalent toabout 12% of total Government expenditures in 1980. This, in fact, would bethe minimum cost since a doubling of prices would undoubtedly elicit asignificant increase in the supply of rice. The financial implications would,therefore, be considerable but the more serious drawback is the incentiveeffects such a large price increase would have. A doubling of padi prices

/1 In order to operate the Guaranteed Minimum Price (GMP) the Governmentexercises control over the imports of rice. Importers have to obtain alicense to import rice and such licenses are granted on condition that theimporter agrees to purchase from the Government stockpile a certain givenratio of local rice. This ratio is regulated in accordance with thequantity of rice the National Padi and Rice Authority wishes to releasefrom the stockpile. When the Government selling price of domestic rice ishigher than the domestic and world market prices, importers cover theirlosses on purchases from the stockpile by increasing the selling price oftheir imported rice. When world market prices exceed domestic prices,rice is sold from the stockpile at the lower domestic prices to equatesupply and demand.

- 48 -

would undoubtedly lead to very substantial distortions and economnic ineffi-ciencies which would obstruct the needed long-term transfer of resources,especially labor, from padi to more production occupations. Such difficultiesare now being encountered in Korea. Even within agriculture such a largesubsidy would very probably result in land and labor being transferred fromthe production of crops in which Malaysia has a comparative advantage to riceproduction. Also, the geographical position of Malaysia could create asubstantial threat of smuggling from neighboring countries that have a policy

of underpricing rice. For these reasons, padi price supports as a major meansof eradicating poverty among pady farmers does not seem warranted.

2.58 Nevertheless, as a supplement to other measures, price supportsstill deserve careful consideration. One promising approach would be to setthe offer price at a levesl equivalent to "normal" long term world price andto adjust it annually for inflation. The present effective offer price /1 ofM$30 per pikul /2 for medlium grain padi is 13% below the estimated 1980 world

Table 2.12: REPRESENTATIVE ONE HECTARE PADI FARM OF A POOR HOUSEHOLD _a

1980 PRICES

Cropping intensity (%) 1.25Total production (tons) 2.90Marketed production 2.00Gross-cash value /b 990Value of cash inputs and

irrigation changes 276Net cash income from padi 714Other cash income 744Total cash income 1,458Imputed value of subsistence consumption 429Total income 1,887

Poverty line 3,400Poverty gap 1,513

/a There are no data available to estimate directly the average position of

a poor padi household. The representative household portrayed above isbased on representative farm budgets for single cropping poverty house-holds covered in the National Small-Scale Irrigation Project (see Apprai-sal Report No. 1523-MA, May 13, 1977) and double cropping poverty house-holds covered in the Krian-Sungei Manik Project (see Staff AppraisalReport No. 2344-MA, May 16, 1979).

/b The marketed output is valued at the government offer price of $30/pikul.The marketed output includes output used for payments in kind for rent,inputs, etc.

/1 GMP plus M$2 coupon.

/2 Equivalent to 133.33 lbs.

- 49 -

price (in constant prices) and further the 1980 world price is about 17% belowthe projected long-term world padi price (in constant prices). Thus a policyof providing to farmers the underlying long-term trend price would implyincreasing the offer price to approximately M$42 in 1980 and thereafteradjusting the price for domestic inflation.

2.59 How much would this increase cost and how much would go to the poor?The current world price estimated at the farm gate in padi equivalent tons isabout M$34.5 per pikul./l The subsidy to the producer would be M$7.5 perpikul in 1980./1 National statistics indicate that padi farmers market about50% of their crop and utilize the rest for domestic consumption, seeds, rent,wages in kind for harvesting and other services, and payment of the zakat.This figure understates the actual proportion that enters the marketingchannels since much of the padi used for the above purposes is sold for cashsoon after harvest and repurchased for domestic consumption as needed or issold by recipients of rent and wages. Further, an increase in the farmgateprice would keep to a minimum the amount of padi not marketed. It seemsreasonable therefore to assume that about 85% of padi production is eventuallymarketed./2 At the current production level of about 1.8 million tons ofpadi, the total fiscal cost of the producer subsidy would be about M$200million.

2.60 In terms of the representative poor padi household (see Table 2.12),this increase in the offer price from M$30 to M$42 per pikul would addapproximately M$400 net cash income or represent a 27% increase in totalhousehold cash income. Of the total increase in the farmgate price roughly15% would go to poverty households specializing in padi production. At firstglance there would appear to be substantial leakage, however, two facts mustbe borne in mind. First, there are some 300,000 households that grow padi inPeninsular Malaysia. Of these only about 150,000 are considered to bespecializing in padi production (in the sense that padi is the main croputilizing 75% or more of the farm area)./3 Thus, an equal number of farmerscombine the cultivation of padi with other crops. There are no separateproduction or income data on these mixed farmers, however, there is a strongpresumption that most of these are poor or near poor. Thus, in 1978 the EPU

estimates that 121 thousand or 73% of mixed farmers were below the poverty

/1 The producer subsidy is calculated on the basis of the prevailing worldprice of M$34.5/pikul and not the current offer price of M$30/pikul. Tothe extent rice is purchased and marketed below the world price, thisrepresents a consumer subsidy.

/2 This would allow for an average per capita consumption of rice bypadi farmers approximately 10% above the national average.

/3 The 110.6 thousand padi households in poverty refer only to thisspecialized group of producers.

- 50 -

line. Second, there are almost no large padi farms in Malaysia - in 1970 forinstance 97% of the holdings were less than 10 acres and 78% were under fiveacres. Thus, it is not likely that a significant part of the subsidy would goto rich farmers. At the same time it should be recognized that some leakagewill undoubtedly occur. Attempts to eliminate such leakage would probably becostly and so complicate the system as to make it unworkable.

2.61 Under this proposal, the subsidy would be gradually reduced as thelong-term "normal" price was gradually approached. An important advantage ofsetting the minimum price equal to some notion of a basic "normal" price isthat whatever subsidies are implied are temporary and do not give distortedincentives to domestic rice production. This is particularly important inthe case of rice which is characterized by extreme instability due to thevery small proportion of rice traded internationally and the fluctuations inclimate. Historically, this instability has been quite marked. Of course,the basic long-term price is only a projection and would need to bere-examined periodically. The present estimates, however, which indicate along-term "normal" price somewhat above the current world price (in realterms) make it possible to provide a significant subsidy to padi farmers andat the same time not seriously distort agricultural incentives. It is alsoworth noting that since Malaysia is a net rice importer, whatever leakage doesoccur is at least contained domestically.

2.62 Setting the minimum price fully equal to the estimated price in1990 is of course a somewhat arbitrary decision. A different year, e.g. 1985,or more or less than 100% equality, could be decided instead. This decisionis ultimately a budget consideration once the basic principle is accepted,for example Government, for budgetary reasons, may only want to approach thissuggested GMP in stages over a few years.

2.63 Once a policy of setting producer and consumer prices based on"normal" market conditions were established, the large annual fluctuations inthe world price would not be given undue importance. However, it is cruciallyimportant that the producer and consumer prices are adjusted frequently fordomestic inflation.

2.64 We have not dealt here with the question of consumer rice prices.In the past at time of low world prices consumers have generally paid morethan the world price and when world prices were relatively high they have paidless. In establishing a price policy for consumers, cognizance should begiven to the fact that many consumers are also poor and that rice represents amajor household expenditure for them. Thus one study /1 of the 1965-72period, when consumer prices were generally above world levels, the higherprice was equivalent to a 5% reduction in the incomes of the poor. Because ofthe strong resource position of Government it would seem appropriate to

/1 Richard Goldman "Staple Food Self-Sufficiency and the Distributive Impactof Rice Policy." School of Comparative Social Services, Universiti SainsMalaysia, Mimeo June 1975.

- 51 -

finance producer subsidies mainly from government revenues rather than con-sumer expenditures. In this regard a reasonable policy for consumer pricesmight be to establish a price equivalent to the short-term trend price or if aprice subsidy to consumers were desired some fraction, say 90%, of that price.

2.65 Land Tenure. The system of inheritance law which leads to fragmen-tation of land holdings has been both a cause of poverty, by contributing to avery small average size of holding, and an impediment to its alleviation, byinterfering with possible remedial measures. The problem should be attackedfrom both sides. First, any further fragmentation of holdings must beprevented. Some land settlement schemes forbid the physical fragmentation ofland, so this is clearly a legal possibility. Heirs inherit legal sharesrather than physical pieces of land. However, while this practice may preventthe proliferation of diseconomies of scale, it does not affect the number ofpeople dependent for their incomes on a given piece of land. Acceptance ofsome part-owners to settlement schemes could be made contingent upon theirrenouncing all shares of land they own, but the problem would still besignificant.

2.66 The multiple ownership of land hampers the actual operator infinding the most efficient way to use his land, since changes in crop orsale of land require the agreement of all owners. In some cases, land fallsinto disuse because it is easier to abandon it than to sell it. Furthermore,it is widely, although not universally, believed in Malaysia that Malay padifarmers have a strong attachment to their land and would be very reluctantto sell it. Renting the land is a possibility, but tenants may be reluctantto invest in any but very short term crops, since they have little securityof tenure. An institutional structure could be developed to overcome theseproblems and facilitate the operation of a market in land. A land bank ortrust could take over the management of uncultivated land, renting it outand paying rent to the owners and eventually arranging for its sale if theowners agreed. Even if sale of land remained difficult, this would increasethe amount of land available for cultivation. Renting land is a traditionalmeans for young people to build up larger farms, apparently more so thaninheritance or purchase, and in fact surveys in two large irrigation schemesreveal that tenants or mixed tenant-owners have larger holdings than owners.Tenancy arrangements at present tend to be restricted to relatives, and aland bank would encourage their use on a larger scale.

2.67 Land Taxes. Land in Malaysia is taxed on the basis of the cropgrown, rather than the quality of the land. This may contribute to thedifficulties in obtaining provision to shift from one crop to another. Thesystem of land taxes should be reviewed.

2.68 Alternative Crops. An alternative to subsidization of padi farmersis to allow or even encourage them to shift to other, more profitable crops.A number of crops produce a net income well above that from padi, but themajor question is whether there are crops which can be grown and marketed ona large scale by padi farmers. Some padi land is not suitable for other

- 52 -

crops because of soil, drainage, or other physical constraints. Many farmers,however, are already growing other crops as well as padi and if the incen-tives to produce padi were reduced, they might simply increase production ofthe other crops. For other farmers, production of new crops could be intro-duced through farmer education, as well as provision of inputs and demonstra-tion by extension workers where necessary. In the past., large numbers ofsmallholders went into rubber production without Government promotion, andnow many of them are replanting their rubber land with other crops, so farmersobviously do respond to economic stimuli.

2.69 Marketing is leass straightforward. First is the question of whetherdemand for a particular crop is elastic enough to absorb large increases inproduction without a sharp decline in price. For those crops where Malaysiasupplies a relatively small part of the international market, there would beno problem, although there might be quotas governing Malaysia's level ofproduction. Most of the crops that were listed in Table 1 (Annex VI),however, are consumed locally, not exported, and the market for them would belimited. Singapore might be a major outlet for some vegetables; this andother marketing possibilities are briefly examined in Annex VI, but would haveto be investigated before an effort was made to promote particular crops.Such an analysis may be under way as part of the Agricultural Inputs andDiversification Subsidy Project of the TMP and should play a central role inthe further development of Government policy toward agriculture.

2.70 Another problem might arise in processing and transporting perish-able crops. The fruit of the oil palm, for example, must be processed fairlyquickly after harvesting; it is for this reason that most oil palm is grown onestates. It might be possible, however, to overcome this problem by promotingoil palm as a crop in certain areas where a mill could be established to servegroups of smallholders. In the case of other crops it might be necessary toprovide cold storage facilities or a regular collection service.

2.71 Mechanization. Some padi farmers have begun to mechanize operationssuch as plowing and harvesting. This can be done even by small farmers eitheron a cooperative basis or by hiring machines (and operators by the hour orday). In areas where migration has led to labor shortages, the Govdrnmentmight encourage mechanization through the provision of credit to the farmers(this is already being done in Sabah) or to entrepreneurs wishing to buymachinery for hire. In the long run, mechanization may be the only way toincrease Malaysia-s rice production, while keeping it competitive with othercrops and with activities outside of the agricultural sector.

C. FISHERMEN

2.72 Fifty-five percent of Peninsular Malaysia's 42,000 fishing house-holds were estimated to be in poverty in 1978. This incidence of povertyexceeds that for any other identifiable group except rubber smallholders. Twofactors stand out as causes of the high rate of poverty among fishermen.Perhaps the most fundamental cause, particularly on the west coast, which

- 53 -

supports over half of Malaysia's fishermen, is the depletion of in-shoremarine resources, which provide the livelihood for small traditional fisher-men. The second factor responsible for the poverty is the fact that thegrowth that has taken place in the sector has come mainly from trawling, whirequires larger, more capital-intensive boats than are traditionally used.The work of trawler crews requires little skill and no experience in fishingand trawlers have tended to hire labor from the large pool of unemploved yourather than from among traditional fishermen. Thus in the past decade as thsize of the catch has fallen in per capita and even at times in absoluteterms, modernization of the industry has led to a reduced demand for labor,and the traditional fishermen have failed to make significant gains. Many aprobably worse off than they were a decade ago. The fishing industry as itnow structured simply cannot adequately support the number of people dependeupon it.

2.73 During the years 1961 to 1968, marine fish landings in PeninsularMalaysia rose at an average annual rate of about 12%, but in subsequentyears they leveled off. Fisheries production increased again between 1972and 1974, but the growth was apparently due mainly to trash fish, which havelow food and monetary value./l Production of fish by weight rose by 32% inthe period 1975-77, and fell by 5.4% in 1978, but the composition and valueof the catch are not available.

2.74 During the period that fish production leveled off, in the yearsaround 1970, the number of trawlers continued to grow causing the catch pertrawler to fall dramatically. In 1967 the average catch per trawler inPeninsular Malaysia was 90 metric tons, but by 1972 it had fallen to 16 tons(see Table 2.13). The total catch in those two years was approximatelythe same. Real earnings of crew members in Penang, a major fishing center,fell by about half during that period, and by 1974 they had fallen stillfurther to M$97/month, well below the poverty line for a family (seeTable 2.14). In 1975 the incidence of poverty among fishermen was 63%.Between 1975 and 1978, production per vessel (by weight) fell slightly, sincethe number of vessels rose more rapidly than did output,/2 so the estimatedreduction in poverty to 55% may have resulted from a deterioration in theincome distribution among fishermen, as some took up employment on trawlerswhile others probably suffered a reduction in income. A total of 7,000households was assisted by various Government programs, and 3,000 householdsmoved out of poverty.

/1 Khoo Khay Huat, "Optimal Utilization and Management of FisheryResources" Kajian Ekonomi Malaysia, Vol. xiii, Nos. 1 and 2, June/Dec.1976, p. 41.

/2 Mid-Term Review of the TMP, p. 129.

- 54 -

Table 2.13: ESTIMATED CATCH PER TRAWLER, 1967-1972

Year Catch/trawler/year(MT)

1967 90.21968 74.21969 42.01970 20.31971 18.91972 16.3

Source: Khoo Khay Huat, "Optimal Utilizationand Management of Fishery Resources"Kajian Ekonomi Malaysia, Vol. xiii,Nos. 1 & 2, June/Dec. 1976 p. 41

Table 2.14: AVERAGE EARNINGS OF TRAWLER CREWSIN PENANG, 1966-74

Year Average Earning/Crew/Month /a(Current M$) (1967M$)/b

1966 1751967 168 1681968 161 1611969 158 1591970 108 1071971 97 941972 98 921973 105 891974 97 70

/a Includes fringe benefits.

/b Deflated by cost-of-living index for Peninsular Malaysia.

Source: Khoo, op. cit., p. 44.

2.75 Poverty among fishermen is not well documented. The Government'snumbers are based on two income surveys, one for the east coast, and one forPenang and Kedah, and the change over time is derived from rough estimates ofthe impact of government programs and changes in output. The conclusion was

- 55

that poverty is most acute among fishermen on the east coast where theincidence was estimated to be 95% in 1970 and 90% in 1975. Poverty on thewest coast was estimated to be 50% in 1970 and 32% in 1975. /1 The analysisof "hard core" poverty in Chapter 1 also indicates the incidence of poverty isgreater in the East which accounted for 60% of hard core poverty households infishing in 1973. The implication drawn from this finding was that governmentprograms should concentrate on the east coast.

2.76 As in-shore marine resources have declined, cultivation of fish, oraquaculture, has gained attention. Fish are the cheapest source of animalprotein in Malaysia, providing nearly half the animal protein consumed and 12%of the total protein in the Malaysia diet. Before the intensive use ofpesticides and the advent of double-cropping on a broad scale, padi fieldsprovided the main supply of fish for Malaysia's rural population. Now, how-ever, other sites for acquaculture are becoming more important. These includereservoirs, abandoned mines, rivers, and irrigation canals for freshwater fishand mangrove swamps and mudflats for brackish water fish. Freshwater fish areused mainly for local consumption, but brackish water fish include a number ofhigher grade varieties. The total catch of inland fresh and brackish waterfish is still very small, about 3% of total fish landings by weight, fromabout 12,000 acres of freshwater ponds and about 2,000 acres of brackishwater. Comparable ratios for Indonesia and the Philippines are over 20%.Some of the constraints to aquaculture are difficulty in acquiring land,inadequate supplies of young fish, shortage of feed, diseases, pollution,pesticides, lack of know-how and technical personnel, and inadequate marketingfacilities.

Government Programs

2.77 Government programs in the fishing sector include subsidization ofboats, engines, and other gear; provision of infrastructure, such as landingjetties or storage and marketing facilities; trawler projects to createemployment; training; and the provision of credit. The TMP allocation for thesector was M$276 million, but by the end of 1978 only M$54 million had beenspent. Delays occurred in site acquisition, contractual works, and a majortrawling project which had to be scaled down because of a lack of fishresources. Despite these problems, the revised allocation for 1976-1980 isM$328 million, which leaves M$274 million to be spent in 1979 and 1980. Theability of the sector to absorb these funds is questionable, and, in any case,the impact of the various programs on poverty among fishermen is debatable.

2.78 Programs that provide subsidies and credit for the purchase of equip-ment are subject to a number of problems that reduce their effectiveness./2

/1 TMP pp. 165, 173. Overall, poverty among fisherman fell from 73% to 63%.

/2 For a critique of the subsidy scheme, see Jahara Yahaya, "SomeImplications of the Fishermen's Subsidy Scheme in Peninsular Malaysia."Kajian Ekonomi Malaysia, op. cit., pp. 72-80

- 56 -

The subsidy scheme covers engines and gear, but relies on credit to providehulls and operating funds. According to some observers, this fact greatlyreduced the benefits from the subsidies. A shortage of institutionalizedcredit led fishermen to borrow from traditional money lenders, who wiere ableto capture a substantial proportion of the fishermen's increased income.

Bank loans were sometimes not well supervised, resulting in a failure byfishermen to repay them. Another problem is the lack of experience andtechnical knowledge in operating motorized boats, which, along with lack ofspare parts and maintenance facilities in many villages, led to rapiddeterioration of the engines. Supporting services and infrastructure ingeneral are often lacking.

2.79 Subsidies for capital equipment tend to distort the market forfishing vessels, encouraging capital-intensive technology in a sector whichhas surplus labor and which, in many areas, has reached its maximum level ofoutput. The subsidy scheme originally covered only the east coast ofPeninsular Malaysia, where additional fish resources still existed, but under

the TMP, it was extended to the west coast, where depletion of resources is amajor problem. Over one-third of the beneficiaries of the scheme under theTMP are expected to be on the west coast. The subsidies may attract morepeople into fishing, including some who fish at present to supplement their

incomes from other sources but might turn to fishing full time if they can getsubsidized equipment. The situation illustrated in Tables 2.13 and 2.14 of anindustry with falling productivity and incomes, would seem to require just the

opposite of a scheme which encourages expansion. Provision of capitalequipment may be necessary to provide adequate incomes, but in that case anintegrated program should be undertaken which would include the absorption of

unemployed and underemployed fishermen by other sectors. Perhaps onefavorable aspect of the scheme is that because of staffing constraints it isunlikely to be fully implemented during the remainder of the TMP. During the

first three years of the plan, M$12 million was spent to assist 6,000fishermen to buy boats and equipment. The total allocation to the subsidyscheme in the TMP was M$70 million.

2.80 The Fisheries Development Authority of Malaysia (MAJUIKAN) received54% of the allocations for fisheries in the TMP. Its activities include

the construcion of an ice plant, a freshwater fish and prawn project, regu-

lation of fish marketing, assistance to fishermen½s cooperatives, andtrawler projects to provide employment for fishermen. During the first thre

years of the TMP, boats built by MAJUIKAN employed about 1,000 fishermen whonow earn M$200-300/month, or as much as four times the earnings of a tradi-

tional fishing family. These people, however, are only a small minority of

fishermen.

2.81 The Government has tried to promote fishermens cooperatives byproviding grants and loans since 1955. Early attempts to form cooperatives

met with little success. Most of them were unable to repay the governmentloans, and some collapsed altogether. Major problems are said to have been

poor management and inadequate support from the Government, in part becauseof staffing constraints in the departments concerned. Beginning in the

- 57 -

mid-1960s, cooperatives were opened to local businessmen and were granted amonopoly over trawling licenses in an attempt to ensure that the benefits fromtrawling reached the small fishermen who did not have the capital to purchaseboats on their own. The Government used the licensing requirement to regulatethe growth and location of the industry so as to prevent it from competingwith smaller inshore equipment. Judging by the figures in Table 2.13 effortsto rationalize the growth of the industry were not successful, and fishermenwith small boats complained of damage to their gear and fishing groundsdespite a ban on trawling inside certain limits. Furthermore, in many cases,neither owners nor crews of trawlers have come from among the traditionalfishermen. The situation is exacerbated on the west coast by the fact thatboth owners and crews on trawlers tend to be Chinese, whereas traditionalfishermen tend to be Malays./l Crew members are not well paid, in any case;one third to one half of the earnings go to the boat owners.

2.82 Fish marketing faces some serious constraints./2 Consumers of fishin Malaysia prefer to buy fresh fish packed in ice, and if ice is not readilyavailable, the fish must be sold quickly or dried. Access is often diffi-cult, since many fishermen live in small scattered villages which cannot beserved economically by wholesalers. Furthermore, fish landings, particularlyon the east coast, are subject to large daily and seasonal fluctuations,making it difficult to arrange regular transport facilities. In 1971, theGovernment established the Fish Marketing Board, which was later absorbed byMAJUIKAN. The Board established fish auctions which were accepted only veryslowly by both buyers and sellers. Present government involvement inmarketing appears to be limited to the licensing of wholesalers and therequired use by them of approved scales to ensure a fair price.

2.83 Government programs have had some success in promoting the modern-ization of Malaysia's fishing sector. However, as programs to eradicatepoverty, and even as programs to increase production, they appear to be lesssuccessful. Although some traditional fishermen have become employed as crewmembers on trawlers, the net effect of the expansion into this and other morecapital-intensive equipment may have been to reduce employment, or at least toreduce the size of the resources to be shared among the remaining traditionalfishermen. Trawling itself has expanded too rapidly, resulting in falling percapita output and depletion of Malaysia-s marine resources. The impact ofmany programs has been minimal, because of lags in their implementation, andthose fishermen who have benefited, for example by buying subsidized gear, maywell be making gains only at the expense of other fishermen.

/1 David S. Gibbons, "Public Policy Towards Fisheries Development inPeninsular Malaysia: A Critical Review Emphasizing Penang and Kedah"Kajian Ekonomi Malaysia, op. cit., pp. 104-5. In 1973, well over90% of the trawlers in Ke3ah and Penang were under Chinese ownership.

/2 This subject is discussed in greater detail by Lim Chong Keat, in "AGeneral Review of Fish Marketing Problems in the East Coast ofPeninsular Malaysia," Kajian Ekonomi Malaysia, op. cit., p. 229-236.

- 58 -

Recommendations

2.P4 Regulation. Overfishing not only reduces incomes of fishermen, hutit can also permanently deplete a major natural resource. Present governmentpolicy does not restrict: fishing and may actually encourage it by subsidizingengines and equipment. These subsidies should be ended. The Governmentshould then take further steps to restrict fishing in the areas now fishedtoo heavily. It could do this by reducing the number of licenses availablefor trawlers, by declaring closed seasons or areas, by placing quotas onfishing, or by limiting the type of gear used. The last two measures wouldbe difficult to enforce, but the first two could be quite effective ifapplied strictly. Restrictions on fishing will, of course, reduce theincomes of some fishermen. Measures to reduce poverty among this group must,therefore, concentrate on iinding alternative employment or sources ofincome, rather than on increasing output from existing fishing activities.

2.85 Land Development Schemes. Selection of fishermen for new landsettlement is one way of reducing their numbers. Fishermen have been takeninto FELDA schemes in the past with mixed results - some chose to return totheir former way of life - but they should continue to be considered, alongwith all other applicants, for the schemes.

2.86 In Situ Agriculture. Some fishermen live in villages with unusedland nearby, and can supplement their incomes by cultivating the land. Thechoice of crop will rest on the same analysis as that for any other farmers(see Annex VI)._/

2.87 Aquaculture. Malaysia has the potential to expand considerably itsoutput of cultivated fish. It is estimated that Peninsular Malaysia alone hasabout 370,000 acres of mangrove swamps which would be suitable for growingbrackish water fish such as shrimp, mussels, cockles, grouper, or sea bass.This area could support about 75,000 households at a generous 5 acres a piece,more than enough to absorb Peninsular Malaysia's 23,000 poor fishing house-holds and many others as well./2 In addition, fresh water aquaculture may bepossible on as many as 200,00C0acres in Peninsular Malaysia. Although theincome from the fish is not as high as that from the brackish watervarieties, they can be an important source of protein and supplementalincome for smallholders of all kinds. Single-cropped padi fields, forexample, can be used in the off-season to raise fish, although recentincreases in the use of fertilizer have reduced the potential for thisactivity. Other possibilities lie in natural ponds and ahandoned mines.

/1 A pilot project for fishermen has been prepared by the State and RuralDevelopment Project in Kedah.

/2 Estimates of net income from brackish water aquaculture range fromM$1,200 per acre to M$3,600 per acre (see Annex VI).

- 59 -

2.88 One of the great advantages of aquaculture for fishermen is thatit enables them to continue to live the way they have in the past, close toth& sea. However, although the, potential availability of land for thisactivity is high, the geographical distribution of the land does not matchthat of the fishermen. Most mangrove swamps are on the west coast ofPeninsular Malaysia, whereas the east cost, which supports roughly half ofthe fishing households, have mainly sandy beaches which are not suitable foraquaculture. Thus, although there are some opportunities in aquaculture onthe east cost, many fishermen would have to be resettled. Aquacultureshould not be restricted to fishermen however. It should be encouragedamong all rural households, especially those in poverty, whatever theirsource of income. Another difficulty might be in obtaining the land, muchof which is now under forest reserve and controlled by the states.

2.89 If aquaculture is to be encouraged on a large scale, hatcherieswill be necessary to supply fry. At present they are obtained from the wild,but a more regular supply is necessary. One hatchery has already beenapproved by EPU and a consultant has been requested from UNDP to helpestablish it.

2.90 Marketing the output of aquaculture is not expected to be a prohlem,once the necessary infrastructure is in place (see Annex VI). Malaysiaitself consumes large amounts of fish; in 1978, the country imported anestimated 142,000 tons of fish, or 2,000 tons more than it exported. Totalfish landings were about 583,000 tons, so imports supplied one quarter ofdomestic consumption by weight. Furthermore, large foreign markets exist.Japan, for example, buys a good deal of fish from Malaysia, particularlyprawns, which are very high priced.

2.91 The Ministry of Agriculture has a plan calling for the developmentof 125,000 acres for aquaculture, but the status of this program is not clear.Certainly the program for 1976-1980 of 16,500 acres has not been implemented,although a pilot scheme is now getting underway in Kedah. There is a subsidyprogram for aquaculture, but it relies on applications for aid and has hadlittle apparent impact. Large-scale development of aquaculture will requirea more aggressive government role in identifying sites, demonstratingtechniqyes, and providing services such as credit and training.

2.92 Need for a Unified Approach to Poverty Eradication. The fishingsector in Malaysia provides a good illustration of the need to tackle povertyin a corprehensive way, rather than by crop or activity. Efforts so far tohelp poor fishermen have concentrated on increasing their output of fish, agoal which is ultimately self-defeating. In some parts of Malaysia, theeconomic limits to fishing have already been surpassed. The solution formany fishermen will be to find sources of income in other activities. Somewill be able to remain in the sector by turning to aquaculture, but othersmay have to change their way of life and even leave their homes. Some willmigrate to urban areas, some will be taken into land development schemes,and some will turn to cultivation of annual crops. In each case, they willbe competing for resources with people from elsewhere in the agricultural

- 60 -

sector. On the other hand, aquaculture, particularly in brackish water, maybe able to provide incomes for many nonfishermen. Fishing and fishermen,therefore, cannot be treated in isolation from the rest of the sector.

D. COMMON ISSUES

2.93 Organization of Programs to Eradicate Poverty. Malaysian agricul-ture is serviced by a large and diverse set of institutions, many of whichwere established to handle specific crops, such as padi or rubber replantingThe result is sometimes duplication of effort and a lack of coordinationwhich leads to a tendency to come up with narrow solutions to problems. TheGovernment's approach to poverty eradication typifies this situation.Poverty groups have been identified on the basis of their major (though byno means only) crop, and this categorization has led to proposed programswhich focus on these part:Lcular crops, when at times a broader approachwould be preferable. For example, programs to raise the incomes of padifarmers include irrigation for double-cropping, provision of seeds andfertilizers, and rice price supports, although for many padi farmers thebest solution might be to grow other crops as well or to get out of padifarming altogether. Programs for fishermen provide boats and equipment,when the real problem is overfishing and the solution, to give fishermenother sources of livelihood.

Extension Services

2.94 Extension services in Malaysia need strengthening, both in numbersand in organization. Shortages of extension and technical workers exist (theratio of extension workers to farm households is roughly half what it shouldbe), and the proliferation of agencies providing extension services hasresulted in a situation where some farmers are visited by several specialistswhile others get no coverage at all. These problems should be approached intwo ways, one aimed at increasing the overall capacity for extension work andthe other at increasing its effectiveness through improved coordination.Agricultural training institutes in Malaysia are presently operating at onlyabout 50% of their capacity. The reason for this is apparently the fact thatthey compete for secondary school graduates with universities where, for thesame number of years of study, students gain a more general education whichgives them much greater fLexibility and advancement potential in their careersbut which does not prepare them for work in agriculture. One way of reducingthis competition would be to shorten the length of the agricultural traininginstitute course from three years to two or one and a half. Another possi-bility is to reduce the entrance requirements for the course, making it asecondary vocational, rather than a postsecondary degree.

2.95 A third way of increasing the number of extension agents is theTraining and Visit system which uses local people with somewhat lower levelsof training as village level workers and contact farmers in each village tospread information and establish demonstration plots. Not only does thisraise the availability of extension services, but it might also provide more

- 61 -

effective extension workers than at present. Most of the people who reach theeducational level now required of extension workers come from the cities.They resist postings in some of the more rural states, and are often reluctantto work in the fields alongside the farmers. The Training and Visit systemhas been very successful in other countries and is being introduced in pilotareas in Peninsular Malaysia under the National Extension Project, and theGovernment has decided in principle to adopt the system on a national scale.

2.96 Extension services are provided by many different agencies, andthere is no overall coordination of them. The result is often spotty coverageof farmers. For example, RISDA is the only agency providing extensionservices for rubber smallholders, but it does so only for those included inits replanting programs. Rubber smallholders who are not registered withRISDA or who have completed their replanting do not receive any assistance.Furthermore, even those smallholders who are covered by RISDA receive adviceonly on their rubber trees, whereas many of them grow other crops as well.The same is true in the major irrigation areas (e.g. MADA, KADA), whichprovide their own extension services for padi. Some farmers, on the otherhand, might be visited by several extension agents, each looking after adifferent crop. Such a system is clearly not optimal. Overall coordinationof extension services, probably by the Department of Agriculture, is necessaryto eliminate the gaps and overlaps described. Most extension agents areperfectly capable of looking after more than one crop, and only during actualdevelopment stages (e.g., rubber replanting, coconut replanting andrehabilitation) should it be necessary to have technical mono-cropspecialists..

- 62 -

3. ISSUES IN LAND USAGE

A. LAND AVAILABILITY AND DEVELOPMENT

3.01 Because of the large amounts of undeveloped land in Malaysia andbecause, as we have seen in the above discussion, small land-holdings are amajor cause of rural poverty, development and resettlement of new land hasbeen a major Government program to reduce poverty.

3.02 Since 1961 about 2.7 million acres have been developed in Malaysia.There are no comprehensive data available on settlers; but it is roughlyestimated that this degree of land development would directly accommodateabout 250,000 families (actual settlement to date is only about two-thirdsthis amount due to lags between development and settlement). During thesame period, the rural population increased by about 650,000 families; thusland development has directly absorbed the equivalent of about a quarter ofthis addition. Of course compared to the total rural population in 1978 of1.8 million households, the land development program is relatively small.The current rate of land development is 200,000 acres per year.

3.03 An important question to be addressed is: What are the prospectsand desirability of continuing this rate of land development? To determinethe present and potential land use of Malaysia, the Government has justupdated its land use inventory (a detailed summary of this review ispresented in Annex VII). It would be a mistake to look to the results of therecent land classification review to tell us exactly how much land isavailable for development and how many people it can support. Standards ofland-suitability for particular uses are somewhat elastic, since changingeconomic conditions influence what can profitably be grown on what types ofsoils and topography, and the intensity of cultivation can greatly affectviable man/land ratios. But given these cautions against any mechanisticapplication of the data, the latter do tell us how much land remainedavailable for development as of 1976. The overall picture is provided byTable 3.1. These data suggest that at the end of the TMP (i.e. early 1981)Peninsular Malaysia will still have available for settlement around 5million acres /1 of Classes 1, 2 and 3. Even if this estimate significantlyoverstates land availability, it should be possible to achieve theGovernment's land development target for Peninsular Malaysia of 2.4 millionacres between 1976 and 1990. In fact, one could argue for an acceleration.

/1 The 6.6 mn undeveloped acres at the botton of Table 3.1 (a 1976 figure)minus 1.0 mn acres being developed during the TMP and minus 10-15%for nonsettlement uses.

- 63 -

Table 3.1: AGRICULTURAL LAND BY SOIL SUITABILITY CLASSES WITHIN LANDALIENTATION AND GAZETTMENT CATEGORIES: PENINSULAR MALAYSIA - 1976

acres

A. Developed Agricultural Land

Within Soil Suitability Classes 1, 2 & 3Alienated for agriculture 7,333,430State land 315,913Malay reserves 231,933Forest reserves 82,498

Subtotal 7,963,774

Within Soil Suitability Class 4Alienated for agriculture 877,591State land 39,273Malay reserves 35,815Forest reserves 16,796

Subtotal 969,475

Within Soil Suitability Class 5Alienated for agriculture 425,087State land 41,002Malay reserves 41,743Forest reserves 33,839

Subtotal 541,671

Total - Developed Land 9,474,926

3, Undeveloped Agricultural Land

Land Under Forest, Scrub, Grassland andSwamp Within Soil Suitability Classes1, 2 h 3 Alienated for agriculture 1,674,413State land 2,205,463Malay reserves 632,320Forest reserves 2,075,047

Total - Undeveloped Land 6,587,243

GRAND TOTAL, A + B 16,062,163

Source: Annex VII.

- 64 -

3.04 There are however some serious reservations about how much and howquickly this land can be developed. One major drawback is the uneven distri-bution of land among the states. A state-by-state comparison of the amount ofundeveloped agricultural land Classes 1 + 2 + 3 and the number of poor ruralhouseholds provides a crude indication of the extent to which each state canhope to use land development as a means of relieving rural poverty. Table 3.2presents such figures. It shows that if all the available agricultural land inPeninsular Malaysia could be divided evenly among the 589,000 pooragricultural households in 1970, each could be provided with about 11 acres,comfortably more than needed for almost any crop to provide an income abovethe poverty line. But in 6 of the 11 states, families could be given under 4acres and in 5 of them under 2.5 acres. When Perlis, Kedah and Kelantan arecompared with Johore and Pahang it is seen that the latter pair have about 10and 50 times more land to offer their poor households than do the three poornorthern states. These figures help show how important it is to find ways ofincreasing interstate migration in moving poor households onto largerholdings. This finding assumes even greater importance when combined withanother major finding of this review, namely, that increasing the size of insitu land-holdings must be given higher priority in Malaysia's anti-povertystrategy if the objectives of the New Economic Policy are to be achieved.

Table 3.2: LAND AVAILABILITY AND RURAL POVERTY, BY STATES

Undeveloped Undevelopedagricultural Estimated number of land available perland available poor rural households poverty household

(1976) (1970)acres 000 acres

Perlis 30,875 15 2.06

Kedah 220,324 92 2.39Penang 7,163 41 0.18Perak 521,417 95 5.48

Selangor 206,243 54 3.81N. Sembilan 331,968 28 11.85Melacca 32,604 22 1.5Johore 1,360,229 71 19.15Pahang 2,866,435 30 95.53Trengganu 795,093 47 16.91Kelantan 214,890 94 2.29

PeninsularMalaysia 6,587,243 589 11.18

3.05 A second problem is that while 5 million acres may be potentially

available for agriculture, the land best suited for large scale land develop-ment has been largely exploited. As a result, Federal agencies are alreadyexperiencing predictable problems in looking for new land to develop, e.g.,

- 65 -

soils unsuitable for plantation crops, steep terrain, land located oninaccessible places where development costs are higher and more damage tocrops occurs from wild animals, etc.

3.06 It thus may prove difficult for technical reasons for the Governmentto maintain, let alone expand, its current rate of land development. A recentGovernment policy paper /1 on land development, however, actually calls fora substantial reduction in land development from 1.0 million acres in theSMP and TMP to 750,000 in the Fourth Plan, 600,000 in the Fifth, and to500,000 during the 1990's. The reasons given are to protect forests a bitlonger, to recognize the demographic projections of a "peaking out" in thenumber of rural households as rural outmigration continues to gathermomentum, to minimize the rising costs of extensive land development, and,not least, to devote more resources to in situ land development.

3.07 First, given the extent of Malaysia's poverty problem and thedesperate need for additional land, such a deliberate slowdown does not appearwarranted. While ecological arguments deserve careful consideration, theecological costs need to be carefully assessed and weighed against thepotential benefits before a substantial cut in land development would bejustified. To the mission's knowledge no such assessment has been carriedout, and it would seem premature to cut the progam at this time.

3.08 Second, the peaking in the growth of rural population is based onrather optimistic assumptions about the rate of labor absorption in theurban industrial and service sectors. Even if realized, however, this is notsufficient reason to reduce the rate of land development. The projectionsin the TMP, for instance, do imply a peaking in the number of agriculturalhouseholds during the 1990s (see Table 3.3). These projections also implythat during 1978-1990 an additional 240,000 households would find above-

poverty income opportunities within agriculture. At the current rate ofland development over 80%, or 200,000, of these families would be accountedfor by the land development program. If the program were cut in half thensettlement would be reduced to 130,000 families and an additional 70,000families would be forced to remain in poverty. Clearly this calculus indi-cates that at least within the 1990 time horizon, even with peaking of thegrowth of the agricultural population, there is no justification for cuttingback on the rate of land development.

3.09 Even beyond the 1990s there is good reason to maintain the pace ofland development. The 242,000 households that the Government estimateswould still be in poverty in 1990 would clearly be the hard core of thepoverty problem and settlement or migration would probably be the only

/1 A 21-page draft paper prepared in December 1978 by the Ministry of Landand Regional Development (MLR). The paper has been reviewed by the LandDevelopment Coordinating Committee and the Land Utilization Group, atechnical subcommittee of the National Agricultural Policy Committee.Although some recommendations are inevitably controversial, the generalthrust of the paper appears to have been well accepted.

- 66 -

escape from poverty for most of these families. At current rates ofdevelopment about an additional 175,000 of these families could be pulledout of poverty by the year 2000. However, the feasibility of maintainingthe current rate of land development during the 1990s is highly conjectural.While it would appear feasible in terms of total acreage still available,other considerations, such as the likelihood of increasingly encounteringpoorer quality land with steeper slopes in ever smaller blocks, wouldprobably constrain the pace of development significantly.

Table 3.3: IMPACT OF ALTERNATIVE RATES OF LAND DEVELOPMENTON OFFICIAL POVERTY ESTIMATES

Peninsular Malaysia, 1970-1990

ProjectedCurrent 50% cut inrate of rate of

development development1970 1978 1990 1990

Current Rate of Development

Agriculture households 853 941 909 909Poor 582 514 242 312Nonpoor 271 427 667 597

of which in land developmentschemes 50 100 300 230

Note: The current rate of development in Peninsular Malaysia is about200,000 acres per year. The estimates of settler households aremission estimates based on the overall level of land development andthe settlement rates of FELDA.

3.10 The final two arguments presented in the MLR policy paper, those ofincreased cost and devoting more resources to in situ development, are moreserious. It is not that financial resources are a serious constraint, butrather that additional skilled manpower might be required to design andimplement future land development projects, thus reducing the manpoweravailable for in situ programs. This assumes, of course, that such humanresources are easily substitutable which is highly questionable. The skillsrequired to implement land development - a project concept that is well-designed and tested - are very different from the skills needed to design newand innovative projects in in situ agriculture. Even aside from this problem,theoretically the appropriate balance could only be determined by comparingsocial rates of return of both types of project. In the absence of such ananalysis there is a good prima facie reason for not prematurely

- 67 -

slowing the pace of land development. In the context of an overall shortageof poverty projects, it would be rather wishful to reduce a known andattractive avenue to poverty alleviation in the hope that it would result inthe formulation of in situ projects with a higher social return.

3.11 The justification for continuing an all-out effort on land develop-ment may be better appreciated in the context of the present distribution ofland. Currently the 513,000 poor agricultural households in PeninsularMalaysia have access to almost 1.4 million acres. This gives an average ofonly about 2.8 acres per household. The discussion in the preceding chaptersemphasize that in the two major crops (rubber and padi) this size holding isinsufficient (even with irrigation in padi and high-yielding clones in rubber)to produce incomes above the poverty line. Thus the additional 5 millionacres of potentially available land more than triple the existing land assetsof the poor, and provide an excellent opportunity to redress poverty byincreasing the average allotment to poor households. These 5 million acresplus the existing 1.4 million would provide about 12.5 acres per household ifevenly divided. While it may be difficult for technical reasons to developall 5 million acres, even development of half this amount (as proposed in theTMP) would increase the acreage per household to 8 acres.

3.12 Aside from this rather controversial recommendation the draftpolicy paper contains a number of other recommendations that merit generalsupport. These are summarized below:

(a) While land development has been regarded as "the majorvehicle for rural poverty redressal," it may be questionedwhether it has in fact successfully served this objective.There is no question that the settlers on large-scale federalschemes have done well. But the number of beneficiariesseems small for the amount of funds invested in landdevelopment. There is therefore a need to look for new, lesscapital-intensive forms of land development to spreadbenefits more widely (the paper looks at land-developmentschemes mainly in terms of numbers of settlers directlybenefitted; it does not look at such schemes as exogenousinvestments that generate indirect as well as direct streamsof beneficiary income).

(b) Ways and means must be found to persuade the land-rich states(identified as Pahang, Johore, Sabah, and Sarawk) to acceptmore settlers from outside their borders.

(c) Settler income will vary with soil characteristics, cropping-patterns used, topography, and other factors. It wouldtherefore be unwise to specify any standard lot size for allland development schemes. Flexibility should be the rule,with desired income levels, not lot size, taken as theindependent variable.

- 68 --

(d) The economic basis of future land schemes is expected to con-tinue to depend heavily on the traditional perennial treecrops of rubber, oil palm, .-nd cocoa. But to protect set-tlers against the impact of inevitable price fluctuations,land schemes should attempt to include foodstuffs, both sub-sistence and, where market opportunities exist, cash crops.

Not all the concepts and. recommendations in this important policy paper maysurvive into the Fourth Plan. But they represent the principal ideas on landdevelopment now circulating in the Governmenlt.

3.13 The mission agrees substantially with t-hese recommendations, and inparticular with the need to find ways of increasing interstate migration insettlement policy. The mission would male two additional suggestions,however:

(a) We urge the land settlement agencies, notably the Federal LandDevelopment Authority (FELDA), to gear settler selection moreclosely to areas with uneconomicallysized holdings than hasbeen true in the past. We are not certain thls will provefeasible (e.g. padi smallholders may prove unwilling to moveonto oil palm or rubber schemes, political pressures mayfrustrate attempts to limit settler applications to overcrowdedareas, formulas to achieve consolidation of vacated holdingsmay prove impossible to find).

(b) We suggest that the Federal Government start taking initiativesfor experimental joint land development schemes in Sabah andSarawak. Today, all land development schemes in those twoland-rich states are in the hands of two State Land DevelopmentBoards. Eventually - perhaps 10-15 years from now - the largeamounts of land available in those two states should becomeavailable to settlement from any part of the country, underagreed rules. We think that the state governments couldposition themselves for the future by undertaking one or twoexperimental land development schemes in cooperation withFELDA, now barred by its charter from operating independentlyin Sabah. We foresee great long-run advantage to both Sabahand Sarawak and Peninsular Malaysia in laying a groundwork nowfor joint ventures in land development that will combinePeninsular Malaysia's growing need for more land and itsexperience in land development with the availability of land inthe two eastern states.

B. LAND DEVELOPMENT AND SETTLER SELECTION

3.14 An important element in determining the benefits of land develop-ment is how settlers have been selected. The interstate migration of

settlers is also a critical issue for the future pace of land development.These issues are discussed below. Because of data limitations however, thediscussion pertains only to FELDA.

- 69 -

3.15 One of the primary aims of FELDA is to assist poverty reduction byselecting settlers from among those below the poverty line income (PLI) andgiving them opportunities to earn incomes well above the PLI. To what extenthas FELDA succeeded in doing this, and what problems have been encountered inusing the resettlement program to accomplish this objective? The rulesgoverning settler selection help answer both questions. There are in factthree sets of rules that must be satisfied in selecting FELDA settlers(selection of settlers for other agencies are not governed by exactly the samerules). The three sets of rules are: (i) the 1960 Federal Land (GroupSettlements Area) Act; (ii) the policies laid down by the states in whichFELDA schemes are located; and (iii) FELDA's own policies. The first tworequirements define how much freedom FELDA has in setting its own rules. Thepolicies of most states are not embodied in law but are subject to discussionwith FELDA on an ad hoc basis. The main points in each of these three sets ofcriteria are the following:

(a) 1960 Land (Group Settlement Areas) Act

This Act requires all federal land settlement agencies to selectsettlers from citizens who do not own more than 2.0 acres of land.The two-acre ceiling on land ownership would appear to restrictselection to very small farmers; this is somewhat deceptive,however, as the criterion is based on the size of a settler'slegal ownership and not on the size of the lot(s) he may beworking. An applicant with a one-fifth share in a nine acreholding would be eligible, for example, even if he were the soleoperator on the nine acres.

(b) State Policies

State ownership of unalienated land gives each state the right tolay down policies on who is to be eligible for land titlesdirectly or through federal land development schemes. Althoughmost states have laid down formal selection criteria, most haveadopted an informal policy of limiting selection to applicantsfrom their own state unless no suitable applicants are available.The results of this policy are evident in Table 3.4, which showsthe state of origin of FELDA settlers for FELDA schemes in eachstate. In all states but one the overwhelming majority ofsettlers have come from the state in which each scheme is located.The one exception is a major one, i.e., Pahang, much the largeststate in Peninsular Malaysia and one with large amounts ofunsettled land and small numbers of applicants for resettlement.Consequently, Pahang has been far more willing than any otherstate to accept FELDA settlers from other states. With theimportant exception of Pahang, FELDA must gear its settlerrecruitment to applicants from the state in which each scheme islocated, not to national considerations of relieving poverty orland pressure where these problems are most serious. Thissituation has made it increasingly difficult for FELDA to relieve

- 70 -

land and employment pressures in such labor-surplus states as Kedah,Perlis and Kelantan, since other states are generally unwilling totake settlers from those states in large numbers. The issue is evenmore serious on non-FELDA schemes, which require all settlers tocome from within the state. The problem of compartmentalization, or

state restrictions on settler mobility, is currently a major concernto both FELDA and the Ministry of Land and Regional Development.The latter is formulating proposals for government considerationthat might encourage the states to liberalize their settlerselection criteria (e.g. make certain federal assistance programsconditional on such liberalization).

Table 3.4: FELDA SETTLERS, 1957-76: STATES OF ORIGIN AND SETTLEMENT;YEARS OF SETTLEMENT

Total number of Settlers originating in samesettler households state, by location of scheme

by state of settlement %

Johore 8,834 94.9

Kedah 1,513 95.9Kelantan - -Melaka 1,092 89.9Negeri Sembilan 4,607 78.7Pahang 13,413 33.0Perak 2,444 90.4Perlis - -Pulau Pinang - -

Selangor 1,797 76.1Trengganu 1,831 88.6

Total 35,531 /a 67.7

/a Total settler population: 210,712 (= 5.93 persons per household).

Source: FELDA.

(c) FELDA Selection Policies

FELDA has had over 20 years of experience in selecting settlers,starting in 1957. Table 3.5 shows some of the characteristics ofFELDA settlers as revealed by the 1976 FELDA Settler Census. Theoverwhelming majority (96%) of settlers have been Malay. Thisdominance by Malays may be consistent with the poverty selectioncriteria since mnost rural poor, and the worst-off among the poor,are Malay. Nonetheless, if the Government is serious aboutincreasing the non-Malay share in agriculture, some increase in the

- 71 -

non-Malay share of settlers is warranted. In this regard, Indianestate workers, who face increasing under-employment following theestates conversion from rubber to oil palm would be good candidatesfor land development schemes. The data also show that the majorityof settlers have only elementary school education and were formerlypadi and rubber farmers. These characteristics are also consistentwith a poverty background. It may also be worth noting that FELDAhas not geared its recruitment to districts where the Federal LandConsolidation and Rehabilitation Authority (FELCRA) was implementingits programs, despite the fact that the two agencies generally havecordial working relationships.

Table 3.5: SELECTED CHARACTERISTICS OF SETTLERS AND THEIR WIVES

A. Race

Malay 96.0%Chinese 1.8%Indian 1.8%Other/no info. 0.5%

B. Educational Level Husbands Wives…- (%)…

None 5.7 19.3Primary 1-3 17.3 18.7Primary 4-6 67.8 47.2Some secondary 6.3 3.9No info. 2.8 10.9

Total 99.9 100.0

C. Occupations Before Entering Scheme

Trader 3.7 1.3Padi planter 36.5 28.3Fisherman 4.0 0.2Oil palm plantation worker 4.5 2.4Rubber tapper 27.2 20.0Ex-serviceman 9.1 0.1Laborer & odd job worker 10.9 2.3Unemployed 4.1 45.4

Total 100.0 100.0

Source: FELDA.

- 72 -

3.16 The preceding review suggests that it is wrong to regard the FELDAsettler-selection process as a finely-tuned instrument for the relief ofpopulation pressures in specific localities where other agencies can step inbehind it to effect consolidation made possible by FELDA-s relief of landpressure. The impact of resettlement so far operates only in general andindirect terms and therefore much of the potential benefit of land develop-ment may not be exploite(d.

3.17 Thus, under the present arrangements there is no mechanism to

ensure that the poor population that remains behind will have exclusiveaccess to the land located by settlers. For instance, settlers may keeptitle to their existing 'Land and thus continue to share in the income itgenerates. Renters may not necessarily be poor, nor if the land is sold isit likely to be purchased by families below the PLI.

3.18 An approach which coordinates settlement with consolidation on aproject-by-project basis would help ensure that the beneficial impact on thenonsettled population is maximized. Spreading the benefits in this waywould help to justify the high capital costs per settler family and increasethe social return of these projects./l One possible mechanism that would

help to improve consolidation in the wake of a land settlement project is aland bank which would provide an institutional framework for land transfer.This suggestion is discussed further below.

3.19 The available evidence suggests that almost all FELDA settlers

have been drawn from the poor, with heavy concentration among padi and

rubber smallholders. That the great majority of them have become or willbecome much more highly productive agriculturists is clear from the average

earning figures issued by FELDA. Average monthly incomes for FELDA settlerson 108 schemes where the main crop had come into production by the end of1976 are shown in the Table 3.6 below.

/1 An analysis of a typical FELDA project and a typical irrigation projectin Malaysia by Helmers (see Malaysia CPP, May 20, 1976, Attachment 8)

showed that while the economic rates of return on such projects were

similar, the social return was somewhat higher on the irrigation

project. This resulted largely because a higher proportion of the

benefits of the FELDA project were in the form of additional income well

above the poverty line and hence receiving a lower social weight. Agreater spreading of the benefits to the non-settler population and theinclusion of these benefits in the analysis would considerably improve

the attractiveness of FELDA projects from a social point of view.

- 73 -

Table 3.6: SETTLERS' AVERAGE MONTHLY NET INCOME (JAN-JUNE), 1972-76

1972 1973 1974 1975 1976

Rubber schemes 124 251 250 209 338Oil palm schemes 250 247 819/a 442 361

Estimated PLI 177 183 202 230 235

/a The marked increase in oil palm income in 1974 is mainlydue to a large price increase in palm oil that year.

3.20 The highly productive enterprises which FELDA has created should

not have their impact on poverty measured solely in terms of the number ofjobs directly created for settlers or by the latters' incomes. It isequally important - and perhaps more so - to think of FELDA schemes in muchthe same way one would think of new high-wage industrial enterprises, i.e.,as centers of income-generation which, through re-spending, generate waves ofhigher incomes for many more people than the settlers themselves. Nostudies have yet been made of these secondary impacts. But no judgment onthe contribution of land development schemes to the generation of employmentor the relief of poverty can be complete without an attempt to look at thesesecondary impacts.

3.21 Possible Establishment of a Land Bank. Suggestions have been madefrom time to time for the establishment of a "land bank," i.e. an institu-tion that would buy selected parcels of agricultural land from owners desir-ing to sell or lease and which would then resell the land, or lease it, ineconomically-sized parcels. There would be two main objectives: (a) helpingpersuade smallholders to sell/rent property for which they no longer wish tobe owners/operators by giving them a ready market; and (b) providing aninstitution that can assist the market in consolidating smallholdings intoeconomically viable sizes. The bank might operate selectively, limiting itsactivities to certain areas, certain types of land, certain size of plots,etc. It would not seem necessary to create a large staff, since the bankcould rely heavily on other government officers for much of its field work.The mission feels this suggestion deserves detailed study and therefore recomn-mends the establishment of a task force to look into the desirability andfeasibility of establishing a land bank as part of the Fourth Plan.

C. LAND TENURE AND CONSOLIDATION

3.22 In many parts of the world (notably Central and South America, andon the Indian cubcontinent) the two most pressing and politically-chargedtenure problems are the concentration of land in the hands of large landlordsand the insecurity and lack of incentive of those who work these large

- 74 -

holdings either as tenants or as wage laborers. Neither of these traditionalproblems appears to be a major issue in contemporary Malaysia. The countrydbes have land tenure problems, however. These center on how to achieve defacto consolidation of certain types of holdings judged incapable of gene-rating incomes above the poverty line no matter how efficiently they may beworked. The discussion below considers first the extent of traditional tenureproblems, and second, the issue of consolidation.

3.23 Probably the most specific work yet done on tenancy arrangements inany agricultural subsector in Malaysia has been done by the University SainsMalaysia (USM) in the Muda River region./l The Muda River study has much tosay about the size distribution of lots and parcels in the region and on thetypes of relationships between owners and tenants. Farmers are divided intothree groups, owner-operators, tenant-operators, and "mixed" operators (i.e.farmers who own some of the land they work and who rent additional parcels toincrease the total size of their farms). Although 68% of the lots wereoperated as single parcels (reflecting pure ownership or pure tenancy) nearlyone-third of the lots were broken up into multiple parcels with farmers owningsome of the land and renting some.

3.24 The authors of the Muda River study advise caution in attempting toachieve equity or economic goals for padi farmers through legislation thatregulates tenancy or sets minimum economic sizes of holdings. Indeed, therealready exists a 1967 Padi Cultivators Act which does in fact try to regulatetenancy in the sector. The study found that the great majority of tenancyarrangements are conducted entirely outside the requirements of the Act: only6% of all landlord-tenant agreements were embodied in written, registeredagreements as required by the Act. Eighty percent were conducted underinformal verbal agreements which, while appearing to give tenants littlesecurity or protection, were in fact widely regarded as acceptable to bothparties. A major reason for the generally satisfactory working of tenancyagreements in the Muda region is ascribed to the fact that well-over half thetenants had some kind of kinship relation to their landlords, plus the factthat most landlords were local persons who owned only modest amounts of land.Indeed, the study showed that it was very difficult to tell landlords fromtenants. "... landlords do not provide credit or marketing functions, and tendto possess no outstanding characteristics to set them apart as a distincteconomic class from other farmers" (the authors caution that there is also agroup of large landlords in the region but that this group was not representedin the district where the sample survey was conducted). The USM/MADA surveyarrives at the following conclusions:

/1 A pilot study was done (1974-77) in one of the region's 12 districts,the work being done in close cooperation with the Muda AgriculturalDevelopment Authority (MADA). A similar but less exhaustive study oftenancy arrangements in the Kemubu River region was done in 1974/75 byFELCRA, work which is to be followed up by a more detailed study to bestarted by USM in 1979).

- 75 -

(a) "Until further information on landlords is obtained, such as by animproved register based on stature declarations by landownersconcerning the operators of their land, we can only comment thatthere is evidence of at least three types of landlord and that anystrategy to redistribute landed property rights to cultivatorsshould identify with precision the different parties involved andtheir interests in the land so as to minimize hardship (i.e., toretired farmer/small operator) and avoid possible socialdislocation." (Summary, p. xxiii.)

(b) "We have not so far studied the subdivision of ownership which iscriticized for reducing the incomes of individual co-owners and forinefficient farming, but we suggest that legislation to change thelaws of inheritance or to impose minimum holdings are not likely tobe successful and the best solution may be to increase the choiceand number of alternative occupations.... The wisest course for thealteration of farm size is achieved through tenancy.... The contin-uation of tenancy, which allows flexiblity in farm management,requires the continuation of landlords and we have found that a verylarge proportion of these are small farmers or retired farmers them-selves, indistinguishable from the rest of the farming population."(Summary, pp. xxiv-xxv.)

(c) As far as absentee or very large landlords are concerned, theauthors state that: "Once these can be identified and the maximumpracticable farm size for operation under present and likely futuretechnology established, there may be a case for introducing aceiling on land holding which would release a small amount of landonto the market for distribution to landless farmers."(Summary, p. xxvi.)

3.25 While the traditional tenure problems of large landowners andinsecure titles may not be substantial, the fragmentation of holdings appearsto be a major problem. As Chapter 2 stressed, the small average size ofholdings in rubber resulting from this history of fragmentation is perhapsthe major constraint on raising incomes for rubber smallholders. Similarclaims may be made for padi farmers. For example, despite a 3.6-foldincrease in farm incomes during the first decade of MADA, one-third of theregion's padi farmers still had household incomes below the PLI in 1975.Almost all of these worked holdings of three acres or less. MADA authoritiesdo not see much hope of lifting these farmers above the poverty line unlessthe primary cause - holdings that are too small - can be overcome. And theonly way to achieve this appears to be the resettlement of "surplus" padifarmers on other land or in other occupations. Projections of the rate ofindustrialization in Kedah over the next decade or two suggest that therewill not be sufficient nonagricultural opportunities to absorb the surpluspadi farmers, nor are the prospects for resettlement encouraging - there islittle land within Kedah available for resettlement schemes, and otherstates are reluctant to accept "foreigners" on land development schemeswithin their boundaries. At present, therefore, there is no clear strategy

- 76 -

for lifting Muda padi farmers above the poverty line; the most that presentstrategies envisage is to lift then closer to or slightly above the PLI byintensifying padi inputs.

3.26 Although, as noted, USM has been commissioned to do a M4uda-typestudy in the Keinubu River padi-growing region, that work will probably notbe completed for another two or three years, at the earliest. Some work onincomes and landholdings (but without much attention to tenancy arrange-ments) has already been done by FELCRA. which in late 1977 published theresults of a "Socio-Economic Survey of Kemubu. Kelantan Irrigation District."The survey found that while padi yields had doubled between 1971 and 1975(the Kemubu irrigation scheme was completed in 1972), two-thirds of theabout $235 for that date). The central finding of the survey was that thereappeared to be little hope of lifting the large number of below-poverty padifarmers to higher income levels without an increase in farm sizes (83.5% of

the padi farmers were found to own lots of two acres or less, 70% owned oneacre or less and 25% ovmed 0.5 acres or less). The survey found that manyfarmers would indeed be prepared to resettle on land development schemes butonly if allowed to retain title to their present Kemubu holdings "for thetime being." There was little interest in consolidation that did not leadto larger farm sizes per farmer, even though larger operating tnits mightpermit the purchase of inputs needed for more intensive farming than farmers

could finance when working their plots individually. A proposal forconsolidation and for the resettlement of some Kemubu farmers has reportedly

been worked out, at least partially, but no details were available to themission and no experience has yet been gained in implementation.

3.27 Traditionally, "land development" in Malaysia meant the clearing ofvirgin lands and the resettlement of smallholders in new, unfamiliar communi-

ties. There is now emerging a second form of "land development" which, if itproves viable, may become equally important. The general term "in situ"land development is used to cover what are in fact a number of variationsaround a central concept, namely the regrouping of economic activities, andof housing amenities, within existing village areas. In situ land develop-ment is a new approach to poverty-reduction that attempts to restructurevillage productivity by mleasures that go beyond traditional replanting but

which do not involve the transfer of selected smallholders (drawn from manydifferent villages) to new settlement areas of the FELDA type. Villagersremain in their villages although in many cases these will, be entirely

reconstructed on new village ground in the area so as to provide improvedstandards of housing and, especially, of those amenities which theGovernment considers to fall within its standards of basic needs (roads,electricity, potable water, schools, health facilities). Central directionand management of the village's basic economic activity would be introduced,perhaps but not necessarily involving some change in a village's traditionalcrops. Since poverty is unlikely to be overcome in some kampongs unlessfamilies can be provided with larger plots, in situ land developmentfrequently will have to incorporate into the reconstructed village economyunalienated "fringe" land that lies on its outskirts (usually not more than

- 77 -

2-3 miles distant). Indeed the availability of additional Government landnear a kampong appears to be a necessary condition for persuading villagersto enter this type of reconstruction scheme./l Finally in situ land devel-opment of the kind being described may involve fundamental changes in thekinds of titles villagers hold. The most important change is a possibleshift from the traditional smallholding title over both agricultural landand house to a share basis of production under which villagers do have titleto their (perhaps new) house and to a small piece of orchard land butsurrender their traditional titles over their smallholdings in exchange forshares in a village-wide economic unit. Villagers would be employed forwages to work anywhere within the village enterprise where assigned by thelocal manager (who may be responsible to a village committee). In additionto their basic wages (which would normally be slightly higher than theiraverage incomes as smallholders before reorganization) they would receivedividends on their shares in accordance with earnings of the village scheme.

3.28 Since a substantial proportion of in situ land development costswould be recovered from participants as a loan (i.e. all costs except thoseregarded as the cost of basic amenities, which the Government provides freeas a matter of policy), net dividends would not be large until loan repay-ments were completed - a system similar to that which has proven viable onFELDA schemes. But in the form of in situ development just described (whichis in fact FELCRA's proposal for its future program) villagers would not begiven title to any plot of agricultural land after the development costs hadbeen repaid. In that important respect, the FELCRA in situ model /2 differsfrom the standard FELDA model. The first pilot project to test this model(near Pasir Puteh in Kelantan) suggests that it may be too expensive toreplicate widely: the project budget is set at M$2.5 million, which worksout at around M$25,000 per household for 100 families averaging five memberseach./3 The Government will recover half of the costs from villagers over a20-year period.

/1 But the physical availability of land is often negated by land administra-tion problems. FELCRA has stated that "the chaotic state of land admin-istration ... would mitigate against large-scale FELCRA in situ develop-ment in the near future" ("FELCRA to the year 2000," November 23, 1978,p. 8).

/2 A fuller outline of FELCRA's in situ development model will be found inAnnex IX.

/3 This cost includes all of FELCRA's project-related administrative costs,which account for nearly half of total costs. This first project cost,including the high administrative element, may not be representative offuture costs as FELCRA gains experience.

- 78 -

3.29 The model just described is the heart of the program put forward byFELCRA for the development of its program for the next 20 years. But FELCRAis not the only agency that is experimenting with in situ schemes of thisgeneral type; RISDA, the Rubber Research Institute of Malaysia (RRIl4), andthe state of Kedah and Kelantan also have somewhat similar projects in handor about to start. (These are described in Annex IX.) The Governmenthas indicated to all agencies experimenting with new forms of in situ landdevelopmet that if their present pilot projects prove viable, the Govern-ment will be prepared to scale up this approach to poverty reduction in theFourth Malaysia Plan (FMP), and beyond. In point of fact, not enoughexperience will have been gained by the FMP to scale up this effort verygreatly. But the FMP should provide an opportunity for a much largertesting of: (a) the administrative feasibility of this aproach; and (b) itsacceptability to villagers in various forms. At present, the fewexperiments now going on testify to the pragmatism, flexibility, andimagination now going into the improvement of village agriculture and intothe physical reconstruction of traditional settlement patterns (essentiallythe tearing down of unplanned diffuse residence patterns that are costly tosupply with basic services and the construction of new nuclear villagers).FELCRA bases its model for the future on experience gained in the pastdecade with Youth Settlement Schemes (now to be phased out), with rehabilita-tion schemes to salvage ailing state settlement projects, and with thefringe settlement schemes (i.e., the incorporation of unalienated villageland into the village economy, but without the reconstruction, or sharebasis of ownership and working, to be used in its in situ model).

3.30 FELCRA does not yet have much experience to assess either theappeal or the viability of its new model. While the mission feels it is tooearly to give an unqualified endorsement to the concept, it does endorsewithout qualification the desirability of expanding the testing of thismode. It would probably help to spread and to evaluate the effort if theBank, if requested, were to include funds to support such schemes as acomponent in an early agriculture or rural development project. Suchsupport need not be limited to FELCRA schemes; it could include support forsimilar experiments being tried by other agencies (e.g. RRIN or RISDA).These are described in Annex IX.

- 79 -

4. SYNOPSIS OF MAJOR RECOMMENDATIONS

4.01 The principal recommendations of this report are summarized inthis chapter. Many of these proposals have been made previously by otherauthors and some are being actively discussed within the Government. Theserecommendations therefore do not claim to be a new or original but representin the mission-s judgment an appropriate direction for overcoming some ofthe constraints hampering more effective poverty alleviation in rural areas.

General Issues

4.02 Formulation of Contingency Strategy. As an alternative, a lessoptimistic industrial growth strategy should be formulated in the context ofthe Fourth Malaysia Plan on which to determine the appropriate scope ofprograms to reduce rural poverty. The economic social costs, benefits andrisks of both approaches need to be carefully evaluated.

4.03 Analysis of Labor Transfer. As the major mechanism for ruralpoverty redress, a study of the rural-urban migration process and its rela-tionship to rural poverty redressal should be given high priority in thecontext of the Fourth Malaysia Plan and the 1980 Population Census.

4.04 Improved Monitoring of Poverty Households. A data collection systemshould be established by the Department of Statistics in conjunction with EPUto monitor on an annual basis the income and living conditions of poor house-holds. This system should be designed to give a reasonably reliable up-to-date indication of the progress being made to alleviate poverty.

4.05 Subsidization of Basic Services to the Poor. The cost of basicservices, especially education, are a substantial burden to the poor and limittheir access to these services. Consideration should be given to subsidizingthe consumption of such services to the poor. An area of high priority issubsidizing out-of-pocket expenses for education which currently constitutea substantial burden on the poor.

4.06 More Coordinated Poverty Implementation. This would require(a) greater coordination of implementing agencies to address more effectivelythe complex needs of poverty households and (b) more focussed attention onpolicies needed to overcome serious structural constraints to poverty allevia-tion. Suggested administrative mechanisms to accomplish this are set out inAnnex X.

Rubber Smallholder Issues

4.07 Reduction of Taxes on Poor Rubber Smallholders. Such reductionwould have an immediate and substantial effect on the incomes of all poorrubber smallholders. Taxes and cesses on rubber smallholders currently amountto about half the net income of rubber smallholders. In the interest ofsocial equity and poverty eradication, the Government should give high

- 80 -

priority to devising a way to reduce taxes, particularly the export tax, onrubber smallholders.

4.08 Review and Restatement of Objectives. Raising the incomes of thesmaller, "hard core" smallholders is more difficult than helping the largersmallholders who have been the primary beneficiaries of replanting programs inthe past. The best way to raise their incomes may often be to shift them outof rubber. It is entirely possible that smallholders may abandon rubber morerapidly than the productivity of remaining smallholders can be increased,which would lead to a net decline in smallholder rubber production. The 1978increase in the replanting grant, which was limited to smallholders whoreplant with rubber, reflects the pull of government objectives in somewhatdifferent directions - protecting rubber production versus raisingsmallholder incomes. The role of smallholder output in total Malaysian rubberproduction is dependent on Government policy towards preserving its share inworld natural rubber output. This problem needs to be addressed moreexplicitly than has so far been the case, so that policy can be set withrespect to the contributions to be sought from both the estate and smallholdersectors. Until that larger question is settled, RISDA and other agencies willbe unsure whether the goal of rubber production or that of poverty redressalshould dominate in programs for rubber smallholders. Although the needed dataare lacking, it may be possible that a policy geared to poverty redress willstill result in an adequate output of smallholder rubber (from land on whichrubber remains the most profitable crop).

4.09 Strengthening the Data-base on the Socioeconomic Characteristicsof Smallholders. While there will be a continuing need for new surveys toextend existing data, the main objective for the next one or two yearsshould be to organize and analyze data that is already available. There arethree things that need to be done with sources of existing data in theshort run:

(a) The data on replanting which is already available in RISDA-s localoffices but not at headquarters should be centrally collected.These will at least tell us what is not presently well documented,i.e., the proportion of smallholders in each sizeclass of holdingwho have replanted and who have not. Local offices may also yieldadditional useful data.

(b) The tabulation and publication of the data gathered in the 1976National Smallholders Survey and the earlier Kedah survey should becompleted as rapidly as possible.

(c) The 1976 National Smallholders Survey and the 1977 AgriculturalCensus should be analyzed for whatever light these sources may shedon the socio-economic characteristics of rubber smallholders, brokendown by size of holding, if possible. A much better knowledge ofthese characteristics is needed to design programs that will meetthe needs of the "hard core" smallholders.

- 81 -

4.10 Preparation of a Written Statement of Goals and Programs. Atpresent RISDA has no written statement of its various programs, theirrelative importance, or their costs. The discipline of preparing such astatement, even if somewhat tentative, would contribute to the neededclarification of the agency's objectives and work. Preparation of normalfinancial accounts would clarify RISDA's resource position and also help itsinstitutional image (the latest published account is for 1973, the year ofRISDA's establishment).

4.11 Extending Assistance to Squatters Willing to "Legitimize"Themselves. This group is apparently large enough obetween fk>ZUA ot allrubber smallholding acreage) so that their efficiency significantly affectsoutput and the size of the poverty group. RISDA should attempt to secureagreement with the necessary Government agencies on how squatters might bedeclared eligible for replanting assistance. We understand that discussionsof this issue are currently underway with the state government of Kedah.

4.12 Introduction of Stronger Re planting Incentives for the SmallerSmallholders. In late 1978 or early 979 the Treasury approved a grant ofM$20 million for a new two-year program of income-maintenance subsidies forrubber smallholders. No rules for the use of these funds had been workedout at the time of the mission's visit. The offering of these fundsrepresents a departure from the quarter-century old policy of limiting thereplanting grant to the estimated cash costs of replanting -- without anyattempt to provide cash to sustain incomes through the immaturity period.

The new funds are reportedly intended to provide partial income maintenance.We recommend that the funds be concentrated on the smaller smallholders,i.e., those who cannot do replanting in stages (and thus partially protecttheir incomes) because their holdings are too small.

4.13 Review of Block Replanting and Block Newplanting. Analyticalreviews of these two important RISDA programs shou1d be made before thestart of the Fourth Plan and as part of the overall programming exercisesuggested below. The main difficulty with block replanting is thedifficulty of persuading all owners in a block to participate: the use ofcompulsory powers to force participation (perhaps only in. cases where, e.g.,

two-thirds of all owners are for it) should be considered (FELCRA hasapparently been able to use such authority to force participation in similarschemes). The main criticism of RISDA newplanting schemes is that RISDA isnot the logical agency to implement such programs; FELDA is said to be amore appropriate agency to carry out block newplanting, which is aland development and settlement operation, something FELDA has far moreexperience in doing. Because of obvious institutional interests, theconduct of the suggested reviews should be done by RRIM, the Department ofAgriculture, or a composite interagency task-force.

4.14 Strengthening of RISDA-s Extension Services. At present rubbersmallholders receive advice and assistance from RISDA extension staff onlyat the time of replanting and during the immaturity period while the

- 82 -

replanting grant is still being paid out. No further help is received aftertapping begins, even though such help could undoubtedly help spread culturalafid tapping practices which would increase yields and returns. At presentRISDA has only about half as many extension agents as needed to provide theintensity of service which experts judge desirable. No "crash" program tobuild up the extension staff should be undertaken, however, until RISDA hasfirst clarified its objectives and until the Government has decided whetherto convert RISDA into a general-purpose agency covering all smallholdercrops or to continue it as an agency charged primarily with serving rubbersmallholders.

Padi Farmers

4.15 Reassessment of Crop Promotion Policy. Rice cultivation ispromoted as part of Malaysia's self-sufficiency policy. However, thereappears to be considerable potential to increase incomes by switching toother crops. It is therefore recommended that the practical alternatives ofother crops be evaluated in terms of the objective of maximizing smallholderincomes.

4.16 Intensification of Extension Services. There is a considerablevariation in padi yields in Malaysia and there is substantial scope forincreasing incomes by increasing yields. Provision of additional extension,perhaps through a village-farmer extension system, would yield substantialbenefit.

4.17 Changes in System of Land Holding. Inadequate size of holding isa major constraint on increasing padi incomes above the PLI. High priorityshould therefore be givenl to measures to halt further framentation and toestablish an institutional mechanism such as a land bank to facilitate theoperation of a market in land.

4.18 Increasing the Offer Price for Padi. At present the Government'soffer price for padi is about 13% below the world market price. Further,the current world market price is about 17% below the "normal" long-termworld price. In these circumstances, a significant impact on poverty couldbe achieved by increasing the offer padi price to the long-term "normal"level. This would mean am offer price of about M$42 per pikul in 1980 andincrease a poor padi farmer's income by 20-25%.

Fishermen

4.19 Reassessment of Government Strategy. The Government strategy ofmaking fishing more capital intensive through subsidy programs does notaddress the central problem of dwindling fish resources. Measures to reducepoverty must concentrate on finding alternative sources of income rather thanon increasing output from existing marine fishing activities.

4.20 Promotion of Aquaculture. A very promising alternative is thepromotion of aquaculture which preliminary analysis suggests could support

- 83 -

large numbers of fishermen at above poverty income. An intensified govern-ment effort in this area appears warranted.

Land Issues

4.21 Need to Maintain Scope of Land Development. The shortage of landis a major constraint on increasing incomes of rural households. GivenMalaysia's ample land resources, the likelihood that rural poverty willpersist even under optimistic assumptions about industrial growth and theavailability of public sector resources, the rate of land development shouldbe maximized, constrained only by land availability. Attempts to reducedeliberately the rate of land development in the context of the FourthMalaysia Plan should be resisted.

4.22 Need for Interstate Mtigration Policy. Because the availableundeveloped land is distributed very unevenly, there is need to develop, inconjunction with the states, a migration policy so that state restriction onsettlers' origins will not artificially constrain the pace of landdevelopment.

4.23 Improvement of Coordination Between Development and Consolidation.The benefits of land development could be increased considerably by bettercoordination of consolidation with settler selection and land development.In this way, the settlers could be selected in an area and in a manner whichwould facilitate the consolidation of land among the remaining population.

4.24 Pursuing Experiments in In Situ Development. A number ofexperiments are underway for a new form of land development which redevelopsexisting villages, consolidates and adds fringe land. It is too early torecommend large scale application but further experimentation and testing isstrongly endorsed.

- 84 -ANNEX IPage 1

POVERTY LINE INCOMES

1. A number of different poverty line incomes (PLIs) have been inuse in Malaysia. Four of the lines frequently used are summarized in Table 1.These are:

(a) the PLI used in the Third Malaysia Plan as a basis forestimating the poverty incidence;

(b) the PLI used in the Mid-Term Review of the TMP;

(c) the "EPU revised" PLI of iarch 1978 for rural, urban,and total; and

(d) the medium estimate used in the Anand analysis.

2. For comparability all these various PLIs are estimated for keyyears in current prices by inflating or deflating by a price index reflect-ing price changes in the poverty basket (see Table 2). For the period 1970to 78, the PLIs are deflated by consumer price indices for rice and

cereals, other food, and nonfood, weighted according to the weights used inestimating the particular PLI.

3. It is not clear how the PLI estimate of M$270 used in the MTR wasderived. One possibility is that it is based on the original TMP estimate ofM$180 but inflated differently than is done in Table 1. This discrepancyneeds to be resolved.

Table 1: POVERTY LINE INCOMES 1970-78(M$ per month per household, current prices)

TMP Mid-term EPU revised/b Anand.Year original review /a Rural Urban Total medium PLI /a

1970 180.0* 163.5 156.4 173.2 160.4 135.0*1973 209.9 191.5 183.1 202.8 187.8 158.11975 265.8 240.3 230.4 255.1 236.3 198.91976 270.4 245.9 235.2 260.5 241.2 203.01977 281.9 257.3 246.1* 272.6* 252.4* 212.51978 295.9 270.0* 258.2 286.0 264.8 222.9

/a Inflated by price index using weights in revised EPU index, i.e.column 6 of table 2.

/b Adopted as poverty line income for internal use in World Bank.

Notes: * refers to original estimate for each series, other years-estimates are inflated/deflated by indices in Table 2.

- 85 -

ANNEX IPage 2

Table 2: PRICE INDICES 1970 = 100

Components Weighted aggregatesRice Other Non TMP orig. Revised EPU

Year cereals food food CPI poverty basket poverty basket

1970 100.0 100.0 100.0 100.0 100.0 100.01973 113.4 124.5 111.1 115.9 116.6 117.11975 160.5 158.1 127.6 142.2 147.7 147.31976 156.3 164.2 131.7 145.9 150.2 150.41977 156.6 176.5 136.9 152.8 156.6 157.41978/a 164.6 185.4 143.3 160.3 164.4 165.1

/a Annual estimate based on first three quarters of 1978.

Note: Indices weighted as follows:

Rice/cereals Other food Nonfood

CPI 13.1 33.7 51.2TMP/Orig 27.6 36.1 36.3EPU revised 22.2 40.6 37.2

- 86 -ANNEX II

Page 1

REWEIGHTING OF OFFICIAL POVERTY DIET

1. In order to test the hypothesis that the composition of the offi-cial poverty diet (i.e. the revised EPU diet) is a high cost diet in thesense that it is a relatively expensive way to obtain the stated calorierequirements, the diet was reweighted based on actual consumption of lowincome households.

2. The actual consumption of low income households is derived fromthe expenditure pattern of lower income rural households taken from the 1973Household Expenditures Survey. The conversion of monetary expenditures intocalories was done by dividing the expenditures by estimated prevailingprices for various food items to derive quantities consumed and thenconverting to calories using calorie conversion estimates from the FAO "FoodComposition Tables For Use in East Asia".

3. Table 1 summarizes the actual caloric composition for fourexpenditure groups and compares them to the composition used in the offi-cial PLI. Table 2 compares expenditures required to meet the calorictargets with the revised weights and with the official weights.

Table 1: CALORIC COMPOSITION OF RURAL HOUSEHOLDS' DIETS(% of calories from various foods)

Monthly expenditures per household (M$)Weighted/aaverage Official

0-49 50-99 100-149 150-199 0-199 PLI

Rice 69.2 65.6 61.7 58.7 61.9 55Bread and other cereals 7.7 8.7 10.1 11.1 10.0 6Meat 0.6 0.7 1.1 1.5 1.1 -Fish 3.7 3.7 4.0 4.1 4.0 5Milk 0.6 1.3 2.0 2.7 2.0 4Oils and fats 5.1 5.5 6.0 6.5 6.0 7Fruits and vegetables 1.8 2.3 2.9 3.3 2.9 11Sugar 10.1 10.7 10.3 9.8 10.2 12Coffee 0.3 0.3 0.3 0.4 0.3 -Other 0.8 1.2 1.5 1.9 1.6 -

Total 100.0 100.0 100.0 100.0 100.0 100.0

/a Weighted average based on population of four lowest expendituregroups. Weights are 3.8; 24.1; 36.5; and 35.7 for groups inascending order of income.

- 87 -

ANNEX IIPage 2

Table 2: REQUIRED EXPENDITURES TO ACHIEVE CALORICTARGETS /a WITH DIFFERENT WEIGHTS(M$ per capita per month, 1977 prices)

Expendituresusing actual Expenditures using1973 weights PLI weights /b

Rice 113.99 96.64Bread and other cereals /c 23.63 22.77Meat 19.67 -

Fish 77.83 93.03Milk and dairy 14.79 28.46Oils and fats 22.60 25.20Fruits and vegetables 20.51 47.30Sugar 21.85 24.53Coffee, etc. 11.82 )Other 9.18 16.09)

Total 335.87 354.04

/a Caloric requirement 2180 per person which is equivalent tothe PLI estimated requirement of 1982 per person plus 10% for

safety margins.

/b Caloric requirement of 1982 per person, plus for all foods(excluding coffee and other) 5% for additional caloric requirementsuggested in PLI paper. Coffee and other are estimated as 5% oftotal.

/c Includes starchy tubers.

Table 1: HOUSEHOLD CALORIE CONSUMPTION IMPLIED BY 1973 HOUSEHOLD EXPENDITURE SURVEY"

Monthly Household Expenditures M$ Average0-49 50-99 100-149 130-199 200-299 300-399 400-499 500-599 600-699 700-799 800+ Peninsular Malaysia

Total calories consumedper day per household 2,328 5,030 6,825 8,565 10,066 12,144 13,879 15,052 16,848 18,034 18,176 9,919

Household size 1.99 3.62 4.46 5.11 5.69 623 6.74 7.01 8.00 7.79 7.51 5.4

Number of earners 1.46 2.09 2.38 2.70 2.99 3.29 3.62 4.04 4.71 4.73 4.73 2.90

Household caloric requirement /a 4,257 7,477 9,120 10,437 11,613 L2,714 13,793 14,476 16,567 16,200 15,698 11,089

Consumption/requirements x 55 67 75 82 87 96 101 104 102 111 116 89

/a Based on government estimated requirements of adult male 2530 calories, adult female 2000 calories, child 1-3 years 1360 calories, child 4-6years 1830, and child 7-9, 2190 calories. Household composition was estimated by assuming that the number of earners per family (given in 1973HES) was equivalent to average adult requirement and that balance of family was equivalent to average child requirement.

Source: Mission estimate based on 1973 Household Expenditure Survey. Calorie consumption estimates obtained as explained in Annex Ill.

- 89 -ANNEX IVPage 1

ESTIMATION OF AVERAGE INCOME GROWTHOF LOW-INCOME AGRICULTURAL HOUSEHOLDS

1. The methodology used to estimate the average income growth of low-income agricultural households in Peninsular Malaysia for the period 1960-78, is summarized below. First, five time series (1970=100) were estimatedfor the various types of agricultural households in poverty:

(a) a producers' price index by sector (Table 1);

(b) a household index relating number of households persector (Table 2);

(c) a production index of smallholders by sector (see Table 3);

(d) a price index of the poverty basket (Table 4);

(e) a set of weights of poverty households by sectorfor 1970 (Table 5);

Second, on the basis of these indices, three additional indices bysector and five aggregate indices were derived:

(f) production index per household by sector [c/b) (Table 6);

(g) a nominal income index per household by sector [f.a](Table 7);

(h) an index of real income per household by sector [g/d] (Table 8);

(i) aggregate index of real income per low-income household [h.e](Table 9);

(j) aggregate index of nominal income per low income household[g.e] (Table 9);

(k) aggregate index of production prices for low income households[j/iJ (Table 9);

(1) aggregate index of terms of trade for low income households[k/d] (Table 9); and

(m) aggregate index of producton per low income household inagriculture [h.e] (Table 9).

- 90 -

ANNEX IVpage 2

Table 1: PRICE INDICES BY SECTOR 1960-78(1970 = 100)

1960 1970 1973 1975 1976 1977 1978

Rubber /a 183.3 100.0 119.4 108.4 149.3 159.3 169.4

Padi /c 100.0 100.0 131.3 162.5 162.5 162.5 162.5

Oil palm /a 94.4 100.0 88.A 172.9 138.7 194.1 182.5

Coconut /a 94.7 100.0 118.9 127.4 117.3 180.9 201.6

Fish /b 92.8 100.0 132.0 175.4 196.1 209.5 223.6

Other agriculture /d 92.8 100.0 124.5 158.1 164.2 176.5 185.4

/a Unit value index for export price.75 1960-73: from overall consumer price index;

1973-78: based on average price of pomfret and mackerel from CPI;1978: estimate based on first quarter increase (over previous year'sfirst quarter).

/c Guaranteed Minimum Price (GMP) of padi, medium grain exmill./d 1960-70 CPI for food;

1970-78 CPI for food (nonrice).

- 91 -

ANNEX IV

Page 3

Table 2: NUMBER OF HOUSEHOLDS BY SECTOR (1970-100)

1960 1970 1973 1975 1976 1977 1978

Rubber 76.3 100.0 107.7 113.2 114.5 116.4 117.9

Padi 76.3 100.0 103.6 106.0 106.2 106.5 106.8

Oil palm - 100.0 127.3 150.0 184.5 226.9 283.3

Coconut 76.3 100.0 104.4 107.5 107.3 107.0 106.7

Fishermen 76.3 100.0 104.9 108.3 108.7 109.1 109.6

Other agriculture 76.3 100.0 109.2 115.8 117.3 119.5 122.1

Estate workers 76.3 100.0 90.5 84.7 82.6 80.5 78.4

Total 76.3 100.0 104.1 107.3 108.3 109.2 110.3

Notes: All estimates (except for oil palm) for 1960 based on estimatedgrowth of rural population of 2.8% between 1960 and 1970. Despiteentry of zero for oil palm, overall total is 76.3 because ofnegligible absolute number of oil palm smallholders. Estimatesfor 1970, 1975 and 1978 are from TMP and 14TR. Estimates for 1973,1976 and 1977 are interpolations.

- 92 - ANNEX IVPage 4

Table 3: PRODUCTION INDEX OF SMALLHOLDERS BY SECTOR1970=100

1960 1970 1973 1975 1976 1977 1978

Rubber /a 46.5 100.0 131.3 135.3 146.5 145.2 147.9

Padi 55.2 100.0 116.4 117.6 117.5 110.7 82.2

Oil palm /a - 100.0 188.0 291.8 322.7 370.6 415.5

Coconut 71.8 100.0 77.6 74.3 75.0 72.9 73.9

Fish /b 51.0 100.0 127.8 129.2 143.3 157.0 164.1

Other agriculture /c 57.0 100.0 123.5 127.2 144.6 149.0 152.5

/a Excludes estate production.

/b 1960 based on estimated growth in fish landings of 7% p.a. during1961-70; 1970 and 1975 based on national accounts estimated growth ofvalue added in fishing; 1973 based on fish landed and related to 1975index; 1976-1978 based on fish production estimate in MTR.

/c 1960 based on growth in value added in agriculture 1960-70; 1970-75based on growth in value added in agriculture excluding forestry andfishing; 1976-78 based on index of agriculture production from MTR.

-93 - ANNEX IVPage 5

Table 4: PRICE INDEX OF POVERTY BASKET1970=100

1960 1970 1973 1975 1976 1977 1978

Price index 91.0 100.0 116.6 147.7 150.2 156.6 164.4

Notes: 1960 based on CPI growth between 1960 and 1970;1970-78 from Annex 1, Table 2 column 5.

Table 5: DISTRIBUTION OF POVERTY HOUSEHOLDS IN AGRICULTUREBY SECTOR FOR 1970

Sector Weight

Rubber 38.9Padi 21.2Palm oil 0.3Coconut 2.9Fishermen 4.8Other agriculture 21.7Estate workers 10.2

Total agriculture 100.0

Note: Based on TMP estimates of number of householdsin each sector and poverty incidence in eachsector.

- 94 -ANNEX IVPage 6

Table 6: PRODUCTION INDEX PER HOUSEHOLD BY SECTOR1970=100

1960 1970 1973 1975 1976 1977 1978

Rubber 60.9 100.0 121.7 119.5 127.6 124.7 125.4

Padi 72.3 100.0 112.4 110.9 103.9 103.9 77.0

Oil palm - 100.0 147.7 194.5 163.3 163.3 146.7

Coconut 94.1 100.0 74.3 69.1 68.1 68.1 69.3

Fish 66.8 100.0 121.8 119.3 143.9 143.9 149.7

Other agriculture 75.7 100.0 113.0 109.8 124.7 124.7 124.9

Source: Table 3 -r Table 2.

- 95 -ANNEX IVPage 7

Table 7: NOMINAL INCOME INDEX PER HOUSEHOLD BY SECTOR1970=100

1960 1970 1973 1975 1976 1977 1978

Rubber 111.6 100.0 145.3 129.5 190.5 198.6 212.4

Padi 72.3 100.0 147.5 180.2 179.7 168.8 125.1

Oil palm - 100.0 131.3 336.3 242.6 317.0 267.7

Coconut 89.1 100.0 88.3 88.0 82.0 123.1 139.7

Fish 62.0 100.0 160.8 209.3 257.5 301.5 334.7

Other agriculture 70.2 100.0 140.6 173.6 202.5 210.2 231.6

Estate 155.2 100.0 113.9 128.5 146.1 171.8 174.4

Note: Estimate for all sectors except estates derived from Tahle 6 x Table 1.Estate incomes are estimates of nominal wages based or weighted indexof rubber and palm oil prices.

- 96 - ANNEX IVPage 8

Table 8: INDEX Of' REAL INCOME PER HOUSEHOLD BY SECTOR1970=100

1960 1970 1973 1975 1976 1977 IC

Rubber 122.6 100.0 124.6 87.7 126.8 126.R 129.?

Padi 79.4 100.0 126.5 122.0 119.6 107.8 76.

Oil palm - 100.0 112.6 227.7 161.5 202.4 162

Coconut 97.9 100.0 75.7 59.6 54.6 78.6 85.0

Fish 68.1 100.0 137.9 141.7 171.4 192.5 203.6

Other agriculture 77.1 100.0 120.5 117.5 134.8 134.2 140.R

Estate 170.5 100.0 97.6 87.0 97.3 109.7 106.1

Source: Table 7 -: Table 4.

- 97 -ANNEX IVPage 9

Table 9: AGGREGATE INDICES OF PRODUCTION AND PRICESPER LOW INCOME HOUSEHOLD IN AGRICULTURE

1970=100

1960 1970 1973 1975 1976 1978

Real income 104.6 100.0 120.5 102.6 123.9 120.6/a

Nominal income 95.2 100.0 140.5 151.5 186.1 198.3

Production 86.6 100.0 114.0 110.9 119.2 112.8

Production prices 109.9 100.0 122.8 136.6 156.1 175.1

Consumption prices 91.0 100.0 116.6 147.7 150.2 164.4

Terms of trade 120.8 100.0 102.0 92.5 103.9 107.8

Sources: See explanation page 2 items "i-m" of this Annex.

/a If the real incomes of padi farmers were based on conditionsexpected in 1979 instead of the 1978 when a drought causeda substantial fall in padi output, the aggregate index wouldbe 128.9 rather than 120.6 (see text Table 2.7 for estimatesof price and production estimates for 1979).

- 98 -

ANNEX VPage 1

COMPOSITION OF RUBBER SMALLHOLDINGS

Smallholdings account for 2.7 million or 58% of the total of4.7 million acres of land planted to rubber in Peninsula Malaysia (PM) in1976 (there are another 750,000 acres under rubber in Sabah and Sarawak, butyields there are low and only about 5% of Malaysian output comes from thetwo East Malaysia States). Wiithin the 2.7 million acres of smallholdings inPeninsula Malaysia, the following three broad groupings can be identified:

(a) 1.7 million acres (64% of the 2.7 million total) are owned andoperated by 270,000 "unorganiized" smallholder families. Thisgives an average farm size per family of about 6 acres. Althoughthe average is 6 acres the distribution is skewed. For examplebased upon RISDA-s registry, about 62% of rubber smallholdersown less than 5 acres of rubberland; within this group,three-quarters are Malays with average holdings of just over2.5 acres. These 124,000 independent Malay smallholders with very

small holdings constiture almost two-thirds of the 198,000rubber smallholders estimated to fall below the poverty line in1978. This group is widely but unevenly scattered throughoutPM; they constitute the core of the poverty problem amongrubber smallholders. A word of caution is needed, however;data from the 1960 Agricultural Census showed that over halfthe rubber smallholders with rubber acreage of 3 acres or lessalso held additional land on which other crops (usually padi,fruits or coconuts) were also grown. Thus, for a majorityof the smallest smallholders, rubber is not the sole sourceof income. On average, nonrubber income is estimated toaccount for about 25% of total household income of smallholderson average-sized individually-operated rubber holdings./l

(b) Some 0.7 million ac:res (25% of the 2.7 million total) are owned by"organized" smallholders whose plots are part of the Government-sponsored land-development schemes that have been organized withinthe past 25 years. Most of these holdings are therefore plantedwith new or higher-yielding rubber characteristic of much of the"unorganized" smallholder sector. The following subgroups withinthis "unorganized" smallholder sector can be identified:

(i) 250,000 acres in FELDA land-development schemes (25,000families);

/1 Colin Barlow, The Natural Rubber Industry (Oxford University Press, 1978)p. 279.

- 99 -

ANNEX VPage 2

(ii) 125,000 acres in block new planting schemes administered byState governments or state statutory authorities, often withfinancial assistance from the Federal Government;

(iii) 120,000 acres of fringe-area new planting developed (with mixedsuccess) under Fringe Alienation schemes, most by FELCRA;

(iv) 135,000 acres developed by private individuals or group effortwith no Government assistance; and

(v) Other special schemes, not included in a-c above, whereholdings range from 2.5 - 10 acres.

(c) 0.3 million acres of ex-estate land which became fragmented intoabout 36,000 holdings (average size: 10 acres) in the late 1950s andearly 1960s when the Government briefly pursued a policy of breakingup the rubber estates. This group of smallholdings consists ofrelatively large farms, mostly owned by Chinese and Indians, notMalays. It is assumed that the incidence of poverty within thiscategory is very low, as indeed it would be among the better-rununits within the "organized" category.

Table 1 below summarizes much the same information in a slightly differentform, based on 1972 data. It shows that about three-quarters of allsmallholdings consisted of individually-ope:rated farms, the other quarterbeing on organized schemes of various kinds. The much higher proportion ofimmature rubber on smallholdings in schemes than on individual holdings sug-gests that the former were growing more rapidly than the latter (a trendthat may no longer be true becaus of the strong shift towards oil palm inmany schemes).

- 1100 -

ANNEX VPage 3

Table 1: SOME FEATURES OF TH1E' VARIOUS TYPES OF SMIALLIHOLDINGS, 1972

AverageTotal planted Proportion Propor

Type of planted area per high-yielding arefarm area farm material imnarur-

('000 acres) (acres) (X) (%)

Individual /a 2,072 6.9 [300]/b 63 26

SchemesFelda 188 9.0 [ 21] 100 52

Unsubsidized 131 6.0 [ 22] 88 27Fringe 128 5.3 [ 24] 95 52

State 36 4.5 [ 8] 73 38Felcra 24 6.0 [ 4) 100 100Other subsidized 117 3.4 [ 34] 95 35

Total schemes 625 5.5 /c[113] 94 /c 45 /b

GRAND TOTAL 2,697 6.5 /c[413] 70 /c 30 /b

/a Combining Lim's classes of "individual" and "subdivided" holdings.

/b Figures in brackets denote number (in thousands) of farms in each class.

/c Weighted according to total planted area in each class.

Source: Lim, S. C. (1974).

ANNEX VI

- 101 - Page 1

FARI' BUDGETS

1. Padi farmers and rubber smallholders are the two largest identi-

fiable groups of the poor in rural Malaysia. Many of the Government's

programs are aimed at subsidizing or increasing the productivity of these two

groups in order to increase their output and raise their incomes above the

poverty line. It appears, however, that in both cases the goal of poverty

eradication may not be entirely consistent with another Government policy,that of increasing production in order to achieve self-sufficiency in rice and

to maintain Malaysia's share of the rubber market. Both crops currently yieldrelatively low incomes, and, from the standpoint of smallholder incomes, a

revaluation of crop promotion policy appears warranted. The Government has

carried out a number of large-scale irrigation schemes for double-cropped

padi, some of them very successful. However, the areas best suited for

large-scale irrigation have already been included in projects, and further

work will be done on a much smaller scale and will cover many farmers with

very small holdings. The alternatives suggested in this Annex are for these

people, not for those who are already double cropping their padi land.

2. Tables 1 and 2 compare the net income per acre that can be derived

from a number of smallholder crops. The data are from two different sources,

and may not be strictly comparable. Table 1 shows average net receipts per

acre from 16 crops, excluding tree crops.

ANNEX V i- 102 -Page ?

Table 1: FARM BUDGETS /a(1977 M$ per acre)

Net Net receiptsCrop Receipts Expenditures /b receipts Man-days per man-day

Chillie 4,400 528 3,872 240 16.13Tomato 3,600 1,070 2,530 121 20.91Green mustard 3,000 670 2,330 220 10.59Potato 3,300 995 2,305 59 39.07Cabbage 3,000 797 2,203 65 33.89Kai Choy 2,400 651 1,749 151 11.58Tobacco 2,100 355 1,745 139 12.55Mustard flower 2,100 634 1,466 167 8.78Cassava 1,300 213 1,087 33 32.94White mustard 1,540 651 889 124 7.17Peanuts 1,050 281 769 40 19.23Pineapple 1,200 454 746 44 16.95Padi /c 560 81 479 31 15.45Soybeans 400 148 252 18 14.00Millet 450 211 239 27 8.85Maize 400 222 178 21 8.4P

/a Assumes average yields and prices.79 Excludes labor, which is provided by the family./c M$28/pikul, single crop.Source: MARDI, "Estimated Production Costs and Income from Crops and

Livestock", March 1977.

ANNEX VI-103- Page 3

Table 2: FARM BUDGETS /a(1977 M$ per acre)

NetNet Man- receipts/

Crop Receipts Expenditures /b receipts days man-day

Coffee & pepper 3,868 449 3,419 146 23.42Coffee 2,347 140 2,207 87 25.37Lates (fish) /c 4,800 2,938 1,862 58 31.92Cocoa 1,890 238 1,652 32 51.63Oil palm 1,232 165 1,067 33 32.33Silkworm 1,050 292 758 63 12.03Rubber 712 147 565 79 7.17Padi (1 crop) 681 128 553 55 10.05Padi, average actual 470 44 426 51 8.35Rubber, average actual 404 50 354 55 6.44Coconuts 184 6 178 13 13.69Rubber, old 127 20 107 30 3.57

/a Rows 1 through 8 are hypothetical budgets in Kedah/Perlis after produc-tion reaches a stable level following the provision of infrastructure orimproved inputs. The last four rows are actuals for padi, rubber andcoconuts and for old rubber trees. All budgets use 1977 prices.

/b Excludes labor.

/c Brackish water.

Source: Economic Consultants, Ltd., Kedah-Perlis Development Study.Vol. 3, September 1978; Coconuts: Coconut Smallholders'Development Project Staff Appraisal Report (#1906-MA),January 30, 1978.

ANNEX VI- 104 - Page 4

The receipts from padi (M$479 from a single crop) are lower than all hutthree other crops: soybeans, millet and maize. This would be true evenafter allowing for income from a second padi crop. The most productivecrops in the table are chillies, tomatoes, green mustard, potatoes, andcabbage, each producing over M$2,000 per acre p.a. Tobacco, a popularcrop, produces M$1,745 per acre p.a., several times the padi output.

3. Labor costs have not been included in the comparison, since laboris provided by the farmer and his family. However, it is important to knowthe amount of labor required, since to some extent the less labor input thatis needed to produce the crop, the more will be available to grow other cropsor to earn income outside the farm, if opportunities are available. Therefore,the number of man-days required for each crop is also shown, as are the netreceipts per man-day worked. Use of this indicator changes the ranking ofcrops significantly, and padi comes out better, at M$15.45 per man-day. Thetop crops are potatoes, cabbage, and cassava, all over M$30 per man-day. Itmust be emphasized, however, that a family's ability to earn income fromsources other than their main crop depends not only on the time left to them

after growing their crop, but also on the availability of either additionalland or outside employment. In the poorest areas of Malaysia, both of thesefactors are often severely limited.

4. Table 2 presents similar comparisons for eight smallholder crops,including some tree crops. In this case the receipt and expenditure figuresin the first nine rows are the potential estimated for a particular regionat 1977 prices once production has reached its stable level following theprovision of improved inputs (e.g. ponds for fish, replanting for rubber, orintercrops for coconut). They do not represent actual farm budgets. Forcomparison, the last four rows of the table show the budgets for presentaverage production levels for padi, rubber and coconuts, and for old rubbertrees which need to be replanted. Using improved and recommended levels ofinputs, which result in yields 45% above the present average in the region,rubber and padi come out seventh and eighth of the first eight crops rankedeither by net receipts per annum or by receipts per man-day. Particularlynotable are the potential incomes from aquaculture, coffee and cocoa, allof which are at least three to four times the income from single-croppedpadi or from rubber./l The data for coconuts, which come from a differentsource and may not be strictly comparable to those for other crops, show thatthis is also a very low income crop.

/1 Brackish water acqualture is not an alternative for all farmers, butmuch coastal paddy land could be flooded and used for raising brackishwater fish.

ANNEX VI-106- Page 6

Table 3: PRICE INDICES FOR COMMODITIES, 1977-1990(1977 = 100)

Commodity 1977 1980 1985 1990

Tobacco 100 106 116 119Peanuts 100 80 75 82Rice 100 119 135 140Soybeans 100 71 96 115Maize 100 126 139 142Coffee 100 39 40 43Cocoa 100 72 49 33Oil palm 100 88 73 70Rubber 100 105 110 118Copra 100 87 95 94

Source: Staff projections.

ANNEX VI- 105 - Page 5

5. Some caution must be used in interpreting the farm budgetspresented above. They all incorporate specific assumptions about yields,prices, and use of inputs which may not be representative of the country asa whole and which do not take into account large shifts in supply. Tables 3and 4 illustrate the impact of expected price changes on some of the farmbudgets through 1990.11 The prices of staples such as maize, rice and soy-beans are all expected to rise in real terms by 1990, as are those of rubberand tobacco. Coffee and cocoa prices, on the other hand, were very high in1977 and are expected to fall sharply. Copra, peanut, and oil palm pricesare also projected to fall. Tobacco and coffee remain two of the most pro-fitable crops, despite the drop in the coffee price to less than half its1977 level. Cocoa gains in the first few years, then falls to seventh placeby 1990. Oil palm, peanuts and rubber approximately retain their rankings,as do soybeans, maize and coconuts, which remain the last three crops. Padi(single-cropped) shows the greatest relative increase, from seventh place in1977 to third place in 1985 and 1990. In fact, by 1985, double-cropped padiwould probably rank second only to tobacco.

/1 Price projections are not available for the other commodities.

ANNEX VI- 107- Page l--

Table 4: PROJECTIONS OF NET RECEIPTS, 1980, 1985 and 1990(Constant 1977 M$)

Net Receipts per acre /.aCrop 1977 1790 1985 1990

Coffee 2,207 775 799 869Tobacco 1,745 1,871 2,081 2,144Cocoa 1,652 1,123 688 386Oil palm 1,067 919 734 697Peanuts 769 559 507 580Rubber 565 601 636 693Padi (1 crop) /b 553 682 791 825Soybeans 252 136 236 312Maize 178 282 334 346Coconuts 178 154 169 167

/a Assumes price changes only in output and assumes farmgate price indexsimilar to world price index.

/b Assumes guaranteed miaimum price follows world price.

Source: Tables 1, 2 and 3.

ANNEX VI- 108 - Page 8

6. An examination of the markets for some of the other crops is alsonecessary to determine which ones offer the best long-term income prospects.The market for brackish water fish could sustain large increases in produc-tion from Malaysia without much change in prices. Tn 1976, PeninsularMalaysia exported M$ 234 million of fishi and fish preparations, of which 32%,went to Japan and 15% to Singapore. Prawns were the most popular fishexport, making up 62% of the total, with one-third of them going to Japanand 4% to Singapore. However, imports from Malaysia make up less than 3% ofJapan's imports of shellfish and 29%o of Singapore-s shellfish imports, soincreased production from Ma:laysia would have little impact on prices.

7. Close to half of Peninsular Malaysia s exports of fruit and vege-tables went to Singapore in 1.975 and 1976. In tact, Singapore was virtuallythe sole importer of some of Malaysia's fresh food such as bananas, pine-apples, tomatoes, potatoes and cabbage, and in 1974 all of Singapore-simports of the first three of those goods come from Peninsular Malaysia.Potatoes and cabbages, however, come mainly from other sources and Malaysiaitself imports many more potatoes than it exports. Thus, although Malaysiamay not find it possible to expand its output of some agricultural goodswithout causing a substantial fall in prices, the markets for some goodscould support substantial increases. Potatoes and cabbages, for example,could probably be exported to Singapore in much larger amounts, and both ofthese crops provide net incomes per acre of over M$2,OOO p.a.

8. The Government-s agricultural input and diversification subsidyschemne under the TMP provides subsidies for planting certain crops in Penin-sular Malaysia. This scheme probably contributed to the 32% increase incocoa acreage and the 22% increase in acreage under fruit between 1975 and1978. Acreage under vegetables, on the other hand, did not grow. Bureau-cratic requirements concerning the registration of land use in titles to theland and programs to increase the output of some major crops may act counterto the stated diversification policy.

9. Some of the trade statistics used above are several years out ofdate, and the situation may have changed by now. What is called for atpresent is a thorough study oif the markets for a variety of produce in orderto determine which goods should he promoted as part of Malaysia's program ofagricultural diversification. At the same time, an assessment is needed ofwhether the land potentially available for these crops is suited to growing

them. Some physical constraints exist. For example, land which is idealfor padi may need extensive drainage facilities before it is suitable forsome other crops. In that case, the investment in drainage facilities mustbe set against the gains in income. The type of soil will also be animportant factor, as will the availability of transport, storage and market-ing facilities for fresh food. The farmers themselves may not need muchadditional encouragement from the Government. Smallholders in the pastproved themselves eager to diversify into rubber, and the same might be trueof other crops if the institutional constraints were removed.

ANNEX VII-109 - Page 1

LAND AVAILABILITY AND CLASSIFICATION

1. This section contains a summary description of 24alaysia's landclassification system and a report on the findings of the recently-completedreview of land availability.

2. Malaysia compiled its first conprehensive inventory of present andpotential land use in the late 1960s to strengthen the country's capability indevelopment planning. The ten-year old inventory has just been updated by theNatural Resources Section of the Economic Planning Unit (EPU), and a newseries of land resource maps, covering both East and West Malaysia, is in theprocess of being issued. Among the many characteristics shown by this inven-tory (see below) are the present availability of land by alienation or gazet-tement status and by soil class, based on soil-suitability for agriculturaluse. One result of this land-resource review is to increase moderately theestimate of land in Peninsula Malaysia still available for development. Theincreae is on the order of one million acres (25% over earlier estimates);this would add about five years to the time-horizon for land developmentprograms in PM at recent rates of about 200,000 acres a year. The newfigures would extend land development possibilities in PM into the late1990s instead of the early part of the decade implied by earlier figures.Notwithstanding the welcome increase in estimated land availability, theprocess of land development will inevitably encounter increasing limitationsthat will progressively reduce the degree of freedom within the system formaking choices. Land development costs will rise since development mustincreasingly be accommodated within smaller tracts, in more remote locations,and on soils of lower quality and with steeper slopes. It remains true,nevertheless, that Malaysia still enjoys an overall man/land balance thathas "frontier" characteristics and which is far more favorable than thegreat majority of developing countries.

3. For the immediate future, Malaysia must be thought of as two inde-pendent countries so far as land availability is concerned, i.e., EastMalaysia (Sabah and Sarawak) and the 11 states of West or Peninsular Malaysia.Over 60% of the nearly 17 million acres of nonalienated land in the countrylies in East Malaysia; but at the present time there is no thought of usingland in East Malaysia to solve problems of resettlement of the Peninsularpopulation. The situation is thus quite different from that found inIndonesia, where transmigration is being used as an instrument of povertyredressal. There may be some need to resettle some people within EastMalaysia itself, but the mission paid no attention to this possibility. Nordid it concern itself with the possibility of using land development in EastMalaysia as a possible instrument of agricultural policy, e.g., to spreadplantation agriculture in order to expand exports. Thus the mission's almost

AVNNEX Vil- 110 - Page 2

exclusive interest - as it is of the GOM itself - lay with land developmentin Peninsular Malaysia. This Annex and its supporting tables will thereforebe limited to PM.

4. Under the Malaysian constitution the original ownershiip of all land,and therefore the right to dispose of its use, lies exclusively with thecountry's 13 states. Mlany programs involving land development, however,either originate with or are being executed by the Federal Government or itsagencies. The latter must therefore negotiate with each state, on an ad hocbasis, for any proposed land use by the Federal Government, acting either inits own interest or (as in the large land-settlement schemes) oii behalf ofthe State involved. The states naturally closely guard their constitutionalcontrol over land use, which affords them considerable revenue opportunitiesand which also carries political implications (i.e., the power to rewardsupporters). The political dimension of land development and settlement isone reason most states have required federal land development agencies(notably FELDA) to select settlers from within the state, if available, andwhy they insist on having a state representative on the settler selectioncommittees.

5. Although "land development" is normally taken to mean the openingup of virgin land for settlement (both in new areas as well as in fringe areasaround existing settlements), it can also include the rearrangement of owner-ship and tenancy patterns on land already in use and changes in the use towhich such land may have been traditionally dedicated. This second sense of"land development" is not yet as important at the first or settlement" sense,because Malaysia still has substantial amounts of virgin land to settle. Itis rapidly growing in importance, however, and already commands dominantattention in certain areas where small farm size constitutes the principalconstraint on raising family productivity and incomes. In such areas thelegal and administrative aspects surrounding proposed changes in land use, orchanges in ownership and tenancy relationships, affect the lives and liveli-hoods of many more people than the rules governing the development of newlands. The GOM is in fact showing increasing concern about the impact ofpresent land-administration practices on land use, since these practices limitthe degree of freedom which both the Government and private parties have inworking out the new tenure land use arrangements which seem necssary, in someareas, if certain roups are to be assisted to move above the poverty line.The key agencies in land administration matters are the State Survey Offices(branches of the Survey Department of the Federal Ministry of Land andRegional Development) and, particularly, the District Land Offices, which arepart of the district adminiistration and are responsible for the maintenance ofland title registries and the issue of land titles. Two major research stud-ies have recently been completed to see what can be done to improve record-keeping in land offices and to speed up the process of decision-making andthe issuance of legal documents governing land use, ownership, tenancy andtaxation.

ANNEX VII- 111 - Page 3

The Land Resource Data Base

6. For purposes of economic planning and initial project identifica-tion, the principal sources of data on present and potential land use are thenew land resource maps currently being issued, together with data assembledfor their compilation. These maps are issued with the caution that they area "planning guide - to identify areas to be further investigated in detail."They are nevertheless useful "as a guide indicating the general potential fordevelopment of each area." The maps show the status of all land according tothe following six characteristics:

(a) land alienation (original issue of title to an owner otherthan the State) and gazettement (official dedication to aspecified use, under private or public ownership);

(b) land resource potential (e.g. agriculture, forestry, mining,(urban, etc.);

(c) soil suitability classes (technical classification of soil types);

(d) land use at present;

(e) forest resources; and

(f) areas of conservation interest.

Table 1 below shows the amount of land in PM by alienation and gazettementcategories according to soil suitability types; it provides the basic dataon which are based the estimates of land remnaining available for futuredevelopment. Before looking at that "bottomn line" figure, however, it isuseful to understand a bit more about the meaning of the key terms used inthe land resource naaps.

Land Alienation and Gazettement

7. All land begins initially as "State land" that has been neithieralienated nor gazetted. "Alienation" means the issuance of a title to anyindividual, company, or public or private authority other than the State whichoriginally owned the land. "Gazettement" means the official designation ofstate-owned land for a given use (e.g., Malay Reserve, Forest Reserve). Thereare several subcategories within "alienated" and "gazetted" land. Also,land within either of these two basic categories may or may not yet have been"developed" for the use indicated by it. alienation or gazettemnent category.Thus "State land", which by definition is all land not alienated nor gazetted,

Yth, l i A.4R(1ili3VrRAIL IANI) BY SI)1I SI) 'TARM) I IY ' ASSESWITH N LANtl All IENAKTION AND (-.A7. FTTK'IENT CA'I i3 :RI FS

lang 6 . y. Penhiss-ll3rP,-rl is Y-dah P. We I N-s Iv 1r-k StIspor :6 Iai,. Malaci:cd "I'.re P'alr.a..g Trengg,nti relantan Malaysi a

1. D veloped Agricultural Land

Within Soil Suitability Classes 1, 2 . 3Alienated for agricIlture 108,186 711 ,854 125,476 1,(173,709 749, i98 h6n,900 ?84,54/ 1,704,053 .110,2311

36

4,32

5534,755 7,333,431)

State land I ,729 11,856 1,235 2h,676 6.91h 7 ,9i14 1.482 RI ,757 lf6 ,7' 1 f,4 ,961 4,446 115,913Malay reserves 4,940 64,4627 3i,134 111,177 i1,11S - 19,76h 68,172 988 22,230 231,933ForesL reserves 11,609 6,422 - 2(1,995 3, 458 11,115 I ,471) 7,9n4 13,832 1,729 2,964 82,498

Subtotl1 126,464 794,599 126,71 1 1,151,514

f9 9 9

69 /,, 14 88,496 1 ,8i1,474 1.199,185 432 .00 564.395 7,961774

Within Soil Suitability Class 4Alienated for agriculture 3,705 286,5/Il Z i24: 76,123 56 ,3411 1, 152 1'it,5S6 289,237 2S,194 2i,959 44 ,213 877,591State land - 3,211 1,482 3,211 1.729 494 494 14,82(0 5,187 8,15I 494 39,273Malay reserves 247 13,338 - S,434 5.928 - - 6,916 2,964 9RR - 35,81SForest reserves - 7,161 _ 3,952 2,717 494 - 2,470 - _ _ 16,796

Subtotal 1.952 2% 2 32 J2.?74 88,920 64]j 11,29 27 113.443 33,J45 33,098 44,707 969,47

Within Soil Suitability Class 5Alienated for agriculture 3,458 24,71w41 21,489 90,649 39,7f.7 49,44jo 1,729 22 724 74,594 19,760 76.817 425,087State land - 74? 247 4,446 2,221 :',271 - 2,723 20,0UI7 3,705 5,187 41,002Malay reserves - 9,633 - 3,705 98H 4,199 - 247 2,223 - 20,748 41,743Forest reserves - 4,199 247 9,139 988 2.717 - 1,482 4,199 247 30,621 33,839

Subtotal 5 39,273 21,983 4 f . 5839 1.729 2.6,676 1(11,023 23.712 113,373 541.,7l

Total - Developed Land 133,874 1,144,104

171,418 1,348,373 87H,579 /72,8h- 127.275 72153593 1,333553 48883 722,475 9474920

1. Undeveloped Agricultural Land

Land Under Forest, Scrub, Grasslard andSwamp Within Soil Suitability Classes_j, 2 & 3

Alienated for agriculture 14,573 67,678 5,928 209,209 5$,28f) 1l5 ,222 16,820 30(5,786 557,232 251.175 81,510 1,674,413State land 741 5,928 494 59,033 77,171 1,9901 S,434 382,109 1,321,450 352.716 8,398 2,205,463Malay reserves 1,976 68,913 - 119,548 15,7471 34,827 - 300,529 193,895 988 91.884 632,320Forest reserves 13,585 77,805 741 133 627 if01,( 35 14q9927 12,350 571 ,805 793.858 188,214 33,098 2,075,047

Total - Undeveloped Land (1,2 & 3) 30,875 ,2_0324 7,163 521,417 26245 331_966 i,04 6 136229 2,866,435 795,093 214,890 6,587,243

GRAND TOTAL, I +l 164,749 79 35t3822 4,199,988 1,283,906 937,365 16,062,163

ANNEX VII- 113 - Page 5

may be either developed or undeveloped (e.g., FELDA schemes would fall understate land, "developed" category until such time as settlers were given theirland titles, when the land would be reclassified as "Alienated forAgriculture"). The "Alienated" category includes land for which titles havebeen issued or for which title applications have been approved but not yetissued, but excluding land occupied under Temporary Occupation Licenses.The other principal alienation category is for city, town and village use.Mining land - of which there is a considerable amount, reflecting the impor-tance of surface tin mining in Malaysia - is not alienated but is worked underlicenses that leave the title with the state. With respect to "Gazettement,"the Land Resource Maps show five types of gazettement: Malay Reserves,Aborigine Reserves, Forest Reserves, Game Reserves and Grazing Reserves.The maps also shows land "reserved" (but not gazetted?) as water catchmentareas and "for government purposes other than those shown separately above."Malay reserves are lands that may be alienated to, and are subsequentlytransferable among, Malays only. (Presumably Malay and Aborigine Reserveland, when alienated, is reclassified as alienated land, although this isnot known; see "Unalienated Malay Reserves" Category in Tables 2 and 3).Aborigine Reserves stand in the same position with respect to aborigines.Gazetted Forest, Game, and Grazing Reserves belong to the States, as doesall unalienated land. Table 1 shows only the main alienation and gazettementcategories for land of material agricultural use.

8. Soil Classes. The five broad soil classes are based on thefollowing criteria:

Class 1 - Soils with no limitation or only minor limitations tocrop growth and suitable for a widest range of agri-cultural and forest crops (5 subclasses).

Class 2 - Soils with moderate limitations to crop growth andsuitable for a lesser range of agricultural and forestcrops (46 subclasses).

Class 3 - Soils with one serious limitation to crop growth andsuitable for a restricted range of agricultural andforest crops (38 subclasses).

Class 4 - Soils with more than one serious limitation to cropgrowth and suitable for a very restricted range ofagricultural and forest crops (? subclasses).

Class 5 - Soils with at least one very serious limitation to cropgrowth and best retained under forestry use (14 sub-classes).

ANNEX VII- 114 - Page 6

The maps show oinly the dominant s5il class for each area, since imos t soilsurvevs have been carried otit only at a reconnaissance level. For projectwork, detailed area soil surveys willi be needed, using topographic riiaps plusdetailed soil studies by the Departmient of Agriculture. The recognizedsubclasses within each soil class provide a total of 120 soil subclasses, eachof which can be ranked as "suitable", "marginal", or "unsuitable" for thiegrowing of 26 groups of crops important in Malaysian agriculture. A tablecorrelating soil subelasses with these 26 crop groups contains 3,120 cells;each cell furthier contains a code referring to which, if any, of 15 types oflimitations to crop growth may exist in a specific area (e.g., drainage,erodibility, nutrient imbalance, stoniness, texture and structure, etc.).Table 1 does not go beyond the aggregate data given by broad soil classes.Tables 2, 3, 4 and 5 provide sorme additional data or alienation/gazettementstatus and on present agricultural use, by class of soils.

9. Table 1 shows the distribution of agricultural land in PM, bystates, for each of four gazettemaent categories. This does not include allland in the Peninsula but only that considered suitable for some kind ofagriculture if it were decicded to dedicate the land to agricultural Ilse.Land excluded from the table includes that already dedicated to other uses(towns, industry, roads, airfields, etc.) plus land that falls below the class5 category, i.e., land believed unsuitable for agriculture under any economiccircumstances. The total agricultural land availability for Pit thus stands at16.06 million acres. Just under 60% of this is classified as "developed"land, which means that basic clearing has been done except for those areasintended to be left as forest reserves. The remaining 417, represent Classes1, 2, or 3 lands which have not yet been developed, i.e. where basicclearing is needed before land can be put to its intended use. It is the6.59 million acres that comprise this 41% of the total that constitute mostof the undeveloped land available for settlement in PM4 (note that the tabledoes not include land in Classes 4 and 5 which fall in the undevelopedcategory. It is estimated that a maximum of 2.0 million additional acres ofthese Classes 4 and 5 lands iniight eventually be suitable for some kind ofagriculture. These would include the bris (very sandy) soils on the Eastcoast plus the peaty soils of the west coast, much of which is now beingdrained and may become useable).

10. The following are sonie of the more significant points to be derivedfrom the table:

(a) Of the total amount: of land in Classes 1, 2, and 3 over 45%remains undeveloped, i.e., still available for settlement. Whilenot all the undeveloped land in thiese three classes shown in thetable is likely to prove available or suitable for settlement,whatever deductions may have to be made will be offset (in unknown

ANNEX VII- 115 - Page 7

degree, to a maximum of 2 million acres) by Classes 4 and 5 land notincluded in Part II of Table 1 that proves suitable for settle-ment.

(b) The great bulk of the land covered by these tables (over 90%consists of land in Classes 1, 2 and 3. This is somewhatmisleading, since it would be wrong to conclude that 90% of PM Indfalls in these three classes: the tables omit undeveloped Classes 4and 5 land. The reason for the omission is the lack of any basisfor estimating the potential of such land for agricultural useuntil it is brought under development (as in Part I of Table 1).

(c) The proportions of Classes 1 + 2 + 3 land in the totals coveredby Table 1 are high in all states, ranging from a low of 74.4% inKedah to a high of 96.8 in Pahang, the largest state in PM.

(d) A quarter of the undeveloped Classes l + 2 + 3 lands have alreadybeen alienated. While yet to be developed and settled, they canno longer be considered available for public projects. The amountof undeveloped land set aside for Malay Reserves is less than 10%of the total; even this relatively small amount is 2.7 times aslarge as the already-developed Malay Reserves. As noted earlier,the great bulk of undeveloped land - almost two-thirds of it -consists of stateland and forest reserves. Much state land wouldbe under forest, but not gazetted as forest.

(e) Two states contain nearly two-thirds of all undeveloped Classes l +2 + 3 land in P14. Pahang has 43.5% and Johore 20.6%. Trengganuand Perak have considerable acreage also, but nothing like as muchas the two largest, southern most states. Clearly the land poli-cies of Pahang and Johore will continue to play a major role inthe Federal Government-s ability to carry out large-scale landdevelopment schemes in PM.

(f) The proportion of undeveloped Classes 1 + 2 + 3 land to the totalaumount of land in those classes (developed plus undeveloped)varies greatly. For example, only about 5% of available Classes 1,2 or 3 land in Penang and P. Wellesley remains undeveloped asconipared with 70X in Pahang.

(g) The tables tell us nothing about the ownership of alienatedundevelopec land, the size of undeveloped parcels (alienated andri-naIii.nated), or thieir location. For example, we cannot concludeanythi7.- fr-jca such a-gregate data on how auch undeveloped land may

ANNEX VII- Jl6 - Page 8

be available in fringe areas around existing kampongs that might beused for eventual in situ land development. Nor can we tell muchabout the practical difficulties which land development agencies(notably FELUA) may have in finding suitable parcels forimplementing schemes where they may be most needed. Such informa-tion is of course available at state and local levels.

ANNEX VII- 117 - Page 9

Table 2: GAZETTEMENT STATUS OF LAND IN

EACH OF THE FIVE CLASSES OF LAND

(East and West Malaysia)

Alienation and

gazettement Class Class Class Class Class Total

category I II III IV V

State land 11.4 17.0 16.8 33.5 24.0 21.4Agricultural land 76.0 59.9 56.0 39.5 6.3 34.7Mining land 0.7 0.7 1.1 0.7 1.8 1.3Unalienated Malay reserve 2.3 6.2 5.3 7.4 21.2 12.5Grazing reserve 0.3 0.3 0.3 0.2 - 0.2Orang Asli reserve 0.3 0.3 0.4 0.1 0.2 0.2Forest reserve 4.7 12.9 17.4 16.6 36.6 24.0Game reserve 0.7 2.0 1.8 1.1 9.0 4.8Urban land 3.4 0.5 0.5 0.7 0.7 0.7Other government reserve 0.2 0.2 0.4 0.2 0.2 0.2

Total 100.0 100.0 100.0 100.0 100.0 100.0

Total Area 831.0 8,662.0 5,793.0 3,103.0 13,826.0 32,274.0(thousand acres)

ANNEX VI.L

118 - Page 10

Table 3: PROPORTION OF CLASS 1, II, IIl, IV AND VLAND IN EACH GAZETTEMENT CArEGORY

(East and West Malaysia)

Alienation and Totalgazettement Class Class Class Class Class Total area

category I II III IV V (acres)( 000)

State land 1.4 21.3 14.1 16.1 48.1 100.0 6,893Agricultural land 5.7 46.5 29.1 11.0 7.7 100.0 11,161Mining land 1.4 15.6 15.6 5.2 62.2 100.0 411Unalienated Malay

reserve 0.5 13.4 7.6 5.7 72.8 100.0 4,033Grazing reserve 4.5 47.1 32.4 10.7 5.3 100.0 56Orang Asli reserve 3.0 30.6 27.0 5.2 34.2 100.0 75Forest reserve 0.5 14.4 13.0 6.7 65.4 100.0 7,736Gaine reserve 0.4 11.0 6.8 2.1 79.7 100.0 1,555Urban land 12.6 20.2 12.9 9.7 44.6 100.0 221Other government

reserve 2.1 21.6 35.1 9.1 32.1 100.0 73

Total 2.6 26.9 18.0 9.6 42.9 100.0 32,214

ANNEX VII- 119 - Page 11

Table 4: PENINSULAR MALAYSIA: USE OF LAND ALIENATED FOR AGRICULTUREPERCENTAGE DISTRIBUTION BY PRESENT LAND USE

AMONG SOIL SUITABILITY CLASSES

TotalPresent land Class Class Class Class Class Total area

use I II [II IV V (acres)

(O000)

Urban and associated 5.3 39.7 24.3 7.0 23.7 10U 115,843Horticulture 14.4 46.2 24.5 11.6 3.3 100 587,119Rubber 4.6 45.5 34.5 8.9 6.5 100 4,589,507Oil palm 10.0 60.7 23.1 3.3 2.9 100 1,145,087Coconuts 7.3 47.6 13.1 30.8 1.2 100 469,300Other perennials 9.7 44.8 18.9 18.2 8.5 100 63,975Pineapples 0.7 2.0 5.4 9.9 0.0 100 56,803Sugar cane 0.0 77.7 21.2 0.6 0.6 100 44,213Diversified crops 7.9 31.7 36.8 17.9 5.6 100 96,577Padi 9.8 51.6 27.3 10.9 0.4 100 980,345Grassland/Lalang 3.2 36.3 31.0 23.1 6.4 100 233,168Forest 1.2 44.1 20.0 3.7 20.8 100 1,244,880Scrub 5.2 43.8 26.2 10.0 14.7 100 455,461Cleared land 1.8 52.5 29.1 7.6 9.1 100 591,518Unproduction/swamp/

etc. 2.5 25.2 19.7 38.3 14.2 100 523,640

11,197,436

ANNEX VII- 120 - Page 12

Table 5: PROPORTION OF LAND CLASS I-V AMONG AGRICULTURAL USES

PENINSULAR MALAYSIA

Present land Class Class Class Class Class Totaluse I II III IV V

Urban andassociated 0.2 0.9 0.9 7.0 23.7 1.0

Horticulture 13.5 5.2 4.4 11.6 3.3 5.3Rubber 33.5 40.2 48.8 8.9 6.5 41.1Oil palm 18.5 13.4 8.2 3.3 2.9 10.3Coconuts 5.5 4.3 1.9 30.8 1.2 4.2Other perennials 0.2 0.6 0.4 18.2 8.5 0.6Pineapples 0.0 0.0 0.0 9.9 0.0 0.3Sugar cane 0.0 0.7 0.3 0.6 0.6 0.4Diversified crops 1.3 0.6 1.1 17.9 5.6 0.9Padi 15.2 9.8 8.3 10.9 0.4 8.8Grassland/Lalang 1.2 1.6 2.2 23.1 6.4 2.1Forest 2.5 10.6 11.5 3.7 20.8 11.2Scrub 3.6 3.7 3.5 10.0 14.7 3.9Cleared land 1.6 6.0 5.3 7.6 9.1 5.3Unproduction/

swamp/etc. 2.2 2.5 3.0 38.3 14.2 4.7

Total 100.0 100.0 100.0 100.0 100.0 100.0

Total Area 631,826 5,243,664 3,243,664 1,227,837 864,747 11,161,436(acres)

- 121 - ANNEX VIII

Page 1

LAND ADMINISTRATION

1. Land administration does for already-developed land what land-settlement does for undeveloped land: it constitutes the Government'srule-making function which defines the kinds of opportunities open to thosewho want to use land giving legal sanction to actions which private partieswish to take. In a country where classical land-reform, in the sense offorced land acquisition and redistribution, has no appeal, and where greatreliance is placed on using free-market forces to achieve goals of equityand income growth, the efficiency of land administration becomes a matter ofgreat importance. A confused or inefficient regime of land administrationcan delay or frustrate private intentions. While the frustration ofundesirable intentions is of course to be welcomed, the present Governmentconcern about land administration is not with preventing public or privatepersons from doing things the Government does not want done; it is theopposite problem: how to modernize an antiquated system of land administra-tion so that: (a) traditional market forces can work out improved land-usepatterns with greater speed and convenience; and (b) new forms of landownership and use - in which there is much interest - will not be frustratedor delayed by a dysfunctional system of land administration.

2. The Prime Minister's Office, the Ministry of Land and RegionalDevelopment, and other agencies concerned with agriculture and land use areall showing concern with problems of land administration. Two major studieshave been completed: (a) a five-volume report of local government and landadministration in the State of Negri Sembilan done by the Management andManpower Planning Unit (MAMPU) of the Prime Minister's Office; and (b) thepreparation of a computerized land data bank for the Muda River area, doneby the University Sains Malaysia's Center for Policy Research (CPR), locatedin Penang. Both these research projects are regarded as experimental, inthe sense that they have wanted to test the ability of local land records togenerate data suitable for computerization (a form of record-keeping which itis hoped would speed up land administration, improve the collection of quit-rents (local land taxes), and facilitate research on patterns of land owner-ship, tenancy and land use).

3. Among the questions that have concerned those conducting the MAMPUstudy were the issuing of Temporary Occupation Licenses (TOLs), the issuingof permanent titles, the classification of land for setting "express condi-tions" in land titles, the subdivision of land by sale or inheritance, andthe acquisition of land by Government for public purposes. A major causeof current concern is delays in the issuing of titles when land is alienated(i.e. transferred from state to private ownership). There has reportedlybeen a large increase in the work loads of the District Land administrators,the land officers attached to each district office, although it is not clearwhether this applies mainly to newly-developed districts or to older, well

- 122 - ANNEX VIII

Page 2

established districts as well (the Negri Sembilan study had only just beengiven to NAMPU's client, the state government, so no copy could be madeavailable to the mission).

4. At the USM the Center for Policy Research has been involved inseveral studies related to land use, land ownership and land administration.its pilot studies have been conducted in the Muda River region of Kedah,where CPR has worked under contract to the Modernization of AgricultureSubcommittee in Kuala Lumpur. The major purpose has been to see if a modelland registry could be developed, suitable for computerization to provide aland data-bank. The motivating interest in the Muda River study has been tosecure data for analysis of ownership and tenancy arrangements affectingpossibilities for the consolidation of smallholdings. The three-year pilotstudy (1974-77) involved detailed work with the (separate) Survey DepartmentOffice (a branch of the Survey Department in the Ministry of Land andRegional Development) andi the District Land Offices. Different data arestored in these separate offices (whether this separation affects routineland administration, or only research, is not clear). Generally speaking,the quality and accessibility of data is said to be better in the SurveyOffices than in the Land Offices, although the latter are more directlyconcerned with routine land administration and in contacts with the public.The CPR data-bank has succeeded in computerizing the following data tor theMuda region:

(a) lot identification and location;

(b) alienation condition;

(c) area of lot;

(d) name, address, identification card number, and legal shareof each lot owner(s);

(e) the number of parcels in each lot;

(f) the name, address, identity card number, and parcels oper-ated by each operator;

(g) whether each parcel is single- or double-cropped;

(h) the tenurial status of eaclh parcel;

(i) the rent paid for the current and previous seasons for eachparcel under tenancy; and

(j) the nature of kinship ties, if any, between tenants andowners for all parcels under tenance.

- 123 - ANNEX VIIIPage 3

The main findings of the Muda River pilot study have been published as aMADA document (see Chapter 3 of this report for the discussion of tenancyarrangements). In view of CPRs success in compiling a land-registry databank in the Muda River region, the Kemubu Agricultural Development Authority(KADA) hopes to commission a similar study of the Kemubu padi growing region.

5. Improvement of land administration is bound to take many years.The construction of computerized land-registry information is only one part ofthat task, and is still in the pilot-testing stage. About all one can say atpresent is that the problem is well recognized and has begun to receive atten-tion. There seems no need for any assistance fromu the Bank. It may, howeverbe useful for Bank staff doing sector or project work involving land-use ques-tions to become familiar with the work reported above and with follow-upmeasures the Government will undoubtedly take.

- 124 - ANNEX IXPage 1

EXPERIMENTS IN IN-SITU LAND DEVELOPMENT

FELCRA's "In Situ" Development Program

1. Under FELCRA's concept for "Integrated Kampong Development,"kampongs should satisfy the following criteria:

(a) depressed kampongs of between 40-100 families and incomes less than$100.00 per family per month;

(b) agro-environment should be capable of producing at least one majorcrop such as oil palm, rubber, coconut or padi;

-(c) kampong should have an unalienated area within two miles of thekampong which can be released for incorporation into the kampongdevelopment progran; and

(d) such area would be large enough to build an average minimum sizeof six acres per family.

2. Based on FELCRA's experience with share schemes it was decided toexpand and incQrporate this system, which aims at rationalizing and/or expand-ing the total resource base and productive mechanism which produce the small-holders income in his kampong into the "In-Situ" model.

3. The Model proposes to deal with the spatial and productive disabili-ties of the kampong through a radical restructuring of the village which wouldcontain the following major elements.

4. Firstly, in the participating kampongs most landownership wouldchange from individual-operated parcels to estate basis with villagers receiv-ing a share of the "estate's" net proceeds from:

(a) 3 acres - comnmunally run main crop areas - rubber, oil palm,coconut or whater crop would suit the agro-environment in each case;

(b) 2 acres - communally run cash crop/livestock areas;

(c) 1 acre - communal or privately-owned orchard areas; and

(d) 1/4 acre - privately owned house sites.

In total each share is equal to 6 1/4 acres. The major attraction of thistype of operation is the ability to inject high quality extension, management,and mnarketing inputs into the village-s main income earning enterprises. It

- 125- ANNEX IXPage 2

also allows risk spreading of total crop and income failure over a larger areaand potentially larger number of crops. At the same time the inborn instinctfor individual landownership remains intact through privately owned orchardareas and housing lots suitable for planting home garden crops.

5. Another major advantage in this model is the ability to revitalizethe village economy during development by maximizing village labor use,dirctly by FELCRA and by private contractors.

Criteria for Selection

6. Participation in the "In-Situ" program is based on three mainaspects:

(a) villagers must own land and have a house in the selected villagearea; or

(b) own land and live outside the village area; or

(c) own a house in the village area and no land.

7. Income prior to the productive period of the main crop is providedbasically through the cash crop/livestock enterprise and once the trees comeinto bearing from the dusun (orchard) area. Villagers receive a daily wagefor work on the communal area and a share of the total enterprise income.Full employment can be reached by year 4, increasing to 1.1 labor units perfamily when the main crop comes into production in year 8. Substantialunderemployment is minimized and is the major design criteria in preparinglocal models. The relative proportion of wages and enterprise revenueare estimated in Table 1 below.

Table 1: IN SITU MODEL ESTIMATES OF REVENUE

Year 2 Year 7 Year 15Early Last year before Main crop in

development main crop produced full production

Percentage wage 62.8% 38.3% 33.0%

Percentage enterprise 37.4% 61.7% 67.0%

Income 100.0% 100.0% 100.0%

Therefore reliance on wage income diminishes over time and stabilizes relativeto enterprise income in about 1:2 ratio which is very important for theelderly or infirm who cannot earn wage incomes.

- 126 - ANNEX IXPage 3

8. In constant terms, the estimated 1977 family incomes of $100/monthwill increase to about $350/month (after loan repayment) at full developmentfrom the main net enterprise revenue. Loan repayment begins in year 11 withfull repayment in year 20. The abrupt drop in income from year 11 (whenloan repayment begins) as compared to year 10, is about 19% of income in con-stant dollar terms; this quickly rises to the same target income of$300/month in year 13, however.

9. Secondly, a cluster village is created which permits the supply ofquality public infrastructure, utilities and basic amenities of acceptablelevels of cost.

10. Whereas in most kampongs, housing has been haphazardly constructedwith little regard to planning, basic amenitites and to agricultural land use,centralizing of village structures is essential for maximum development of thephysical resources.

11. Following intensive studies like: soil analysis, land contour, etc.FELCRA submits to the local state City and Planning Board for a new villagedesign which includes provisions for:

(a) 0.25 acre house site for each participating farm family enablingthe build up home gardens, shade or fruit trees or whatever wouldbe individually owned;

(b) village infrastructure - clinic, school, play grounds, cooperativeshops, community hall, market place and mosque;

(c) electricity - and potable piped water - supplied at more accept-able levels of cost; and

(d) all-weather roads with good drainage for access to village andagricultural areas thus guaranteed access to markets throughoutthe year.

12. Finally, the "In-Situ" model calls for the restructuring of thehuman resource in these depressed kampongs, where the overall levels of edu-cation and dissemination of information is weak and in most cases a weakcommunity structure is manifested.

13. To insure momentum, assure stability and promote active participa-tion of the villagers in the implementation and development cycle a villageworking committee is formed, elected by the villagers themselves, andchaired by the Felcra project manager. Subcommittees are formed to promotecommiunity development activities in: health, education, religion, industry,etc., and to coordinate these activities with the respective Governmentagencies involved. The major aspects being:

-127- ANNEX IX

Page 4

(a) to place the responsibility in the hands of those who willbenefit - the villagers - with FELCRA as the stimulator and

persuader; and

(b) to forge a viable two-way communication system able to transmitthe villagers perceived needs and sense of priorities to Felcraand intern for Felcra to communicate its objectives and practices.

14. The authors of the "In-Situ" concept realize that success of sucha radical restructuring of the human and physical resources must stem fromconvictions originating from the desire to develop, by those who would par-

ticipate and in theory, benefit from the development process - the villagersthemselves - and that the implementing body (FELCRA) must orchestrate inperpetuating this desire.

15. To assure this in implementing the three Pilot Projects and also inlight of the huge investment required by government to bring about a com-plete restructuring, a detailed monitoring system and evaluation program isbeing carried out. The monitoring and evaluation program will assist indetermining:

(a) can villagers work within a set of new communal relationships;

(b) to what extent their incomes improve and what social price theyhave to pay for such improvements;

(c) management level, interagency relationships will be tested andevaluated in respect of integrated approach;

(d) management intensity and training needs required by FELCRA staffto carry out project; and

(e) assess the financial and managerial feasibility of large-scalereplication of model.

RISDA's Approach

16. The RISDA variant of in situ land development is slightly olderthan FELCRA's but it is still new and its future uncertain. Twenty-eightschemes have been prepared of which 17 are under implementation (covering3,600 acres of smallholder rubber). RISDA refers to this approach as its"Mini-Estate" scheme. Under the scheme, all smallholders in an area mustagree to hand over their titles to RISDA to be held in trust for them for a30-year period (recalcitrant minorities in this, as in all similar schemes,

- 128 -- ANNEX IXPage 5

can apparently be forced to participate). RISDA then redevelops the landunder RISDA management, using replantecl rubber as the central crop butadding fishponds, livestock, and any other supDlementary agriculturalactivities considered appropriate. Each smallholder is paid a cashallowance of $15/month per acre contributed. In addition, the estate-srequired labor force is drawn from the participating smallholders, affordingthem an additional source of income during the estat&es immaturity period.Under this arrangement there is no guarantee of any minimum family income,only the guarateed month:Ly payment per acre contributed. The normalreplanting grant is not paid to the smallholders but is used by RISDA tocover the costs of estate development (in effect the wage payments are beingfinanced out of the replanting grant funds used by RISDA to finance theseschemes). At present it is not wholly clear what will happen at the end ofthe 30-year trust period: will. participants be given back their originalplots, or equivalent plots, or perhaps shares in a continuing estate-managedenterprise (the latter is the form of equity participants will enjoy afterthe rubber is ready for tapping and until the 30-year trust period expires)?The uncertainty of future tenancy arrangements on RISDA's Mini-Estates ismatched by equal uncertainty concerning the form of equity or tenancyarrangements to be made with the settlers who are currently working onRISDA's Block Newplanting schemes - some 98,000 acres have been developedalong FELDA-type lines, 60% of it in oil palm, 40% in rubber (crop selectiondepends primarily on soil suitabilities). The settlers selected for RISDABlock Newplanting schemes are not chosen on the same basis as FELDAsettlers; essentially, all must come from the rubber smallholder group (nodetailed discussions were held on settler-selection rules). One of theinteresting aspecs of this RISDA experiment is that rubber smallholdersappear to have been willing to join the schemes as settlers even though theyhave not been given any specific promises as to the kind of equity or landtitles, if any, they will receive. This provides further evidence of theapparent willingness of many Malaysian smallholders to move to new areas forhigher incomes even though they may not have firmr, promises of land titles intheir new settlements. In FELDA schemes settlers are not required to giveup any land they may already have. In FELCRA-s pilot in situ schemes at PasirPuteh participants surrender existing land titles (on non-padi land).

Rubber Research Institute of Malaysia Experiments

17. The Rubber Research Institute of Malaysia is experimenting with twotypes of tenancy projects as pilot schemes designed to increase smallholderincomes by means not limited to technical inputs. One of these is a (verysmall) FELDA-type of rubber estate, at Panti in the State of Negri Sembilan.The second is a very different concept, based on the improved coordination oftraditional inpuits without any centralized management structure; these areidentified as Total Development Concept' (TDC) schemes. One T'DC project isunderway at Segamat in Johore; a second lhas been proposed at Lipis in Pahang.

- 130 - ANNEX IX

Page 7

Table 2: COMPARISON OF YIELDS AND OPERATING COSTS IN THEPANTI SCHEME AND COMMERCIAL ESTATES

Panti Commercial estatesItems 1975-78 1976 1976

Size (ha) 103 103 106Yield (kg/ha) 1,455 1,455 1,376

Costs (cts/kg)Management 9.7 9.1 8.0Other overheads 5.9 6.3 5.5Field maintenance 9.8 11.4 9.0Latex collection 1.2 0.8 1.8Tapping wages 35.8 36.6 33.3

Total 62.4 64.2 57.6

Source: RRIM

-129 - ANNEX IXPage 6

(a) Panti Scheme. This scheme has four years of experience behind it,and is generally judged quite successful. It covers a small groupof (originally) 23 settlers on a small estate of about 250 acres.Housing and amenity standards in the newly-constructed nucleussettlement are based on FELDA standards. Settlers were selectedfrom landless rubber workers having not more than two children.The settlers were taken on under a guaranteed wage arrangement,supplemented by shares in the net profits of the scheme (everyoneholds equal shares, which are not transferable). A professionalscheme manager and an accountant are posted at Panti; the manageris paid under a bonus system that allows him to earn as'much asprofessional employees at RRIM4 headquarters, which is roughlydouble a typical manager's salary on an "average" small-scaleChinese or Malay estate. The settlers' wage is geared to thenational trade union scale for estate workers. On top of this,they are paid whatever share-dividend remains after replayment ofdebt-service incuLrred for the rubber development cost plus thecost of housing (other infrastructure costs are not charged to thesettlers but are provided as a grant, as in FELDA and indeed allpublic schemaes in Malaysia). RRIM estimates that settlers will beable to pay off their rubber development debt in about eightyears, their housing debt in about ten years; this is almosttwice as fast as FELDA settlers pay off their indebtedness. Untilthis indebtedness is paid off, the settlers' net dividend addsaround 25% to their guaranteed wage; when the indebtedness ends,the possibility will arise that the dividend would increase by afactor of four or five times, making the share dividend roughlyequal to the normal tapping wage. RRIM is undecided how to handlethis problem. A:Lthough there have been some problems at Panti(original plot sizes were too small; lack of a desirableage-pyramid among settlers; weak motivation to work kitchen-gardenplots because of wild animal risks), the Government has beensufficiently impressed with the experiment to invite RRIM toprepare plans for replicating the approach to 5,000 acres. It isnot known what agency would be given responsibility forimplementing this much larger trial. The distinctive feature ofthe scheme seems to be that it is designed for landless laborerswith experience in rubber, settles them on newplanted rubberestates run on centrally-managed lines, gives them a guaranteedwage, and shares out profits equally among those who work theland. A comparison of yields and costs at Panti and in Commercialestates is given in Table 2 opposite.

(b) Segamat TDC Scheme. This is a younger scheme than Panti, one thatattempts to raise smallholder incomes without the direction ofcentral estate-type management, without communal working and with

- 131 - ANNEX IX

Page 8

no change in smallholder independence, land titles, or terms ofremuneration. The scheme relies instead on local committees(guided by a resident RRIM Project Manager who acts primarily as astimulator and advisor) which try to mobilize and coordinate assis-tance from the various government agencies and departments that aresupposed to serve their needs. Technical assistance oil rubber ques-tions is provided by four junior RRIM officers who live at theproject. Productivity increases are intended to come mainly fromsupervised farm credit, supplied by RRIM. The village-level andMukim (parish) committees are intended to help identify "felt needs"which define what types of government assistance (health, roads,schools, water supply, etc.) are needed and to help villagers learnfrom each others' experience. Although too early to provide evententative assessment, Segamat may prove to have relevance for thosepoor smallholder areas where no possibilities exist for Panti-typeresettlement, nor for FELCRA-type in situ development, nor forRISDA Group Replanting/Block Newplanting/1'Iini-Estate schemes. TheSegamat approach basically works forward from the classical type ofRISDA smallholder replanting approach, building other components(both economic and social) onto that program.

The "Landlord-in-Trust" (LIT) Proposal

18 A number of the experimental schemes noted above have involvedproposed or acutal surrender of traditional smallholder land titles inexchange for centralized management and communal working of (rationalized)holdings, usually combining a basic wage paid by the Central ManagementAuthority (a Government agency) plus a share in the profits of the scheme. Sofar, these schemes have proven easier to organize outside padi-growing areasthan within them, reflecting the greater strength of feeling toward holdingonto padi land than to other types of land. The Government is interested inexpanding this type of centrally-managed, wage-plus-share system, at leastexperimentally, and has proposed a new legal formula intended to encouragemore smallholders to overcome the often strong reluctance to surrender landtitles. The new formula is called a "landlord-in-trust" arrangement; it wouldgo part way to preserving the smallholders equity in a land title but wouldlimit his right to dispose of his land or to rent it out or to subdivide itamong heirs. In effect, the LIT instrument would convert titles to specificpieces of land into shares of equivalent value in the overall holdings of thescheme; the right to dispose of shares would be subject to stipulatedconditions designed to preserve the economic functioning of the scheme. Thisproposal was not acceptable in the form in which it was originally proposed tothe states by the Ministry of Land and Regional Development. But the conceptis not entirely dead, and may be resurrected if the movement for convertingsmallholdings into collectivized schemes gathers momentum.

- 139 - ANNEX X

Page 1

NATIONAL POVERTY TASK FORCE

INDICATIVE OUTLINE AND TERMS OF REFERENCE

Context

1. At present, no single agency has centralized responsibility forpoverty eradication. Rather, a large number of agencies have broad anddiverse mandates which include poverty alleviation as one among manyobjectives. Thus the poverty objective has to compete with other objectivesand as a result difficult poverty problems are often deferred to other moretractable problems. This situation appears to be inconsistent with the factthat poverty eradication is one of the two principal objectives of Malaysia-sfundamental development strategy.

2. This problem of competing objectives is further complicated by thelarge number of agencies working in the field of rural development as well asthe fact that many poor households, while often categorized by a single cropfor the sake of convenience, are in practice multi-crop farmers. Not only isthere substantial duplication as well as important gaps in this system, thecrop and agency specific approach to poverty reduction is inadequate to dealwith the overall and complex needs of poverty households. Thus povertyprojects implemented by any one agency often neglect one or more of thefollowing: the multiple sources of income of poor households, their livingconditions and access to basic services, the cost and taxes on essentialconsumer goods, access to productive assets such as land and capital, andaccess to continuing and relevant agricultural extension service. Suchagency/crop specific projects do make a dent in poverty but they are not ableto address adequately the effective eradication of poverty in the targetpopulation. A prime exarnple of this is the MUDA irrigation project which hasincreased significantly t1he incomes of poor households in the area but bytreating only one, albeit: an important, part of the problem, has not beenable to eliminate poverty among a large number of MUDA farmers. Similarthings could as well be said about other in-situ projects. This single-agency/single-crop approach may have been appropriate in the past when therewere a number of obvious large-scale investments that had substantial returnsto small farmers. However, there are fewer such obvious investments todayand it is becoming increasingly difficult to reach the poor who have notbeen able to benefit from past public investments.

3. Structural constraints, in particular the small size of holding,will severely limit the traditional single-crop type projects from increasingthe incomes of the poor. The need for integrated area projects isincreasingly recognized by Government, and a number of agencies have alreadymoved in this direction. However, to be fully effective this approach willrequire much greater interagency coordination and the adoption of povertyeradication as the overriding focus of these projects. In other words,

-133 - ANNEX XPage 2

such projects or programs would be designed to include whatevercomponents and to recommend whatever policy changes are required toeliminate effectively poverty in the target population.

4. In addition to the need for integrated poverty programs that focuson the overall needs of poverty households, there are increasingly apparentstructural and institutional constraints to poverty reduction that requirenational policy changes. Some of these are already evident, others willquickly surface in the design of integrated projects outlined above. Becausethese policy issues inevitably cut across institutional and sectoraljurisdictions, individual agencies are not capable or do not have theauthority to formulate and implement the needed changes.

Basic Objectives

5. In this context there is a clear need to establish two objectives:first the drawing up and implementation of an integrated area-specific actionplan to eliminate poverty and second the formulation of national policyrecommendations to overcome structural and institutional constraints topoverty alleviation and/or to increase the incomes of the poor directly.These two tasks are discussed further below. The prior question is the kindof institutional arrangement that could effectively accomplish theseobjectives.

6. As discussed above, the current organizational approach, which hasadded a poverty target to the mandates of a large number of diverse agenciesand theu allowed them to work more or less independently of each other, nolonger seems to be the most effective way to attack poverty.

7. As we see it, to achieve effectively the objectives set out abovewould require the following basic factors:

(a) More focussed attention at the political level to the problem ofpoverty so that, first, greater impetus is given to the diverseagencies to coordinate their activities to eradicate poverty,and second, an environment is created that is conducive to theformulation and approval of basic policy modifications necessaryto eliminate poverty. This is not to suggest that povertyeradication is not taken seriously by the nation's politicalleaders but rather that the crucial interface between politicalleaders and the civil service on poverty issues is too diffuse anduncoordinated. For instance, poverty issues and objectives do notreceive the kind of sharply focussed attention that a ministerwould give to his portfolio in order to achieve results. Onepossible way to achieve this would be to establish a cabinetsubcommittee on poverty eradication with a senior minister aschairman.

- 134 - AUNNEX XPage 3

(b) Within the public service itself there has to be responsibilityat one point to see that the objectives noted above are met andtransmitted to the cabinet subcommittee for approval and/ordecision and to oversee their implementation. A crucial elementhere is the degree of interagency cooperation needed to actuallyundertake the required work. One possibility would be toestablici a National Task Force on Poverty made up of seniorgovernment officials who head the principal agencies/institutionsoperating in the area of poverty eradication. Such a task forcewould report to the cabinet subcomnmittee and would arrangefor appropriate staff support to achieve the objectives. Thisstaff support could be left in place in their existing agenciesor alternative arrangemnents could be made as deemed appropriate.

8. An elaboration on the terms of reference to achieve the objectivesof the Task Force is outlined below.

Overall Terms of Reference

9. We would propose two basic types of activities be undertaken simul-taneously: the formulation of national polici,es to reduce poverty and thedesign and implementation of area-specific poverty programs to eliminatepoverty in the target population. These two activities are outlinedseparately below followed by a discussion of their interrelationships.

10. National Poverty Policies. Many issues affecting povertyhouseholds cannot be dealt with adequately on a project-by-project basis.Rather they require a national focus and national and state-level decision-making. The Task Force would designate ad hoc groups of specialists eitherinside Government or fromn outside to analyze such issues with a view toproposing to the cabinet subcommi-ttee recommendations for their resolution.A preliminary listing of such issues includes:

(a) restructuring the rubber tax to reduce the burden on poor small-holders;

(b) increasing the replanting grant to cover the loss of incorme duringthe period of immaturity;

(c) price subsidies to poor padi farmers;

(d) price subsidies or grants for poor households on basic servicessuch as education, electricity and water supply;

(e) improving the access of the poor to land; and

(f) rationalizing the functions of tihe many agencies deliveringservices to the poor - particularly in the agriculture sector.

- 135 - ANNEX XPage 4

In addition, it is likely that in the analysis of area-specific povertyprograms outlined below, a number of other issues requiring a nationalsolution will surface.

11. Area-specific Poverty Programs. In this activity, it is suggestedthat the Task Force assume responsibility for the design and implementationof a Malaysia-wide system of area-specific poverty programs. The fundamentalcharacteristic of these programs is that they set as their objective the

elimination of poverty in particular geographic areas (in some instances, itmay be preferred to take a sector approach such as in designing a program

for estate workers). Initially, it is suggested that a small number ofprototype programs be designed and implemented. Once experience is gained

with such prototype programs, similar programs could be applied to otherareas throughout the country. This task would involve:

(a) Geographical poverty mapping. First a quick geographicalmapping of poverty households would be undertaken on thebasis of the agriculture census and piecemeal informationfrom ground-level agencies. Based on this mapping, asmall number (say 3) of prototype poverty areas would beselected reflecting the predominant cropping pattern and

income sources prevalent among poverty households inMalaysia (e.g. a predominantly rubber area, a predominantlypadi area, a mixed farming area, a fishing village).

(b) Program design. The basic objective here would he todetermine the package of measures necessary to eliminate

poverty in the target area. Therefore, the design ofthe program would need to examine:

(i) the potential for increasing the productivity of theland, for example through rubber replanting, irrigation,replanting with other high valued crops;

(ii) the impact such increases would have on the incomes of thepoverty households;

(iii) the need and potential for increasing land availabilitythrough consolidation or other measures if, as is likely,

the small size of holding constrains households frommoving out of poverty even with increases in landproductivity; and

(iv) the need and potential for other measures such as off-farmemployment, outmigration of a family member, pensions,supplemental support for expenditures or education, etc.

- 136 - ANNEX XPage 5

12. Interrelationships. Clearly there two basic activities ofnational policy formulation and the design of area-specific poverty programs

are closely interrelated in a number of important areas. For instance, the

changes in national land policies that are needed would in many respectsonly surface in the detailed analysis of area specific poverty programs.

Similarly, the appropriate subsidy for padi farmers should be derived in the

context of other opportunities, such as land consolidation or irrigation

available to padi farmers. Thus, an important function of the Task Force

would be to ensure feedback from the analysis on-the-ground to the analysis

of national policy and vice versa. At the same time, however, in a numberof important policy areas sufficient information is probably available to

warrant prompt and independent analysis and recommendations. For example,

the analysis and formulation of a restructuring of the rubber tax need notwait for the analysis of area-specific programs. Therefore, it is

recommended that work go ahead on both these broad fronts simultaneously, onthe understanding that certain issues or subissues may have to be deferred

until more detailed on-the-ground analysis is completed but other issues

which can be resolved more directly, be tackled immediately.