Change in the Malaysian economy circa 1800–1990

John Drabble, former Reader in Economic History, University of Sydney, Australia

This brief article gives an overview of the economy of Malaya—known as Peninsular Malaysia since Federation in 1963. In that year, Sabah (formerly British North Borneo) and Sarawak joined the Federation of Malaysia. These territories did not participate in the earlier mining and rubber booms to any comparable extent owing mainly to locational factors. ‘The economy’ will therefore refer to Malaya unless otherwise stated. A principal theme will be the increased involvement of government in managing the economy. Statistics will be used sparingly, but see Drabble (1973, 1991 and 2000) and Sultan Nazrin Shah (2017).

During the period of almost two centuries, starting from around 1800, the country’s economy experienced five fairly distinct but overlapping phases, which form the structure of this article.

Pre-modern period, circa 1800–1870

In the pre-modern period, the Malay peninsula—sparsely populated and heavily forested—was no stranger to external trade. Such commerce mainly involved the exchange of surplus products (for example, pepper and forest products) for others (iron works, for instance) with surrounding regions, as far afield as India and China, without involving large amounts of either capital or labour. The vehicle for much of this trade was the British East India Company. The British-established (years in parentheses) commercial ports of Penang (1786), Singapore (1819) and Melaka (1824), initially served the India–China trade, but soon became entrepots in their own right serving the surrounding region, with Singapore’s trade eventually outperforming that of the other two (Drake, 2018). These three territories were later grouped together in the British Crown Colony of the Straits Settlements (1867).

Growth of exports of the tin and rubber industries, 1870–1920

The period 1870–1920 saw massive growth in Malaya’s trade, initially propelled by the export of tin and later by rubber, and was facilitated with the opening of the Suez Canal in 1870, which greatly reduced shipping times between Europe and Asia.

Tin —limited quantities of this commodity had been produced in the Malay peninsula for centuries, the depth of mining being limited by water seepage. The production of tin, mainly by Chinese miners, increasing during the 19th century, but the discovery of large deposits on the peninsula’s west coast after about 1850 transformed the industry and brought about (sometimes hostile) competition between rival clans. The growth of the tin trade was in response to the emergence of the tinplate industry in the West (especially in Britain) after 1870. Transport of tin for export was, however, difficult and expensive, and was initially made largely by water.

The tin industry went through several stages. The earliest involved ‘picking the eyes’, that is, stripping the surface soil off the most accessible deposits and extracting the tin ore. The second entailed mining at greater depths—once the water-seepage problem had been overcome—using high-pressure hydraulic hoses to extract the tin-bearing gravel. Most of this activity was carried out using Chinese capital with the support of migrant labourers. In 1912, tin mines were some 80 per cent owned by Chinese. The third stage, starting in around 1912, using the tin-dredge (a bucket-band, able to reach much greater depths), required much more capital. This was a largely European activity, mainly British owned (65 per cent by 1931).

Rubber —about 20 years after its introduction from Brazil in 1876 by the British government, proprietary planters using private funds briefly experimented with this new crop, Hevea Brasiliensis. However, they lacked enough capital to develop their estates and were tempted either by speculative profits in land, or connections with largely British mercantile firms in Singapore, to float the estates as a public joint-stock company (mainly through the London stock exchange). These mercantile houses, with commercial connections, played a crucial role linking landed interests in Malaya with investors in the West, often securing appointment as managing agents of the estates which they then managed as ‘groups’.

Between 1897 and 1922, the total acreage under rubber in Malaya surged from just 345 acres to 2.3 million acres (roughly 900,000 hectares), split between 60 per cent European and 40 per cent Asian. The impetus came from steeply rising, albeit volatile, market prices for rubber, which peaked in 1910. This was derived demand from the fast-developing automobile industries in the West, especially in the United States, which needed rubber for tyres. This prompted a rush of British company flotations: between 1903 and 1912, for example, about 260 companies with sterling capital were floated, and 145 in 1909–1910 alone, in a virtual free for all with little or no government control.

Rubber was an attractive crop for indigenous Malays and Javanese migrants from the Dutch East Indies (now Indonesia). These were small farmers (later known as smallholders), chiefly with 5–10 acres, but many with less. The seeds were easily collected, grew readily in the climate and could be interplanted with existing trees or on land switched from some other use, for example, rice. Smallholders in Malaya worked on just over 800,000 acres against 1.3 million acres on European and Asian estates, according to the 1921 population census.

Smallholder rubber plantings were scattered, leading European planters and officials to regard them as ‘unscientific’, with too dense planting compared with what the Europeans regarded as\more orderly estates. Officials were unhappy that Malays were ‘trafficking’ in their ‘ancestral’ land (that is losing to non-Malays), such as that for rice and fruit trees, which was land regarded by the Europeans as integral to village (kampong) life, and in a commercial crop they saw as unsuited to smallholders. The outcome was the Federated Malay States Malay Reservations Enactment of 1913, which provided for gazetted areas in which land sales were permitted only to other Malays. This was later extended to other states in the Malay peninsula.

Rubber was an attractive crop for indigenous Malays

Source: National Archives Malaysia

During World War I, 1914–1918, rubber (and tin) exports were licensed by the government only after proof was given that they would not ultimately fall into enemy hands. Companies with capital in sterling were required to make provision for an ‘Excess Profits Duty’, though few were actually affected. From around World War I, the Malayan economy was truly a colonial export economy dominated by tin and rubber, responsive to Western industrial demand.

Restriction on exports of tin and rubber, 1920–1940

The period between the wars was marked by extreme volatility in trade and greatly affected by the Great Depression. Demand for Malaya’s primary commodities of rubber and tin was subject to booms and slumps, which played havoc with production and prices, and led to restrictions aimed at stabilising prices. For rubber, first was the Stevenson Scheme (1922–1928), followed by two International Rubber Regulation Agreements (IRRAs), of 1934–1937 and 1937–1941, all of which were initiated by the colonial government and administered by an international committee with the aim of limiting exports to reduce world stocks and raise market prices. Tin was subject to similar restrictions during 1931–1933 and 1934–1941.

The Stevenson Scheme had an initial ‘pivotal’ price of 1s 3d per pound, later raised to 1s 9d, but the IRRAs had no pivotal price. (These prices should be seen in a context of the 1910 peak being 12s 9d.) Each producer under the Stevenson Scheme was given a Standard Production limit, but under the IRRAs only a quota, which was distributed domestically. Prices generally rose, especially in 1925–1926 when inelasticity in exports led to prices reaching nearly 5s per pound, causing a boom in planting both in Malaya and the Dutch East Indies. There was much argument in the industry over the perceived inequity in the distribution of Standard Production limits and quotas.

The various plans were only successful in the short-term, and they primarily benefitted the interests of the large estates.

European interests now argued that the rubber industry needed more research, for example bud grafts, to increase yields. In 1925, the Rubber Research Institute of Malaya, and later in 1934 the Smallholder Advisory Service, were established by the colonial government, but both suffered in the 1930s from administrative and financial constraints.

World War II, the Emergency, and the beginning of national planning, 1940–1960

The 1940s was a decade of stagnation and decline for the Malayan economy: 1941–1945 witnessed the Japanese military occupation, when both rubber land and tin mines were left unexploited; 1946–1947 a failed attempt to form the Malayan Union; and 1947–1960 the Malayan Emergency during the communist insurgency.

By 1950, the rubber industry had to face the fact that most of the trees were reaching the end of their economic lives (about 30 years), having been planted in around 1905–1920, and that the United States had succeeded in producing synthetic rubber. A new crop, oil palm, requiring a shorter time to reach maturity, was increasingly adopted by Malayan planters as an alternative. The Korean war (1950–1953) temporarily boosted demand (and prices) for rubber and tin, but was followed by a global economic recession.

Independence and a national government came to the Federation of Malaya in August 1957. Government-led national economic planning began in 1950 with the Draft Development Plan, 1950–1955, which prioritised post-war reconstruction, natural resources, a broadening of the provision of utilities, and access to health and education services. The 1st and 2nd Malaya Plans, 1955–1965, emphasised mining and still-embryonic manufacturing, and aimed to improve rural income through infrastructure development and employment creation. From about 1958, with the Pioneer Industries Act, which incentivised foreign direct investment, the very early stages of industrialisation got underway. The aim was for import-substitution industries to produce, domestically, goods that had been previously imported, such as building materials and industrial goods. Foreign investment played a major role in these industries, which by the early 1970s had largely met the domestic market for manufactured goods.

From the mid-1950s, statutory bodies like the Federal Land Development Authority and the Federal Land Consolidation and Rehabilitation Authority opened up large blocks of land, which were then parcelled out to smallholders. Settlers on these schemes planted approved crops for commercial production, such as rubber and, increasingly, oil palm. These schemes aimed to meet the land-hunger that had long been evident among smallholders, and to alleviate rural poverty. They also supported the diversification of commercial agricultural activities from a heavy reliance on rubber. By the 1960s and 1970s, the newly formed Federation of Malaysia was emerging as a major world producer of palm oil.

The Federation of Malaysia emerged as a major producer of palm oil

Source: www.ehm.my

The fraction of Indians in Malaya’s population rose very sharply in the decades between 1901–1921, from just 6 per cent to 15 per cent, as rubber planting expanded and inflows were at their peak. But the Indian share of the population fell after 1931 and was just 11 per cent by 1947, as many Indian plantation workers were repatriated as a result of the rise in unemployment over the Great Depression years (Figure 1).

Beyond the plantations, Indians were recruited, inter alia, for public works, as police and guards, and also to serve in the lower ranks of the colonial bureaucracy. Most came from Tamil areas in south India. They were considered to be more accustomed to British rule, more amenable to discipline than the Chinese, and more willing to work for low wages. Access to low cost Indian labour migration helped ensure the rubber industry’s spectacular growth and profitability. Since there was work for wives and older children on the rubber estates, Indian migration included whole families. But low wages, indebtedness, poor social status, and physical isolation kept estate Indians apart and they tended to exercise little influence on Malayan society.

Industrialisation and the New Economic Policy (NEP), 1960–1990

The Federation of Malaysia experienced ethnic disturbances in 1969, and the in 1971 the national government announced its New Economic Policy (NEP), which provided the foundation of policy for the next 20 years. One aim of the NEP was for Bumiputera (Malays and other indigenous people), who owned 2 per cent of corporate share capital in 1970, compared with 23.5 per cent for other Malaysians and 60.7 per cent for foreign interests, to increse their ownership of total commercial and industrial activities to at least 30 per cent by 1990, and the share owned by foreign capital to fall to 30 per cent. An example of the shift in this direction was the purchase by Permodalan Nasional (National Capital) of a controlling interest in the primary sector investment of British agency houses—Guthrie Corporation and Harrisons & Crosfield—as well as other foreign-owned firms during the 1980s. The domicile of these assets was transferred to Malaysia. However, by 1990 the targeted overall Bumiputera share of the NEP was only 19.3 per cent, whilst that of other Malaysians stood at 43.4 per cent.

Export-oriented industrialisation began around 1970 with the establishment of several free trade zones starting with Penang, and then in Selangor and Melaka. Efforts to industrialise started during the First Malaysia Plan (1966-1970) and intensified during subsequent Malaysia plans. Under the Free Trade Zone Act 1971, electrical and electronic firms as well as textiles and garment producers were heavily present in these zones. Government incentives included duty-free imports of raw materials and capital equipment, tax breaks and so on, provided that at least 80 per cent of the output was exported.

The change in the export composition was striking: between 1963 and 1990, the export of inedible crude materials, such as rubber and tin, fell from about 62 per cent of total exports by value to 8 per cent, and that of machinery rose from under 2 per cent to 43 per cent. Primary industries had become ‘sunset’ rather than ‘sunrise’. However, investments in heavy industries during this period, aimed at supporting economic diversification of the economy, were on the whole not always successful. For example, the Heavy Industries Corporation of Malaysia and Perwaja Steel suffered heavy financial losses.

Conclusion

In the long period under review, the economy changed from pre-modern, through colonial exporter of a few primary commodities, to that of a modern industrialised nation, largely through government initiatives to which private enterprise responded. At the end of the period, Malaysia was firmly set on a path of industrialisation. And in 1991, the government launched its ‘Vision 2020’, which aimed to propel the country to become fully industrialised and to graduate to high income status.