Unbalanced historical economic development: Malaya and the US - Articles

Unbalanced historical economic development: Malaya and the US

In the first four decades of the 20th century, Malaya's colonial-controlled economy grew spectacularly on account of the phenomenal upsurge in exports of rubber and tin. Did this stellar growth performance lead to corresponding gains in the well-being of Malayan people? What does the evidence show?

A good indicator of individual standards of living is consumption per head. If this indicator had risen in line with GDP per head, then the benefits of this remarkable economic performance would have trickled-down to the pockets of the Malayan people. However the evidence suggests otherwise.

Over the first four decades of the 20th Century, Malaya’s real GDP per capita grew at an average annual rate of 3.7%, and yet over the same period real consumption per head only grew at an average annual rate of 1.4%. In post-independence Malaysia, consumption growth paralleled GDP: over the period 1970 to 2009, per capita real consumption advanced at an average annual rate of 3.5 per cent, only marginally below average real per capita GDP growth of 3.7 per cent. The contrasting performances of GDP and consumption over the opening decades of the 20th century are evident in Figure 1. Why did such promising economic growth, albeit volatile in nature, not translate into matching growth in consumption and individual welfare?

Figure 1 Malaya: GDP and Consumption Indices 1900 = 100

It seems that much of the income generated by Malaya’s growing economy did not find its way to most households. Although comprehensive data do not exist for this period on personal sector (or household) income, an index of real wages is available, based on the reported wage rates for selected agricultural and non-agricultural grades and expressed in real terms by deflating by the 1914-based consumer price index. Household income will also depend on the number of members employed and unemployed, but variations in real wages will clearly play the most important part. Real wages in Malaya grew at an average annual rate of around 1.0 per cent over the period 1900-1939.

Figure 2 plots real GDP per capita and real wage rates, showing their very different time profiles. The data strongly suggest that personal sector income accounted for a rapidly decreasing share of GDP, with increasing income flows going as corporate income to foreign companies and employment income to non-residents who repatriated most overseas. When substantial income flows to firms and individuals are remitted overseas, GDP per capita is not a good measure of most Malayan citizens’ well-being.

Figure 2 GDP and Wage Indices, Malaya: 1900 = 100, USA: 1870 = 100

A market in Malaya in early 20th century

Source: National Archives Malaysia

2001/0042078

Colonial commerce in a Malayan town in early 20th century

Source: National Archives Malaysia

2003/0000303

The first four decades of the 20th Century in Malaya have features similar to those of the United States during its late 19th Century ‘Gilded Age’, when, in Thomas Piketty’s¹ view, ‘many observers in the United States worried that the country was becoming increasingly inegalitarian’ (p.506).

In the US during this period real GDP per capita also grew much faster than real wages, as is also evident in Figure 2.² On average, real wage rates in the US over the Gilded Age grew at around half the growth rate of GDP per capita (0.9 per cent per annum for real wages compared with 1.8 per cent for GDP per capita). In the Malayan case, real wage rates grew on average by 1.0 per cent per annum over 1900-1939 and real GDP per capita by 2.9 per cent.

Economic growth that fails to benefit most households is unbalanced. In early 20th century Malaya and in the US during its Gilded Age, rapid economic growth failed to benefit a large number of both countries’ people - real wages grew sluggishly at best. Colonial Malaya had very different features from those of the US, the most important of which was the dominant role played by foreign companies in developing its natural resources. But, in their different ways, they illustrate the undesirability of economic growth that fails to improve the well-being of most citizens.

¹Thomas Piketty, Capital in the Twenty-First Century Harvard University Press, March 2014

² The US real wage rate series is from Jeffrey G. Williamson, ‘The evolution of global labor markets since 1830: background evidence and hypotheses’, Explorations in Economic History 1995 32, 141-196. The US real GDP per capita series is from the Maddison Project database: see J. Bolt and J. L. van Zanden (2014), ‘The Maddison Project: collaborative research on historical national accounts’ The Economic History Review, 67, 627–651.