Chapter One

UNDERSTANDING
MALAYSIAN ECONOMY

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 Chapter Overview

• Chapter 1 explained the economic status and

the historical evolution of the Malaysian
economy since independent.
• Evolution of Malaysian economy consisted of
four stages:
– 1957 to 1960s: Agriculture based activity
– 1970s to 1980s: Manufacturing and
industrialization
– 1990s: Financial crisis in 1997/98
– 2000: Information & Communication Technology-
driven economic growth
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 Objectives

• After studying this chapter, you should be

able to understand:
– The background of the Malaysian economy.
– The main features of the Malaysian economy
during independence.
– The economic status in 1960s.
– The economic status during the 1970s & 1980s
– The rationale behind the policy of labor-intensive
industries
– The financial crisis of 1997/ 98
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 Introduction

• Upon independence, our country was known

as Malaya.

• The formation of Malaysia in 1963 happened

after Sabah, Sarawak, and Singapore joined
the new federation.

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 Introduction

• Malaysia is a visionary nation. The vision

depend on good leadership and the Malaysian
people.

• The early economic transformation from

agriculture to manufacturing and diversification
was the work of vision. Its transform Malaysia
into a new developing countries.

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The Economic Status During Independence

• Prior to independence, Malaysian economy

was based on primary sector and on
international trade.
• Example of primary sector of Malaysia in 1957
were agriculture and mining.
• In 1957, primary sector was a major
contributor to GDP (45.7%) as well as
employment (61.3%).

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The Economic Status During Independence

• Agriculture activities contributed 39.3% to GDP and

58.3% to employment in 1957.

• Primary agriculture activity was rubber cultivation.

• Supporting agriculture activities were:

– Palm oil plantation
– Rice cultivation
– Fishery, and
– Forestry activities

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The Economic Status During Independence

• Mining was a minor contributor to GDP. It

contributed 6.4% to GDP and 2.8% to
employment in 1957.
• The secondary sector was very small
contributor to GDP(11.1%) and
employment(9.6%) in 1957.
• Examples of secondary sector activities in
1957 were light manufacturing, building and
construction.
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The Economic Status During Independence

• Manufacturing sector was minor

contributor to GDP and employment
because in 1957 it had natural
diseconomies of scale.
• For examples:
– Repair of plantation and mining equipment
– Processing of agriculture product
– Product with transportation cost.
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The Economic Status During Independence
(cont.)

• Tertiary sector contributed a significant 43.2% to

GDP in 1957.

• In 1957, Malaysia was very dependence on

international trade. Export amounted to about
50% of GDP.
• The need to provide services such as financial
and banking to support the export activities
boosted the tertiary sector.

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The Economic Status During Independence

• The service sector consisting of private and

public services such as health and
education contributed 11.1% to GDP in
1957.
• The Malaysian economy as at 1957 can
safely be said to be based on:
– Primary industries, and
– Highly trade-oriented production.

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The Economic Status During Independence

• In 1957, the population was growing at 3.4%,

one of the highest recorded rates of natural
increased in the world.
• Unemployment rate started to increase
because less of employment opportunity at
that time.

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The Economic Status During Independence

• Actively unemployed means those who are not

gainfully at work but actively seeking
employment and capable of taking a job if
offered.
• Passively unemployed means those who are
not actively looking for work because of
despondency or ignorance but will accept work
if offered.

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The Economic Status During Independence

• Another features of Malaysian economy

in 1957:
– Uneven distribution of income
– Wide disparities between rural and urban
sectors
– Wide disparities between inhabitants of
Peninsular Malaysia and the Borneo
states.
– Wide disparities between races in term of
profession and income.
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The Economic Status During Independence

• In 1957,
– The average annual income per head of the
Malays was RM367
– The average Malay employee earned about
RM1,770 whereas the non-Malay counterparts
earned as much as RM3,200.
– Government established the Rural and Industrial
Development Authority (RIDA) to develop Malays
competitiveness in commerce and industries.

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The Economic Status During Independence

• Final feature of the economy in 1957,

– Low level of human resources development, which
resulted in a shortage of many skills required for
development to take place.

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The Economic Status During Independence
-Conclusion

• The strength of the Malaysian economy in its

early years of independence was
characterized by:
– Exports of primary products of tin and rubber
– Resource-based industries
– High degree of inequality
– High unemployment
– High population growth

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The Economic Status During 1960s – 1980s

• During 1960s to 1980s, the Malaysian economy

gradually transformed to secondary sector.
• The economy became heavily dependent on
manufacturing activities.
• The process of manufacturing has evolved with
two fundamental strategies:
– 1. Import Substitution.
– 2. Export-Oriented Strategy.

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The Economic Status During 1960s – 1980s

• Import substitution means the economy

deliberately producing goods or services locally
to replace those imported items.
• Malaysia tried to substitute imported items with
locally produced goods and services to save
cost and to reduce its dependency on foreign
products.
• Import substitution was actively pursued in the
First Malaysia Plan (RMK-1, 1966-1970).
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The Economic Status During 1960s – 1980s

• Export-Oriented Strategy means the economy

deliberately producing goods and services at
efficient scale for local use as well as exporting
to other countries.
• The activities could generate more income in
term of foreign exchange to Malaysia.
• The export-oriented strategy has been
implemented since the Second Malaysia Plan
(RMK-2, 1971-75)
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The Economic Status During 1960s – 1980s

• In the early 1960s, the Malaysian economy was

still heavily dependent on development of
agriculture sector – the main foreign exchange
earner and source of employment.
• Despite high productivity in the agriculture
sector, most of the population were either
unemployed or engaged in low-income
employment.

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The Economic Status During 1960s – 1980s

• The government realized agriculture sector

didn’t provide enough growth impetus for the
overall economy.
• In the early 1970s, the government started to
emphasize on the structural change of
economy.
• The change in the emphasis from agriculture to
manufacturing sector has led to the
implementation of import substitution and
export-oriented strategy.
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The Economic Status During 1960s – 1980s

• The early structural changes (1970s) resulted in

a better balance between the agriculture,
manufacturing, and services sectors.
• As a result, modernization and diversification of
the Malaysian economy started during 1970s.
• The range of activities and products as well as
sources of growth became more diversified and
enlarged.

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The Economic Status During 1960s – 1980s

• In 1970s, the following features were very

apparent in Malaysian economy:
– Increasing degree of sectoral interlinkages
– Greater integration among the sectors.
– Strengthening of linkages within the economy.

• Example: Vegetables were exported to

Singapore.

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The Economic Status During 1960s – 1980s

• In 1970s, manufacturing sector experienced

rapid expansion with its average growth rate at
10.3% per annum between 1970 and 1990.
• The agriculture sector which was traditionally
very important continued to decline in its growth
rate from 5% per annum in 1970 to 0.8% in the
1980s.

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The Economic Status During 1960s – 1980s

• Since 1970s, the primary manufacturing activities took

place in primary and export-oriented industries.
• The growth leaders were:
– Wood processing
– Palm oil processing
– Tobacco products
– Textile and clothing
– Footwear
– Rubber products (especially tires and tubes)
– Plastic goods industries.

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The Economic Status During 1960s – 1980s

• The manufacturing sector experienced

tremendous growth and underwent structural
changes due to domestic and external
conditions.
• The structural changes in the 1970s and 1980s
were necessary as the changes prepared the
manufacturing sector to be more resilient in the
1990s.

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The Economic Status During 1960s – 1980s

• In mid-1980s, however, some of the early

leading industries in manufacturing sector were
experiencing cyclical decline because of:
– Diversifying, or
– Responding to comparative advantage changes.

• For example, the severe deceleration in world

trade and increased protectionism caused the
textiles and clothing industry, and rubber
products to experience negative growth.
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The Economic Status During 1960s – 1980s

• In term of employment, the performance of the

manufacturing sector was also impressive
• The share of employment contributed by the
manufacturing sector increased from 9.1%
(1968) to 15.8% (1980).

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The Economic Status During 1960s – 1980s

• In the 1980s, the sub-sectors which contributed

significantly to employment creation in manufacturing
sector were:
– Electrical and electronics
– Machinery and appliances
– Transport equipment
– Non-electrical machinery
– Rubber
– Plastic
– Apparel
– Paper and wood industries.
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The Economic Status During 1960s – 1980s

• The rapid growth and structural change in

Malaysia’s quest for industrialization have
affected the country’s external trade pattern,
in particular, the composition of export.
• For example, inedible crude materials
accounted for 68% of Malaysia’s total gross
export in 1960 was reduced to 32% in 1980.
• (Inedible crude material and exports comprise
mainly of rubber, tin, sawn logs and timber).
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The Economic Status During 1960s – 1980s

• During 1970 to 1980, exports of manufactured

goods grew from RM814 million to RM7,158
million, an increase of 24.3%
• Overall shares of manufactured products
totaled less than 17% in 1960 but has
increased to more than 27% of total export in
1980.
• (Example of manufactured products:
manufactured goods, machinery and transport
equipment, and miscellaneous articles).
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The Economic Status During 1960s – 1980s

• There were four industries which were very

important to Malaysian economy in the 1980s.
• The four industries responsible to the
manufactured product export growth were:
– a) Electronic components and assembly
– b) Textiles and clothing
– c) Rubber products
– d) Wood products.

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The Economic Status During 1960s – 1980s

• The four industries above had two things in

common:
– a) Labor-intensive industries: In the 1980s,
Malaysia urgently required greater job opportunities
for its expanding labor force.
– b) Non-resource-based industries: As
comparison to traditional Malaysian exports, which
are generally resource-based.
• Rapid growth in the four industries has changes
the composition of Malaysian exports from
resource to non-resource-based.
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The Economic Status During 1960s – 1980s
- Conclusion
• Structural changes of Malaysian economy started
during the 1970s until today.
• Two important strategies implemented by the
government during this time were import substitution
and export-oriented strategy.
• Manufacturing became increasingly important
compared to agriculture.
• The 4 prime industries – electronics components and
assembly, textiles and clothing, rubber products, and
wood product contributed to the changed in export
composition of Malaysian products (from resource to
non-resource-based)
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The Economic Status During 1960s – 1980s
- Conclusion

• Employment opportunity increased via

manufacturing activities.
• The initial vision of developing country was
realized with the help of industrial strategy of
import-substitution and export-oriented
industrialization.
• The shift from agriculture based economic
activities to manufacturing was a necessary and
an integral step to attaining success in
developing Malaysian economy.
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 The Economic Status During 1990s

• In the 1990s, the principles for industrial development

were guided by:
– i. The manufacturing sector, and
– ii. The focus on cluster-based development.
• Manufacturing sector led the industrial development
via the adoption of the First Industrial Master Plan
(1985) and the Second Industrial Master Plan (1996).
• Cluster is an agglomeration of interlinked or related
activities comprising industries, suppliers, critical
business services, requisite infrastructure, and
institution.
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 The Economic Status During 1990s

• In the 1990s, manufacturing was the primary

contributor for Malaysia’s GDP and
employment.
• The manufacturing sector was the largest
contributor to employment creation in the
economy, accounting for about 44% of new
jobs created between 1990 and 1998.
• The rapid expansion of the manufacturing
sector has however led to a tight labor market
in the 1990s.
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 The Economic Status During 1990s

• Labor shortages were more apparent among

the “labor-intensive” technical and production
industries especially textiles, wood-based, and
electronics.
• This led to the subsequent recruitment of
foreign workers specifically from Indonesia, the
Philippines, and Bangladesh.

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 The Economic Status During 1990s

• The progress of the 1990s was overshadowed

by the effect of the financial crisis in 1997/98.
• The 1990s would always be remembered as
the worst financial crisis in Malaysia’s economic
development.
• Financial crisis in 1997/98 not only led to a
contraction in all sectors of the economy but
also affected the value of RM against other
currency.

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 The Economic Status During 1990s

• The growth momentum of 1960s, 70s, and 80s

continued to dominate most years of the 1990s.
• Between 1991 and 1997, real GDP grew by 8.9% per
annum.
• Real GDP is the value of final goods and services
produced in a given year when valued at constant
prices.
• Nominal GDP is the value of the final goods and
services produced in a given year valued at the prices
that prevailed in that same year.

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 The Economic Status During 1990s

• The rapid expansion of real GDP in 1990s was due to

the investment in the following 4 factors during 70s
and 80s:
– Physical infrastructure
– Research and development (R&D)
– Education and skill training, and
– Large inflow of foreign direct investment (FDI)

• The above factors led to the shift of industrial focus

from an investment-driven economy which
dominated the 70s and 80s to a productivity-driven
economy of the 90s.
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 The Economic Status During 1990s

• Although Malaysia emphasize on productivity-

driven economy in the 1990s, the economic
management of 1997-98 focused on reducing
risks in the economy to ensure:
– macroeconomic stability – standard of living, cost of
living (inflation or deflation), and economic growth
(positive employment, business cycle etc.)
– Restoring confidence (among local and
international investors as well as consumers), and
– Promoting stronger financial system (bank, finance,
insurance etc.)
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 The Economic Status During 1990s

• The impact of the financial crisis on economic growth

during recession period became evident when real
GDP contracted by 2.8% in 1st. quarter, 6.8% in 2nd.
quarter, 9.0% in 3rd. quarter, and 8.1% in 4th. quarter
of 1998.
• The real GDP for the whole of 1998 registered a
reduction in growth to 6.8% (compared to 8.9% in
1991 to 1997).

• As a result, the per capita income decline by 1.8 per

cent or RM11, 835.

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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98:

– On export-oriented industries: production of
electrical machinery, apparatus, appliances and
supplies declined by 7.7% because of weak
demand from Asia-Pacific region and depressed
global market for semiconductors.
– On domestic-oriented industries: construction-
related products declined by 27.7%; fabricated
metal products 17.2%; transport equipment 52.2%;
and petroleum products 11.5%. This reduction was
due to the impact of the crisis, which led to massive
unemployment and reduction in income.
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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98 (cont.):

– On agriculture sector: Output decline by 4% in 1998
as a result of lower production of all major
commodities due to lower external demand that
was aggravated by inclement weather, labor
shortages, unfavorable prices, reduced cultivated
area and lower use of land.
– On mining sector: Output rose by 0.8% due to
higher output of crude petroleum and gas as well as
the turn around in tin production, in response to
favorable price in the commodity.
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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98 (cont.):

– On service sector: The finance, insurance, real
estate, and other business services moderated
grew at 4.4% on account of:

• the decline in credit extended by financial institutions,

• sharp decline in prices and volume of shares traded in

Kuala Lumpur Stock Exchange (KLSE), and

• slower growth in the insurance industry.

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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98 (cont.):

– On price: inflation pressures from the depreciation
of RM became apparent towards the end of 1997.
• The Consumer Price Index (CPI) peaked at 6.2%.
• The Producer Price Index (PPI) increased to 10.7% in
1998 compared to 2.7% in 1997.
• Weak RM also led to substantial increase in the prices of
machinery and transport equipment, manufactured
goods, and miscellaneous manaufactured articles, and
chemical products.

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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98 (cont.):

– On employment: the employment opportunity
declined by 3% in 1998 compared to a positive
growth of 4.9% (1996) and 4.6% (1997).
– On unemployment: the rate increased from 2.6% in
1997 to 3.9% in 1998. The total retrenchment was
19,000 workers in 1997, and 83,865 in 1998. Out of
this total number,
• 54% was from the manufacturing sector,
• 28% from the service sector, and
• 11% from the construction sector.
• 7% from other sectors.
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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98 (cont.):

– On the demand side: Real aggregate demand
declined by 25.9% in 1998 from a growth of 6.5% in
1997.
– On the consumption side: The consumption was
badly affected, in which real aggregate
consumption decline by 10.3%
• Public consumption declined by 3.5%.
• Private consumption declined by 12.4%. The sharp
decline in private consumption reflected the negative
wealth effect arising from depressed equity prices and
erosion of purchasing power.

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 The Economic Status During 1990s

• The effects of financial crisis in 1997-98 (cont.):

– On public investment: the government continued
with the counter-cyclical policies adopted in the
early 1988 in sustaining public investment.
– On gross national saving (GNS): it rose by 5.1% in
1998 increasing its share to 41.2% of Gross
National Product (GNP).
– On the nation’s total external debt: the situation
remained manageable in 1998 despite the
prolonged regional financial crisis due to the
reduction in short-term debt by 34% to RM28.5
billion.
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 The Economic Status During 1990s
- Conclusion
• The 1990s have witnessed the most turbulent times in
Malaysia’s economic history.
• The period of rapid growth had been disrupted
abruptly due to external forces, in particular
speculative attacks on the stock markets and currency
trading.
• The government had played an important role and
taken the initiative in restoring economic growth and
maintaining the standard of living already achieved for
its population.
• If the government had not intervened, the country
would have loss all that it had achieved in the last four
decades.
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 The Economic Status in 2000s

• After financial crisis in 1997-98, the government

of Malaysia realized that the country should
venture into information and communication
technologies (ICT) at a faster rate in order to
have sustainable economic growth.
• Multimedia Super Corridor (MSC) was
introduced in 1998 to facilitate Vision 2020
• The government also realized that agriculture
plays important roles to the country’s economic
well being specifically in food production.
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 The Economic Status in 2000s

• The government encouraged reforms in

agriculture sector through bio-technology.
• To generate healthy economic activities, the
Malaysian government introduced micro-loan or
small-loan scheme for entrepreneurs.
• Loan payment are made via Bank Pertanian
Malaysia (BPM) and Bank Simpanan Nasional
(BSN)

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 The Economic Status in 2000s

• To meet the challenges from other developing

countries, specifically China (which has cheap labor
cost and large consumer market), the government
start emphasizing on capital-intensive economy.
• Capital-intensive means the economic activities
required large amount of capital investment to produce
efficient quantity of goods or services.
• New sources of income are introduced such as sport-
tourism industry i.e. Sepang F1 Circuit, Pangkor Duty-
Free Island, Malaysia Open House, etc.
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 The Economic Status in 2000s
- Conclusion

• ICT became growth engine of Malaysia. MSC

was introduced to help the nation achieved
developed country status in the year 2020.
• The economic growth occurred via
expansionary policy through public
consumption and government investment.
• Eco-tourism and sport-tourism become one of
the latest foreign exchange earner to Malaysia.

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