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 Chapter 3

From Tin to Petroleum

John Thoburn

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 Learning Objectives
 The economic arguments on extractive industries
 The importance of two key extractive industries in
Malaysian development
 The mechanisms through which extractive industries
impact the economy
 What government policies can be adopted to
increase the development benefits of mineral
extraction

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 3.0 Introduction

 Tin was the dominant export until 1900s (when rubber

became important)
 Tin was an important export until 1970s (when
manufacturing exports became important)
 Malaysia, world’s largest producer of tin before First World
War to early 1980s
 Tin collapsed after 1985 International Tin Agreement
financial failure
 Tin industry dying by 1990: low prices + low reserves
 Even with substantial recovery of the world tin price in the
late 2000s, the Malaysian tin industry has not revived
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 3.0 Introduction (cont.)

 Malaysia acquired petroleum when Sarawak joined in

formation of Malaysia in 1963
 Oil and gas seriously coming on stream in 1970s after OPEC
oil price rises
Expected development effects of Tin
 Very positive, through market forces
Expected development effects of Petroleum
 Only positive with the right policies
• Sharing in foreign exchange earnings through taxation
and ownership policies
• Avoiding ‘Dutch disease’ effects
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 3.0 Introduction (cont.)

Outline of the chapter:

 Theoretical debates on extractive industries
 The tin industry and Malaysian development
• Early development
• Development effects
• Policies
 Petroleum and Malaysian development
• Development of the oil industry and its impacts on
Malaysian development
• Policies
 Conclusions and implications

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 3.1 Theoretical Debates on
Extractive Industries
The economic arguments on extractive industries
 Singer-Myrdal-Prebisch hypothesis on loss of the
gains from trade—1950s to1970s
• Enclaves: Retained value (net foreign exchange
earnings) → net economic gain
• Linkages: Backward, forward, final demand
• Declining terms of trade
 Staple theories from 1960s
• Different effects of different primary exports
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 3.1 Theoretical Debates on
Extractive Industries (cont.)
The economic arguments on extractive industries
(cont.)
 ‘Resource curse’/‘Dutch disease’ problems—
from 1980s
• working through real exchange rate appreciation
 Global value chains—from 2000s, but very little
work on extractive industries

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 3.2 The Tin Industry and
Malaysian Development
Key extractive industries in Malaysian development:
History of Tin
 From 1870s major finds, in Perak and Selangor +
growing Western industrial demand
 Strongly associated with immigration from southern
China and with local Chinese capital
 ‘Europeans’ did not really establish themselves until
1900s

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 3.2 The Tin Industry and
Malaysian Development (cont.)

Key extractive industries in Malaysian development:

History of Tin (cont.)
 Key role of choice of productive techniques
• Dredging—foreign, overwhelmingly British,
companies
• Gravel pumping—ethnic Chinese companies
 Minimal Malay participation, even as workers

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 Figure 3.1 Real price of tin, 1860–2008

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 3.2 The Tin Industry and
Malaysian Development (cont.)

Policies on Tin—Colonial Time

 Export duty (around 12-13%) ploughed back into
railway development
 Prohibitive export duty on tin concentrates to
encourage local smelting
 Price support policies via export restriction and
international agreement in interwar period

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 3.2 The Tin Industry and
Malaysian Development (cont.)
Tin Policies—Independent Malaysia
 World shortage of tin and rising real tin prices
 Important to secure the mineral rents generated by
Malaysia’s being an intra-marginal producer
• World price set by Bolivia, the largest and marginal
producer—hard rock deposits vs. SE Asian alluvial
deposits
• Continued role of sliding scale export duty
• Company income taxes and other taxes (profits tax
and tin development tax)—concept of resource rent
taxation
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 3.2 The Tin Industry and
Malaysian Development (cont.)

 Ownership restructuring as part of post-1969 New

Economic Policy: Stock-exchange takeover of
Western mining companies in 1970s, eventually to
form Malaysia Mining Corporation
• Had been earlier gradual development of local
shareholdings in tin companies
• Some residual foreign ownership remained after
the takeover

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 Table 3.2 Distribution of the gains from tin mining in Malaysia, 1978

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 3.2 The Tin Industry and
Malaysian Development (cont.)

Tin—Development Gains
 Backward linkages
• Transport development, which aided rubber
• Power
• Engineering
 Forward linkages
• Smelting
• Tin plate?
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 3.2 The Tin Industry and
Malaysian Development (cont.)
 Final demand
• In 1970s about 70% labour income spent locally
in the beginning
 Externalities
• Labour training

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 3.3 Petroleum and Malaysian
Development
Key extractive industries in Malaysian development:
Petroleum and Gas
 Major export expansion in 1970s
 Gas production started in early 1980s
 Petroleum from both East Malaysia and from off East
coast of Peninsular Malaysia
• 2008 nearly half of country’s crude oil production
was from Peninsular Malaysia

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 3.3 Petroleum and Malaysian
Development (cont.)
 Generating 24% of Malaysia’s export earnings in
1980, about double that of tin, at time of very high
prices for both petroleum and tin
 2008 exports of crude petroleum, petroleum
products and liquid natural gas—some 17% of
Malaysian exports
• Tin about 1%, compared to 11% in 1978 and
28% in 1965

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 3.3 Petroleum and Malaysian
Development (cont.)
Petroleum—Development Effects
 Less academic research on development effects of
petroleum exports in Malaysia than on tin
 No strong development effects expected a priori
• Small employment and very capital intensive
• Inputs imported, but actually now Malaysia can
make some of its own oil rigs and drilling platforms
• But forward linkages in the form of petroleum
refining and petrochemicals
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 3.3 Petroleum and Malaysian
Development (cont.)
 Key issues are:
• Sharing of foreign exchange earnings
• Avoidance of Dutch disease exchange rate over-
valuation

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 3.3 Petroleum and Malaysian
Development (cont.)
Petroleum—Policies
 Petroleum Development Act 1974, setting up
PETRONAS to oversee country’s petroleum
development: Production sharing with foreign
investors
• Renegotiation of contracts after 1974, leading to
temporary problems for foreign investment
• Local content requirements on foreign investors

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 3.3 Petroleum and Malaysian
Development (cont.)

 Generating 40% of government revenue in late

2000s, with petroleum income tax, oil and gas
royalties, export duties, sales taxes and dividends
 National depletion policy
• US Geological Survey estimated reserves in
2006 as—Oil: 21 years and Gas: 34 years

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 Dutch disease/resource curse?
 Except for tin in late 19th century, neither tin nor petroleum
dominant in country’s export earnings (nothing like
Nigeria’s 95%+ from oil in export earnings)
 Even in late 19th century, tin does not seem to have
discouraged other exports (encouraged rubber and other
activities via railway development and labour supply,
although much rubber labour was imported too)
 Petroleum does not seem to have discouraged
manufacturing exports
 Real effective exchange rate (REER) appreciated in 1970s
but then gradually depreciated—see next slide
• No accessible REER data earlier than 1975
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 Figure 3.2 Real effective exchange rate (REER), Malaysia, 1975–2008

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 3.4 Conclusions and
Implications
 Tin had virtually all the positive effects on development that
could be expected from a primary commodity export.
• Even colonial policy wisely invested revenue from tin
taxation into infrastructural development
 Malaysia has been lucky to have had petroleum
development come on stream when the world grew short of
oil.
• Petroleum has become an important source of Malaysian
government revenue
• Dutch disease effects have largely been avoided
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