Malaysias Transition from Agricultural to Industrial Economy

towards Enhancing Growth and Employment

1. Introduction
1.1. Background
Ever since Industrial Revolution from late eighteen century, economic
progress and development have been closely identified with industrialization. This
thinking has continued to influence policy makers especially so in developing
countries (Jomo, 1993). Post-independence, Malaysia has enjoyed one of the best
economic growth records in Asia, with GDP growing at an average 6.5% for almost
50 years. The economy has traditionally been fuelled by its natural resources and
agriculture, namely rubber, palm oil and tin, but has since expanded to an export
driven economy spurred on by high technology, knowledge based and capital
intensive industries. Malaysias success has been partly attributed to its ability to
attract foreign direct investment (FDI) and supportive government policies.
1.2. Problem Statement
Malaysia continued to pursue the macroeconomic policies that were
prevalent during the British rule during the first decade after independence, which
was mainly to confine government expenditure within domestic revenue expansion.
The economic downturn in developed countries in early 1980s, triggered by
both the oil-price shock and the United States high-interest rate policy (the Volcker
shock), resulted in a massive collapse of world commodities trade. The economic
collapse caused demand for Malaysias primary goods to plummet both
domestically and internationally. The new technology growths in developed
countries resulted in alternative material such as the synthetic rubber further
burdened Malaysias rubber industry. On the general business front, the sharp
downturn in aggregate demand created massive excess capacities and a rising
number of corporate bankruptcies. In Figure 4, the unemployment rate increased
to 7.4% in 1986 from an average level of 4.5% during the first half of the decade.
2. Policy Instruments
The government realized the follies of reliance on agriculture and primary goods
based economy which made the economy extremely vulnerable from these external

shocks, hence instituted major structural adjustments in the economy. The aim was to
widen the manufacturing capacity and capability of the economy, targeting greater
export revenue. Amongst the major strategies were: promotion of heavy and capital
intensive industries and resource-based industries; and introduction of Promotion of
Investments Act (PIA), 1986 to replace Investment Incentives Act, 1968. This paper
focuses on policies that were implemented by Malaysia to overcome the economic
downturn they were facing by:
a. Increasing foreign direct investment (FDI)
b. Improving transport and communications network
2.1. Foreign Direct Investment
Malaysias major plus points as an ideal investment target are its location,
cultural ties with Singapore and Taiwan, economic and political stability,
increasingly competent labor force, and good infrastructure. The main barriers
have been restrictions put on foreign investment and ownership as part of the
government's policy to ensure Malay dominance of domestic markets. To
overcome these barriers, the government introduced the PIA that provided foreign
investors with a tax holiday of up to ten years for investments in new industries and
assured them with convertibility and repatriation of capital and profits.
The policy package also involved contractionary fiscal policy and exchange
rate devaluation, coupled with a notable policy shift to favor the role of private
sectors, which marked a significant departure from state-led economy pursued
over the previous one-and-a-half decade. There was also a new emphasis on
promoting FDI in the economy. The Investment Coordination Act, 1975 which
aimed to increase Malay participation at the enterprise level, in order to achieve
the NEP objective was amended in October 1986 1. The PIA applied only to
investments exceeding US$1 million (the previous threshold was US$400,000) or
to plants employing more than 75 workers. The amendment also eased limitations
on the number of expatriates employed in foreign affiliates. Foreign investors could
gain full ownership in new projects that exported eighty percent of their products,
or sold their products to firms in Free Trade Zones (FTZs) that employ at least 350
full-time Malay workers.
1

Promotion of Investments Act 1986; AG Chambers of Malaysia

2

In 1987, foreign firms were wary of the increase in production costs due to
the escalation in wages. To reassure cost stability, the government froze wage
increases for three years. As much as the Malaysian government had laid down
the ground work to attract FDI, the Malaysian Industrial Development Authority
(MIDA) played a significant role as well. MIDA was established in the early 1970s
to attract potential FDI and encourage them to invest in Malaysia. It was the first
point of contact for investors who intended to set up projects in manufacturing
sectors and related support services sectors in Malaysia. In 1985, the government
made MIDA the one-stop shop for foreign investments. MIDA was rebranded as
the Centre of Investment (COI) to facilitate new and potential investors. It targeted
FDI for higher value-added activities and more technology intensive processes. In
addition, MIDA introduced incentives to encourage local content and began to
proactively reach out to investors across the country, connect them to approving
authorities, assist in submitting applications, and act as a mediator in expediting
approvals. MIDA was involved in assisting firms from inception to their last day of
operations in Malaysia a process that later came to be known as hand holding.
To do so, they established offices in all twelve states with special project officers
handling firms' issues in each state (MIDA, 2008).
2.2. Improving Infrastructure
As Malaysias economic well-being is intrinsically tied to the performance of
its exports to international markets, the development and modernization of
infrastructure facilities were vital as a supplementary policy. The expansion in
infrastructure would help Malaysia with the demands of a rapidly expanding
economy and ensure that the countrys competitiveness in global markets was not
compromised.
Infrastructure development would improve accessibility of less developed
regions of the country to enable the expansion of rural economies and redress
economic disparities. Because of the importance of infrastructure in economic
development and poverty alleviation, the government of Malaysia continued to give
the highest priority to infrastructure development (Economic Planning Unit, 2012).
This is evident from the following:

a. Infrastructure has received the largest share of public sector development

expenditure in the Malaysia Plans and the amount of resources earmarked
for infrastructure development has generally increased from one Malaysia
Plan to the next and often by very significant amounts;
b. The governments privatization policy has facilitated private participation in
infrastructure development and management. Under the policy there has
been divestiture in the equity of state-owned enterprises such as Klang Port,
Telecom Malaysia and the electricity utility company, Tenaga Nasional;
c. The North-South Expressway and Tanjung Pelepas Port are examples of
numerous Build-Operate-Transfer projects undertaken in the infrastructure
sector;
d. As a proportion of GDP investment in infrastructure has been very high,
ranging between a low of 1.9 per cent in the Second Malaysia Plan and a
high ratio of approximately 7.5 in the Fifth Malaysia Plan;
e. Transport has been the biggest recipient of investment in infrastructure,
which mostly involve construction of roads (see Table 1); and
f. Other infrastructure segments that have received sizeable investments in
capacity

expansion

and

modernization

include

electricity

and

telecommunications industries.