Topic 2 The Malaysian Economy - Growth & Structural Changes

Chapter
The Malaysian Economy:

Growth & structural
changes
Malaysian Economy
Oxford Fajar Sdn. Bhd. (008974-T) 2011
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Learning Objectives
Tracking the changes in agriculture in Malaysia.
Tracking the changes in Petroleum industry in

Malaysia.
Tracking the changes in manufacturing in Malaysia.
Malaysian Economy
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Growth & structural changes

Before
independent, Malaysian economy

had heavy reliance on tin mining and
rubber plantation.
In
the nineteenth century (1800s), world

demand for producing tinplate tin rose due
to the discovery of a more efficient
method (for canned food).
Malaysian Economy
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Tin mining industry was dominated by

European capital, especially colonial British.
Malaysian ownership in Malaysian-incorporated

56.3%
Malaysian ownership in United Kingdomincorporated tin dredging companies 20.0%.
Total Malaysian ownership in both Malaysianincorporated and United Kingdom-incorporated

tin dredging companies in Malaysia is 35.1%.
Malaysian Economy
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Malaysias tin reserves of tin were exhausted

in the 1980s and prior to which the government
lay emphasis on alternative source of
economic growth.
Malaysian Economy
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Agricultural
sector especially rubber

production was a very important source
of growth in Malaysian colonial era
Rubber
expansion in Malaysia began on

estates, being stimulated by:
1)
Very high prices.
2)
Capital and management from Europe.
Malaysian Economy
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3.
Suitable local weather, investment from

the British.
4.
New technology of extracting the rubber

latex from the trees (called tapping) by
an incision with a special knife expedite
the rise of rubber production.
5.
Labor from South India
Malaysian Economy
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Parallel
development on independent
rubber shareholdings took root, as both
Malay farmers and immigrant Chinese
workers perceived the high income to be
earned from the new crop.
Malaysian Economy
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: Decline of rubber
Malaysia replaced rubber with palm oil and

manufacturing as source of growth due to:
1.
Manufacturing sector has higher value-added,
2.
Rise in rubber production cost. (there was

growing labour shortage and consequent rise in
real price of labour in rubber plantation sector
as rubber is a labour intensive crop)
3.
Increased in substitution competition from

synthetic rubber.
Malaysian Economy
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Agriculture
Economists agree that agriculture is a key

contributor to overall economic growth and
modernization.
Self reliance in food production in case of war,

embargoes, other forms of conflict is important for
national stability.
Its seen that a strong agricultural sector is important

for the development of other sectors e.g.
manufacturing, services, knowledge economy
unless for middle east countries that are endowed with
oil deposits and unfavorable climatic conditions.
Malaysian Economy
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Agriculture
Initially the agricultural sector included the

production of livestock, fisheries and other
miscellaneous crops.
There was transition to valuable cash crops such as

palm oil, rubber and food commodities; owing to
the increase in earnings from the major commodities
.
Malaysian Economy
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Table 4.2 Composition of GDP by sector, Malaysia, 1965-2009 (%)

Sector
Agriculture
1965
1970
1975
1980
1985
1990
1995
2000
2005
2009
31.5
29.0
27.7
22.9
20.8
15.2
12.9
8.6
8.4
9.5
9.0
13.7
4.6
10.1
10.5
11.8
6.2
10.6
14.4
12.9
10.4
13.9
16.4
19.6
19.7
24.2
26.4
30.9
29.6
26.6
Construction
4.1
3.5
3.8
4.6
4.8
3.9
6.2
3.9
3.0
3.3
Electricity, gas
and water
1.1
1.1
2.0
1.4
1.8
2.2
2.6
3.0
2.7
2.6
43.9
38.8
45.5
41.4
42.4
44.3
47.8
46.2
44.0
48.3
Mining
Manufacturing
Services
Malaysian Economy
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Table 4.3 Distribution of employment by sector, Malaysia, 19702009 (%)

Sector
1970
1975
1980
1985
1990
1995
2000
2005
2008
2009
Agriculture
53.5
49.3
39.7
35.7
26.0
19.0
16.0
12.9
12.0
12.0
Mining and
quarrying
2.6
2.2
1.7
1.1
0.6
0.5
0.5
0.4
0.4
0.4
Manufacturing
8.7
10.1
15.7
15.1
19.9
25.7
27.1
28.7
28.8
28.4
Construction
2.7
2.9
5.6
6.9
6.3
8.9
9.2
7.0
6.6
6.6
Services
20.5
22.5
23.6
26.2
34.5
35.1
37.2
51.0
52.5
52.6
Government
Services
12.0
13.0
13.7
15.0
12.7
10.8
10.0
9.7
10.9
11.0
Total
Employment
(000)
3,340
3,928
4,817
5,625
6,686
8,024
8,547
Primary
56.1
51.5
41.4
36.8
26.6
19.5
16.5
13.3
12.4
12.4
Secondary
11.4
13.0
21.3
22.0
26.2
34.6
36.3
35.7
35.4
35.0
Tertiary
32.5
35.5
37.3
41.2
47.2
45.9
47.2
51.0
52.2
52.6
Malaysian Economy
10,895 11,577 11,585
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Figure 4.2 Agricultural growth versus manufacturing growth, Malaysia, 19702005
Malaysian Economy
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The Old Agriculture
Lack of technical change
Greater promotion of manufacturing saw manufacturing

overtaking agriculture as the main contributor to Malaysias
GDP and employment in the second half of the 1980s and
the mid-1990s, respectively.
No competitiveness: Old agricultural technology in food

production could not sustain the sectors competitiveness
and hence this sub-sector began to face growing trade
deficits from the 1980s
Malaysian Economy
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Agricultural products
1 Palm oil
Produces more than ten million tonnes of oil per year, over half of
the world's supply.
Steadily improved at all levels, including the quality of planting
material, cultural practices, processing methods and marketing
strategies
.
Agriculture
2 Rubber,
Malaysia is also the world's leading supplier of natural rubber,

80% of which is produced by smallholders in both eastern and
western parts of the country.
Prices and export volume for rubber have both fallen in recent
years owing to huge stocks in the region and slower demand
from consumers.
Hence government support for the smallholder sector with grants
for planting materials, fertilizers and pesticides
Malaysian Economy
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Agricultural
products
Cocoa has been commercially planted in Malaysia since
3 Cocoa, Agriculture
the 1950s while cocoa processing began in the 1970s.
Most of the planting areas are situated in Sabah, but
most of the grinding and manufacturing are based in
the Peninsula.
Malaysia is the fifth largest cocoa processor in the
world.
4 Rice,
Vietnam still dominates rice imports, with Thailand in

the second spot
The need to increase self-sufficiency level for rice had
prompt the GOM to take few initiatives such as the
Ninth Malaysia Plan (2006-2010).
The Ninth Malaysia Plan supposed to increase selfAll Rights Reserved

Malaysian Economy sufficiency to 90% by 2010 this however fail to
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materialize .
Agricultural products
Fruit production in Malaysia is rising despite land issues and the
5 Fruit banana,
Agriculture
lack of foreign Investment
pineapple
The government is focusing on a selection of fruit to increase sales
overseas: giving emphasis to star fruit, papaya, mango,
watermelon and pineapple.
The focus for Europe is on star fruit and papaya, and Papaya and
pineapples for Middle East
6 Fish
Plays a significant role in the national economy. Apart from

contributing to the national Gross Domestic Product (GDP), it is
also a source of employment, foreign exchange and a source of
protein supply for the rural population in the country.
The fisheries sector has 3 main subsectors, namely marine
capture fisheries, aquaculture , & inland fisheries.
Malaysian Economy
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The New Agriculture
Biotechnology. The new agriculture has extensive focus on

the use of biotechnology,
Development in genetics (both GMOs and non-GMOs),

microbiology and diagnostics, and nanotechnology have
revolutionized and pushed out agricultural production
and profit frontiers.
Modern marketing
Use of ICT & modern marketing emphasizes connecting with

supermarket-driven value chains and sustainable
development
New agriculture sought to raise unit productivity by

increasing the utilization of knowledge-based-farming.
Malaysian Economy
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The New Agriculture
Output and productivity of a number of commodities

have risen since 2005..
Fishing overtook forestry and logging in 2009
Oil palm has been the dominant crop to enjoy local

downstream processing over the period 1990
2010.
Malaysian Economy
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Figure 4.1 Agricultural policies, Malaysia, 19502010
Malaysian Economy
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Agriculture
Effect of agricultural modernization to Malaysian
Industrialization: Positive Effects
Provide enough food for the industrial sector

population.
Increase productivity in agricultural sector

releaseS labour surplus to industrial sector.
Generate higher income to agricultural sector

population. This lead to higher domestic demand
and savings that support the industrial sector.
Malaysian Economy
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Agriculture
Effect of agricultural modernization to Malaysian

Industrialization: Negative Effects
Greater export earnings contribute to increasing

foreign reserves, which in turn appreciating the
real exchange rates. Real appreciation of
Ringgit squeezes manufacturing profits, thus
lead to de-industrialization.
Malaysian Economy
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Agriculture
Effect
of agricultural modernization to
Malaysian Industrialization: Negative
Effects
Since
prices are mainly determined by the

conditions in the world markets, high
productivity and output in agriculture may,
without offsetting changes in relative prices,
may induce the flow of resources into the
agricultural sector, thereby squeezing out
the manufacturing sector.
Malaysian Economy
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Petroleum and Malaysian

Development
Malaysian Economy
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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 countrys crude oil production
was from Peninsular Malaysia
Malaysian Economy
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Development (cont.)
PetroleumPolicies
Petroleum Development Act 1974, setting up
PETRONAS to oversee countrys 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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Development (cont.)
1980
2008
Contribution to export
earnings
24%
17%
Observation
Double that of tin
>rubber, palm oil & timber
products
By 2008 Malaysia as the 3rd largest exporter of

natural gas.
Malaysia has remained outside OPEC, but has

consulted with OPEC members on limiting
production.
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Development (cont.)
2004
Domestic
consumption of
domestic
production
Export
imports
52%
37%
17%
The co-existence of imports and exports of

crude is explained by the export of high quality
Malaysian low sulphur oil and import of lowerquality crude.
Malaysian Economy
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Development (cont.)
Petroleum has limited impact on development via

employment and final demand linkage from
workforce.
High capital intensive.
It contributes only large amounts of short term

employment in construction sector.
Taxation plus other forms of sharing revenue are

important in securing gain for the economy.
Contribution to Government
revenue %
Malaysian Economy
2000
2006 - 2008
25%
40%
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Development (cont.)
Forward Linkage
1.
Growth of petroleum Driven by growth in

products
domestic market
2.
Growth in
Petrochemical subsector
Malaysian Economy
Driven by the growth in

the capital intensive,
Heavy industry sector.
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Development (cont.)
Back ward Linkage
1.
Malaysian companies are capable of building oil rigs and

drilling platforms.
2.
PETRONAS has diversified its operations internationally in

oil and gas related activities.
Other value adding investments.

PETRONAS has developed shipping interest with a view to
transport LNG.
Malaysian Economy
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Development (cont.)
National depletion policy

US Geological Survey estimated
reserves in 2006 asOil: 21 years and
Gas: 34 years
Malaysia limits production in order to
conserve its oil and gas reserves.
Malaysian Economy
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Dutch disease/resource curse?
The Dutch disease refers to situation where a countrys

key export hinders the growth of other industries for
export.
Neither tin nor petroleum dominated Malaysias export
earnings (e.g. Nigerias 90%+ from oil in export
earnings)
Even in late 19th century, tin does not seem to have
discouraged other exports (encouraged
Rubber and other activities flourished via railway
development and labour supply , (although much rubber
labour was imported too)
Petroleum does not seem to have discouraged
manufacturing exports
Malaysian Economy
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Manufacturing
Malaysian Economy
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Manufacturing
Since 1970, Malaysia has based its economic

development strategy on three longterm policies:.
Year
Policy
197090
New Economic Policy (NEP) - To eradicate poverty,

To restructure Malaysian society
19902000
National Development Policy (NDP),

Balance between economic growth and equity
200110.
National Vision Policy (NVP), Building a Resilient

Nation, Unity and Spirit of Patriotism
Building Economic Resilience
Growth with equity continues to be the guiding

development strategy.
Malaysian Economy
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Manufacturing
As a dependent colonial economy, Malaysia

concentrated on the exports of primary raw
materials and imported manufactured products.
1947
Agriculture
Employed %
68%
Tertiary sector,
22.5%
Mining
2.5%
Manufacturing
6.7%
Malaysian Economy
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Manufacturing
The proportions remained largely unchanged until

independence.
During the colonial period, agricultural processing

was the main manufacturing activity,
But in the 1960s and 1970s newer industries

developed, namely:
1.
Beverages,
2.
Textiles,
3.
Chemicals and chemical products,
4.
Transport equipment.
Malaysian Economy
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Manufacturing
The 1970s ushered in a new phase of economic

growth, marked by the rapid rise of construction
and manufacturing and a strong strategic
emphasis on equitable or fair distribution,
specifically through affirmative action policies.
By 1990, the economy was more industrialized,

despite being buffeted by massive shocks
1.
The oil crises of 197374 & 197879
2.
The global slowdown in demand for electronics and

primary commodities in 198586.
Malaysian Economy
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Manufacturing
Under such conditions, the industries that grew were

those that had some natural protection due to
location advantages. (labor & natural resources)
The manufacturing industries that enjoyed such

advantages were the primary processing industries,
including the processing of agricultural,
mining,
forestry products,
Malaysian Economy
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Manufacturing
domestic marketoriented industries such as food

products, printed materials, furniture, rubber
products, and
building supplies (for example, cement, bricks, and

light engineering goods).
Malaysian Economy
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Manufacturing
The country had developed comparative advantage

in resourcebased manufacturing industries, and so:
i.
Imports were more capital intensive.
ii.
Exports more labor intensive.
The estimates indicate that growth, led by

Malaysias laborintensive manufactured exports,
was underway by the early 1970s
Malaysian Economy
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Factors for the growth of

Manufacturing industry
Low-wage model: In the 1980s the low-wage

model worked well for Malaysias manufacturing
sector making the country a haven for the electrical
and electronic (E&E) companies.
Malaysian Economy
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Malaysian Economy
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Malaysian Economy
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Challenges of Manufacturing
industry
1.
Low wages-model does not bare efficiency.
2.
Malaysia did not enter new growth segments

with the advent of new technologies in the late
1990s and early 2000s, making the future look
pretty challenging for the sector as smartphones
and then tablet computers made great strides in
denting demand first for PCs and now even for
laptops and notebooks.
Malaysian Economy
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industry
Products higher up the value chain like solarpowered and light-emitting diode industries are in
and low-technology E&E goods gradually
diminishing.
More than 40% of exports are still derived from E&E

segments such as hard disk drives and consumer
electrical products, and this does pose a problem for
overall economic growth.
3. Rising labor costs makes the country to lose its

shine as a destination of foreign investments until
recently.
Malaysian Economy
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industry
4. South-East Asian economies are highly reliant
on foreign multinationals and there is some
delay where technology transfer is concerned as
companies will not transfer high technology knowhow readily.
This was part of the middle-income trap faced by

emerging economies as they confronted the
challenge of trying to sustain the manufacturing
sector by relying on foreign multinationals through
the low-wage model, tax breaks and other
subsidies.
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industry
Low-wage model in manufacturing is a disincentive

for foreign companies to transfer technology and for
firms to move up the value chain
5. Brain drain problem, Malaysia does produce talent

but there is a problem in retaining the talent.
Low wages was one factor why there was a brain

drain.
Malaysian Economy
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Government response
1.
Educated workforce. As the manufacturing sector

moves into high-technology non-E&E
operations, there will be a need for an educated
workforce and so wages are bound to rise.
2.
Capital-intensive investment. Government

focuses on higher value-added downstream
manufacturing activities, which is reflected in the
increasingly capital-intensive investment pattern in
the manufacturing sector.
Malaysian Economy
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Government response
3. Grow the non-E&E sector. Malaysia had in the
past decade emerged as a major exporter of key
non-E&E products such as chemicals and
chemical-related products, refined petroleum
products and rubber products supported by the
domestic availability of raw materials. (central bank
annual report)
Malaysian Economy
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Topic 2 The Malaysian Economy - Growth & Structural Changes

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Topic 2 The Malaysian Economy - Growth & Structural Changes

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Chapter

The Malaysian Economy:

All Rights Reserved

Tracking the changes in agriculture in Malaysia.

Tracking the changes in Petroleum industry in

Tracking the changes in manufacturing in Malaysia.

All Rights Reserved

Growth & structural changes

independent, Malaysian economy

the nineteenth century (1800s), world

All Rights Reserved

Growth & structural changes

Tin mining industry was dominated by

Malaysian ownership in Malaysian-incorporated

Malaysian ownership in United Kingdomincorporated tin dredging companies 20.0%.

Total Malaysian ownership in both Malaysianincorporated and United Kingdom-incorporated

All Rights Reserved

Growth & structural changes

Malaysias tin reserves of tin were exhausted

All Rights Reserved

Growth & structural changes

sector especially rubber

expansion in Malaysia began on

Very high prices.

Capital and management from Europe.

All Rights Reserved

Growth & structural changes

Suitable local weather, investment from

New technology of extracting the rubber

Labor from South India

All Rights Reserved

Growth & structural changes

All Rights Reserved

Growth & structural changes

Malaysia replaced rubber with palm oil and

Manufacturing sector has higher value-added,

Rise in rubber production cost. (there was

Increased in substitution competition from

All Rights Reserved

Economists agree that agriculture is a key

Self reliance in food production in case of war,

Its seen that a strong agricultural sector is important

All Rights Reserved

Initially the agricultural sector included the

There was transition to valuable cash crops such as

All Rights Reserved

Table 4.2 Composition of GDP by sector, Malaysia, 1965-2009 (%)

All Rights Reserved

Table 4.3 Distribution of employment by sector, Malaysia, 19702009 (%)

10,895 11,577 11,585

All Rights Reserved

Figure 4.2 Agricultural growth versus manufacturing growth, Malaysia, 19702005

All Rights Reserved

The Old Agriculture

Lack of technical change

Greater promotion of manufacturing saw manufacturing

No competitiveness: Old agricultural technology in food

All Rights Reserved

Malaysia is also the world's leading supplier of natural rubber,

All Rights Reserved

Vietnam still dominates rice imports, with Thailand in

The Ninth Malaysia Plan supposed to increase selfAll Rights Reserved