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MALAYSIA’S CHANGING ECONOMIC PROFILE

OVERVIEW OF MALAYSIA’S HISTORY, POLITICS, ECONOMY AND INNOVATION

3.3 MALAYSIA’S CHANGING ECONOMIC PROFILE

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business leadership from other ethnic groups. Snodgrass (1995) in his paper entitled, Successful Economic Development in Multi-Ethnic Society: The Malaysia Case, has shown that during the 10 years of implementation of NEP, Malaysia was among the top ten fastest growing economies in the world. In fact, according to Snodgrass (1995), the NEP was an essential tool that balanced the country economic growth by contributing to the national unity through modernization of rural society.

All NEP goals were to be reached in the context of economic growth. No one was to suffer any loss of a job, income, or business, although obviously some loss of opportunity to improve one’s job or increase one’s income or business was implicit in the redistribution plan (Snodgrass, 1995, p7).

As a conclusion, the intervention by government to attempt to manage ethnic tensions is one of the factors that have contributed to Malaysia’s stability. The complexity of managing these ethnic questions is ongoing. Maznah in Ethnicity and Inequality in Malaysia: a Retrospect and a Rethinking (2005) makes the point concisely:

Each group has actually existed separately or within parallel systems in a cultural or economic sense. As long as each group feels that their group interests are not being threatened and deprivation gaps are prevented from being unduly widened, there is stability even if ethnic tension prevails (p5).

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electronics parts, chemicals and rubber products. The Malaysian government established the Free Trade Zone Act in order to encourage and boost up these export activities.

Among others features of the Act, manufacturing companies enjoyed the benefits of exemptions for duties for the import and export of equipments from the relevant authorities, namely the Customs Department (Gomez & Jomo, 1999).

The growth on import based activities has supported Malaysia’s venture into export oriented economic activities. Foreign multinational corporations (MNCs) began to penetrate Malaysian’s market. The Malaysian government offered attractive incentives and benefits to attract and encourage these MNCs to invest in Malaysia. However, even though many MNCs set up factories in Malaysia, they did not bring technology into the country. Instead these foreign manufacturers only used Malaysia as its assembly and packaging plant. Research and development activities were still done in their origin countries (Narayanan & Wah, 2000 and Norlela & Figueiredo, 2004). This is one of the factors that contributed to the low level of technology activities in Malaysia during this era.

When the export oriented economic activities proved to be a success, in the early 1980s, Malaysia began to expand its economy into heavy industries. The main objective of this expansion was to encourage the industrial diversification to generate economic growth (Haslinda, Raduan & Kumar, 2007). The industries which are grew under this heavy industrialization program included the national car project, iron and steel mills, cement factories, paper and paper products, and petrochemicals. These industries are managed

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by the Heavy Industries Corporation of Malaysia (HICOM). The purpose of the HICOM was to support this growth in heavy industry by facilitating the industrial sector with incentives and tariff protection.19 However, Malaysian ventures into heavy industries were not an easy task (Zubair, 2007). According to Zubair (2007), heavy industries are characterised by expensive start up costs, long lead times to gain profit, involvement in continuous development processes and steady demand for skilful human capital. All these factors require some degree of government support. In response the Malaysian government launched several action plans. Privatization of selected public agencies was one of the key actions taken. The Malaysian privatization policy approach was inspired by the idea of ‘Japan Incorporated’, the assumption that the nation acts as one big corporation where a conducive business environment is facilitated by government (Zainal & Bhattasali, 2008). The policy was issued through Guidelines on Privatization in 1985 and plan of action on privatization taken through the Privatization Master Plan which was launched in 1991.

According to the Action Plan, 424 GOEs [government-owned enterprises] under federal, state and local government were assessed, and 246 were considered to be privatizable. Out of the 246 GOEs, it was determined that 69 could be privatized within two years, 107 within two to five years, and the remaining beyond five years (Zainal & Bhattasali, 2008, p18).

Privatization initiatives were envisaged to fulfil many objectives at the same time: lessen government financial responsibility, increase the country’s efficiency and simultaneously support the implementation of the NEP (the NEP was launched under the Second

19 “Apart from enormous injections of public funds, the targeted industries were heavily protected through tariff and import restrictions and licensing requirement. For instance, the effective rate of protection for the iron and steel industry rose from 28 percent in 1969 to 188 percent in 1987. The level of protection for motor vehicle assembly and cement industries was so high that these industries operated at negative value added at free trade prices” (Kanapathy, 2000, p144).

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Malaysia Plan (1971-1975), (Zainal & Bhattasali, 2008).20

As noted earlier, the race riot's which took place in 1969 were an important factor that contributed to the launching of NEP. Before the 1969 incident, Malaysia’s economy was characterized by the predominance of the Malays in crop plantation, the Indians in the estates and the Chinese controlling the mining sector. This distribution of economic activities could be linked to an uneven distribution of the country’s economic assets. For example: the Malays 1.5 percent, Chinese 22.8 percent, Indians 0.9 percent, and the balance belonging to foreign interests, this situation created injustice for the Bumiputera (Ritchie, 2005). Local people felt that the fragmented economy was the major factor that caused high poverty among the Bumiputera. Table 3.1 and Table 3.2 show the number of households in poverty and mean household incomes between different racial groups in Peninsular Malaysia21 in 1970.

Realizing that poverty was correlated with racial division, the government started to formulate policies which could reduce the identification of race with economic function.

To this end the NEP provided policies to upgrade the standard of living in rural areas, encourage rapid growth of urban activities and to improve education and training

20 It is reported, during the Seventh Malaysia Plan (1996-2000) period, privatization program has saved a total of RM49.3 billion of government capital expenditure, (47.6 percent was from the electricity and gas sector) and from 1983 until 2005 a total of 113,220 workers were transferred to the private sector (which contributes in reducing the government operational expenditure). Also, from 1983 until the year of 2000 about 203companies were privatised. Please see Malaysia (2001) and Malaysia (2006) for further information on this topic.

21 According to Hirschman (1987) “Peninsular Malaysia, formerly Malaya, consists of eleven states plus the Federal Territory (the site of the capital city of Kuala Lumpur) of Malaysia on the mainland of Southeast Asia. The other two states, Sabah and Sarawak, on the island of Borneo, were joined with Malaya (which had been an independent nation since 1957) in 1963 to form Malaysia. Singapore was initially part of Malaysia but left the federation in 1965. In 1980 Peninsular Malaysia had a population of 11.4 million, approximately 83 percent of the total population of Malaysia (Department of Statistics 1983, 2:1)” (p555).

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programs at all level of society. At the same time, the plan also tried to eliminate imbalances between ethnic groups. In the NEP, the Bumiputera were given special treatment in the development process which included specific quotas in the institutions of higher learning and jobs in the public sectors (Crouch, 1993).22

Although there is criticism on the plan favouring the Bumiputera alone, the NEP has succeeded in building an upper class of Bumiputera professionals in Malaysia with other ethnic group, particularly the Chinese, also gaining benefits. For example Ethnic Chinese have successfully developed business linkages and network between Malay business partners (Maznah, 2005).23

Under the NEP, several programs were carried out in order to increase the participation of the Bumiputera in the country’s development process. The programs include the establishment of several in-trust agencies, namely the National Equity Corporation (PNB), State Economic Development Corporation (SEDCS), the Council of Trust for the Indigenous People (MARA) and the National Corporation (PERNAS). These agencies were set up by the government with the intention of assisting the Bumiputera to increase

22 “In order to effectively coordinate the administration and implementation of the intake of a greater number of Bumiputera students, the government established a Central Unit for University Student Selection within the Ministry of Education. This was to ensure that future admissions into the universities were in line with the NEP” (Selvaratnam, 1988, p184).

23 This is also supported by Mohamed (2007), “the NEP is not a policy purposely to discriminate against non-bumiputera ethnic communities or withdraw from them the levels of income and wealth they have already gained; on the contrary, it seeks to ensure the increments in the nation’s wealth and income redound more fully to the Bumiputera and not disproportionately to the minority. To achieve this, the Bumiputera must eventually participate on an equal footing in the modern high productivity sectors. The NEP therefore places emphasis on advancing economic productivity of the Bumiputera, on education and training, on the adoption and spread of modern technology, on market efficiency and competition in a largely private sector regime, and on a business friendly government”. For further reading on this topic please see http://bigdogdotcom.wordpress.com/2008/08/10/the-role-of-new-economic-policy-nep-in-building-a-united-malaysian-nation-in-diversity

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their involvement in economic activities.

Table 3.1

Peninsular Malaysia: Households in Poverty by Race, 1970 Ethnic group

and strata

All households (000)

Poor households

(000)

Poverty incidence

(%)

Percentage of total poor households

Malay 901.5 584.2 64.8 73.8

Chinese 525.2 136.3 26.0 17.2

Indian 160.5 62.9 39.2 7.9

Others 18.8 8.4 44.8 1.1

Total 1,606.0 791.8 49.3 100.0

All rural 1,166.7 683.7 58.6 86.3

All urban 439.3 108.1 24.6 13.7

Source: Third Malaysia Plan (1976-1980)

Table 3.2

Peninsular Malaysia: Means Household Incomes, 1970

Groups Mean household income

(RM per month)

Malay 172

Chinese 394

Indian 304

Others 813

Rural average 200

Urban average 428

All households 264

Source: Third Malaysia Plan (1976-1980)

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One of the most important restructuring programs during the NEP was the plan to expand education opportunities.24 Several education initiatives were undertaken in the plan, inclusive of the establishment of the Curriculum Development Centre, who is responsible for reviewing school curriculum, and also the increase in the number of vocational and technical training institutions. As part of these initiatives the Malay language was made the national language replacing the English language. This expansion of education opportunities has shown establishment of new public institutions such as, the Polytechnic Ungku Omar, Mara Institute of Technology and several teacher training colleges (Okposin, Abdul Halim & Ong, 1999).

The NEP ended in 1990 and in 1991 the Malaysian government announced and launched the National Development Plan (NDP) (1991-2000). Under the NDP, the Malaysian government launched a long term development plan known as Vision 2020. This plan provides guidance to Malaysia in becoming a fully developed nation and achieving fully industrialized status by the year 2020.25

24 According to Maznah (2005), NEP did provide education opportunities for the Bumiputera, hoewver, it did not successfully fulfil its objective “A quota system was implemented to raise number of Bumiputera places in local universities and a scholarship scheme was created to allow large numbers of Bumiputera students to pursue their professional degrees abroad. However, a study by Ozay Mehmet and Yip Hat Hoong (1986) in Malaysian universities showed that only 12% of the Bumiputera students surveyed and who received government scholarships came from poor families. The study found that poor Malay families have far less opportunity of having a child in university than the Chinese and Indian poor families. Furthermore, more than four out of every five employed graduates with a scholarship (almost all Bumiputera) worked for the public sector, with university education ending up being inefficient in fulfilling technical and professional manpower needs… While recognizing that it built up Bumiputera group confidence, the NEP was not successful instrument for alleviating inter-ethnic mistrust, not in overcoming inter-ethnic inequality. In the absolute sense, there have been increases in Bumiputera presence in the modern sector. Nevertheless, in a relative sense, Bumiputera participation rates in high-waged occupations, in tertiary education and earnings (household incomes) are still below that of the other ethnic groups” (p13).

Above all, skilled human capital supply has

25 To complement Vision 2020, the government of Malaysia has shifted towards economy that is based on knowledge. In knowledge based economy, knowledge plays a critical role in enhance the productivity. The key components for knowledge based economy (k-economy) are intellectual capital, info-structure, organizational transformation and intervention model to drive smooth transition (Academy Sciences of

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been a major emphasis for Vision 2020. Due to this, the Malaysian government has initiated various programs in human capital formation. For example, the Human Resources Development Fund (HRDF) was established in 1993 where a scheme to provide a pay-roll levy to industrial sectors was implemented. Under this scheme, companies/employers with more than fifty employees contributed one percent of the said employees’ payroll to the scheme. The contribution made to the HRDF is claimable as an expense for training programs conducted by the government and training institutes managed by industry (Felker, 1999). Besides this scheme, the government also created a National Vocational Training Council (NVTC) which is responsible to co-ordinate all vocational training programs. In Malaysia, vocational education is handled by three different ministries (i.e. Ministry of Human Resource, Ministry of Youth and Sport and Ministry of Education) and Majlis Amanah Rakyat (MARA or Council of Trust for the Indigenous People). Each of these entities operates and provides vocational and training to various and different target groups. The establishment of NVTC has made vocational education more manageable. The role of higher education was also highlighted. Steps were taken to increase the enrolment of students in sciences based courses and to establish new universities and government has also encouraged the establishment of

Malaysia, 2000). However, Malaysia needs to improve the country’s situation in order to embark on the k-economy. Such as claimed by Ramlee and Abu (2004), “However, Malaysia currently lacks some of the critical elements to support the k-economy. Among them are the lack of adequate knowledge and skilled human resources, inadequacy of a k-economy supportive education and training infrastructure, a lack of R&D capability, a relatively weak science and technology base, a deficiency in institutional support and info-structure, a slowly evolving financing system, and a lack of technopreneurs (Govinda, 2000)…the creation of quality human resources is important in a k-economy. These individuals are the backbone of the k-economy” (p54 & 56). Thus, to transform from production economy into the k-economy, the government has taken several initiatives, which includes the formation of National Information Technology Agenda (NITA) and also the launch of K-Economy Master Plan. K-economy Master plan is the major policy document that outlines framework to support Malaysia transition into k-economy. In the plan, developing knowledge human capital is one of the elements that given a priority. Focusing on training and vocational education, improving the quality of teaching, increasing enrolment at tertiary education and promoting lifelong learning are among the strategies outline to create high quality human capital.

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private universities.