Dr. Shashi Tharoor, Member of Parliament Thiruvananthapuram Lok Sabha, India  
Sultan Nazrin Shah’s Charting the Economy impressively assesses the course of Malaya's commodity-dependent economy during the first 40 years of the 20th century under British colonial control, contrasting it with economic growth and development in contemporary Malaysia.

Structural change in the economy was less common and less well understood in the first half of the 20thcentury, for two basic reasons. First, countries in Asia and Africa were mostly colonies of one or the other European countries, so their history was seen mainly in the context of the growth of these colonial powers and the contest between them. Second, very few studies were attempted on the economies of these colonies and most of what is known deals with the role of the businesses of the ruling colonial power rather than of the colonies themselves. 

The modern concept of Gross Domestic Product (GDP) was not even invented (by Simon Kuznets) until 1937, and was not widely applied to high income countries until after the Second World War.It was only after the Great Depression that the economists in the industrialized countries began to develop analytical tools to compile countries’ national accounts. 

Slowly, the use of the GDP concept started being widely adopted, especially after the Great Depression. In addition, an effort was made by economists to extend the series to the 19th century as well. As a result, for those colonies who became independent post World War II, post-independence GDP data was calculated and recorded. But the same level of data is lacking in the period before independence, and whatever small information on the economies of these colonies in the 19th century is available and supposed to be reported can be expected to be misleading and influenced, in many cases, by extraneous considerations.

This study by HRH Sultan Nazrin Shah fills an important gap in our understanding of the Malayan economy prior to the country’s independence, and also demonstrates the use of an innovative methodical approach to estimating GDP from very limited data. Understanding this context also becomes a guide to what probably happened in many other colonies. 
Early 20th Century Malayan Economy
The economy of the Malay Peninsula was anything but stagnant. Despite the impact of the World War I and the Great Depression in the 1930s, Malaya’s economy grew on a real per capita basis at an average of 2.9% for nearly four decades. However, the growth was not steady and was based mainly on two commodities, rubber and tin, whose prices varied widely during 1900-1939.

Incomes of the workers in these mines and plantations did rise during 1900-1939, but only very slowly at 1% a year. Income and wages grew at a much smaller pace compared to the rapid growth in GDP, resulting in significant levels of poverty. 

Even today, countries whose economies depend largely on commodity exports face significant challenges: workers still get low wages and the maximum profits are shared between the foreign investors and the governments of those countries. However, in Malaysia, the government revenue does flow in a large part into benefits for the people of the country. This means that household incomes and expenditures have grown as rapidly as the GDP, unlike during the colonial period. In some other countries, the profit still is squandered on projects of little value to the people or is concentrated in the hands of a few powerful politicians. This “resource curse” is particularly true for minerals and less so for agricultural crops such as rice or rubber, where small holders account today for a much larger share of production, with profits often going directly to the farmers. 

Between 1913-1950 Malaya’s economy grew by 1.5% a year—This was a good deal better than in India, which grew at about 0.01% between 1900 and 1947. The colonial era did provide Malaysia with what, for the 1950s, was good infrastructure in the form of paved highways, and a railroad system that linked the major centres on the west coast of the Malayan Peninsula, together with electricity and potable water in the major cities. However, as often occurred in colonial times, these were developed originally to serve mining and plantation interests, rather than the native population. In my own book Inglorious Empire: What the British Did to India I have demonstrated how most of the supposed “benefits” of British colonial rule in India came from initiatives brought into the country to facilitate colonial exploitation, perpetuate British control or enhance British profits, rather than to benefit Indians. Malaysia was no exception to this colonial rule. 

The education of the Malaysian elite at the University of Malaya in Singapore during the late colonial times provided the country after independence with a higher quality civil service than in many other developing countries just after liberation from colonial rule. But as in India, the intention in educating a small elite was to facilitate British rule by creating a class of “interpreters” between the British and the masses they ruled; it was not intended to educate the broad Malayan public. 

But colonial policies created an economy where occupations were closely associated with the race. Chinese Malaysians dominated most of commerce, construction and industrial employment. The Malays were largely confined to farming and after independence to the civil service, security and uninformed services, especially the police and the military. The Indians provided the labour for the plantations. In 1969 this situation would lead to riots that traumatised the country and ushered in policies to eliminate the connection between occupation and race. 

Malaysia at independence, however, was clearly in a better position to launch sustained economic development efforts than most other developing countries such as Indonesia. 
Strengthening Colonial Control 
Sultan Nazrin Shah’s account makes it clear that British control over the Malay Peninsula progressively established itself from the last quarter of the 19th century to the second decade of the 20th century. Colonialism facilitated control of lands, people as well as exploitation of the natural resources.

From April 1867, the three strategically located port cities of Penang, Malacca and Singapore came to be ruled directly as the British crown colony of the Straits Settlements, having been earlier controlled as one administrative unit by the British India Company. These ports were initially used to bolster and protect the East India Company’s lucrative trading routes to China and other locations in Asia—the bulk of the world’s trade to the eastern Asia passed through the Strait of Malacca. Each of these three Straits Settlements had free port status. The Settlements, in particular Singapore, which was a flourishing centre for commodity exports, served as a springboard for British expansion of control over the Peninsula’s Malay States. Through a series of treaties, the UK progressively gained suzerainty over the nine Malay Sultanates on the Peninsula (Penang and Malacca were directly controlled). Four of these were eventually grouped together as the Federated Malay States, and five as the Un-federated Malay States. 

In the early 20th Century there was a little sense, if any, of a national identity among the people living in the British Malaya, it was essentially an assembly of political entities without a common vision for national development. The Pangkor Treaty of 1874 provided for the appointment of a British Resident to advise the Sultan of Perak in all matters affecting general administration (including British control over all aspects of the administration other than those touching on Islam and Malay custom). It was a critical milestone in the formal relationship between the UK and the Malay States and in the subsequent extension of British rule across the Peninsula. And it was modelled on the Indian experience, by which treaties and “subsidiary alliances” had also extended British control of the “princely states” in India through an official also modestly called “the Resident” who dictated terms on behalf of the colonial power. 

Malaya’s peninsula was a territory with abundance of land and natural resource but with a small population of just 1.7 million. The labour force was small and did not grow through most of the early 20th century. The growing population was engaged principally in the production of tin and later rubber as well as the provision of a broadening range of support services, subsistence and small scale agriculture. Most of the Malays preferred to stay with their traditional farming and fishing occupations, so labour was imported -- Indians for the rubber plantations and Chinese for the tin mines. As I show in my book, convict labour transported from India built much of the Straits Settlements in the first half of the 19th century; it is estimated that a majority of the buildings in Singapore by 1860 had been built by Indian labour. 

The large inflows of low cost foreign workers recruited from China and India resulted in the population shares of these two communities increasing substantially, with Chinese mostly toiling in the tin mines and the Indians working on the rubber estates. Migration from elsewhere in the Malay Archipelago was encouraged as a part of colonial policy inorder to increase the local food production, especially of rice, to feed the growing population not engaged in agriculture. Since there was work available for wives and older children on the rubber estates, Indian migration sometimes included whole families, who were then housed on the plantations in the labour lines. But their low wages, indebtedness, poor social status and physical isolation kept the Indians apart and they tended to exercise little influence on the Malayan society. Tamils were considered to be more accustomed to British rule and more amenable to discipline than the Chinese, and to be willing to work for lower wages than the Malays. 

This migration of labour by the year 1931, had markedly changed the ethnic composition of the country. In 1901, Malays comprised some 63% of the Peninsula’s population. By 1931, their share had fallen to 49% despite the substantial immigration of Malays from the Dutch East Indies. Malaysia’s multi-ethnic, multi-cultural and multi-lingual character stems to a large extent from this period of British colonial rule. In the middle of the second decade of the 21st century, the Malay share has increased to more than 60% of the total population as a result of higher fertility rates, while the share of the Chinese and Indians have decreased as a result of their lower fertility rates. The most significant impact was the close association of the occupation with race. India had no such problem; Sri Lanka did. 

However, the “divide and rule” policy pursued in India finds resonance here, except that while the division encouraged in India was on the basis of religion, in Malaya it was constructed on race. While the different occupational activities created an economic divide between the Peninsula’s ethnic groups, their different religious and cultural customs generated further social barriers. The maintenance of a class structure in which the elite of all ethnic groups cooperated with the British in order to ensure their own access to privilege, rank and wealth was a central element of the colonial enterprise which prevented the development of a sense of common identity and national unity. In the case of India this led to a separate Muslim nationalism that partitioned the country when the British left. Malaya was luckier – though Chinese-majority Singapore did in fact become a separate state. 
Extraction of Tin and Rubber
By 1904 Malaya was producing more than half of the world’s tin, especially following the surge in the use of tin cans for food preservation. Simultaneously, the colonial government of the Federated Malay States invested heavily in rail and road infrastructure, which helped to lower the production costs. They also provided land concessions to new companies. The net result was that, whereas in 1912 some 80 % of Malaysia’s tin production was under Chinese management, by 1931 British firms accounted for more than 65% of the total production.

Rubber commercial production began in the early 1900s. General assistance to plantation companies included long term security of land tenure and freedom to recruit low-cost foreign labour. In addition, incentives were provided to encourage an industry that was dependent on substantial capital investment, and where the period of returns on the investment was long (it took 5-7 years after land clearing and seeding before trees could be tapped). The massive trade boom during the early 20th century was dependent largely on the growth of the US motor industry and the related demand for rubber tyres. 

All communities benefited from the rubber industry’s growth, with the Europeans, the Chinese, the Malays and the Indians all having a stake in ownership. But European plantation companies were the dominant players because of their ability to mobilise large amounts of capital through joint stock companies, especially in London. The Europeans employed about 258,000 plantation workers in 1929, of whom 80% were from South India. Rubber plantations were also subsuming land meant for other cash crops such as sugar and tapioca. By the 1930s, Malaya had become the world’s largest natural rubber producer. Due to the dramatic rise in foreign investments, a total of 129 European companies were operating in the Federated Malay States by 1939, most of which were joint stock companies registered in London. The profits were huge, with dividends from some of the bigger and stronger companies ranging from 20-80%. The preferred vehicle for raising capital was the British public joint stock company through the London Capital market. All this echoed similar patterns in India, where tea, jute and cotton was exploited in a comparable way. 

Just as the British forced Indian labourers and farmers to grow cash crops like indigo in order to serve colonial interests – often at the expense of their traditional agricultural practices -- Malaya’s economy was dependent on the primary sectors of agriculture and mining with relatively little manufacturing, and only an infant service sector (to support the plantation and mining sectors). The Malayan economy was thus directed to meet the needs of industry in Europe and North America which were manufacturing hubs following their industrial revolutions, while domestic industry was stifled – just as in India.   

Infrastructure Supporting Commercial Interests

The modern railway system in Malaya was established solely to support colonial interests
Source: The National Archives of Malaysia 

British control of state revenues facilitated spending on economic and social infrastructure in support of colonial interests and to advance the economic interests of the European investors. Tin was earlier transported by river which was time consuming and inefficient. The establishment of a modern railway system began in 1885 with the opening of the first line between Taiping and Port Weld in the state of Perak. A few years later in 1893, Ipoh and Telok Anson were connected; providing links to the Kinta Valley which had the world’s largest tin mine. By 1930, the rail network connected almost all of the main towns and ports, running through the major tin mining and rubber growing hubs on the west and east coast as well as to Siam. As in India, this development was entirely driven by British economic considerations and had nothing to do with the needs of the Malayan public, least of all for convenient transportation of people.

Malaya’s subsequent road network developments similarly had its origins in efforts to promote its commodity exports. Each state established a Public Works Department to support road construction and maintenance. There was a significant increase in the sums spent from 1927 onwards. Once again, public interest was irrelevant; it was all about British commercial interests.
Investments in the electricity began in the late 19th century, predominantly in the Federated Malay States and the Straits Settlements. Private Supplies of electricity had preceded the public provision. From the early 1890s, the landed elite began purchasing small electric generators for home use. In 1894, the first application of electricity to power mining pumps was made in Selangor’s tin mining town of Rawang. Private supply for street lightning was extended to the town, and subsequently to the new railway station in neighbouring Kuala Lumpur. In 1900, the first power station, the Sempam Hydroelectric power station in Raub, Pahang, was built to support the local gold mining industry, after which the public electricity supply was progressively expanded. With improvements in the living standards, demand for electricity rose markedly over time. To meet this demand, large amounts of capital were provided from government revenues, supplemented much later by private domestic and foreign investments. As I point out in An Era of Darkness, there is no comparison between the quantum of electricity the British installed during their rule and its extension under an Independent government. The former was minimal and motivated by British interests alone; the latter aimed to bring light into the lives of millions.

Social Sectors

Similarly, advances in the social sectors during this period were influenced more by the need to ensure the success of colonial economic activities than by any vision of social development for the people of Malaya. They did nevertheless have positive impacts on the well-being of the general population. Investments in health care and education mainly benefited the colonial administrators and elite families living in towns, with only very limited medical services and schooling reaching rural areas. Where they did exist, out-of-town clinics served primarily to protect the health of Europeans, and only secondarily, to maintain the health of the labour force working to support colonial economic interests. Hygiene and sanitation in the towns were poor, and working and living conditions in and around the tin mines and rubber plantations were harsh. Annual death rates from malaria and other infectious diseases were high and exceeded birth rates. The migrant population introduced new infections into the local population and at the same time migrants were exposed to local endemic diseases. Government hospitals were supplemented by the private medical providers in the bigger tin mines and rubber estates.

Later, the increasing influx of the European medical practitioners in the government hospitals and outpatient clinics began applying the findings of the medical research carried out at the London school of Hygiene and Tropical Medicine and the Liverpool school of Tropical Medicine to spread awareness of the need of improved hygiene and safe sanitation, which resulted in the control of diseases and improvements in health . Town Sanitary boards were established to supervise street cleaning and lighting, road upkeep, the building of drains and management of markets, which progressively contributed to a gradual reduction in mortality rates, although the lack of complete and reliable mortality data from the Peninsula makes it difficult to quantify the magnitude of improvement. Evidence from Straits Settlements on infant mortality trends, albeit based on imperfect data, suggests that while in 1900 about 1 in 4 babies would die during the first year of life, this had fallen to 1 in 5 in 1920 and 1 in 6 by the late 1930s. Levels of infant mortality would almost certainly be higher elsewhere in the Peninsula, away from areas where the workforce was concentrated. 

Colonial rule, with its concomitant economic expansion and demand for Chinese and Indian labour, gradually transformed the formerly Malay-speaking states into a multilingual society, particularly on the more developed west coast. With the expansion of the British bureaucracy in Malaya, English became increasingly used in the civil service despite the misgivings of some of the Malay rulers, and the fact that Malay was recognised by the British as the language of governance. Malaya’s education system evolved following this pattern of cultural pluralism rather than through an education policy designed to create a unified and common national identity. The children of the rural Malay families attended government funded schools, which provided only four years of basic elementary education in the Malay language and the children of the Malay ruling elite generally attended the expensive English medium schools together with the children of the Europeans. Foremost among these was the Malay college in Kuala Kangsar, founded in 1905, which was administered along the lines of an English public school, and aimed to prepare the sons of privileged families for future government service. Chinese and Tamil vernacular language also began to grow in number in line with the increase in the Chinese and Indian school-aged children. While the vernacular school system served to reinforce the group identity of the different ethnic communities, attendance at English schools tended to weaken the traditional cultural loyalties. 
The British provided expensive education only for children of Malay ruling elite 
Source: The National Archives of Malaysia 
One outcome of this education policy was the social and cultural isolation from each other of the Malays, Chinese and Indians educated in their own languages – very much an objective of colonial policy. Another was the emergence of a cosmopolitan Westernised elite, drawn from all three of the main communities, whose common bond was English. Again, as in India, this elite was kept small, mainly to constitute a thin sliver of “natives” to serve as interpreters between the rulers and the ruled, and as allies and collaborators of the British in this exercise.

Another point which finds its resonance with the Indian experience relates to the nature of trade with the metropolitan power. Commodity exports accounted for almost all of the country’s merchandise exports from 1901 to 1939 and contributed to about 60% of the GDP. Malaya was also a captive market for imported British manufactures, just like India. 
Commodity Dependence and Volatility of Growth
The major implication for Malaya’s economy of this dependence on only two major primary commodities with highly changeable prices were the volatility and instability reflected in the extreme fluctuation of GDP over the first 40 years of the 20th century. There was an intense volatility and highly erratic growth of the country’s major exports during the colonial rule and it had a depressing effect on its average growth performance. The major oscillations in the international prices of rubber and tin, and their impact on the Malaya’s export earnings, government revenues and the incomes of producers represent commodity instability. A comparison of Malaya’s experience with that of several international and regional countries has shown that it was the most dependent on trade in terms of the share of exports in GDP. The annual growth rate of GDP in Malaya ranged from a peak of 46.2 % in 1925 to a trough of -30.7% in 1931, a swing of 77%. It was highly dependent on US as it was the main destination for the Malaya’s rubber and tin exports.

Of course, the more commodity-dependent an economy is (that is, higher the share of the primary goods in the country’s exports), the more vulnerable it will be to commodity price shocks. The inelastic nature of both the supply of, and the demand for, tin and rubber, contributed to their excessive price volatility, which arguably affected Malaya’s growth over the period in ways that went beyond the Indian case. (On the other hand, there is no parallel in Malaya for the destruction of the thriving pre-existent industries of India – textiles, shipbuilding, and steel in particular, none of which existed in Malaya before the advent of the British). 

Britain, for most of the period until independence, provided much of the capital, technology and management skills to help realise the potential of the country’s natural resource abundance. But ultimately this reliance on the extraction and export of the country’s natural resources was unable to provide a sound basis for sustainable development. A much more comprehensive national development strategy has been necessary to achieve this, including the more productive reinvestment of the wealth generated by the natural resource endowments. 

Colonial support for British business, however, offers another parallel to India. By 1931, British firms accounted for more than two-thirds of total tin production, having displaced the earlier dominance of Chinese owners. In rubber plantations also, European plantation companies, largely British, were the dominant players. This was due to their ability to mobilise large amounts of capital through joint stock companies on the London Stock market. These foreign owned businesses reaped huge profits and dividends, which, it seems safe to assume were mostly repatriated to their foreign shareholders and only to a lesser extent were reinvested in Malaya. Colonial authorities laid great emphasis on the maintenance of a laissez-faire economic system, with the objective of facilitating the exploitation of tin and rubber for profit by British businesses.  
Consequences of Laissez Faire
The British private sector was given free rein to operate and maximise profits. They protected and promoted the interests of commodity companies by providing a supportive legislative and institutional environment. Other forms of government support included the provision of choice land for plantation with minimal restrictions, and at nominal prices, low export duties and taxes, and the subsidisation of the immigration of low-cost labour from India. Local manufacturing was embryonic at this time and there was heavy reliance on imports -- mainly from the UK, of course -- to meet consumer needs. This pattern of asset accumulation by the UK and its private sector was similar to the practice in other colonies like India.

By the eve of World War I, the UK presided over the world’s preeminent colonial empire, owing foreign assets equivalent to nearly two years of its own national income. By the turn of the 20th century, capital invested abroad was yielding around 5% a year in dividends, so the UK’s national income was around 10% higher than its domestic product. UK had a large surplus on its income account due to remittances which enabled a strong positive balance of payments. In contrast, for Malaya and other colonies in which capital assets were owned by foreigners, it was possible to have a high domestic product but a much lower national income, once profits and rents flowing abroad were deducted from the total. 

One consequence of such laissez faire practices was uneven development, with economic growth being concentrated in areas of the west coast states of the Peninsula, where tin mines and rubber plantations were located. These states also developed better infrastructure. In the east coast states, the population was mainly engaged in low-productivity subsistence agriculture and fishing, with little or no development.   

Another consequence was the sharp inequality that developed in relation to ownership and control of the economy. Income inequality widened for two reasons. First, the rising income and profits from the capital went to a fewer and richer people. Second, the wages were largely stagnant, so the gap between rich and poor widened. Real wages were more or less stagnant between 1900-1939, growing on an average at only 1.6 % per annum. As GDP per capita grew at almost twice this rate, the return on capital must have also exceeded the growth rate of the economy. However, much of the capital was owned by the foreign companies and the income flows from it would largely have been remitted overseas, just as in India. Owners of land and capital in Malaya would also have shared some of the benefits, and this would have widened the income distribution inequality among the local population. At the time of independence, foreigners still owned 60% of the share capital in limited companies overall, with 75% in the agriculture sector and 73% in the mining sector with the major bulk of the export earnings coming from these two sectors.  

This situation reflected the legacy of British colonial economic policy, which sought to protect and preserve its long established business interests in the newly emerging nation state of Malaysia. The big commercial agency houses (including Guthrie and Company, Edward Boustead and Co.), supported by the joint stock companies and with major financial backing from London and British banks, enjoyed privileged access to land, facilitated by the colonial administration. The imbalanced nature of colonial economic development is highlighted by the large differences in consumption levels and expenditure patterns among the major groups -- Chinese labour, Malay labour, Indian labour, Asiatic clerical, Eurasian clerical and European – and among the other ethnic and occupational groups, and between rural and urban areas. For those persons spending according to the European consumption standard, comprising just 1% of the population, expenditure levels were more than 21 times higher than the overall average. For Chinese, Malay and Indian labourers, collectively comprising 97% of the population, expenditure was 24% below the weighted average for all the groups combined, which remained almost the same throughout the first four decades of the 20th century.  

Investment growth rates in real terms -- averaging less than 10% per annum -- were also very low, as was government expenditure, suggesting that little of the production surplus was being reinvested in the domestic economy. It was clear that the colonial government had no strategic vision for economic transformation or for the social development of the local population. As in India, colonial rule in Malaya was just based on the principle of maximising profits from rubber and tin industries to better cater the British businesses. 
Post-independence Directions
These issues of uneven and unbalanced development, poverty and inequities were eventually addressed in Malaysia after independence as part of the national development plans, particularly in the aftermath of the May 1969 racial clashes, by accelerating economic growth through investments in the agricultural development, infrastructure and rural development. An important initiative was the Federal Land Development Authority (FELDA) which increasingly involved the cultivation of oil palm rather than rubber as originally intended, and also resettled poor landless farmers in the large government schemes throughout the country. Initially the land cleared at government expense was leased to the rural families with an option to purchase using the proceeds of the produce. It was a highly successful reform model which contributed to significant reductions in poverty and the creation of a middle class. However the negative impact was seen in the later years because the more educated children of the early settlers were no longer interested in working on their parents’ farm holdings, creating a labour shortage that has since been filled by migrant workers.

The 1969 racial conflict led to a radical shift in the direction of the National Development Policy. The new economic policy announced in 1971 with the aim of creating national unity had two fundamental goals: ending poverty among all communities and restructuring Malaysian society in order to remove the association of ethnicity with occupation and location. It reflected a more interventionist government concerned with rectifying the inequalities created during the colonial era. There was a sharp break from the laissez-faire approach of the past with an aim of reducing the foreign ownership of corporate capital from 70% in 1970 to 30% in 1990. Foreign companies trading in Malaysia’s natural resources were restructured through equity buyouts by public sector enterprises and were placed initially under the government control and management. Resource revenues were then used by the government to redistribute income and reduce absolute poverty through multiple economic and social pathways. 

Malaysia’s wise macroeconomic development has delivered growth with equity. The absolute poverty in which most of the population lived at independence in 1957 has been almost eradicated. This is also accompanied by massive investment in the social sector, especially in health and education, which has led to broad based and high levels of human development. Malaysia has become a modern urban industrialised nation and its diverse, multicultural population enjoys safety, security and prosperity and a secure institutional environment has in turn encouraged high levels of national and foreign investment. 

Sultan Nazrin Shah shows all this with thorough research, well-marshalled facts and persuasive reasoning. His book is a pleasurable and instructive read. 

Further reading : 
Tharoor, S. 2017. Inglorious Empire: What the British Did to India. London: Hurst Publishers. This book was earlier printed as: Era of Darkness: The British Empire in India (2016). New Delhi: Aleph Book Company.
Sultan Nazrin Shah. 2017. Charting the Economy: Early 20th Century Malaya and Contemporary Malaysian Contrasts. Kuala Lumpur: Oxford University Press.

c/o Asia-Europe Institute
University of Malaya,
50603 Kuala Lumpur

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