Growth and welfare in colonial Malaya: comparisons with other Asian colonies - ARTICLES

The British played a crucial role in facilitating rapid growth of the economy

Source: The National Archives of Malaysia

2001/0046243

The study by Sultan Nazrin Shah is an important contribution to our understanding of the economic development of early 20th century Malaya. In this paper, I attempt to place the development of the region now known as Peninsular Malaysia (the modern state of Malaysia excluding Sabah and Sarawak) in a broader context, paying particular attention to the role of government. Sultan Nazrin Shah refers in several places to the laissez faire policies of the British. There is a sense in which that is true; the British did tend to give the private sector, dominated by British companies, the main role in developing the agricultural and mineral resources of the colony, in response to growing international demand for rubber, tin and palm oil. But it is important not to underestimate the role of the colonial state in raising revenues and in spending both domestic revenues and loan funds on a range of projects which modern economists would see as developmental, including public works, health and education. British Malaya was far from being a passive night watchman state, and the government played a crucial role in facilitating the rapid growth of the economy. On the other hand, there was, as Sultan Nazrin Shah emphasizes, a strong ethnic bias in the provision of education and public sector jobs which survived into the post-independence era.

Government Revenues

By 1929, both the Straits Settlements and the Federated Malay States were in fact spending a higher amount in per capita terms than any other colony in Southeast Asia, including Taiwan (Table 1).

Table 1: Revenues per capita (US $), 1929, 1938 and 1952

Colony	1929	1938	1952
British
Burma	6	4	9
Straits Settlements/ Singapore^a	29	30(16)^b	63
Federated Malay States	28	17	42
Unfederated Malay States	11	10	^a
Brunei	n.a	20	465
North Bornea(Sabah)	n.a	6	25
Sarawak	n.a	5	29
Other
Taiwan	16	12	27
Philippines	6^b	5^c	12
Indonesia	5	4	9
Thailand	4	3	8
Vietnam	3	2	3 (1950)
US GDP Deflator	115	100	199

^a After 1945, the Federated and Unfederated Malay States were amalgamated into the Federation of Malaya. Singapore became a separate crown colony, and the other parts of the Straits Settlements (Malacca and Penang) became part of the Federation of Malaya.

^b Figure in brackets excludes the payment from the Currency Guarantee Fund

^c Figures include local government revenues

Sources: 1929 and 1938: Taiwan: Mizoguchi and Umemura (1988: 288); Vietnam: Bassino (2000: 286-88); Netherlands Indies: Creutzberg (1976), population data from van der Eng (2002); Philippines: Commonwealth of the Philippines (1941), Table 100 and Birnberg and Resnick (1975); Thailand: Ingram (1971:329-337); Burma: Andrus (1948: Table 37); Federated Malay States, Straits Settlements: Department of Statistics (1939), with additional data from Colonial Office (1955: 33-56). Brunei, Sarawak and Sabah: Colonial Office (1955: 107, 125, 146)

1952: International Monetary Fund, International Financial Statistics various issues between 1952 and 1958, with additional data for Federation of Malaya, Singapore, Brunei, Sabah and Sarawak from Colonial Office (1955: 33, 56, 107, 125, 146) and for Philippines and Indonesia from Central Bank of the Philippines (1956); Bank Indonesia (1956).

Exchange rate for Taiwan in 1952 from Sato et al (2008: 369). Other exchange rates from van Laanen (1980: Table 8) and Bidwell (1970).

The composition of revenues also differed from most other colonies (Table 2). In both the Straits Settlements (SS) and the Federated Malay States (FMS), there were attempts to tax incomes during the first world war, but the revenues raised were small and met with fierce resistance from both the European and the Chinese business communities (Thompson, 1943: 166). Arguments for and against income taxation continued, but the business communities across British Malaya managed to prevent the imposition of either corporate or personal income taxes until the Japanese arrived in 1941. The situation across the straits in Indonesia was very different. By the late 1930s, taxes were levied on both corporate and personal incomes and wages. They amounted to over one fifth of all government revenues in 1938 (Table 2). Estate companies operating in both colonies complained to the Dutch colonial authorities about what was seen as an ‘unfair’ tax, but the Dutch authorities were unmoved.

Table 2: Percentage Breakdown of Government Revenues: Southeast Asia, 1938

Country	All taxes	Land taxes	Income taxes	Excises
Burma	81.4	33.0	11.6	14
N.Borneo	72.5	16.7	0	^b
Philippines	64.0	n.a	28.3(19.3)	17.1
Indonesia	62.8	6.7	22.0	13.8
Thailand	61.5	6.3	8.6(6.5)	15.0(8.7)
Sarawak	58.8	0	0	^b
Vietnam	58.7	n.a	10.0	17.0
FMS	49.3	0	0	11.1(8.3)
Burnei	36.8	0	0	^b
Straits Settlements	0	0	0	27.1(9.2)

^aFigures in brackets for the Philippines refer to the license and business tax; for Thailand the capitation tax, and the opium regime; for the SS (Straits Settlements) and FMS (Federated Malay States), opium revenues. For Burma, the FMS and the SS, stamp duties and other licence fees are included in tax revenues.

^b Total tax revenues include other duties including some excises and licenses.

Sources: Vietnam: 1938: Bassino (2000: 286-88); Indonesia: Creutzberg (1976: 67); Central Bureau of Statistics (1947: 133); Philippines: Commonwealth of the Philippines (1941: Table 102); Thailand: Central Service of Statistics (1940: 274-79); Burma: Andrus (1948: Table 37); Federated Malay States and Straits Settlements: Department of Statistics (1939: 238-41); Brunei, North Borneo and Sarawak: Colonial Office (1955: 107, 125, 147).

Taxes on international trade were over 38 per cent of total revenues in the FMS; given the elasticities of foreign demand and domestic supply, it is likely that much of the incidence of export taxes fell on local producers. This was no doubt a further reason why the large plantation and mining companies resisted the imposition of income taxes. In both the SS and the FMS, non-tax revenues accounted for over half of total government revenues. These non-tax revenues varied across time and space; they included profits from government enterprises, and also revenues from forests, and civil administration. More controversially, they included revenues from government monopolies, including those on the production and sale of opium. These last were controversial. The British, French and Dutch regimes were all, by the early 20th century, justifying their colonialism in terms of a ‘civilizing mission’, bringing enlightened standards of government to the benighted populations of Asia. How could they justify deriving often substantial revenues from a narcotic whose sale and consumption was increasingly controlled, if not completely banned, by governments in the metropolitan countries? In the Philippines, the Americans were the first colonial power to cease deriving government revenues from the sale of opium. They also fought hard for the prohibition of opium trading, except for medical purposes, throughout Asia in the early part of the twentieth century, although other colonial powers, including the British, were reluctant to support more than its ‘gradual’ withdrawal (Foster, 2003: 112).

The British had good reason for their reluctance, as the opium levy was an important source of revenue in all three parts of British Malaya. Indeed, Bayley and Harper (2004: 33) argued that British rule in both Burma and Malaya was “supported by narco-colonialism on a colossal scale”. This is an exaggeration, but not too far from the truth. In the Unfederated States, especially Johore and Kedah, revenues from opium sales comprised over 40 per cent of total revenues in 1919 (Lim, 1967: 351). The reliance on opium did fall after 1920, as revenues from other sources including customs duties increased. In Kedah the opium monopoly only accounted for around 12 per cent of revenues in the late 1930s. A similar decline took place in the Federated Malay States, where opium revenues accounted for around 20 per cent of total revenues in 1920, but had fallen to under ten per cent by the late 1930s. The Straits Settlements were more reliant on opium revenues, mainly because of the absence of customs revenues, or revenues from income taxation. In the latter part of the 1930s, they still accounted for more than 20 per cent of total budget revenues (Department of Statistics, 1939: 238).¹

Local producers were opposed to the imposition of taxes by the British

Source: The National Archives of Malaysia

2001/0039999

Contrasting Government Expenditures

On the expenditure side, the early years of the 20th century saw a marked change in the role of governments in many parts of the region. The colonial governments across Southeast Asia began to assume responsibility for a much broader range of activities than simply the maintenance of law and order and the collection of revenues. But in spite of these changes, there were marked differences in spending priorities across colonial Southeast Asia. The comparative study carried out by Schwulst (1932) showed that the percentage of ordinary budgetary expenditures on the armed forces varied from over 20 per cent in the Netherlands Indies and Siam to virtually nothing in the Philippines, where the cost of the small military presence was charged to the American budget until the latter part of the 1930s (Table 3). The percentage of ordinary expenditures devoted to public works and agriculture also varied considerably from 30 per cent in French Indochina, to only six per cent in Indonesia. The percentage on health and education was under 15 per cent in most colonies; the exceptions were the Philippines and the Federated Malay States. Particularly striking is the Philippines, where the government was spending over a third of the budget on health and education, compared with only four per cent in French Indochina.

Table 3: Percentage Breakdown of Government Expenditures by Sector, 1931^a

Sector	Philippines	Siam	Indonesia	Federated Malay States
Education	28	6	9	5
Health	8	2	3	15
Public works	8	12	6	20
Agriculture	10	3	1	8
Administration	31(8)	45(9)	38(6)	34(6)
Military	0	22	26	2
Public debt	12	9	13	9
Other	3	1	4	7
Total	100	100	100	100

^aPercentages in brackets refer to expenditures on law and order. Figures for the Philippines and French Indochina refer to central government expenditures only. All figures are for ordinary budgets only and may understate some capital expenditures.

Source: Schwulst (1932: 57)

Investments in Education

The emphasis on education in the Philippines meant that by the late 1930s, the percentage of the population in schools and universities was higher than in any other Southeast Asian colony except Taiwan (Furnivall, 1943: 111). The 1939 population census in the Philippines found that 48 per cent of the population over 15 was literate, a very high proportion by Asian standards. Although the percentage was higher for men than women, 41 per cent of women over 15 were literate in 1939, again a very high figure in comparison with other parts of Asia, and with most states in Central and South America (Table 4). By 1948, 60 per cent of the Philippine population was literate; this can be contrasted with the Malayan Federation where in 1947, over 60 per cent of the population was illiterate. For Malay women the figure was close to 90 per cent. It seems clear that educational policy in colonial Malaya was aimed at providing a good education for boys and young men from elite Malay families and from those Chinese and Indian families able to pay. The rest received little or nothing.

One important consequence of the expansion in government expenditures in Southeast Asia was the growth in public sector employment, much of which was taken up by indigenous employees in many parts of the region. Censuses carried out in the 1930s showed that indigenous workers comprised between 87 and 97 per cent of total employment in government and the professions (Booth, 2007: Table 6.4). It was perhaps not surprising that the percentage was high in independent Thailand where very few foreigners were employed in government service, or the Philippines which had been granted self-government in 1935, and where very few Americans remained in government employment by the time of the census in 1939. In both Thailand and the Philippines, the Chinese were either discriminated against in public sector employment, or preferred to work in the private sector. This was also the case in Indonesia, where the employment of indigenous Indonesians increased quite rapidly in the 1920s, although they seldom managed to move into the higher ranks of the public service, or the judiciary. British Malaya was the main exception to these trends. In the Straits Settlements, only 20 per cent of workers in government and the professions were indigenous; in the Federated Malay States the proportion was around one-third. This resulted from the failure of most Malays to gain access to English-language education. Those who did manage to get government employment usually worked in unskilled jobs. This disparity remained for post-independence governments to address.

Table 4: Illiteracy in Asian Countries: 1930s to 1940s (Percentage of Population over 15 Illiterate)

Country	Males	Females	Total
Ceylon
1946	22.1	54.8	37.0
Philippines
1939	45.6	58.9	52.3
1948	35.9	43.8	40.0
Thailand
1937	52.8	85.1	68.8
1947	32.6	59.9	46.3
Singapore
1947	35.3	77.5	53.5
Malayan Federation
1947:All races	43.0	83.5	61.6
Malays	49.7	88.3	69.1
Chinese	37.0	79.1	55.6
Indians	37.6	78.8	51.3
Burma
1931	44.0	83.5	n.a
Burmans	28.3	79.0	n.a

Sources: UNESCO (1957: 60-99); Burma: Andrus (1948: 36).

Conclusion

The British bequeathed to the independent state of Malaysia a productive economy with a high per capita GDP in comparison with neighbouring countries, and with the two Asian giants, China and India. But there were substantial inequalities in the distribution of income and wealth, and the great majority of Malays worked in rural areas, with little access to education beyond primary level. Successive governments since 1957 managed to sustain quite high rates of economic growth while addressing the ethnic imbalance through expanding access on the part of Malays to education, and employment in non-agricultural occupations. Today Malaysia is one of the few former colonies in Southeast Asia which has made significant progress in closing the gap in per capita GDP with the former colonial power, while at the same time integrating the Malay majority into the modern economy. These are considerable achievements, which deserve close study from scholars of comparative economic development in other parts of the world.

The fraction of Indians in Malaya’s population rose very sharply in the decades between 1901–1921, from just 6 per cent to 15 per cent, as rubber planting expanded and inflows were at their peak. But the Indian share of the population fell after 1931 and was just 11 per cent by 1947, as many Indian plantation workers were repatriated as a result of the rise in unemployment over the Great Depression years (Figure 1).

Beyond the plantations, Indians were recruited, inter alia, for public works, as police and guards, and also to serve in the lower ranks of the colonial bureaucracy. Most came from Tamil areas in south India. They were considered to be more accustomed to British rule, more amenable to discipline than the Chinese, and more willing to work for low wages. Access to low cost Indian labour migration helped ensure the rubber industry’s spectacular growth and profitability. Since there was work for wives and older children on the rubber estates, Indian migration included whole families. But low wages, indebtedness, poor social status, and physical isolation kept estate Indians apart and they tended to exercise little influence on Malayan society.

The fraction of Indians in Malaya’s population rose very sharply in the decades between 1901–1921, from just 6 per cent to 15 per cent, as rubber planting expanded and inflows were at their peak. But the Indian share of the population fell after 1931 and was just 11 per cent by 1947, as many Indian plantation workers were repatriated as a result of the rise in unemployment over the Great Depression years (Figure 1).

Beyond the plantations, Indians were recruited, inter alia, for public works, as police and guards, and also to serve in the lower ranks of the colonial bureaucracy. Most came from Tamil areas in south India. They were considered to be more accustomed to British rule, more amenable to discipline than the Chinese, and more willing to work for low wages. Access to low cost Indian labour migration helped ensure the rubber industry’s spectacular growth and profitability. Since there was work for wives and older children on the rubber estates, Indian migration included whole families. But low wages, indebtedness, poor social status, and physical isolation kept estate Indians apart and they tended to exercise little influence on Malayan society.

The fraction of Indians in Malaya’s population rose very sharply in the decades between 1901–1921, from just 6 per cent to 15 per cent, as rubber planting expanded and inflows were at their peak. But the Indian share of the population fell after 1931 and was just 11 per cent by 1947, as many Indian plantation workers were repatriated as a result of the rise in unemployment over the Great Depression years (Figure 1).

Beyond the plantations, Indians were recruited, inter alia, for public works, as police and guards, and also to serve in the lower ranks of the colonial bureaucracy. Most came from Tamil areas in south India. They were considered to be more accustomed to British rule, more amenable to discipline than the Chinese, and more willing to work for low wages. Access to low cost Indian labour migration helped ensure the rubber industry’s spectacular growth and profitability. Since there was work for wives and older children on the rubber estates, Indian migration included whole families. But low wages, indebtedness, poor social status, and physical isolation kept estate Indians apart and they tended to exercise little influence on Malayan society.