Malaysian economic growth and catch-up, 1870–1980

Professor Gregg Huff, Pembroke College, University of Oxford¹

By 1960, Malaysian per capita gross domestic product (GDP) had been falling behind the world’s leading countries throughout most of the previous century. To be sure, an export economy based on rubber and tin had brought spurts of rapid advance and a higher standard of living than anywhere else in Southeast Asia. But it had delivered neither the industrialization nor the technical progress needed to close a yawning gap in 1960 of an income level less than a sixth that of the United States and two fifths of Japan’s.²

This article has two main aims. One is to analyse pre-World War II growth and structural change in the context of a vent-for-surplus model in which international trade affords a vent, or outlet, for surplus land and other natural resources as well as possibly also for surplus labour, which is defined as a zero marginal product of a part of the workforce, though not necessarily a zero product addition of a person-hour of these workers. The other is to try to show how after independence in 1957 government policy moved away from the developmental constraints of a vent-for-surplus, staples economy dependent on rubber and tin and towards industrialization, while avoiding the balance-of-payments crises and stop–go policies that affected so many newly independent developing countries seeking to industrialize. Both before and after World War II, trade served as an engine of growth, but before independence was pre-eminent in providing this growth role.

Although by 1980 Malaysia had made real progress in diversifying the economy towards industry and had achieved technical progress in agriculture, it had still not created a basis for sustained technological advance in the export-oriented manufacturing sector. Although a main objective of the sector was initially to offer employment, in the longer term the aim must be to nuture technological advance and so provide higher-wage employment. Yet even for today’s Malaysia, the implementation of technology remains a problem, since much recent industrialization has relied on low-wage, low-skill immigrant labour from elsewhere in South and Southeast Asia, rather than prioritising the achievement of higher-productivity, technologically driven manufacturing.

Late 19th-century globalization and Southeast Asian vent-for-surplus

This section uses the traditional vent-for-surplus model, suggested by Adam Smith, applied to developing countries by Hla Myint and formalised by Ronald Findlay, to explore Malayan (from 1963 Malaysian) development.³ Lillian Knowles, in a classic book, wrote of an ‘unlocking of the tropics’, while for resource abundant tropical regions like Southeast Asia, Myint chose the metaphor of an ‘opening up process’.⁴ The vent-for-surplus model provides a useful tool for understanding this unlocking: it offers a convincing explanation of the process through which Southeast Asian countries were drawn into world trade as part of rapid late-19th century globalization, and why the region soon became a group of mono-economies specialized in a handful of primary commodities produced chiefly for export.

Rice accounted for the bulk of exports in three of the six Southeast Asian economies—Burma, Thailand, and Indochina. Malaya relied heavily on rubber and tin, and the Philippines on sugar. A variety of tropical products was exported from Indonesia alone, although specialization occurred with increased tin, petroleum and, especially, rubber production in some of its outer islands. In all these Southeast Asian economies, expansion, as the vent-for-surplus model specifies, was through the settling and exploitation of a moving frontier, extending horizontally outwards in the case of agriculture and vertically downwards for mining.⁵

A long list of distinguished economists—all influenced by Myint's theoretical work—point to a vent-for-surplus model as best capturing the realities of Southeast Asian growth, if sometimes with qualification as to whether surplus labour as well as surplus land existed. Lewis indicates vent-for-surplus as appropriate to Burma and Thailand; Findlay and Lundahl specify Burma and mention Malaya. So too does Maddison, who further extends the analysis to Indochina and Indonesia. Booth elaborates on the latter's vent-for-surplus nature, while Power and Sicat as well as Hooley draw attention to this pattern of growth in the Philippines. An important article by Drake gives credence to all these instances. So too does Hayami.⁶

Vent-for-surplus model

The principal aim of this subsection is to apply the traditional vent-for-surplus model to pre-1957 Malayan economic development. In the model (Figure 1), the economy consists of two sectors, manufacturing, M, and food and primary commodities, X. The line MX defines total person hours available and labour required for each unit of manufactures and primary commodities. The supply of land is not a constraint because it is assumed to lie beyond point X. There is not a separate capital constraint on the assumption that any required tools are simple and available to the labour force in the desired quantities.

The economy begins with both surplus land and surplus labour. As neither has domestic uses regarded as worth the effort of mobilizing, the economy is not producing on the production possibility frontier XM but somewhere inside, at point F. The opening of trade provides a vent or outlet for the surpluses and so an opportunity to use them. At the same time, trade expands the productive capacity of the economy through leading to the development of transport, the creation of linkages associated with exported commodities and the strengthening of an institutional framework conducive to stability and commerce. When trade is opened (as in Malaya with early tin mining) and a new improved terms of trade, represented by the segment p*, becomes available, the economy can move to point H, assumed to be tangential to the community’s highest feasible community indifference curve. The trade triangle FGH shows the exchange of FG of food for FH of manufactures. This initial, or Smithian venting phase (after Adam Smith and his idea of a vent for a superfluity of some commodity) is pure gain. However, leisure must be sacrificed to produce more primary commodities, FG, destined for international markets.

An increased opportunity cost of leisure induces this sacrifice. Opportunity cost rises because of the chance to obtain, in exchange for primary commodity exports, not just more goods of broadly a type previously produced or ‘manufactured’ by the economy but also new items, the ‘novelties hitherto unknown in the subsistence economy’ emphasized by Myint.⁷ Imports such as cotton piece goods replace handicrafts as a cheaper way of satisfying existing wants. Moreover, a greater range of goods, including, in time, capital items like sewing machines, stimulates new wants and are a dynamic force in the expansion of exports. Through trade, the economy can consume at point H above point F.

In a second Ricardian phase (after David Ricardo and the theory of comparative advantage), factors of production are reallocated in line with comparative advantage. The country specializes, at point X, in the production of primary commodities. In the traditional vent-for-surplus model, trade increases along a path defined by both an unchanged terms of trade and unchanged community consumption preferences. By exchanging some of a greater primary commodity production for manufactures, the country can now consume at point I, above point H. The exchange is represented by the larger of the figure’s two trade triangles, PXI. Point I does not lie directly above point H but to its right because with unchanged preferences the country is able to consume more of the primary commodity output it produces as well as receive a greater quantity of manufactures.

Figure 1 Vent-for-surplus land and labour

A third phase of vent-for-surplus development, again a venting one and so Smithian, starts as, with the growth in population, surplus land is brought under cultivation and/or mineral resources are exploited. Figure 1 represents this as a new production possibility frontier X'M'. Evidence for this venting of land, its exploitation and the settling of the Malayan frontier is dramatic. By the turn of the century, tin mines dotted the western Malay states, especially Perak and Selangor. In 1900, rubber cultivation covered 1,000 acres in Malaya; by 1938 just under 1.4 million acres were planted with para rubber trees, about equally divided between smallholdings of under 100 acres owned mainly by Malays and Chinese, and by estates principally in European ownership.

At point X, and similarly at X', in Figure 1, economic specialization is complete. The economy produces entirely primary commodities, which are traded for other goods, both food and manufactures. That accords well, if not completely, with the reality of Malayan development.⁸ By 1925/27, at the peak, rubber and tin accounted for 70.9 per cent of Malayan merchandise exports.⁹

Figure 2 Malaya distribution of primary commodity production, 1950

Source: Huff (2020), p.139.

Demographic and geographical patterns

In Malaya’s late-19th and early 20th century frontier economy, land and natural resources were in large surplus, but local labour probably was not by the time that point X on the horizontal axis of Figure 1 had been reached. Here, Asia’s pre–World War II integrated labour market fundamentally shaped Malayan demographic history. Under the British colonial policy of unrestricted immigration and owing to relatively high Malayan wages, surplus labour was drawn chiefly from the vast reservoirs of India and China. Between 1880 and 1939, 6.24 million immigrants came to Malaya. Immigrant inflows per decade averaged 826 persons per 1,000 Malayan resident population, by far the highest proportion in the world during these decades. The arrivals were Lewis’ ‘unlimited supply of Indians and Chinese willing to travel anywhere to work on plantations for a shilling a day’.¹⁰ New arrivals more than replaced departures continuously to augment Malayan labour supply and forever to change the country’s demography.¹¹

Figure 3 Chinese tin mining in Selangor in the 1910s

Source: https://www.worthpoint.com/worthopedia/tin-mining-selangor-m-malaya-1910s-162393664

As well as demographically, Malaya developed—economically and geographically —as a dual economy with the ‘lopsided pattern of development’ described by Nurkse, referring to the co-existence of well-developed export sectors with traditional economies (Figure 3).¹² In 1940, the peninsular population (that is the Malay states and excluding Singapore) of 4.8 million divided into 45.5 per cent Malay, 38.1 per cent Chinese, 14.8 per cent Indian, and a tiny proportion of others.¹³ Malays were overwhelmingly rural dwellers and constituted the bulk of settlement in the ‘traditional’ parts of Malaya, including Malaya’s east coast states, none of which had been more than partially drawn into the tin and rubber export economy, and Kedah and Perlis in the far northwest. Although many Malays were rubber smallholders, the majority followed other, more traditional pursuits which, as well as rice cultivation, included fishing. Chinese settled disproportionately in urban areas and in a rubber and tin belt that began in southern Kedah and continued southwards along the entire peninsular west coast to Singapore.¹⁴ While Malays made up almost three-quarters of the population in Malaya’s ‘traditional’ areas, Chinese accounted for almost half of those living along the west coast where Malaya’s export economy predominated. Many Chinese were rubber smallholders or tin miners. Indians, chiefly Tamils, provided the bulk of the labour force for European-owned rubber estates and so were concentrated along Malaya’s west coast, especially in Selangor and Perak.

Capital constraints and Malayan export expansion

A substantial part of Malayan export expansion, and until about 1910 the great bulk of it, was largely self-financing. However, that changed during the twentieth century and, in contrast to the typical Southeast Asian pattern, capital became an important input to much of the Malayan vent-for-surplus economy. The exhaustion of easily won alluvial tin deposits necessitated deeper mines and these involved dredging with its associated high capital requirements for dredges and other mining inputs. European-owned estate or plantation rubber also required large capital inputs because of the need to pay and manage an estate rubber labour force to plant and then look after the trees for seven years until they came into bearing.

Until about 1910 in Malaya, the venting of surplus land and natural resources depended almost entirely on the use of traditional cultivation and mining techniques. These labour-intensive production functions made it possible for production to be essentially self-financing, as it also was in vent-for-surplus growth in much of Southeast Asia—for example, in Burma, Thailand, and Indochina where the methods of growing rice hardly altered as more land was cultivated. In Malaya, Malay and Chinese miners relied on large labour inputs and used basic tools and so required relatively little capital. Both workers and financers, often storekeepers, could be paid once tin was found. Initial investment by Malaya’s rubber smallholders consisted mostly of their own and family labour time. Most necessary finance to buy seeds and tools came from personal savings or borrowing from traders, local shopkeepers and others. Rubber smallholders often planted trees on nearby land and tended them at the same time as maintaining earlier, subsistence production. So long as land was available, the main expenditure was the effort of planting rubber and maintaining the trees.

Once tin or rubber production was underway, the main need was for circulating capital or produced inputs (as opposed to fixed or durable inputs). These were used up in one period of production and included whatever 'wage fund' advances were paid to workers at the outset of the production cycle. It was typically short—under a year for rubber trees once established and even less for tin mining. Finance was self-sustaining. Principal recouped and profits from one cycle provided finance for the next and, moreover, new capital to extend the export production frontier, so long as the rent created by clearing new land at least equalled the interest cost of the wage fund.¹⁵

After the turn of the century and during the inter-war years, Chinese miners, though with more capital than their late nineteenth-century counterparts, continued to account for a substantial share of tin output and Malay and Chinese smallholders produced around two fifths of Malayan rubber with only small capital inputs. Nevertheless, twentieth-century Malaya had to look to international financial markets to avoid any serious capital constraint and continue to vent surplus land and attract surplus labour. Because of dredging’s high capital requirements, European mines largely supplanted Chinese ones and increasingly fell under the control of international mining companies with their ready access to finance and technology. Capital for plantation rubber came principally through the floatation of rubber companies on the London stock market but also from Shanghai and Ceylon.¹⁶ An initial rush beginning in 1909 and lasting into 1910 to acquire a stake in rubber set off the then greatest new share boom in the London market’s history. However, Singapore Chinese entrepreneurs sidestepped much of the capital needed to bring estate rubber into bearing by organizing sharecroppers to grow a catch crop of pineapples and, at the same time, look after growing rubber trees in exchange for a share of the profits from selling pineapples and a fixed fee for the trees. In this way, rubber estates could be established for about £14 an acre rather than the £70 required for European-owned estates.¹⁷

Growth sources, linkages and urbanization

In Malaya, exports were the chief component of autonomous expenditure and so a major determinant of national income. Because of rubber’s extreme importance to the economy and linkages with substantial income multiplier effects, the fortunes of the rubber industry go a considerable way towards explaining income levels in Malaya and its macroeconomic fluctuations. The 1931 census showed that rubber cultivation engaged some 661,000 persons, a third of Malaya’s working population. It was the sole occupation of over three-quarters of these workers and was the principal activity of a large proportion of the remaining quarter returned in the census as in ‘other and multifarious’ agriculture. The economic impact of the tin industry was less than for rubber. That was partly because Malayan tin mining employed a comparatively small labour force and became chiefly a European industry, given the need for dredges and other capital requirements. In 1931, the tin industry employed only 79,400 people, about 4 per cent of Malaya’s working population.¹⁸

Exports due to the venting of surpluses were not, however, the sole source of growth. Tin and rubber exports led to the development of a Malayan transport network, created major forward and backward linkages and expanded the size of the domestic market. Railways, extensive intra-regional shipping and, by the inter-war years, motorized transport widened and deepened the market for locally produced goods and services, promoting specialization. More efficient transport networks enabled the economy more fully to realize its productive capacity through allowing increasingly larger areas to be drawn into vent-for-surplus production and, at the same time, created further, new sources of growth in their own right.

Institutional development paralleled Malayan growth and complemented it through secure property rights, a system of courts and the rule of law, albeit under British colonial rule. In 1906, the inauguration of the sterling exchange standard facilitated trade though tying the Straits dollar (from 1938 the Malayan dollar) to the gold standard. The resulting adoption of the colonial currency board system was, however, probably at the cost of discouraging industrialization due to ‘Dutch disease’ effects of driving up the price of non-tradeables and so undermining competitiveness, as well as exacerbating fluctuations in the Malayan economy, which were already considerable due to rubber’s extreme price volatility.¹⁹

The Malayan railway network developed initially in response to the tin industry's need for the transport of ore from the Malay states to coastal ports and so complemented a network of local shipping (Figure 4). Between 1885 and 1895 railways took the form of short, east west lines which connected each of the main tin mining districts with its coastal port: Port Weld (1885), Klang (1888), Port Dickson (1891) and Telok Anson (1895). Local shipping linked these ports to Singapore and Penang. Even before the turn of the century, however, the railway system, following the major valleys, began to turn north south, and so towards Singapore. By 1903 the north south pattern was well established. It was, however, under the influence of rubber, beginning in the early years of the twentieth century, that the railway system developed rapidly and finally reached Singapore.²⁰ Owing to rubber, the Malayan railway network proved profitable and its extension could be financed entirely out of revenue.

Figure 4 Malayan railway development, 1890–1935

Source: Federated Malay States Railways, 1935, p. 2.

Engineering was the most important manufacturing linkage arising from tin and rubber. The processing of tin ore gave rise to a major forward linkage and the two Malayan smelting companies, the Straits Trading Company in Singapore and Penang and the Eastern Smelting Company. Both companies operated world-class smelting operations and both used local engineering services. United Engineers (UE) was the most important of these engineering firms (Figure 5). It was Southeast Asia’s largest engineering enterprise, with two works in Singapore and branches in the Malay Peninsula as well as elsewhere in Southeast Asia. The firm manufactured gravel pumps for mining, used mainly by Chinese miners, and was a large maker of stout-riveted steel pipes to convey gravel and silt laden water. By 1932, UE had built 12 important tin dredges in Singapore, as well as redesigning and reconstructing a number of dredges built abroad.²¹

The rubber industry contributed to the growth of an engineering sector originally required by the tin industry mainly through the need for processing equipment in the form of rubber factories. The demand was considerable, since factories were to be found on practically all of Malaya's several thousand estates and there were numerous Chinese mills treating smallholder rubber. It was principally on this basis that by the inter war years UE had become a large manufacturer of sheeting machines, rubber mangles, scrap washers and smoke houses; supplied and erected plant for lighting, power and water schemes; and built turnkey rubber factories for making sheet rubber from latex. In the 1930s it was said that "many of the principal estates throughout the rubber growing area are equipped with UE machinery, housed in UE structures".²²

Trade gains and attendant specialization promoted urbanization. By 1931, Malaya was easily Southeast Asia’s most urbanized country. Singapore was a metropolis of half a million and Kuala Lumpur had a population of over 100,000.²³ Eight towns had populations of between 10,000 and 20,000 and a further seven were between 20,000 and 100,000.

Figure 5 United Engineers, Singapore in the 1930s

Source: https://uel.sg/history/

Pre-World War II industrialization and growth

Still, on the eve of World War II, Malaya—apart from tin smelting, rubber processing, and pineapple canning and associated engineering requirements—was remarkably little industrialized. A high proportion of nearly all basic manufactures required by Malayans came as imports. Malaya did not approach self-sufficiency even in textiles, about 80 per cent of which were imported. Most rice, central to the Malayan economy as the staple food of all its Asian inhabitants, was imported. In 1931, rice cultivation in Malaya totalled 670,000 acres, or about a fifth of rubber acreage. The country produced 173,000 tons of clean rice annually, as against imports of about 550,000 to 600,000 tons.²⁴ A heavy dependence on rubber and tin exports and lack of industrialization remained features of the economy in 1957, when Malaya, as the Federation of Malaya, gained independence.

Although wealthy by Southeast Asian standards and having grown faster than its regional neighbours, between 1870 and 1960 a reliance on vent-for-surplus exports and extensive growth left Malayan per capita income trailing ever further behind the United States, the world leader. During the later 1920s, Malaya threatened to match Japanese per capita income and possibly even exceeded it. At that time, too, it appeared that Malaysia might close the gap with the United States.²⁵ Malaya’s was, however, a boom and bust economy built on two primary commodities with highly fluctuating prices and uncertain futures.²⁶ By 1938, and even more so in 1960, convergence with per capita income in the United States looked unlikely. In 1870, Malayan per capita income stood at 27.1 per cent that of the United States level; by 1960 it was 13.5 per cent. The ratios in comparison to Japanese per capita income were 90 per cent in 1870 and 38.4 per cent in 1960.²⁷ Although trade was an engine of growth for Malaya, it was not the technologically fuelled one that yields self-sustaining growth.

Development 1960–1980

The main aim of this section is to analyse Malaysian economic development over the two decades between 1960–1980 and identify how the economy moved away from its pre-World War II reliance on vent-for-surplus growth. In the vent-for-surplus model, surplus land—previously the principal means of absorbing population increase—is eventually exhausted. A growing population eats into the exportable surplus and the pressure on exports combines with the presence of surplus labour. Those in charge of the economy now face the problem of shifting the production possibility frontier outwards to continue to achieve economic growth. If growth lags behind what may often be a rapidly growing population, registering annual increases of as much as 3 per cent, an option to export workers through emigration frequently becomes necessary. It is an option now familiar in large parts of Southeast Asia, including the Philippines, Cambodia, Indonesia and Myanmar.

Two technological possibilities are available to escape the growth constraints of vent-for-surplus. One is through raising agricultural productivity, in effect land-saving technology, the other through the expansion of the manufacturing sector. Reports by the International Bank for Reconstruction and Development (1955) and the Industrial Development Working Party (Singapore, 1959) gave population growth and diversification as the main reasons that Malaya should industrialize.²⁸ There are two routes to industrialization: import substitution and manufacturing for export. The first of these paths was pursued after independence in 1957 by the Federation of Malaya and then the second, starting in 1968, by Malaysia.

Economic growth, 1960–1980

Between 1960 and 1980, the Malaysian economy ranked among the world’s foremost developing-country success stories. During the 1960s, real per capita income grew at an annual average of 6.3 per cent. The decade’s close was punctuated in the most brutal of ways by the 13 May 1969 communal riots, which ultimately led to the 1971 New Economic Policy to give Malays a greater share in the economy. The policy traded growth for equity, but from 1970 to 1980 Malaysian real per capita income still increased at an annual 7.7 per cent. Over much of the period 1960 to 1980, export ratios to GDP and growth were boosted by high commodity prices and so a favourable terms of trade. Throughout the two decades, fundamental to economic growth were moderate government policies, an outward-oriented economic stance, and—the events of 13 May notwithstanding—internal political and social stability. For Malaysians, life expectancy and infant mortality both improved dramatically, although the data would need to be disaggregated by race and region for a full picture, given that the social and economic aspects of a dual economy were far from eradicated (Table 1).

Table 1 Malaysia’s main economic and social indicators, 1960–1980

Note: Death rates between the years are not exactly comparable due to changes in age structure, but the trend is clear.
Source: Bruton (1992), pp. 388, 389, 391; World Bank (2019).

In addition to the two technological possibilities raising agricultural productivity and expanding manufacturing—post-1960 Malaysia was unusually fortunate among Southeast Asia’s pre–World War II economies in finding itself with the option of continuing high exports at the same time as it pursued alternative growth avenues. In 1960, high-quality uncultivated land as well as natural resources could be mobilized for export production. Key were three new export staples: saw logs, palm oil, and petroleum and natural gas. Furthermore, although the long-term prospects for rubber and tin looked dim, demand for both commodities continued to rise moderately. By contrast, some commodity-dependent economies like the Philippines, heavily reliant on sugar, faced chronic oversupply and falling prices for earlier export staples. In 1960, rubber and tin accounted for 69 per cent of Malaysian exports (Table 2). By 1980, the proportion had fallen to a quarter of exports which in value rose by nearly eightfold over the two decades. At the outset of the 1980s, saw logs, palm oil and petroleum comprised fully two fifths of Malaysian exports.

Table 2 Malaysia's export components, 1960–1980

Note: Data in table 1 suggest that exports in 1980 were 30,676 million riggit, not 28,172 million riggit as shown in this table. There is no obvious explanation for the discrepancy because population data from Bruton and the World Bank are the same for 1980.
Source: Bruton (1992), p. 392.

One technological option, in effect building directly on the vent-for-surplus economy, is the more efficient production of an economy’s export staples. Figure 6 represents this as climbing from X'M' to X''M'' through technological innovation, a growth jump achieved not through employing more resources of land and labour but a higher output, X'', with the same resources X'. Malaysia succeeded in this regard by raising productivity in the rubber industry, notably on estates and through the innovative work of the Rubber Research Institute.

Industrialization affords a second technological option and has an effect on the economy like that shown in Figure 6. In 1960, and for some time after, import substitution was the favoured developing country choice to develop manufacturing. Table 3 offers a measure of Malaysia’s achievement in establishing a manufacturing sector. In 1960, the ratios of agriculture and manufacturing to GDP were 36.0 per cent and 8.7 per cent respectively; by 1980 the gap in percentages had narrowed to 24.1 per cent for agriculture and 21.9 per cent for manufacturing. By the later date, manufactures contributed 22 per cent of Malaysian exports. A substantial proportion of these exports originated from the 12 export-processing zones that Malaysia had established beginning in 1971. Among developing countries, Malaysia complemented industrialization through import substitution with manufacturing for export at an early date.

Figure 6 Vent-for-surplus end of surplus land

Table 3 Malaysia structure of production (ratio to GDP as %), 1960–1980

Source: Bruton (1992), p. 390.

Developing countries in Southeast Asia and elsewhere have often run into problems with an import-substitution strategy because, after its initial apparent success, there is an increasing need for imports of intermediate and capital goods to support a cluster of highly protected, inefficient industries. The increased need for imports leads to severe balance-of-payments deficits, explaining frequent recourse to stop-go policies.²⁹ Malaysia did not encounter this problem for two reasons. One was that continued high commodity exports afforded ample foreign exchange to support the balance of payments. The Malaysian current account recorded small surpluses for most of 1960 to 1980 or had at most tiny deficits. Second, import substitution was temperate in extent and effective rates of protection were relatively low, both because estate interests would have opposed protection, and because the government, dominated by Malays, believed that import substitution would benefit the Chinese.³⁰ An estate lobby, sometimes regarded as representative of a ‘rubber–tin mentality’, argued that profits in the rubber industry depended on cheap labour and that tariffs would raise the cost of wage goods (mass consumption goods and essential goods) as well as increase the demand for labour from local industry and so bid up wage levels.³¹

Conclusion

The vent-for-surplus model is widely accepted to be the appropriate analytical tool for Malaya and other pre–World War II Southeast Asian economies, but it has seldom been systematically applied to countries in the region and never to Malaya. The present article has tried to demonstrate how the model can be used to help illuminate Malaysian economic development. After the exhaustion of the pre-war vent-for-surplus development phase, Malaya was a lucky country in its rich natural resources. As the limits of vent-for-surplus were reached, Malaysia had the good fortune of a similar natural resource abundance which allowed it to sustain earlier commodity exports and develop new ones. The export of primary commodities was instrumental both as an important growth source in their own right and in helping to finance a move towards industrialization.

The article began with ‘catch-up’ economic growth and that is the caveat in the Malaysian story. Owing to stellar vent-for-surplus performance, economic diversification, benefits of sensible macroeconomic policies and internal peace, Malaysia had, by 1980, gained ground on the United States, with GDP per capita now a fifth of the American level, up from less than a sixth in 1960. But the Malaysian economy had fallen even further behind Japan: in 1960, Malaysian per capita income stood at close to two-fifths of Japan’s, but in 1980 was just over a quarter. Sustained commodity exports and significant industrialization were insufficient to put Malaysia among the world’s high-income countries. Malaysia had to look further for growth solutions.

One attempt was a 1980 initiative to ‘Look East’, meaning to Japan. Styled the Heavy Industries Corporation of Malaysia, the drive for growth and development included iron and steel mills and the manufacture of the Proton car. However, these policies, together with a sharp deterioration in the terms of trade for primary commodities, soon created sizeable balance-of-payments deficits. Growth was badly disrupted until the latter 1980s, when much of the programme was abandoned. By then, Malaysia, though still drawing on natural resource exports and with an inefficient state sector, had embraced an export-oriented, labour-intensive, foreign-investment dependent model and the economy had begun to grow at impressive rates. Yet even this success threatens to be incomplete: Malaysia may now be in danger of falling into a ‘middle-income trap’ with a growth rate low enough to halt catch up with high-income countries and progress towards the attainment of developed country status.³²

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.

Further reading:

Bassino, Jean-Pascal and Pierre van der E. 2020. ‘Asia's “little divergence” in the Twentieth Century: Evidence from PPP‐based Direct Estimates of GDP per capita, 1913–69’, Economic History Review, 73, 1, pp. 185–208.

Booth, A. 1988. Agricultural Development in Indonesia. Sydney: George Allen & Unwin.

Brown, I. 1977. Economic Change in South-East Asia, c.1830–1980. Kuala Lumpur: Oxford University Press.

Bruton, H. J. 1992. Sri Lanka and Malaysia: the Political Economy of Poverty, Equity and Growth. Oxford: Oxford University Press.

Drake P. J. 1972. Natural Resources Versus Foreign Borrowing in Economic Development. Economic Journal, 72, no. 327, pp. 951–62.

______ 1994. ‘Vent for Surplus, the Subsistence Fund, and the Evolution of Money'. In Gerald M. Meier, ed., From Classical Economics to Development Economics, pp. 94–103. New York: St. Martin's Press.

Federated Malay States. 1931. Report of the Rice Cultivation Committee, 2 vols. Kuala Lumpur: Government Press.

Federated Malay States Railways, 1935. Fifty years of railways in Malaya 1885–1935 . Kuala Lumpur: Federated Malay States Railways.

Findlay, R. 1970. Trade and Specialization. Harmondsworth: Penguin.

Findlay, R. and M. Lundahl. 1994. ‘Natural Resources, "vent-for-surplus", and the Staples Theory'. In Gerald M. Meier, ed., From Classical Economics to Development Economics, pp. 68–93. New York: St. Martin's Press.

______ 1999. Resource-led Growth—a long-term Perspective: the Relevance of 1870–1914 Experience For Today’s Developing Countries. Helsinki: UNU/WIDER.

______2001. Natural resources and economic development: the 1870–1914 experience, in R. M. Auty (ed.) Resource abundance and economic development, Oxford: Oxford University Press.

Fisher, C. A. 1948. ‘The Railway Geography of British Malaya’. Scottish Geographical Magazine, 64, 3, pp. 124–28.

Hayami, Y. 2001. ‘Ecology, History and Development: A Perspective from Rural Southeast Asia'. World Bank Research Observer, 16, 2, pp. 169–98.

Hooley, R. 1996. ‘A Century of Philippine Foreign Trade: A Quantitative Analysis'. In E. DeDios and R. Fabella, eds. Choice, Growth and Development. pp. 255–303. Manila: University of the Philippines Press.

Huff, G. 1992. ‘Sharecroppers, Risk, Management and Chinese Rubber Estate Development in Inter-War British Malaya’, Economic Development and Cultural Change, 40, 4, pp. 743–73.

______ 1994. The Economic Growth of Singapore: Trade and Development in the Twentieth Century. Cambridge: Cambridge University Press.

______ 2002. ‘Boom-or-bust Commodities and Industrialization in Pre-World War II Malaya’. Journal of Economic History, 62, 4, pp.1074–1115.

______ 2012. ‘Export-led Growth, Gateway Cities and Urban Systems Development in Pre-World War II Southeast Asia’, Journal of Development Studies, 48, 10, pp. 1431–52.

______ 2020. World War II and Southeast Asia: Economy and Society under Japanese Occupation. Cambridge: Cambridge University Press.

Huff, G. and G. Caggiano. 2007. ‘Globalization, Immigration and Lewisian Elastic Labor in Pre-World War II Southeast Asia’. Journal of Economic History, 67, 1, pp. 33–68.

Huff, G. and L. Angeles. 2011.‘Globalization, Industrialization and Urbanization in Pre-World War II Southeast Asia’ with Luis Angles, Explorations in Economic History, 48, 1, pp. 20–36.

Ingram, J. C. 1971. Economic Change in Thailand 1850–1970. Stanford: Stanford University Press.

International Bank for Reconstruction and Development. 1955. The Economic Development of Malaya Baltimore: Johns Hopkins University Press.

Knowles, L. C. A. 1928. The Economic Development of the British Overseas Empire. London: George Routledge & Sons.

Larkin, J. A. 1993. Sugar and the Origins of Modern Philippine Society. Berkeley: University of California Press.

Lewis, W. A. 1978. Evolution of the International Economic Order. Princeton: Princeton University Press.

______ 1984. ‘Development Economics in the 1950s’. In Gerald M. Meier and Dudley Seers, (eds.). Pioneers in Development, pp. 119–137. New York: Oxford University Press.

Maddison, A. 1990. ‘The Colonial Burden: a Comparative Perspective’. In Maurice FG. Scott and Deepak Lal. (eds.), Public Policy and Economic Development. pp. 361–375. Oxford: Oxford University Press.

_________ 2010. Historical Statistics of the World Economy: 1–2008 A. D.

http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=2ahUKEwju9uarvLLkAhWaEMAKHVglCMAQFjACegQIBhAC&url=http%3A%2F%2Fwww.ggdc.net%2Fmaddison%2FHistorical_Statistics%2Fhorizontal-file_02-2010.xls&usg=AOvVaw305YNz8pDDZ4z96rytXJfA

Malaya. 1932. British Malaya, a Report on the 1931 Census, by C. A. Vlieland. London.

Malayan Union. 1947. Report of the medical department 1946 by R. B. MacGregor. Kuala Lumpur: Malayan Union Government Press.

Malaya. 1949. Malaya, a Report on the 1947 Census of Population, by M. V. Del Tufo. London.

Myint, H. 1954. ‘The Gains from International Trade and The Backward Countries’. Review of Economic Studies, 22 (1954–55), pp.129–142.

______ 1958. ‘The 'Classical' Theory of International Trade and the Underdeveloped Countries’. Economic Journal, 68, pp. 317–337.

______1980. The economics of the developing countries, 5th edn. London: Hutchinson & Co.

Nurkse, R. 1971. Patterns of Trade and Development. Stockholm: Almqvist and Wicksell.

Power, J.H. and G. P. Sicat. 1971. The Philippines Industrialization and Trade Policies. London: Oxford University Press.

Rasiah, R. 2011. ‘Is Malaysia Facing Negative De-industrialization?’ Pacific Affairs, 84, 4, pp. 715–736.

Singapore.1959. An Industrial Development Programme (Lyle Report), Sessional Paper No. Cmd. 5 of 1959 (Singapore: Legislative Assembly, 15 January, 1959).

Singapore manufacturers' exhibition, 2–9 Jan. 1932. I932. Singapore.

Straits Settlements. 1927. Return of imports and exports, 1927. Singapore: Government Printing Office.

Sultan Nazrin Shah. 2017. Charting the Economy: Early Twentieth Century Malaya and Contemporary Malaysian Contrasts. Shah Alam: Oxford Fajar Sdn Bhd.

Thomas, W. A. 1998. ‘An Intra-Empire Capital Transfer: The Shanghai Rubber Company Boom 1909-1912’, Modern Asian Studies, 32, 3, pp. 739–760.

Wheelwright, E. L. 1965. Industrialization in Malaysia. London: Melbourne University Press.

World Bank. 2019. World Development Indicators, 2019. Washington, DC: World Bank.

¹I owe thanks to Andrew Bain, Mike Montesano, and Pierre van der Eng for detailed and extensive comments which have greatly improved this article. Mike Shand, University of Glasgow, drew the maps and figures with consummate skill and patience.

²GDP per capita data are from Maddison (2010), the only comparative data across time and among countries for the period considered. For countries like Malaya, Maddison’s data have the weakness of the single benchmark year of 1990, as shown by Bassino and van der Eng (2020), pp. 186–187. For estimates for Malaya for part of the period which differ from Maddison’s, see Sultan Nazrin Shah (2017).
³Myint (1958), pp. 317–337; Findlay (1970), pp. 70–74.
4Knowles (1928), pp. 138–152; Myint (1958), p. 324.
5Findlay and Lundahl (1994), p. 26.
⁶Myint (1954 and 1958); Lewis (1984), p. 123; Findlay and Lundahl (1994), p. 71; Maddison (1990), p. 364 and (2010), p. 98; Booth (1988), p. 205; Power and Sicat (1971), p. 15; Hooley (1996), p. 269; Drake (1972, 1994); Hayami (2001), pp. 177–181.
⁷Myint (1980), p. 35.
⁸The model assumes constant returns, that is that land and labour are prefect substitutes. In practice, of course, they were not and diminishing returns applied, giving a convex PPP frontier and meaning that specialization was unlikely to be complete in Southeast Asia’s main export staples. The impact of trade on pre-World War II Southeast Asia was, however, dramatic in the degree of specialization which resulted and analysis here captures the main story.
⁹Straits Settlements. 1927.
¹⁰Lewis (1978), p. 15.
¹¹Huff and Caggiano (2007), pp. 33–68.
¹²Nurkse (1971), p. 18.
¹³Malayan Union. (1947), p. 11.
¹⁴For discussion of the composition and pace of Malayan urbanization, see Huff (1994), Huff and Angeles (2011) and Huff (2012).
¹⁵(Drake, 1972, 2004; Findlay and Lundahl, 2001)
¹⁶See, for example, Thomas (1998).
¹⁷Huff (1992).
¹⁸Malaya. 1932, p. 99.
¹⁹Huff. 2002.
²⁰Fisher. 1948. pp.124 28; Federated Malay States Railways. 1935., p.7.
²¹Singapore manufacturers' exhibition. 1932, pp.111–15
²²Ibid, p.111.
²³Malaya. 1949, p. 44; Malaya. 1932, p. 45.
²⁴Federated Malay States (1931), pp. 17–18.
²⁵For the estimate of Malayan GDP per capita greater than Japanese, see Bassino and van der Eng (2020).
²⁶For example, see Huff (2002).
²⁷GDP per capita comparisons are in 1990 Geary Khamis dollars.
²⁸International Bank for Reconstruction and Development (1955); Singapore (1959).
²⁹Cf. Power and Sicat, (1971).
³⁰Bruton (1992), p. 213.
³¹Wheelwright (1965), p. 97.
³²See, for example, Rasiah (2011).