ARTICLES
THE EVOLVING POLITICAL ECONOMY OF MALAYA’S RUBBER DEVELOPMENT FROM COLONIAL TIMES TO INDEPENDENCE

Professor Emeritus Martin Rudner, The Norman Paterson School of International Affairs, Carleton University, Ottawa, Canada

Development Studies call attention to the critical role of creative innovation as an engine of economic progress. Historically, industrial and agricultural innovation in less-developed economies was generally attributed to ‘leading’ sector enterprises which, by virtue of certain attributes, were better able to mobilise capital, adopt new production techniques and/or seek out new markets. The key challenge for national development was to disseminate the innovative capabilities of the leading sectors to the laggard majority. However, the realisable developmental aspirations and capabilities of the broader-based community were often frustrated by legal–institutional constraints. Indeed, it is the contention of this article that Malaya’s rural development was rooted in a smallholding peasantry able and willing to innovate, so that after independence—when these constraints were progressively dismantled and more positive policies were adopted in support of the rubber smallholding sector—the peasantry expedited the developmental transformation of rural Malaya.

The colonial onset

Between World Wars I and II, natural rubber was virtually synonymous with the prosperity of the Malayan peninsula, which provided half the world’s supply. From its inception, the natural rubber industry in Malaysia has been divided into two sectors—estates and peasant smallholdings—the former dominated by British-owned companies and the latter accounting for nearly 40 per cent of Malaya’s pre-World War II acreage. All told, smallholdings produced some 40 per cent of total Malayan rubber output in the 1930s, although this was not indicative of their true comparative efficiency. For most of the interwar period, the industry was beset by restrictive regulations heavily weighted in favour of the large estates, yet the smallholdings were the lower-cost sector. 

Despite discriminatory policies, rubber remained an eminently suitable peasant crop, capable of yielding satisfactory economies of scale on smallholdings: it combined comparative efficiency with the creation of a relatively stable, prosperous and independent peasantry. Yet although rubber smallholdings offered Malaya a promising formula for rural development, Malayan colonial policies strongly favoured the estate sector. This reflected an ingrained bias of British administrators for the neat, well-ordered western-style plantations, who saw them as more efficient. 

Estate interests also coincided with the preferences of a Malay aristocratic elite who considered padi more in keeping with traditional kampong (Malay village) culture, and exclusive Malay involvement in padi as a defence against the perceived threat of Chinese economic domination. This elite collaborated with British officialdom in measures designed to keep the Malay peasant ‘in’ rice and ‘out of’ rubber, going so far as to urge the peasantry to forgo incremental income in order to adhere to the traditional Malay ‘way of life’. In this way, Malayan rubber policies stifled peasant innovation, aiming primarily to support the estate pattern of plantation agriculture on the one hand and upholding the traditional pattern of kampong life on the other. 

Malaya’s rural development was rooted in smallholding peasantry innovation
Source: The National Archives of Malaysia 

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The capacity to produce rubber at prices below the profitability threshold of estates generated fears among British planters that the Malayan rubber industry would eventually ‘go native’, a fear that inspired them to use their access to the colonial authorities to push for policies to protect the capital values of the estate sector. International rubber regulation schemes—originally intended to maintain export prices—came to be used to undermine the long-run competitive position of peasant smallholdings. Well after the expiration of the International Rubber Regulation Agreement, 1934–1942, British estate interests continued to urge the removal of peasants from rubber to other non-competitive, less remunerative crops. A ban on new planting effectively restricted peasant entry, but even after this ban was lifted in 1947, the government refused to allocate additional lands for rubber smallholdings. The larger estates already had adequate reserves of land on which to plant. 

These restrictions, along with a severely regressive rubber export duty that hit peasant income, undermined the efficiency and independence of the rubber smallholdings. And because government agencies, such as the Rubber Research Institute of Malaya, focused their efforts almost exclusively on the estate sector, smallholdings were in effect financing the improvement of their immediate competitors. By the late 1940s, the bulk of the smallholding acreage had already been forced into obsolescence.

Despite the heavy incidence of direct and indirect taxation, rubber remained the most attractive crop for peasant producers because the rewards were far greater than any alternative crop’s. Rural Malays in particular demanded entry into rubber smallholding as a means to economic and social betterment so that, when land was not made available, they took to illicit planting using low-yielding, unselected seedlings. By the end of the colonial period, an estimated 15 per cent of smallholding acreage consisted of inferior stands of this type. 

Colonial rubber policies threatened not only to extinguish peasant economic development, but further jeopardised the competitive position of Malayan rubber in world markets. While Malayan rubber acreage remained virtually stagnant due to restrictions on new planting, the Dutch East Indies loomed as a major low-cost competitor, having expanded its mostly smallholding acreage and output to the point where by 1941 production exceeded Malaya’s. Restrictions on rubber planting in Malaya had also led to comparative stagnation in Malayan natural rubber technology at a time when, after World War II, synthetic production was continuing to make huge advances (initially stimulated by the war). Synthetic rubber kept prices low on the postwar rubber market, putting further competitive pressure on Malayan rubber producers and the flawed colonial rubber strategy, which had implicitly favoured high unit prices over efficient production, and estate company profits over Malay national income. 

Although new planting by smallholders remained proscribed as market prices for rubber declined, the colonial authorities accepted the need to adopt development policies that sought high-yielding clones to increase productivity. 

Opposition from estate interests was overcome by the formulation of two separate replanting schemes for estates and for smallholdings launched in 1952: funds for each (A and B, respectively) were financed by a tax on rubber exports administered by an autonomous Rubber Industry (Replanting) Board. The allocation of money between the two funds was set in proportion to the output of each sector, reinforcing existing inequalities among producers instead of meeting their relative needs. 

Implementation was hampered by basic structural, technical and financial impediments that discriminated against smallholders. Whereas estates received an automatic rebate on proof of replanting, smallholders first had to obtain approval for replanting before applying for a Fund B grant, a process that took no account of differences in the structure and the scale of operations between very small peasant holdings and non-peasant medium-sized producers. In effect, Fund B regressively redistributed resources from the former to the latter. 

Moreover, the policy of encouraging replanting with alternative crops continued even when smallholders took advantage of Fund B, reflecting government concern over Malaya’s excessive dependency on rubber, as well as catering to opposition from estates over competition and the traditionalists’ preference for padi. Consequently, over 10 per cent of replanted smallholding acreage from 1952 to 1955 was switched to alternative crops with a lower revenue yield than rubber. Ironically, smallholders’ contributions to Fund B had financed the removal from the industry of some of the potentially most efficient producers. The government’s overriding concern for revenue and its commitment to upholding vested economic and institutional interests obstructed large-scale peasant investment in new rubber development. As a matter of policy, new rubber planting by smallholders remained virtually frozen, on the pretext that this would avoid a return to ‘shifting agriculture’. 

The upshot of these legal–institutional barriers to peasant innovation was that the replanting scheme was limited to half the targeted smallholding acreage. By 1955, only 8 per cent had high-yielding rubber, while over half had trees more than 30 years old and faced declining output. Colonial policies had undermined and weakened an industry that had the capacity to liberate the rural population from many of the traditional socio-economic evils that afflict underdeveloped peasant agriculture.

Not that Malaya’s peasantry acceded meekly. Many persisted in applying for land, despite continuing refusals, others engaged in illicit new rubber planting, while some joined the Communist-led insurgency. The peasants articulated their grievances in numerous petitions presented to official commissions, but lacked political leverage. The Malay civil service, ostensibly appointed to represent them, not only failed to press their demands, but lent support to government measures detrimental to their interests. 

Referring to deteriorating conditions among producers, the Report of the Commission of Enquiry into the Rubber Industry of Malaya, chaired by R.F. Mudie, former British governor of West Punjab, and published by the colonial federal authorities in 1954, had in 1954 urged the need for policy changes to modernise Malayan rubber production, declaring that ‘if the rubber industry were to be allowed to fall into irretrievable senility, Malaya’s present type of developing economy would collapse’. Yet the colonial authorities failed to act: it would take a reduction in the political power of entrenched interests to weaken their clamp on policy and clear the way for innovation. 

That opportunity came after Malaya’s first general election in July 1955. Some members of the United Malays National Organisation (UMNO), the senior partner in the elected Alliance Party government, harboured traditional ambivalence towards the rubber industry while others, such as the Malayan Chinese Association, UMNO’s partner in the Alliance, saw it as key to rural socio-economic advancement in the Malay kampongs without undue encroachment on Chinese land holdings. 

The post-independence Alliance government supported the integration of peasant producers in the political process
Source: The National Archives of Malaysia 
2001/0051633

Shortly after coming to power, the Alliance government supported the organisation of a Malayan Council of Smallholders’ Associations to integrate peasant producers in the political process, aggregate their interests and press their demands. In 1957, the new Alliance Minister of Commerce and Industry, Tan Siew Sin, demonstrated the Alliance’s commitment to rubber development by proposing that 1 million acres of high-yielding rubber be planted within the next decade.

Replanting scheme

Responding to the Mudie Report after the election, the Alliance adopted a revised rubber replanting scheme, which focused on the replanting of smallholdings. Further changes were made at the start of the 1959 general election campaign, which helped the very smallest producers over Fund B payments, but this initiative gave too little, too late in terms of the replanting target of the First Five-Year Malaya Plan (1956–1960). To maintain its political position among the rural electorate, the Alliance government injected more money into its replanting scheme, which was already the largest single item in its First Development Plan. 

An increase in the replanting grant in the Second Five-Year Malaya Plan (1961–1965), along with the employment of contractors to clear and prepare smallholdings for replanting, had together served to accelerate smallholding replanting so as to cover some 50 per cent of Malaya’s smallholding acreage by the end of 1965. The policy continued until 1967 but by then, so great was demand for assistance from smallholders, that the government had to restrict annual replanting for budgetary reasons until 1970. Henceforth, replanting funds were arbitrarily divided between estates and smallholdings according to past production ratios rather than present or future needs, constituting a major institutional barrier to further peasant innovation through rubber renewal. .

The Federal Land Development Authority

Alongside its replanting scheme, the Malay government embarked on an ambitious, large-scale new planting programme. In 1955, it appointed a working party to consider the opening of new land settlements as a means of overcoming the near-desperate land hunger in the Federation. Despite traditionalists’ preference for diversification through padi, the government accepted the working party’s recommendation that new land settlement be based on rubber to ensure settlers’ prosperity. The Federal Land Development Authority (FELDA) was established in 1956 to administer the scheme with the state governments. Suitable virgin jungle was to be prepared by contractors for subdivision into 10-acre family holdings.. 

Traditionalists preferred diversification through padi, considered kampong culture
Source: The National Archives of the UK

CO 874/463/002-19

Peasants, especially landless Malays, enthusiastically greeted the FELDA scheme. It offered them an outlet for innovation through the redeployment of resources from subsistence agriculture to fairly high income-generating rubber smallholdings. Although political pressure was needed to impel several of the Malayan states with jurisdiction over land matters to cooperate with the FELDA (they continued to favour padi), by 1967, 121,000 acres of new, high-yielding rubber stands had been established. 

Responding to the growing peasant interest in rubber resettlement schemes in the Second Five-Year Malaya Plan (1961–1965) and the First Malaysia Plan (1966–1970) became possible because of rural involvement in the political process. The original FELDA expectation was that these schemes would yield an accounting ‘profit’, although the Alliance leadership had been clear that settlements were to proceed without undue concern for capital repayments and interest, given the urgency of the rural development problem. Ultimately, it was agreed that for the sake of immediate development, profitability could be postponed to the future. 

Further land-settlement schemes were planned, which would broaden the FELDA’s scope to include other remunerative crops that had until then been restricted to estate-type cultivation, such as palm oil, bananas and coffee. In the interest of rural development, income considerations were now accepted as the appropriate criteria to justify resource allocations.

Other land-settlement schemes

Other Malayan land-settlement schemes were less successful than FELDA’s. The Smallholder New Planting Scheme, initiated by the federal government in 1956 as a supplement to the FELDA and later re-invigorated and called the Fringe Alienation Scheme, was undermined by the failure of state governments to provide adequate aftercare. For example, the rubber planted on the fringes of kampongs could not meet the standards necessary for the continuation of Fund B grants. Another land-settlement scheme introduced in 1959 by the Pan-Malayan Islamic Party state governments in the east-coast states of Kelantan and Trengannu identified blocks of uncleared jungle for settlers to plant, but these failed because, without further aid or support, the conditions proved too arduous. 

The failure of both schemes illustrated the difficulty of peasant innovation in an industry demanding the highest technical standards without the assurance of adequate financial support, preparation and aftercare. Simply increasing the acreage of rubber under smallholdings did not, of itself, generate rural development. . 

The estates in 1957–1960

Unhindered by the Alliance government, some 300 rubber estates covering about 230,000 acres were sold by foreign owners to small businessmen. The refusal of the federal authorities to interfere with the disposal of private property meant that only 8 per cent of these smallholdings were owner-occupied, the rest being let to tenants. Standards of management and maintenance on these tenancies deteriorated to the extent that few were capable of regular renewal through replanting, inhibiting the innovation necessary for rural development. 

Much of the FELDA’s success stemmed from the combination of the organisational methods of large-scale plantation agriculture with the economic and social advantages inherent in smallholder rubber cultivation. FELDA management offered settlers certain benefits of scale such as quality control, working capital and the provision of adequate infrastructure, which was usually only available to larger estates. Later replanting schemes were similarly organised, so that benefits of scale were available to smallholders at specific stages of the production process. . 

The changing economic and political relationship between state and peasantry

Malaysia’s experience in promoting rubber smallholding illustrates the significance of the relationship between state and peasantry for rural development. The colonial preference for large-scale, estate-type rubber plantations rather than native smallholdings initially shaped policy, despite the comparative economic advantages of the peasant smallholder. This approach harmed the rural economy and society as well as the competitive position of Malaya’s leading industry. Only when the attitudinal underpinnings of rubber policy were modified to accord with economic reality could remedial action be taken to restore the productive potential of the smallholding sector. 

The revision of official attitudes mirrored changes in political interests. Under the colonial regime, British estate interests had close access to the sources of political power, unlike rubber smallholders who were unorganised and without direct representation in the councils of state.

In such circumstances, only the effects of declining rubber prices on government revenue were likely to bring about a policy change. Once the introduction of representative government in 1955 transferred political power to Malayan peasantry, the need to maintain electoral support impelled governments, even at state and district levels, to respond to peasant demands. 

If rubber smallholders were to realise their economic potential, the legal–institutional barriers to their optimal performance had to be removed: smallholder innovation had been stifled by restrictions on new planting as well as by structural, technical and financial obstacles to replanting. In 1955–1966, policy changes led to an expansion in rubber acreage by 18 per cent and a smallholding sector that increased in size by more than half, overtaking estates in 1960 to become the larger sector of the two by planted acreage. Smallholding production increased over the period by 49 per cent, even though part of that acreage comprised less-efficient subdivided estates.

Peasant investment in a high-technology industry such as natural rubber required government involvement to foster technological progress. The removal of legal–institutional barriers and the application of research encouraged and enabled smallholder innovation; high-yielding clones were made available to smallholders while government supervision ensured adequate standards of maintenance; and the organisational changes such as ‘block’ planting necessary for the optimal deployment of new technology were assisted and supported by successive FELDA schemes.

The colonial preference for large-scale rubber plantations had harmed the rural economy
Source: The National Archives of Malaysia 
2002/0019954

The Malaysian experience also demonstrated that significant progress towards large-scale rural development required a major commitment of national resources. Under the colonial administration, the smallholding sector had served as the milch cow of the federal treasury, but with self-government, an increasing proportion of public expenditure went towards improving the rubber smallholding sector. Capital expenditure on land development reached the target of M$375.9 million in the First Malaysia Plan (1966-1970), most of which went towards economic and social infrastructure on FELDA schemes. These enlarged appropriations were no longer conditional, but an essential element of Malaysia’s economic policy, which was to expand rural productivity through long-term development planning. 

Malaysia’s commitment to rural development also extended to a redistribution of rubber income more favourable to peasant producers, even though this was a major departure from the Alliance’s conservative outlook. As a response to electoral pressure, the Rural Development Authority was charged with financing group-processing facilities for rubber smallholders, 70 per cent of whose production had until then been sold unprocessed at a 20 per cent discount. Although willing to adopt measures for enlarging peasant producers’ share of rubber earnings, the Alliance government remained firm in its refusal to apportion replanting funds other than according to proportional output, which in effect sacrificed the greater needs of smallholders to the canons of conservative finance. Alliance commitment to smallholder development was evidently limited to the point where redistribution became unpalatably radical. 

Peasant innovation achieved more than the revitalisation of the smallholding sector and with it Malaysia’s rubber industry: high-yielding rubber improved peasant smallholders’ standard of living by raising income to what was described as ‘a reasonable income for a rural family’ (Natural Rubber News, July 1967), justifying the FELDA’s slogan of ‘No Need to be Poor’.

Further reading: 
Rudner, M. 1994. Malaysian Development. A Retrospective. Ottawa: Carleton University Press.

Endnote:
The author expresses his profound appreciation to Angela Christine Gendron for her valuable editorial assistance. Any errors remain his own responsibility.
RELATED SITES

ECONOMIC HISTORY OF MALAYA
c/o Asia-Europe Institute
University of Malaya,
50603 Kuala Lumpur


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