Striving for Inclusive Develpment: From Pangkor to a Modern Malaysian State

This book, which traces the evolution of what is now Malaysia from a far-flung colonial trading outpost at the time of the Pangkor Engagement in 1874 to a modern, diversified economy, is divided into five parts, in 10 chapters, which chronicle the events and the transformations—as well as the people—that marked this journey.
Part 1, Forming a Nation and a Mosaic Population, comprises two introductory chapters that focus on how Malaysia and its institutions were formed, and how its population grew.
Chapter 1 outlines the historical evolution of the separate geographical entities of the Malay peninsula over the past 150 years, their changing governance, and how they eventually came together to form Malaysia. It describes the institutions that the British progressively established during their lengthy rule, primarily if not exclusively in order to consolidate their economic and strategic interests. These included political and administrative structures, a legal and security system, and economic policies intended to facilitate investment, trade, and fiscal stability. However, World War II shattered the illusion of British protection of the Malay states, and of Sabah and Sarawak. The post-war proposal to create a Malayan Union with centralized government control and common citizenship aroused widespread opposition among the Malays and led to an upsurge in nationalism. In Britain, too, after the war, there was growing acceptance of the need for a new focus on Malaya’s ‘development’, and for a managed transition to independence.

Chapter 2 begins with an overview of the history of Malayan population census-taking, and of how colonial administrators introduced an ethnicitybased classification that served to separate different communities. It assesses how colonial immigration policy responded to meeting the labour-force needs of the peninsula’s growing extractive economy, and the huge impact that migration had on population growth and ethnic composition. Migrants settled in and around tin-mining areas, estate plantations, and the steadily growing towns located in the west coast states. The northern and east coast states attracted far fewer migrants and remained populated predominantly by peninsula-born Malays. At independence in 1957, occupational segregation and segmented settlement patterns were a legacy of colonial immigration policy: they had become institutionalized, and ethnicity had become closely identified with a person’s economic function. After 1957, immigration was at first curtailed, but since the 1980s a much more liberal policy has been adopted, with new waves of Asian foreign labour entering Malaysia to meet shortages of lower-skilled workers. Yet in the other direction, there have been persistent outflows of the more highly skilled Malaysians, weakening the country’s human capital base.
Part 2, Enhancing Human Well-being, traces the development of the country’s segmented education and health systems, and the steps taken by colonial and Malaysian governments to build human capital and advance well-being.

Chapter 3 reviews the nature of Malaya’s highly segmented education system, where few children—almost all of them from privileged families— had opportunities beyond the basic primary level. During late colonialism, and especially after independence, the fundamentals of the education system began to change, with progressively expanded opportunities that eventually provided much greater access to all levels of education. A more integrated school system gradually emerged to help support nation building and to meet the country’s changing human resource needs. Yet six decades after independence—and despite hugely positive trends in education indicators— the quality (rather than the quantity) of education has not reached the originally expected standards, an issue experienced by many developing countries. The education system is not responding well enough to the needs of the labour market, nor is it ensuring a successful transition for all from school to decent work.

Chapter 4 examines how Malaya’s health policy evolved to support colonial economic development. As infectious diseases took a heavy toll on migrant workers and threatened to decimate the labour force, improved sanitation and health services became imperative. But most measures were implemented in urban areas, and so had little impact on the bulk of the rural population. Only after World War II, with heavy investment in expanding the health infrastructure, improving nutrition, controlling infectious diseases, and adopting disease-prevention and health-promotion measures, was there real progress in health care for the rural population. Health outcomes improved spectacularly, with dramatic gains in life expectancy at birth, consolidating the conditions for a fertility transition and subsequently a demographic dividend which would go on to support economic growth.

Part 3, Expanding and Diversifying the Economy, presents the book’s core economic analysis. It starts with a discussion of the establishment of institutions, and the expansion of the trade in tin and rubber in the colonial period, and proceeds to an evaluation of economic performance since independence.
Chapter 5 begins in the late 19th century, when most of the world’s tin was mined in the Federated Malay States. The first two decades of the 20th century then saw Malaya become the world’s leading producer of rubber, as demand soared, largely as a result of the advent of the mass production of automobiles in the United States. Malaya’s economy was ravaged, however, by the Great Depression of the 1930s, when rubber and tin prices collapsed. In the absence of social safety nets, many people suffered great hardship during these years. By the early 1950s, the colonial administration had more or less rebuilt the pre–World War II commodity-exporting economy, following the destruction of economic activities during the Japanese occupation. From independence through to 1969, much of the colonial legacy remained. However, while the economy sustained solid growth during these years, the rewards were not evenly felt, with the rural population, and Malays in particular, remaining distanced from the modern sector and enjoying little benefit.

Dissecting the factors underlying post-independence economic growth, Chapter 6 focuses on the increase in productivity, and considers the effects that structural change and the demographic transition have had on Malaysia’s economy. Although economic growth compared favourably with that in most other developing countries in the 1950s, the reasons why Malaysia has not performed as well as the Republic of Korea, Singapore, and Taiwan are explored, with deficits in human capital identified as a key part of the answer. This chapter also considers the extent to which Malaysia’s development is sustainable, by looking at development through the lens of the accumulation of ‘genuine wealth’—the country’s portfolio of natural, human, and manufactured capital.

Chapter 7 continues the story of economic development since 1970. The 1970s saw the emergence of an interventionist state, and the start of redistributive policies and aggressive affirmative action intended to sever the colonial association of ethnicity with economic function. The two decades of the New Economic Policy (1971–1990) saw rapid growth and modernization of the economy, and significant social rebalancing in economic terms. Growth accelerated in the first part of the 1990s, appearing to vindicate the policy redirection that followed the commodity crisis of the mid-1980s; but there were signs of overheating and growing economic imbalances in these years, which contributed to vulnerabilities in the economy, and eventually led to severe corrections during the Asian financial crisis. Nonetheless, at the dawn of the new millennium, real incomes were far higher than they had been in 1990, and solid economic growth continued through to 2008, when Malaysia’s economy again stalled as the global financial crisis and Great Recession hit. At the start of the current decade, the economy was again growing, even if concerns were being voiced about slowing economic momentum, institutional weaknesses, and the risks of becoming caught in the ‘middle-income trap’.
Part 4, Achieving Growth with Equity, turns to the processes by which the transition from a predominantly agricultural economy to a modern one led to a huge reduction in poverty, and to more equitable income distribution.
Chapter 8 analyzes, at the commodity and state level, the role of agriculture in the country’s structural transformation and in the enormous reduction in absolute poverty. After 1970, structural transformation accelerated in nearly all states, and rural Malays found higher-paid jobs in urban areas. The productivity of farmers who remained behind rose nearly as fast as that of workers in urban areas, so that the gap between rural and urban labour productivity started to narrow. Fast-rising incomes in rural and urban areas led to a rapid decrease in poverty. By our present decade, absolute poverty has been virtually eliminated, essentially driven by economic growth and the diversification of agriculture.

Chapter 9 begins with an analysis of consumption inequality in colonial Malaya, where Europeans—and a tiny minority of other communities who were living a high-status European lifestyle—were vastly better off than the masses. Indeed, differentials in private consumption expenditure widened during the first four decades of the 20th century. ‘Growth with equity’ became the primary policy objective after independence, starting with the New Economic Policy, as the government played a more interventionist role in managing economic policy, blending it with affirmative social objectives. Standards of living improved sharply from the 1970s onwards, and real average household income more than doubled between 1995 and 2016. A sizeable middle class, which includes members of all communities, has emerged. The country has also made some progress towards a more equitable distribution of income among ethnic groups. Even so, while the income share of the bottom 20 per cent of individuals has improved in recent years, it remains unacceptably low.
Part 5, Creating an Inclusive and Sustainable Future, concludes this booklength inquiry with a forward-looking assessment of some of the central challenges facing Malaysia today. It underlines the fact that the country has made impressive development progress since the end of colonial rule, and that all communities have played an important role. But the time is now ripe for Malaysians to evaluate their circumstances afresh and make key choices about future directions.

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

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