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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1920 - 1941

 

[B]. PERIOD: 1920 - 1941 (THE INTERWAR YEARS)
This section encompasses discussion on the international market environment, developments in main export commodities such as rubber and tin, change in imports of staple food i.e. rice, infrastructure development and improvements in overall welfare. Developments in other industries such as timber, petroleum, iron ore and gold were deliberately omitted from discussion as these commodities played negligible roles in terms of their contribution to economic progress.

[1]. International Market Environment
During this period, international market conditions adversely affected the economy. In April 1920, the Allied governments (Britain, France and USA) implemented deflationary policies to control inflation, ie interest rates were raised and credit was restricted. With this, the boom dissipated as manufacturers reduced output and employment, and purchase orders dwindled. Consequently, prices of raw material nose-dived. Between 1919 and 1922, prices of rubber and tin fell by 60% and 46.4% respectively, while import prices, namely foodstuffs remained relatively high. Inevitably, commodity terms of trade fell by 75% and income terms of trade fell by 51% between 1919 and 1921.

These events served as a platform for the development of the Great Depression of the 30s. Here, international conditions deteriorated further, causing a simultaneous deterioration in domestic conditions.

[2]. Domestic Economic Environment

Rubber

  1. Commodity Control Schemes
    As a result of the slump in these industries, the colonial government intervened to restrict rubber exports from Nov 1922 to Oct 1928.

  2. Voluntary restrictions
    Initially, the colonial government attempted to control rubber exports from 1920-22 but failed to elicit adequate support since this policy did not specifically benefit the local economy. Instead, it was beneficial from a wider imperial perspective whereby, the sterling-US dollar exchange rate could be stabilised by making the Americans pay higher rubber prices.

  3. The Stevenson Restriction Scheme
    Subsequently, from 1 Nov 1922 until 1928, the Stevenson restriction scheme was implemented whereby export restriction was determined by a country's aggregate output with the main aim of stabilising prices, to allow a reasonable margin of profit. The specified output was then distributed among individual producers according to an official formula and a prohibitive rate of export duty was imposed on output in excess of this quota. This level of quota varied according to market prices.

    Was the Stevenson scheme successful? The success of this scheme can be characterised by 3 main phases. In the first 2 years (1922-23), it achieved the desired level of prices. However, between 1924-25, supply was insufficient to meet the surge in American demand due to administrative inflexibility. Hence, this shortage induced a price rise. Lastly, between 1926-28, its effectiveness progressively deteriorated, with prices falling to near pre-restriction levels. Towards the end, the costs of the scheme significantly outweighed the benefits since producers could not minimise losses faced due to low prices by increasing output. Furthermore, their share of world output had declined to 53% since other territories were not subject to the same restrictions. Therefore, the scheme was subsequently abolished. With this, rubber exports surged from 315,000 tonnes in 1928 to 480,000 tonnes in 1929.

  4. The International Rubber Regulation Agreement (IRRA)
    However, this improvement was rather short-lived as threats of the Great Depression became increasingly imminent. Again, prices dipped and the International Rubber Regulation Agreement (IRRA) was established to regulate prices. It regulated rubber production of producing countries from 1 Jun 1934-1943. The basis of the system was similar to the underlying principles under the Stevenson scheme, with the exceptions that there was no specific targeted price level and new planting of rubber was prohibited. Overall, it was more successful than its predecessor in the sense that prices were not as volatile.
[3]. Land
In 1921, when the rubber industry experienced a downturn, European rubber planting firms requested for a 3-year moratorium on further grants for rubber. However, this request was denied on the basis that the downturn was merely temporary.

As a result of the downturn, landowners were put into distress as they were faced with the challenge of satisfying debt-servicing obligations as loans were obtained at higher interest rates in better times.

The Malays commonly sought Chettiars for credit. Due to the inability to meet debt obligations, there was growing concern that non-Malays would obtain ownership of Malay reservation land. Hence, Malay reservations were immediately extended, totalling roughly 1.1 mln hectares or 16% of total land area by 1923. Reserved land area rose to 1.3 mln hectares by the late 1920s. Other short-term measures to conserve the welfare of Malays constitute the passing of the Smallholdings Reservations Enactment in 1931 and the Malay Reservations Enactment in 1933, whereby non-Malays were prohibited from access to reserved land unless granted exemption by the court. The main objective of these efforts was to ensure self-supporting Malay communities with internal facilities parallel to the economy dominated by non-Malays.

However, the welfare of Asian estate owners was marginalized as land resources grew scarce. This was especially apparent when the 1930 ban on land grants was temporarily lifted in 1939 - 40 as they featured prominently among applicants for new land. This policy faced strong Malay opposition since the possibility that land would fall into the hands of non-Malay ownership was perceived as a threat to their rightful heritage.

When rubber prices boomed in the mid-1920s, there was a corresponding boom in applications for land. To dampen demand, higher premiums were charged. However, the government began to realise that unauthorised planting was rampant as land originally granted for other crops were used to plant rubber. Thus, conversion to rubber was permitted at high premiums.

[4]. Tin
From 1920-22, the tin industry experienced a slump. Here, the colonial government intervened by purchasing tin, to create sufficient demand and consequently, sustain price level. Approximately 10,000 tonnes were purchased, costing 19 mln Straits Dollars. This was done to preserve marginal mines (mainly Chinese) and obviate discontent among the workforce.

Subsequently, prices soared in the mid-20s, stimulating influx of foreign capital, with large production capacities. Inevitably, output surplus occurred, and the situation deteriorated further during the Great Depression. This resulted in 3 successive international agreements to control output: (i) 1931-33, (ii) 1934-36, and (iii) 1937-41.

From the surface, the outcome was satisfactory, as excessive price fluctuations were avoided. From 1932-41, the average price per long ton was 217 against 155 from 1929-31.

Restriction schemes were extensively criticised. As depicted by the US government, it was a blatant attempt by colonial powers to extract monopoly profits from producing countries. Large European mines gained at the expense of small, labour-intensive ones (mainly Chinese) as the restriction prevented low-cost producers from maximising their competitive advantage. At least 14% shut down and sold their quotas to larger ones. By 1941, European mines accounted for 73% of output.

Figure 1 below shows the movement in rubber and tin exports from 1924-40.


Figure 1: Rubber & Tin Exports 1924-40

5]. Rice
This period began with crisis in rice imports. The government intervened to ensure supplies at highly subsidised prices. Hence, there was desire to reduce heavy dependency on imports. Table 6 below shows the change in rice output for selected years.


Table 6: Output of rice

From 1925-29, imports were equivalent to 70% of consumption and the shortage problem re-emerged during the Great Depression. Hence, the Rice Cultivation Committee was set up in 1930 to make recommendations on methods to improve yield and the Drainage and Irrigation Department was established. Other projects included technical work on water control and quality of seeds. These efforts led to an increase of approximately 75% of output. Figure 2 below illustrates the significant reduction in rice imports after 1930.


Figure 2: Rice Imports 1924-40

However, imports remained high at approximately 2/3 of consumption. This was due to the impediments faced due to high irrigation costs and difficulties encountered in convincing Malay farmers to relocate despite high costs incurred in upgrading infrastructure in irrigation areas.

  

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