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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : Great Depression


[C]. PERIOD : Malaya during the Great Depression

Although not technically correct, the 1929 stock market crash on the New York Stock Exchange has often been seen as the start of the Great Depression of the 1930s. What started as a typical recession soon became the worst economic contraction the world has ever seen. Governments throughout the industrialised world made mistakes after mistakes. The Depression was a result of domino effects, vicious cycles and a downward spiral in world trade. Consequently, the world economy got trapped in a deflationary spiral that made the Great Depression an experience that no government wants to ever go through again. Developments in the international environment had adverse implications on the Malaysian economy since the demand for her exports experienced contraction.

Protectionist Policies to Keep the Economy Afloat
Due to weak and still falling external demand, Malaya's exports experienced significant declines. As a result, her balance of trade that went into deficit in 1928 only widened in the 30s as Table 7 and Figure 3 (derived from data in Table 7) would illustrate.

Table 7: Malayan Balance of Trade 1924 - 36 ('000 Straits Dollars)

Figure 3: Trade Balance

To deal with the widening deficit, the British administration attempted to reduce dependence on imports and become more self-sufficient. Hence, after the Ottawa Conference 1932, a preferential tariff system was imposed, marking the end of free trade. Japanese goods were singled out as the main threat because Japan was increasingly being seen as a military threat. Also, Japanese goods were extremely price competitive. The devaluation of the Yen in 1931 only led to further price reductions in Japanese imports. By 1934, Japanese goods were 20 - 50% cheaper than European goods. Table 8 demonstrates the extent to which dependency on Japanese imports increased as a result of the devaluation.

Table 8: Japan's Market Share (%) in Malaya

Additionally, import quotas were imposed on textiles in 1934. However, because over 80% of textiles imported from Japan were re-exported, quotas threatened the prosperity of entreport trade. Although effective controls were difficult to impose, and in some cases, there were blatant attempts to evade quotas, textile imports from Japan were immediately reduced. By 1937, textiles from British territories had seized market share that Japan had lost although imports in absolute terms continued to grow until Chinese traders boycotted Japanese goods in response to Japan's invasion of China.

Population & Living Standards
As economic conditions deteriorated, repatriation of labour increased significantly. Between 1930 and 1932, 170,700 Indians and 75,000 Chinese were repatriated, while others paid their own passage. The government spent more than S$1 million in repatriation expenses.

Since domestic economies experienced contractions during this period, the result was an oversupply of labour. Hence, restrictions were imposed on fresh immigration of workers by halting recruitment of labour that received assistance from the Indian Immigration Fund and imposing quotas on the immigration of Chinese labour.

Views on the implications of mass repatriation were mixed. On the one hand, there was growing concern that the repatriation would lead to labour shortages once the economy recovered. On the other hand, officials stipulated that it was wrong that the indigenous community needed to compete with migrants for employment and other resources. Nevertheless, the view that Malaya should develop permanently domiciled Chinese and Indian workforces instead of being heavily dependent on external sources was becoming increasingly popular.

To a certain extent, the change in policy stance during the Great Depression left Malaya more self-sufficient as it became less reliant on imports of both basic commodities as well as labour. This marked the beginnings of import-substitution policies that were further pursued after Malaya obtained independence to fuel her industrialisation. Further discussion on post-independence policies can be found in later issues of i Capital.

In general, the quality of infrastructure improved tremendously during this period.

With respect to transportation, increasing competition amongst various transportation modes led to improved and cheaper transportation. Empirical evidence illustrates the extent of this expansion. Cumulative capital expenditure on railways rose by 19.27% between 1923 and 1938, and the number of cars and lorries increased by 156.5% and 397% respectively between 1923 and 1925. Also, the supply of electricity was made more readily available.

Financial services
To mitigate dominance of the middlemen in the rubber and tin industries, a cooperative movement was introduced. The rationale here was that individual weaknesses would be negated by collective strength. However, when the Great Depression took root, 2 out of 4 cooperatives had to be liquidated.

Total expenditure on education in the Straits Settlements was a mere 4% of total government development expenditure in 1919 and 1929. This figure rose to 6.8% in 1938. Spending in the FMS was 3-6% of total government development expenditure. The bulk of this expenditure went mainly to English-medium schools. Table 9 illustrates this imbalance.

Table 9: % of Government Expenditure in Schools

Generally, the quality of education during this period was modest. Neither Malay nor Indian streams led to secondary education until the Sultan Idris Training College was established in 1922. Thus, children of the Indian estate workforce were the least catered for despite the existence of the Labour Code 1923, where management was required to provide schools when the number of pupils exceeded 10. This is because such schools lacked qualified teachers and attendance was purely optional.

Average expenditure on health was 10% and 6-8% of total expenditure between 1919 and 1938 in the Straits Settlement and FMS respectively. However, it is crucial to note that this figure is not an absolute indication of the health standards as there is evidence that the poorest and least-developed states such as Kelantan were amongst the healthiest. Reasons for this were believed to be that due to the sparse population and fewer disturbances in natural conditions from agriculture and mining, risks of widespread diseases were reduced.

There was significant growth of a plural society in the 1920s. However, as the Great Depression came to an end, so did unrestricted immigration. The Aliens Ordinance 1932 was implemented in Malaya whereby a quota system was imposed on immigration of all adult males, excluding British nationals and British-protected persons. The stance taken in Borneo territories was similar. Alternatively, unrestricted immigration of women was promoted to reduce gender imbalance. Hereafter, natural increase was the prime factor of population growth.


During World War II, the Japanese invaded Malaya and defeated the British. This period can be categorised into 4 broad stages, ie (i). 1942: Reconstruction, (ii). 1943: Peak, (iii). 1944: Degeneration of conditions, and (iv). 1945: Continuous deterioration of conditions.

Import-substitution policies were adopted and controls were imposed on almost all aspects of economic activity, ie the Japanese assumed all aspects of the economy. Imports of rice were significantly reduced from 600,000 tonnes annually during the pre-war period to 168,000 tonnes annually from 1942-3. Supply of rice was imbalanced in states because states with surplus were prohibited from exporting to other states and people in deficit areas were prohibited from moving northwards.

The "scorched-earth policy" adopted when the British retreated from Malaya made reconstruction efforts necessary. However, restoration of export production was modest. Output of iron ore and coal peaked in 1943 and fell thereafter. Patterns in tin, oil and rubber industries were comparable. There was redistribution of labour during this period whereby Indian estate workers and Chinese miners in Malaya were conscripted to work on the Burma-Thai railway. The fact that the labour was distributed to areas unrelated to economic production contributed to the dislocation of former export economies.

Japanese rule had 2 contrary effects on the ethnic division. On the one hand, it heightened ethnic division by treating the Chinese brutally, while maintaining better relations with indigenous groups. On the other hand, scarcity of labour led to the blurring of ethnic divide through occupation.

Losses substantially outweighed any gains made during this period. The migrant communities were especially adversely affected. The Chinese were coerced into making "contributions" to the Japanese and virtually all the Chinese and Indian banks were forced to liquidate. Assets were then appropriated to Japanese banks.

Generally, living conditions deteriorated significantly during this period. Starvation occurred and incidence of beri-beri escalated. Rising inflation, coupled with a shortfall in food supplies against official allowances, impelled people into the black market.


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