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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1945 - 1963



Political Structure
Although the British resumed their authority after 1945, the Japanese invasion shattered Western colonial supremacy and unleashed the forces of incipient nationalism. Hence, they were forced to adapt according to the events that unravelled. Table 10 below shows the chronology of events from 1946 until independence was obtained in 1957.

Table 10: Chronology of Events (1946-57)

Economic Structure

1946-49: Reconstruction
As aforementioned, Japanese occupation left local conditions in a state of devastation. Hence, from Aug 1945 to Mar 1946, the British Military Administration (BMA) was given the task to restore basic civilian life. However, efforts failed miserably, as domestic rice production only regained pre-war levels in 1948. Furthermore, despite demonetisation of the Japanese banana currency, inflation persisted as the BMA circulated notes amounting to 80% above the pre-war issue.

Export Industries: Rubber and Tin
To restore the mining industry, a disbursement of $78.5 mln was made in loans to tin miners, of which two-thirds went to European companies. The effects in this case were modest. In 1949, tin output remained at a mere two-thirds of pre-war levels.

Alternatively, the rubber industry recovered relatively quickly. By 1947, output had surpassed that in 1940. Smallholders who effectively mobilised household labour were more efficient than estates. In 1948, earnings hit its highest since 1926 at $754 mln. Overall, the territories enjoyed trade surpluses from 1947-49.

Apart from reconstruction efforts, contribution of the British government from a financial standpoint was modest. The Malayan government was forced to rely on domestic sources of funds such as indirect taxes from imports and exports, and income tax (though in the face of strong opposition initially). This was because the British Capital Issues Committee refused to grant permission for a $200 mln loan to be floated on the London capital market to fund reconstruction. Hence, a $60 mln loan had to be floated locally.

By and large, the effects of the economic structure that existed during the colonial export period overflowed into this period as immigrants remained in their respective economic activities. The underlying problem here was that disparities in income levels due to varying sources of income led to ethnic divisions. The long-term repercussions of ethnic divisions are discussed in the following sections. Table 11 below demonstrates the extent of income disparities.

Table 11: Income per capita and sources of income

1950-63: Growth Resumes

Economic Development
Economic growth remained highly dependent on the export of a narrow range of primary commodities, namely, rubber, tin and palm oil in Malaya, and timber in Borneo Territories. Although problems associated with this over-reliance were becoming increasingly apparent, diversification efforts to other industries such as manufacturing did not immediately begin. The agricultural sector remained the basis for substantial gains, as development schemes came to fruition and provided the necessary platform for the transition to industrial growth in the latter years.

In Malaya, the Draft Development Plan (1950-55), 1st Malaya Plan (1956-60) and 2nd Malaya Plan (1961-55) were formulated to pilot economic development. Interventionist efforts adopted by the governments of Borneo territories were comparable.

It is crucial to note that growth in exports was extremely vulnerable to fluctuations in prices because of the high degree of dependency on primary exports. Unfortunately, price levels are more often than not, volatile. Although this period began with surging prices, this boom was short-lived. As prices nose-dived, exports stagnated throughout the decade until rubber prices rose again in 1959-60. Table 12 shows the increment in planted area and production levels in Malaya.

Table 12 : Rubber - Area Planted & Production

It was becoming increasingly challenging to survive, let alone excel in the rubber industry as competitive pressures intensified. Indonesia had emerged as a formidable low-cost competitor and synthetic rubber had achieved notable improvements in quality, making it comparable to natural rubber. Therefore, reforms were crucial for survival.

However, the problem here was that while new, higher-yielding trees were essential to reduce the average cost of production, most producers could ill-afford the seven-year loss in revenue that cutting down old trees entailed. Therefore, government intervention was sought to provide the necessary assistance and by 1965, half of the Malayan smallholding area had been replanted.

Other problems included shortage of land. Hence, the Federal Land Development Authority (FELDA) was established in 1956. Large blocks of virgin land were opened up in less developed areas, divided, and then allotted to families (mainly Malay). Services provided by FELDA included provision of financial services, housing, planting materials and technical advice. Under the 2nd Malaya Plan, similar schemes were utilised for general land development.

Oil Palm
Oil palm was becoming an increasingly popular crop as it provided relatively better returns compared with rubber (3-year maturity period against 7 years for rubber). The empirical evidence is illustrated in Table 13 below.

Table 13: Oil Palm - Area Planted & Production

Naturally, as oil palm gained popularity, competition for land between crops began. FELDA schemes were also utilised here to mobilise land resources. By the early 60s, Malaya's output accounted for 20% of world demand.

By and large, rice remained a subsistence crop during this period. However, since there was a desire to promote a higher level of self-sufficiency, the government undertook several measures to encourage rice planting. These measures included : (i) the continuation of programmes that started in the 1930s aimed at making existing land conditions more conducive for paddy planting, as well as extending land area for cultivation; (ii) the initiation of irrigation schemes in Kedah (Muda irrigation scheme) and Kelantan (Kemubu irrigation scheme); and (iii) the implementation of a generous floor price for rice.

As a result of government efforts, there was a notable increase in total planted area and production of rice, as shown in Table 14. Additionally, self-sufficiency in Malaya increased by approximately 23% from 40% in the 1930s to 63% by 1960.

Table 14: Rice - Area Planted & Production

Infrastructure Development
Although the economy constantly experienced trade surplus, there was pressing need for increased independence. A survey by the International Bank for Reconstruction and Development (IBRD) revealed that under the Currency Board System, growth of counter-cyclical domestic activities was inhibited, as it made long-term capital difficult to raise. This was due to the over-reliance on export earnings for sources of funds. Hence, the IBRD concluded that domestic financial facilities were necessary.

Infrastructure received the largest allocation of funds, ie 46.1% and 47.9% of total funds under the 1st and 2nd Malaya Plans respectively. A comparable degree of attention was received in Borneo territories.

Population, Employment & Living Standards
Between 1947 and 1960, the population grew by 42% from 5.79 mln to 8.22 mln, ie approximately 3% annually. There was a corresponding expansion in the labour force between 1947 and 1962 of almost 23%, ie approximately 1.5% annually. Hence, the growth in the labour force lagged behind population growth. This situation was induced by the capital-intensive nature of the import-substitution industries. In 1957, the official unemployment rate was 2% and subsequently rose to 6% in 1962. However, actual unemployment was estimated at 9% in the early 60s.

As for living standards, empirical evidence indicates that overall living standards improved, especially after the Korean War. This can be attributed to the rise in nominal wages (outpacing productivity growth) as labour unions amalgamated, leading to higher bargaining power amongst labourers. Moreover, during the Korean War boom, daily wage rates for the unskilled, semi-skilled and skilled workers rose 75%, 100% and 140% respectively and remained at high levels until the mid-50s. Alternatively, post-Korean War, the cost of living fell.

Review of the Malaya Development Plans
As aforementioned, there were three 5-year development plans. This section provides a brief overview of the degree of success achieved.

The Draft Development Plan fell far short of targets. Actual expenditure was only 80% of planned expenditure. Lack of expenditure on much needed education (45% lower than planned expenditure) was the main culprit for this shortfall. This plan was said to be 'little more than a collection of disconnected, disorganised schemes'.

The performances of the 1st & 2nd Development Plans were distinctly better at 88% and 123% of planned expenditure respectively mainly due to a more sophisticated planning bureaucracy.



MEH: 1957-1970 (Pt1)>>