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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : 1920 - 1941


This special series provides in-depth insights into the history of the Malaysian economy from early 19th century onwards. Discussion on the period prior to the 1920s would be relatively brief as its main purpose is to provide a general idea of the economic conditions faced before full-fledged, systematic economic development began. Prior to discussion on each phase of economic development, the coinciding political situation is outlined as politics and economics are often intertwined. Nevertheless, historically, this relationship has been subtle and complex.

[A]. PERIOD: 1800- 1920
It is crucial to note that few of the developments that occurred during this period were a result of deliberate policies. Often, major developments were a result of international developments that "accidentally" led to domestic changes. In particular, though to a smaller extent in Borneo territories, the tin and rubber booms had far reaching effects on economic progress of Malaysia.

[1]. Political Structure
Throughout the bulk of this period, 1821-1909, the northern states of Malaya (Perlis, Kedah, Terrenganu and Kelantan) were conquered by the Siamese and thereafter transferred over to the British through the Anglo-Siamese Treaty of 1909 aka Bangkok Treaty 1909. There was rarely any form of systematic economic development during this period due to political instability.

Between 1821 and 1841, states were under direct rule from Bangkok. During this period, conditions in the northern states were dismal, mainly because of the Siamese invasion. Furthermore, internal disturbances such as floods and droughts only induced further deterioration.

Subsequently, there was an accession of strong rulers who effectively centralised power and controlled district chiefs who were put in place by Bangkok as their own appointees were appointed. It was only during this period that Sultans influenced the direction of economic development. Roads and canals were built to encourage re-opening of rice lands. Also, the Chinese were encouraged to engage in cash cropping of tapioca, pepper, sugar, coffee and tin mining. These efforts achieved much success since the states, which were initially described as depopulated wastelands prior to reforms, were flourishing by the 1870s.

However, this success was relatively short-lived as successors to the throne fell short of the necessary calibre. Since Sultans drew no distinction between private and public income, state indebtedness increased. As a result of financial problems encountered, the British seized this opportunity to pressure states to appoint a Financial Adviser and a General Adviser. The rationale given was that future financial viability of states was threatened by the Sultans' extravagant spending habits. Though in theory, "Sultans still ruled, but subject to British advice", there were more elements of fiction than truth in this statement. Moreover, with the establishment of Federated Malay States (FMS), new layers of bureaucracy emerged, removing Malay rulers further from any real exercise of power. This had far reaching implications since it was not until Malaya gained independence in 1957 that she was free from the British colonial rule.

As for states such as Penang and Malacca, they became part of the Straits Settlements under the British Administration in India in 1826, moving to direct colonial rule in 1867 until they gained independence in 1957.

The pattern of political structure was similar in the other states as well, whereby they were subject to the rule of foreign parties until independence was achieved in 1957.

[2]. Economic Structure
The principle force behind the transition to modern trade was the industrial boom in Europe. This stimulated demand for raw materials such as tin. Table 1 below illustrates the implications of international trade on Malaya (figures include trade in Borneo territories).

Table 1 (All in Thousands of Straits $)

Before 1875, terms of trade were deteriorating due to rising import prices accompanied by stagnating export prices. However, as illustrated in Table 1, this situation improved thereafter resulting from the tin and rubber booms.

Growth in rubber production was fuelled by growth in demand from Western automobile industry after 1900, particularly from the US. Since most Malayan states were well endowed with natural resources and the appropriate conditions for rubber plantation, it was well positioned to seize the benefits from this surge in demand. Hence, planters were quick to abandon existing crops in favour of rubber. In 1910, 225,000 hectares were planted. By 1921, this had grown to 891,000 hectares, or 53% of total area in South and Southeast Asia.

Table 2 below shows the per capita output of tin for selected years between 1835 and 1911. Empirical evidence here illustrates the increasing importance of the tin industry.

Table 2: Per capita Output of Tin for Selected Years

The booms in tin and rubber along with policies implemented by the British have significant implications on Malaysia's social structure (and divide) of a pluralistic society that exists today. Chinese and Indian immigrants provided crucial sources of labour for tin and rubber industries respectively. Net migration of Chinese more than doubled between 1881 and 1893 from 90,000 to 214,000. Similarly, the number of Indian migrants soared from approximately 22,000 in 1908 to 91,000 in 1913. This is because economic activities of the indigenous and Malays were focussed mainly on subsistence economy. Table 3 below compares the racial composition in 1835 with that in 1911.

Table 3

3]. Infrastructure

With respect to infrastructure, major tin mining states experienced major improvements in transportation to ensure that increase in tin output found its way to ports with the least delay. Here, footpaths and bridlepaths were upgraded into bullock cart tracks, resulting in large reductions in carrying costs. Further improvements were made when pioneer lines were opened to connect mining centres to the nearest port.

Similarly, the communications system expanded. Total wire mileage grew from approximately 2,900 to 26,450 kilometres between 1903 and 1925.

Formal monetary system
In terms of the development of a proper monetary system, a Straits Currency Committee decided in favour of a silver dollar linked to gold at a fixed exchange rate in 1903. This system took some 3 years (until 1906) to be fully implemented. The rate was fixed at 2s. 4d. sterling (12p), and this value was maintained until 1967. From 1908 - 1909, the metropolitan government insisted that all gold reserves be held in London, whereby holdings of sterling securities were 110% of all issues of Straits currency. Therefore, the Straits currency was on a gold exchange standard until 1931, when Britain abandoned the gold standard. Thereafter, a sterling exchange standard was adopted until 1967.

This system benefited Malaya tremendously because: [1]. she was spared the expense of setting up and operating an independent monetary system; [2]. linkage to the sterling gave rise to exchange rate stability, which benefited trade and increased attraction to international investors; and [3]. it provided a built-in mechanism to control inflation.

However, these benefits were not without costs. Some of the disadvantages were that the colonial government could not utilise monetary policy to stabilise local economic conditions; the requirement to maintain reserves of 110% in London locked up funds that otherwise could have been used for social development; and states were obliged to raise external loans at interest rates higher than returns earned on funds locked up.

[4]. Implications of Economic Development on Welfare
There is no doubt that the emergence of the colonial export economy from tin and rubber booms led to economic growth. However, the extent to which respective groups gained differed. Prior to the boom, material inequality existed between the common people and the elite, and among the former, freemen and slaves. From the 1880s onwards, debt slavery was progressively abolished. Initially, this worsened ex-slaves' welfare as their former owners were no longer obligated to house and feed them. As for former district chiefs, they had lost much of their former income by the end of the 19th century.

Though rubber growing was profitable, indigenous Malays did not experience absolute gain since previous activities such as traditional handicrafts were given up. It was non-indigenous groups, particularly the Europeans, who had the most control over productive assets, who were the principle gainers. In 1921, the average acreage size owned by the Europeans was 520 hectares versus 140 hectares for the Chinese-owned estates but more importantly was that 75 - 80% of the total Malayan estate acreage was owned by Europeans while the remaining was owned by the Chinese.

As for the labourers in tin and rubber industries, their well-being varied according to fluctuations in wage rates. Tables 4 and 5 below illustrate the extent to which monthly wages fluctuated in tin and rubber industries respectively.

Table 4 : Wages of workers in the tin industry

Table 5 : Wages of workers in the rubber industry

Generally, the rise in wages was less than proportionate to the rise in productivity because the ample supply of labour from China and India assisted in keeping upward pressure on wages in check. Cost of living during this period remained relatively stable until cost of imported rice tripled in 1920 due to poor harvests and speculative buying. According to the Controller of Labour, Penang, the general cost of living had risen more in 1919 alone than the previous 4 years, whilst wages were only 30 - 40% above 1914 levels. Hence, during this period, the welfare of Chinese and Indian immigrants deteriorated.

Conversely, while it appears that welfare of most groups deteriorated during this period, real GDP per capita rose. Therefore, it is virtually impossible to gauge the exact gains and losses of each group arising from changes in economic structure.


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