Economy

Economic History

The Malay Peninsula and indeed Southeast Asia has been a centre of trade for centuries. Various items such as porcelain and spice were actively traded even before Malacca and Singapore rose to prominence.

In the 17th century, large deposits of tin were found in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were introduced for commercial purposes. Over time, Malaya became the world's largest major producer of tin, rubber and palm oil. These three commodities, along with other raw materials, firmly set Malaysia's economic tempo well into the mid-20th century.

As Malaya moved towards independence, the government began implementing economic five-year plans, beginning with the First Malayan Five Year Plan in 1955. Upon the establishment of Malaysia, the plans were re-titled and renumbered, beginning with the First Malaysia Plan in 1965.

In 1970s, Malaysia began to imitate the footsteps of the original four Asian Tigers and committed itself to a transition from being reliant on mining and agriculture to an economy that depends more on manufacturing. With Japanese investment, heavy industries flourished and in a matter of years, Malaysian exports became the country's primary growth engine. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s.

During the same period, the government tried to eradicate poverty with the controversial New Economic Policy (NEP), after the May 13 Incident of racial rioting in 1969. Its main objective was the elimination of the association of race with economic function, and the first five-year plan to begin implementing the NEP was the Second Malaysia Plan. The success or failure of the NEP is the subject of much debate, although it was officially retired in 1990 and replaced by the National Development Policy (NDP).

The rapid economic boom led to a variety of supply problems, however. Labour shortages soon resulted in an influx of millions of foreign workers, many illegal. Cash-rich PLCs and consortiums of banks eager to benefit from increased and rapid development began large infrastructure projects. This all ended when the Asian Financial Crisis hit in the fall of 1997, delivering a massive shock to Malaysia's economy.

As with other countries affected by the crisis, there was speculative short-selling of the Malaysian currency, the ringgit. Foreign direct investment fell at an alarming rate and, as capital flowed out of the country, the value of the ringgit dropped from MYR 2.50 per USD to, at one point, MYR 4.80 per USD. The Kuala Lumpur Stock Exchange's composite index plummeted from approximately 1300 points to nearly merely 400 points in a matter of weeks. After the controversial sacking of finance minister Anwar Ibrahim, a National Economic Action Council was formed to deal with the monetary crisis. Bank Negara imposed capital controls and pegged the Malaysian ringgit at 3.80 to the US dollar. Malaysia refused economic aid packages from the International Monetary Fund (IMF) and the World Bank, however, surprising many analysts.

Rejuvenation of the economy coincided with massive government spending and budget deficits in the years that followed the crisis. Later, Malaysia enjoyed faster economic recovery compared to its neighbours. In many ways, however, the country has yet to recover to the levels of the pre-crisis era.

While the pace of development today is not as rapid, it is seen to be more sustainable. Although the controls and economic housekeeping may not have been the principal reason for recovery, there is no doubt that the banking sector has become more resilient to external shocks. The current account has also settled into a structural surplus, providing a cushion to capital flight. Asset prices are now a fraction of their pre-crisis heights.

Natural Resources

Malaysia is well-endowed with natural resources in areas such as agriculture, forestry as well as minerals. In terms of agriculture, Malaysia is the world's primary exporter of natural rubber and palm oil, which together with saw logs and sawn timber, cocoa, pepper, pineapple and tobacco dominate the growth of the sector. Palm oil is also a major foreign exchange earner.

Regarding forestry resources, it is noted that logging only began to make a substantial contribution to the economy during the nineteenth century. Today an estimated 59% of Malaysia remains forested. The rapid expansion of the timber industry, particularly after the 1960s, has brought about a serious erosion problem in the country's forest resources. However, in line with the Government's commitment to protect the environment and the ecological system, forestry resources are being managed on a sustainable basis and accordingly the rate of tree felling has been on the decline.

In addition, substantial areas are being silviculturally treated and reforestation of degraded forest land is also being carried out. The Malaysian government provide plans for the enrichment of some 312.30 square kilometres (120.5 sq mi) of land with rattan under natural forest conditions and in rubber plantations as an intercrop. To further enrich forest resources, fast-growing timber species such as meranti tembaga, merawan and sesenduk are also being planted. At the same time, the cultivation of high-value trees like teak and other trees for pulp and paper are also encouraged. Rubber, once the mainstay of the Malaysian economy, has been largely replaced by oil palm as Malaysia's leading agricultural export.

Tin and petroleum are the two main mineral resources that are of major significance in the Malaysian economy. Malaysia was once the world's largest producer of tin until the collapse of the tin market in the early 1980s. In the 19th and 20th century, tin played a predominant role in the Malaysian economy. It was only in 1972 that petroleum and natural gas took over from tin as the mainstay of the mining sector. Meanwhile, the contribution by tin has declined. Petroleum and natural gas which were discovered in oilfields offshore Sabah, Sarawak and Terengganu have contributed much to the Malaysian economy particularly in those three states. Other minerals of some importance or significance include copper, gold, bauxite, iron-ore and coal together with industrial minerals like clay, kaolin, silica, limestone, barite, phosphates and dimension stones such as granite as well as marble blocks and slabs. Small quantities of gold are produced.

In 2004, Minister in the Prime Minister's Department, Datuk Mustapa Mohamed, revealed that Malaysia's oil reserves stood at 4.84 billion barrels while natural gas reserves increased to 89 trillion cubic feet (2,500 km³). This was an increase of 7.2%.

The government estimates that at current production rates Malaysia will be able to produce oil up to 18 years and gas for 35 years. In 2004 Malaysia is ranked 24th in terms of world oil reserves and 13th for gas. 56% of the oil reserves exist in the Peninsula while 19% exist in East Malaysia. The government collects oil royalties of which 5% are passed to the states and the rest retained by the federal government.

Economy

Economic History

Natural Resources

Facts and Figures