Growth, Distribution and the NEP in Malaysia

Jomo Kwame Sundaram

Malaysia Forum, 4 April 2010,

Columbia University

Malaysian Development

5 phases:1957-1969: laissez faire, import substitution, rural

development, growing unemployment

1970-1980: NEP, X industrialization, petroleum

1981-1985: Look East, heavy industry

1986-1997: ‘liberalization’, X industrialization2, bank

crisis BAFIA, sterling losses, 1984 K

controls, endaka end 1997-98 Asian

crisis

1998-2010: state sustains growth

1957-1969

• ISI: tariffs, MIEL: industrial zones,

MIDF

• FDI guarantees

• Rural devt: Razak v Aziz Ishak

• Malaysian common market

• Affirmative action: SEDCs; Bumi

economic congress, Bank Bumi, MTI

1970-1980• ISI EOI: Industrial Incentives Act, L

law reform, FTZs female workers

• May 1969: rejection of Alliance palace

coup BN

• Increased unemployment + inequality

ethnic perceptions redistribution

• NEP 1975 ICA; Oil 1974 PDA

fiscal space public investments

1981-1985: Mahathir 1

• Heavy industrialization (ISI2)

• Look East: Labour policy

• Volcker International economic

slowdown

• Isi penuh (full employment)

jimat cermat (austerity)

1986-1997: Mahathir 2• Privatization + contracting out

• partial educational + economic

liberalization

• 1986 Promotion of Investments Act

• Financial crisis Banking crisis

1989 BAFIA

• EOI2 boom

1998-2010: M3 A N

• 1997-98 crisis greater public

consumption, investments

• Private investments down, FDI

down

• Neglect of technology policy

• Renewed financial liberalization

despite global financial crisis!

Lessons

• Prioritize real economy, not

finance

• Nationalist vs ethno-populist

• Pragmatism, not dogma

• Distribution outcome of

contention, rent-seeking

Growth highest during 1971-96 (NEP, M1)

Real Per Capital GDP and its Annual Growth Rates

1960-1995

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

196

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

RM $

(1978 prices)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

% Growth

GDP % Growth

Per Cap GDP

% Growth

Per Cap. GDP $

Alliance Phase N E P Phase Econ Liberalisation

Gross domestic product

by sector, 1970-20061970 1980 1990 2000 2006

Agric. & Forestry 29.0 22.9 18.7 8.7 7.9

Mining & quarrying 13.7 10.1 9.8 6.3 8.8

Manufacturing 13.9 19.6 26.9 33.4 31.1

Construction 3.8 4.6 3.6 3.3 3.1

Services 36.2 40.1 41.9 52.4 51.8

Output by sector, 1970-2008

Export composition, 1960-2000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1970 1980 1990 1995 2000

Manufactures

Others

Oil & Gas

Tin

Timber

Palm Oil

Rubber

Rubber

Manufacture

Oil & Gas

Tin

Timber

Palm Oil

Per capita national income, 1970-2007

Population by location,

1957-2005 (%)

1957 1970 1980 1990 2000 2005

Rural 91.0 71.2 62.5 45.3 38.1 37.0

Urban 19.0 28.8 37.5 54.7 61.9 63.0

Employment by sector,

1970-2006 (%)1970 1980 1990 2000 2006

Agric. & Forestry 53.5 39.7 26.0 20.0 12.5

Mining & quarrying 2.6 1.7 0.5 0.5 0.4

Manufacturing 8.7 15.7 19.9 23.9 29.1

Construction 2.7 5.6 6.3 7.4 6.8

Services 32.5 37.4 47.3 48.2 51.3

Sectoral employment change, 1970-2005

1970

-75

1976

-80

1980

-85

1985

-90

1990

-95

1996-

2000

2000

-05

Agriculture &

forestry7.4 0.2 2.2 4.4 -17.8 -5.7 -1.2

Mining &

quarrying1.4 -9.5 -24.5 -11.9 10.0 1.7 2.4

Manufacturing 107.0 21.2 9.7 50.6 53.9 26.2 22.1

Construction 126.4 31.2 40.2 -0.6 55.5 5.3 1.0

Services 42.9 16.1 -19.9 -16.2 15.6 -17.5 -19.1

Total 31.0 10.1 13.5 17.7 18.4 15.9 17.5

Poverty trends,1970-2007

1970 1990 1999 2007

Total 49.3 16.5 7.5 3.6

Rural 58.6 21.1 12.4 7.1

Urban 24.6 7.1 3.4 2.0

Poorest - 3.9 1.4 0.7

Poverty (b), Gini (r), 1970-2007

Employment status, 1957-2005

1957 1980 2005

Employer

35.03.8 3.4

Own account worker 27.0 16.6

Employee 56.7 58.3 75.7

Unpaid family worker 8.3 11.0 4.5

Ethnic household

income ratio, 1970-19871970 1973 1976 1979 1984 1987

Chinese/Malay 2.29 2.21 2.28 1.91 1.76 1.65

Chinese/Indian 1.30 1.31 1.46 1.24 1.37 1.31

Indian/Malay 1.77 1.69 1.56 1.54 1.28 1.25

Urban/Rural 2.14 2.12 2.12 1.77 1.87 1.72

Occupations by Ethnicity, 1970-2005 (%)

1970 2005

Bumi Chin Ind Bumi Chin Ind

Managers 24.1 62.9 7.8 37.1 55.1 7.1

Professionals 47.0 39.5 10.8 58.5 31.7 8.2

Technicians - - - - 29.7 59.5

Clerical 35.4 45.9 17.2 56.7 34.3 8.4

Services 44.3 39.6 14.6 51.5 39.6 8.0

Sales 26.7 61.7 11.1 - - -

Agriculture 72.0 17.3 9.7 80.8 11.3 4.3

Crafts & Trades - - - 46.0 44.6 8.2

Production 34.2 55.9 9.6 60.4 24.8 12.9

Elementary - - - 54.4 25.2 14.7

Total 51.8 36.6 10.6 56.4 32.5 9.1

Employment Status By Ethnicity, 1957 (%)

Malays Chinese Indians Others Total

Employer and own

account worker

18.9 28.3 9.8 14.5 35.0

(66.1) (28.8) (4.1) (1.1)

Unpaid family

worker

14.1 4.2 0.5 4.1 8.3

(80.0) (17.8) (0.9) (1.3)

Employee37.8 67.6 89.6 81.4 56.7

(30.8) (42.5) (22.9) (3.7)

In employment (47.3) (35.7) (14.5) (2.6)

Employment Status By Ethnicity, 1980 (%)

Malays Chinese Indians Others Total

Employer2.6 5.8 4.6 4.1 4.0

(35.5) (51.5) (12.3) (0.7)

Own account worker32.9 24.7 8.3 32.1 27.4

(64.5) (31.5) (3.2) (0.8)

Unpaid family worker9.2 5.4 3.3 10.1 7.3

(67.9) (26.2) (4.9) (1.0)

Employee55.2 64.1 83.8 53.8 61.4

(48.3) (36.5) (14.6) (0.6)

In employment (53.6) (35.0) (10.7) (0.7)

Employment Status By Ethnicity, 2007 (%)

Bumiputera Chinese Indians Others Total

Employer2.2 7.5 3.3 0.7 3.4

(41.7) (54.3) (6.7) (0.2)

Own account worker19.9 16.7 10.0 10.8 17.4

(76.0) (24.0) (4.1) (0.6)

Unpaid family worker5.7 5.2 2.2 2.1 4.9

(76.3) (26.2) (3.1) (0.4)

Employee72.2 20.6 84.6 84.6 74.2

(65.0) (23.9) (8.1) (1.1)

In employment (66.7) (25.1) (7.1) (1.0)

Ethnic ownership of share

capital, 1970-2006 (%)

1970 1985 1990 2006

Bumiputera 2.4 19.1 19.3 19.4

Chinese 27.2 33.4 45.5 42.4

Indians 1.0 1.2 1.0 1.1

Foreigners 63.4 26.0 25.4 32.5

Bumiputera ownership of

share capital, 1970-2006 %1970 1985 1990 2000 2006

Total 2.4 19.1 19.3 18.9 19.4

Individuals 1.6 11.7 14.2 14.2 15.1

Institutions0.8 7.4 5.1

3.0 2.6

Trust agencies 1.7 1.7

Post-crisis investment collapse

28

Private investment down, govt investment up

Private consumption flat, government spending up

Pvt Consumption Gov Expenditure Investment

Average Growth % in GDP Demand Components

Pre Crisis Post Crisis

29

30Pvt Consumption Gov Expenditure Investment

% Share of Demand Components to GDP Growth

Pre Crisis Post Crisis

Consumption engine of growth

Key interest rates lowBefore After

US 16 Dec 1.0 0 to 0.25

ECB 5 Dec 3.25 2.5

UK 8 Jan 2.0 1.5

Japan 19 Dec 0.3 0.1

China (1year lending rate)

23 Dec 5.58 5.31

Malaysia (Overnight policy rate)

21 Jan 3.25 2.5

Stimulus package delay slows recovery (% GDP)

1st stimulus 2nd

US 1.1% 6.0%

EU 1.5%

Japan 2.5% 5.8%

China 18.0%

S. Korea 1.1% 4.0%

Singapore 8.5%

Malaysia 1.1%

Growth v redistribution?• Per capita growth highest during 1971-1984

• Fiscally sustained (oil fiscal space)

• After 1984, reduced fiscal space

• Exchange rate 1988-1997 high growth

• Weak indus. invt finance dominant

partial liberalization 1997-98 Asian crisis

• Slower growth sustained by govt spending,

fiscally unsustainable

• Stimulus delay weak recovery, jobs 4 boys

• Ethnic patronage problem, not redistribution

4,500 SINGAPOREANS HEADING FOR NEW ZEALAND Star Mar 27, 2010As a new population of foreigners settles in, many of Singapore ’s own defence-trained talents are moving abroad. By Seah Chiang Nee.

WHILE Singapore is busy attracting talents from abroad, some 4,500 of its own better-educated citizens may be heading for New Zealand.

Such a large number has come as a surprise for two reasons. One is that the New Zealand is not even a top choice and, secondly, Singapore is said to be recovering from the economic crisis.

In 2002, Singapore was ranked as having the second highest migration rate in the world (next to East Timor) – 26.11 migrants per 1,000 citizens.

This would have meant that some 20,640 of its 3 million people were emigrating at the time.

As I was writing this, a news headline read: “Singapore retains its top spot for Asian expats to live in.” While hundreds of thousands of foreigners are making a beeline for Singapore, an opposite flow is also happening.

The outflow of people has long upset leaders

like its founding leader Lee Kuan Yew, who once openly wept when he spoke about the subject.

Almost one in four top students in Singapore end up working overseas, said Prime Minister Lee Hsien Loong.

Some Malaysians are puzzled by this phenomenon.

Critics say there are several reasons for the exodus, including high stress level, a high cost of living (one of the world’s 10 most expensive cities), over-crowdedness and too much government control.

37

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Acknowledgements: UN-DESA