Malaysia – A successful strategy of industrialisation

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DIIS Seminar Series on
State-Business Relations and
Economic Development, Spring 2011

Development coalitions, foreign
business and industrial policy in
Malaysia.

By Peter Wad, DICM/CBDS, CBS
Agenda
Long waves of economic development:
Income-traps and trap-bypassing.
Industrial diversification, deepening and upgrading.
Long waves of political development:
Building state, nation, participation, welfare.
The politics of industrialisation:
Development coalitions, foreign capital and industrial
policy.
New Economic Model 2010-2020:
A paradigme shift of economic strategy?
State-business relations, ’Varieties of Capitalism’
and ’Industrial Relations’:
The case of Malaysia.
Conclusion
Long waves of economic development
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development
(Source: Yusuf & Nabeshima (2009) Tiger Economies under Threat.
Washington:WB)
Long waves of economic development
Income-traps: Malaysia’s GNI/capita
and overall poverty.
Low-income trap: Malaysia 1960s-1970s?
• Incidence of poverty 1970: 49%; 1980: 29%
Middle-income trap: Malaysia 2000s?
• GNI USD/capita: 2000: 3,450; 2009:7,350
• Incidence of poverty: 2004: 6%; 2009: 4%.
High-income trap: Not a trap, a ’Vision
2020’ in Malaysia. A trap of welfare state?
Long waves of economic development
Industrialisation:
conceived as industrial diversification, deepening
and upgrading (Lauridsen 2008).
Strategic industrial policy aims for improving all
aspects.

Industrial diversification in Malaysia:
Declining importance of agriculture, yet still
important export items (e.g. palm oil).
Important oil industry.
Manufacturing dominates export.
Services increasingly important.
Long waves of economic development:
Industrial diversification
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development:
Industrial diversification
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development:
Industrial deepening
(Source:Furby (2005) Evaluating the Malaysian EPZs. Lund: LU)
Long waves of economic development:
Industrial deepening
(Source: IMP3)

Industrial cluster development:
Penang: Electronics (semiconductors).
Shah Alam/Klang Valley: Automotive.
Kerteh, East of Peninsular Malaysia:
Petrochemicals.
Muar, Johore: Furniture.
Batu Bahat, Johore: Textile & apperal.
Subang, Selangore: Airospace.
Long waves of economic development:
Industrial deepening
(Source: Rasiah 2002, 2003)
Industrial clusters require:
Human capital formation (education, training).
Enabling environment for entrepreneurship.
En integrated business network of TNCs, local
firms, business associations, politicians, local
community.
Success:
Penang semiconductor industry (foreign TNCs, local
machine tool suppliers).
Penang Skill Development Centre (PSDC) is a model
for regional networking.
Failure:
The Multimedia Super Corridor (MSC), KL, in IT – so
far a failure.
Long waves of economic development:
Industrial upgrading
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development:
Industrial upgrading
(Source: Yusuf & Nabeshima (2009)
Long waves of political development:
Political development theory (Source:Burnell & Randall 2005)
State building
Military and administrative structures established.
Malaysia: Independence 1957 under cross-ethnic elite coalition
(’Alliance’); Confederation 1963. Singapore excluded 1965.
Nation building
Political culture of national identity & loyalty.
Malaysia: Crisis 1969: Ethnic violence after defeat of ’Alliance’
government loosing control of some local states.
Participatory institution building
Institutions of political democracy & corporatism.
Malaysia: Semi-democracy; 1980s King/sultans clipped; crisis
2008 election gave opposition control of several local states.
Distributional institution building
Redistribution of wealth, welfare.
Malaysia: Affirmative policy for Bumiputera population 1971-
Conflicting development coalitions
(Source: Inspired by Stallings 1978)
Develop Ruling Oppositional
ment ‘Barisan Nasional’ core ‘Pakatan Rakyat’ core
model
UMNO MCA & MIC PKR PAS DAP
Gerakan
Ethno- Hegemon Political Minor Leading Influen- Less
class ic influence pol. Iifl. tial influent.
alliance
State bureaucracy, Secular urban middle layers &
Bumi/Chinese/Indian business workers, peasant smallholders,
elites, middle layers & workers, orthodox Muslims
moderate Muslims
Develop Bumi Protectio Protectio Reforma- Classic Secular
ment hegemo- n of elite n of elite si, HRs Islam populist/
ideology ny Chinese Indians (Justice) (rural) workers
Develop Bumi affirmative policy since Abandoning Bumi affirmative
ment 1971. ‘Vision 2020’ of 1991. policy, Human Rights, anti-
policy ‘New Economic Model’ 2010. corruption, local level
democracy.
Strategic Industrial Policy:
The stage model of industrialisation:
Classic International Division of Labour
Industrial Country: UK
I II III

Commodity Consumer Interm. goods Capital goods
goods
Developing Country: Malaysia 1950s-60s
Strategic Industrial Policy:
The stage model of industrialisation of NIDL –
Primary, Secondary &Tertiary ISI, EOI (DDE?)
Industrial Country: Global North
I II III

Primary Secondary (Tertiary?)

Commodity Consumer Interm. goods Capital goods
goods
Developing Country: Malaysia 1970s-2010
Industrial policies of specific industries
Ressource based industry: State acquisition in
1970s.
Capitalist nationalisation of plantations & institutional capitalism
(GLCs), increasing use of immigrant labour from 1980s.
Export diversification & deepening.
Development of sector innovation system.
Electronics industry: TNCs 1971-
FDI-led EOI expansion in EPZs (& FTZ/warehouses).
Low-cost, labour intensive industry. Anti-union policy.
Local linkages in Penang state, limited innovation.
Automotive industry: State-TNC alliance 1983-
2004.
State-driven national automotive industry (GLCs) with Jap.
technology
Captured and lost domestic market; export failure (CBU & parts).
Foreign TNCs acquire control; Proton in dire straits.
Malaysia’s industrialisation strategies
Main emphasis
Industrial diversification (incl. IMP1 1986-95):
Protectionism & Primary ISI 1957-1971
NEP-strategy & FDI-Primary/Secondary EOI 1971-1981.
State-NEP (SOEs) & Secondary ISI: 1981-1986.
Privatising-NEP & FDI-Secondary EOI: 1986-1991
Industrial deepening (IMP2 1996-2005):
Vision 2020 of 1991, privatising, industrial deepening &
upgrading aiming for tertiary ISI & EOI: 1991-1997.
Crisis and post-crisis governance: Re-nationalisation (GLCs)
& re-regulation 1997-2003.
Consolidation, priority of balanced regional development,
reduction of big development projects 2003-2009.
Industrial upgrading (IMP3 2006-2020):
Moving up the global value chain.
New Economic Model 2010-2020.
New Economic Model 2010-2020
(Source: NEAC 2009)
New Economic Model 2010-2020
(Source: EPU/PMD 2010)
New Economic Model 2010
(Source: NEAC 2010)
New Economic Model 2010
(Source: NEAC 2010)
The New Economic Model 2010-20
Source: NEAC 2010.
Issue Old approach New approach
1. Growth Growth primarily through Growth through
capital accumulation productivity
2. State-market Dominant state participation Private sector-led growth
in the economy
3. Planning Centralised strategic Localised autonomy in
planning decision-making
4. Geography Balanced regional growth Cluster- and corridor-
of growth based economic activities
5. Strategic Favour specific industries Favour technologically
industrial policy and firms capable industries and
firms
6. Export Export dependence on G-3 Asian and Middle East
orientation (US, Europe and Japan) orientation
markets
7. Labour Restrictions on foreign Retain and attract skilled
immigration skilled workers professionals
The New Economic Model 2010-20
(Source: EPU/PRD 2010).
Role of FDI in New Economic Model
Malaysia’s reliance on inward foreign direct investments was strong in
the past. FDI’s share of gross fixed capital formation was 14.4 percent
annual average 1995-2005, 21.2 percent in 2007, down to 16.8
percent in 2008 and then falling to 3.5 percent in 2009 (UNCTAD WIR
2010, country fact sheet Malaysia).
Inward FDI flows do seem to increase again in 2010 due to
“government’s planned efforts in the 10th Malaysian Plan, the NEM,
and GTP in attracting FDI flows (Rasiah & Govindaraju 2011, 6).
But Malaysia’s attractiveness as location for TNC operations relative to
its regional competitors has also weakened in recent years.
Malaysia may have changed to a net FDI exporter following the shift
from inward and outward FDI flows balancing in 2006 into a surplus
of USD 8 billion in outward FDI flow in 2008 (double the amount of
inward FDI flow).
A new and more balanced regime of accumulation will have to be
installed enabling the government to reconsider the pro-FDI policy of
low wages, low unionism and low labour participation in
manufacturing and especially in electronics.
Wage trends in East Asian developing
countries
(Source: Economist 2010-09-04)
Average salary increases based on positions for
executives and non-executives (1996-2005) (in %).
Source: MHR 2008, 32 (after MEF salary surveys). Note: (¤) average own calculations.

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996
2005
(¤)

Exec 8.70 9.20 6.18 5.75 7.27 7.03 6.05 5.97 5.89 5.91 6.80
u-
tive

Non- 8.10 8.58 6.22 6.00 6.80 6.68 5.89 5.66 5.26 5.69 6.49
exec
utive
NEM and labour market reforms
(NEAC 2010)
Policy purpose Possible policy measures
Re-skill the existing labour  Upgrade skills of the bottom segment of the Malaysian labour
force force through continuing training and education.
 Establish a labour safety-net for displaced workers.
 Industry to partner with government in encouraging
‘Contineous Employment Training’ (CET)
 Formalise international quality standards and certification of
skills.
 Allow wage levels to be reflective of the skill level.
Remove labour market  Protect workers, not jobs, through a stronger safety net, while
distortions constraining encouraging labour market flexibility.
wage growth
 Revise legal and institutional framework to facilitate hiring and
firing.
 Raise pay through productivity gains, not regulation of wages.
Reduce reliance on foreign  Enforce equal labour standards for local and foreign labour.
labour
 Use a levy system to achieve targets for unskilled foreign labour
in line with sectoral needs.
New Economic Model 2010
(Source: NEAC 2010)
State-business relations:
Evans’ transformation theory: The Korean case
Transformation of state-business relationships:
Phase 1 Phase 2 Phase 3 Phase 4

State Neo-dev.
Big state Big state state
Autonomy SMEs
Embeddedness Labour
Global
Big Global business
Small business business
business
Transformation theory of state-business
relations: The Malaysian case
(inspired by Bonn Juego, AAU)

Transformation of state-business relationships:
Phase 1 Phase 2 Phase 3 Phase 4?
(1957-69) (1990s-2000s)
Authoritarian
Developmen developmentalist Authoritarian
Small state talist state state Liberalism

Capital Capital
TNCs
GLCs,TNCs Social
Small & Bumi SMEs group
business & Social
foreign resource group
Small Chinese
exporters Small Chinese
business
business
Varieties of capitalism and IR:
LME, CME, HME and Malaysia
(inspired by Schneider, various articles)

LME CME HME (LA) Malaysia
Domestic Corporate Corporate Private Gov. Linked
business competition networking Conglome- Conglome-
structure
rates/PLCs rates/GLCs
Foreign High Medium High TNC High TNC
business presence presence in
presence
mfg
Organised Medium to High Weak Weak
labour weak
power
Workforce High High Low Low
qualification
Varieties of capitalism LME, CME, HME and
Developmentalist (D)ME (Malaysia 1971-2010)
LME CME HME (LA) DME
Malaysia 1971-2010
Domestic business Corporate Corporate networking Private Gov. Linked
structure competition conglomerates conglomerates
Foreign business High Medium Strong TNC presence Strong TNC presence
presence in mfg
Organised labour Medium High Weak Weak
power
Workforce High High Low Low
qualifications
Income inequality Medium Low High Medium

Redistribution Low/Medium Medium/High Low Selective high

State-market Market Mixed Market State

Political system Majoritarian PR president/PM; PR Majoritarian Majoritarian PM and
president/PM; legislature president with PR legislatures.
majoritarian/proporti legislatures Constitutional
onal legislature (Malay) monarchy
and Bumi affirmative
institutions
Varieties of capitalism & labour markets:
LME, CME, HME and Malaysia
Source: Schneider 2009, 562 (LME, CME, LA). Malaysia: Union density (own calculation); Job
tenure: MHR 2008, 28; Labour market regulation index: Botero et al. 2004, 1663 (Malaysia 1997);
Informal economy (percent of households surveyed 2006): DOS 2009.

LME CME HME (LA) Malaysia
Union 28 45 15 9
density (%)

Job tenure 5.0 7.4 3.0 3
(years)

Labour 1.0 1.4 1.8 0.6
market
regulation
index
Informal 13 17 40 14
economy
(percent)
Industrial relations: From ’high control’ to ’high
commitment’ system (source: Todd, Lansbury, Davis 2004)
Varieties of capitalism: Transition of
Malaysia to LME or CME
Liberal market Coordinated
market
High income LMEs CMEs
countries

Middle-income HMEs DMEs
countries

Low income Informal MEs ?
countries
Conclusion:
Malaysia - success and failure
Advantages: Drawbacks:
Sustained economic Dual economy
growth per capita. Low-tech industries
Sustained TNC & FDI
industrialisation. dependence
Poverty alleviation. Weak R&D
Political stability & Weak policy
semi-democratic implementation
political system.
Strong executive
Planning for power and weak
technological judiciary system.
transition.
Civil society exists,
Defending Third World but it is controlled or
interests suppressed.
internationally.
If Malaysia stalls halfway, why?
Colonialism: established an export-sector for raw material
& a multi-ethnic society. Resource abundance.
Post-colonialism: Mainstream to start ISI.
Potential civil war: prevented by authoritarianism and NEP
(incl. FDI-driven EOI) /ethno-nationalism. Internal
pressures contained.
Political-economic cycles: adaptation during recession and
upgrading during boom. External economic, not
security vulnerability.
Political structure: the hegemonic party prevails among
the ethnic majority and includes other parties in a broad
developmental, cross-ethnic coalition (Malaysia Inc.,
Vision 2020, NEM).
Co-optation or repression of civil society groups (religious
communities, trade unions, NGOs).
Development model: ‘authoritatian-developmentalist’
with limited relative autonomy and embedded in ethno-
nationalism. Soft repression of organised labour.
Appendix: Systemic vulnerability – Malaysia
(Doner, Riche & Slater 2005)