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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)

				
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