ERIA-DP-2019-21

ERIA Discussion Paper Series

No. 307

Globalisation and Economic Development:

Malaysia’s Experience*

Cassey LEE
ISEAS–Yusof Ishak Institute

December 2019
Abstract: The economic development of Malaysia has been strongly driven and
shaped by globalisation, from the pre-colonial to the post-independence period.
The country has harnessed trade, foreign capital, and foreign labour to grow and
has transformed its economy from one that was highly dependent on primary
commodities (tin and rubber) into one driven by manufactured exports. The impact
of globalisation on the Malaysian economy has changed through the various
phases of its development experience. The early phases of the country’s
engagement with globalisation reduced poverty and inequality. In later stages,
excessive dependence on low-skilled foreign labour, although beneficial initially,
may have compromised the competitiveness of the economy. Malaysia’s multi-
ethnic society has also posed considerable challenges in the balancing of domestic
needs and benefits with greater engagement with globalisation. The openness of
the Malaysian economy has also made it vulnerable to global economic shocks.

Keywords: globalisation, trade, Malaysia

*
This paper was prepared for a research project co-organized by Economic Research Institute for
ASEAN and East Asia (ERIA), APEC Division, Economic Affairs Bureau, Ministry of Foreign
Affairs of Japan, and Japan Institute of International Affairs (JIIA).
1. Introduction

Globalisation has historically played an important role in the emergence of

Malaysia as a nation and its subsequent development. Almost every important aspect
of globalisation involving trade, capital, labour migration, technology, and
information flows has left deep imprints on Malaysia’s economy and society. The
nature and impact of globalisation, however, have changed over time. These changes
include the economic transformation of an economy that was highly dependent on
primary commodities (tin and rubber) into one driven by manufactured exports.
Waves of migrant workers have also shaped the country into a multi-ethnic society
especially since the 19th century. The openness of the country’s economy in terms of
trade and investment has also made it vulnerable to global economic shocks.
The goal of this paper is to examine the impact of globalisation on the
Malaysian economy through the different phases of its development experience. This
will include socioeconomic development (poverty eradication and inequality),
structural transformation (industrialisation and deindustrialisation), and vulnerability
to external shocks (oil crises and financial crises). The paper will also discuss the
country’s domestic and external economic policies aimed at meeting domestic needs
(affirmative action) and managing the effects of globalisation.

2. Globalisation and the Formation of Malaysia

The formation of Malaysia as a nation is a useful starting point for analysing

the impact of globalisation on the country. Globalisation played an important role in
the economic and political history of Malaysia in the pre-colonial, colonial, and post-
colonial (independence) periods. In the pre-colonial period from the 15th to the 18th
century, the early states in Peninsular Malaysia such as Melaka and Penang grew as
major entrepôts for intra- and inter-regional trade flows. The strategic locations of
these port cities together with bountiful natural resources (gold, tin, forest products)
in their hinterlands attracted successive and competing colonial powers from the
West.

2
 The Portuguese conquered and occupied Melaka in 1511. The Dutch wrested
Melaka from the Portuguese in 1641 and it remained under their control until it was
handed over to the British as part of the 1824 Anglo-Dutch Treaty.2 Penang came
into the possession of the British East India Company when the island was leased
from Sultan Abdullah of Kedah in 1786. Melaka and Singapore came under the
control of the British East India Company in 1864. Three years later, in 1867, the
three entrepôt states became crown colonies (Straits Settlements) and their
administration was shifted from Calcutta to London in 1867.
The British colonisation of the rest of Peninsular Malaysia (Malaya) began to
take shape in the 1870s–1880s with the implementation of the Resident System in the
states of Perak (in 1874), Selangor (1874), Negeri Sembilan (1887), and Pahang
(1888).3 Control over these states was subsequently centralised with the formation of
the Federated Malay States in 1896. The other Northern Malay states of Perlis,
Kedah, Kelantan, and Terengganu came under British control with the signing of the
Anglo-Siamese Treaty in 1909. These states, together with Johor, became British
protectorates and were collectively known as the Unfederated Malay States. Two
other states on Borneo island, namely Sabah and Sarawak, became British
protectorates by 1888. Thus, by the late 19th century, all of the states that are part of
Malaysia today had come under British control.
British control was disrupted by the Japanese occupation during the Second
World War from 1941 to 1945. In the aftermath of the war, administration of all of
the states in Malaya was centralised under British control through the formation of
the Malayan Union in 1946. Fierce opposition from the Malay community and Malay
rulers led to the replacement of the Malayan Union with the Federation of Malaya in
1948. Malaya gained independence in 1957. In 1963, Singapore, Sabah, and Sarawak
joined Malaya to form Malaysia. Two years later in 1965, Singapore exited
Malaysia, and the polity of Malaysia has remained unchanged since then.
In summary, the amalgamation of states into the Federation of Malaysia can be
seen as part of the globalisation process involving colonialisation and de-
colonialisation. The political changes that took place during this process were
accompanied by significant growth and structural change in the economy.

2
The Dutch ceded their control over Melaka to the British between 1795 and 1816 during the
Napoleonic Wars (1795–1815).
3
Under the Resident System, state revenues were under the control of British advisors.

3
3. Trade, Growth, and Structural Change

Since the country’s independence in 1957 and over a period of about 50 years
since then, Malaysia has developed to become an upper middle-income developing
country. In 1960, the country’s gross domestic product (GDP) per capita stood at
$1,354 (in 2010 constant prices), around 10% of the GDP per capita of the United
Kingdom. By 2017, Malaysia’s GDP per capita reached $11,528, about 27% of the
GDP per capita of the United Kingdom (Figure 1). How did Malaysia grow to
become a middle-income country? Trade has clearly played an important role in the
country’s growth and development, as can be seen in the country’s dependence on it.

Figure 1: Gross Domestic Product per capita of Malaysia and Selected

Developed Countries, 1960-2017
60.000

50.000
$ (constant 2010)

40.000

30.000

20.000

10.000

-
1970

2000
1960
1962
1964
1966
1968

1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998

2002
2004
2006
2008
2010
2012
2014
2016

Malaysia Republic of Korea Japan United Kingdom United States

Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

3.1. Pre-Independence Period

The Malaysian economy has always been very open. Even in the pre-
independence period, the country’s trade ratio (share of trade in GDP) ranged from
80% to 120% (Figure 2). In the post-independence period, Malaysia became even
more open. The country’s trade ratio rose from around 100% in the mid-1970s to a
peak of 220% in 2000 (Figure 3). Thereafter, the country’s trade ratio began to
decline due to deindustrialisation. Despite this, the country’s economy remains very
open with a trade ratio of around 135%.

4
 Figure 2: Share of Imports and Exports in Gross Domestic Product – Malaya,
1900–1939
140,0

120,0

100,0

80,0
(%)

60,0

40,0

20,0

0,0

1922
1900
1902
1904
1906
1908
1910
1912
1914
1916
1918
1920

1924
1926
1928
1930
1932
1934
1936
1938
Exports of goods and services Imports of goods and services
Trade ratio

Source: Economic History of Malaya. https://www.ehm.my/home (accessed 30 July 2019).

Figure 3: Share of Imports and Exports in Gross Domestic Product – Malaysia,

1960–2017
250,0

200,0

150,0
(%)

100,0

50,0

0,0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017

Exports of goods and services Imports of goods and services

Trade ratio

Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

With trade as a major source of growth, the country did experience fairly high
growth rates during the pre-independence period (Figure 4). However, economic
growth during this period was very erratic. A major source of this instability was the
importance of primary commodities such as tin and rubber as major sources of
exports. These two commodities accounted for close to 80% of total exports during

5
this period (Figure 5). Fluctuations in the prices of these commodities affected the
country’s economy.
Tin was an important industry in the late 1880s. Although tin had been mined
in Malaya for hundreds of years, the discovery of tin in Perak in 1840 led to a rapid
expansion of the industry through the mid-1890s. The tin industry also developed
rapidly in other states, such as Selangor, Negeri Sembilan, and Pahang. The Second
World War adversely affected tin production, but production recovered after the war,
reaching a peak around 1970 and declining thereafter.
The decline in the importance of tin production and exports were offset by the
rising importance of rubber exports, especially after the 1890s. The rubber industry
grew rapidly in the states of Selangor, Perak, and Negeri Sembilan from 1905, but
stagnated during the Japanese occupation and during the 1950s due to competition
from synthetic rubber. However, the industry grew rapidly from the 1960s through
the mid-1980s. The rubber industry only began to stagnate and decline after the mid-
1980s (Figure 6).

Figure 4: Annual Real Gross Domestic Product Growth – Malaya, 1901–1939

40

30

20
(%)

10

0
1901 1903 1905 1907 1909 1911 1913 1915 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939

-10

-20

Source: Economic History of Malaya. https://www.ehm.my/home (accessed 30 July 2019).

6
 Figure 5: Malaya – Share of Tin and Rubber in Total Exports
120,0

100,0

80,0
(%)

60,0

40,0

20,0

0,0

Rubber Tin Rubber and tin

Source: Economic History of Malaya. https://www.ehm.my/home (accessed 30 July 2019).

Figure 6: Rubber Production, 1905–2010

(tonnes)
1.600.000

1.400.000

1.200.000

1.000.000

800.000

600.000

400.000

200.000

-
1950
1905
1911
1915
1921
1925
1931
1935
1940
1945
1947

1957
1960
1965
1970
1975
1980
1985
1991
1995
2000
2005
2010

Sources: Food and Agriculture Organization of the United Nations; Bruton, H.J. (1992). The Political
Economy of Poverty, Equity and Growth: Sri Lanka and Malaysia. Washington, DC: World Bank;
Lim, C.-Y. (1967). Economic Development of Modern Malaya. Kuala Lumpur: Oxford University
Press.

3.2. Post-Independence Period

The subsequent decline of tin and rubber as sources of exports did not spell
doom for the Malaysian economy in the post-independence years. Economic growth
became more robust and less volatile in some periods. Although external global

7
shocks such as the oil crisis in the 1970s and the Asian financial crisis in the 1990s
did affect the Malaysian economy, it managed to maintain relatively robust growth
during intermittent periods (Figure 7). For example, the average growth rate was
10% during 1988–1996.

Figure 7: Annual Real Gross Domestic Product Growth – Malaysia, 1961–2017

15,0

10,0

5,0
(%)

0,0

2017
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
-5,0

-10,0
Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

The relatively robust growth rates achieved in some periods in the post-
independence era were made possible by the economic diversification strategies
pursued and promoted by the Government of Malaysia. These strategies included the
promotion and development of the palm oil industry, petroleum and gas, and export-
oriented manufacturing.
Historically, oil palms were first introduced into Malaya in the 1870s, but palm
oil only became an important commercial crop between 1917 and 1960 (Rasiah,
2006). Palm oil production grew very rapidly starting in the 1970s partly due to the
land development schemes implemented by the government (Figure 8). Even today,
palm oil remains an important export, accounting for 7–9% of total exports.

8
 Figure 8: Palm Oil Production, 1925–2010
(tonnes)
18.000.000

16.000.000

14.000.000

12.000.000

10.000.000

8.000.000

6.000.000

4.000.000

2.000.000

-
192519301935194019471950195519601965197019751980198519901995200020052010

Sources: Food and Agriculture Organization of the United Kingdom. http://www.fao.org/statistics/en

(accessed 30 July 2019); Lim, C.-Y. (1967), Economic Development of Modern Malaya. Kuala
Lumpur: Oxford University Press; Malaysian Palm Oil Board.
http://bepi.mpob.gov.my/index.php/en/statistics/production.html (accessed 30 July 2019).

Petroleum and gas have been important industries since the 1970s. The early
phase of commercial oil exploration was undertaken during 1910–1929 in Sarawak,
but this was exhausted by 1973 (Adnan, 1982). Major discoveries in 1973 and 1974
off the coasts of Terengganu, Sabah, and Sarawak expanded the industry
significantly. Liquefied natural gas became an important industry in the 1980s. The
importance of crude oil and liquefied natural gas exports has fluctuated over the
years (Figure 9). Fuel as a share of exports peaked at 32% in 1985 and 22% in 2013.
In 2017, fuel as a share of exports was around 15%.

9
 Figure 9: Fuel Exports
(% of merchandise exports)
35

30

25

20
(%)

15

10

0
1976

1994

2012
1964
1966
1968
1970
1972
1974

1978
1980
1982
1984
1986
1988
1990
1992

1996
1998
2000
2002
2004
2006
2008
2010

2014
2016
Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

In the post-independence period, the most important structural change has been
the rise of the manufacturing sector. Malaysia’s export-oriented industrialisation
strategy began in the 1960s. As a result, the manufacturing sector as a share of GDP
has risen over time from 10% in 1960 to 31% in 1999 (Figure 10). A rapid expansion
in manufacturing’s role in the economy can be observed in two periods: 1963–1980
and 1987–1999.
Foreign direct investment (FDI) has been a significant driver of the rise of
manufacturing. The first phase of export-oriented industrialisation was fuelled by
FDI from the West. In the second phase, FDI in the late 1980s came primarily from
Japan following the Plaza Accord. FDI as a share of GDP rose from 1.3% in 1987 to
8.7% in 1992 (Figure 11). However, since 1999, manufacturing’s relative
contribution to the economy has declined and this can also be seen from the trends in
the sector’s share of total employment (Figure 12). The country’s export structure
has also changed over time (Figure 13). At its peak in 1999, the manufacturing sector
accounted for some 80% of the country’s total exports (Figure 14). However, the
sector’s share of GDP declined from 30% in 1999–2004 to about 22% in 2015. Thus,
following a long period of industrialisation over a period of 40 years from around
1960 to 2000, the economy has been deindustrialising for close to 20 years since
1999/2000. This has been accompanied by the rise of the services sector’s share of
GDP (55% in 2015) and employment (60%).

10
 Figure 10: Structural Composition of Malaysia's Gross Domestic Product,
1960–2015
60

50

40
(% share)

30

20

10

0
1970

1992

2014
1960
1962
1964
1966
1968

1972
1974
1976
1978
1980
1982
1984
1986
1988
1990

1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Agriculture Manufacturing Services Mining

Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

Figure 11: Foreign Direct Investment and Capital Formation as a Share of

Gross Domestic Product

35

30

25

20
(%)

15

10

0
2004
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002

2006
2008
2010
2012
2014
2016

Foreign direct investment (net inflows) Gross fixed capital formation

Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

11
 Figure 12: Sectoral Composition of Total Employment, 1985–2015
70

60

50
(% share)

40

30

20

10

0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Agriculture, forestry and fishing Mining and quarrying

Manufacturing Construction
Services

Source: Department of Statistics. https://www.dosm.gov.my/v1/ (accessed 30 July 2019).

Figure 13: Major Export Products

(% share of total exports)
70

60

50
(% share)

40

30

20

10

0
1969

1991
1967

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989

1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013

Crude materials, inedible

Mineral fuels, lubricants, etc.
Animal and vegetable oils and fats
Manufactured goods
Machinery and transport equipment

Source: Department of Statistics. https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019).

12
 Figure 14: Agricultural and Manufactured Exports
(% of total exports)
90

80

70

60
(% share)

50

40

30

20

10

0
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Agricultural raw materials Manufactures

Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

3.3. Empirical Studies on Globalisation and Economic Growth

A number of time-series econometric studies on globalisation and economic

growth in Malaysia have been carried out. In an early study using quarterly time-
series data for the period 1970–1994, Ahmad and Rashid (1999) found evidence of a
stationary long-term relationship amongst exports, imports, and GDP. The study also
found a feedback causal relationship between exports and economic growth for both
manufacturing and agricultural exports.
Keong et al. (2003) used annual data for the period 1959–2000 to test the
export-led growth hypothesis for Malaysia. The authors found that the hypothesis is
valid for Malaysia in both the short and long term. The study also found that the
growth rate is also positively affected by the growth rate of capital formation and
imports.
Sulaiman and Md. Saad (2009) used annual time series data for the period
1960–2005 to verify the positive relationship between exports and economic growth.
The study also found a negative relationship between imports and economic growth.
In a more recent study, Makun (2017) used annual data for the period 1980–
2013 to show that a positive and significant relationship exists between trade

13
openness and growth. Furthermore, the effect of trade openness on growth is
strengthened by human capital and good economic policies.
Overall, the empirical evidence on the relationship between exports and
economic growth has been fairly robust across the different studies employing time-
series econometrics. There is strong evidence that globalisation has a positive impact
on economic growth in both the short and long term.

4. Impact of Globalisation

Globalisation has impacted the Malaysian economy in many ways and through
different mechanisms. This can be examined using different sources of information
and data at various levels of aggregation. Section 4.1 discusses the empirical
microdata literature on exporting, innovation, and productivity in the Malaysian
manufacturing sector. Section 4.2 examines how trade and foreign labour have
impacted Malaysia in terms of the country’s demography and human capital over
time. The impact of globalisation on poverty and inequality in Malaysia is discussed
in section 4.3. The openness of the Malaysian economy has also rendered it
vulnerable to external economic shocks. This is discussed in section 4.5. Finally, the
relationship between globalisation and institutions (e.g. corruption) is discussed in
section 4.6.

4.1. Exporting, Innovation, and Productivity

Evidence on the role and impact of globalisation can also be derived from
studies using microdata. In an early microdata study on the Malaysian manufacturing
sector covering the period 2000–2001, Lee (2004) found that innovation is positively
and significantly correlated with foreign participation. However, the same study
showed that exporting may have a reverse relationship with innovation. This
surprising result has been attributed to sampling limitations.
A study by Noor and Radziah (2009), which used microdata from Malaysian
manufacturing industries for the period 2000–2004, found significant evidence of
positive productivity spillovers to local firms in the same industry when foreign
shareholding is used to measure foreign presence. Interestingly, the authors did not
find any significant difference in labour productivity between wholly foreign-owned

14
and locally owned establishments when foreign presence is proxied by employment
share. In addition, both majority and minority foreign-owned establishments have
significantly lower levels of labour productivity than locally owned establishments in
Malaysia.
In a later study on productivity and exporting in the Malaysian manufacturing
sector covering the period 1997–2004, Lee (2011a) found that the link between
exporting and productivity is a weak. However, the paper presents stronger evidence
that exporting is related to innovation.
Innovation by firms in the manufacturing sector can also be driven by their
participation in the global economy through knowledge flows. Using firm-level
manufacturing data covering the period 2002–2004, Lee (2011b) provides some
evidence that FDI and exporting are related to innovation activities such as training
and acquisition of machinery, equipment, and software. However, the study also
found that the links between innovative firms in Malaysia and other firms abroad in
terms of cooperative activities are relatively weak.
Dogan et al. (2011) used a manufacturing micro panel data to examine the
differences in productivity between exporters and non-exporters. Their study showed
that exporters are more productive than are domestic-oriented establishments.
Entrants to export markets were more productive than both the surviving domestic-
oriented establishments (non-exporters) and, even more telling, surviving exporters.
On the other hand, exiters from the export markets or ‘export failures’ were less
productive than continuing exporters. Churning was also found to contribute to
productivity growth in manufacturing due to entrants having higher productivity than
exiters. In addition, the churning of exporters made larger contributions to
productivity growth than churning amongst domestic-oriented firms.
Lee (2012) studied the dynamics of productivity and innovation using panel
firm-level data from the manufacturing sector covering the years 2002 and 2006. The
study provides some evidence for the existence of strong productivity premiums for
continuing exporters (compared to non-exporters) and relatively weak productivity
premiums for new exporters. There is also evidence of causality from exporting to
innovation that supports the learning-by-exporting hypothesis in the case of

15
Malaysia. It was also found that continuous exporters enjoy significant exporting
premiums in terms of scale of production.
Another study by Lee (2013) examined the impact of globalisation on wage
inequality at the firm level. The study used microdata collected by the Malaysian
government covering the years 2002 and 2006 and the World Bank (covering the
year 2006). The study found that there is a positive but weak relationship between
average wage levels and exporting. There is also a positive relationship between
trade liberalisation and wages, although this relationship is stronger for skilled
workers. The employment of foreign workers also has a depressive effect on average
wage levels for skilled workers.
Lee (2014) used manufacturing data for 2002 and 2006 to study the
relationship between exporting and productivity across different firm sizes. The
study affirmed the positive relationship between productivity and exporting.
However, for larger firms, the productivity gap between exporters and non-exporters
became less important, suggesting that the selection process for exporting is binding
only for small firms.
Dogan et al. (2017) used manufacturing microdata from 2000–2005 to analyse
FDI spillover effects empirically. Their empirical findings are not very encouraging
– horizontal spillovers from FDI are weak. In addition, backward and forward
spillovers are found to be negative.
In a recent study, Chuah et al. (2018) used microdata from three manufacturing
censuses (2000, 2005, and 2010) to study the intra-sectoral reallocation of resources.
In terms of globalisation, the authors found that export-oriented industries are
generally more efficient at resource allocation. These industries include the textile,
wood products, and electrical and electronics industries. The authors also found that
the productivity gap between Malaysia and the United States (US) has widened over
time.
In summary, microdata studies on manufacturing do suggest that exporting is
associated with higher productivity. The contribution of churning amongst exporting
firms shows how such processes can contribute to economic growth. These findings
are generally consistent with the theoretical and empirical literature in heterogeneous
firms and trade (Melitz, 2003). There is also evidence supporting a positive

16
relationship between innovation and exporting. These studies indicate that
globalisation in the form of exporting is beneficial to firms in the manufacturing
sector. However, there are weaknesses in the current state of export participation,
including limited spillover effects and constraints on knowledge flows between
subsidiaries based in Malaysia and their headquarters in more developed countries.
Finally, even though there is a positive relationship between productivity and foreign
ownership, this may not necessarily translate into a positive link between wages and
exporting. This is due to excessive reliance on foreign labour with low skills and low
human capital. This issue is explored further in the next section.

4.2. Trade, Foreign Labour, and Human Capital

Globalisation, in the form of trade and migration, has had a significant and
long-term impact on Malaysia. In the pre-independence period under British colonial
rule, the development of labour-intensive and trade-oriented industries such as tin
and rubber necessitated the use of foreign labour. Between 1850 and 1930, the
development of the tin industry brought about a massive migration of foreign
workers from China into the tin mining areas in Malaya. Similarly, the advent and
rapid growth of the rubber industry during 1911–1931 saw the migration of workers
primarily from South India.
The impact of migration went beyond the development of export-oriented
primary commodities industries. The most important effect of the inflows of migrant
workers in the 1850s to 1930s was the formation of a multi-ethnic society in
Malaysia. While some migrant communities can be traced as far back as the 15th
century, these earlier migrant communities were relatively small. The later waves of
migrants into the tin and rubber industries were significantly larger to the extent that
they subsequently altered the demographic composition of Malaysia. By 1947, the
Chinese population in Malaya accounted for 38.4% of the total population (Table 1).
The Indian community’s share of total population peaked at 15% in 1921. Most of
these migrant workers eventually became citizens of Malaysia. As a result of lower
fertility rates amongst the Chinese and Indian communities in Malaysia, their
population shares have declined over time. Despite this, Malaysia remains a multi-
ethnic society. This has had important implications on the political economy of
resource distribution in the country.

17
 During the colonial period, one of the contentious elements in the Malayan
Union (1846–1948) was the granting of citizenship and equal rights to migrant
communities. In the aftermath of the nation’s independence, children of migrants
born in Malaya/Malaysia were automatically granted citizenship (the jus soli
principle). However, the racial riots on 13 May 1969 proved to be a turning point in
Malaysia. Thereafter, affirmative action policies were introduced to correct the
economic imbalance across the different ethnic groups in Malaysia. The New
Economic Policy (NEP) was introduced in 1970 both to eradicate poverty and to
redress inter-ethnic economic imbalance.

Table 1: Census Population by Ethnic Group, Peninsular Malaysia, 1911–

2010
Population (number)
Year Malays/Bumiputra Chinese Indians Others Total
1911 1,368,954 693,228 239,169 37,700 2,339,051
1921 1,568,588 855,863 439,172 43,068 2,906,691
1931 1,863,872 1,284,888 572,613 66,385 3,787,758
1947 2,427,834 1,884,534 530,638 65,080 4,908,086
1957 3,125,474 2,333,756 696,186 123,342 6,278,758
1970 4,663,284 3,117,896 933,250 66,298 8,780,728
1980 6,315,572 3,865,431 1,171,135 74,475 11,426,613
1991 8,433,826 4,250,969 1,380,048 410,544 14,475,387
2000 11,135,694 4,883,079 1,666,048 147,749 17,832,570
2010 13,735,752 5,509,302 1,892,322 130,205 21,267,581

Population share (%)

Year Malays/Bumiputra Chinese Indians Others Total
1911 58.5 29.6 10.2 1.6 100.0
1921 54.0 29.4 15.1 1.5 100.0
1931 49.2 33.9 15.1 1.8 100.0
1947 49.5 38.4 10.8 1.3 100.0
1957 49.8 37.2 11.1 2.0 100.0
1970 53.1 35.5 10.6 0.8 100.0
1980 55.3 33.8 10.2 0.7 100.0
1991 58.3 29.4 9.5 2.8 100.0
2000 62.4 27.4 9.3 0.8 100.0
2010 64.6 25.9 8.9 0.6 100.0
Source: Economic History of Malaya. https://www.ehm.my/home (accessed 30 July 2019).

18
 The inter-ethnic economic imbalance is related to economic globalisation. The
inflow of Chinese migrants in the late 19th century was mainly concentrated in
modern sectors located in the more developed and urbanised states in Peninsular
Malaysia. The Malay population was primarily agrarian and resided in less
developed areas and states.
Thus, Malaysia’s engagement in economic globalisation has had an impact on
urbanisation and the spatial concentration of economic activities. In terms of
urbanisation, the development of the tin industry during 1850–1930 brought about a
massive migration of Chinese workers to the tin mining areas in three states, namely,
Perak, Selangor, and Negeri Sembilan (Sidhu and Jones, 1981). The five largest
cities during 1911–1931 were Georgetown (Penang), Kuala Lumpur (Selangor), Ipoh
(Perak), Melaka, and Taiping (Perak) (see Figure 15). With the exception of Melaka,
these cities were mainly associated with tin mining activities. With the decline in
mining, a few cities that relied on mining such as Georgetown (which was involved
in the trading and shipping of tin) and Taiping declined in importance (Figure 16).
For other cities, such as Seremban and Kuala Lumpur, the advent and rapid growth
of the rubber industry (during the periods 1911–1931 and 1947–1980) and later palm
oil likely mitigated the effects of the decline in the tin mining industry.
The rise of manufacturing since the 1960s also contributed to the growth of old
cities (Ipoh and Johor Bahru) and the development of new ones such as Petaling Jaya
and later, Shah Alam and Subang Jaya. The growth of these cities entailed inter-state
migration that began to skew the population distribution across the Malaysian states
(Table 2). The share of total population increased significantly in states with export-
oriented manufacturing such as the state of Selangor.

19
 Figure 15: Size of Major Cities, 1911–2010
('000 people)
1.800
Kuala Lumpur
1.600
Ipoh
1.400 Johor Bahru

1.200 Klang
Petaling Jaya
Population

1.000
Kota Bharu
800 Kuala Terengganu
600 Georgetown
Kuantan
400
Seremban
200
Subang Jaya
- Shah Alam
1911 1921 1931 1947 1957 1970 1980 1991 2000 2010

Sources: Lim, H.-K. (1978), The Evolution of the Urban System in Malaysia. Kuala Lumpur:
University of Malaya Press; Saw, S.-H. (2015), The Population of Malaysia, Second Edition.
Singapore: Institute of Southeast Asian Studies; Department of Statistics, 2010 Population and
Housing Census of Malaysia. https://www.dosm.gov.my/v1/ (accessed 30 July 2019).

Figure 16: Major Cities' Share of Total Population, 1911–2010

8
Kuala Lumpur
7 Ipoh
Johor Bahru
6
Klang
5 Petaling Jaya
(% share)

Kota Bharu
4
Kuala Terengganu

3 Georgetown
Kuantan
2 Seremban
Subang Jaya
1
Shah Alam
0 Ampang Jaya
1911 1921 1931 1947 1957 1970 1980 1991 2000 2010

Sources: Lim, H.-K. (1978), The Evolution of the Urban System in Malaysia. Kuala Lumpur:
University of Malaya Press; Saw, S.-H. (2015), The Population of Malaysia, Second Edition.
Singapore: Institute of Southeast Asian Studies; Department of Statistics, 2010 Population and
Housing Census of Malaysia. https://www.dosm.gov.my/v1/ (accessed 30 July 2019).

20
 Table 2: Distribution of Population by State in Peninsular Malaysia
State 1911 1921 1931 1947 1957 1970 1980 1991 2000 2010

Selangor 12.6 13.8 14.1 14.5 16.2 18.5 21.4 24.4 30.3 32.0
Perak 21.4 21.0 20.7 19.4 19.4 17.8 15.9 13.3 11.2 10.4
Johor 7.7 9.7 13.3 15.0 14.8 14.5 14.4 14.7 15.0 14.8
Kedah 10.5 11.5 11.3 11.3 11.2 10.5 9.9 9.2 9.0 8.7
Penang 11.1 10.1 9.0 9.1 9.1 8.8 8.2 7.6 7.1 6.9
Kelantan 12.2 10.6 9.6 9.1 8.5 7.8 7.9 8.3 7.1 6.8
Pahang 5.1 5.0 4.8 5.1 5.0 5.7 7.0 7.3 7.0 6.6
Negeri
5.6 6.5 6.2 5.5 5.8 5.5 5.0 4.9 4.7 4.5
Sembilan
Terengganu 6.6 5.3 4.7 4.6 4.4 4.6 4.8 5.5 4.9 4.6
Melaka 5.3 5.3 4.9 4.9 4.6 4.6 4.1 3.6 3.4 3.6
Perlis 1.4 1.4 1.3 1.4 1.4 1.4 1.3 1.2 1.1 1.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Sources: Saw, S.-H. (2007), The Population of Malaysia. Singapore: Institute of Southeast Asian Studies; (2015),
The Population of Malaysia, Second Edition. Singapore: Institute of Southeast Asian Studies.

Initially, the development of FDI-driven and export-oriented manufacturing did

not entail the extensive use of foreign workers. However, by the early 1990s, the
country began to experience labour shortages. This led to a rapid growth in the
number of foreign workers in manufacturing, agriculture, and services for the next 20
years. The dependence on foreign workers has increased across all states since the
1980s (Figure 17). Looking at the trends in foreign workers’ share of total
employment since the early 1980s, it can be seen that the share of foreign labour
increased rapidly during two periods in particular: 1993–1996, and 2009–2013. The
degree of dependence on foreign labour varied from state to state. The state of Sabah
is especially dependent on foreign labour. Foreign workers account for some 40% of
total employment in the state. Other states with significant dependence on foreign
workers include Selangor (15%) and Kuala Lumpur (13%).
There are currently no data on foreign workers by sector in different states, but
given differences in economic structure, foreign workers are likely concentrated in
two sectors: (i) agriculture in Sabah and Sarawak; and (ii) manufacturing and
services in Johor, Selangor, and KL. Agriculture and manufacturing are the two key
sectors employing foreign labour (Figure 18).

21
 One key concern with respect to the country’s dependence on foreign workers
is the relatively low human capital and skills associated with foreign workers
compared to local workers. In 2015, only 5.7% of foreign workers had tertiary
degrees whereas the corresponding figure for domestic workers exceeded 20%
(Table 3).
The World Bank (2015) estimated that in 2014 about 44% of foreign workers
in Malaysia were employed in low-skilled elementary occupations. Only 5% of
foreign workers in Malaysia have high-skilled jobs. Furthermore, sectors likely
matter. Foreign workers in agriculture and construction may have lower human
capital and skills than foreign workers in manufacturing and services. The proportion
of foreign workers with no formal education (noedupct) or primary education
(primarypct) is particularly high in states with large agriculture sectors such as Sabah
and Sarawak (Figure 19).

Figure 17: Foreign Workers' Share of Total Employment, 1982–2016

45,0
40,0
35,0
30,0
(% share)

25,0
20,0
15,0
10,0
5,0
0,0
1982 1984 1986 1988 1990 1993 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Johor Kedah Kelantan Melaka

Negeri Sembilan Pahang Pulau Pinang Perak
Perlis Terengganu Selangor Sabah
Sarawak Kuala Lumpur

Source: Department of Statistics, https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019).

22
 Figure 18: Number of Foreign Workers in Malaysia by Sector,
2000–2015
800.000
700.000
600.000
500.000
400.000
300.000
200.000
100.000
-
2000 2001 2002 2003 2004 20052006 2007 2008 2009 2010 20112012 2013 2014 2015

Maid Manufacturing Construction

Services Agriculture
Source: Department of Statistics, https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019).

Table 3: Labour Force by Educational Attainment, 2015

Malay Chinese Indians Others Foreigners Total
No formal
169.6 19.2 15.5 6.1 236.0 446.3
education
% 2.1 0.6 1.7 6.4 10.9 3.1
Primary 796.2 322.0 102.6 22.0 986.8 2,229.6
% 9.7 10.2 11.3 23.3 45.5 15.4
Secondary 4,584.2 1,856.1 526.3 46.9 823.1 7,836.6
% 56.0 58.9 58.0 49.7 37.9 54.0
Tertiary 2,642.4 956.7 263.3 19.4 123.5 4,005.4
% 32.3 30.3 29.0 20.6 5.7 27.6
Total 8,192.4 3,154.0 907.7 94.5 2,169.4 14,518.0
100.0 100.0 100.0 100.0 100.0 100.00
Source: Department of Statistics. https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019)

23
 FT Labuan 2016
FT Labuan 2014
FT Labuan 2012
FT Labuan 2010
FT Kuala Lumpur 2015
FT Kuala Lumpur 2013
FT Kuala Lumpur 2011
Sarawak 2016
noedupct = no education, primarypct = no primary education, secondpct = no secondary education, tertiarypct = no tertiary education.

Sarawak 2014
Sarawak 2012
Sarawak 2010
Sabah 2015
Sabah 2013
Figure 19: Education Composition of Workers by State, 2010–2016

Sabah 2011
Terengganu 2016
Terengganu 2014
Terengganu 2012
Terengganu 2010
Selangor 2015
tertiarypct

Selangor 2013
Selangor 2011
Perlis 2016
Perlis 2014 Source: Department of Statistics. https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019).
secondpct

Perlis 2012
Perlis 2010
Perak 2015

24
Perak 2013
Perak 2011

primarypct
Pulau Pinang 2016
Pulau Pinang 2014
Pulau Pinang 2012
Pulau Pinang 2010
Pahang 2015

noedupct
Pahang 2013
Pahang 2011
Negeri Sembilan 2016
Negeri Sembilan 2014
Negeri Sembilan 2012
Negeri Sembilan 2010
Melaka 2015
Melaka 2013
Melaka 2011
Kelantan 2016
Kelantan 2014
Kelantan 2012
Kelantan 2010
Kedah 2015
Kedah 2013
Kedah 2011
Johor 2016
Johor 2014
Johor 2012
Johor 2010
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
 Relatively cheap and low-skilled foreign labour helped sustain the country’s
manufacturing competitiveness in the 1990s; however, this later became an obstacle
to efforts to upgrade the manufacturing and other economic sectors. The country’s
heavy dependence on low-skilled foreign workers has adversely affected productivity
growth in all sectors in the economy. Access to cheap foreign labour could have
disincentivised employers from upgrading their production technology (more capital
intensive) and investing in human capital development. There is some evidence that
the use of foreign labour could have weakened agglomeration economies related to
human capital (Lee, 2018). Upgrading the country’s manufacturing sector requires
workers that are productive, innovative, and well-paid (World Bank, 2012).

4.2. Poverty and Inequality

Malaysia has made significant progress towards eradicating poverty since the
1970s. In 1970, close to 50% of the country’s population were living below the
poverty line. By 1997, the incidence of poverty had declined to about 11%. Even
though the government implemented rural development programmes (such as the
Federal Land Development Authority scheme) to eradicate poverty, the most
important factor has been identified as the absorption of rural educated workers into
higher income occupations in the industrial and services sectors (Ragayah, 2011).
Thus, insofar as the country’s manufacturing sector is export-oriented, globalisation
has had a positive and indirect impact on the decline in the incidence of poverty in
Malaysia.
Inequality in Malaysia as measured by the Gini ratio has declined over time
since the 1960s (Figure 20). Significant reductions were achieved in the second half
of the 1970s and remained relatively stable thereafter until further declines in the
2000s. A number of factors were identified, including improved salaries at the lowest
levels in the public sector, a tight labour market, and income transfers to rural
households (Ragayah, 2011). These last two factors are indirectly related to
globalisation through employment and the income-generation effects of the export-
oriented manufacturing sector.

25
 Figure 20: Incidence of Poverty in Malaysia, 1970–2009
60

50

40
(%)

30

20

10

0
1970 1976 1984 1990 1993 1995 1997 1999 2002 2004 2009

Malaysia Rural Urban

Sources: Ragayah, M.Z. (2011), ‘Poverty and Income Distribution’, in R. Rasiah (ed.) Malaysian
Economy. New York: Oxford University Press; (2012), ‘Poverty Eradication and Income
Distribution’, in H. Hill, T.S. Yean, and R.M. Zin (eds.) Malaysia’s Development Challenges.
London: Routledge.

Figure 21: Gini Index Estimates

0,6

0,5

0,4

0,3

0,2

0,1

Ragayah et al World Bank

Sources: Ragayah, M.Z. (2011), ‘Poverty and Income Distribution’, in R. Rasiah (ed.) Malaysian
Economy. New York: Oxford University Press; (2012), ‘Poverty Eradication and Income
Distribution’, in H. Hill, T.S. Yean, and R.M. Zin (eds.) Malaysia’s Development Challenges.
London: Routledge; World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

26
 Despite the improvements in inequality, there is growing concern that the
country’s addiction to cheap foreign labour could have suppressed the wages of
lower skilled workers in the labor market. A consequence of this could be worsening
wage inequality. A few studies have examined these issues. Athukorala and
Devadason (2012) provided industry-level evidence of the negative impact of foreign
workers on the wages of unskilled workers. This is borne out by the changes in
average wage levels across occupational categories in the manufacturing sector
during 2000–2005.
There is also evidence that average wage levels have risen faster at the
managerial, technical, and supervisory levels than for clerical, general, and
production workers (Table A1). A more qualitative analysis was undertaken by
Mohamad (2010) who argued that wage inequality worsened during 1995–2007 and
that this might be due to industry-level effects and job characteristics. In another
study, Said and Hamid (2011) argued that micro-level evidence based on household
surveys points to decreasing demand for professional workers (rather than technical
workers) due to changes in technology. All of these studies could also be capturing
the effects of structural change, that is, deindustrialisation and the increasing
prominence of the services sector. More recent data suggest that export-oriented
manufacturing may be a less important source of job creation (Figure 22).

Figure 22: Jobs Created by Economic Activity, 2015–2018

60

50
Total Jobs ('000)

40

30

20

10

0
Apr-15

Apr-17
Jun-15

Apr-16
Jun-16

Jun-17

Apr-18
Jun-18
Aug-15

Aug-16

Aug-17

Aug-18
Dec-15
Feb-16

Dec-16
Feb-17

Dec-17
Feb-18

Dec-18
Oct-15

Oct-16

Oct-17

Oct-18

Agriculture Mining & quarrying Manufacturing Construction Services

Source: Department of Statistics. https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019).

27
 Finally, an important issue related to inequality in Malaysia is the inter-ethnic
income and wealth distribution. Malaysia became a multi-ethnic society through the
inflows of migrants into the tin and rubber industries in the late 19th to the early 20th
centuries. In 1969, communal tensions following the general elections resulted in
racial riots.
The policy response to the riots was the NEP, a long-term strategic policy
covering the period 1970–1990 and aimed at addressing the root causes of the riots,
namely, poverty and inequality. The two goals of the NEP were the eradication of
poverty and achieving a more equitable inter-ethnic distribution of income and
wealth. The policies for the NEP was subsequently extended under the New
Development Policy (1991–2000) and the National Vision Policy (2001–2010). In
2010, the New Economic Model covering the period 2011–2020 was launched. The
orientation of the New Economic Model differed from previous policies in that it
attempted to depart from an affirmative action orientation to a more needs-based
approach. However, this shift was not very successfully implemented due to
concerns from the Bumiputra community regarding the erosion of their rights and
special standing.
Several aspects of these NEP-type policies have implications for the country’s
engagement in globalisation. A key aspect of the implementation of NEP-type
policies is the trusteeship model in which state-owned enterprises, government
investment corporations, and government-linked corporations hold equity in large
companies in key sectors on behalf of the Bumiputra community. These sectors
include banking and transport. This strategy was aimed at ensuring that the
Bumiputra community owned at least 30% equity in the modern sector (services and
manufacturing). Another important aspect is public procurement in which some
preferences were given to Bumiputra-owned companies. This was meant to support
and nurture Bumiputra entrepreneurs.
More than 50 years after its implementation, the extent of corporate equity
remains controversial. Though official data indicated that Bumiputra ownership in
listed companies reached only 18.9% in 2004, a study undertaken by the Centre for
Public Policy Studies and Asian Strategy and Leadership Institute suggest that the
figure could be as high as 45% in 2005. In a more recent study, Gomez et al. (2017)

28
estimated that the government’s share in the companies listed on the Bursa Malaysia
increased from 43.7% in 2011 to 47.1% in 2015. Much of the government-owned
equity in the corporate sector is in the services sector. Menon and Ng (2017) have
argued that state-owned enterprises or government-linked corporations crowded out
private investment in 2007–2011.

Table 4: Ownership of Share Capital in Listed Companies

(%)
Group 1970 1985 1990 2004
Bumiputra 2.4 19.1 19.3 18.9
Chinese 27.2 33.4 45.5 39.0
Indians 1.1 1.2 1.0 1.2
Nominee companies 6.0 7.2 8.5 8.0
Foreigners 63.4 26.0 25.4 32.5
Source: Table 4.5 in Leete, R. (2007), Malaysia: From Kampung to Twin Towers. Kuala Lumpur:
Oxford Fajar.

There are two important implications of government ownership and control in

the services sector. The increasing importance of services in the Malaysian economy
implies that the growth of the Malaysian economy is likely to be increasingly driven
by productivity in the services sector. Furthermore, there are positive linkages
between manufacturing productivity and services inputs (Lee, 2019). If productivity
in the services sector is adversely affected by government ownership, this could have
negative implications for the future growth of the Malaysian economy.
The significant presence of government ownership in the services sector and
affirmative action in government procurement policies could be obstacles to the
country’s participation in the next generation of trade agreements. This is already an
issue in Malaysia’s guarded participation in recent trade agreements such as the
Comprehensive and Progressive Agreement for Trans-Pacific Partnership. If
Malaysia fails to liberalise its trade regime further, including its services sector, this
could limit the country’s ability to deepen its participation in the global value chain
in manufacturing and services.

29
4.2 Openness and Economic Stability

The openness of the Malaysian economy has made it vulnerable to global

economic shocks. This is one of the risks of economic globalisation. Since the
country’s independence in 1957, there have been four major global economic shocks
that have had significant impacts on the Malaysian economy. These include (i) the
Organization of Petroleum Producing Countries (OPEC) oil crisis (1973–1974), (ii)
the commodity crisis (1985–1986), (iii) the Asian financial crisis (1997–1998), and
(iv) the global financial crisis (2008–2009)
The impact of each of these shocks is summarised in Figure 23 and Table 5.
The severity of the impact of each of these global economic shocks has varied. This
is not surprising as the nature and sources of each of these shocks also differed.

Figure 23: Annual Real Gross Domestic Product Growth – Malaysia, 1961–2017
15,0

10,0

5,0
(%)

0,0
1975

2009
1961
1963
1965
1967
1969
1971
1973

1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007

2011
2013
2015
2017

-5,0

-10,0
Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

30
 Table 5: Impact of Global Economic Shocks on the Malaysian Economy
Period Event Decline in economic growth (real GDP)

1973–1974 OPEC oil crisis 8.3% (1974) → 0.8% (1975)

1985–1986 Commodity crisis 7.8% (1984) → −1.0% (1985)

1997–1998 Asian financial crisis 7.3% (1997) → −7.4% (1998)

2008–2009 Global financial crisis 4.8% (2008) → −1.5% (2009)

GDP = gross domestic product, OPEC = Organization of the Petroleum Exporting Countries.
Source: World Bank Open Data. https://data.worldbank.org (accessed 30 July 2019).

The first shock, the OPEC oil crisis (1975–1975), was triggered by the actions
of OPEC member countries. The oil embargo imposed by OPEC on the US and its
allies essentially caused a severe oil shortage and a sharp increase in oil prices. This
supply-side shock severely affected Malaysia, which had not yet fully developed its
oil and gas sector.
The second shock, the commodity crisis (1984–1985), was brought about by
the high interest rate policy in the US in the early 1980s that weakened demand for
primary commodities. This significantly affected Malaysia, which by this time had
become a major exporter of both palm oil and, to a lesser extent, rubber and tin. The
severity of this crisis was greater as it was more prolonged partly due to the country’s
inability to implement effective counter-cyclical policies because of fiscal constraints
faced by the Malaysian government (Athukorala, 2010).
The third shock was the Asian financial crisis (1997–1998), which was
triggered by Thailand’s decision to devalue its currency following the Government of
Thailand’s decision not to peg the baht to the US dollar. This action unnerved foreign
investors, causing sharp withdrawals from equity markets in the region including
Malaysia. This was accompanied by a speculative attack on the ringgit. The financial
liberalisation in the 1990s was an important precursor to this crisis. Unlike the
previous two crises, this crisis was primarily due to financial globalisation.
The fourth and more recent crisis, the global financial crisis (2008–2009), was
originally caused by the deterioration of sub-prime assets in the US, which
subsequently led to systemic liquidity problems in the global interbank and credit
markets. This brought about deleveraging activities and recessions in developed
economies. Malaysia’s exposure to this crisis was primarily through the weakened

31
demand for the country’s exports as well as the decline (following deleveraging
activities) in foreign investments.
Given the different nature and impact of each of these economic crises, it is not
surprising that the policy responses from the Malaysian government have been
different (Athukorala, 2010). These policy responses depend on both external
constraints (e.g. speed of global economic recovery) as well as internal constraints
(e.g. socioeconomic policies and fiscal space). There are also inter-temporal
dependence and learning effects over time for policy makers. For example, the
restructuring of the financial and corporate sectors in Malaysia during the aftermath
of the Asian financial crisis strengthened the ability of the country’s financial sector
to cope with the effects of the global financial crisis.
In summary, the openness of the Malaysian economy made it vulnerable to
global economic shocks. Prior to the 1990s, the crises were mainly transmitted
through the trade sector; however, since liberalising its financial sector in the 1990s,
the Malaysian economy became vulnerable to external shocks to both the trade and
financial sectors.

4.3 Institutions

Institutions are today recognised as an important factor in economic growth

(Acemoglu et al., 2005). In the context of globalisation, institutions are also an
important source of comparative advantage (Levchenko, 2007; Costinot, 2009).
Within this literature, the traditional way of conceptualising institutions is in terms of
the enforcement of contracts and property rights. In addition to these, the transaction
costs of exporting and importing could also be affected by the quality of institutions.
For example, rampant corruption in customs could increase importing and exporting
costs. The implementation of trade facilitation measures could also be slowed as such
measures could be perceived as reducing opportunities for corruption. Aside from
transaction costs, the benefits of trade could also be reduced by corruption. For
example, as a result of corruption, importers have to pay higher import costs that are
then passed on to consumers. Corruption can also make it easier to smuggle goods
into the country, resulting in the loss of government revenues.

32
 In the case of Malaysia, there is a scarcity of empirical research on how trade is
affected by problems related to the quality of institutions (e.g. corruption). There is
anecdotal evidence but hardly any empirical quantitative studies on this issue. 4
Fortunately, the World Bank provides some statistics on the extent of corruption in
relation to import licences (Table 6). Table 6 shows that the incidence of corruption
(as measured by the percentage of firms expected to give gifts to obtain import
permits) is fairly high in some industries in Malaysia, such as garments.
Interestingly, the incidence of corruption amongst non-exporters is much higher than
amongst exporters. However, firms with foreign ownership tend to experience a
higher incidence of corruption compared to domestic firms.

Table 6: Globalisation and Incidence of Corruption in Malaysia, 2015

Percent of firms
expected to give gifts
Subgroup level
to get an import
license
All 39.0
Food 24.6
Garments 74.6
Chemicals and chemical products 12.7
Electronics and communications equipment 34.0
Other manufacturing 38.4
Direct exports are 10% or more of sales 28.0
Non-exporter 47.9
Domestic 39.9
10% or more foreign ownership 49.3
Source: World Bank – Doing Business Data. https://www.doingbusiness.org/en/data (accessed 30 July
2019).

The above statistics suggest that there is significant room for improvement in
the area of corruption in trade-related activities. This topic is especially worth
highlighting given the recent developments in Malaysian politics. One of the most
significant events in Malaysia since the country’s independence was the shock defeat
of the ruling political party coalition, Barisan Nasional, in the 14th general election
held on 9 May 2018. Prior to its defeat, Barisan Nasional had ruled the country

4
In a 2014 statement by customs, it was reported that RM1.67 billion worth of cigarettes and alcohol
had been smuggled into Malaysia since 2011. See ‘Corrupt M’sian customs officers: Lavish lifestyle
gave them away’, AsiaOne, 7 September 2014.

33
continuously since 1957. A key reason for the end of Barisan Nasional’s rule was the
deterioration in institutions and governance in the country, which led to massive rent-
seeking and corruption. A key item on the agenda of the new Pakatan Harapan
government is institutional reforms, which are largely aimed at improving economic
and political governance in Malaysia. These are likely to include reductions in the
incidence of corruption in import and export activities. If such reforms materialise,
Malaysia’s competitiveness as an export-oriented manufacturing base and as a
trading nation is likely to improve.

5. Conclusions

Globalisation has, without any doubt, had a very significant impact on

Malaysia. The country’s engagement in globalisation can be traced to the pre-
independence period. This engagement – through trade and labour migration flows –
helped shaped the country as it is today. The multi-ethnic nature of its society and its
development into an upper middle-income economy were both driven by
globalisation. The country’s economic openness in terms of trade and investment
brought about the development of an export-oriented manufacturing economy.
Evidence from microdata research indicates that productivity and innovation are
positively related to exporting in the manufacturing sector. However, these studies
also indicate that there are weaknesses in terms of FDI spillovers and knowledge
flows. Due to these problems, and possibly others, it is not surprising that premature
deindustrialisation has been a problem since the late 1990s. This problem has been
compounded by an over-dependence on low-skilled foreign labour. Extensive
government ownership in the services sector to achieve affirmative action and wealth
redistribution goals could also have limited the sector’s potential contributions to
economic growth. This could have adversely affected the productivity of the services
sector and limited the country’s participation in new regional trade agreements. One
cost of engagement with the global economy is economic instability. All four major
global economic crises in the post-war period have adversely affected the Malaysian
economy. The transmission mechanisms of these crises have differed due to
differences in the sources of these crises as well as changes in the Malaysian
economy over time. Despite such risks from globalisation, disengaging from

34
globalisation is not an option for the Malaysian economy due to its small size. From
a policy perspective, better institutions and policy instruments are needed to cope
with the risks arising from globalisation. Improvements in institutions are also likely
to improve Malaysia’s trade competitiveness further.

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Appendix
Table A1: Malaysia – Population and Labour Market Indicators, 2000–2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0–14 years 8,003 7,880 7,893 7,891 7,881 7,857 7,824 7,791 7,757 7,724 7,828
14,56 15,29 15,84 16,40
15–64 years 16,955 17,510 17,857 18,203 18,547 18,890 19,079
0 3 6 0
65+ years 932 950 989 1,029 1,069 1,110 1,151 1,193 1,236 1,282 1,427
23,49 24,12 24,72 25,32
Total population (‘000) 25,905 26,477 26,832 27,186 27,541 27,895 28,334
5 3 7 0
Population growth rate (%) 2.5 2.6 2.5 2.4 2.3 2.2 1.3 1.3 1.3 1.3 1.6
0–14 years (%) 34.1 32.7 31.9 31.2 30.4 29.7 29.2 28.7 28.2 27.7 27.6
15–64 years (%) 62.0 63.4 64.1 64.8 65.5 66.1 66.6 67.0 67.3 67.7 67.3
65+ years (%) 4.0 3.9 4.0 4.1 4.1 4.2 4.3 4.4 4.5 4.6 5.0
Total population (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

10,24
Labour force (‘000) 9,556 9,699 9,886 10,346 10,413 10,629 10,890 11,028 11,315 11,517
0
Labour force participation (%) 65.4 64.9 64.4 65.2 64.4 63.3 63.1 63.2 62.6 62.9 62.7
Total employment ('000) 9,269 9,357 9,543 9,870 9,980 10,045 10,275 10,538 10,660 10,897 11,129
Unemployment rate (%) 3.0 3.5 3.5 3.6 3.5 3.5 3.3 3.2 3.3 3.7 3.4
Employment in manufacturing
2,174 2,184 2,069 2,131 2,023 1,989 2,083 1,977 1,945 1,807 1,880
(‘000)
Manufacturing employment
23.5 23.3 21.7 21.6 20.3 19.8 20.3 18.8 18.2 16.6 16.9
share (%)

Growth in total employment (%) 0.9 2.0 3.4 1.1 0.7 2.3 2.6 1.2 2.2 2.1
Growth in manufacturing
0.5 -5.3 3.0 −5.1 −1.7 4.7 −5.1 −1.6 −7.1 4.0
employment (%)
Source: Department of Statistics. https://www.dosm.gov.my/v1/DOS (accessed 30 July 2019).

40
 ERIA Discussion Paper Series

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2019-20 Kostas MAVROMARAS, December
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and Zhang WEI Framework for Reforms
Md Abdullah AL MATIN,
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2019-19 TANAKA, Shigeki Connected PV Systems of November
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Markus NORNES
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Trinh W. LONG, Matthias
2019-12 Global Value Chains and Formal September
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Literature and Writing Overseas

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In the Closet: Japanese Creative

Industries and their Reluctance to
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2019-07 August
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2019-02 The Next Generation Automobile June
Seio NAKAJIMA
(no.288) Industry as a Creative Industry 2019

2019-01 Cool Japan, Creative Industries June

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(no.287) and Diversity 2019
ERIA discussion papers from the previous years can be found at:
http://www.eria.org/publications/category/discussion-papers

42