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Background of the Economy of Malaysia

Question:

Discuss about the Economic Policy and Industrial Relations.

In the contemporary global framework, apart from the existing predominant economies, several new economies are making their mark as immensely progressive ones, with attributes like high economic growth, industrial and commercial expansion and overall improvement in the standard of living of the residents of the concerned economies. This has been especially true for several South East Asian countries, which have been in limelight in the recent decades for their impressive development, of which one of the primary one is the economy of Malaysia (Jomo, 2016).

With an annual GDP of almost 0.816 trillion USD and a high GDP growth rate of almost 6.2% (2017), the country is the third largest economy in South East Asia and has managed to be the thirty fifth largest economy in the global framework. The country is popular for a highly competitive and productive economy, efficient labor market, technological and manufacturing success as well as knowledge based industries. All these attributes of the economy of the country attracts immense global attention and investments over the years (Athukorala, 2012).

However, this economic growth of the country can be attributed to several economic phenomena which the country experienced over the past years, which with their positive as well as negative implications have helped immensely in shaping up the economy of the country as it is today (Hatta & Ali, 2013). One of such economic phenomena which had significant implications on the country is that of the New Economic Policy, which came into action in the country in 1971 and continued till 1990, being of the nature of affirmative type of policy. The concerned report tries to emphasize on the New Economic Policy of the country, its effects on the economy, the positive and negative implications it had. It also compares and contrasts the same with the similar affirmative policy taken in countries like South Africa, in the later sections (Lee, 2012). 

As discussed above, the government of Malaysia implemented the New Economic Policy in the country, with the Second Malaysia Plan in 1971 and this policy remained in operation till the Fifth Malaysia Plan (1990). The policy was implemented keeping into consideration three main long term socio-economic welfare objectives which are as follows:

  1. To achieve and maintain the unity, integrity and harmony in the national domain
  2. To reform and restructure the socio-economic standards prevailing in the country
  3. To increase the welfare of the residents of the country by minimizing their poverty and income inequality (Segawa, 2013)

The policy which was undertaken by the government of Malaysia consists of two types of strategies, which aimed in reducing the poverty of the indigenous residents of the country as far as possible and also to put an end to the racial discrimination and unequal distribution of wealth and other facilities based on racial identification. To achieve an overall high standard of living for the Malaysians, the main aim of the policy was to improve the economic status of the same by helping them to gain easier access to land, training facilities, capital and other facilities which they are entitled to (Gomez & Saravanamuttu, 2013).

New Economic Policy of Malaysia

To understand the need for such a policy in the highly developing economy of Malaysia, it is of immense importance to know about the history of the societal and economic, as well as political history of the country which laid the ground for the need of the implementation of the NEP in Malaysia. The history and the causal factors for the implementation of the same are discussed in the following section of the report. 

The roots of the New Economic Policy in Malaysia lie in the periods as early as sixteenth century. Over the last few centuries the country has experienced immense economic prosperity and political and societal stability which attracted huge number of people across the world to migrate in the country for a better life and economic prosperity. These populations of immigrants were significantly composed of the Chinese and Indian migrants (Andaya & Andaya, 2016). The Chinese mainly started migrating to Malaysia after the Portuguese captured Malacca. Migrations of Indians as well as Chinese increased even more during the period of British Colonial Rule. The main reason behind this extensive immigration of the Chinese and Indians was the poor quality of life of these people in their countries under the autocratic rule of the British and the search for a better life with better economic and social prospects. The increasingly developing economy of Malaysia attracted these people in huge numbers (Aziz, 2012).

During that period, the indigenous population and the local residents of Malaysia, mainly known as Malays or the Bumiputera mainly engaged themselves in agricultural or agro-based activities for the purpose of sustenance and economic progress and they mainly lived in the rural areas of the country. The Chinese, on the other hand, who migrated in the country in search of better economic prospects, engaged mainly in industrial and commercial activities in the country while the Indians emphasized on the estate sectors, thereby developing these sectors of the country immensely and bringing in immense economic progress for the country as well as for themselves in the succeeding periods (Epu.gov.my, 2018). However, this economic progress led to a segregation between the Malays living in rural areas and operating in the agricultural sector and the Chinese immigrants who were based in the urban and more developed areas and who primarily enjoyed the fruits of commercial success of the country, thereby leading to the creation of a better standard of living for the latter over the formers (Idrus, 2017).

Affirmative Action Policy

The distribution of wealth in the country became even more skewed post the independence in 1957, with the major share of economic prosperity flowing towards the Chinese population of the country, thereby depriving the original residents of the country, known as Bumiputera or the Malays. This in turn led to the creation of a situation of abject poverty and inequality which was ethnicity based. The problem was even more acute in the Peninsular Malaysia, where the monthly household income of the Malays were as low as RM276 (During 1970) and that of the Chinese population ranged as high as RM632 which was more than double of the former.

The increasing unequal distribution of wealth among the different ethnicities of the country led to the creation of immense unrest among the different ethnic groups, especially the Malays as they in spite of being the original residents of the country were deprived of the privileges and economic welfare in the country. These huge ethnic tensions led to immense outburst within the country in the form of a massive riot in 1969, which took lives of hundreds of residents of the country.

This gave rise to the need for major rectifications of the policy structure of the country among the policy makers and the government officials of the country, which in turn led to the development and implementation of the New Economic Policy in Malaysia in 1970. 

The term “Affirmative action policy” refers to those steps or measures taken by the governing authorities of a country which tries to favor and increase the welfare of those section of people in the society who have been suffering for a prolonged period due to the discriminations and unequal flow of privileges coming for them. In this context, the New Economic Policy, taken by the government of Malaysia can be termed as one of the most significant policies of affirmative nature (Noor & Leong, 2013). This is because the main objective of the policy was to eradicate the unfair discrimination happening against the Malays and Bumiputera of the country in terms of lack of privileges, unequal distribution of wealth, comparatively lower standard of living and less prospered economic scenario, which also affected the other sphere of life of the same. Apart from providing the Malays with easier access to resources, skill development and public welfare services, the NEP was also designed to create a fairer distribution of opportunities for the Malays to participate in the different economic activities in which they were not seen to participate earlier.

Positive Implications of NEP in Malaysia

Due to the presence of acute poverty and inequality among the Malays, they were mostly deprived from other amenities of life in many spheres which includes the provision of proper education, skill building, employment and overall standard of living among these people. The Malays being confined to only subsistence agriculture before the implementation of the NEP, the policy also aimed to take them out of that confinement by providing government assistance to the same in the following aspects:

  • Developing skills to find sustainable and quality employment for themselves
  • Acquiring ownership in the different sectors of the economy which were previously under the control of Non-Malaysian population
  • Participating more and more in the different economic activities in the country thereby strengthening their own position and increasing their economic and overall welfare.

The primary targets of this affirmative action policy was to reduce the overall poverty in the country to 16.7% by the year 1990 and to increase the share of capital in the hands of the Bumiputera to 30% from 2.4% and to decrease the same for the foreigners to 30% from 63.3% (CHO, 2016). 

The implementation of the NEP in the country had huge positive implications on the economy which was seen in the progress of the economy as a whole. However, there were several adverse effects of the implementation of the same too, which are discussed as follows:

  1. a) Overall reduction of poverty- The policy succeeded noticeably in reducing the poverty level in the country for not only the Malays but also for all the other ethnic groups by significantly decreasing the number of people living below the poverty line from as high as more than 50% in 1970 to a strikingly low 3.8% by 2009.

Figure 1: Benchmarks achieved by the NEP over the years in different aspects of economic welfare

(Source: Dl6.globalstf.org, 2018)

  1. b) Restructuring of the economy- As is evident from the above figure, the overall economic pattern in the country significantly changed with the implementation of the New Economic Policy. While the share of ownership of wealth of the Bumiputera increased significantly from 2.4% to as high as 19.3%, along with the increase in the same for the Chinese, Indians and others surpassing the goals, the share of the same decreased significantly for the foreigners (33.9%), thereby indicating towards a more equitable distribution of wealth among the different ethnicities among the country (Gomez & Saravanamuttu, 2013).
  2. c) Restoring national unity- The reduction in the inequality among the different ethnicities of the country not only increased the overall welfare quotient of the same but also helped in reduction of the tensions among the different ethnic groups, thereby restoring the national unity and stability in the country.
  3. d) Creation of Middle Class- The NEP by redistributing the wealth efficiently across different ethnic groups of the country, led to the creation of proper middle class in the country, which also significantly consisted of the Bumiputeras and the Malays.

Thus, the success of the NEP in the country was multi-dimensional with the increase in the welfare and reduction of tensions across the different ethnic groups of the country. However, there were several aspects of the policy which did not work well for several sectors of the economy:

One of the primary failures of this otherwise significant policy was that it failed to address several sections of the society, especially the Non-Bumiputeras, who were also suffering from the same problems as the former. This includes the rural estate based Indians, who fell as outliers of the policy and are still reeling under the pressure of poverty and inequality. The empirical evidences show that though there was a huge increase in the share of wealth of the Non-Bumiputeras (46.8%) under NEP, of this almost 44.9% belonged to that of the Chinese population with only 1% getting accrued to the Indians (Tan, 2012).

Another adverse impact of the policy was the creation of the notion of the presence of two different ethnicities in the country and a sense of difference among the population, which may hamper the social stability of the country. Also in a hurried quest to increase the economic welfare of the Malays, the policy failed to take into account the need for increase in the skills, knowledge levels and cultural integration, which are required for a health and long term sustainable society (Lin & Rosenblatt, 2012).

Negative Implications of NEP in Malaysia

The implementation of the NEP not only affected the economic aspects of the country but also has its implications on the political dynamics of the country. The Malaysian politicians being allowed to hold business posts along with their political responsibilities, the introduction of the NEP led to the emergence of huge money politics in the country. The NEP particularly benefitted the elite classes in all the ethnic groups who enjoyed strong ties with the politically influencing personnel bestowed with the duty of proper redistribution of wealth and other privileges, thereby creating a disproportionate distribution of wealth among the different sections of Malay as well. The countries privatization under NEP was a cause of foreign debt in the country due to the deliberate fund embezzlement by several corrupt politicians who taking advantage of their political power, allowance to participate in business and lack of management and discipline in the political situation of the country (Forbes.com, 2018). However, the implementation of NEP, in spite of its shortcomings, helped in creating a middle class and bringing in open economic operations in a more or less stable political environment.

The NEP of Malaysia can be compared with the Employment Equity Act in South Africa which was implemented in 1998, with the objective of providing more access to employment for some designated groups, including women of colors, people with disabilities and Indian people. Under this act, the qualified and designated people are expected to get equal chances in all the job categories.

The policy, though being similar to that of the NEP, is far more targeted than the latter as it targets the employment sector only. However, the implications of the same have not been that farfetched like that of the NEP as the same is more recent than the latter. However, the action did help in creating employment prospects for the otherwise discriminated ethnic and racial groups in the country (Labour.gov.za, 2018).

Conclusion

From the above discussion it can be asserted that the NEP in Malaysia, being one of the most widespread affirmative policies, had immense implications on the economy of  Malaysia, both positive and negative, with the positive aspects being greater. It helped in restructuring the economy, increasing the overall welfare and eradicating the overall poverty in the country. However, some of the sections of the society remained unattended thereby hampering their welfare, which in turn leaves the scope of improvement of the policy framework in the country in the future periods.

References

Andaya, B. W., & Andaya, L. Y. (2016). A history of Malaysia. Palgrave Macmillan.

Athukorala, P. C. (2012). The Malaysian economy during three crises. Malaysia’s Development Challenges: Graduating from the Middle, 83-105.

Aziz, R. A. (2012). New Economic Policy and the Malaysian multiethnic middle class. Asian Ethnicity, 13(1), 29-46.

CHO, Y. M. (2016). A study on the origins of ethnic conflict and settlement process in Malaysia: the effect of the New Economic Policy on Chinese Malaysians.

Dl6.globalstf.org. (2018). The New Economic Policy (1970 – 1990) in Malaysia: The Economic and Political Perspectives. Dl6.globalstf.org. Retrieved 8 January 2018, from https://dl6.globalstf.org/index.php/jlss/article/viewFile/520/537

Epu.gov.my (2018). New Economic Policy. [online] Laman Web Rasmi Unit Perancang Ekonomi. Available at: https://www.epu.gov.my/en/development-policies/new-economic-policy [Accessed 8 Jan. 2018].

Forbes.com. (2018). Forbes Welcome. Forbes.com. Retrieved 8 January 2018, from https://www.forbes.com/2009/05/06/malaysia-politics-economy-business-oxford

Gomez, E. T., & Saravanamuttu, J. (2013). The New Economic Policy in Malaysia: Affirmative action, ethnic inequalities and social justice. NUS Press.

Gomez, E. T., & Saravanamuttu, J. (2013). The New Economic Policy in Malaysia: Affirmative action, ethnic inequalities and social justice. NUS Press.

Hatta, Z. A., & Ali, I. (2013). Poverty reduction policies in Malaysia: Trends, strategies and challenges. Asian Culture and History, 5(2), 48.

Idrus, D. (2017). New Economic Policy and the Birth of Malaysia’s Own Industrial Relations System. Jurnal Kemanusiaan, 1(1).

Jomo, K. S. (2016). Growth and structural change in the Malaysian economy. Springer.

Labour.gov.za. (2018). Basic Guide to Affirmative Action — Department of Labour. Labour.gov.za. Retrieved 8 January 2018, from https://www.labour.gov.za/DOL/legislation/acts/basic-guides/basic-guide-to-affirmative-action

Lee, H. A. (2012). Affirmative action in Malaysia: Education and employment outcomes since the 1990s. Journal of Contemporary Asia, 42(2), 230-254.

Lin, J. Y., & Rosenblatt, D. (2012). Shifting patterns of economic growth and rethinking development. Journal of Economic Policy Reform, 15(3), 171-194.

Noor, N. M., & Leong, C. H. (2013). Multiculturalism in Malaysia and Singapore: contesting models. International Journal of Intercultural Relations, 37(6), 714-726.

Segawa, N. (2013). Affirmative action and nation building in Malaysia: The future of Malay preferential policies. African and Asian Studies, 12(3), 189-214.

Tan, J. (2012). The pitfalls of water privatization: failure and reform in Malaysia. World Development, 40(12), 2552-2563.

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