(SANITIZED) MALAYSIA: ECONOMIC PROSPECTS AND RACIAL DISCORD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010092-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: January 28, 2010
• Sequence Number: 92
• Publication Date: July 1, 1971
• Content Type: IM

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D
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Cnnfid
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum.
Malaysia: Economic Prospects And Racial Discord
Confidential
ER IM 71-140
July 1971
Copy No Y 52
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
cnouP I
rcludtd from aulomalk
downgrodinq mid
Jnd ______ ion
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
July 1971
INTELLIGENCE MEMORANDUM
MALAYSIA: ECONOMIC PROSPECTS AND RACIAL DISCORD
Introduction
1. The outbreak of racial violence in Kuala Lumpur in May 1969
threatened to upset Malaysia's tenuously balanced interracial political system
and its considerable economic achievements. With the riots the grievances
of the relatively poor, largely rural Malays against the relatively well-off,
largely urban Chinese became a readily exploitable political issue. The more
radical Malay political groups quickly surfaced their demands for rapidly
overcoming racial economic disparities. Essentially, these demands have
called for wider Malay participation in the modern sectors of the economy
at the expense of the Chinese. They have implied, furthermore, massive
government intervention and subsidization which would be a sharp departure
from the traditional free enterprise system.
2. The previous, 13-year administration of the Tunku Adbul Rahman
was reluctant to imperil economic efficiency and investor confidence by
capitulating to more extreme Malay demands. How the fledgling Razak
administration, which assumed formal power only in September 1970,
ultimately responds to the pressures of these demands will greatly influence
Malaysia's future. This memorandum analyzes the factors underlying
Malaysia's past economic achievements, assesses the present economic
positions of the Malays and the Chinese, and evaluates the prospects for
continuity in economic policies and for continued economic growth.
Discussion
Malaysia's Unique Achievements
3. Malaysia is an outstanding example of a less developed country
achieving sustained economic growth as a primary commodity exporter.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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Whereas many other countries have remained dependent on a single crop
or mineral export and experienced very slow or stagnating economic growth,
Malaysia has boosted trade earnings and national output by introducing
new export products. It has also made substantial gains in developing import
substitution industries. During the 1960s, GNP grew 7% annually (see
Figure 1), reaching $3.9 billion in 1970. J Although population also has
grown rapidly - at more than 3% per year - per capita GNP has risen
steadily and now stands at about $360, topped in Southeast Asia only by
the city-state of Singapore and the small, oil-rich sultanate of Brunei.
150
MALAYSIA: Selected Economic Indicators
(1957-59=100)
Exports
19557.59 1960 1961 1962 1963 1964 1965 1966 ' 1967. 1999 1969 1970
'Computed for West Malaysia only.
'Estimated for 1970.
1111705 7.71 CIA
1. All dollar figures in this memorandum are in US dollars.
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4. One of the. most prosperous, efficient, and well-run economies
in the less developed world, Malaysia has been largely self-reliant in its
development while maintaining a strong balance of payments and a
non-inflationary domestic economy. Official aid has been relatively
unimportant and the government has borrowed mostly from domestic
sources. Service payments on official external debt currently run at a small
3% of annual exports.
5. The colonial "open" system of international trade and payments,
retained after independence from the United Kingdom in 1957, has worked
quite well. Import barriers are few for a less developed country, capital
movements are virtually unrestricted, and the domestic currency is fully
backed by official international reserves. These amounted to over $800
million at the end of 1970, enough to finance about seven months' imports.
Large reserves have been maintained under the open system partly because
incomes are highly dependent on exports, and imports tend to adjust
automatically to export trends (see Figure 2). In addition the price level
is heavily influenced by the availability of imports. The consumer price
index in Malaysia rose by less than 1% a year between 1960 and 1970.
6. In no small measure, sustained economic growth and stability have
been possible because of political stability. Although tensions have
sometimes been acute between the politically dominant Malays and the
economically dominant Chinese, such difficulties have not adversely affected
Malaysia's economy. The private enterprise system has been left virtually
undisturbed, and extensive official investment incentive programs have
bolstered investor confidence. The economy has continued to run smoothly
and efficiently through such crises as the break with Singapore, the
confrontation with Indonesia, and even the May 1969 racial riots. Private
investment did fall slightly in 1969 probably because of the May
disturbances, but in 1970 it rose by a substantial 33%.
7. Economic growth has taken precedence over social and political
goals in official policy, although the government has made some effort to
improve the economic position of the Malays. Public investment J more
than tripled in the past decade and now accounts for about 30% of total
fixed investment (see Figure 3). The great majority of this investment has
gone to Malay-dominated smallholder agriculture and to infrastructure and
2. In all, budgetary expenditures amount to about $100 per capita, a
very high figure for a less developed country. Malaysia raises only a small
amount - about 10% - of its revenues from export taxes, relying on income
taxes and import and excise duties (largely on luxury goods) for most of
the remainder. Such a taxation system is beneficial for exporters' incentives
ecause taxes are largely based on profits rather than on the quantity of
foreign sales.
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i400
MALAYSIA: Foreign Trade
''(Million US $)
1950 1059 1960 1901 1902 1903 1904 1965 1966 1007 1909 . 1059 ' 1970
MALAYSIA: Private and Public Investment
(Millkn US $)
Total Investment
PUBLIC INVESTMENT
~t t1. ~GRt 1~G { ~r t J~ir V fy -1..~4PFHV.ATE INVESTMENT' 4i y y!`
1000 1901 1902 1963. 1064 ' 1005 1900 1907 1969 1969 1970
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social services, especially education. All of the races have benefited from
Malaysia's growth, but probably the economically disadvantaged Malays
most of all, particularly because this relatively backward group had most
to gain from the improvement of the infrastructure and social services.
8. West Malaysia, where 85% of the population is found, accounts
for 85% of the gross national product (GNP), produces about 95% of the
rubber and palm oil and all of the tin, Malaysia's only important mineral
resource. The major economic activity in East Malaysia on the island of
Borneo, which accounts for almost three-fifths of Malaysia's log exports,
is timber exploitation. Petroleum, which is also exploited in East Malaysia,
supplies about one-sixth of national needs.
Export Production
9. Although Malaysia's population is only 1 1 million, exports totaled
$1.7 billion in 1970 (43% of GNP) and were the fifth largest among
non-oil-producing less developed countries, only slightly below India's.
Malaysia has for many decades been the world's largest exporter of rubber
and tin and during the 1960s became the top exporter of tropical hardwood
logs and palm oil.
10. Export growth averaged 6% annually during the 1960s in spite
of stagnating world demand for the'
country's traditional export
commodities. The price of natural rubber fell by about 25% in 1961 as
a result of intensifying competition from synthetic products and continued
downward through 1970, when it was only 55% of the 1960 level (see
Figure 4). The volume of rubber exports increased appreciably, thereby
compensating somewhat for the lower price, but rubber's importance as
an export fell from 55% of total exports in- 1960 to 34% in 1970 (see
Table 1). Tin prices on the other hand climbed by 65% in 1970 over the
1960 level, but the volume of tin exports did not change significantly.
Timber was the major contributor to export growth, increasing more than
five times from 1960 to 1970, while earnings from palm oil also quadrupled,
but from a much smaller base.
11. Efficient produce& , responding quickly to new market
opportunities and receiving government support, are largely responsible for
Malaysia's export success. Both local and foreign investors plunged quickly,
into timber exploitation as the demand for wood, particularly in Japan,
increased sharply. Malaysia, together with Indonesia and the Philippines,
supplied most of Japan's increased demand for broad-leaved logs from l q",66
to 1970. The phenomenal rise in palm oil production was the result of
cooperation between the government and estate owners who were eager
to reduce their hitherto virtually complete dependence on rubber.
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MALAYSIA: Major Exports
RUBBER TIN
1960=100 1960-100
Price
000 1062 1904 1000 1000 1070
1960=100
Volume
0
1000 1002 1001 1000 1000 1010
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SAWN LOGS
1
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Table 1
Malaysia:
Commodity Composition of Exports
Percent
1960
1970
Rubber
55
34
Tin
14
19
Timber
5
17
Saw logs
3
13
Sawn timber
2
4
Palm oil
2
5
Iron ore
4
2
Other
20
23
Government subsidies were made available to help defray the investment
costs of planting, and government-sponsored research developed
high-yielding palms. Acreage under cultivation increased by 450% to
735,000 acres in 1969, with 80% on rubber estates, where the world's
highest palm oil yields are attained. By 1966, Malaysia had surpassed Nigeria
and the Congo (K) in sales and by 1970 accounted for over 40% of world
exports. Malaysia's investment in extensive land clearing and resettlement
schemes for thousands of landless farmers has boosted smallholder palm
oil production appreciably.
12. Through technological advances, Malaysia has increased its lead
as the first-place and most efficient natural rubber producer. / The 1.3
million tons produced in 1969 was 45% of world output, or a 5% greater
share than in 1960. Malaysia's output rose some 66% during the 1960s.,
but acreage increased only 9%. Thus most of the increased production
derived from raising yields per acre. Replanting with new, high-yielding tree
varieties has been most important in improving yields. By 1969, new trees
covered 90% of estate and 60% of smallholder acreage. From the new trees
and other innovations, substantial gains in productivity and product quality
have also ensued. A newly developed processing technique produces rubber
of uniform purity and grade in conveniently handled block form more
cheaply than previously used techniques, This block rubber, which
commands top price in the world market, accounted for 11% of output
in 1969. The government has subsidized new planting, technological
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innovations, and land resettlement schemes which have been a boon to
smallholders in particular. Rubber, acreage in these projects increased enough
to more than offset a 16% decline in estate acreage which was caused chiefly
by the shift to oil palm. Since 1960, smallholder acreage has risen from
one-half to about two-thirds of the total. Under the guidance of extension
services, smallholder yields have also been steadily rising and are now about
three-fifths the yields on estates.
13. Malaysia remained one of the few major tin producers whose
output was not adversely affected by political turmoil, and domestic ovt ut
rose more than 3% annually in contrast to an increase ;,, world demand
of only 1%o during the 1960s. Worldwide production shortfalls were created
by political and economic upheaval, especially in Indonesia and Bolivia.
The higher world prices were a spur to Malaysian production despite a
decline in the tin content of Malaysia's deposits. Most of the increased
output in Malaysia originated not from the large dredging companies but
from smallscale producers operating gravel pumps. The number of pumps
more than doubled during the decade. J '
Import Substitution
14. Substantial increases in rice production and manufacturing have
increased the share of gross domestic product consumed domestically by
10 percentage points between 1960 and 1969 as shown below:
1960
1969
Production for export
55
45
Production for domestic use
45
55
15. With strong official support, Malaysia's farmers doubled their rice
production during the 1960s, to almost 1 million tons. This increased output
significantly reduced import dependence to 20% of total supplies, compared
to 40% in the early 1960s. Growth was attributable to a 60% acreage
expansion and a 25% rise in yields. Thanks mainly to government-sponsored
irrigation projects, West Malaysia's double-cropped rice acreage, insignificant
in the early 1960s, accounted for 20% of total rice acreage at the decade's
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end. The government has also established credit and extension services and
subsidized fertilizer. Moreover, production against imports has been offered
through producer price support and requiring importers to purchase a set
proportion of domestic rice for every ton purchased abroad.
16. Government policies also encouraged growth of import
substitution industries. The still small manufacturing sector increased
production by 9.S% annually from 1960 to 1969, raising its share of national
output from 9% to 12%. Domestic manufactures now account for over
one-half of domestic market needs, compared with one-third in the early
1960s. Growth was most rapid in food processing, textiles, rubbc products,
and cement. More recently, steel, electrical machinery, and car and truck
assembly have also become leading growth industries. Tariffs normally
ranging from 25% to 40% ad valorem on selected products have been the
chief policy instruments for fostering this growth. These have been
supplemented by import quotas, but imports of raw materials and
intermediate goods have been generally exempt from duty. In addition, tax
incentives have been used selectively, including tax holidays for the so-called
Pioneer Industries - those granted special status for developing new priority
production - and investment tax credit for certain other industries. Foreign
investors receive virtually the same incentives as local entrepreneurs. The
government has also built many industrial estates with requisite
infrastructural facilities to attract new investment.
The Economic Status of the Malays
17. Malay ownership in the goods-producing modern sectors is still
quite minor, although they account for 44% of the population. The Chinese,
with 37% of the population, and a relatively few Europeans own most of
such facilities. The Chinese share, however, has been increasing at the
expense of foreign interests. European ownership (including a few
Americans) of estate acreage planted to rubber declined from about 59%
to 52% of the total. Most of this decline was due to the transfer of estates
to Chinese ownership and part to a shift to oil palm production. European
rubber estate acreage is overwhelmingly British and still accounts for the
vast bulk of holdings above 1,000 acres as well as for most of the estate
rubber processing factories. Tin mining operations in the rapidly growing
gravel pump sector are practically all Chinese-owned. This sector's share
of tin concentrate output rose from one-third to more than one-half from
1960 to 1969, while the number of dredges in the mainly British-owned
dredge sector remained virtually constant and output declined.
Manufacturing, including non-estate rubber processing, is controlled mainly
by Chinese interests, including many of the large plants built in recent years.
Among the new industries qualifying as Pioneer Industries - ranging from
automobile assembly to electronics - foreign investors have a 60% share.
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18. Chinese interests have also been acquiring an increasing share of
control in finance and commerce. Although 22 of Malaysia's 38 commercial
banks are foreign-owned, Chinese-owned banks have been gaining an
increasing share of the rapidly expanding business and now hold about 40%
of total deposits, compared with about 25% in the early 1960s. Local
Chinese control most of tl a import, wholesale, and retail trade, although
the foreign-owned estate-company agency houses still conduct an important
but gradually declining part of the business.
19. The distribution of employment by race among sectors points
up the concentration of Malays in smallholder agriculture. According to
Kuala Lumpur, this distribution has remained fairly constant. J The 1968
data show Malays account for about 80% of those employed in smallholder
agriculture. The remaining 20% are practically all Chinese, mainly rubber
growers. In contrast the total employed labor force is 50% Malay, 36%
Chinese, and 13% Indian. On the estates, half the employees are Indians
and the balance are Chinese and Malays (see Table 2).
20. Outside agriculture, Malay employment is concentrated in
government services, including teaching. The decisive Malay domination in
government services - over 60% of the total - reflects their political power
and constitutionally guaranteed preferences. J With the rapid spread of
education and Malay language training, Malays by 1968 occupied 53% of
the 75,000 teaching jobs in West Malaysia. They also comprise the bulk
of police and armed services personnel. In some other non-agricultural
sectors - public utilities, sanitary services, transport, storage, and
communications - Malays predominate over each of the other races, with
40%-45% of employment. Most of these jobs, however, are menial and
low-paying.
21. In contrast, the Chinese account for over 60% of those employed
in non-estate rubber processing, mining, manufacturing, construction,
commerce, and non-government services. Moreover, Chinese hold 75% of
the proprietorship and managerial positions. In the professions, except for
teaching, the Chinese account for 50%. Most Indians work on estates and
in public utilities, transport, and government services. Moreover, the
relatively small Indian minority accounts for almost as many professionals
as the Malays.
5. Employment data on East Malaysia are not available.
6. As outlined in the constitution, some of the special privileges of Malays
include: the reservation of a fixed proportion of public service positions,
scholarships, educational opportunities, license for trade and business for
Malays; and the reservation of the Royal Malay Regiment exclusively for
Malays.
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West Malaysia: Employment by Industry and Race, 1968 a/
Total Employment
Employment by Race
(Percent of Sector)
Percent
Thousand
of Total
Malays
Chinese
Indians b/
Other
Agriculture, forestry, and fishing
(excluding estate-type products)
500.7
21.2
79.3
17.9
1.0
1.8
718.8
30.4
52.5
25.8
21.1
0.6
n
Oil palm and tea
40.4
1.7
28.1
1703
53.1
1.5
O
z
Rubber growing
Rubber processing off estates
Other
621.4
6.3
50.7
26.3
0.3
2.1
52.5
28.9
74.7
27.3
61.9
10.6
19.7
7.7
14.7
0.5
1.5
0.0
Mining and quarrying
72.0
3.0
26.4
61
0
11
8
0
8
z
F-J
Manufacturing
214.8
9.1
32.3
.
62.1
.
4.8
.
0.8
1
Construction
78.9
3.3
27.5
60.9
10.4
1.2
r
Electricity, gas, water and
sanitary services
Commerce
Transport, storage and commu-
nication
86.2
3.6
42.0
35.8
21.2
1.0
Services
413.0
17.5
43.8
38.9
15.1
2.2
Government services c/
111.7
4.7
61.6
14.3
18.8
5.3
Other services
142.0
6.0
25.0
61.4
12.9
0.7
Not specified
a. Average for period mid-1967 to mid-1968.
b. Includes small proportion of Pakistanis and Ceylonese.
c. Includes teachers.
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22. The largely rural Malays have benefited most from the spread
of modern infrastructural facilities and social services. Extensive road
construction and the expansion of public transportation have significantly
reduced the isolation of rural areas a%id made them more accessible to health
services and education. Enrollments in Malay-speaking schools - the
principal but not the sole source of Malay education - have risen steadily.
Since the mid-1960s the main increase has been in secondary education,
where enrollments in Malay-speaking schools increased sixfold.
23. Unemployment rates among Malays have remained rather
constant, while those among Chinese and especially Indians have increased.
In West Malaysia in 1968 the unemployment rate for Malays was 5.8%,
compared with 6.1% in 1962. During this same period the rate for Chinese
rose from 6% to 7% and that for Indians from 6% to more than 10%.
These trends probably reflect relatively greater opportunities for Malays in
smallerholder agriculture partly as a result of rural resettlement schemes.
While the total number of unemployed Malays rose by only 4%, the ranks
of unemployed Chinese rose by 14% and those of Indians almost doubled.
The growth of Chinese unemployment reflects in part their higher
concentration in urban areas, where unemployment reached about 10% in
1968. Unemployment is also high among the young, especially in urban
areas. Unemployment in the 15 to 19 age group in cities was 29% in 1968
and 16% in the 20 to 24 age group. The soaring unemployment of Indians
resulted mainly from lay-offs on rubber estates because of new labor-saving
production techniques.
Protest and Response
24. The United Malay National Organization (UMNO), the ruling
political party since independence, has been able to avoid granting the more
radical Malay demands for special treatment which might threaten economic
growth. In its coalition with the Malay Chinese Association, UMNO is
pledged to the interracial compromise that allows the Chinese full economic
rights in the modern economy. Until May 1969 the strong political
leadership; the greatly increased spending on education, infrastructure, and
agriculture; and the favorable economic situation apparently blunted Malay
discontent. But the racial riots of May 1969 following the elections which
upset the delicate racial balance in the government brought the Malay
problem into the open. There was a rising clamor, especially among the
younger, middle-echelon UMNO leaders, for extending Malay economic
privileges. Speculation quickly arose that radical departures in policy might
be in store, especially since Tun Abdul Razak was soon to take over as
Prime Minister and as head of UMNO after a 13-year rule by the Tunku
Abdul Rahman. New laws were passed to greatly increase the role of the
Malays in modern economic activities, but in practice nothing was done
to disrupt the economy.
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25. Official pronouncements following a mid-1969 policy review
stressed the intention to impose Malay hiring quotas on new Pioneer
Industries. But because of the scarcity of Malay skilled labor, these quotas
have remained negotiable, Legislation was also passed making citizenship
a prerequisite of employment, a law designed to reserve jobs for Malays
since most non-citizens are Chinese and Indians. When this Employment
Restrictions Act was promulgated in July 1969, broad exemptions were
made for those holding skilled and professional jobs - mostly Chinese in
urban areas - and the main initial impact fell on Indian estate labor. At
the end of 1969, there were only 900 Malay applicants for over 5,100
unfilled jobs on estates. In consequence, Kuala Lumpur found it expedient
to back down and permit the rehiring of Indians, and since then the
legislation has been largely ignored.
26. The mid-1969 policy review and subsequent official actions have
reaffirmed and strengthened past policies of promoting economic growth
and improving the Malays' lot without restricting Chinese enterprise. There
have been intensified efforts to stimulate private investment in
labor-intensive industries and/or those producing for export. Coordination
of the Pioneer Industries Program has been vested in the new high-level
Capital Investment Committee which has stepped up promotional campaigns
to attract foreign as well as domestic investors. Partly as a result, the capital
pledged for Pioneer Industries increased by 250% in the first 10 months
of 1970 compared with the entire previous year. At the same time, the
government began to honor its long-standing pledge to lend direct support
to Malay industries by putting up one-fifth of the share capital for a Malay
batik textile enterprise in late 1969.
27. Preliminary releases in May 1970 on the Second Five-Year Plan
(1971-75) underscore continuing promotion of Malay development together
with incentive support for Chinese private enterprise. Public investment is
to increase by more than half and will account for more than half of total
investment during the Plan. Much of this will be devoted as in the past
to programs of special benefit to Malays, including opening up new irrigated
rice lands and replanting smallholder rubber plots as well as continuing high
expenditures on education, including technical training. The Plan also
indicated Kuala Lumpur's intention to involve both government and private
enterprise more directly in industrial development in the predominantly
Malay regions of West Malaysia's cast coast.
Outlook
28. Malaysia's economic future will depend on a continuation of
political stability and traditional economic policies as well as expansion of
production for export and the home market. Political stability is rather
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tenuous. Recent experience has vividly shown that the undercurrents of
racial hostility run very deep, and Malay protest against Chinese economic
predominance has become increasingly strident even within UMNO ranks.
Moreover, the income gap between Malays and other races is not likely
to narrow much over the next several years even with continued economic
prosperity. Racial mobility across economic sectors is not expected to
increase very much, because acquiring technical, managerial, and
entrepreneurial skills is inevitably a long-term process. But even though
serious communal disturbances disrupting the economy cannot be ruled out,
the prospects for maintaining political stability and policy continuity are
probably better in Malaysia than in many other less developed countries.
The political institutions are deeply embedded, and Razak's is a law and
order regime pledged to suppress interracial violence. Moreover, even if racial
income disparities are not lessened appreciably, the Malay's lot and his
potential for a larger role in the modern economy will continue to improve
with sustained economic growth.
29. The generally healthy condition of Malaysia's economy should
provide a favorable setting for continued export growth. There was an
investment boom in 1970, and under the stimulus of present incentive
policies, investment could easily grow more vigorously in the next five years
than during the First Malaysia Plan. Moreover, the opportunities for boosting
economic growth through import substitution remain substantial. Further
gains in rice output are likely both from expanded acreage and yield
increases. Malaysian rice yields - about 2,400 pounds per acre - are higher
than elsewhere in Southeast and South Asia but are still quite low compared
with other regions. Yield increases should occur because most acreage
expansion will be in areas with controlled irrigation and because modern
techniques will be used more intensively. Manufacturing for domestic
consumption could also continue growing rapidly since the home market
for many basic products has hardly been tapped. Local textile production,
for example, still accounts for less than one-fifth of consumption. A strong
balance of payments should enable Malaysia, as in the past, to weather
temporary slowdowns in export growth without setbacks to ongoing public
and private projects. And, with the large reserves on hand, the potential
for expanding public investment through increased official borrowing abroad
is considerable.
30. The growth of exports is likely to be sustained despite fairly weak
world demand for natural rubber and tin. Merely by maintaining its present
share of world tin and rubber exports - a conservative estimate considering
its relatively efficient producers - Malaysia could maintain earnings from
sales of these products at roughly their current levels. If at the same time
exports of logs, sawn timber, palm oil, and all other products as a whole
continue advancing at past rates, the rate of overall export expansion will
be about the same as that achieved during the past five years (6.3%).
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31. Export earnings from rubber can probably be maintained at about
their present levels. Natural rubber faces a downward price trend and
sluggish demand which may grow at only about 3% per year. Export
receipts, therefore, are unlikely to reach the highs of 1969, when prices
took it sudden and shortlived upturn. Malaysian producers, however, should
be able to keep their world market leadership. Yields per acre may be
increased in the smallholder sector In particular as more yielding trees come
into production. The use of new chemicals, still in the experimental stage,
may also have some effect,
32. Tin earnings are expected to continue at present high levels.
Demand for tin probably will rise by about 1% annually, and prices should
remain quite steady. Malaysia can easily hold its own in this market partly
because its industry is making significant investment in modernization to
assure continuing modest output growth. Meanwhile, sonic other big
producers such as Bolivia and Indonesia are unlikely to achieve major output
gains.
33. Export expansion over the next several years will continue to
focus mainly on timber and palm oil. The world market for wood, and
especially the Japanese market, which takes about two-thirds of Malaysia's
timber exports, will almost certainly continue to grow. Logging output from
Malaysia's extensive and accessible forest reserves should continue to rise
at rapid rates. Earnings will probably be increased, moreover, by the
increasing share of lumber in total timber exports. Prospects for substantially
increased earnings from palm oil exports are also bright. As reflected in
a 54% rise in the price for palm oil in 1970, there has been an upturn
in the world market for vegetable oils, and the future strength of demand
is promising. Because over half the growth of Malaysian oil palm acreage
has occurred since 1966 and because it takes three to four years for a
tree to begin producing, future output should continue to rise very rapidly,
In addition, earnings from palm oil exports will increase with the completion
of facilities that will make it possible to export a much larger portion of
the product in refined form.
34. On a lesser scale, manufactwres could also become a source of
export growth. They comprised only about I0. % of total exports in 1970,
but recent trends in their growth and in government policy are promising.
Exports of manufactures, included processed foods, rose by nearly one-half
between 1966 and 1970 and in the latter year alone they increased by
almost one-fifth. Among the leading items have been wood products,
cement, and machinery and equipment. Policy support for exports of
manufactures was further extended in April 1970 with the creation of the
National Export Advisory Council. More recently the government has been
campaigning to attract investment by US electronics firms, hoping to
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establish plants producing primarily for the US market. Manufacturing for
export and attracting foreign investment for that purpose represent two
probably essential preconditions for sustaining a more rapid industrial
expansion in the future. Like Hong Kong, Taiwan, and South Korea,
Malaysia can best sustain large-scale investment in the long-run by drawing
on foreign sources eager to exploit plentiful and cheap local labor and by
producing for vast foreign markets, especially in developed Western
countries,
Conclusions
35. Malaysia has sustained rapid economic growth largely through its
remarkable success as a primary commodity exporter. It has increased its
world market share of traditional exports - rubber and tin ?- and developed
new ones. Substantial gains have also been made in expanding output for
the home market. 'T'hese accomplishments have been made without benefit
of significant foreign aid while maintaining a remarkably strong balance
of payments and a non-inflationary domestic economy. Underlying this
economic progress has been comparative political stability and government
policies which have stimulated private sector development. Moreover, official
economic policies have been aimed primarily at growth rather than at
political and social goals despite the relatively unfavorable economic position
of the politically dominant Malays in comparison with the economically
powerful Chinese.
36. Both the Malays and the Chinese have benefited from the
country's economic progress, but the racial economic disparities, particularly
in terns of income, have not narrowed very much. The Malays have
benefited in particular from government support of rice production and
large government investment in infrastructure and social services. Largely
because of these factors, racial economic discontent did not loom large
as a political issue until the 1969 racial riots.
37. Despite some rise in Malay discontent, the fledgling Ratak
administration appears to have reaffirmed and strengthened the past policies
of promoting economic growth and improving the Malay's lot without
restricting Chinese enterprise. The more radical demands for massive
government intervention to broaden Malay participation in the modern
sectors have been rejected out of hand. Although further outbreaks of racial
violence could occur. Razak's commitment to law and order strongly implies
a pledge to essential continuity in traditional growth-oriented economic
policies.
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38. With continuing political stability, Malaysia's prospects for
sustaining economic growth rates of about 6% annually appear favorable.
Opportunities for Import substitution remain substantial, and export
prospects are fairly bright despite weak world demand for natural rubber
and tin. Even if foreign sales of those two commodities remain at current
levels -- a conservative estimate - export expansion will probably continue
at near past rates because of newly develop,cd product lines. 'Timber and
palm oil exports will continue to grow, and manufactured goods are
expected to become an increasingly significant source of export growth.
Furthermore, the country is protected against short-term economic
difficulty by its large international foreign exchange reserves, relatively few
foreign debts, and an excellent international credit rating upon which it
could borrow.
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