Globalization, Employment and Equity: The Malaysian Experience*
 
  by  
  Prema-Chandra Athukorala Research School of Pacific and Asian Studies Australian National University   and   Jayant Menon Centre of Policy Studies and Impact Project Monash University  
 
 
 
 
  Study undertaken as part of the ILO/EASMAT project, Strengthening the Capacity of the Social Partners for Effective Employment Strategies in the Context of Globalization and Liberalization  
 
 
 

ILO East Asia Multidisciplinary Advisory Team (ILO/EASMAT)

ILO Regional Office for Asia and the Pacific

Bangkok June 1996
 

____________

* Unpublished document issued without formal editing by ILO. The responsibilities for opinions expressed in this document rest solely with the authors and its inclusion here does not constitute an endorsement by the ILO of the opinions expressed therein.
 

Globalization, Employment and Equity: The Malaysian Experience⁽¹⁾

Table of Content

1. Introduction
2. Policy context
3. Globalization and Growth
4. FDI and export-led industrialization
5. Employment and wages
6. Poverty and income inequality
7. Concluding remarks
 

1. Introduction
 

Malaysia is undoubtedly a development success story. Throughout the post-independence period since 1957 Malaysia has enjoyed rapid growth with rising per capita income and price stability. Economic growth has been accompanied by rising living standards, greater urbanization and access to health and education, and an improvement in the distribution of income, ameliorating the twin problems of poverty and racial imbalances. The performance has been particularly remarkable after 1987 when the economy achieved above 7-per cent growth in seven consecutive years reaching virtual full employment by 1995. With this background Malaysia now aspires to become a fully developed economy by 2020. This dramatic economic transformation has occurred against a background of massive shifts in the world economy as a result of increasing internationalization of production and trade. Malaysia's success is widely attributed to the ability it has shown in positioning itself within this new world economic order. As a small-open economy, Malaysia's economic policy stance has been not to isolate itself from these global trends. Rather it has tried to respond to developments on the international front as they unfolded.
 

The purpose of this paper is to examine the Malaysian development experience in historical perspective with emphasis on the nature of policy choices in the context of rapid globalization of the world economy. Particular emphasis will be placed on the implications of globalization and liberalization (market based reforms) for employment creation and poverty alleviation.
 

The paper is organized as follows. Section 2 surveys Malaysian economic policy since independence, in order to place the ensuing discussion in context and to delineate the key policy shifts to guide the study of globalization and its developmental implications. Overall growth trends are surveyed in the context of ongoing process of globalization of the economy in Section 3. The process of export-led industrialization is examined in section 4, with emphasis on the role of foreign direct investment (FDI). The implications of globalization for domestic employment and real wages, and poverty and income inequality are examined in Sections 5 and 6. The paper ends in Section 7 with some concluding remarks.
 

2. Policy context
 

When Malaysia gained independence (Merdeka) in 1957⁽²⁾

, it appeared to have all the characteristics required for rapid and sustained economic growth. It inherited from the colonial past well-developed infrastructure, an efficient administrative mechanism and a thriving primary export sector with immense potential for expansion. In terms of per capita income, literacy and health care, it was well ahead of most of its neighbours. Even though the rate of population increase was already very rapid, the highly favourable ratio of land and other natural resources to total population offered great potential to raise income per head. The mobilization of this developmental potential for building the new independent Malaysian economy had, however, to be done under a major constraint; the conflicting challenges forced by a plural society inherited from the colonial past⁽³⁾

. In fact, the post-independence economic policy making in Malaysia can best be described as a continuing struggle to achieve development objectives while preserving communal harmony and political stability. In terms of major policy shifts experienced in this endeavour, the post-independence period can be divided into three subperiods; from Merdeka to the May 1969 riots, the New Economic Policy (NEP) period (1970-87), and the period from 1987 to the present when policy shifted from the NEP emphasis on redistribution to market-oriented development policies.
 

(a) From Merdeka to the May 1969 riots
 

Government policy during this period is perhaps best described as a "holding" programme, designed to suppress growing inter-communal rivalries. The policy thrust was to maintain the status quo while redressing ethnic economic imbalances through rural development schemes. Like in many other developing countries, import-substitution industrialization was on the policy agenda in Malaysia during this period. However, unlike in other countries, attempts were not made to achieve "forced" industrialization through direct import restrictions and the establishment of state-owned industrial enterprises. Snodgrass (1980, p.206) ascribes this policy neutrality to the influence of advice from a major World Bank mission to Malaysia in 1954. There is at least one other factor which might have been more influential in determining the direction of Malaysian policy, however. Throughout this period, Malaysia generally enjoyed a sound balance of payments position, and hence felt no compulsion to resort to stringent import restrictions.

Whilst foreign investment was welcomed with open arms during this period, its impact on the economy was bound to be limited for two reasons. First, in the absence of binding import restrictions, quota-hopping was not a major motive to establish import-substituting plants in Malaysia. Second, the process of internationalization of production through the international division of labour within vertically integrated global industries had not yet begun.
 

By the late 1960s, there was a growing recognition that the easy stage of import substitution industrialization was coming to an end and that future prospects for industrial development depended upon the expansion of export-oriented industries. It was decided accordingly to give more emphasis to those industrial and investment incentives which would encourage the growth of export-oriented activities (Lim 1970). This led to the enactment of the Investment Incentives Act in 1968. The rich assortment of incentives offered to export-oriented FDI by the Act included exemptions from company tax and duty on imported inputs, relief from payroll tax, investment tax credits and accelerated depreciation allowances on investment. In 1970 legislation provided for the establishment of special export processing zones.
 

(b) New Economic Policy (1970-1987)
 

The subdued pace of economic change during 1957-1969 resulted in little progress being made towards solving the "special" problems of the Malays. On the other hand, with urban unemployment rising and education and language again looming as issues, non-Malays began to question the extent to which their interests were being safeguarded in the new Malaysia. The disenchantment growing among all segments of the population ultimately erupted in the bloody communal riots of May 1969.

The Malay political leaders, who were the dominant group in the ruling coalition, decided that the ground rules for governance had to be changed. When parliamentary government was restored in February 1971, the constitution was amended to make seditious public discussion of constitutional provisions for language, citizenship, the special position of Malays and the status of the Malay rulers (Sultans). Thus, the discussion of sensitive constitutional issues was removed from political debate. In the economic sphere, there was a clear shift from planning and policy making based purely on economic considerations and towards an affirmative action policy based on ethnicity. This policy shift was formalized in the New Economic Policy (NEP), which was introduced in the Second Malaysia Plan (1971-75).
 

The overriding objective of the NEP was to maintain national unity through the pursuance of two objectives: eradication of poverty among the entire population and restructuring of society with a view to eliminating the identification of race with economic function. For the first objective, the overall development strategy was reformulated with emphasis on export oriented industrialization, and an ambitious rural and urban development programme. For the second objective, long-term targets were established for the Malay ownership of share capital in limited companies, and the proportion of Malays employed in manufacturing and installed in managerial positions. The NEP aimed to increase the Malay share in corporate assets from 2 per cent in 1970 to 30 per cent in 1990, and to have employment patterns in the urban sector reflect the racial composition of the country. Malay participation in business promoted in two ways: (I) through the expansion of the public sector where Malays held most of the key positions, and (ii) by providing Malays with privileged access to share ownership and business opportunities in the private sector.
 

A major policy initiative during the NEP period was the Industrial Coordination Act (ICA) passed in 1975. The most significant change introduced by the ICA was to subject the conduct of medium- and large-scale enterprises to licensing. The granting of licences, and the conditions imposed when licences were granted, revolved around equity structure, employment structure and use of local professional services. Many of these conditions related directly to the Government's stated aim of improving the relative position of the Malays. The ICA is widely regarded as having had a stifling effect on private investment, not only in manufacturing but in the economy generally (Snodgrass, 1980). The Act was designed to ensure implementation of the NEP at the enterprise level. Its most deleterious effects, however, was probably due to the fact that it introduced so much uncertainty into business planning that it was a disincentive against which all forms of incentive appeared unattractive. This was particularly the case with respect to foreign investment. Another NEP initiative, the Petroleum Development Act (PDA) of 1974, unilaterally cancelled all previous oil production arrangements with foreign multinational companies. An amendment to this Act in 1975 sought to gain control cheaply of companies in the distribution, marketing and refining of petroleum products by forcing these companies to issue a special class of management share to the national Malay-dominated oil company, Petronas. This resulted in Esso Malaysia pulling out of its oil exploration efforts pending a more favourable policy. As Jesudason (1989, p.169) puts it, "the elites, as they embarked on Malay nationalism, were trying to test how much they could squeeze the foreign sector, and clumsily overstepped the acceptable bounds of commercial logic". As a result, there was a pragmatic switch in policy away from public sector involvement and towards the private sector in the Fifth Malaysia Plan; this was hastened, in part, by the recession of the early 1980s.
 

The industrialization policy began to place increasing emphasis on heavy industries from the early 1980s, in an attempt to "emulate Japan" as part of Mahathir's "Look East" policy. The government established the Heavy Industries Corporation of Malaysia (HICOM) and other state bodies to go into partnership with foreign companies in setting up ventures in areas such as petrochemicals, iron and steel, cement, paper and pulp, and motor vehicles.
 

The blow-out in public expenditure as a result of massive government investment programmes was reflected in widening budget and current account deficits between 1981 and 1986. The macro imbalance was compounded by the terms of trade decline in the early 1980s and the subsequent world recession in the mid-1980s (Corden 1993, p.35). The required cuts in government expenditure had invariable contractionary effects on the domestic economy. At the same time, the uncertainty in the policy environment was reflected in stagnation in private investment (both local and foreign) in the economy. These factors brought the economic advances of the 1970s to a halt and created an environment in which race relations became increasingly tense. In this volatile climate, the government clamped down on various opposition groups and embarked on a series of policy reforms.
 

(c) Transition from the NEP to the National Development Policy (NDP)
 

The new policy orientation involved gradually easing of the strictures of the NEP, with a view to putting creating wealth ahead of redistributing it.⁽⁴⁾

Thus, more emphasis was placed on the role of the private sector, accompanied by the removal of impediments to greater integration of the national economy in the global economy. The Fifth (1986-90) and Sixth (1991-95) Malaysia Plans (1991-95) saw a significant reduction in public sector expenditure and a shift in government spending away from public sector enterprises and towards infrastructure projects designed to enhance private sector development.
 

The approach that the Government had adopted towards increased Malay participation in the economy also changed. The commitment to the 30 per cent equity participation target became less dogged, with the Government placing more emphasis on entrepreneurship, managerial expertise and skill development within the Malay community (Ariff, 1991). These changes reflected a switch in the Government's approach towards support for the Malay community. The support now came in the form of assisting the Malay community to compete more confidently with the other communities, without being too dependent on the Government.
 

The government also relaxed regulations on foreign equity participation in Malaysia, and parts of the Industrial Coordination Act were liberalized. Up to 100 per cent foreign equity ownership of export-oriented companies was allowed, and work permit requirements for foreign employees of companies with foreign paid-up capital of US$2 million or more were eased. In addition, guidelines for the approval of new investment projects were relaxed.
 

A gradual process of transformation of the political system has accompanied these policy changes. Over the years, the Malaysian political system had moved a considerable distance towards a more authoritarian political order, while retaining the initial democratic electoral framework largely in place. The Government also took firm actions to limit trade union militancy. Low nominal wages were enforced by industrial relations legislation which provided for compulsory arbitration of disputes and prohibition on the right to strike in "essential services". Furthermore, unions were banned in the most important export-oriented industry - electronics - until 1988, after which only 'in-house' unions were allowed at the plant, rather than the industry, level. This modified political system, despite many criticisms, has ensured political stability and policy continuity required for the outward-oriented growth process with foreign capital participation.⁽⁵⁾
 

(d) A summing up
 

As evident from the discussion above, while there have been significant policy shifts, Malaysia has been able to maintain an overall policy stance that has been both pro-market and outward oriented. While the affirmative action policies of the NEP were not without economic cost, the private sector was never marginalized and always had enough room for expansion. In particular, the policy emphasis on export-orientation (which began in the late 1960s) was never compromised. The resource cost of redistributional policies was not a major drag on growth because of the key role played by FDI flows in augmenting the domestic resource base. Despite the early emphasis on import substitution and the more recent attempts to promote heavy industries via public sector participation, Malaysian policy makers have stayed clear of quantitative import restrictions as a policy tool. With this approach, domestic price signals have not been insulated from world market conditions, and resource costs arising from rent-seeking activities have always been minimal by developing country standards. With this policy regime, coupled with the stable political climate, Malaysia has been well placed to take full advantage of new opportunities arising from integration with the global economy.
 

3. Globalization and Growth
 

The data on overall economic growth and openness of the Malaysian economy are summarized in Table 1. Growth of real GNP averaged about 6.5 per cent per annum during the 1970s, but then slowed down in the first half of the 1980s falling to negative one per cent in 1985. This slowdown was partly a reflection of the NEP based pro-distribution strategy. With better domestic macroeconomic policies and market based reforms, the Malaysian economy has picked up again since 1987. Real GDP growth accelerated to over 8 per cent a year on average over the eight years up to 1995.
 

The data point to a close association between growth acceleration and the degree of openness of the economy. The degree of openness as measured by the trade-GDP ratio increased at a modest rate during the 1970s, slowed down in the first half of the 1980s and then increased sharply from about 1987. The ratio of trade to GDP in 1995 (194 per cent) was twice as high as in 1970.
 

In the 1970s and early 1980s, Malaysian economic growth was predominantly accounted for by the expansion of service industries emanating from public sector activities and growth in primary production (Table 2). In the primary sector, growth performance in the 1970s was led by a rapid expansion of the palm oil sector, and a modest expansion of rubber production. In the deregulated environment since the late 1980s, not only has there been a significant increase in growth, but much of it is has come from the expansion of manufacturing through private sector initiatives. Between 1985 and 1995, the manufacturing sector grew by an average annual rate of 13.5 per cent, with the share of manufacturing in GDP increasing from about 20 per cent to over 33 per cent. Between these two years, over 50 per cent of the growth in GDP came directly from the manufacturing sector. In addition, much of output and expansion in the tertiary (service) sectors in recent years has been closely related to the expansion of the manufacturing sector (Ariff 1991).
 

The expansion of manufacturing production has predominantly been export-led. The export structure of Malaysia, as it evolved during the colonial era, was characterized by heavy reliance on a limited range of primary commodities. In the early 1970s, the share of manufactures⁽⁶⁾

in total merchandise exports was about 10 per cent (Table 3). Since then, manufactured exports have emerged as the most dynamic element in the export structure. Exports of manufactures grew (in current US dollar terms) at an annual compound rate of 35 per cent during 1980-92, and by 1994 their share in total merchandise exports had reached 78 per cent. In the 1970s and early 1980s, resource-based manufacturing such as food, beverages, tobacco, wood products and basic metals loomed large in the structure of manufactured exports. The transformation of Malaysia's export structure in line with emerging patterns of the international division of labour gathered momentum only in the late 1980s; by the 1990s, the share of resource-based exports had declined while the shares of electronics, electrical machinery and appliances rose sharply. As a result of this rapid export expansion, the share of exports in gross manufacturing output was over 60 per cent in the early 1990s, compared to less than 10 per cent in the early 1970s (Athukorala and Menon 1996).
 

Foreign direct investment (FDI) has undoubtedly been the engine of manufactured export expansion. In the following section we discuss at some length the trends and changing patterns of FDI flows to Malaysia and their role in the process of export-led industrialization.
 

4. FDI and export-led industrialization

FDI flows to Malaysia have grown remarkably over the past two decades (Table 4). There has been a boom in the amount of FDI coming into the country, particularly since the mid-1980s; between 1987 and 1991, foreign capital inflows have increased by almost ten-fold. Since the mid-1980s, FDI flows to Malaysia have been increasing at a faster rate than that to the other ASEAN countries. Since 1991, the volume of FDI flowing to Malaysia has remained higher than to any of the other ASEAN countries (UNCTC, 1991; UNCTAD-CTC, 1995).⁽⁷⁾

This expansion has occurred in the context of a significant decline in the relative magnitudes of FDI flows from developed to developing countries ("North-South" flows) compared to flows among the developed countries ("North-North" flows) (Athukorala and Menon 1995, Table 1). The share of global FDI going to Ds declined from about 25 per cent in the early 1980s to about 16 per cent in 1990, with many developing countries experiencing a decline in absolute terms.
 

(a) Source-country composition of export-oriented FDI
 

Historically, the UC has been the dominant source of FDI; at the time of independence in 1957, the UC owned more than 90 per cent of the stock of FDI in Malaysia. The British dominance in FDI continued until the early 1970s, when investment flows from the US, Japan and Germany began to expand rapidly in export-oriented manufacturing (Junid, 1980). By the early 1980s, Japan had become the largest single investor in terms of annual volume of inflow (Table 1). The US share in total FDI has varied in the range of 3 to 28 per cent in the 1980s, although this share would have been somewhat higher if the focus is only on export-oriented investment. Recent data exhibit a dramatic increase in the importance of FDI from other developing countries in East Asia. The share of approved investment accounted for by East Asian investors increased from 21.75 per cent in 1980 to 40.25 per cent in 1994. Taiwan clinched the mantle of the largest investor in Malaysia from Japan in 1990 and 1994, with investment shares of 36 and 25.6 per cent, respectively. Malaysia also ranked second (to the US) among the recipients of Taiwanese capital in 1990. However, in terms of total accumulated investment (value of fixed assets), Japan is still the pre-eminent investor, followed by Singapore, US, Taiwan and UC (Table 3, last row).
 

There have been two major rounds of export-oriented investment from East Asia (Wells, 1993). The first round (from the mid-1970s to the mid-1980s) was driven by the so-called "quota jumping" motive. In response to stringent voluntary export restraints (VERs) imposed on textiles, clothing and footwear exports from East Asian Countries under the Multi Fibre Arrangement (MFA), firms in these countries shifted production bases to Malaysia and other neighbouring countries which had unfilled export quotas. The second round has come from companies seeking lower-cost export bases. These firms are involved in the production of a wide range of products in the categories of electrical equipment, electronics, and spare parts for motor vehicles. For East Asian investors, the need to go abroad has arisen for reasons which include currency appreciation, rapid increases in wages at home, and the difficulty in hiring workers domestically, even at prevailing wage rates.⁽⁸⁾

In addition to these cost considerations, the abolition of special treatment for NIC exports under the Generalized System of Preferences (GSP) by developing countries in major developed-country markets, and the liberalization of government rules in Korea and Taiwan on outward capital movements, have also contributed to this surge of "new wave" investment (Menon and Athukorala, 1994).
 

(b) Industry composition of FDI
 

Virtually all FDI (mostly British) in pre-independent Malaysia (then Malaya) was in the primary sector (mainly in tin mines and rubber plantations) and related service sectors. FDI flows to manufacturing began only in the late 1950s and, for the next two decades, flowed predominantly into import-substitution production. Export-oriented FDI began to expand slowly but steadily since the mid 1970s. By the late-1980s, FDI inflows had decisively shifted from production for the domestic market to using Malaysia as a base for manufacturing for the global market. The share of projects with an export orientation of 50 per cent or more increased from 24 per cent of total approved projects during 1984-85 to about 82 per cent during 1988-89. The proportion of projects with an export orientation of 80 per cent or above increased from one-fifth of the total in 1984 to about three-quarters in 1989 (Ariff, 1991).
 

Foreign firms in export-oriented manufacturing are mostly in assembly operations in electrical goods and electronics, and diffused-technology consumer goods production. However, in recent years, FDI has begun flowing into the production of mature-technology final products such as radios, TVs, cameras, computers, etc. Malaysia's efforts in attracting FDI in the electronics industry were so successful that by 1980 it had become the largest developing-country exporter (and one of the world's major exporters) of electronic components, particularly integrated circuits (Granwald and Flamm, 1985). The electronics industry accounted for 19 per cent of foreign paid-up capital and 27.5 per cent of foreign-owned fixed assets in Malaysia at the end of 1989. Despite the rich natural resource base of the country, recent foreign capital participation in "modern" resource based industries (i.e. in areas other than conventional plantation-based product sectors) does not appear to be significant, particularly as compared to neighbouring Indonesia.⁽⁹⁾
 
 

(c) Contribution to the expansion of manufacturing exports
 

The available direct estimates of export orientation of foreign firms in Malaysia are limited only to the performance of Japanese and US firms (which accounted respectively for 34 and 25 per cent of total fixed assets in manufacturing by the early 1990s). The share of Japanese firms in total manufactured exports from Malaysia increased from 5.2 per cent in 1972-73 to 10 per cent in 1989. The US firms accounted for over 50 per cent of total manufactured exports in 1992 compared to 21 per cent in 1977 (Athukorala and Menon 1996). These direct estimates apart, a simple comparison of data on the export composition (Table 3) and industry-structure data on output shares of foreign firms (Table 6) clearly brings out the pivotal role of FDI in export expansion.There is a close association between the degree of foreign presence in product sectors and their relative contribution to total manufactured exports. The electronic industry (which is almost completely foreign owned) alone contributed to over 63 per cent of total exports in 1994. Malaysia's efforts in attracting FDI in the electronics industry were so successful that since the early 1980 it had been the largest developing-country exporter (and one of the world's major exporters) of electronic components, particularly integrated circuits.
 

The contribution of FDI to export expansion is, however, is much greater that what is suggested by this export share. From the point of view of the host country, local firms' access to market channels from the ICs is an important advantage offered by FDI. There is mounting evidence to suggest the important role that foreign firms in general play as catalysts for the development of local exporters (Wells, 1993; Keesing and Lall, 1992). Following the entry of foreign firms into garments and other light consumer goods industries in a given country, international buying groups which have long-established market links with these firms also set up buying offices in the country.⁽¹⁰⁾

These buying groups subsequently play a crucial role in linking local firms up to highly competitive international markets for these products. Moreover, joint-venture operations with foreign investors provide local entrepreneurs with an opportunity to acquire production and international marketing skills required for the successful operation of their own (independent) production units. Thus, export diversification offered directly by the foreign investors themselves may dramatically understate the actual contribution of these firms.
 

5. Employment and wages
 

(a) Employment
 

Unemployment received public attention for the first time as an important issue in Malaysia only in the early 1960s. A sample survey conducted by the Department of Statistics in 1963 reported the unemployment rate in Peninsular Malaysia at 6 per cent. By the time the NEP was promulgated in 1970, this had increased to 8 per cent, but the Second Malaysia Plan could not offer anything more promising than containment at that level (Snodgrass 1980, p. 59). After a drop to around 5 per cent in the early 1980s, the unemployment rate continued to increase reaching a peak of 9.1 per cent in 1987.
 

From then on, the unemployment rate began to decline. By 1995 the economy reached virtual full-employment with unemployment at only 2.8 per cent (Table 8). It is interesting to note that this impressive employment record has been achieved in a context of a rising labour force participation of the population. This latter increase is a reflection of both rapid rate of urbanization and the increased labour force participation of women. Most of the new employment has came from the rapid expansion of the manufacturing sector (Table 9). The share of manufacturing in total labour deployment in the economy increased from 14 per cent in the mid-1970s to over 25 per cent the mid-1990s. The direct contribution of manufacturing to total employment increment between 1987 and 1994 was as high as 60 per cent. In addition, as noted much of output ( and hence employment) expansion in the tertiary (service) sectors in recent years has been closely related to the expansion of the manufacturing sector.
 

Table 10 brings together data on the relative contribution of foreign firms to sectoral production and employment in manufacturing. The percentage of workers employed in foreign firms increased from about 30 per cent in 1983 to 42 per cent in 1992. This increase in employment has been faster than the increase in the share of output of these firms (from 41 to 48 per cent). This suggests that with the rapid expansion of export-oriented manufacturing, the structure of manufacturing production has become more labour-intensive over the years. This pattern is particularly noticeable in non-metallic minerals, basic metal products, fabricated metal products and miscellaneous manufacturing. In the case of electronics, the employment and output shares have remained virtually unchanged at comparable levels as this industry has been highly labour-intensive right from the start.
 

Employment pattern in export-oriented firms (in particular those in the electronics industry) is characterized by a heavy reliance on women workers (Rasiah, 1993 and 1995). In this context, the question as to whether the job opportunities created within export-oriented foreign firms are a "net" addition to employment is often raised (see, for instance, Lee, 1984). Unfortunately, data are not available to provide a straightforward answer to this question. It is quite possible that these firms have contributed first and foremost to a rise in labour force participation rates, notably through the entry of young women into the labour force. In the absence of FTZ employment opportunities, most of these young women workers would probably have remained outside the labour force.
 

(b) Real wages
 

Real wages in the manufacturing sector declined in the early 1970s. The index of real wages (1990 = 100) in manufacturing was 61 during 1970-74 compared to 68 during 1965-69 (Table 12). At the time, the critics of export-led industrialization alleged that the working class was subject to high "disciplines" (through restrictions on labour unions) and low wages for the benefit of multinationals and local capitalists (Lee 1984, Jomo and Osman-Rani 1984, Osman-Rani 1983).⁽¹¹⁾

This is not the full story, however. Perhaps the most important reason for the decline in real wages was the availability of a vast pool of surplus labour, particularly in the rural economy. In fact, real wages started to rise from the late 1970s with the rapid depletion of surplus labour. The real wage index increased from an average level of 74 in 1975-79 to 105 in 1985. Following a mild decline during the years of macroeconomic adjustment in the mid 1980s, it increased continuously reaching a historical high of 110 in 1992. Judging form the significant decline in the unemployment rate, real wages would have continued to increase during the ensuing years. Interestingly, the recent increases in real wages have occurred in a context where the profitability of manufacturing production (as measured by the price-cost margin) remained virtually unchanged. Thus it appears that, with the rapid depletion of surplus labour reserves in the economy, the workers have become the major beneficiaries of productivity growth in manufacturing.

As the domestic labour market approaches full employment forcing rapid increases in real wages, the Malaysian economy has begun to experience a massive influx of migrant workers from neighbouring labour surplus countries, Indonesia in particular. Official estimates put the number of migrant workers at half a million in 1994. However, there is circumscribed evidence that the number could be as high as 2 million (about 16 per cent of the work force). By the early-1990s, more than half of the workforce in the construction industry and the plantation sector consisted of foreign workers, and they had also begun to enter the manufacturing sector (Athukorala 1993).
 

Malaysia is at present in the midst of a debate on appropriate national policy towards migrant workers. The availability of migrant workers certainly provides relief from labour scarcity and thus helps with maintaining Malaysia's image as a competitive location for export-oriented manufacturing activities. In addition to the direct cost lowering effect on manufacturing production, migrant workers also contribute to the relative profitability of export (and other tradeable good) production through their significant presence in the non-tradable sector, particularly in the construction industry. The increased reliance on foreign workers is not without cost, however. By limiting increases in real wages, migrant workers hold back structural shifts in the manufacturing industry away from labour intensive manufacturing activities and towards high-tech and human-capital intensive production. They also tend to jeopardise technology transfer as firms are less willing to invest in contract workers through training and development of labour skills. These influences, in turn, limit factor productivity growth in manufacturing. In addition, migrant workers are likely to contribute to a widening of economic disparity by depressing the incomes of local unskilled workers. They also draw on limited social amenities and (allegedly) cause social and security problems (Ariff and Tho 1994). Thus there is a legitimate case for regulating labour inflows with a view to facilitate long-term structural adjustment of the economy while minimising the socio-economic costs of excessive reliance on migrant workers. The policy choice is, however, constrained by the dearth of skilled workers in the country. Potential policy alternatives such as restricting migrant worker inflows and implicitly discouraging labour intensive production through greater selectivity in investment approval procedures can achieve expected structural changes in the economy (without jeopardising output and employment expansion) only if the skill content of the domestic labour force can be upgraded at a rapid rate.
 

6. Poverty and income inequality
 

Right from the start, the problems of poverty and income inequality in Malaysia have had an ethnic and a regional dimension. In 1957/58, 34.9 per cent of households had incomes of less than RM 120 per month (the official cut off point for measuring poverty). More than half of these households were Malay, and more than two-thirds were rural (Snodgrass 1980).
 

Rural development programs in the 1960s brought about some improvements in several forms of social consumption, such as in education, public health services and other amenities (Anand 1983). The impact that these programs had on reducing poverty and income inequalities were, however, limited, to say the least. According to a Socio-economic Survey conducted in 1967/68, while the percentage of households with incomes of less than RM 120 had decreased by 0.2 per cent, the total number of households receiving incomes less than this limit had increased substantially. The ethnic and rural-urban distribution of poverty and income inequality had hardly changed over the period. According to the Post Enumeration Survey of 1970, 78 per cent of poor households were Malay. Mean household income among the Malay community was RM 41 per month, compared with RM 79 per month for Indians and RM 86 per month for Chinese.⁽¹²⁾

Poverty continued to remain very much a rural problem; 88 per cent of poor households were rural, and almost 60 per cent of rural households were poor.

Since the mid-1980s, Malaysia's record of reducing poverty and income inequalities has undoubtedly been a success (Table 8). The incidence of poverty among all households has fallen from 18.4 per cent in 1984 to 13.5 percent in 1993; this figure is projected to fall to 8.8 per cent in 1995. A significant decline is observable for both urban and rural households. The Gini coefficient has fallen from 0.479 in 1984 to 0.459 in 1993. There has also been a significant improvement in the relative position of Malay households in terms of mean household income (Table 9).

The most important factor underlying the reduction in poverty and increase in overall living standards has been the growing opportunities for non-agricultural work, particularly in the rapidly expanding export-oriented manufacturing industries. The demand for unskilled labour created by the process of export-led industrialisation has been so great that it is now a scarce factor with a rising price (i.e. real wage rate). Since unskilled labour is the most widely distributed factor of production, the increase in its real wage has brought about an overall reduction in poverty in the country. In addition, the increase in the number of two-income households has contributed to increase in total household income. This is underpinned by the increasing importance of women in the work force. Again, much of this increase is due to the demand for low-skilled labour generated by the rapid expansion of labour intensive export-oriented manufacturing activities (Rasiah, 1993). The labour force participation rate for women increased from 37.2 per cent in 1970 to 46.7 per cent in 1990, while the share of women in employment increased from 31 per cent to 35 per cent over the same period (Government of Malaysia, 1991). Thus, the Malaysian experience with employment generation and poverty reduction since the late 1980s compares closely with that of Korea and Taiwan in the late 1970s and 1980s (Fei et al., 1975; Hong 1990).
 

7. Concluding remarks
 

Malaysia has been successful in achieving its developmental objectives by adopting pragmatic policies in line with changes in the global economy. While there were some policy excesses triggered by conflicting objectives in a plural society, the policy makers have been successful in rectifying policy errors swiftly. It was this flexibility and pragmatism which put the Malaysian economy back on the growth track in the mid-1980s, after the difficulties of the late 1970s and early 1980s created by the excessive emphasis placed on distributional objectives. In spite of the expected slowing down of growth in the industrial world, the outlook for the Malaysian economy for the remaining years of the 1990s remains good. So long as the liberalization and deregulation of the domestic economy continues, the environment for private initiatives and enterprise as well as private saving and investment will continue to improve.
 

The key lesson to come from the Malaysian experience is that in a small open economy, the task of achieving the conflicting objectives of growth and equity is facilitated by a long-term commitment to a open and liberal trade and investment policy regime. Unlike many other developing countries, Malaysia never resorted to stringent quantitative trade restrictions. Domestic price signals were therefore never insulated from world market conditions, and resource costs arising from rent-seeking activities have always been minimal by developing country standards. With this policy regime, coupled with the stable political climate, the Malaysian economy has been well placed to take full advantage of the new opportunities arising from integration with the global economy.
 

With the depletion of surplus labour reserves, the major challenge currently facing the Malaysian economy is the upgrading of the workforce to create the resource base to enter world trade in high-tech and human capital intensive product areas. Government policy initiatives in the form of restricting migrant worker inflows and implicitly discouraging labour intensive production through greater selectivity in investment approvals will achieve this outcome only if the skill content of the domestic labour force can be upgraded at a rapid rate. As the Singaporean experience with the deliberate "high-wage" policy during 1981-85 has shown, forced resource allocation policies carried out independently of the economy's capacity to meet the demand for skilled labour can turn out to be counter-productive.
  Table 1

Malaysia: Growth and Openness, 1970-1995
 

Notes:

* At constant (1990) prices.

** Estimates by Ministry of Finance.

X Exports of goods and services

M Imports of goods and services
 

Source: IMF, International Financial Statistics Yearbook- 1995 and Malaysia Ministry of Finance, Economic Report 1995 (for estimates for 1995).
 
 

Table 2

Sectoral Growth Performance: Contribution to GDP and

Real Growth Rates(in bracket), 1970-1995*
 

Note: * Output shares and growth rates are based on constant (1978) price

data. Growth rates are annual averages between the reported years.

Source: Ministry of Finance Malaysia, Economic Report (various issues)

Table 3: Manufactured Exports: Percentage Composition and Share in Total Exports
 

Source: Bank Negara Malaysia, Annual Report, Kuala Lumpur, various issues.
 

Table 4 : Source Country Composition of Foreign Direct Investment, 1980, 1983, 1986, 1989, 1990-1994 (Millions of US$)^*
 

Notes:(*) Data based on investment approvals. Figures in parentheses refer to country percentage shares in total.

Source: Malaysian Industrial Development Authority (MIDA).
 

Table 5

Foreign Ownership of Fixed Assets in Malaysian Manufacturing (value and share in total fixed assets)
 

Source: Computed using unpublished returns from Malaysian Industrial Development Authority, Annual Survey

of Companies in Production.

Table 6

Foreign-owed Fixed Assets in Manufacturing, by Industry and Country, 31 December 1993 (percentage shares)
 

Source: Computed using unpublished returns from Malaysian Industrial development Authority's Annual Survey of Companies in Production. .

Table 7

US Affiliates in Malaysian Manufacturing: Total Sales and Exports to the US.
 

Source: Compiled from US Bureau of Economic Analysis, US Direct Investment Abroad: Operations of US Parent Companies and their Foreign Affiliates, Washington, D.C.: US Bureau of Commerce, 1987 and 1992 issues.
 
 
 
 

Table 8

Summary Statistics on Employment and Unemployment,

1980 and 1985-1996
 

* prediction

Source: Ministry of Finance, Economic Report (various issues)
 

Table 9

Employment by Sector, 1976, 1980, 1985, 1990 and 1995 (% shares)
 

Source: Ministry of Finance, Economic Report (various issues)
 

Table 10

Share of Foreign Firms in Production and Employment by Industry, (percentage shares).