Malacca

Brief History

Malacca's (one of the states in Malaysia) strategic location as the bridge between Europe and East Asia made Malacca a major regional entrepot in the 16th century, where Chinese, Arab, Malay, and Indian merchants traded goods. Ships from the east traveling to the west and vice versa have to pass through the Straits of Malacca which makes it a natural trading port. This potential jewel of economy attracted the attention of many European countries that competed for Malacca's rule. The control of Malacca switched hands from the Portuguese, Dutch and to the British. From 1826 onwards, the British started colonizing the states surrounding Malacca. By 1895 the peninsula of Malaysia was united as the Federated Malay States. During World War 2, Japanese occupation interrupted the British rule. Popular sentiment for independence swelled during and after the war and in 1957, the Federation of Malaya, established from the British-ruled territories of peninsular Malaysia in 1948, negotiated independence from the United Kingdom under the leadership of Tunku Abdul Rahman, who became the first prime minister.

Government

Malaysia is a constitutional monarchy, nominally headed by the Yang di-Pertuan Agong ("paramount ruler"), customarily referred to as the king. Executive power is vested in the cabinet led by the prime minister; the Malaysian constitution stipulates that the prime minister must be a member of the lower house of parliament who, in the opinion of the Yang di-Pertuan Agong, commands a majority in parliament. The cabinet is chosen from among members of both houses of parliament and is responsible to that body.

The bicameral parliament consists of the Senate and the House of Representatives.

Economy

The main problem that Malaya faced after its independence in 1957 was poverty. Initially, efforts were aimed at developing the rural areas and diversifying the economy to reduce poverty. The economy was based on the export of palm oil, rubber and tin while there was no significant manufacturing industry. The Malayan society was also divided racially by their economic functions. The Malays were mainly concentrated in the agricultural sector; the Chinese were focused in the commercial industry; while the Indians worked in the tin-mining industry. Unfortunately, pocketed Communist threats prevented Malaya's plan from being carried out successfully.

After the Singapore defected from Malaysia in 1963, Malaysia lost its busiest port. Then Prime Minister, Tunku Abdul Rahman launched the first of its five-year plan that called for industrialization and diversification of its economic base. The plan targeted at improving the level of education, developing infrastructure to attract foreign direct investment and setting out a liberal trade policy. In 1969, close to half of Malaysian families were still receiving wages below the poverty level. Malaysia's commercial sector was still dominated by Chinese while about 70% of the Malays were still located in the agricultural sector. These racially divided economic functions resulted in a confrontation on May 13 1969 between the Malays and the Chinese. This confrontation was only resolved in September 1969 after many deaths and much destruction.

In 1971, Malaysia launched its New Economic Policy (NEP) that promoted private entrepreneurship and local investment. This indirectly aimed in narrowing the gap of wealth between the two main races (Malays and Chinese) in Malaysia and promoting social harmony among its people. Malaysia's stability and free market policy attracted investments mainly from Taiwan, Japan and the USA. Low inflation and high savings rate spurred Malaysia's economic growth. However, in 1974, the OPEC oil crisis caused Malaysia's inflation rate to soar above 18%.

Between 1976 and 1980, Malaysia discovered gas and oil reserves in the South China Sea. Oil revenues helped Malaysia's economy boom. The state-owned oil company, Petronas ran all aspects of oil extraction and production in Malaysia. Malaysia exchanged high-quality, low sulfur content oil for Saudi Arabia's higher sulfur content oil at favorable rates. By 1979, the Malaysian economy was growing at average rate of 5.2% while the manufacturing sector grew at 8% annually, driven by the electronics industry based largely in the island of Penang.

However, in the end of the 1970s, economic nationalism and crony capitalism were firmly entrenched in Malaysia. Corruption was also deeply rooted in its economy. The government started a campaign to reduce foreign ownership or Malaysian capital. Privatization began and drew criticism as upper class Malays had been favored with generous loans and assets were sold to these businessmen with government connections. In his first five years in office, Mahathir utilized greater state intervention to promote heavy industrialization and domestic imitations of Japanese sogososhas. The slogan of the period was 'Look East' to emulate Japan and South Korea.

Yet, this was a difficult period when the world economy faced a recession following oil price hikes, and interest rate increases instituted in 1980 by Paul Volcker, newly appointed chairman of the US Federal Reserve Bank. The Malaysian economy was badly affected by falls in primary commodity prices as demand for manufactured exports fell. In spite of this, Dr. Mahathir imposed an austerity drive that reduced government spending and placed state-owned enterprises under closer scrutiny. This mixed approach of reversing public sector expansion while changing the course of state intervention was accelerated by Daim Zainuddin after he was appointed Finance Minister in 1984. Daim, with Dr. Mahathir's endorsement, made significant economic policy reversals, including regressive fiscal (tax and spending) reforms, more stringent public expenditure cuts, privatization, deregulation and financial liberalization. This resulted in the fall of GDP during 1984-1986 as shown in Figure 1.

Figure 1: Comparison of Gross Fixed Capital Formation and Goods Exported as proportions of the real GDP.

During the period of 1985-1986, the limit of foreign ownership was abolished. They were now allowed to have 100 percent ownership of enterprises particularly if output was entirely for export. Other generous provisions for both foreign and domestic investors were attractive to both local Chinese and Taiwanese investors. In addition to high levels of education and low labor costs in Malaysia, the Free-Trade Zone established in Penang attracted electronics manufactures such as Intel, Inventec and Dell.

Dr. Mahathir also permitted