The role of the manufacturing industry in the performance of the Malaysian economy

Abstract

Diversification of economic activity is a difficult task for oil-exporting countries, thus few countries have historically succeeded in diversifying their economic activity and reducing their dependence on oil. This analytical study aimed at addressing the manufacturing sector in Malaysia, and determining the success factors of the experience of Malaysia in the development of manufacturing industries and thus the development of the country.

The study showed that the manufacturing industries gave a strong boost to the performance of the Malaysian economy, enabling it to achieve a strong industrial base. Consequently, the success of the Malaysian economy is due to the success of the manufacturing sector as a productive activity rather than an over-dependence on oil revenues.

Jel classification : L52, O14.

1. Introduction

diversifying economic activity for oil-exporting countries is a very difficult task, as evidenced by the fact that few countries have historically succeeded in diversifying their economic activity and reducing their dependence on oil, especially when their oil production has been available and sufficient for a long time. In the late 18^th century, coinciding with the Industrial Revolution, many countries considered industrialization as the key to future development and diversified their economies by focusing on the industrial sector, like Malaysia, which has been able to make great progress and move quickly from reliance on a primary sector of agriculture and extractive industries to rely on the transformational industrial sector, which is the basis of the development of societies.Manufacturing is considered even more critical for development than the industrial sector as a whole, which also includes extractive industries, such as mining and oil, which do not necessarily require significant quantities of labor; the product can be extracted from the ground and exported without further processing. While manufacturing requires a mixture of labor, capital, and management expertise. It offers an opportunity to introduce modern technology and economies of scale and to complement agricultural production. It does not guarantee development, but it nevertheless fulfills an important condition.

Accordingly, the following question is posed:

What is the role of the manufacturing industry in the performance of the Malaysian economy?

Hypothesis :

• Manufacturing industries have helped to achieve industrial development in particular and economic development in general in Malaysia.

The aim of the study:

This study aims to identify the Malaysian experience in the rely on the manufacturing sector in the development of its economy, through the presentation of the most important industrial strategies followed and analyse the contribution of each strategy to upgrade the industrial base during a specific period of time. And finally to identify the most important points that oil-exporting countries can benefit from and adopt to develop manufacturing and give up the excessive dependence on oil exports.

2. Development of the manufacturing sector in Malaysia:

Malaysia’s economy was largely based on agriculture before independence in 1957(Zulaifah & Maisom, 2001, p. 91). There were very few manufacturing industries then, and these industries were mainly limited by the production of simple products such as packaging of processed food and simple consumer goods. Soon after independence, Malaysia began to industrialize, mainly to diversify and create employment opportunities. According to different indicators such as share GDP and contribution to exports earning and to job creation, manufacturing is now the single most important sector of the Malaysian economy(Jomo, 1998, p. 148).

2.1. Historical perspective of Malaysia’s manufacturing indicators: 

Industrialization in Malaysia, especially manufacturing industries, was chosen as the « leading sector » of the big development push(Ozay, 1986, p. 75). Since independence in 1957, the rate of growth in manufacturing output has been rapid, with the share of manufacturing in total gross domestic product.

Table 1: Manufacturing’s share of gross domestic product and employment

1947-1991

Source: Jomo K.S and Chris Edwards, «industrializing Malaysia: policy, performance, prospects », Routledge, London, 1993, p14.

Since independence in 1957, the rate of growth in manufacturing output has been rapid, with the share of manufacturing in total gross domestic product rising from less than 7 percent to 28 percent thirty years later (see table 1). It has also accounted for an expanding share of employment. Firstly, manufacturing was a minor source of employment, it was employing only 7 percent of the country’s labor force, even by 1965, it was just 8 percent. Then with the advent of more labor-intensive industries in the late 1960s and the 1970s, manufacturing employed more than 20 percent in 1991.

Besides manufacturing’s growing contribution to total GDP and to be a source of employment, it came to play a big role as a foreign exchange earner with the government’s intention of reducing Malaysia’s dependence on primary exports. So manufacturing exports rose rapidly as we can see the average annual growth rate of manufactured exports averaging almost 28 percent during 1971-75, declining to 14 percent from 1981 to 1985 before rising again to 36 percent in 1989 (see table 2).

Table 2: Average annual growth rates of manufacturing value-added and manufacturing exports, 1971-89

Notes:

^a Average annual growth rates before 1970 are not shown because the system of calculating National accounts was changed from 1969.

^b Preliminary.

Source: Jomo K.S and Chris Edwards, Op-cit, p15.

The changes in the net output of the manufacturing sector which accounted for over a quarter of the gross domestic product of Malaysia and the structure of Malaysian exports have been due to the deliberate government policy to industrialize and develop the domestic economy through the export-oriented development strategy since the 1980s by diversifying and intensifying the export base and at the same time focusing on manufactured exports.

2.2. Manufacturing strategies in Malaysia: 

The Malaysian government has implemented three manufacturing strategies: import substitution strategy, export-oriented manufacturing strategy and import substitution strategy based on heavy industries. Each strategy was designed to meet the challenges and opportunities of the industrial sector in the period of implementation of the strategy. Therefore, each industrialization strategy is justified economically, as follows:(Tei, Azfar, & Hanani, 2018, pp. 154, 155)2.2.1. Import substitution strategy: One of the immediate concerns of Malaysian policymakers after their independence from British colonialism in 1957 was the development of the industrial sector. Malaysia needed to reduce its dependence on imports, particularly consumer goods with available resources to produce them alone because domestic production would reduce imports and overcome the problem of excessive dependence on the foreign sector. In 1958, the Malaysian government has provided incentives to local institutions to manufacture various imported goods and set taxes on imported goods in 1960. This encouraged the creation of new industrial enterprises, thus the increase in the local supply of certain products.The import substitution strategy aimed to increase local production on the one hand, and to reduce imports on the other hand, and actually managed to achieve the following results:-  The expansion of Malaysia’s emerging industrial base through the abundant use of local natural resources;-  The excessive reduction of the dependence on imported products and thus promoting Malaysian economic diversification;-  Job creation.2.2.2. Export Oriented Manufacturing Strategy: The Malaysian government realized that its domestic market was relatively small, then it embarked on implementing an export-oriented manufacturing strategy aimed at penetrating foreign markets. Since the export of products requires administrative costs as well as transportation costs, the Malaysian Government has provided facilities by granting manufacturers of export-oriented products with funding to expand their production, providing incentives and compensation for expenditures incurred for promotional activities in foreign markets, and also by creating a free trade area to facilitate the activities of export, through the promotion of geographical agglomeration and infrastructure development.Labor-intensive industries (such as electronics, electrical, textile and clothing) generated many new jobs, although initially with low wage levels. However, wage levels have risen with the reduction of unemployment and the increase in productivity.(Chris & Jomo, 1993, p. 316)2.2.3. Import substitution strategy based on heavy industries: The manufacturing enterprises of the 1960s and 1970s managed to modernize the Malaysian economy by stimulating the industrial production of many commodities that rely heavily on Malaysian resources, such as automobile, steel, iron, oil refineries, and petrochemicals. in 1980 the government shifted its manufacturing strategy for the second time to the import substitution strategy, but this time it was based on heavy industries, led by HICOM; that was the entreprise of the heavy industries in Malaysia which established in 1981, that one acquired a large proportion of the various heavy industries, including the manufacturing of the Malaysian car « PROTON » that acquired a share of 70%.During the implementation of this strategy, the Government has set up protection policies for its industries to reduce importing, because its new industries in the relatively small domestic market will be under severe pressure to achieve economies of scale and thus it is unable to compete directly with foreign enterprises in the heavy industry. Therefore, the intervention of the state was effective, especially in the early stages of the industrial establishment.

2.3. Factors of successful manufacturing development in Malaysia:

There are key factors that contributed to Malaysia’s structural change, from an agricultural-based economy to an industrial-based economy, listed in the following:

2.3.1. People are the most precious asset: 

There are four requirements to making Malaysians productive,(Bakri, 2007, p. 113) they must be:

• At peace and harmony with each other;
• Educated and trained so they can contribute with their knowledge and skills;
• Healthy and robust;
• Afforded some freedom so they can realize their full potential.

Developing human capital took the highest priority in Malaysia, we can say that the smartest decision they made early was to build schools instead of barracks and train teachers instead of soldiers, they knew early that investments in education yield the highest returns.

2.3.2. Foreign direct investments:             

« To achieving the vision 2020 and become an industrial nation, Malaysia much effort is required and foreign direct investments is one of the ways to help achieve it »(Zulaifah & Maisom, 2001, p. 38). That means that FDI is very important for the economic development of a country, especially for a developing country such as Malaysia. A large number of multinational companies, which invest in this country, shows the importance of FDI to the Malaysian economy. It had grown from US$1668 million in 1989 to US$ 5006 million by 1993(International Money Fund Balance of Payment Statistics yearbook, 1995), came from different sources as shown in table 3. Statistical data also shows that FDI has greatly contributed to Malaysian economic growth, particularly in the manufacturing sector. At present, the manufacturing sector is the highest contribution of output to Malaysia’s GDP.

Table 3: Source of Foreign Direct Investment in Malaysia by Rank (1982-1993)

Source: Malaysia Industrial Development Authority (MIDA) Annual Report, 1993.

Malaysia has allowed foreign direct investment to enter on conditions serve the national economy, of between it, goods produced by foreign investors do not compete for domestic industries that meet the needs of the domestic market, and that the foreign investors export at least 50% of its total production.

2.3.3. Industrial planning: 

One of the key factors that helped Malaysia diversify its productive base is its future vision of development and economic activity through successive and integrated plans since independence and its early readiness to enter the 21^st century by planning for Malaysia 2020 and achieving what has been planned. Malaysians benefited from the Japanese in terms of preparing plans; and benefited from Japanese investments that helped to flourish heavy industries and became the industry’s main engine of growth in Malaysia (Table3).Concerning the industrial sector, the government applied manufacturing strategies in line with the prevailing economic situation. Each strategy was chosen to meet challenges and exploit opportunities in the industrial sector during the period of implementation of the strategy. As a first step, the industrial development strategy tended to replace imports in consumer industries, which was dominated by foreign firms before independence. Secondly, they start focusing on the export of electronic components, which was labor-intensive industries that led to a reduction in the unemployment rate and an improvement in the distribution of incomes and wealth in society. In the early 1980s, an industrial plan was put in place to create a new wave of industries replacing imports and heavy industries, followed by a set of policies to stimulate industrial growth and strengthen the orientation of exports in manufacturing activities.As for industrial policies, they played a role in the development of the Malaysian economy. The manufacturing industries and exports of these industries were developed through the liberalization of investment laws, the privatization of enterprises and the opening of the economy to foreign trade and foreign investment. Thus, the role of selective industrial policies played in Malaysia’s economic development miracle. In the 1980s, policymakers have produces three master plans(Tei, Azfar, & Hanani, 2018, pp. 169- 175); Industrial Master Plan1 (IMP1) (1986-1995), Industrial master plan2 (IMP2) (1996-2005) and Industrial Master Plan3 (IMP3) (2006-2020). Since the period of implementation for all three policies is longer than six years, they may be considered to be long-term policies, each one of them attempts to address industrial problems specific to the period, which means that anyone from these plans has its particular objectives (see table 4).

Table 4: Objectifs of Industrial Master Plans (1986-2020)

Source: Tey Hwei Choo and Azfar Hilmi Baharudin and Hanani Ahmad Fued, Op-Cit, p170, 172, 175.

2.3.4. Availability of resources for industrial sector: 

Malaysia has vast natural resources to be used as input to industries. For instance, rubber trees can be used to manufacture tyres, shoes and other rubber products at a cheaper cost.

3. Manufacturing success in Malaysia: 

The value added of manufacturing in the Malaysian economy has risen after being based primarily on agriculture and mining. The figure (1) shows an increase in the manufacturing sector, which registred about 31% in 2000, slightly lower in 2008, reaching 29,1, but remains high compared to other economic sectors. This is a sign of the success of Malaysian’s industrial policies, reducing its dependence on the outside through import substitution, then manufacturing for exports in order to improve its production and exports of machinery.

Figure 1: share of manufacturing in sectoral value added (2000, 2008)

Source: Department of Statistics, Malaysia.

The employment figure paint a similar picture of the value added. The manufacturing sector is a significant contributor to the functioning of the Malaysian economy, although the ration has declined, as shown in figure (2) between 2001 and 2008, but remains the largest among the various economic sectors. This is due to Malaysia’s foreign investment promotion policies, which seek to preserve its human capital and provide incentives to train the local workforce.

                                          Figure 2: share in employment by sector (2001, 2008)

Source: ILO Laborsta.

Implementing successive and integrated industrial strategies in Malaysia pushed it to achieve a leading industrial base and diversifying its export products (Figure (3)).

Figure 3: Structural export composition in Malaysia (2016)

Source: Atlas of Economic Complexity. (2017). Annual report. p105.

The profile of the products exported offers some insights. Firstly, the rich list of export products of many manufacturing industries shows the success of industrialization in Malaysia. Secondly, Malaysia’s concentration in electronic products rose from 37% in 2006(Brenda & Mohd, 2018, p. 6) to 44% in 2016 as shown in the figure (3), also many other products, show the diversification that Malaysia realized in its exports after applying consecutive industrial strategies and plans.

4. Conclusion: 

The manufacturing sector is the most strategic sector that contributes to the diversification of the economy and the creation of a strong and competitive industrial base. Therefore, countries are working to find the appropriate mechanisms and policies to develop this sector. The Malaysian experience was cited as being one of the countries with pioneering manufacturing experience. It has been able to make great progress and move rapidly from dependence in its economy to a primary sector of agriculture and extractive industries to rely on the transformational industrial sector, by rising the contribution of the industrial sector to the GDP and improving the effectiveness and efficiency of the manufacturing sector, through structuring oil-rents as incentives to encourage investments in desired new economic activities in the manufacturing sector.

We can summarize what has been extracted by this research in the following points:

• Transfer-based rents may be viewed as a « double-edged sword », as they can yield either a positive or a negative outcome, depending on management of the rent ;
• While some rent-seeking processes yield poor and undesirable results, others may yield new economic capacities and capabilities as well as productivity gains, thus contributing to economic development ;
• Malaysian manufacturing growth since independence relies on strength in industrial policy and excessive reliance on foreign investments.

Recommendations:

Oil-exporting countries can benefit from the Malaysian experience in the development of manufacturing industries, by paying attention to the following points:

• Attention to the human element as the main actor in the development process, which requires educated and trained workers in various fields. Malaysia has focused on education and training to provide a skilled and experienced workforce in the highly successful manufacturing and development sectors ;
• planning the foreign direct investments, because getting the highest level of benefits from FDI is not an automatic process but a planned process based on good governance, as Malaysia is one of the most successful developing countries in using incentives to target and direct foreign direct investment to specific industries and sectors ;

–  Good preparation and evaluation and implementation of industrial projects realistically and seriously, as the best way to achieve industrial development, through the optimal use of available economic resources;

• Valorization of vast natural resources which can be used as inputs to different industries.

5.    Citations

Bakri, M. (2007). Towards a Competitive Malaysia: Development Challenges in the Twenty-First Centry. Selangor- Malaysia: Strategic Information and Research Development Centre.

Brenda, C. W., & Mohd, S. S. (2018). Complexity and Growth: Malaysia’s Position and Policy Implications. Central Bank of Malaysia.

Chris, E., & Jomo, K. (1993). Policy Options for Malaysian Industrialisation. Dans Industrializing Malaysia: Policy, Performance, Prospects (pp. 316- 335). Routledge.

International Money Fund Balance of Payment Statistics yearbook. (1995).

Jomo, K. S. (1998). Industrializing Malaysia: policy, performance, prospects. London: Routledge.

Ozay, M. (1986). development in Malaysia, poverty, wealth and trusteeship. USA: Croom Helm.

Tei, H. C., Azfar, H. B., & Hanani, A. F. (2018). Malaysian Economy: Unlocking Growth, Sustaining Equity. New York: Oxford University Press.

Zulaifah, O., & Maisom, A. (2001). Pattern of Total Factor Productivity (TFP) Growth in Malaysian Manufacturing Industries, 1985-1995. Dans s. Y. Tai, & R. Alias, selected reading on economic analysis of industries and natural resources (pp. 72- 105).

6. References :

• Bakri Musa. (2007). Towards a Competitive Malaysia: Development Challenges in the Twenty-First Centry. Selangor- Malaysia: Strategic Information and Research Development Centre.
• Brenda, C. W., & Mohd, S. S. (2018). Complexity and Growth: Malaysia’s Position and Policy Implications. Central Bank of Malaysia.
• Chris Edwards & Jomo K.S. (1993). Policy Options for Malaysian Industrialisation. Published by Routledge. Industrializing Malaysia: Policy, Performance, Prospects (pp. 316-335).
• International Monetary Fund Balance of Payment Statistics yearbook. (1995).
• Jomo Kwame Sundaram. (1998). Industrializing Malaysia: policy, performance, prospects. London: Routledge.
• Ozay Mehmet. (1986). Development in Malaysia, poverty, wealth and trusteeship. USA: Croom Helm.
• Tei Hwei Choo, & Azfar Hilmi Baharudin, Hanani Ahmad Fuad. (2018). Malaysian Economy: Unlocking Growth, Sustaining Equity. New York: Oxford University Press.
• Zulaifah Omar & Maisom Abdullah. (2001). Pattern of Total Factor Productivity (TFP) Growth in Malaysian Manufacturing Industries, 1985-1995. Universiti Putra Malaysia Press. Edited by: Tai Shzee Yew & Alias Radam. Selected reading on economic analysis of industries and natural resources. (pp. 72-105).

Other references:

• Malaysia Industrial Development Authority (MIDA) Annual Report, 1993.
• Atlas of Economic Complexity. (2017). Annual report. p105.
• ILO Laborsta.
• Department of Statistics, Malaysia.