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The Asian side of the world

Jean-François Sabouret

Part two. National challenges and their strategies to overcome them

Asian capitalism in crisis: a focus on Malaysia

Elsa Lafaye de Micheaux

Texte intégral

1April 2009

2Malaysia is a small, prosperous country between India and China, with a population of 27 million and an area 330,000 km2. The country is separated into two distinct regions by a stretch of sea; Peninsular Malaysia lies on the Strait of Malacca and the states of Sabah and Sarawak are situated on the island of Borneo. Malaysia is situated at the crossroads of South-East Asia, to the north of the Indonesian archipelago. From an economic point of view, it belongs to the new generation of emerging countries known as the “Tigers”, which along with Thailand, the Philippines and Indonesia, and in the wake of the four Dragons (Korea, Taiwan, Hong Kong and Singapore), have participated in the “Asian miracle”. Malaysia’s standard of living and buoyant economy definitely make it the leading “Tiger” of ASEAN. At the heart of the Malay world, rooted in a long Muslim tradition, its multi-ethnic population and religious pluralism also make it a crossroads where languages, civilisations and influences meet and intermingle.

3From the 16th century onwards, the highly coveted port of Malacca was subjected to successive waves of European colonial conquests (by the Portuguese, Dutch and English), which had a primarily commercial objective. In the 19th century, along with Penang and then Singapore, Malacca was part of the Straits Settlements and was under British rule. The exploitation of local natural resources quickly superseded the mercantilist reasoning behind port business. From 1874 onwards, Great Britain extended the direct colonial rule of strategic ports to the Peninsula’s tinmining states. Colonisation, although somewhat incomplete, thus drew Malaysia into the so-called first globalisation at the beginning of the 20th century, generating an opening up of the local economy that had never occurred before. Flows have structured Malaysia’s economy and demography in the long-term including the flow of goods, which was a continuation of much older trades, the flow of foreign capital for funding regional development, and the massive influx of partly servile immigrant labour from China and especially India to carry out the additional work created by this development. Trade greatly accelerated from 1910 until the Great Depression in the 1930s and the Peninsula started to produce rubber and tin for European and American capitalist companies, to meet the global demand.

  • 1 In 1963, the Federation of Malaysia welcomed the states of Sabah and Sarawak (Borneo). Singapore g (...)
  • 2 The short attempt at promoting imports, influenced by nationalism in the 1970s, did not mean a rej (...)

4Modern Malaysia’s initial vulnerability to global economic cycles, through its dependence on foreign export demands, foreign capital and imported technology, has remained a characteristic trait of its economy. From the 1960s, Malaysia1 initiated a gradual conversion of its agriculture exports into more diversified industrialisation. This was carried out, upon recommendations from the International Bank for Reconstruction and Development (IBRD) and mostly, with European financial aid. Since the arrival of capitalism in Malaysia, however, and regardless of the period, the flagships of Malaysian industry have always been created based on quantity, run and dominated by foreign capital, and products have mainly been allocated for export2.

5An outcome of successful reconversion and the driving force behind its economic growth, the electronics industry has led to the country being ranked the leading world exporter in this domain for more than a decade. However, the pioneering companies, which were welcomed by local authorities from 1972 onwards, are American and Japanese multinationals, and more recently Taiwanese. Concentrated mostly in Penang’s industrial cluster, they apply technology developed in parent companies. This concentration inhibited the emergence of national companies capable of competing with these global electronics giants. Employing close to a fifth of the active industrial population, the electronics industry accounts for nearly 40% of Malaysian exports, more than other export revenues that mainly come from the country’s abundance of natural resources (natural gas, crude oil, palm oil, petroleum products and exotic wood).

  • 3 Foreign trade is more than twice its GDP, direct foreign investments have been flowing in since th (...)

6As a small open economy3, Malaysia is therefore structurally vulnerable to external shock. This is the reason for which it was shaken up by the financial crises in 1997 and 1998 and then by the burst of the internet bubble in 2000, which sent a severe jolt through the global electronics industry. Consequently, the limits of extraversion and the virtue of economic sovereignty became apparent within the region. This sovereignty was exercised several times in Malaysia’s economic history. The most famous is undoubtedly Prime Minister Mahathir’s refusal of IMF’s aid in 1998 while he was restoring control of the capital, in order to isolate the country from the collapse in the economies of emerging countries. More discreet, but equally as striking, was that public investment permanently took over a domestic demand weakened by the crisis and a foreign demand that had been slowed down by a change in the global business cycle of the electronics industry. In the middle of the first decade of the 2000s, the state played a major role in accumulating the capital, (for example, more than 60% in 2001-2004), which helped to reignite the Malaysian economy under better conditions. The weight of public investment was still 54% in 2007. Curiously, this economic sovereignty was part of the ongoing measures taken by the New Economic Policy (NEP, 1971-1991), and reflected the ambiguity of these measures. In order to reach its development objectives, the government created a type of state capitalism, closely linking politics to business circles. On the other hand, despite a local economy characterised by both the dynamism of small and medium-sized Chinese businesses, and the influence of a Chinese business class, which had been residing in Malaysia for a long time, the economic policy was prone to promoting foreign interests rather than supporting local Sino-Malaysian entrepreneurs. The Chinese population living in Malaysia represents about a quarter of the national population and owns two thirds of the small and medium-sized local businesses. Following the two periods of economic slow-down in 1998, 2000 and 2001, the country also attempted to diversify its economy by supporting sectors that focused on domestic demand, by developing “Islamic” sectors, and by trying to weaken the structural influence of the electronics industry and its dependence on America’s demand.

  • 4 Aziz Zeti Akhtar, “Asia, a decade of transformations”, Finances and development, IMF, June 2007, p (...)

7The global financial crisis, which since autumn in 2008 has gradually turned into a global economic crisis, seemed to temporarily spare Asia’s emerging countries, particularly those of South-East Asia. Like Zeti Akhtar Aziz, Governor of Negara Bank, it is plausible to think, that “the changes occurred since the 1997 crisis have made Asia a centre of dynamism and stability within the world economy4”. In its overview of the world economy that was published in November 2008, the IMF considered that the decline in Asian GDP would be minimal, as the region, inspired by lessons from the Asian crisis, was resisting the 2008 financial turbulence quite well. For Malaysia, experts announced a growth rate of 5.7% in 2008 and 4.8% in 2009.

8However, the forecast for global growth has already had to be scaled down: the world economy is entering into recession (-1% for 2009), and although developed economies are being hit the hardest, as Asia participates in global business, it cannot escape the crisis.

  • 5 However, Malaysia would later register a trade surplus for the 11th consecutive year.

9In February 2009, IMF’s updated data predicted a growth rate of only 5.5% for developing Asia in 2009 (compared to almost 8% in 2008), and a halved growth rate for the five ASEAN countries (2.7% in 2009 compared to 5.4% in 2008). What was even more surprising was the situation of the Asian Dragons, which experienced a severe recession, with a fall in GDP of-3.9%. In the last quarter of 2008, Malaysia saw almost no growth (+0.5%), which reduced its annual growth around the end of 2008 and the beginning of 2009.5 In fact, Japan, Singapore and the United States, Malaysia’s leading business partners, saw their economies decline, and dragged their small business partner into their recession.

10Thus, the year 2009 started very badly with a sharp decline in industrial production that was due to Malaysia’s dependence on its exports. The manufacturing industry registered a 22% drop in sales in January 2009 compared to January 2008. Employing almost a million people, the industrial sector lost a tenth of its workforce in a year. The sectors most severely affected by this meltdown were the major export sectors. In the software sector, the sale of computers and peripheral devices dropped by half (- 48.5%) compared to the previous year, while the sale of semiconductors dropped by 35%. These two branches alone explain the 40% decline in registered industrial sales. If we consider export trends, the analysis confirmed that Malaysian exports fell by 25% between January 2008 and January 2009, mainly due to exports of electronic goods that have lost more than a third of their value. A counter-trend, albeit a fragile one, is that domestic demand remains, for the moment, steadier than during previous crises, due to both the relative stability of private consumption growth maintenance and the strong support of public demand.

11We can expect a deepening of the global crisis in 2009 in spite of the growth plans that have been announced. If this scenario continues, Malaysia will be caught up in the crisis, despite its intrinsic virtues, political voluntarism and its successful integration into globalisation through international trade.


1 In 1963, the Federation of Malaysia welcomed the states of Sabah and Sarawak (Borneo). Singapore gained sovereignty in 1965 and since then Malaysia has been a federation of 13 states located in two geographical entities that are separated by the South China Sea.

2 The short attempt at promoting imports, influenced by nationalism in the 1970s, did not mean a rejection of the policies promoting exports.

3 Foreign trade is more than twice its GDP, direct foreign investments have been flowing in since the end of the 1980s and the capital market was deregulated.

4 Aziz Zeti Akhtar, “Asia, a decade of transformations”, Finances and development, IMF, June 2007, p. 27.

5 However, Malaysia would later register a trade surplus for the 11th consecutive year.

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