Explaining Malaysia’s Past Economic Growth

Abstract

Post-independence Malaysia has achieved significant economic growth: faster than that of most of the developing countries of Africa and Latin America, slower than the tiger economies of Northeast Asia, and similar to the growth rates of several Southeast Asian neighbouring countries. Manufacturing quickly replaced rubber and tin as the dominant growth engine of the country. Government policies particularly with respect to physical infrastructure contributed to manufacturing growth but other government policies, notably the new economic policy of 1971 and the heavy industry policies of the 1980s and 1990s were a drag on overall economic performance. Requirements designed to promote the Bumiputera ownership share of business played a central role in limiting the contribution of domestic manufacturers to Malaysia’s rapidly growing manufactured exports. Manufactured exports as a result came mainly from foreign direct investment that were not subject to the ownership requirements. A careful analysis of the innovative capacity of the key sectors of manufacturing indicates some areas where Malaysian firms were innovative, but the rate of innovation in most of the leading sectors has been modest. Limited domestic innovation capacity also helps explain the country’s slow total factor productivity growth. Weaknesses in the Malaysian education system are an important component particularly at the tertiary level of why innovation has not progressed more rapidly. Government’s pursuit of social goals in the education sector is one part of why the country has not produced enough innovators to support more robust innovative capacity in the country.KeywordsGDP growthBumiputera OwnershipManufacturingProductivityInnovationEducation