Chapter 4. Malaysia’s Move Toward a High-Income Economy: Five Decades of Nation Building—A View from Within

Reda Cherif, Fuad Hasanov, and Min Zhu
Published Date:
April 2016
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Ahmad Tajuddin AliThe author wishes to acknowledge the contribution of Rushdi Abdul Rahim of the Malaysian Industry-Government Group for High Technology in the preparation of this chapter.

Malaysia is blessed with quite a few advantages that have enabled it to diversify economic activities and achieve a high quality of life. It has a strategically favorable location in Southeast Asia and enjoys a good year-round climate that helps keep it relatively free of natural disasters. Its arable land is fertile for plantations; its rainforest is biodiverse and rich in resources, including timber; and valuable deposits of mineral and metal oxides are found throughout the country. These commodities and products have been exported to other countries and have contributed significantly to the nation’s economy.

Since independence in 1957, Malaysia, in many ways a microcosm of Asia, has achieved sustained economic growth marked by low inflation and unemployment. This is reflected in the country’s current ranking in global indicators and indices. In 2014, it placed 17th in the World Bank’s Ease of Doing Business Index, 33rd in the Global Innovation Index,1 20th in the World Economic Forum’s Global Competitiveness Index, and 25th for its quality of infrastructure. Malaysia’s population reached 30 million in 2014; 54 percent of the population represent the country’s middle class, with per capita income of about $10,000. Moving up the ranking in the Global Competitiveness Index from 24th in 2014 to 20th in 2015 (World Economic Forum 2012, 2014). Malaysian competitiveness improved owing to the economy’s successful horizontal and vertical diversification, while inflation and wage pressures remained contained.

The education system is an important element in supporting intergenerational equity. As part of an ambitious transformation effort for the education system, the government continues to invest about 16 percent of the federal budget in education (Ministry of Education Malaysia 2013). However, educational outcomes are not yet commensurate with the level of funding.

Malaysia is one of the very few resource-rich countries that invests more than the resource wealth extracted. Figure 4.1 shows a significant reduction in reliance on the primary sector as a result of the rapid pace of the economy’s horizontal diversification, with robust growth in the manufacturing and services sectors. Of equal importance, the economy has diversified vertically by moving up the commodities value chain from upstream to downstream activities (Bank Negara Malaysia 2013).

Figure 4.1Horizontal and Vertical Diversification of the Malaysian Economy away from Commodities

Source: Malaysia, Department of Statistics, Economic Planning Unit.

A lid on inflation and wage growth has supported the diversification efforts. Malaysia recorded inflation of 2.3 percent from 2002 to the first quarter of 2013, lower than its peers (at a compounded annual growth rate). Productivity growth of 3.2 percent exceeded wage growth of 2.7 percent in the same period.

Reflecting the growth of the nation, Kuala Lumpur has undergone tremendous development to become one of Asia’s most iconic cities. The country has a progressive outlook on development, and offers an attractive business environment with quality infrastructure.

Prerequisites for Development

Malaysia’s success so far is due to its ability to leverage visionary leadership, political stability, sound planning mechanisms, and abundant natural resources. Visionary leadership and political stability provided a strong base for development and the implementation of national strategies, leading to a sound planning mechanism. This in turn helped sustain growth, expand both foreign and domestic direct investment, and supported the tourism industry—an ever growing contributor to the economy.

Since independence, Malaysia has been led by five prime ministers, who have influenced the nation’s growth. Malaysia gained its independence on August 31, 1957, when the country’s first prime minister, Tunku Abdul Rahman Putra Al-Haj, known as the Father of the Nation, was handed power by the British. In 1970 he was succeeded by Tun Abdul Razak. After his untimely demise, Tun Hussein Onn became prime minister. During this period, the nation’s social and economic foundations were laid down.

In 1981, Tun Dr Mahathir Mohamad became prime minister. He embarked on an energetic drive to increase economic activities and build Malaysia’s competitiveness. He is known as the Father of Industrialization, because of the significant advancement made during his administration in the industrial and manufacturing sector. Citing personal reasons, Mahatir retired in 2003 after 23 years at the helm.

Balancing social needs within the economic development, Malaysia’s fifth prime minister, Tun Abdullah Ahmad Badawi, promoted human capital development before handing the post to his deputy, current Prime Minister, Dato’ Sri Mohammad Najib bin Tun Haji Abdul Razak, who has relentlessly pursued the nation’s sustainability agenda by focusing on encouraging more downstream activities and expanding manufacturing.

Political stability complementing good leadership allowed for the effective implementation of policies. These supported a conducive business environment and helped attract high foreign investment.

Malaysia, as noted, is fairly safe from natural calamities such as earthquakes and volcanic eruptions. Its geographic location also protects it from tornadoes (though it experiences occasional floods during the monsoon season). Malaysia benefits from tropical weather throughout the year, encouraging the growth of various plants, some of which have been converted into major sources of income.

The abundance of natural resources has been a prerequisite for Malaysia’s success story, with rubber and palm oil being the first commodities produced. During the early postindependence years, tin ore, rubber, and palm oil contributed significantly to the nation’s wealth. These commodities, in later years, blossomed into other economic activities, such as manufacturing; that is, instead of exporting raw materials, consumer and industrial products were made and then exported. And this downstreaming is still under way.

Notwithstanding the stability Malaysia has enjoyed through the years, the country has weathered occasional challenges caused by its dependence on commodities and natural resources, including economic fluctuations due to the trend of decreasing resources and volatility in commodity prices, and rising environmental concerns.

Not only does diversification have a profound impact on an economy, but it can also influence a country’s environmental landscape and social structure. When the development of Malaysia’s rubber and palm oil industries started in the 1960s and 70s, the government, researchers, and planters made efforts to improve the ecosystem to make these industries more resilient. They have also enjoyed strong support through the development of infrastructure and good governance. Today, as environmental concerns increase, continuous research on sustainability is being undertaken to ensure balanced growth for the nation, both economically and environmentally.


In 1877, the first rubber tree seedlings were brought from the Amazon Basin and planted on an experimental basis before attempts were made to produce rubber on a commercial scale. The British, the colonial power at that time, provided capital for forest clearing and planting rubber trees, and also provided a market for rubber. Skilled labor from India was transported to work on the rubber estates. Rubber became one of the major commodities in Malaysia with the help of important national initiatives, such as establishing the Rubber Research Institute in 1926 (Malaysian Rubber Board 2011). In 2013, Malaysia exported 1.31 million metric tons of natural rubber, and was the world’s third-largest exporter of natural rubber after Thailand, at 2.8 million tons, and Indonesia, at 2.45 million tonnes (Malaysian Rubber Board 2013).

Palm Oil

In 2014, palm oil cultivation covered about 5.4 million hectares of land in Malaysia, producing 19.7 million tons of palm oil and 2.3 tons of palm kernel oil. Malaysia is one of the largest producers and exporters of palm oil in the world, accounting for 12 percent of global oils and fats production and 27 percent of the export trade in oils and fats. Malaysia’s palm oil industry provides employment to more than half a million people and livelihoods to an estimated 1 million (Malaysian Palm Oil Council 2014). It accounts for 5 percent to 6 percent of GDP.

In the early 1960s, palm oil cultivation expanded at a fast pace under the government’s agricultural diversification program, which was introduced to reduce the nation’s economic dependence on rubber and tin. Later, the government introduced land settlement schemes for planting palm oil to eradicate poverty among landless farmers and smallholders. Malaysia’s palm oil plantations are largely based on the estate management system and smallholder scheme. A key driver for this effort was the Federal Land Development Authority, established in 1956 to promote socioeconomic responsibility in the development of plantation land for the rural poor and landless (Malaysian Palm Oil Council 2012).

The palm oil industry has consistently contributed toward poverty eradication and narrowing the income gap between rural and urban residents. It has created rural townships where workers enjoy good quality of life with adequate social infrastructure (for example, housing, health, and religious facilities), contributed to social security and peace, and reduced migration of the labour force from rural to urban areas.

Social and Political Challenges

During the British colonial era, Chinese laborers were brought in to work in tin ore mines, and Indians to help run the civil service and work in the plantations. In doing so, the British colonial system created ethnic communities based on economic activities. But this system created an imbalance in the working structure for the local population, as Chinese and Indians were brought in to work in the economically productive sectors, disadvantaging locals (Yusof 1998). However, since independence, affirmative action has minimized the gap.

Demographically, Malaysia is a young nation. Since the 1970s, the proportion of its working-age population has increased in tandem with the rapid development of the nation (Mahari 2011). However, different age groups, with different roles and needs, require tailored development programs.

On average, a Malaysian spends at least 10 years in school before joining the workforce. Education has supported the development of the country’s social fabric. Mutual understanding and respect are key in developing and maintaining the harmony of Malaysians.

Although Malaysia’s main political parties are race-based, they usually form coalitions or alliances during elections. Several parties are represented in the current ruling coalition, Barisan Nasional (National Front).

Economic Challenges

Despite occasional social flux and economic volatility, Malaysia has managed to climb the economic ladder through a series of practical development plans, along with continuous public infrastructure development, and the integration of science, technology, and innovation in the economy.

To recap, economic activities in the early years after independence were highly dependent on primary commodities, namely rubber and tin, which accounted for 70 percent of total export earnings, 28 percent of government revenues, and 36 percent of employment (Economic Planning Unit 2013). However, reassuring as this performance may have been, diversification was crucial to reducing the nation’s dependence on commodities.

Malaysia’s development is rooted in its series of five-year national plans. These began with the First Malaya Plan, from 1956 to 1960, and the Second Malaya Plan from 1961 to 1965. After the formation of Malaysia in 1963, this five-year plan, known as the Malaysia Plan, ran from 1966 to 1970. The 10th Malaysia Plan is the current one, and preparations for the next one, covering 2015–20, are under way.

Because of the British colonial legacy of keeping economic activities divided among races, by the late 1960s gaps were beginning to show in economic development between the predominant Malays in rural areas and the Chinese in urban areas. This disparity and inequality, fueled by an uncertain political future, contributed to the race riots following the 1969 elections. To avoid a repetition of these events, the government brought the various political parties, organizations, and political personalities together to formulate strategies to deal with the sensitive issues of poverty and inequality among ethnicities and regions. This led to a critical evaluation and a major shift in the formulation of development policies, resulting in affirmative action—the New Economic Policy. The policy is characterized by two main goals: to eradicate poverty irrespective of race and to restructure the society. The New Economic Policy highlights the basic philosophy of national growth and unity.

In the 1980s Malaysia embarked on a diversification strategy, moving from an agriculture-based economy to a resource-based one. The “Malaysia Incorporated” concept launched by former Prime Minister Mohamad in 1983 represented a new approach to national development. Both the public and private sectors adopted the idea that the nation was a corporate or business entity, jointly owned by both sectors and working together in pursuit of a common mission. In the same year, a privatization policy was announced and developed to underscore the increased role of the private sector in the development of the economy. During this period, the manufacturing sector recorded its fastest growth, rising from 10.4 percent of GDP to 22.6 percent in the 1980s, surpassing the contribution of the agricultural sector (Economic Planning Unit 2013). Exports were also diversified; the main exports included electronic equipment, petroleum and liquefied natural gas, wood and wood products, textiles, and chemicals.

The pace of development changed rapidly as the economy underwent structural transformation under the National Industrial Policy and Industrial Master Plan of the mid-1980s. Subsequent plans to enhance development included measures to aggressively promote manufacturing and services in the 1990s.

Nevertheless, a nation’s development should not be approached solely in economic terms. Given that social transformation requires “well-being” as a key component, development and growth had to occur along all dimensions: economic, political, social, spiritual, psychological, and cultural. Vision 2020, launched in 1990, set out a road map for Malaysia to become by 2020 a united nation, with a strong democratic society, infused with moral and ethical values.

Transforming the Nation and Supporting Growth

In 2010 the National Transformation Programme was launched as the main agenda of national development through the Government Transformation Programme and the Economic Transformation Programme.

The Government Transformation Programme covers structural issues, and aims to enhance the efficiency of the civil service. Under the program, six National Key Results Areas were identified:

  • Reducing crime
  • Fighting corruption
  • Improving student outcomes
  • Raising living standards of low-income households
  • Improving rural basic infrastructure
  • Improving urban public transport

These areas represent important issues that require government involvement.

The Economic Transformation Programme aims to lift the nation’s gross national income per capita from $6,700 to $15,000 in 2020, an increase that would raise Malaysia to a high-income country. Under the program, the 12 National Key Economic Areas have the potential to contribute a quantifiable amount of growth (PEMANDU 2013):

  • Oil, gas, and energy
  • Palm oil
  • Financial services
  • Tourism
  • Health care
  • Communications, content, and infrastructure
  • Business services
  • Electronics and electrical
  • Wholesale and retail
  • Education
  • Agriculture
  • Greater Kuala Lumpur

Lead ministries are responsible for the implementation of the National Key Results Areas; the implementation of the National Key Economic Areas is a collaboration between the private sector and the government.

As well as strategic growth plans, major investments were made in infrastructure development to support the economic transformation. Physical infrastructure and well-equipped transportation hubs—world class airports, sea ports, and a network of well-maintained expressways—were built to enable the efficient movement of people and goods. Malaysia has seven international sea ports, five international airports, and 500 industrial estates and free industrial zones, including technology parks such as the Multimedia Super Corridor which specializes in multimedia technology. Malaysia also has a high quality telecommunications network and services (Malaysian Industrial Development Authority 2015).

Various government agencies were established with specific tasks and authority to support and facilitate economic growth. Agencies under the Ministry of Trade and Industry, for instance, play significant roles in supporting business growth; among them, the Malaysian Industrial Development Authority, the Malaysia External Trade Development Corporation, the Malaysia Productivity Corporation, and SME Corporation Malaysia.

In addition, these initiatives were complemented by and harmonized with business policies and tax packages to ensure that doing business in Malaysia is an attractive proposition. The main incentives include pioneer status, investment tax and reinvestment allowances, and support for high technology industries, strategic projects, and for setting up international and regional service-based operations.

The focus on human capital development is also significant. Here, the government has continuously invested in developing talent, after realizing early on that Malaysians needed to be equipped with the necessary knowledge and skills to compete globally. Each of Malaysia’s five-year development plans put a high priority on education and skills development, thereby ensuring that the quality of Malaysia’s workforce is one of the highest in the region.

2020 and Beyond: Focus on Science, Technology, and Innovation

There is no doubt that Malaysia has been quite successful in reaping the benefits of its endowments. However, if it is to sustain growth and stay ahead of competitors, complacency is not an option. As the saying goes: We do not inherit the world from our ancestors, we borrow it from our children. Thus, any plans made today should put a high consideration on the young, because positive values can be engrained through education that prepares the quality leaders of tomorrow.

In tandem, technology advancement and know-how are essential for industry to grow. A continuous supply of skilled and knowledgeable workers is critical to sustaining economic growth, and, again, education is crucial for developing human capital.

As reflected in the Rukun Negara (National Principles), the Malaysian national pledge, the nation aspires to build a progressive society that will make use of science and modern technology as the foundation for moving forward socially and economically.

To meet global and local science and technology challenges, Malaysia is striving to master science, technology, engineering, and mathematics. Having a supportive education system in which these areas are prioritized is vital for generating quality human capital at various academic levels. In 1967, the Higher Education Planning Committee proposed that a 60:40 ratio of science to arts students would fulfil future demand. To date, however, tertiary enrolment shows a 30:70 ratio.

The emphasis on science, technology, and innovation runs through Malaysia’s development programs, including the Malaysia Plans, the Industrial Master Plans, the National Science, Technology, and Innovation Policy, and Public Research Assets.

The general thrust of the National Science, Technology, and Innovation Policy, launched in 2013, is to strengthen basic foundations in these areas; namely, competency in generating and deploying knowledge, strengthening human capital, elevating the innovative potential of local industry, enhancing governance, and developing a society receptive to science, technology, and innovation. The policy and its implementation plans are expected to imbue a new vigor for science that will propel the nation’s economic trajectory to a higher plane.

The Ministry of Science, Technology and Innovation is the lead ministry for implementing programs to promote science and technology, including the bulk of national research and development activities in these areas. Moreover, its agency, Academy Science of Malaysia, plays a vital role in pursuing, encouraging, and enhancing excellence in science, engineering, technology, and innovation.

The Global Science and Innovation Advisory Council was set up in 2010 to improve and optimize national capabilities through international networks. Industry leaders and prominent academicians from around the world are on the council, as well as members of the New York Academy of Sciences President’s Council. Officials from key Malaysian ministries and local corporate leaders are also on the council.

The Science to Action (S2A) initiative is the latest national agenda to ensure that Malaysia maintains sustainable growth beyond 2020. Its goal is for Malaysia to be not only a consumer of technologies, but also a producer through a “science transformation” initiative to bolster fundamentals in the science, technology, and innovation ecosystem. To achieve this, the initiative was streamlined into three thrusts to facilitate sustainable growth. The three thrusts, according to the Malaysian Foresight Institute (2014) are:2

  • Science for Industry to strengthen current industries, create new industries and entrepreneurs by identifying new growth areas, as well as increasing private sector participation in science and technology development.
  • Science for Well Being to improve the quality of people’s lives through the use of science and technology. This includes popularizing science and improving the uptake of the Science, Technology, Engineering and Mathematics exploration center.
  • Science for Governance to strengthen public services and governance to ensure a conducive ecosystem for the development and uptake of science and technology.


Malaysia, in common with many other nations, has found that not all targets it has aspired to have been met or achieved as planned. This can be attributed to factors that include resource limitations, implementation issues, and different externalities. Moreover, like other nations, Malaysia is not immune to wage pressures, inflation, and global economic uncertainties. Yet by diligently working on overcoming these obstacles, it has become stronger and attained a better position for achieving the national vision of becoming a high-income nation by 2020.


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