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The Malay Peninsula and indeed Southeast Asia has been a centre of trade for centuries. Various items such as porcelain and spice were actively traded even before Malacca and Singapore rose to prominence. In the 17th century, large deposits of tin were found in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were introduced for commercial purposes. Over time, Malaya became the world's largest major producer of tin, rubber, and palm oil. These three commodities, along with other raw materials, firmly set Malaysia's economic tempo well into the mid-20th century. Instead of relying on the local Malays as a source of labour, the British brought in Chinese and Indians to work on the mines and plantations. Although many of them returned to their respective home countries after their agreed tenure ended, some remained in Malaysia and settled permanently. As Malaya moved towards independence, the government began implementing economic five-year plans, beginning with the First Malayan Five Year Plan in 1955. Upon the establishment of Malaysia, the plans were re-titled and renumbered, beginning with the First Malaysia Plan in 1965. In 1970s, Malaysia began to imitate the footsteps of the original four Asian Tigers and committed itself to a transition from being reliant on mining and agriculture to an economy that depends more on manufacturing. With Japanese investment, heavy industries flourished and in a matter of years, Malaysian exports became the country's primary growth engine. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s. During the same period, the government tried to eradicate poverty with the controversial New Economic Policy (NEP), in the wake of the May 13 Incident of racial rioting in 1969. Its main objective was the elimination of the association of race with economic function, and the first five-year plan to begin implementing the NEP was the Second Malaysia Plan. The success or failure of the NEP is the subject of much debate, although it was officially retired in 1990 and replaced by the National Development Policy (NDP). The rapid economic boom led to a variety of supply problems, however. Labour shortages soon resulted in an influx of millions of foreign workers, many illegal. Cash-rich PLCs and consortiums of banks eager to benefit from increased and rapid development began large infrastructure projects. This all ended when the Asian Financial Crisis hit in the fall of 1997, delivering massive shock to Malaysia's economy. As characteristic of other countries affected by the crisis, there was speculative short-selling of the Malaysian currency, the ringgit. Foreign direct investment fell at an alarming rate and, as capital flowed out of the country, the value of the ringgit dropped from MYR 2.50 per USD to, at one point, MYR 4.80 per USD. The Kuala Lumpur Stock Exchange's composite index plummeted from approximately 1300 points to nearly merely 400 points in a matter of weeks. After the sacking of finance minister Anwar Ibrahim, a National Economic Action Council was formed to deal with the monetary crisis. Bank Negara imposed capital controls and pegged the Malaysian ringgit at 3.80 to a US dollar. Malaysia refused economic aid packages from the International Monetary Fund (IMF) and the World Bank, however, surprising many analysts. In March 2005, the United Nations Conference on Trade and Development (UNCTAD) published a paper on the sources and pace of Malaysia's recovery, written by Jomo K.S. of the applied economics department, University of Malaya, Kuala Lumpur. The paper concluded that the controls imposed by Malaysia's government neither hurt nor helped recovery. The chief factor was an increase in electronics components exports, which was caused by a large increase in the demand for components in the United States, which was caused, in turn, by a fear of the effects of the arrival of the year 2000 (Y2K) upon older computers and other digital devices. However, the post Y2K slump of 2001 did not affect Malaysia as much as other countries. This may have been clearer evidence that there are other causes and effects that can be more properly attributable for recovery. One possibility is that the currency speculators had run out of finance after failing in their attack on the Hong Kong dollar in August 1998 and after the Russian ruble collapsed. (See George Soros) Regardless of cause/effect claims, rejuvenation of the economy also coincided with massive government spending and budget deficits in the years that followed the crisis. Later, Malaysia enjoyed faster economic recovery compared to its neighbours. In many ways, however, the country has yet to recover to the levels of the pre-crisis era. While the pace of development today is not as rapid, it is seen to be more sustainable. And, although the controls and economic housekeeping may not have been the principal reason for recovery, there is no doubt that the banking sector is more resilient to external shocks now. The current account has also settled into a structural surplus providing a cushion to capital flight. Asset prices are now a fraction of their pre-crisis heights. The fixed exchange rate regime was abandoned in July 2005 in favour of managed floating system within an hour of China's announcing of the same move. In the same week, the ringgit strengthened a percent against various major currencies and was expected to appreciate further. As of December 2005, however, expectations of further appreciation were muted as capital flight exceeded USD 10 billion. In September 2005, Sir Howard J. Davies, director of the London School of Economics, at a meeting Kuala Lumpur, cautioned Malaysian officials that if they want a flexible capital market, they will have to lift the ban on short-selling put into effect during the crisis. On March 23 2006, Malaysia removed the ban on short selling. |