DIIS Seminar Series on
State-Business Relations and
Economic Development, Spring 2011
Development coalitions, foreign
business and industrial policy in
Malaysia.
By Peter Wad, DICM/CBDS, CBS
Agenda
Long waves of economic development:
Income-traps and trap-bypassing.
Industrial diversification, deepening and upgrading.
Long waves of political development:
Building state, nation, participation, welfare.
The politics of industrialisation:
Development coalitions, foreign capital and industrial
policy.
New Economic Model 2010-2020:
A paradigme shift of economic strategy?
State-business relations, ’Varieties of Capitalism’
and ’Industrial Relations’:
The case of Malaysia.
Conclusion
Long waves of economic development
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development
(Source: Yusuf & Nabeshima (2009) Tiger Economies under Threat.
Washington:WB)
Long waves of economic development
Income-traps: Malaysia’s GNI/capita
and overall poverty.
Low-income trap: Malaysia 1960s-1970s?
• Incidence of poverty 1970: 49%; 1980: 29%
Middle-income trap: Malaysia 2000s?
• GNI USD/capita: 2000: 3,450; 2009:7,350
• Incidence of poverty: 2004: 6%; 2009: 4%.
High-income trap: Not a trap, a ’Vision
2020’ in Malaysia. A trap of welfare state?
Long waves of economic development
Industrialisation:
conceived as industrial diversification, deepening
and upgrading (Lauridsen 2008).
Strategic industrial policy aims for improving all
aspects.
Industrial diversification in Malaysia:
Declining importance of agriculture, yet still
important export items (e.g. palm oil).
Important oil industry.
Manufacturing dominates export.
Services increasingly important.
Long waves of economic development:
Industrial diversification
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development:
Industrial diversification
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development:
Industrial deepening
(Source:Furby (2005) Evaluating the Malaysian EPZs. Lund: LU)
Long waves of economic development:
Industrial deepening
(Source: IMP3)
Industrial cluster development:
Penang: Electronics (semiconductors).
Shah Alam/Klang Valley: Automotive.
Kerteh, East of Peninsular Malaysia:
Petrochemicals.
Muar, Johore: Furniture.
Batu Bahat, Johore: Textile & apperal.
Subang, Selangore: Airospace.
Long waves of economic development:
Industrial deepening
(Source: Rasiah 2002, 2003)
Industrial clusters require:
Human capital formation (education, training).
Enabling environment for entrepreneurship.
En integrated business network of TNCs, local
firms, business associations, politicians, local
community.
Success:
Penang semiconductor industry (foreign TNCs, local
machine tool suppliers).
Penang Skill Development Centre (PSDC) is a model
for regional networking.
Failure:
The Multimedia Super Corridor (MSC), KL, in IT – so
far a failure.
Long waves of economic development:
Industrial upgrading
(Source: Yusuf & Nabeshima (2009)
Long waves of economic development:
Industrial upgrading
(Source: Yusuf & Nabeshima (2009)
Long waves of political development:
Political development theory (Source:Burnell & Randall 2005)
State building
Military and administrative structures established.
Malaysia: Independence 1957 under cross-ethnic elite coalition
(’Alliance’); Confederation 1963. Singapore excluded 1965.
Nation building
Political culture of national identity & loyalty.
Malaysia: Crisis 1969: Ethnic violence after defeat of ’Alliance’
government loosing control of some local states.
Participatory institution building
Institutions of political democracy & corporatism.
Malaysia: Semi-democracy; 1980s King/sultans clipped; crisis
2008 election gave opposition control of several local states.
Distributional institution building
Redistribution of wealth, welfare.
Malaysia: Affirmative policy for Bumiputera population 1971-
Conflicting development coalitions
(Source: Inspired by Stallings 1978)
Develop
ment
model
Ruling
‘Barisan Nasional’ core
UMNO
MCA &
Gerakan
MIC
PKR
Influential
DAP
Hegemon Political
ic
influence
State bureaucracy,
Bumi/Chinese/Indian business
elites, middle layers & workers,
moderate Muslims
Secular urban middle layers &
workers, peasant smallholders,
orthodox Muslims
Develop
ment
ideology
Bumi
hegemony
Reforma- Classic
si, HRs
Islam
(Justice) (rural)
Develop
ment
policy
Bumi affirmative policy since
1971. ‘Vision 2020’ of 1991.
‘New Economic Model’ 2010.
Protectio
n of elite
Indians
Leading
PAS
Ethnoclass
alliance
Protectio
n of elite
Chinese
Minor
pol. Iifl.
Oppositional
‘Pakatan Rakyat’ core
Less
influent.
Secular
populist/
workers
Abandoning Bumi affirmative
policy, Human Rights, anticorruption, local level
democracy.
Strategic Industrial Policy:
The stage model of industrialisation:
Classic International Division of Labour
Industrial Country: UK
Commodity
I
II
III
Consumer
goods
Interm. goods
Capital goods
Developing Country: Malaysia 1950s-60s
Strategic Industrial Policy:
The stage model of industrialisation of NIDL –
Primary, Secondary &Tertiary ISI, EOI (DDE?)
Industrial Country: Global North
I
II
III
Primary Secondary (Tertiary?)
Commodity
Consumer
goods
Interm. goods
Capital goods
Developing Country: Malaysia 1970s-2010
Industrial policies of specific industries
Ressource based industry: State acquisition in
1970s.
Capitalist nationalisation of plantations & institutional capitalism
(GLCs), increasing use of immigrant labour from 1980s.
Export diversification & deepening.
Development of sector innovation system.
Electronics industry: TNCs 1971FDI-led EOI expansion in EPZs (& FTZ/warehouses).
Low-cost, labour intensive industry. Anti-union policy.
Local linkages in Penang state, limited innovation.
Automotive industry: State-TNC alliance 19832004.
State-driven national automotive industry (GLCs) with Jap.
technology
Captured and lost domestic market; export failure (CBU & parts).
Foreign TNCs acquire control; Proton in dire straits.
Malaysia’s industrialisation strategies
Main emphasis
Industrial diversification (incl. IMP1 1986-95):
Protectionism & Primary ISI 1957-1971
NEP-strategy & FDI-Primary/Secondary EOI 1971-1981.
State-NEP (SOEs) & Secondary ISI: 1981-1986.
Privatising-NEP & FDI-Secondary EOI: 1986-1991
Industrial deepening (IMP2 1996-2005):
Vision 2020 of 1991, privatising, industrial deepening &
upgrading aiming for tertiary ISI & EOI: 1991-1997.
Crisis and post-crisis governance: Re-nationalisation (GLCs)
& re-regulation 1997-2003.
Consolidation, priority of balanced regional development,
reduction of big development projects 2003-2009.
Industrial upgrading (IMP3 2006-2020):
Moving up the global value chain.
New Economic Model 2010-2020.
New Economic Model 2010-2020
(Source: NEAC 2009)
New Economic Model 2010-2020
(Source: EPU/PMD 2010)
New Economic Model 2010
(Source: NEAC 2010)
New Economic Model 2010
(Source: NEAC 2010)
The New Economic Model 2010-20
Source: NEAC 2010.
Issue
1. Growth
Old approach
Growth primarily through
capital accumulation
New approach
Growth through
productivity
2. State-market Dominant state participation
in the economy
Private sector-led growth
3. Planning
Centralised strategic
planning
Localised autonomy in
decision-making
4. Geography
of growth
Balanced regional growth
Cluster- and corridorbased economic activities
5. Strategic
industrial policy
Favour specific industries
and firms
Favour technologically
capable industries and
firms
6. Export
orientation
Export dependence on G-3
(US, Europe and Japan)
markets
Asian and Middle East
orientation
7. Labour
immigration
Restrictions on foreign
skilled workers
Retain and attract skilled
professionals
The New Economic Model 2010-20
(Source: EPU/PRD 2010).
Role of FDI in New Economic Model
Malaysia’s reliance on inward foreign direct investments was strong in
the past. FDI’s share of gross fixed capital formation was 14.4 percent
annual average 1995-2005, 21.2 percent in 2007, down to 16.8
percent in 2008 and then falling to 3.5 percent in 2009 (UNCTAD WIR
2010, country fact sheet Malaysia).
Inward FDI flows do seem to increase again in 2010 due to
“government’s planned efforts in the 10th Malaysian Plan, the NEM,
and GTP in attracting FDI flows (Rasiah & Govindaraju 2011, 6).
But Malaysia’s attractiveness as location for TNC operations relative to
its regional competitors has also weakened in recent years.
Malaysia may have changed to a net FDI exporter following the shift
from inward and outward FDI flows balancing in 2006 into a surplus
of USD 8 billion in outward FDI flow in 2008 (double the amount of
inward FDI flow).
A new and more balanced regime of accumulation will have to be
installed enabling the government to reconsider the pro-FDI policy of
low wages, low unionism and low labour participation in
manufacturing and especially in electronics.
Wage trends in East Asian developing
countries
(Source: Economist 2010-09-04)
Average salary increases based on positions for
executives and non-executives (1996-2005) (in %).
Source: MHR 2008, 32 (after MEF salary surveys). Note: (¤) average own calculations.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996
2005
(¤)
Exec
utive
8.70
9.20
6.18
5.75
7.27
7.03
6.05
5.97
5.89
5.91
6.80
Nonexec
utive
8.10
8.58
6.22
6.00
6.80
6.68
5.89
5.66
5.26
5.69
6.49
NEM and labour market reforms
(NEAC 2010)
Policy purpose
Possible policy measures
Re-skill the existing labour  Upgrade skills of the bottom segment of the Malaysian labour
force
force through continuing training and education.

Establish a labour safety-net for displaced workers.

Industry to partner with government
‘Contineous Employment Training’ (CET)

Formalise international quality standards and certification of
skills.

Remove labour market 
distortions
constraining
wage growth

Allow wage levels to be reflective of the skill level.
Protect workers, not jobs, through a stronger safety net, while
encouraging labour market flexibility.

Reduce reliance on foreign 
labour

Raise pay through productivity gains, not regulation of wages.
Enforce equal labour standards for local and foreign labour.
in
encouraging
Revise legal and institutional framework to facilitate hiring and
firing.
Use a levy system to achieve targets for unskilled foreign labour
in line with sectoral needs.
New Economic Model 2010
(Source: NEAC 2010)
State-business relations:
Evans’ transformation theory: The Korean case
Transformation of state-business relationships:
Phase 1
Big state
Phase 2
Big state
Autonomy
Embeddedness
Small
business
Phase 3
Phase 4
State
Neo-dev.
state
SMEs
Big
business
Global
business
Global
business
Labour
Transformation theory of state-business
relations: The Malaysian case
(inspired by Bonn Juego, AAU)
Transformation of state-business relationships:
Phase 1
(1957-69)
Small state
Phase 2
Phase 3
Phase 4?
(1990s-2000s)
Authoritarian
Developmen developmentalist Authoritarian
Liberalism
talist state
state
Capital
TNCs
Small
business &
foreign resource
exporters
GLCs,TNCs
& Bumi SMEs
Small Chinese
business
Social
group
Small Chinese
business
Capital
Social
group
Varieties of capitalism and IR:
LME, CME, HME and Malaysia
(inspired by Schneider, various articles)
LME
Domestic
business
structure
Foreign
business
presence
Organised
labour
power
Workforce
qualification
CME
Corporate
Corporate
competition networking
HME (LA)
Malaysia
Private
Conglomerates/PLCs
High TNC
presence
High
Medium
Medium to
weak
High
Weak
Gov. Linked
Conglomerates/GLCs
High TNC
presence in
mfg
Weak
High
High
Low
Low
Varieties of capitalism LME, CME, HME and
Developmentalist (D)ME (Malaysia 1971-2010)
LME
CME
HME (LA)
Domestic business
structure
Foreign business
presence
Organised labour
power
Workforce
qualifications
Income inequality
Corporate
competition
High
Corporate networking
Medium
Private
conglomerates
Strong TNC presence
Medium
High
Weak
DME
Malaysia 1971-2010
Gov. Linked
conglomerates
Strong TNC presence
in mfg
Weak
High
High
Low
Low
Medium
Low
High
Medium
Redistribution
Low/Medium
Medium/High
Low
Selective high
State-market
Market
Mixed
Market
State
Majoritarian
president with PR
legislatures
Majoritarian PM and
legislatures.
Constitutional
(Malay) monarchy
and Bumi affirmative
institutions
Political system
Majoritarian
PR president/PM; PR
president/PM;
legislature
majoritarian/proporti
onal legislature
Varieties of capitalism & labour markets:
LME, CME, HME and Malaysia
Source: Schneider 2009, 562 (LME, CME, LA). Malaysia: Union density (own calculation); Job
tenure: MHR 2008, 28; Labour market regulation index: Botero et al. 2004, 1663 (Malaysia 1997);
Informal economy (percent of households surveyed 2006): DOS 2009.
LME
28
CME
45
HME (LA)
15
Malaysia
9
Job tenure
(years)
5.0
7.4
3.0
3
Labour
market
regulation
index
Informal
economy
(percent)
1.0
1.4
1.8
0.6
13
17
40
14
Union
density (%)
Industrial relations: From ’high control’ to ’high
commitment’ system (source: Todd, Lansbury, Davis 2004)
Varieties of capitalism: Transition of
Malaysia to LME or CME
Liberal market
High income
countries
LMEs
Coordinated
market
CMEs
Middle-income
countries
HMEs
DMEs
Informal MEs
?
Low income
countries
Conclusion:
Malaysia - success and failure
Advantages:
Sustained economic
growth per capita.
Sustained
industrialisation.
Poverty alleviation.
Political stability &
semi-democratic
political system.
Planning for
technological
transition.
Defending Third World
interests
internationally.
Drawbacks:
Dual economy
Low-tech industries
TNC & FDI
dependence
Weak R&D
Weak policy
implementation
Strong executive
power and weak
judiciary system.
Civil society exists,
but it is controlled or
suppressed.
If Malaysia stalls halfway, why?
Colonialism: established an export-sector for raw material
& a multi-ethnic society. Resource abundance.
Post-colonialism: Mainstream to start ISI.
Potential civil war: prevented by authoritarianism and NEP
(incl. FDI-driven EOI) /ethno-nationalism. Internal
pressures contained.
Political-economic cycles: adaptation during recession and
upgrading during boom. External economic, not
security vulnerability.
Political structure: the hegemonic party prevails among
the ethnic majority and includes other parties in a broad
developmental, cross-ethnic coalition (Malaysia Inc.,
Vision 2020, NEM).
Co-optation or repression of civil society groups (religious
communities, trade unions, NGOs).
Development model: ‘authoritatian-developmentalist’
with limited relative autonomy and embedded in ethnonationalism. Soft repression of organised labour.
Appendix: Systemic vulnerability – Malaysia
(Doner, Riche & Slater 2005)