Why has Malaysia failed to develop into a first world country like Singapore?

First of all, if someone is under the impression that Singapore serves as a good model for Malaysia to follow they are deeply mistaken. Singapore is an offshore financial center that was created by the British for the very purpose of trade therefore as long as the country is able to maintain at least a slight advantage over its neighbors in regulations, labor force and political stability they are going to prosper. On the other hand Malaysia is not a mere city state like Singapore. It has a much larger population which at the time of independence was mostly rural therefore the development needs of a “proper country” like Malaysia is very different from a city state like Singapore or Hong Kong. Therefore in order to have a more insightful answer, the question needs to be rephrased as: “Why has Malaysia failed to develop into a first world country?”,leaving aside any references to Singapore as this assumes Singapore should act as the benchmark Malaysia needs to follow.

Malaysia in 1965 (year of Singapore independence), had a lot more in common with South Korea or Taiwan in terms of the structure of the economy therefore these two countries present better examples that Malaysia could have followed but unfortunately none of the leaders of Malaysia took this seriously until Mahathir’s “Look East” policy. Even then the implementation of this developmental model was poor thus Malaysia benefited very little from it.

If we were to look at South Korea and Taiwan on their trajectory of economic growth which could have been more successfully followed by Malaysia, there growth was driven by 3 key policies:

  1. Land reform: Distribution of land among the rural peasantry along with the provision of fair credit, agricultural infrastructure, extension services and market arrangements. The aim here is to achieve the highest possible level of productivity from a largely rural workforce and limited capital input.
  2. Export oriented industrialization: Cajoling the most capable entrepreneurs to undertake manufacturing ventures in ways that allow their firms to proceed up the technological learning curve as soon as possible. The key detail here is to couple these ventures with export discipline, meaning government support for the enterprises should only be available as long as they are willing to export and develop foreign markets for their products. It is also important for the state to cull under-performing enterprises therefore removing losers from the market.
  3. Keep the financial markets on a tight leash and have capital controls thereby letting the state leverage the financial system to achieve goals 1 and 2 listed above.

Unfortunately Malaysia did not show sufficient political will and vision to implement these 3 policies therefore could not industrialize like South Korea or Taiwan. These could have been the only avenues by which Malaysia could have attained standards of living nearing that of Singapore. To further emphasize on this point I would like to go through on how Malaysia fared on each policy.

  1. Malaysia did not have proper land reform. The only thing that came close to it was the FELDA scheme. Even then, the model was based on the colonial structure of agriculture with little focus on making maximum use out of the rural workforce and was more or less a welfare measure for the rural poor. This left the productivity of the rural sector at a subpar level.
  2. Malaysia showed little interest in export oriented industrialization initially. This caused the nation to waste a lot of precious time by continuing the status quo of a colonial plantation based economy followed by some dabbling in import substitution industrialization. This caused very little industrialization in the country and instead produced a few a rent seeking ventures. Finally, Mahathir attempted some real industrialization by establishing ventures like Proton and Perwaja Steel. However, instead of pushing these projects on private firms, they were set up as government enterprises and they both had very little success. Instead of undertaking industrial ventures the most capable entrepreneurs of Malaysia ended up in sectors such as plantations, mining and real estate and at worst many simply became rentier capitalists benefiting from government sanctioned revenue farms like flour milling, casinos and mobile telephony licences. These businesses have contributed very little towards industrial development of Malaysia. When industries were eventually established in Malaysia, it was mostly foreign owned. This meant the capital and technical know-how was foreign therefore Malaysia simply rented out its cheap labor force. Malaysia gained little in the way of technological progress from this development. Instead this resulted in what is known as “technology-less industrialization” which was a phenomenon common allover southeast Asia in 1980s and 1990s.
  3. Given that little progress was made in the first two policy areas, it’s a waste of time to discuss how capital markets were used two meet the earlier objectives. Malaysian government gave plenty of freedom to the financial markets and had few capital controls therefore the financial sector was almost never leveraged for industrialization or agricultural empowerment.

As you can see the failure to follow through these 3 basic policy objectives have meant that Malaysia was unable to industrialize itself to reach the standards of living enjoyed by citizens of nations like Singapore. If Malaysian leadership can correct itself on these points, it is not impossible for a nation like Malaysia to become a developed country.

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