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

AgendaLong 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 developmentIndustrialisation:

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 buildingMilitary and administrative structures established.Malaysia: Independence 1957 under cross-ethnic elite coalition (’Alliance’); Confederation 1963. Singapore excluded 1965.

Nation buildingPolitical culture of national identity & loyalty.Malaysia: Crisis 1969: Ethnic violence after defeat of ’Alliance’ government loosing control of some local states.

Participatory institution buildingInstitutions of political democracy & corporatism.Malaysia: Semi-democracy; 1980s King/sultans clipped; crisis 2008 election gave opposition control of several local states.

Distributional institution buildingRedistribution of wealth, welfare.Malaysia: Affirmative policy for Bumiputera population 1971-

Conflicting development coalitions(Source: Inspired by Stallings 1978)

Development model

Ruling‘Barisan Nasional’ core

Oppositional‘Pakatan Rakyat’ core

UMNO MCA &Gerakan

MIC PKR PAS DAP

Ethno-class alliance

Hegemonic

Political influence

Minor pol. Iifl.

Leading Influen-tial

Less influent.

State bureaucracy, Bumi/Chinese/Indian business elites, middle layers & workers, moderate Muslims

Secular urban middle layers & workers, peasant smallholders, orthodox Muslims

Development ideology

Bumi hegemo-ny

Protection of elite Chinese

Protection of elite Indians

Reforma-si, HRs (Justice)

Classic Islam (rural)

Secular populist/ workers

Development policy

Bumi affirmative policy since 1971. ‘Vision 2020’ of 1991. ‘New Economic Model’ 2010.

Abandoning Bumi affirmative policy, Human Rights, anti-corruption, local level democracy.

Strategic Industrial Policy:The stage model of industrialisation:

Classic International Division of Labour

I II III

Capital goods

Industrial Country: UK

Developing Country: Malaysia 1950s-60s

Consumer goods

Interm. goodsCommodity

Strategic Industrial Policy:The stage model of industrialisation of NIDL –

Primary, Secondary &Tertiary ISI, EOI (DDE?)

Primary Secondary (Tertiary?)

I II III

Capital goods

Industrial Country: Global North

Developing Country: Malaysia 1970s-2010

Consumer goods

Interm. goodsCommodity

Industrial policies of specific industriesRessource 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 1971-FDI-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 1983-2004.

State-driven national automotive industry (GLCs) with Jap. technologyCaptured and lost domestic market; export failure (CBU & parts).Foreign TNCs acquire control; Proton in dire straits.

Malaysia’s industrialisation strategiesMain emphasis

Industrial diversification (incl. IMP1 1986-95): Protectionism & Primary ISI 1957-1971NEP-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 Old approach New approach

1. Growth Growth primarily through capital accumulation

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 corridor-based 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 ModelMalaysia’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 19962005

(¤)

Execu-tive

8.70 9.20 6.18 5.75 7.27 7.03 6.05 5.97 5.89 5.91 6.80

Non-executive

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 measuresRe-skill the existing labour force

Upgrade skills of the bottom segment of the Malaysian labour force through continuing training and education.

Establish a labour safety-net for displaced workers.

Industry to partner with government in encouraging ‘Contineous Employment Training’ (CET)

Formalise international quality standards and certification of skills.

Allow wage levels to be reflective of the skill level.Remove labour market distortions constraining wage growth

Protect workers, not jobs, through a stronger safety net, while encouraging labour market flexibility.

Revise legal and institutional framework to facilitate hiring and firing.

Raise pay through productivity gains, not regulation of wages.Reduce reliance on foreign labour

Enforce equal labour standards for local and foreign labour.

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 Phase 2 Phase 3 Phase 4

AutonomyEmbeddedness

Big state

Small business

Big state

Bigbusiness

State

Globalbusiness

Neo-dev.state

Globalbusiness

LabourSMEs

Transformation theory of state-business relations: The Malaysian case

(inspired by Bonn Juego, AAU)

Transformation of state-business relationships:Phase 1 Phase 2 Phase 3 Phase 4?(1957-69) (1990s-

2000s) Small state

GLCs,TNCs & Bumi SMEs

TNCsSmall

business &foreign resource

exporters

Developmentalist state

Authoritariandevelopmentalist

state

Small Chinese business

Small Chinese business

Authoritarian Liberalism

Capital Capital

Socialgroup

Social group

Varieties of capitalism and IR: LME, CME, HME and Malaysia

(inspired by Schneider, various articles)

LME CME HME (LA) MalaysiaDomestic business structure

Corporate competition

Corporate networking

Private Conglome-rates/PLCs

Gov. LinkedConglome-rates/GLCs

Foreign business presence

High Medium High TNC presence

High TNC presence in

mfgOrganised labour power

Medium to weak

High Weak Weak

Workforce qualification

High High Low Low

Varieties of capitalism LME, CME, HME and Developmentalist (D)ME (Malaysia 1971-2010)

LME CME HME (LA) DMEMalaysia 1971-2010

Domestic business structure

Corporate competition

Corporate networking

Private conglomerates

Gov. Linkedconglomerates

Foreign business presence

High Medium Strong TNC presence Strong TNC presence in mfg

Organised labour power

Medium High Weak Weak

Workforce qualifications

High High Low Low

Income inequality Medium Low High Medium

Redistribution Low/Medium Medium/High Low Selective high

State-market Market Mixed Market State

Political system Majoritarian president/PM;

majoritarian/proportional legislature

PR president/PM; PR legislature

Majoritarian president with PR

legislatures

Majoritarian PM and legislatures.

Constitutional (Malay) monarchy

and Bumi affirmative institutions

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 CME HME (LA) MalaysiaUnion density (%)

28 45 15 9

Job tenure (years)

5.0 7.4 3.0 3

Labour market regulation index

1.0 1.4 1.8 0.6

Informal economy (percent)

13 17 40 14

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

Coordinated market

High income countries

LMEs CMEs

Middle-income countries

HMEs DMEs

Low income countries

Informal MEs ?

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 economyLow-tech industriesTNC & FDI dependenceWeak R&DWeak policy implementationStrong 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 ethno-nationalism. Soft repression of organised labour.

Appendix: Systemic vulnerability – Malaysia

(Doner, Riche & Slater 2005)