Background

Early and colonial history

The Malay Peninsula and indeed Southeast Asia has been a center for 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 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.

During the 1970s, Malaysia followed the footsteps of the original four Asian Tigers and committed itself to transition from reliance on mining and agriculture to manufacturing. With Japan’s and the West's assistance, 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.

Current GDP per capita grew 31% in the Sixties and an amazing 358% in the Seventies but this proved unsustainable and growth scaled back sharply to 36% in the Eighties rising again to 59% in the Nineties led primarily by export-oriented industries. The rate of poverty in Malaysia also fell dramatically over the years. However, its precipitous drop has been questioned by critics who suggest that the poverty line has been drawn at an unreasonably low level.

Central planning has been a major factor in the Malaysian economy, as government expenditure was often used to stimulate the economy. Since 1955, with the commencement of the First Malayan Five Year Plan, the government has used these plans to intervene in the economy to achieve such goals as redistribution of wealth and investment in, for instance, infrastructure projects.

A legacy of the British colonial system was the division of Malaysians into three groups according to ethnicity. The Malays were concentrated in their traditional villages, focusing mainly on agricultural activities, while the Chinese dominated Malaysian commerce. Educated Indians took up professional roles such as those of doctors or lawyers, while the less better-off worked the plantations. The Reid Commission which drafted the Malaysian Constitution made a provision for limited affirmative action through Article 153, which gave the Malays special privileges, such as 60% of university entrance (quota). However, after the May 13 incident of racial rioting in the federal capital of Kuala Lumpur, the government initiated more aggressive programmes aimed at actively establishing a Malay entrepreneurial class through direct intervention in the economy. The first five year plan that implemented these goals was the Second Malaysia Plan; its perceived heavy-handedness led to a new emphasis in the Third Malaysia Plan on a growing economic pie, so as to avoid robbing Peter to pay Paul.

As of 2006, the most recent five year plan is the Ninth Malaysia Plan. The five year plans have been criticised for resembling the central planning of Soviet communism; the five-year time frame has been attacked for being insufficient in dealing with short-term crises and long-term trends. The effectiveness of the plans has also been disputed; at the beginning of 2005, the last year of the Eighth Malaysia Plan, almost 80% of the funds allocated under the plan had not been disbursed.

There has also been a trend towards government involvement in the economy through government-linked companies (GLCs). Their purpose was to "[level] the economic playing field" and "serve as the vehicles for Malay entry into the private sector" according to one commentator. However, several GLCs were reportedly taken over by the United Malays National Organisation (UMNO), the ruling party, through nominees, resulting in criticism that they were vehicles for corruption.