RESTRICTED

Report No. EAP-23a

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

DEVELOPMENT PROBLEM:S

AND PROSPECTS

OF

MALAYSIA

(in three volumes)

VOLUME I

THE MAIN REPORT

May 17, 1971

East Asia and Pacific Department

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CURRENCY EQUIVALENTS

Currency Unit - Malaysian Dollar

M$1.00 = US$0.327US$1.00 = M$3.06M$1 million = US$327,000

WEIGHTS AND MEASURES

1 mile = 1.6093 km1 acre = 0.4047 hectares1 sq. mile = 259 hectares1 lb. = 453.59 gm1 long ton = 1,016.05 kg

PREFACE

This report is based on the findings of an Economic Mission whichvisited Malaysia in October/November 1970. The mission was composed of:

Mr. WilliWm M. Gilmartin ChLef of MissionMr. Parvez Hasan Deputy ChiefMr. Shinji Asanuma Chief EconomistMr. Jean-Marie Jentgen Project CoordinationMr. Choeng-Hoy Chung General EconomistMr. Mark Leiserson Employment Economist

(ILO Consultant)Mr. Thomas Geer Commodity Economist (part-time)Miss Lucy Keough Industrial EconomistMrs. Helen Hughes Industrial Economist (part-time)Mr. Jack Baranson Industrial Economist (part-time)Mr. M.S. Parthasarathi Transport Economist (part-time)Mr. V. Rajagopalan Public Utilities Specialist

(part-time)Mr. Vaughan R. Sear Power Specialist (part-time)Mrs. Georgia C. O'Donnell Secretary

This report also draws from the findings of an IBRD AgricultureSe,ctor Review Mission (October/November 1970), an UNESCO Education SectorReview Mission (October/November 1970), organized under the UNESCO/IBRDCooperative Program, and an IBRD Telecommunications Appraisal Mission(November/December 1970). Mr. K. Takeuchi assisted the Economic Missionby writing a paper on the market outlook of forestry products, andMr. Siddiqui a background paper on family planning in Malaysia, both ofwhich are used in this report as annexes.

Background papers on the transport, power, water supply andsewerage, and telecommunications sectors are available on request fromthe East-Asia and Pacific Department.

TABLE OF CONTENTS

Page No.

BASIC DATA

MAP OF MALAYSIA

SUMMARY AND CONCLUSIONS ...................... i

I. PAST RECORD OF ECONOMIC DEVELOPMENT .......... 1

Socio-Political Background .................. 1Basic Economic Structure ........... 3Firtt Malaysia Plan 1966-70 (FMP) ............ 4Achievements and Shortcomings of FMP ...... 4

II. PROBLEM OF UNEMPLOYMENT ........ . 10

Current Situation .... 10Prospective Trends ... . 11Employment Policies . ........ o ................ 13Conclusion ......................... . . ...... 15

III . DEVELOPMENT STRATEGY FOR THE FUTURE .......... 16

Medium-Term Growth Prospects ................. 16Statement of the Problems and Policies ...... 17Development Planning and Implementation

Capacity of the Public Sector ............ 20

IV. POLICIES FOR SECTOR DEVELOPMENT .. ..... 22

Agricultural Policies . .22Industrial Policies . 27Development of Infrastructure. 32Education Policies . .34

V. RESOURCE MOBILIZATION: PROBLEMS AND PROSPECTS 37

Public Finance for the Future (1971-75) ..... 37Balance-of-Payments Outlook ................ ,. 43External Finance ............ ........... * 46

ANNEX I - Projections of Export Volume, Prices and ValueANNEX II - Market Prospecto for Ma1or Export CcommoditiesANNEX III - Markets for Manufactured GoodsANNEX IV - Family PlannilngANNEX V - Problems of Unemployment and Income Disparity

Volume II - Public Sector Projects for External Financing

Volume III Statistical Appendix

it

a

BASIC DATA

Area:West Malaysia 50,840 square milesSabah 29,388 square milesSarawak 48,342 square miles

Total Malaysia 128,570 square milesUnder cultivation 12,670 square miles

Population (End 1967 estimate):West Malaysia 8,655,299Sabah 601,448Sarawak 912,,432

Total Malaysia 10,169,179Rate of growth, 1961-69 3.1 percent per annum

L4bor Force and Unemployment (West Malaysia, 1967):Labor force 2,964,000Unemployed 197,000Unemployed as percentage of labor force .6.9 percent

Political Status: Federation of States since 1963 comprising West Malaysia,Sabah, Sarawak and Singapore. The latter was separated in August 1965 andbecame an independent republic.

Gross National Product (Current market prices):Estimate for 1970 M$ 12,083 million

Percentage composition:Agriculture 29.3Mfining and quarrying 6.3Manufacturing 12.1Construction 4.3Wholesale and retail trade 14.8

Gross National Income Per Capita 1970 US$ 336

Savings, Investment and Resource Balance(as percentage of GNP): 1969 1961-68

Public Sector: Savings 5.5 4.9Investment 5.4 6.7Balance 0.1 -1.T

Private Sector: Savings 16.8 13.1Investment 11.0 11.9Balance 1.2

National Economys Savings 22.3 18.0Investment 16.4 18.7Balance 5.9 -0.3

Basic Data Page 2

Money and Credit: Malaysia dissolved the common Currency Board shared withSingapore and Brunei on June 11, 1967 and issued a new nation4l currency, theMalaysian Dollar. The par value of the new currency is O.290?99 grammes offine gold (equivalent to US,cents 32.6607 per Malaysian dollar).

Rate of ChangeEnd 1969 (1964-69)

Total money supply M$1,911 million 6.3% p.a.Currency in circulation H 970 million 1.5% p.a.Currency as percentage of money supply 51%

End 1969 End I

Bank credit outstanding to Government (net) M$ 9 milliqoz t4 7 millionBank credit outstanding to private

sector M$1,841 mili4on $l,27U mii,lipor

12I0 1969 1968 1965(Seco,nd''quarrter)

Consumer price index 108 107 ,108 102(West Malaysia, 1959 100)

Public Sector Operatl2not 1966

Federal and State Government reenue "? ̀ 4 3 - 1,943Federal and State Government expen,,lture g2'126 1 799Current surplus -37 -IPublic Authorities current surplus 7 55Emloyees Provident Fund (EPT) -reqe.lpt, (v2) l.1 163Public sector current surplus -,-627 'YiPPublic sector capital expenditure A86IV .1

Overall deficit ",!'0External Finance '201 128

xOternal Debt US XuI-3 on

Total debt (December 31 1969) U414Ing ..disg-,ud7Total debt'service (196) ?, '9Debt service as percentage of -zppors ,ofgo$,

and services .(1969)

Bilance of Paments (US$ "illion)i 42g2. 1965

Merchandise oexports (f7o1b,2) $29 1,226-Merchandi-se.imports (f,.o..,t,.) A.-46

Merchandise b.alan" 3 1"70.Transfers (net) W-56 -19

'Balance on.go.ode .rvi, e,,s, an-,feris , 218 40

a/ Adjusted f.or shortfalls.b/ Official grants.are -exc.luded.

Basic Data Page 3

Concentration of Merchandise ER=orts (percentage): 1969 1965

Rubber 40 39Tin 19 23Timber 15 9Palm oil 3 3Others 23 26

Gold and Foreign Exchange Reserves (end 1970): US$ million

Monetary authorities 733Government and other publicauthorities 91

Commercial banks (net) 27

Total 851

1050 1100 1150

MALAYSIAInternationall Boundaries j .State Boundaries - Kota BfRailway KotuanBE'>-KOTA BHARU RaTuon

,.ARU Main Roads P KOTA KINABALUMain Towns * PAPAR/

a \uaIa\ BEAUFOT,,eKrai A K TRENGGANU 0 100 200 300 400 MILES VICTOR RIAAo f KILOMETERS 0 100 200 300 400 500 BR

K. Dungun Sen 'LIABANG

C, WEST- SOU TH C H / N A S E A E AST MIRiJ¶ KuloLipis 2.N MALAYSIA MALAYSIA MARUDIP HjVA N GK> .Long Lomo

A - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i~~~~~~~OKung fvMiri-iton :9 Pekon * / BINTULU, -k -7

4EGR / ~ UABelaga I

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GElVKA Kua JOHORE BAHRU *;Q>9C lMPd EI'%!i~~ '( NGAPORE GGANGSMNGAG . ._ 22

P. RANGSANGIB~ Tap~pnj0 OR ~: BlNAPNGBINTAN

P/lA1GNT N uang Ef K \L EOK ANTUW

-9kKeSP$;-,zXP KN D° -KA

Th(ulai JOHORE BAHRU SIMUN2V~~ ~ ~~~~~~~~AN L L.ANTA 5

1050 K L 4 A TA015~~~~~~ (Bad ~~~~~~~~~~~~~~~~~~~~~~~~R N Ea

SUMMARY AND CONCLUSIONS

i. Political calm has continued in Malaysia for nearly two yearssince the communal riots of May 1969, and near-normalcy has returned tothe political scene. Parliament, which was suspended following the riots,was reconvened in February 1971, political party activity having beenallowed to resume in October 1970. Nevertheless, uncertainty stillpervades the political atmosphere. The present foci of the Government'sefforts are primarily on the strengthening and maintenance of nationalunity on the political front, and, on the economic front, more rapid ex-pansion of the economy and employment, and correction of the economicdisparity which exists between the Malay and non-Malay communities.

ii. The current course of the Malaysian economy is, paradoxically,one of satisfactory economic growth and financial stability in spite oflagging private and public investment and gradually rising unemployment,both of which are a cause for concern over the long-term growth prospectsof the economy. Continuing the trend of the early 1960's, real GNP in--creased about 6 percent a year between 1965 and 1970, as the economywas buoyed by rising output from investments of the early 1960's,especially from the planting and replanting of rubber and oil. palm whichhave long gestation periods, and from development of timber resources.In the same period, the investment ratio declined from about 19 percent ofGNP to 16-1/2 petcent. The major reason for the slowdown in privateinvestment was the continuous decline in plantings of rubber and smallerinvestments in new tin mines than in the early 60's. Virtual stagnationof public investment appears to have been caused by the insufficientcapacity of the Government to identify, prepare and carry out investmentprojects.

iii. In the meantime, the estimated rate of unemployment increasedto 7-8 percent of labor-force, partly because of a relative decline inthe demand for labor by traditional perennial agriculture and mining, bothof which-experienced rapid increases in labor productivity. So far thelabor market ad'ustments to a rapidly increasing labor force in WestMalaysia appear to have been fairly effective. Nevertheless, since laborsupply is likely to accelerate in future, the unemployment situation couldfurther deteriorate and become perhaps a difficult social. problem ifempl.oyment continued to increase only at the present rate of 2-1/2 percenta year for a long time.

iv. SluggIslhness in investmnent may have little impact in the nearfututre an(d the economic situationi will probably continue to be favorabl.efor a while because of continuting rising otitput from the past developmentof rubber, oil palm, forestry ancd tin. However, it probably will haveserious adverse effects on long-term growth. Consequently, a substantialincrease in the amount and the scope of private and puhl.ic investment isrequire(d not only in order to maintairn the growth of income and employmentin the longer run as well as in the immediate future. Potentlal opportun-ities for larger investment exist in the form of vast land, forestry, and,

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possibly, mineral resources which have not yet been developed; in furtherdevelopment of manufacturing both for domestic and export markets; andl inpotential demand for building construction. A strategy to make the mostof these opportunities would seem to call for the strengthening of agri-cultural and Industrial policies.

v. In agriculture, it would primarily menn accelerating the paceof land development by improving the land development capabilities ofGovernment agencies and hy d-rawing on the expertise of the private estatesector, thereby supplementing the limited capacity of the public sector;replanting remaining smallholder rubber land,covered with low yieldingvarieties; improving applied research on annual crops which could be grownafter rice self-sufficiency is attained; and establishing a more rationalforestry policy'to economize the use of forestry resources and to encouragtethe development of integrated forestry-based industries in Malaysia.

vi. In order to sustain and accelerate the past growth 'o investmentand production in manufacturing, the Government would have to, as in thepast, depend largely on initiatives of the private sector, bu't couldstimulate them by dispensing with the present ad hoc case-by-case promotion,protection and control of specific firms by the Government, and by establish-ing instead a uniform framework of industrial incentives- giving broadinducements to offset some.of Malaysia's handicaps for more rap-id indus-trialization. More effective export incentives should be an importantelement of such a framework, for Malaysia will have to look increasinglyto exports for an important part of the demand for industrial production.

vii. The Government intends to. support its development policy withpublic investment programs substantially larger in amount and-w-ider inscope than in recent years. For this to be feasible,, however, the pln,a_ningand implementation capacity of the Government would have to b.e considgerablyand quickly improved. The- Government is keenly aware of the urgent need toremove the general shortage of technical and special-skill m,anpow,er i,n the,ublic sector, but no; promising measures have yet been.de,vis.ed.

v-iii. At the moment, availability of resources is not the prima,ryDbstacle to maintaining real GNP growth of around 6 percenit a yge;a and a3ubstantial inicrease in- the investment level. However, resiource mobiliz.a-tion, for the: pub.lic s:ector is likely to become a major pollcy ptrob.lpm ifthe Government succeeds in improving its implemenitation. capacity and,incre'as,ing public investment. The Government is consideri:kmng piroposal1s fo.rtax, reforms which would make Malaysia's revenu,e system mqrse, res,ponsivme- toincome growth and for additional tax ef-fort-s neede,d to f-i,nance growi,ngpublic. expenditure. In view of slugg-ish invesatment, a dififf-uclt pgblicfinance posiition and rather favorable external paymen,ts and- reserve posit-ions,a case- can be made for the v-iew that the centr-al bank should play a largerroale in, future in financing the budget-ary deficit which is expec,ted to!amerge as a- result of increas,ed public investment. EoA,ever, such be-ing aradical departure from the past es.tablished policy of the Government, it isessential for future fiscal and monetary poli.cies to see to it that the

- iii -

amount of Government borrowing from the banking sector does not exceed themagnitude justified by the prevailing balance-of-payments and monetarysituation.

ix. Primarily because of an expected slowdown in export value,the balance-of-payments position is most likely to change from the presentfavorable position to a moderate current deficit if investment expansionand the accompanying import growth are to be sustained in future. As aresult, the need for official capital inflow, projected at the net amountof M$ 1,300 million (US$420 million) for the five-year period 1971-75, willbe about 50 percent larger-than the actual inflow in the 1966-70 period.An inflow of this magnitude is undoubtedly an ambitious target in view ofpast experience, but attainable if project preparation and implementationcapacity of the Government is improved. Prospects of obtaining sizeablegrant aid are not propitious and the possibility of borrowing in inter-national capital markets is moderate, but a sufficient amount of bilateralcredits for investment projects appears to be available. Malaysia's out-standing external public debt amounts to only about 20 percent of her annualexport value, and the debt-service ratio is likely to remain between 3 and5 percent throughout the 1970's. Malaysia is creditworthy for substantiallymore external borrowing on conventional terms.

I. PAST RECORD OF ECONOMIC DEVELOPMENT

1. Malaysia's political scene has been calm for nearly two yearssince the communal troubles of May 1969. Nevertheless, communal tensionsremain deep in the structure of the nation. The working arrangement forcommunal tolerance, which had secured a relative stability in relationshipsamong the ethnic groups which make up Malaysia was badly shaken by the Mn"troubles, and a new understanding as a basis for national solidarity hasnot yet emerged. At the same time, Malaysia also faces some difficulteconomic problems, especially lagging investment and employment. For thetime being, the economic situation is favorable, and it will probablycontinue so for a while as a result of the continuing additional outputfrom the large past investments made in agricultural and mineral output forworld markets. This trend will-be difficult to sustain in the longer run,however, unless investment can be revived and employment accelerated.

Socio-Political Background

2. Underlying the difficult political situation In which thegovernment finds itself today is the multi-racial character of the country.The population consists of Malays (44 percent) who are generally regardedas the indigenous community; the Chinese community (36 percent) which wasestablished mostly in this century by immigrants for economic activitiesin tin, rubber and commerce; and the Indian community (10 percent) made uporiginally by immigrant workers on the rubber plantations. With differentreligions, languages, social customs and values, and, more generally, lifepatterns, communal lines run through many facets of life. The employmentpattern reflects the differences in origin. Malays predominate in small-holder agriculture and fishery; Chinese in commerce, industry, mining andfinance; and Indians in estate agriculture and also in conmerce. Ownershipis predominantly Chinese and European. Regional differences also exist.The West Coast of Malaysia is more developed in plantation agriculture,mining and industry while the East Coast States depend mainly on smallholderagriculture. The States of Eastern Malaysia (Sabah and Sarawak) are stillless developed.

3.. Inter-communal harmony-has been maintained through a bas:Lc, thoughimplicit, social compact which was generally understood and accepted atthe time of Independence, and through continual balancing of communlalinterests in accordance with this compact. In a rather blunt and simplifieddescription, the implicit compact was that the Malays would have the para-mount place in the political and religious life of the country whiLe theChinese would dominate the economy. The Constitution of Malaysia takesinto account the multi-racial nature of the society and the differentialeconomic status of the Malay and the non-Malay colmmtunities. It provicles the

- 2 -

basic working arrangement under which Malays are entitled to certain privi-leges 1/ in offset to the superior economic power of the non-Malay groups,while the latter are given citizenship rights and substantial freedom topursue their economic objectives with little interference. The rulingAlliance Party is a coalition of three separate ethnic political groups. 2/

4. Political calm has continued for nearly two years since thecommunal riots of May 1969. Parliament, which was suspended following theriots, was reconvened in February 1971, political party activities havingbeen allowed to resume with some limitations in October 1970. 3/ However, itis premature to assume that the status quo ante has been fully restored, forit is generally believed that the communal attitudes toward the tacit socialcompact have changed, as reflected in the recent polarization of politicalsentiments. First, political consciousness has increased in both the Malayand non-Malay communities, which has led to more explicit assertion ofcommunal interests - the Malays in economic improvement and the Chinese inpolitics. Second, in spite of the political dominance of Malays in thepost-Independence period and of the Government's efforts to elevaite theMalay economic status, the relative economic position of the Malay communityas such has probably not improved.

5. The major economic objectives of Government policy remain econ4micgrowth, creation of employment and the improvement of the Malay economicposition. The Government has tried to achieve these objectives lairgelythrough rural development in the sense of both social and productive improve-ment and education of the rural Malay population. Rural productivityimprovement in the existing agriculture and newland development also raiserural employment and income mainly among Malays, and thus contributes to th'eabove three objectives simultaneously. In addition, mainly in response tothe changed political climate, the Government now emphasizes more extensive

1/ They are: Islam as the national religion; Malay as the nationallanguage; preservation of the sultanate structure; Malay preferencesin civil service positions, in the grantings of scholarships and' otherpublic training privileges, and in the issuance of permits and licefie6necessary for certain businesses and trades (e.g., timber extraction;bus, taxi and trucking operations); and "Malay reservation areas"earmarked for development only by Malays.

2/ They are: the United Malay National Organization (L30O), the MalaysianChinese Associaton (MCA) and the Malayan Indian Congress (MIC).

3/ A ban continues on public discussion of sensitive issues such as thespecial privileges of Malays in the Constitution, the position andauthorities of the Sultans in the Status, Malay as the nationallanguage and Islam as the national religion, and citizenshipproblems.

3-

Malay participation in the.nore modern and dynamic seetors of the economy --in industry, coumierce and 'finance". However, the effective means for pursuingthis objective and its efficacy as a means-of furthering communal lharmonyremain still 'unclear.

Basic Economic Structure

6.. A prominent teature of the Malaysian economy is its richendowment with natural resources, both land and utineral. and the developmentof the-economy historically proceeded along exploit:at.ioon of tiiese naturalresources. Since the beginning of this century, naturnl ru'bber productioniand tin mining for overseas markets, s'ide by side withi suibsistenceagriculture and fishing, were the' main forces of economic *levelopment.Firstly, the economic structure.today shows clearly this histnrical deveL--opment. ptocess; commodity concentration of domestic prodœlction is high,with rubber and tin together accotnting for 54 percent of' commodity exportsand 20 percent 'of net domestic output. Secdndly, the openness of theeconomy is indicated, by the fact that external tra(le amouints to 44 percentof GNP. Thirdly, natural resources yet.to be exploited exist in abundance.The populationr-density of Malaysia in relation to cultlvable land is one ofthe lowest in Southeast Asia. Fourthly,-.at the same time, the developmentas an export.economy led to concent'ration of. economtic activities in the?western part of Malaysia. The East Cost areas and East Malaysia (Sabah andSarawak) have remained reiatively--undeveloped.

7. Acnlevements along this 'line' of development i.n the post--warperiod have been 'considerable. First, while many primary commodit:ies havesuffered from.substitutes and other causes of decl.ining world prices,Malaysia has met this problem'in the case of rubber with a far-reachingand successful program which has improved productivity and mnnintainedcompetitiveness. Consequently, rubber, along witlh tin. Is Internationallystrong. This effort, as well as the rising efficienicy of tin production havebeen facilitated by the fact that at least one-half of Malaysia's output of.rubber and-tin originates from producers organized in large units and amodern corporate form. Nevertheless,'it is a tribute to the program forr'ubber i.mprovement that it has also-tranisformed the productivity of morethan half of the. smallhol.der acreage. IEfforts for modernization andproductivity. improverients in-export production are continuing.

8. Second, diversification of the production structure has proceeledsatisfnctoril.y.. In the export tsector', palm oil, production, which wasnegligible before the Second World War, has been developed on a large scale'first at the initiative of large 'plantation companies and later encouragedby the Government. Moreover, taking advantiage of strotig worldl demand,timber extraction expanded-. Thus, Malaysia has estahlislhed its positionas the, single. largest exporter of -palm oil and tropical tJinh#r ini additionto natural. rubber and tin. Import: substltution also) profgressed well.; iiiagriculture, with double cropping, on the bAtds of irrigation )rograms an(Iwide use of fertilizer, rice production inc-rease(d and s.' f-i-;fficiencyiR now only a. few years ahead. Poultry and htog outpul-t fincro.-sed to rant[sfythe domestic denmand. In industry, domestic produiction of t7ianu:focturesincreased and satisfies now more than 50 percent of int-:!rnal demand.

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9. Third, the Government provided well for infrastructure and main-tained financial stability, thus creating and sustaining favorable condi-tiohs for private 'initiAtive. At no time since Independence (andespecially sinlce the termina-tion of the communist insurgency) has provisionof transport and commurnication facilities and of ptublic utilities laggedbehlind demand. Malaysia's price level has remained almost constant-andit has'been an open economy virtually 'free from'trade and exchange restrict-ions.

10. -In these circumstances, GNP has increased by 5.21perceut'a,yeirover -the last 1l5 years. '1/ Per capita GNP increased by 3.4:pericent'duritigthe same period and is now 'about US$370 - one of the highest in'As-ia. Thiere'is, of course, an inherent vulnerab'ility 'fami'liar to any export-brieritedeconomy dependent 'on 'few primary commodities. The -long run 'deteriorfa*tilonof 'Malays'ia's terms 'df trade'offset productivity gains in the 'export fse:e'or.,and the c'onsequent income loss slowed growth'of domestic produetiion'ndempiloyment and also-added tor'rra-l-urban income disparity.

First'Malaysla Plan '1966-70 (FMP)

-11. The 'irst'Malaysia Plan had the ttip'le'objective of attaining(a) growth6f lincome and co'nsumption, (b) generation of employment-, and(c) more equitable income'distribution, inipareicular'between rural andurbtan 'population -- the %bhlect'ives in commbn 'with -those of ;many -other*LDd's. The FMP 'soiigh t 1to -builld up product'ion for 'the-domes'tic market and'thtfs reach ;a'better'balance between domestic -production and produetion fb£r'exp'ort in 'the interes't of 'less vulnerabil'ity to world 7market fluctuationsand long-term changes 'in world demand. -In view -of iexport possibil'itiesq,reliatively fas'ter -expanslon of production for 'domestic market both intag`icultUre and iTniis'tty lwas a'lso deemed necessary 'for an adequate 'contr-i-'bu-tion Ito ihnc6me/etimploYment growth.

12. bThe seddnd 'feat-ure of FMP was 'its 4em'phha6is; on irtral d94i'opment-to 4-impr6ve the 'economicb we'l'f are of the pred6*irid, titly lMaiay 'rural tp6opu'flea-Cdh..'Prdvis-idn 'of irrigation 'facilities for rice 1dduble 4 croppi'ng., financi'll alai-'d*te8hnica1 diioport 'fbr 'rdpkahting 'of 1low--YteUtding tsm'al'thhlder rtubbe'r,, r

,Arid .d&velopmrit 'f`6r 'fhe landless, =and vi.llage;programsT 'f so6iaol -6 Kdet,cdhs"titt-ted tthe fno6st iMiO'6rftant elemernts df'the developmentt polid?l .r Riral-educaticini was qespei'a'l-ly fempha6sized, for fhe iGovernment -regarded 'cit ;as ,lon'g-tertm solut'oh 'ffor comimunal incomed'is,parl!ty.

Achlevements 'and 'Shortcomings of FMP

13-. The 'achieevemendts f'f lthe FMP are 'ixed. In 'agre'gate ~tdrms8,productiond nd :inc''me 1in&reased 'beyond *eixpe'tationsl; ltradlei6oal exporits

1/ We6st NMilasyia Iliy; tn r1r4reit ;mArkeikt 1i's. In 1955'-70, The 1eos!t*of-Ii'vihg 'index ihcrtoeds by 0.7 'pe'c6eht 4 ',year.

turned out to be more favorable than expected; and diversification of pro-duction proceeded well. On the other hand, public investment encountereddifficulties and fell short of the target. So did private investment.

14. Income and Production. Table I-A below indicates the growth ofproduct and income during the FMP period in comparison with those of theprevious five-year period. Growth of the economy, although slightly slowerthan the 1961-65 period, has been maintained at a satisfactory rate andexceeded the pace envisaged in the Plan. Income grew a little more slowlythan real national output because of terms-of-trade deterioration. Thisdeterioration not only affected the income of the export sector, but also hadan adverse impact on domestic production.

Table I-A

Growth of Income and Product

(in M$ million)

Annual Change (%)1961 1965 1970 1961-65 1965-70

Gross National Product 6,681 8,786 12,083 7.1 6.6(current market prices)

West Malaysia 5,889 7,638 10,089 6.7 5.7East Malaysia 792 1,148 1,994 9.7 11.7

Gross National Product 6,759 8,786 11,808 6.8 6.2(1965 market prices) -

Real Gross National Income(1965 constant prices)/a 6,978 8,786 11,270 5.9 5.1

Real GNI per capita 833 933 1,029 2.9 2.0Real GNI per capita (US$) (272) (305) (336) (2.9) (2.0)

La Purchasing power, in 1965 prices, of the current value of GNP,obtained through adjustment for terms-of-trade changes.

Source: Based on Statistical Appendix Table 2.1 and( mission estimates.

15. The growth of production in West Malaysia by economic sectors isindicated in Table I-B below. In East Malaysia, trade and expenditurednta indicate that the growth rate of about 10 percent in real terms wasmninly due to the booming timber extraction, and this contributed to ahigher growth rate for Malaysia as a whole. In West Malaysia, productiongrowth slowed down from the previous period hut only sltghtly. Thecontinuation of overall trends conceals a change during 1966-70 in thegrowth pattern, characterized by a fast increase in the commodity producinlgsectors and A lag in the service sectors.

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Table I-B

West Mala!ysia: Production Growth by Sectors

(lil 1965 constant prices)

Composition (% of QTDP)-) Annfual GriWth- Rate (%___________________ ~~1961 1965 -. 1970- 1961-65 1965-?

Agriculture 28.6 32.? 3.3 8Ru1~ber (16.0) (14.8) (16.6) (2.7) (8.2)Other (1A8 (13.2) (15.4) (~4.0) (8.)

Miniqg 98 8.7 7027 9

Manufacturing 8.1 10.2 12.6121P1

Constructionl 3.7' 4.6 (4.1.

Public Utilities /a 5.2 5.5 5.3 7.3

Public Admninstqtatiop /b 6.4 7.1 7.3 2.2

Other /c 354 3. 31712 .Xi

GDP at 1965 io6 0.0 10 _Fqctor C-ost - -0.. 10. 0. 5 .7 .

/a Inc2ludes tran8portation.

/b Include4 oiefepsg.

/c Includes trade, bapIkipg buildin g, nershi)p #qj4 6te eei&yie

Source: Statistical Ap,pejd¾ai 2.6 i4m ip

16. The pa psf~ a~iutrlotput t.n19W79 yW afast as in the preypiA f f Rbber inrae It %oj tN "I" 8,1 as high-yieldjp.g rA1bb.er trq p latd n~ ,9~ w4- ;"*d,'it.-ion. Palm pil prpduction icrpaped at ?k P- Rece, &I-erRice ou-tput alo atxp ~ o o~~~ph, of irrigat~d doubleprqp,p ~ ande fertilizer use.odct

for 4r~iesip mrkets, ~p,c .ly livestock*p isr1~ i~~ rates. MinigQtu r ltl n1965-70, Rattly beas f nusalhigh level re1ch6d-th In ne Rn tds oitztd u

ther~efrom svrgg. in ~-b pa V jof -the 19§T's o ~f~biipric,es? and p,, 4p. Sce 19,65 t h- -rc 1otput

or l~ess q.tbiik at ths high leyel6-. -1hi 1,916_.-70,- M4da~Ba-y-faon,ooutput further decipd papt- b ecqde go udiq~ty _ores if~~~i~ ~1 1 aehave ben depleted an~d pa~rtlir.due to ~th,edi#Scgpy of rc iron oeAngtin -lefst Australia,. yi4ich dd fio1d thJ#E"-d6bAn.f to.tiuMafacturing continued ,grpy*ix~g at a high raao hn1 ~re ytdo,

although tapering off slightly toward the latter part of the period. Asa result, the share of manufacturing in the total product increased from10 percent in 1965 to nearly 13 percent in 1970. The demand pattern seemsto have been responsible for the slowdown in the rest of the economy. Thedeterioration in terms-of-trade offset the favorable trend in agricultulreand weakened domestic demand for services. Weak investment demand halvedthe growth rate of construction activities. Furthermore, expansion ofpublic investment, defense and other public expenditures slowed down markedlyin the latter half of the FMP.

17. Investment Activities. On balance, 1965-70 was thus a period ofsatisfactory economic expansion, mainly as the large output emerged fromlong gestation investments which had been made (mainly rubber and oil palm)in the early 1960's. New investment both in the public and private sectorsin 1965-70, however, was sluggish and-slower than GNP. While privateinvestment slackened, the virtual stagnation of public investment in thelatter part of the 1960's was even more conspicuous (see Tab]e I-C).

Table I-C

Investment and Savings, 1960--7(=

As % of GNP- Annual Change in %1960 1965 1970 1960-65 1965-70

Investment /b 14.0 18.9 16.5 12.5 3.5

Private Sector 10.4 12.0 11.2 9.3 5.0Public Sector 3.7 6.8 5.3 19.8 0.9

Savings /c 19.6 18.7 21.0 5.4 9.5

Privare Sector n.a. 14.6 16.1 n.a. 8.9Public Sector n.a. 4.1 4.9 /d n.a. 11.3

la To net out world market cyclical influences, three-year movingaverages are used for 1960 and 1965. For 1970, a two-year averageis used.

/b Includes stock changes./c GNP less consumption less transfers abroad (mostly family remittances

abroad). The savings may be overestimated because of a large nega-tive errors and omissions itens in the balanace-of-paymenits. Partof errors and omissions is rep.arded as unrecordecd imports of goods-and services.

Id Estimate by the Bank economic mission.

Source: Based on Statistical Appendix Tuib:Le 2.4 and mission estimates.

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18. Factors which stimulated private investment in the first half ofthe 1960's were less evident in the second half. Firstly, and most import-antly, the replanting of new high-yielding trees on estates has nearly beencompleted, and planting of oil palm has been only a partial offset to adecrease in rubber replanting. Because of obstacles to new land acquisitionby plantations as well as their disinterest in new long-term agriculturalventures, land development by estates interests, especially those owned andmanaged by European capital, has been limited. About one-half of thesmallholder acreage has also been replanted and most of the remaining low-yielding acreage represents subsistence holdings for which the presentplanting subsidy seens an insufficient inducement 1/. For various reasons,new land development by smallholders was also limited 2/, Thus, investmentin perennial crops, which accounted for over one-third of total privateinvestment in the early 1960's declined absolutely after 1963 and now accountsonly for 11 percent of the total.

i9. Secondly, investment in new tin mines was small in 1965-70. Thequality of tin ore deposits in present mining areas has been declining, butthe installation of more efficient dredges and gravel pumps has enabledprofitable operations on lower-quality mines. Tin prices, which increasedby 57 percent between 1961 and 1965, had brought in marginal mines thatwere commercially exploitable only under the prevailing high prices. Since1965, however, there were no additional price incentives for investment innew mines. The number of mines in operation remained unchanged at around1,100 and investment was limited almost entirely to technical improvement.

20. Thirdly, although statistical details are not available, itappears likely that construction of residential and commercial buildingswas adversely affected in 1967 and 1968 by the export recession and in 1969mainly by the communal disturbances.

21. Public investment virtually stagnated after 1965 mainly becauseof insufficient capacity of the Government in planning and implementationof investment programs. This constraint seems to be fairly commonin all sectors of the Government. Initiation, preparation and coordinationof public sector investment programs are primarily the responsibility of theEconomic Planning Unit (EPU) and operating ministries. EPU has a fewcompetent and experienced planners, who are overburdened and have only in-adequate supporting staff. The operating ministries suffer from generalshortage of staff at the technical and subtechnical levels. They experiencedifficulties both in recruitment and retention of the staff. For instance,vacancies amounted to over 25 percent of authorized positions in the PublicWorks Department (PWD) of the Ministry of Works and Communications, whichis responsible for carrying out almost half of public sector investment.In top skill categories PWD vacancies exceeded 40 percent.

1/ In Malaysia, a smallholding is defined as one with less than 100 acres.The definition thus includes many estates which depend on hired laborand are operated as commercial ventures.

2/ See Agricultural Policies in Chapter IV, "Policies for Sector Development."

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22. As a result, public investment in 1966-70 fell short of the FMPtarget (which was set atea moderate level, only 33 percent higher than theachievement in 1961-65) by about 15 percent. The results of shortfalls areseen more-conspicuoun;ly in land development, road construction, telecommuni-cation, water supply and education. Limitations in available technicaland managerial capacity made it difficult to accelerate land development.Road constructions were held back inending completion of the GeneralTransport Survey which would have determined investment priorities in th4ssector. Delays in education were caused by inadequacy in program planningand preparation. Inadequate technical skills were a major reason in theshortfall in water supply programs. Limited engineert. and constructioncapacity of the Government also affected transportatit. , education, andgeneral administration.

Table I-D

Public Sector Development Expenditure, 1966-70

Plan Target-- Actual Estimates(MS million) (M$ million) (% of Total)

Agriculture 1,178 905 22.5General (343) (260) (6. 4)Irrigation (350) (305) (7.5)Land Development (393) (340) (8.3)

Industrial Development 135 13', 3.3Transportation 706 547 13.4Communications 237 160 3.9Public Utilities 799 721 17.8Education 392 267 6.6Health and Housing 498 460 11.3

Housing (158) (154) (3.8)

General Administration 205 167 4.1

Sub-Total Non-Security 4,148 3,362 82.6

Defense Security 691 706 17.4

Total 4,839 4,06n8 100.0

L The original plan target was sl' >.2htly revised by the Mid-Term Reviewin 1968. rhis column shows tl' cevised targets.

Lbk Mission estimates based on 1:2complete data.

Source: Economic Planning Unit and mission estimates.

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II. PROBLEM OF UNEMPLOYMENT .1!

23. Unemployment appears to have been rising in Malaysia because of arapidly increasing labor force in excess of 3 percent a year and a relativedecline in labor demand by the traditional export sectors of agricultureand mining. Since these trends are expected to continue into the 1970's,unemployment may become a serious social and economic problem in future.Employment creation is thus a major objective of the Government's developmentpolicy.

Current Situation

24. The Employment Surveys of West Malaysia in 1962 and 1967 indicatethat open active unemployment has increased from 6.0 percent in 1962 to6.8 percent in 1967. In the 1967 Survey another 2-3 percent of theiaoor rorce was estimated to be "passively unemployed", i.e. willing towork but discouraged from seeking employment and withdrawn from the activelabor force. The current rate of unemployment is estimated to range between7 and 8 percent of the labor force. However, given the difficulties incomparability between the two sample surveys in- the two years, too muchsignificance should not be attached to the estimated increase in unemployment.That thie economy was able to absorb a 15 percent increase in labor force, orabout 400,000 additional workers between 1962 and 1967 with,only less thanone percentage point increase in the measured open unemployment confirmsthe mission's impression of rather effective labor market adjustments inWest Malaysia until recently.

25. The s.tructure of unemployment is presented in Table I-A below.It shows that unemployment was highest in the'younger age group with un-employm.ent of urban teenagers at almost 30 percent and that three-quartersof the total unemployed are under the age of 25. Eighty percent of' th'slatter group have had no previous job experience, so that at least 60percent of the total unemployed are new entrants to the labor marketi. Incontrast, open.unemployment of the prime. labor force such as males over25 was, kept at a, 2 percent range. The unemployed- are located' both' Lw t1iirural and' urban areas. Reflecting the population composi7tiont, the' rural;unemployed.mainly consist of Malays, while the urban unemployed arevosWeltChinese. The high rate of unemployment among Indians, both' in- the' rural&and urban areas, has resulted from the declining employment opportunhftfieson rubber estates.

1/ Thei unemployment problem, di"scussed in this chapter, is- eminent-ly, aproblem. in, West MalayWsla. In Eas,t Maiaysia-, particularly. in' Sabai,-there. itar a, gpner&al shortage, of, labor, associakted with- & rapl4 expanckonwofE tz3knber- indusftry and' the- economy. The problem of unemployment- is'discussed, in.more deta-lls in Annex- V.

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Table II-A

Structure of Unemployment, 1967/68

Composition of Unemployed Percentage of Labor ForceAge Group Total Urban Rural Total Urban Rural

15-19 years of age 49.1 46.0 51.6 20.5 29.0 16.820-24 26.2 27.9 24.8 11.4 15.8 9.125-34 13.1 13.9 12.4. 3.4 5.1 2.635-64 11.6 12.2 11.2 2.0 3.0 1.4

Total 100.0 100.0 100.0 6.8 9.0 5.4

Source: Department of Statistics, "Socio-Economic Sample Survey ofHouseholds - Malaysia 1967-68" (Employment and Unemployment -West Malaysia).

Prospective Trends

26. The serious nature of the unemployment problem lies in its pro-spective trends. The labor force is expected to increase at 3.1 percenta year between 1970 and 1975, compared with 2.6 percent over the past fiveyears, as the post-war surge in births has begun to affect the rate oflabor supply. With some two-thirds of the population living in rural areas,,most new entrants into the labor market will come from rural backgrounds.On the other hand, the trend of a relative decline in labor demand by exporl:agriculture and mining is likely to continue in future, and maybe accentuat--ed. It is thus unlikely that additional labor originating in rural areascould be absorbed by employment additionally created in rural areas. Theconsequent need for non-agricultural, urban sectors to employ an increasingproportion of the labor force not only makes it difficult to keep the rateof unemployment within a reasonable limit 1/, but also points to a difficuLttask of training new entrants with a rural background for urban, non-agricultural employment. Moreover, since those with a rural background havea weak competitive position in labor markets for urban jobs, the incidenceof unemployment is likely to fall increasingly on the rural populationshould the rate of employment creation lag seriously behind the increase inlabor supply, and this may add to the social instability in Malaysia's socialcontext.

1/ If employment were to increase only at the rate of 2.5 percent a yearas in the 1962-67 period, the unemployment rate would reach 12 percentby 1975.

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Table II-B

An Illustrative Projection of Employment, 1970-75

1970 1975 Annual Contribution(est.) (pro,.) Rate % p.a. Increment Total Increment(%)

Gross Domestic Pro-duct /a (M$ million) 8,520 11,868 6.9 3,348

Output Employment(M$ thousand) i 2.87 3.48 3.9 7.71

Employment (000) 2,969 3,406 2.9 437 100.0Agriculture 1,454 1,554 1.3 100 2-2.9Mining 64 60 -1.3 -4 -0.9Manufacturingi 302 383 4.9 $1 18.5Construction 103 122 3.4 19 4.3Public Utilities 129 148 2.8 19 4.3Public Administration 240 286 3.6 46 10.5Others 677 853 4.7 176 40.3

Labor Force (000)/b 3,200 3,730 3.1 530 -

Unemployment (000) 231 324 7.0 93Rate of Unemployment 7.2% 8.7% -

/a GDP at factor cost, less value added in ownership of dwellings./b Labor force in 15-64 age group.

Source: Economic Planning Unit, "A Survey of Labor Uttilix,tlpn in WestMalaysia, 1957-75", December 1970. This tablg i8s based onProjection I in the study.

27. The magnitude of the task ahead of keeping the rate of plfy-ment at a reasonable level is illustrated by Table II-B, which u,,m.arizes aprojection of employment by sectors in relation to needpo putput, incr.ease.It shows that even if increases in lebor productivity in -manufacturi-ng, con-.struction and public utilities are assumed to slow down -f-rom thea pas,t tre:nds,the rate of real GDP growth has to be accelerated by 1.3 percenXtage ppinta -year from >5.6 percent in 1965-70 to 6.9 percent in 1.979-75, in order -tokeep the pace of employment creation at the same rate as thp g-rowth -rate oflabor supply. Although agriculture is likely to remain the sin,g,le l4arge"tsource of additional employment, it cannot be expected to Absorb m,o,re than one-quarter of additional labor because of the expected high rate of l,abor pro-ductivity increase. For a rapid increase in agricultural output ccruing fromexpansion of `doubLe-cropping of rice, dev.elopment of livestock and -yield,gains in tree crops will n6t as much contribute to employment creation asto the rise in income of the already .employed. Additional.agricultural-employment thus has to come mostly from -new land development and settlement.Manufacturing employment is projected to grow 4.7 percent a-year. However,

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because of the small share of manufacturing employment in the total., itscontribution cannot possibly exceed one-fifth of additional labor. Thus,more than one-half of additional labor will have to be absorbed by theservice sector which currently employs about one-third of total employment.

Employment Policies

28. The Government has been trying to provide enployment for addiftiInallabor largely through the following three kinds of policies. Firstly, inthe First Malaysia Plan, agricultural development - especially new landdevelopment and settlement - was postulated to be the main source ofadditional employment accounting for 45 percent of additional job oppor-tunities. Recognizing the fact that the unemployment problem in Malaysiatoday is also eminently a youth problem, the government has undertakencollective land development schemes specifically designed1 for employmentof the young unemployed. In addition, migration to East Malaysia wasencouraged through subsidy schemes. Secondly, the Government has beenmaking long-term efforts to increase employability of workers and improveeffective functioning of labor markets through establishment of varioustraining and educational institutions and development of the labor exchangeservices. Thirdly, more recently, the Government took supplementarymeasures which were meant to have immediate short-term effect. They includedGovernment regulations and restrictions on employment related to non-citizenemployment, and limitations on over-time work.

29. In quantitative terms, with the notable exception of the landdevelopment schemes under FLDA, these programs could not and should nothave been expected to have had a major positive effect on employment. Suchprograms as youth land development schemes and migration to East Malaysia,although useful as short-term relief measures, have inherent limitations asmajor elements in the employment policy. Youth employment programsare concerned with potential workers at the very beginning of their careersand consequently the educational and training aspects of such schemes arecrucial to their success. Unless education and training facilitate theparticipants' eventual absorption by productive employment, these programsmay serve only as palliatives. Ifowever, the emphasis on education and train-ing raises difficult problems of integration with the vocational. requirementsof the country, increases both the financial. costs and the requiired manage-ment manpower, and makes it difficult to implement them on a larger scalethan at present.

30. The effects of the programs mainly directedl at better organizationof labor markets are inherentl.y difficult to assess and by and largediscernible only in the long run. In ftiture, training andi edIucation willbecome increasingl.y important for the reason referred1 to in para. 84.The review of the ed(ticntion sector also indicates the urgent need ofstrengthcning technical and vocational edticatlon. The Malaysian systemof employment services andl Information Is stitl in an early stage of(levelopmenet and nslFfers from orgrinizatitonnl deftc.lencte, IIn particul ar.nrlac of trLn edl staff. Experience seems tto in(icate that a s Ignificailtproportion of votung anhor tutrns to the government employment oft'ices for

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assistance in job-seeking. This would provide the employment service withthe opportunity to serve as vocational guide and counsel,.if the professionalstaff of employment service were considerably strengthened.

31. As far as can be judged from available information, the favorableeffects of the various em,ployment regulations and restrictions have beenun,clear, mainly because these regulations either tend to increase labor costor have deleterious effects on economic activities as well as on uise o flqbor relative to qther factors of production or have disruptive effectsog) production. The direct effects, for example, of limiting qvertime wprkor employment of non-citizens, are often offset by their disrutptiv,ei9fluences on the overall economic activities.

32. Although of a,n entirely different nature, the n,egBtve pffectsotn o,v,,erall ,enp.Mpyrnt that the policy of !'Malay partici ation,'i fo9uld ,hqyr.if carried out with little flexibility, should be also clearly recognized.From the beginning of the First Malaysia Plan, the Governmept _gas b,enencouraging more extensive employment of Malays in the modern or qu"IT:mqdern segments of the private sector economy. 1/ This poli.cy cr,n be yigyedas an extension of the ethnically-based employment quotas in the publicservices under which additional positions in the civil servic, p4jq4ld beallotted in a four-to-one ratio to Malays and n,on-Malays. To effect thepolicy of "Malay psrticipation", all "pioneer" fi'rm - thpoe firup whichernjoy fiscal incentives - have been required to commit themselvps to worktopards, and maintain, the racial composition of employment which uo,uldreflect the multi-racial composition of the population. In4ustriql estatep,financed ,and developed by State governments, often require tenant firms to

1/ The Government aims at encouraging morp ebtensive partcipin af M,alaysin th# modern and dypamic sectors of the economy so that the Mply c,oimunity as a whole cou'ld reap the benefits of eco.nomic growth, @specisllythose accruing to the leading sectors. Inr SQ far as there is e o,ffipcial view of the quantitative target, the pgrticipation of Malays inindustry, commerce and finance to the extent of 25 percent of etmp,y,ntat all leyels from manual labor to management and owner,ship, is to beachieved in one generation. The Socio-Econoqp4c Sample Sqryfy of H,o,use7holds, Mal,a,ysi,>a, 1967-68, reveals that (a) in terms of tg Atx4ustrialempioymept,'Maliy employment accounts for more than 25 percent, and(b) by oc,cupation M,a2lys account for more than 25 percent in mostoccupatio,ns'except () 'architects, surveyors and ege (i) adwmi-nistrative executives and managerial o.ccupati,ons in th" private sector,and (iii n miners.A,part fr,om e,,n,cora.egment of Malay p#rticip-ti9 t,iR Gv @t h,a alksmobe,en impl ep,e,n,,t,iXng th,e poli', cf Malaysianiza,tiqn, i.e., re,pl,ac,me,t ofgxpqatriate profesio,nal, technical and managerial manpower b.y nationalsthrough Wqrk permit regulatio,ns.

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employ a certain percentage of total employment from among Malays (e.g. 25percent of total employment should be Malays on the Selangor IndustrialEstates). Moreover, moral suasion is used to seek cooperation of privateconcerns in increasing Malay participation at the executive and professionallevels. However, the Government's attitude in the application and enforce-ments of these measures has been flexible.

33. The Government indicates its intention to reinforce its effortstowards wider Malay participation during the Second Malaysia Plan. Theultimate goal of removing the communal lines in the employment pattern isa legitimate one for a multi-racial nation. Presumably, the policy canbe carried out with patience and flexibility, and coordinated with suchsupplementary policies as sufficient education and training. Excessivecost of carrying out the policy, in terms of overall income and employmentgrowth, might be avoided through reliance on incentives for implementationrather than regulations.

Conclusion

34. The projections of the working age population 1/ indicates thatthe current rate of increase in labor force is not likely to slowdown untilsome time between 1980 and 1985. The task of keeping the rate of unemploy-ment within manageable bounds is thus i'ndeed a difficult one. There is,therefore, the need to exploit labor using opportunities which are likelyto be most promising in developing new land as rapidly as possible, promotingmore labor intensive industries and encouraging construction activities.However, the efficacy of various policy instruments for affecting thelabor-intensity of productive activities is at the present rather limited.Also, the direct effect of any of these employment-oriented policies can beexpected to absorb hardly more than a fraction of additional labor supply.Moreover, effective policy instruments cannot be devised to influence theservices sector which is expected to absorb more than a half of theadditional labor. All these considerations therefore point to the need fora faster overall expansion of the economy and the necessity of increasedinvestment.

1/ EPU, "The Structutre of Employment in West Malaysin, 1965-85", December1967.

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III. DEVELOPMENT STRATEGY FOR THE FUTURE

Medium-Term Growth Prospects

35. Malaysia's economic structure and 'growth mechani-sm remain thoseof-an export-oriented economy. Thus, a-major factor in her mediumi.termgrowth prospects is, as in the past, the trends in exports,. which arelargely determined by Malaysia's past investments in her export capacity.and the world market situation, which.strongly influences theiincomegrow.th in Malaysia by the direct and indirect effects ofkexport,pricefluctuations. Government control over this basic determinant ofcthecourse of the.economy is thus rather limited in the medium run. The*,mipsion's commodity-by-commodity analysis of Malaysia's export prospectsindicates that -the growth rates of both export value and -volume swill1 -mostlikely slow down considerably from 5.3 percent and 7.2 percent respectivelyin the 1965-70 period to 4.1 percent and 6.1 percent in the 1970-75period 1/.

*.T,aly 1II-A

-Macro-Economic Pro-.ect ions. 19,7,0-7-5 a-(in HM miWion)

1970 19T5 TChaqge 1-9,70-175(as tima.te.) ,(prod etc ted) c(annual average)

GNP, 1970 market prAces lb 12,083 .16,,27.0 ,.1Gross National Income, 1970 pr-ices-- 1.2,08'3 1-5,650 5;-3%

Population,, million 1,0.8 1 2.4Per capitaXGNI, M$ 1,119 -.1,,260 2.%4Z

Gross Investment,-Z o£f GNP , 1 6. ,, 5 1-9_. 0iPrivate, % of GNP -1 1.3 13.0,P'ubsic, of.fGNP Id 5.2 6.0 8,.;6%

Gross Savings, % of ,GNP - 20.4 18,.,2 3;D %

Exports, go,ods .4,858 4e '5,920 ik. I %-kipor-ts, .go 1p 3,9.63 4,880 4.3%Serv-iSe -payments, net 632 1,000 9,16%Transfer payments,, ne.t 224 o180 A, 3%

C,urr,ent Balance 39 -1i40 -

/a Made, by nthe' ml8ion..7b R.e,al pturchasing power, adj,,usted -for terms -of -,trade -changes.

U projection.a ~GNP less consumption -less transferm,.

Y'e Missi,on estimate.

1/ More detailed,discussion of export prospects is given in Chapter V andAnnex I.

- 17 -

36. Despite these export prospects, it should still be possible tomaintain a real GNP growth rate of around 6 percent a year on the averagein the coming five years, provided that Malaysia can raise substantiallythe level of investment and diversify production for domestic markets.Import substitution is expected to continue both in agriculture an(d manu-facturing, but its pace will depend on the nature and magnitude of assistanceand incentives (and removal of existing disincentives) provided by theGovernment to the private sector in the coming years. Some increase Inunemployment would appear tnavoidable in the coming five years, if theeconomy expands at the projected rate of 6 percent a year. A normativeprojection of macro-economic variables presented above in Table III-A, isbased on the mission's assessment of export prospects and is meant to des--cribe a possible growth path of the economy for the coming five-year period.

Statement of Problems and Policies

37. The above projection, in conjunction with the (levelopmentsin the economy in the past five years, suggests that the major economicpolicy objective for the future should be to reverse the recent sluggish-ness of investment and to raise its level substantially, not only tomaintain the growth of income and employment in the immediate futurebut more importantly to lay the basis for a more rapid economic expansionin the long run. The present decreased investment level, if allowed tocontinue, would probably have serious adverse effects on the long run growthpotential of the economy, when more rapid expansion of the economy and em-ployment is called for.

38. First, if the present declining trend of rubber plantings andreplantings were extrapolated into the future, the current steady growth rateof natural rubber production at over 8 percent a year would graduallyslow down to about 2-1/2 percent a year towards the end of this decade.Expansion of oil palm acreage is also slowing down. Given the seculardeclines in export prices of these two commodities, the production slowdownwould affect the pace of export growth, thus resulting not only in a slowergrowth of domestic-production but also in a less favorable balance-of-payments position. Secondly, the future expansion programs for annual cropsare uncertain. During the 60's the Government prepared and commencedconstruction of major irrigation projects for double-cropping of rice andlarge-scale land development schemes for palm oil production. On the basisof currently available geographical and hydrological knowledge, no newpossibilities for major irrigntion projects exist. Furthermore, diversifi-cation into other crops, after rice self-sutfficiency is achieved, is handi-capped by inadequnte applied research. Thirdly, the limited managementcapacity hampers the pace of new land development by the public sector.

39. Potential Investment opportunities no doubt exlst; Malaysiapossesses considerahbe land and possibly mineral resources yet to hedeveloped. Further manufacturing development slhotld be possible bothfor the domentic marrket, ns suggested by mnnufactured goods Imports ofM$ 2,100 million (US$690 million) or 16 percent of GNP, and for export.Finance does not seem to be a crucial problem, nor is lack oF entrepreneurial

- 18 -

and managerial capability a serious bottleneck in the private sector. Rather

the problem appears to lie in the present incentive system which stimulatesinvestment only moderately.

40. In agriculture, the States. are unwilling to make land available to

foreign investors and they are also reluctant in the present politicalatmosphere to do so for private Chinese development. Furthermore, Europeanplantations appear to have little interest in new long-term projects, partly

because of uncertainties about the future of rubber and palm oil and partly

because of more attractive investment opportunities elsewhere. The Malaybusiness community is not yet in a position to make a significant con-

tribution to accelerate large-scale land development. Furthermore, lackof adequate infrastructure in available virgin land and the introductionof high-yieldling techniques, which are difficult for the smallholder onhis own, make the opening-up of new land by smallholders difficult withoutGovernment participation.

41. Although expanding at a pace 80 percent faster than GDP, manufac-turing in Malaysia remains relatively unideveloped for the size of the countryand its per capita income which is one of the highest in South-East Asia.

This Is lue primarily to Malaysia's successful specialization in export cropsin the past, which discouraged both the Government and the private sectorfrom taking a more positive view of industrial opportunities in Malaysia.Predominance of non-Malay and foreign interests in industrial activitiesencouraged this attitude of the Government, and the Government's efforts topromote industrialization are relatively recent. The Chinese business com-

munity has been predominantly mercantile and has entered into manufacturingonly recently. The openness and modest size of the economy, coupled with

alternative investment opportunities in Singapore, Hong Kong, Korea, and

Taiwan, deter some potential foreign investors in importsubstitution indus-

tries and explain the relatively small foreign investments in Malaysia.Moreover, domestic capital and entrepreneurship are highly mobile betweenMalaysia and Singapore because of the historical ties, and slight differencesin investment opportunities induce their' transfers from one to the other.

42. Since the present sluggish investment seems to reflect various

structural problems, the stimulation of investment in the private sectorwould require more than expansionary fiscal and monetary policies by the

Government. The policy for the future will have to be directed towardsconscious efforts to provide incentives which would offset the abovementioned obstacles and make the most of the potential of the economy. It

is not easy to design such a policy because of uncertain effectivenessof various policy measures in inducing private investment. However, an

effective strategy would seem to require the following general policy ele-

ments.

43. Firstly, a device must be found to utilize the existing expertise

in land development and management of the private estate sector in order to

supplement the limited capacity of the public sector. The unwillingness

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of private estates to increase their financial commitment to Malaysia maynot change, and political obstacles to new private European and Chinese es-tates may continue. For these reasons, the main thrust of new land develop-ment has to come from the public sector. This should be possible not only bymeans of public land development schemes but also with the participation ofprivate estate concerns in public land schemes either in joint ventures witlthe States or as managing agents. The joint venture was a fairly commonform of association of Chinese capital and management with public land de-velopment before the communal troubles in 1969, and in improving politicalclimate it should be possible to revive it. In addition, thie provisionof sufficient infrastructure in currently inaccessible but suitable virginland areas would make possible a more effective private smallholder develop-ment.

44. Secondly, Malaysia's industrialization efforts should be strength-ened in order to sustain and accelerate the past growth of investment andproduction. Up to now, Malaysia's industrial policy combined public devel-opment of industrial infrastructure and Government-supported industrialfinancing with moderate fiscal incentives and tariff protection. However,application of these incentives and protective measures involved cumbersomeand extended firm-by-firm examinations and decisions by the Government,which taxed its already scarce manpower resources and resulted in bureau-cratic inefficiency and limited scope for competitive private initiative.Fiscal incentives appear to have been also of limited effectiveness. More-over, the policy of "Malay participation", for instance in the form of em-ployment and ownership quotas, if pursued more forcefully in the future,would tend to have some disincentive effects. Greater emphasis on indus-trialization within the existing policy framework would not only put furtherpressure on the Government's manpower resources but more importantly wouldlead to over-protection of less-promising industries as well as under-pro-tection of more worthwhile industrial projects. Because of the limited dom-estic market, Malaysia will eventually have to look to exports for an impor-tant part of industrial production, an aspect of industrial policy whichis not sufficiencly emphasized at present. These sliortcomings of thepresent policy point to the need to dispense as muClh aa pousible withad hoc case-by-case promotion, protection and control of specific firms bythe Government and to provide instead additional general incentives appli-cable to the manufacturing sector as a whole but: with specijl emphasis onthe export sector. One such method would be to estahlish uniform blanket im--port tariffs for broad categories of manufactured goods. The adverse effectsof such a tariff policy on manufactured exports might at thie same time beneutralized by a system of export sLubsidies during the period of developingan expanded and efficient industrial sector.

45. Thirdly, construjction ehould be encouraged. It grew slowly inrecent years, partly because of stagLatillg investment. Faster increases inboth private and public investment would stimulate construction other thanbuilding. However, the encouragement of residerntil and commercial buildingconstruction, whichi account for a large part of private lnvestment, wouldrequire more aggressive Government pol len includinLg arraiigengents forlonger-term financing and the establishment of a 1'ublic lhousing Authiority

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now under consideration by the Government. Increased construction activities,labor-intensive by nature, would also have a favorable effect on employment.

Development PlanninR and Implementation Capacity of the Public Sector

46. For a more rapid increase in the amount and the scope of publicinvestment, quick and substantial improvement of the planning and implementa-tion capacity is a prerequisite. There are, however, indications that thesituation is worsening rather than improving. The Economic Planning Unithas since 1967 been assisted by the Harvard Advisory Group, but foreignadvisors do not have sufficient counterpart staff. As a result, sectorand project planning work has been suffering. The operating ministriesand departments -- especially in critical departments such as the PublicWorks Department (PWD) of the Ministry of Works and Communications a;,dthe Drainage and Irrigation Division (DID) of the Ministry of Agriculture --could not be staffed adequately in the recent past by special skill man-power. Although the number of Government employees has been increasing atthe rate of 4-5 percent a year 1/, both the vacancy rate and turnover oftechnical or specialized manpower have been high. With the workload increas-ing both for planned new construction and maintenance work, and the key im-plementation agencies operating already above their manpower capacity, it isnot surprising that designing, execution and supervision have suffered,resulting in construction delays, lower quality, cost increases andin some cases inadequate maintenance. Although the situation is less severein the case of FLDA, availability of experienced management, particularly atthe individual settlement scheme level, are limiting the rate at which FLDAcan open up new land for settlement. Autonomous public entities had so farrelatively few problems in project implementation, but some experiencedifficulties in recruiting and retaining staff.

47. There is no simple solution to the capacity problem. The generalshortage of technical and specialized manpower in the Government appears tohave been caused by the otherwise legitimate government policy of theMalaysianization, a national policy since 1965 for replacement of expatri-ate professional, technical and managerial manpower in the public and privatesectors by nationals through work permit regulations. As the policy ofMalaysianization proceeded, experienced expatriate technical manpower inthe Government was replaced by nationals. At the same time, the implemen-tation of the same policy, together with the development of industrialactivities, increased the demand for technical and special skills in theeconomy, thus inducing outflows of government-trained technical personnel tothe private sector. Secondly, it cannot be denied that the recent politicalatmosphere which emphasizes the Malay predominance in the Government does notencourage non-Malay graduates to apply for and remain in government employ-

1/ Mission estimates based on the analysis of personnel emolumentsexpenditure. See "Malaysia - An Economic and Functional Classificationof Central and State Government Budget Estimates, 1969".

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ment, while it is equally difficult to recruit Malay graduates. The socio-economic household survey in 1967/68 indicated that the stock of technicaland special skill manpower was mostly consisted of non-Malay graduates, andthat availability of Malay graduates in such disciplines as engineering wasstill severely limited. Moreover, the private sector competes with the publicfor those few available. Thus, the solution to the capacity problem wouldseem to lie only in a long-term education policy with emphasis on more ex-tensive technical education throughout all segments of the Malaysian socipty.

48. No doubt better management and operational techniques, which theGovernment has been trying to introduce, would allow a more efficient useof available manpower. But they are difficult to implement and their effi-cacy is limited in a situation where the basic problems of shortage andattrition of experienced personnel have not been solved. Adjustment ofsalaries towards the private sector levels, and efforts to improve in-servicetraining and to increase the supply of graduates particularly in engineeringmight be helpful, but not to the extent of solving the basic problem. Asolution which the Government is considering is the wider use of privateconsultants and contractors, domestic as well as foreign, for feasibilityand engineering studies, design and construction work. It would probablybe more costly and involve the risks that private firms will hire away ex--perienced personnel from the Government. Moreover, the private firms wouldhave to be supervised by experienced personnel in the Government.

49. The Government is well aware of the lack of implementation capa--city in the public sector and of its implications on the possible role ofthe public sector in the future development of the economy, and is contem-plating various measures to prevent further deterioration of the implemen-tation capacity of the public sector. However, no satisfactory analysis hasyet been made of the manpower needed to achieve the public investment tar-get. The limited planning capacity available in the Government has so farbeen used excessively on the establishment of the social objectives andmacro-economic framework of planning and too little on the evaluation ofmanpower requirement and availability, the development of sector strategi,es,the formulation of sector programs and the preparation of investment proj-ects. As a result the specifics of a clear strategy for economic advance-ment and the means for its implementation have not yet been formulated.

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IV. POLICIES FOR SECTOR DEVELOPMENT

50. Thie future course of development of the important sectors dependscritically on the choice of a Government policy from among various alter-natives. Some of the major policies which the Government has prepared inthe past several years are being completed. This is the situation with themassive programs of rubber replanting on larger holdings; the switch intooil palm by private sector estates also seems to be gradually coming to anend; self-sufficiency of rice will be achieved in a few years' time; tinmining in the presently mined areas and their vicinity appears to havereached a plateau; the "Malay participation" is a new unknown factor inindustrial development; universal education up to the lower secondary levelhas already been introduced; and basic infrastructure has been installed.New policies and guidances are needed to activate new lines of development.

Agricultural Policies

51. Agriculture generates about one-third of GDP and more than 60percent of total value of merchandise exports. It also accounts for about50 percent of total employment in West Malaysia. Tree crops, especiallyrubber and oil palm, dominate Malaysia's agriculture both in terms of valueof productlion and acreage, while annual crops mainly padi, accounts forabout one-fifth of the total. Agricultural development has been fairlyrapid in recent years, due to fast increases in productivity in rubber,expansion of oil palm acreage, double cropping of rice and a faster paceof forest exploitation.

52. In spite of this commendable performance, there are problemswhich would call for intensified efforts of the Government if agriculturaldevelopment were to be accelerated. Firstly, the rate of land developmentin recent years has been slow in relation to available unused land resources.Secondly, although the replanting program of rubber estates has beennearly completed, about 600,000 acres of smallholder rubber land is stillcovered with low-yielding rubber trees, wiich is one of the reasons forrural poverty. Thirdly, the'future expansion program for annual crops isuncertain after self-sufficiency of rice, which is an early prospect,w-ill have been achieved. Fourthly, although expanding at a rapid rate,the present method of forestry exploitation is wasteful, and there is somedbubt as to whether the country's forestry resouces would not be depletedbefore long at the current rate of cutting. If these problems were nottackled, it would be difficult for Malaysia to maintain a steady increaseof export earnings in the long run, especially if, as seems likely, thereis a continuing deterioration of terms of trade; to improve rural income;and to create additional agricultural employment. Solutions to theseproblems are likely 'to be along the following lin'es:

53. Land Development. According to the recent land classificationof West Malaysia, the land area which is suitable for agriculture comprises16.9 million acres, of which only 7.1 million is currently under agriculturalcrops. The remainder of 9.8 million now covered with forests thus offers

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opportunities for further agricultural development - and, as a by-product,for forest resource exploitation. Of the 9.8 million acres, 1.8 millionacres are on land suitable for annual crops while the remainder is subjectto serious soil erosion and its use is limited to tree crops and possiblypasture.

54. The major role in land development has traditionally beenplayed by the private estate sector, largely by European plantation companiesunder the colonial administration. In the past 15 years, estate acreageunder rubber declined from more than 2 million acres to 1.6 million acresin 1969, in part because of fragmentation of estates into smallholdings 1/but also because of the replanting of low-yielding rubber with oil palm.The decline in estate acreage, however, illustrates the general unwilling-ness based on the secular decline in rubber prices and the reluctance offoreign companies to increase their financial commitments in Malaysia. Thusof a total area of 880,000 acres newly planted with rubber between 1955 and1969, only 145,000 acres, or less than 17 percent: was on estates. Practi-cally no new planting of rubber is expected on estates for the coming fiveyears. -Estate planting of oil palm is expected to decline rapidly infuture because most of the suitable land on existing estates has been usedup and the long-term prospects for palm oil have considerably weakened sincea sharp price decline in 1968.

55. The initiatives for new land development thus came - and will haveto come - largely from the public sector and the smallholder developmentassisted by Government agencies. Since the late 1950's, both the FLDAState Govermnents and various State development corporations have beenactively engaged in land development, and have brought into production atotal of about 320,000 acres in 1961-68, of whichi about 200,000 acres wereaccounted for by FLDA schemes. High density settlement under close super-vision of FLDA management staff lhas been successful in securing a highquality production control and so have State estates, some of which arejoint ventures with the private sector. However, other State schemes forprivate smallholder development, State fringe and block alienation schemes, 2/

1/ In Malaysia, a holding of less than 100 acres is classified as a small-holding. The fragmentation takes place when estates owned by foreigncompanies are sold to local Chinese concerns, partly because of thelarge size but also because of the advantages of not having to maintaina school and a clinic and to hire the unionized labor.

2/ Under the fringe alienation scheme, land is developed for agriculture,usually within 3-4 miles of an existing Kampong, primarily to augmentthe income of existing smallholders. Initial development is carriedout by the State Government with financial assistance from the FederalGovernment. Under the block alienation scheme, blocks of land aredeveloped for agriculture by the state government into holdings whichare themselves adequate to support a family unit (6-8 acreages, usually).Land clearing is financed by the Rubber Industry Replanting Board.Housing settlements are financed by the State or low-cost housingscliemes of the Federal Government.

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have been less successful, mainly because of inadequate planping, extension,supervision and discipline, and the Federal Land Consolidation and Rehabi-litation Authority (FELCRA) had to be created to rehabilitate the better onesof these schemes.

56. In the next five years, tho Government proposes to developabout 750,000 acres of new land, of which more than 600,000 acres wouldinvolve public sector participation. The target would' triple the,rate of public land development from an average of about 40,,000'acreq ayear in 1961-68 to an annual average of 120,000 acres a year. The proposeddevelopment by implementation agencies is presented in Table IV-A below.

Table IV-A

Five-Year Land Development Targets

Federal CoC0s PedleralAcreage& Per Acre DdneVm0 t ost

('00 Acres WsT (^H$;million)

A. Federal Schemes

FLDA Schemes 250' 0 2,0001 500'. 0'Fringe Alienationt

Schemes: (FELCRA3 40.0. 600, 24.0Cooperative Block New

Planting. (RIRB)' 150.0 750: 112.5

Sub-Total, 440',0- 636,5

B. State' Government SchpmessYouth Schemes' 75. 0 60O6 45.0'Low-Cost Settlement Schemes: 37'.5- 1,200 4,%;,Public State Estates 37'.5 ~ V,'200 45'I0

Sub-Totall 150.0 - V35.0

C.. Private Sector Particip!ation

Joint Venture Es,tates' 50.0-Private- Estates, 1122.5_

Sob-Totatl 1'625,5

Total'i 752.25 7-71in.5

La These' schemesi are. fed ar2!l'j subs,01iz4d.Source-: Econom1,c PlanningLUnit.

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57. The target indicates a considerable broadening of the scope ofGovernment activities in land development. While the organization andmanagement of FLDA can and should be further improved, there is a limit toexpansion of its capital- and management-intensive operations if thealready developed schemes were to be managed properly and closely super-vised. The Government thus proposes to give more emphasis to privatesmallholder development assisted by the government (i.e., FringeAlienation, Cooperative Block New Planting, lowcost settlement) on theone hand, and the development of public estates (i.e., Youth schemes,public sector or joint venture estates) on the other. However, neitherFELCRA nor the RIRB 1/ achieved to date significant success in openingnew land. Also there would be a considerable strain on the implementationcapacity of State agencies of the eastern and southern States where mostof new State schemes would be located. For the target to be met, therefore,the managerial and technical capacity of these public sector agencieswould have to be expanded considerably, which is a difficult propositionas explained in Chapter III. Hence, a device is necessary to draw on theexisting expertise in private estates, which should be encouraged toparticipate in public land schemes either in joint ventures with theStates or as managing agents.

58. Another difficult problem the Government has to face is that ofthe crop choice. Land development schemes Ln the past have been plantedwith rubber or oil palm. In view of the likely further declines of rubberand palm oil prices, the Government is aware of the danger of continuingwith planting of these two crops. Yet lack of applied research other thanon rubber and oil palm makes large development of other crops an unrealisticobjective for the time being. Although cocoa and feedgrains appear to bepromising crops, neither would be suitable for production on settlementschemes. As in the past, settlement schemes will have to plant rubber oroil palm - crops which are well suited to Malaysian conditions and forwhich a considerable pool of experience already exists. Moreover, a largerproportion of new land should be planted with rubber than in the recentpast. Rubber seems likely to have a steadily growing market at 6-7 percenta year, compared with fats and oils for which demand is estimated to growat 2-1/2 percent a year and for which supply surpluses are at times expected.With new techniques and planting materials, rubber can be grown as profit-ably at projected world prices as oil palm.

59. Smallliolder Rubber Replanting. Approximately 600,000 acres ofsmallholder rubber land are still planted with low-yielding trees, andsome 130,000 peasant families depend on these holdings for their living.The Government intends to complete replanting of these holdings with high-yielding materials duriLng the 1971-75 period. However, it would appearthat the existing -financial incentives (replanting grants) will not offersufficient inducement for the replanting of these holdings, because thesmnllholders, typically with less than 5 acres of rubber land, would nol:be ablc to find needed financial resources which are not covered by re-planting grants as well na an alternative source of income for a period

1/ Rubber Industry Replanting Board.

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of five to eight years until new plantings mature. A combination of measuresis thus likely to be needed to induce the "hard-core" smallholders intoreplanting. Firstly, credits slhould be made available to facilitate someof these smalllholders to move into poultry and feedgrain production.Secondly, chemical yields stimulants (recently developed "Ethrel") shouldbe made available to treat part of a smallholding,, so as to increase yieldsof old trees and conpensate for the loss of income during the replanting;also more intercropping of immature rubber should be encouraged. Thirdly,consolidation of two or three smallholdings should be encouraged byoffering smallholders the opportunity to settle on new land and to usethe value of old holdings as part-payment of new land.

60. Annual Crop Development. Past investments in irrigation anddrainage facilities which allow expansion of double-cropping of riceestablished a basis for a sustained growth in padi production. WestMalaysia and Sabah will probably attain self-sufficiency in rice by the mid-1970's. Steps should be taken to find alternative production opportunitiesfor part of newly opened land and for rice farmers with marginal single-crop land, to enable the Government to lower the support price of rice(which is currently about 30 percent higher than the world market prices)eventually towards the world market level. For double-cropping farmers,a lower producer's price would be more than offset by an increasedincome from double-cropping and new high-yielding varieties.

61. Export prospects for annual crops are poor, and increasedproduction will have to be primarily for the domestic market. As a resultof an expected rapid expansion of livestock production, particularly pigsand poultry, demand for feedgrains is likely to grow very rapidly over thenext decade. Feedgrains, in particular maize and sorghum, have good pros-pects and could be produced on marginal padi land, peat land and also newland settlement schemes. However, production of feedgrains will onlybecome economically feasible if high-yielding varieties suitable for theMalaysian soil conditions are developed. Other animal feedatuffs such astapioca, soybean, groundnut and tropical legumes could also be developed.Since Malaysia currently imports more than M$ 70 million of feedgrainsand such imports are increasing rapidly, development of feedgrains wouldcontribute greatly towards import substitution. To encourage thisdevelopment, the government will have to make substantial efforts in appliedresearch and extension, and to make credits available to farmers willing tomove into feedgrain production.

62. Foriestry Development Policy. In recent years, Malaysia hasbecome one of the world's major timber exporters, and forest products nowcomprise more than 15 percent of export earnings. However, present Imethods of exploitation are resulting in inefficient use and unnecessarilyrapid depletion of forest resources. Action is necessary to correct severalmajor deficiencies. Firstly, Malaysia exports forestry products mostly inthe form of logs, while it could almost treble its export earnings fromforestry products if all were exported in the form of sawn timber.Malaysia thus loses potential value added. Secondly, under the presentsvstetu of forest exploitation, only those species for which apparent export

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demands exist are taken out and the remainder is left to rot on the ground.Some of the latter, however, hias potential commercial value, and, ifproper marketing efforts are made, could be exported at profit. Thirdly,cutting in West Malaysia is faster than can be sustained on a continuingbasis and more land is cleared than needed for agricuilture. Programs shouldbe developed to determine the marketability of different forest species, toestablish overseas markets for Malaysian sawn timber, to set up a jointforest program for all States of West Malaysia taking account of resourcemaintenance and alternative land use, and to rationalize the marketingsystem so as to provide financial incentives for the prodtuction and ex-port of sawn timber. In Sabali, export outlets shiould be diversified sothat more species can be marketed, while in Sarawak infrastructure isneeded to start exploiting the inland forests.

63. Institution ruilding. Agrictultural policy requirements poin1t tothe need to strengthen the institutions and agencies whlich would be involvedmainly in land development, research and agricultural credit. Pre-irivestmentstudlles for land development - Land Classification Survey and variotisRegional Land Development Master Plans - have been proceeding satisfactorily,andl the pace of lan(i development critically dependls on the imnplementationcapacity of the puhli.c stector agencies. The need to improve the capaci