Up the value chain: Manufacturing and services fill the gap left by declining commodities

Along with its neighbours, Malaysia has remained a beacon of economic optimism, maintaining a positive trajectory as Western economies have faltered in recent years. While the country’s GDP growth has been sustained over the last few decades, the engines of growth continue to be expanded, improved and reinvented to adapt to a changing global marketplace.

Initially dominated by a primary commodity- and agriculture-based economy, concerted efforts by policymakers have shifted Malaysia up the value chain, first through an export-oriented industrialisation push in the 1980s and more recently in the form of value-added industry and services. The make-up of Malaysia’s economy is very different from even a decade ago, with services now accounting for more than half of the economy and manufacturing making up more than a quarter. Sharing many geographic, historical and social similarities its South-east Asian brethren such as Indonesia and Thailand, Malaysia’s economy has evolved in similar patterns to its neighbours in some aspects while charting its own course in others.

EVOLUTION: One of the first native commodities to have a significant impact on Malaysia’s economy and export market was tin. A major contributor to the economy for over a century, domestic commercial tin mining has been carried out since the 1820s. Strong global demand for the metal pushed commercial production higher in the ensuing decades until Malaysia became the world’s largest producer by the 1880s and supplied more than half the world’s tin by the end of the 19th century.

Malaysia retained the top spot in global production until the tin market collapsed in the early 1980s, with output plummeting from over 70,000 tonnes per annum in the 1970s to less than 10,000 tonnes per annum by the mid-1990s and registering just 2380 tonnes in 2009, according to date from the Department of Statistics (DoS). It was during this period that another of the country’s important major mineral resource began making its presence felt as large-scale petroleum and natural gas production started to take off in the 1970s.

AGRICULTURE: As Malaysia’s mineral commodity industry has adapted to changes in the global marketplace, so too has its other primary commodity source, agriculture. While domestic food cultivation has long been a mainstay of Malays, large-scale export-oriented agricultural business was fostered by the colonial British intent on developing new sources of rubber around the end of the 18th century. The contribution of agriculture, forestry, livestock and fishing to the economy declined from 20% of GDP in 1987 to 7.7% by 2011, according to DoS data. A good portion of this reduction is the result of the concurrent rise of the manufacturing sector, which began in the 1980s and saw the industry’s contribution to the national economy grow from 19.9% ($5.19bn) in 1987 to just over 30% in the early 2000s before declining to 25.1% share by 2011.

Another pillar of Malaysia’s early economy, rubber, followed a similar trajectory to tin. A well-established estate system provided a steady flow of rubber, peaking in 1971 with 672,100 tonnes. Like tin, rubber output then entered into a period of decline, although it has since recovered and plans are now under way to raise production further (see Agriculture chapter).

DEVELOPMENT PROGRAMMES: To fill the void left by the decline of these commodity-based revenue streams, the state made major and largely successful efforts to develop first manufacturing and later the services sector through a number of development initiatives, such as the Economic Transformation Programme, the Government Transformation Programme, 1Malaysia and a series of five-year plans (now in the 10th Malaysia Plan 2011-15). Yet despite the obvious advantages of creating higher-paying, value-added manufacturing and service businesses (Malaysia’s manufacturing and services sectors accounted from more than three-quarters of GDP contributions in 2011, according to DoS), traditional commodity exports remain a reliable and lucrative mainstay of the economy.

Driven by the strong market for palm oil and supplemented by other primary cash crops such as rubber, timber, tobacco, pepper and cocoa, Malaysian farmers produced crops worth $33.7bn in 2011. This was 27% greater than the $26.6bn achieved in the previous year and more than double the $14.5bn recorded in 2005. Rather than forgoing commodity extraction and exportation altogether, new efforts are being made to move up the value chain by strengthening agriculture and agro-based industries for further wealth creation.

COMPARATIVE ADVANTAGES: While Malaysia’s natural resources and agricultural climate have undoubtedly influenced the arc of its economic evolution, a host of other social, cultural and environmental factors have helped shape its fiscal path. Initially, many of Malaysia’s neighbours followed a similar trajectory of capitalising on their bountiful natural resources to secure cash inflows into state coffers, prior to creating favourable environments for high technology, knowledge-based and capital-intensive industries. Indonesia, for example, has exported large quantities of many of the same commodities as Malaysia over the years – most notably tin and palm oil. Both countries have dominated global exports of these goods at one time or another.

Despite this similarity, however, Malaysia has been more aggressive in its efforts to remake itself into a higher-income nation, as laid out in numerous economic plans. One example of the concerted effort to move away from lower-value commodity exports is in tin production. In this regard, Malaysia has taken a path similar to that of heavily industrialised Thailand.

Like Malaysia, Thailand’s mine production of tin-in-concentrate reached its zenith in the late 1970s and early 1980s, peaking at 34,300 tonnes per annum in 1980 (second only to Malaysia), according to the nonprofit research organisation Industrial Technology Research Institute. As the country shifted its focus to manufacturing in subsequent years, tin production dropped off to 2010 levels of just 300 tonnes. Conversely, Indonesian tin output has been steadily increasing, growing from 32,500 tonnes in 1980 to 53,600 in 2000 and 95,700 by 2010 (good enough for the global lead, just a tick above China’s 95,600 tonnes).

CONTRIBUTION TO GDP: Malaysia’s mining and quarrying sector has declined from a 13.3% share of GDP in 2005 to 8.8% in 2011, as mining and petroleum output has slowed, according to the DoS. This 4.5-percentage-point drop over six years is significantly greater than the 1.7-point dip (9.4% to 7.7%) experienced by Indonesian mining and quarrying over the same period. Meanwhile, with its economy primarily focused on manufacturing, Thailand’s mining and quarrying GDP contribution fluctuated between just 2.2% and 2.5%.

Despite being the world’s largest and second-largest exporters of palm oil, agriculture’s contribution to the economies of both Malaysia and Indonesia is also in decline, with the former decreasing from 8.3% to 7.7% and the latter from 14.5% to 12.7% from 2005 to 2011. Thailand’s agricultural sector remained largely static again, ranging from 8.1-8.6% of GDP in the period.

Once the main focus of the government’s economic development efforts, the importance of Malaysian manufacturing is slowly waning as well, and its GDP contribution declined from 27.5% in 2005 to 25.1% in 2011.

SERVICE CHARGE: Although the value of Malaysian manufacturing, agricultural and mining sectors has risen substantially in recent years, their relative share of GDP has dipped due to the rise of other industries – primarily services. Testament to the push towards a high-income economy, the services industry exceeded the 50% threshold in 2008 (50.9%) and has increased from a 46.8% share of GDP in 2006 to 54.2% as of 2011, higher than Indonesia at 47.3% and Thailand at 48.1%.