Rubber and the Malaysian economy

T. R.
Abbreviations Used
An Overview
Chapter I
The Malaysian Economy -
Chapter II
Supply and Demand for Rubber
Chapter III -
The Competition Between Synthetic And Natural Rubber
Chapter IV -
Commodity Control Schemes for Rubber
Chapter V
The Economic Organization of Natural Rubber Production
Chapter VI -
Natural Rubber and Malaysian Economic Development
An Analytical History
OR almost half a century the economic structure of the Malaysian area has
remained without significant qualitative modifications. Wars, emergencies,
depressions and changing political relationships have had temporary quantitative impact
but the basic structure, resting on the highly specialized production and export of
rubber and tin on the one hand, and the importation of a wide range of manufacrured
consumer goods and supplementary food for internal consumption on the other, has
persisted unchanged. Singapore's economic role within the Malaysian area has also
remained largely unchanged; it has been the entrepot, handling trade and commercial
servicing; in addition, Singapore has served the wider hinterlands of Southeast Asia
as an export collection and import distribution point.
Since the early years of the cenrury, the tariff regimes of the various Malaysian
states have supported a rubber-tin-entrepot specialization by concentrating on revenue
rather than protecting domestically produced goods in the home market. Singapore
and Penang (and, at various times, other minor ports) have been free ports; the
Federation of Malaya, Sarawak and Sabah have had low levels of duties that permitted
manufactured goods to be imported and sold cheaply. Since markets have been small
and geographically fragmented, competition with imports intense, and alternative uses
of capital and labour in rubber, tin and trade promising, little incentive has existed
for the establishment of local manufacturing anywhere in Malaysia. The exceptions
were few and isolated.
Until very recently the limited industrial development which took place depended
to a large degree on elements of natural locational protection. Involved were products
with large weight-bulk transformation in the manufacturing process, products expensive
to transport over long distances, and products where delivery time advantage was
crucial. Bulky items such as boats, tin cans and cement pipes, semi-perishable goods
such as biscuits, ice-cream and aerated water, and time-critical products such as newspapers and job printings represented the main items of industrial output in the area.
The aggregate value of investment commitments, and employment in manufacturing
- defined to exclude the cottage type of industries
never attained substantial
economic significance in Malaysia, accounting for less than 5 per cent of total capital
investment and total employment respectively.
According to the 1960 census, the
pattern in Malaysia was not un typical of many less developed economies in other parts
of the world, although the type and degree of specialization in the economy are unique.
Malaysia in this book refers to the geographic area of Malaya, Singapore and the Borneo
States of Sarawak and Sa bah (North Borneo).
The increasing rubber-tin-entrepot specialization in the Malaysian area economy
has been associated with the generation of increasingly higher per capita income over
a period of five decades. This in turn has reflected the area's absolute and comparative
advantage in concentrating on the rubber-tin-entrepot complex rather than engaging
in diversified agriculture and industry. Even with the problems of political reorganization and the "Emergency", the economy grew more prosperous in the initial decade
and a half of the post-World War II era. As a matter of fact, the terms of trade
relevant to its specialization were so advantageous at the time that it was economically
feasible to continuously transfer productive resources from food production and other
economic activities to rubber and tin production and to entrepot trade. At the same
time, Malaysia increased its dependence on imported food and manufactured commodities since it could produce these less efficiently than its specialized rubber-tin-entrepot
goods and services.
This situation has not been without its dangers. Under any circumstances, heavy
dependence on external sources of food supply are worrisome. The fact that the
prosperity of the area's economy was established on such a thin edge of intensive
economic specialization in export commodities, particularly rubber, made the economy highly vulnerable to sudden changes in world supply and demand. Both of these
problems have been recognized but the "COSt" of bearing the economic risks
of specialization invariably appeared lower than' the cost of diversifying into relatively
less profitable economic activities. It is indeed amazing that so much rather than
so little food has been produced in Malaysia, since the comparative advantages of
factor use in the rubber industry and to a somewhat smaller extent in the cin industry
and in the trade and entrepot functions have been so great.
The Malaysian area, it should also be noted, has had good fortune. The rapidly
increasing demand for rubber in the decade of 1950-1960 came at a time when
Malaysian production was expanding while Indonesia, the world's largest producer,
began to experience a long-term downward trend in production. Compared to the
prewar decade, Malaysia not only increased its output of rubber significantly but also
gained by extremely favourable terms of trade. For a variety of reasons, including
the Korean War boom, the 1950-1960 decade proved to be the most spectacularly
profitable period in the history of the rubber industry in Malaysia. Average prices
were, in order of magnitude, seven to eight times prewar levels; at the same time,
output increased to almost double the immediate prewar levels.
While relatively less important, Malaya's comparative advantage in tin mining
also contributed to the area's prosperity in the same decade. No other tin-producing
area in hte world
and only half a dozen cOllntries are significant producers of tinhas the advantage of extensive, high-grade alluvial deposits of tin which are relatively
inexpensive to mine. During the tin price boom brought about by the Korean War,
p.rices moved to the highest level of the century. Despite subsequent restrictions on
output of tin in Malaysia, gross earnings in the tin industry during the period were
higher, by a large margin, than at any decade on record.
The economic attainments in Malaysia's entrepot function
which is largely the
economics of Singapore's commercial trade and servicing activities
were not as
spectacular as those of the rubber and tin industries; but Singapore's trade and service
industries have shown a capacity to take advantage of growth in other sectOrs of the
Malaysian economy. Much of this growth, of course, was predicated on the increasing
affluence of its hinterland and therefore tied to developments in the rubber industry.
To only a minor degree did a general growth in trade in the Southeast Asian countries
contribute to Singapore's prospericy during the 1950-1960 decade. Nevertheless, all
measurements that are available on Singapore's activities suggest a continuing growth
of enrrepot functions in Singapore during this time.
Despite impressive economic accomplishments and growing affluence during the
fifties, a series of parallel social, economic and technical changes were taking place
which undermined the future viability of the Malaysian area's economic structure and
made a structural transition of the economy both necessary and inevitable. One of
the most significant changes was the rapid growth of the total population and the
labour force. For the area as a whole, the population has been growing at a rate
probably in excess of 3 per cent per year. A large population requires a large amount
of food, clothing, shelter and services. In growth theory, economists usually assume
that the net output of goods and services in the area must exceed population growth
if there is to be any development. While many people frequently over-simplify the
analysis, it is essentially correct to state that Malaysia, even to protect its current levels
of living, would have to increase the value of its economic Output by over 3 per cent
per year.
Population enters the changing picture in another way. Approximately a third
of a country's total population usually is in, or seeks gainful employment in the
economy. The percentage of the total population entering the labour market depends
on the age and sex distribution of the population since the very old and the young,
and a high percentage of women, usually remain outside the labour market. The
current pattern of population growth in Malaysia is such that a heavy percentage of
the population is concentrated in the very young age segments. In the future,
indications are that this will change and a higher percentage of the total population
will be in the labour market.
There is one other qualitative effect that should not be overlooked. Not only
will a large number of net additions to the labour force take place but both the
aspiration levels and the consumption horizon of the population will continue to change.
More people will want more and better food, clothing or shelter, higher education and
better transport. Population growth will thus compound increasing numbers with
increasing individual expectations; the result is demand for greater output to be used
either directly or in exchange.
In addition to quantitative and qualitative changes in population, fundamental
technical and economic changes, with lagged impacts, have been taking place in
Malaysia and the world. Beginning in the early years after World War II, rubber
planting and replanting programmes
to be discussed in detail in subsequent chapters
- have been organized in the various states of Malaya. Using improved seed and
bud-grafting from high-yielding clones, a large percentage of rubber acreage has now
been planted or replanted with high-yielding stock.
Significant increases in
productivity per acre, as well as in total output, began in 1958; a continuation of the
impact of the programme should insure that yields will increase to the point where
annual production will exceed a million tons of rubber by the early seventies. This
level of output is over twice that of prewar decades and 60 per cent higher than the
annual average in the 1950-1960 decade. This represents an impressive accomplishment.
Despite dramatic developments in the natural rubber industry, two important
parallel factors should be recognized. The first is that technological developments in
the synthetic rubber industry in both the United States and Europe
have provided
that will be the major focal point of our interest in this book
products that are technical substitutes for natural rubber in almost all significant uses
and that are technically superior to natural rubber in many uses. Production costs of
high volume substitutes are probably roughly comparable to natural rubber, and have
shown no signs of increasing. The result is that even the most optimistic price
expectations of natural rubber are now substantially lower than the average price
realized in the fifties. While the past decade was a most unusual one, it is well
to note that the average expected price per pound of rubber that can be optimistically
expected in the next ten years is only slightly more than half of the 1950·1960 average.
In other words, the production of almost twice as much rubber will be necessary
to keep a level of income generation equal to that of the 1950-1960 decade.
Production will probably increase dramatically in the years ahead but not sufficiently
to compensate for the decreasing price level.
In the meantime, of course, the population in the Malaysian area sharing the income stream is increasing at a rate that will
double itself in twenty years.
On the employment side, there are also facts which warrant attention. To remain
competitive in a rapidly changing technological market, natural rubber producers must
become more efficient. This efficiency not only calls for increasing rubber yields per
acre and per tree, it also means increased output per worker. Fortunately for its competitive position, labour output is now over the 3,000-pound mark compared with
slightly over 2,000 pounds in the immediate postwar period. In fact labour productivity
on estates has increased in every one of the last ten years, as noted in Table 1..
While increasing labour productivity is both necessary and desirable for natural
rubber's competitive survival at the individual firm level, questions relating to aggregate
employment opportuni ties in the area are raised. The continuing expansion of natural
rubber production in the Malaysian area will probably take place without any significant
net addition to the labour force in the industry. Seen in terms of the steadily increasing
numbers of persons entering the labour market, the non-viability of the only large
industry in the country, at least in terms of absorbing additional labour, is a serious
problem that must be met in some other way.
Both income generation and labour employment opportunities in the tin industry
and in the entrepot services also appear to be substantially less promising in the future
than they have been in the recent past. Average production of tin, for example, is
unlikely to move far beyond the 40,000 to 60,000 tons a year Output of the 1950-1960
decade. This level of output, if new technology is not brought into the picture, will
not provide any additional net increase in employment opportunities. Fortunately,
average tin price expectations over the present decade are approximately the same
as in the 1950-1960 decade.
The future prospects in both income generation and employment opportunities in
the entrepot sector of the Malaysian economy are difficult to predict with any degree
of accuracy. Certain trends suggest a limited viability of this economic sector in the
foreseeable future. It is probable that the total value of Malaysia's imports and exports
will increase, but at a far slower rate than in the past. A good portion of such trade
will be handled through Singapore. Singapore's role as a regional entrepot, however,
is likely to undergo contraction rather than expansion. An increasing amount of direct
shipping from Indonesian and Bornean ports had developed in recent years and total
non-Malaysian tonnage handled by Singapore showed a secular decline even before
"Konfrontasi" came into picture. It is now widely recognized that Singapore's rapid
postwar growth pattern, based largely on its entrepot function in the 1950-1960 decade,
cannot be duplicated unless unusual developments take place in the international sphere.
Roughly summarized, therefore, we can make three points:
The existing structure of the Malaysian economy, based largely on the
narrowly specialized production of rubber and tin and the provision of
entrepot services mostly in Singapore, has provided a high level of income
generation and employment opportunities in the past. By exploiting
absolute and comparative advantages and increasing these through the
In this and in subsequent chapters, the relevant tables and figures are grouped together at the
end of each chapter.
economics of large-scale specialization, Malaysia's economy has reached
levels of prosperity unparalleled in Southeast Asia.
Growth in the physical output of goods and services within the existing
structure will probably continue. Shifting terms of trade against rubber
and no improvement in the terms of trade with tin appear almost inevitable
if the 1950-1960 decade is taken as a base. The prospects for economic
growth in the rubber, tin, and entrepot sectors are further limited by the
developments of increasing direct shipments from out-ports in the Malaysian hinterland.
(3 )
Stagnant and negative expectations in the traditional rubber-tin-entrepot
complex are paralleled by rapid increases in Malaysia's population and
labour force. The conclusion is inevitable that the economy must move
into different activities if it is even to protect the existing level of per capita
welfare of the population. To grow economically, it will have to develop
and expand rapidly in new fields of economic activities.
To suggest that the contemporary economic structure of Malaysia is non-viable
as a base for the nation's future economic development begs the important question
of what are the alternative paths along which Malaysian development can take place.
Certain aspects of the problem stand out in bold relief. The first is the relatively
restricted natural resource base from which the area economy must operate. With
the exception of the Seria oilfields in Sarawak with their declining productivity, and
scattered small coal beds, most of which are of low quality, Malaysia is without fossil
fuel resources. Malaysia's hydro-electric potential near settled areas is also small
although both Sa bah and Sarawak have subs tantial potentials in outlying areas which
might ultimately warrant development. Mineral resources other than tin and modest
amounts of iron and bauxite are largely absent; with some limited exceptions, one
can also state that the tropical soils of Malaysia are relatively poor and tree crops
are usually the ooly "safe" crops from ao ecological points of view.
The Malaysian area does possess large forest reserves; in the immediate years
to come these will undoubtedly become one of the major sectors of development in
the economy although the basic questions of conservation practices versus commercial
exploitation remain to be resolved. The fishing industry has also some expansion
but plankton counts are low in most Malaysian waters with the result
that fish populations are not large in near-shore waters, and pond culture or deep-sea
fishing are the only promising areas of development for the industry. The livestock
industry has never thrived in Malaysia because of the poor quality of grasses and
of other reasons. Large-scale expansion in this realm does not seem to be in the
By the process of elimination, industrialization appears to be the only alternative
that can, potentially, provide the necessary and desirable income genera tion over time
as well as the labour absorption capacity that is required by expanding population and
labour on the one hand and the contraction of opportunities in the traditional
of the economy on the other. But what type of industrialization is appropriate for
Malaysia with its limited resource base? And what are the means by which
indusltialization can be brought about? These twO questions are so closely intertwined
that one answer invariably depends upon the other.
One reason Malaysia has not industrialized in the past, as we have already
suggested, was that the comparative advantages of labour, land and capital factor use
in the rubber-tin-entrepot complex were so great and the competition from imported
manufacmred goods so intense that it just did not make economic sense to go into
industrial manufacturing activities. Although institutional and attitudinal rigidities
will prevent some changes from taking place, it is already apparent that the comparative advantages in many of the traditional sectors of the economy are no longer as
great as they were and the alternative uses of factors are becoming more attractive.
Thus, market forces themselves will increasingly operate to make industrial activities
relatively more attractive than they have been.
Nevertheless, it is highly likely that industrialization, to proceed at a rapid rate,
will depend to a substamial degree on government attitudes and actions. Of all
government policies designed to promote development, the selective use of tariff
protection is perhaps the most critical. That protective tariffs are a double-edged
sword is clear. The initial impact of protective tariffs is a transfer of real income
away from the consumer to the producer. It is also clear that high protective tariffs
frequently attract grossly inefficient producers, and that serious economic distortions
are bound to arise when markets are heavily protected. On the other hand, it is also
an historical fact that few modern developing nations have industrialized without some
selective use of protective tariffs. The notable exception of Hong Kong must be
in the perspective of the early fifties when a steady stream of refugee labo\¥'
with an amazingly low supply price came into Hong Kong at the same time that
large technical and capital resources from Shanghai became available. Malaysia has
no counterpart of either.
It is difficult to foresee a transition in Malaysia's economic structure which does
not involve a shift from the heretofore low tariff policy geared to a revenue function
to a new selective protective policy geared to making industrial activities serving the
local market more profitable. At the same time, the economic advantages of specialization, particularly in the production of natural rubber, have been so clear over the
post World War II era, that any attempt to transfer resources from a "proven" investment to an "unproven" one is bound to be difficult.
The transition in the Malaysian economy is many sided. It involves a comprehensive change in the pattern of industrial employment and investment now
concentrated in the rubber and tin industries. It involves a steady shift away from
dependence on specialized exports to, and general imports from, the world market.
It involves increasing production for internal consumption. And, from a tariff point
of view, it involves a change from low tariffs, geared to revenue production, to higher
tariffs geared to protective functions. With government planners now playing
such an important role in the economic development equation both as initiators of
government rubber planting and replanting schemes and as incentive and disincentive
creators for all types of alternative investments, the decision of government policy rather
than the market place is bound to become critically important.
Labour Force
in Thousands·
Estate Output
In Thousand Long Tons
OutPut of Rubber Per
Man Year Input,
In Long Tons
27 0.1
• Estimated average yearly employment based on total nnmber of direct and contract employees
on estates during Department of Labour employment census day in mid·year.
Basic data are from Department of Labour Reports in Rubber Statistics Handbooks,
1954-1965, and the National Union of Plantation Workers, First Triennial Report,
1956.1959, Kuala Lumpur, p. XXI.