U HA -3 PERPUSTAKAAN NEGARAMALAYSI A T. R. M.P.H. PU ICATION RIAN cNa/e D TABLE OF CONTENTS PAGES ••• Preface 111 ••• Abbreviations Used V1l1 An Overview 1 Chapter I The Malaysian Economy - Chapter II Supply and Demand for Rubber Chapter III - The Competition Between Synthetic And Natural Rubber 35 Chapter IV - Commodity Control Schemes for Rubber 45 Chapter V The Economic Organization of Natural Rubber Production 62 Chapter VI - Natural Rubber and Malaysian Economic Development 77 An Analytical History PERPUSTAKAAN NEGARAMALAYSI A • 1V 9 I, CHAPI'ER I THE MALAYSIAN ECONOMY - AN OVERVIEW· 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. PERPUSTAKAAN NEGARAMALAYSI A • Malaysia in this book refers to the geographic area of Malaya, Singapore and the Borneo States of Sarawak and Sa bah (North Borneo). 2 T. R. MCHALE POST-WORLD WAR II DEVELOPMPNTS 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. PERPUSTAKAAN NEGARAMALAYSI A 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, I \ , RUBBER AND THE MALAYSIAN ECONOMY 3 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. I I > • 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. I I • •• • SOCIAL, ECONOMIC AND TECHNICAL CHANGES 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. PERPUSTAKAAN NEGARAMALAYSI A 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. 4 T. R. McHALE 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 developments 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. PERPUSTAKAAN NEGARAMALAYSI A 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 I RUBBER AND THE MALAYSIAN ECONOMY 5 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. PERPUSTAKAAN NEGARAMALAYSI A Roughly summarized, therefore, we can make three points: (1) • 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. 6 T. R. McHALE economics of large-scale specialization, Malaysia's economy has reached levels of prosperity unparalleled in Southeast Asia. (2) 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. FUTURE DEVELOPMENT 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. PERPUSTAKAAN NEGARAMALAYSI A 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 potential 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 offing. RUBBER AND THE MALAYSIAN ECONOMY 7 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. • PERPUSTAKAAN NEGARAMALAYSI A 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. • 8 T. R. McHALE 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. TABLE I LABOUR PRODUCTIVITY ON MALAYAN ESTATES 1954-1963 Year I Labour Force in Thousands· I Estate Output In Thousand Long Tons I OutPut of Rubber Per Man Year Input, In Long Tons PERPUSTAKAAN NEGARAMALAYSI A I 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 272.2 278.2 280.2 276.7 281.9 282.5 285.3 285.6 286.2 286.3 275.4 27 0.1 345 352 351 368 389 407 413 429 438 458 471 482 1.27 1.27 1.25 1.33 1.38 1.44 1.45 1.50 1.53 1.60 1.71 1.78 • 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. Source: 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.
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