Malaysia’s independence from British rule was completed in 1963 with the inclusion of Singapore and the Borneo territories of Sabah and Sarawak into the new Malaysian Federation along with Malaya, itself independent since 1957.
The process of decolonization not just need to negotiate between Malaysia and its former colonial master but also need to negotiated between major ethnic groups of the new state. The federal system is devised, in which made an independence agreement whereby Malaysian Chinese would accept Malay dominance of the political in return basic guarantees that their business activities, which dominated the domestic economy, would not be undermined.
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Prior to independence, UMNO forged alliance with the Malaysia Chinese Association (MCA) and the Malaysian Indian Congress (MIC), which defeated a range of the multiethnic unitary parties to form the first government. Prime Minister Tunku Abdul Rahman and the Alliance administration followed a broadly Laissez-faire policy approach, reflecting the independence agreement.
During the 1969 general election, the Alliance performed badly, winning less than fifty percent of the vote. Chinese opposition parties celebrated their success and the counter demonstrations by government supporter soon descended into rioting.
The government argued that the roots that cause the May 13 riots and killings in Kuala Lumpur has been the economic disparities between Malays and non-Malays, a legacy of the colonial administration and its policy of the ethnic division of labor. So the government and Tunku Abdul Razak try to reverse the policy by implemented the New Economic Policy (NEP) in conjunction with the second Malaysia five year plans (1971-1975).
The important point here is that since 1969, the Malaysian government has to a fundamental extent based its claims for legitimacy on its role as ethnic redistributors. The government’s subsequent implementation in 1971 of the twenty-year New Economic Policy (NEP) to address the root causes of interethnic tensions. During the first outline perspective plans (OPP) that is second Malaysian plan to fifth Malaysian plan. Objective of the NEP is separated into two parts that is to reduce and eliminate poverty irrespective of race and to restructure Malay society so as to correct economic imbalance and eliminate the identification of race with the economic function to create conditions for national unity .The enabler for both these goals would be rapid economic growth, the speedy expansion of the economic pie to divide across all Malaysians, so that no subgroup would feel absolutely disadvantaged.
The enabler for both these goals would be rapid economic growth, the speedy expansion of the economic pie to divide across all Malaysians, so that no subgroup would feel absolutely disadvantaged. It promotes national unity and a just society by attacking poverty and increasing Malay participation in the economic sphere through affirmative action programs for Malays.
The goals for restructure Malay society were state very explicitly. It’s an effort to raise Malays equity share by poverty reduction policies in the rural sector through increase income and expansion of employment opportunities in the urban sector from 2.4 per cent in 1971 up to 30 per cent within two decades. The Chinese share would be allowed to grow to 40 per cent and the foreign share would be reduced to 30 per cent. These goals clearly represented a victory for the forces of Malay economic nationalism. Poverty reduction strategies which emphasized increasing income levels of the poor at a faster rate than rest of the population contributed significantly to reducing inter ethnic income inequalities
Malaysia: Distribution of Household Income by Ethnicity, 1970-1999 Mean
The first goal of the restructure is to balance the ratio of the share capital ownership. The capital share of limited companies in 1970 Malays accounted for 2.4% of all share capital of limited companies, versus 63.3% for foreign interests, 27.2% for Chinese ,1.1% for Indians and 6.0 for others (2.4:27.2:63.3) to 30:40:30. This means that to achieve the 30% ownership, there would be a need to significantly increase the ownership of Malay enterprises as well as corporate managerial control and hiring practices.
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Malaysia: Ownership of Limited Company share capital according to ethnic group, 1970-1990
At the result of the NEP, measures have been taken to promote Malay entrepreneurship by setting up a large number of public enterprises. This would mean that while the Malay shares increase, the non-Malay shares would not decrease. To reduce the imbalances in the ownership of assets and wealth the NEP has focus on the financial in all sectors. In 1960s few firm of small and medium-scale industry have the potential to produced for the export market , most of these industries are operated by the Chinese with the implementation of NEP these industries is support by institution such as Majlis Amanah Rakyat (MARA), Bank Pembangunan Malaysia Berhad (BPMB) ,Urban Development Authority (UDA), Malaysian Industrial Development Finance Berhad (MIDF) as well as private commercial bank, serve as channel of credit to the potential Malay entrepreneurs. By the end of the 1970s, the establishment of new Malays firms are faster than Chinese due to the licensing in printing, petrol service station, air and shipping transportation, mining and vehicles import were either solely or predominantly reserved for Malays. Besides, advisory and consultancy support were provide to help Malay to establish their businesses.
NEP sought to boost aggregate economic growth with the export-oriented industry, generous incentives and the provision of free trade zones, industrial estates and licensing manufacturing warehouse attract many multinational industries to Malaysia. The industrial coordination act of 1975 has constraint the Chinese small industries, if they have more than twenty-five full time workers; they are bound to obligation of the equity redistribution. So many Chinese industries remain small or divert their capital to other businesses.
During the second Malaysia five years plan, the government provided incentives and new policies to further expand large-scale manufacturing industries and energy-intensive industries. In 1980, government invested fund for the manufacturing sector, fourth Malaysian five years plan there is a creation of the Heavy Industries Corporation of Malaysia (HICOM) marked the launching of the fully state-owned heavy industry in Malaysia. Other than that there also other public enterprise involved in food processing, construction, resource-based and some other industries.
Malaysian Government’s allocation to the manufacturing sector, 1986-1990
The neo-liberal interpretation neglects the heavy involvement of the Malaysian state in the economy, and the way in which relation between capitalist and the state have shaped the outcomes of the NEP. However the implementation of the NEP, both the Malay and the Chinese political and business leadership appeared essentially satisfied with its results. The policy succeeded in its highly ambitious twin goals of social restructuring across racial lines and poverty reduction mainly within the Malay community.