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DIIS Seminar Series on State-Business Relations and Economic Development, Spring 2011

DIIS Seminar Series on State-Business Relations and Economic Development, Spring 2011. Development coalitions, foreign business and industrial policy in Malaysia. By Peter Wad, DICM/CBDS, CBS. Agenda. Long waves of economic development: Income-traps and trap-bypassing.

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DIIS Seminar Series on State-Business Relations and Economic Development, Spring 2011

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  1. DIIS Seminar Series on State-Business Relations and Economic Development, Spring 2011 Development coalitions, foreign business and industrial policy in Malaysia. By Peter Wad, DICM/CBDS, CBS

  2. Agenda • Long waves of economic development: • Income-traps and trap-bypassing. • Industrial diversification, deepening and upgrading. • Long waves of political development: • Building state, nation, participation, welfare. • The politics of industrialisation: • Development coalitions, foreign capital and industrial policy. • New Economic Model 2010-2020: • A paradigme shift of economic strategy? • State-business relations, ’Varieties of Capitalism’ and ’Industrial Relations’: • The case of Malaysia. • Conclusion

  3. Long waves of economic development(Source: Yusuf & Nabeshima (2009)

  4. Long waves of economic development(Source: Yusuf & Nabeshima (2009) Tiger Economies under Threat. Washington:WB)

  5. Long waves of economic development • Income-traps: Malaysia’s GNI/capita and overall poverty. • Low-income trap: Malaysia 1960s-1970s? • Incidence of poverty 1970: 49%; 1980: 29% • Middle-income trap: Malaysia 2000s? • GNI USD/capita: 2000: 3,450; 2009:7,350 • Incidence of poverty: 2004: 6%; 2009: 4%. • High-income trap: Not a trap, a ’Vision 2020’ in Malaysia. A trap of welfare state?

  6. Long waves of economic development • Industrialisation: • conceived as industrial diversification, deepening and upgrading (Lauridsen 2008). • Strategic industrial policy aims for improving all aspects. • Industrial diversification in Malaysia: • Declining importance of agriculture, yet still important export items (e.g. palm oil). • Important oil industry. • Manufacturing dominates export. • Services increasingly important.

  7. Long waves of economic development:Industrial diversification (Source: Yusuf & Nabeshima (2009)

  8. Long waves of economic development:Industrial diversification (Source: Yusuf & Nabeshima (2009)

  9. Long waves of economic development:Industrial deepening (Source:Furby (2005) Evaluating the Malaysian EPZs. Lund: LU)

  10. Long waves of economic development:Industrial deepening(Source: IMP3) • Industrial cluster development: • Penang: Electronics (semiconductors). • Shah Alam/Klang Valley: Automotive. • Kerteh, East of Peninsular Malaysia: Petrochemicals. • Muar, Johore: Furniture. • Batu Bahat, Johore: Textile & apperal. • Subang, Selangore: Airospace.

  11. Long waves of economic development:Industrial deepening(Source: Rasiah 2002, 2003) Industrial clusters require: • Human capital formation (education, training). • Enabling environment for entrepreneurship. • En integrated business network of TNCs, local firms, business associations, politicians, local community. • Success: • Penang semiconductor industry (foreign TNCs, local machine tool suppliers). • Penang Skill Development Centre (PSDC) is a model for regional networking. • Failure: • The Multimedia Super Corridor (MSC), KL, in IT – so far a failure.

  12. Long waves of economic development:Industrial upgrading (Source: Yusuf & Nabeshima (2009)

  13. Long waves of economic development:Industrial upgrading (Source: Yusuf & Nabeshima (2009)

  14. Long waves of political development:Political development theory (Source:Burnell & Randall 2005) • State building • Military and administrative structures established. • Malaysia: Independence 1957 under cross-ethnic elite coalition (’Alliance’); Confederation 1963. Singapore excluded 1965. • Nation building • Political culture of national identity & loyalty. • Malaysia: Crisis 1969: Ethnic violence after defeat of ’Alliance’ government loosing control of some local states. • Participatory institution building • Institutions of political democracy & corporatism. • Malaysia: Semi-democracy; 1980s King/sultans clipped; crisis 2008 election gave opposition control of several local states. • Distributional institution building • Redistribution of wealth, welfare. • Malaysia: Affirmative policy for Bumiputera population 1971-

  15. Conflicting development coalitions(Source: Inspired by Stallings 1978)

  16. Strategic Industrial Policy:The stage model of industrialisation:Classic International Division of Labour Industrial Country: UK I II III Commodity Consumer goods Capital goods Interm. goods Developing Country: Malaysia 1950s-60s

  17. Strategic Industrial Policy:The stage model of industrialisation of NIDL – Primary, Secondary &Tertiary ISI, EOI (DDE?) Primary Secondary (Tertiary?) Industrial Country: Global North I II III Commodity Consumer goods Capital goods Interm. goods Developing Country: Malaysia 1970s-2010

  18. Industrial policies of specific industries • Ressource based industry: State acquisition in 1970s. • Capitalist nationalisation of plantations & institutional capitalism (GLCs), increasing use of immigrant labour from 1980s. • Export diversification & deepening. • Development of sector innovation system. • Electronics industry: TNCs 1971- • FDI-led EOI expansion in EPZs (& FTZ/warehouses). • Low-cost, labour intensive industry. Anti-union policy. • Local linkages in Penang state, limited innovation. • Automotive industry: State-TNC alliance 1983-2004. • State-driven national automotive industry (GLCs) with Jap. technology • Captured and lost domestic market; export failure (CBU & parts). • Foreign TNCs acquire control; Proton in dire straits.

  19. Malaysia’s industrialisation strategiesMain emphasis • Industrial diversification (incl. IMP1 1986-95): • Protectionism & Primary ISI 1957-1971 • NEP-strategy & FDI-Primary/Secondary EOI 1971-1981. • State-NEP (SOEs) & Secondary ISI: 1981-1986. • Privatising-NEP & FDI-Secondary EOI: 1986-1991 • Industrial deepening (IMP2 1996-2005): • Vision 2020 of 1991, privatising, industrial deepening & upgrading aiming for tertiary ISI & EOI: 1991-1997. • Crisis and post-crisis governance: Re-nationalisation (GLCs) & re-regulation 1997-2003. • Consolidation, priority of balanced regional development, reduction of big development projects 2003-2009. • Industrial upgrading (IMP3 2006-2020): • Moving up the global value chain. • New Economic Model 2010-2020.

  20. New Economic Model 2010-2020(Source: NEAC 2009)

  21. New Economic Model 2010-2020(Source: EPU/PMD 2010)

  22. New Economic Model 2010(Source: NEAC 2010)

  23. New Economic Model 2010(Source: NEAC 2010)

  24. The New Economic Model 2010-20 Source: NEAC 2010.

  25. The New Economic Model 2010-20 (Source: EPU/PRD 2010).

  26. Role of FDI in New Economic Model • Malaysia’s reliance on inward foreign direct investments was strong in the past. FDI’s share of gross fixed capital formation was 14.4 percent annual average 1995-2005, 21.2 percent in 2007, down to 16.8 percent in 2008 and then falling to 3.5 percent in 2009 (UNCTAD WIR 2010, country fact sheet Malaysia). • Inward FDI flows do seem to increase again in 2010 due to “government’s planned efforts in the 10th Malaysian Plan, the NEM, and GTP in attracting FDI flows (Rasiah & Govindaraju 2011, 6). • But Malaysia’s attractiveness as location for TNC operations relative to its regional competitors has also weakened in recent years. • Malaysia may have changed to a net FDI exporter following the shift from inward and outward FDI flows balancing in 2006 into a surplus of USD 8 billion in outward FDI flow in 2008 (double the amount of inward FDI flow). • A new and more balanced regime of accumulation will have to be installed enabling the government to reconsider the pro-FDI policy of low wages, low unionism and low labour participation in manufacturing and especially in electronics.

  27. Wage trends in East Asian developing countries(Source: Economist 2010-09-04)

  28. Average salary increases based on positions for executives and non-executives (1996-2005) (in %). Source: MHR 2008, 32 (after MEF salary surveys). Note: (¤) average own calculations.

  29. NEM and labour market reforms(NEAC 2010)

  30. New Economic Model 2010(Source: NEAC 2010)

  31. State-business relations:Evans’ transformation theory: The Korean case • Transformation of state-business relationships: Phase 1 Phase 2 Phase 3 Phase 4 Autonomy Embeddedness Neo-dev. state State Big state Big state SMEs Labour Global business Global business Big business Small business

  32. Transformation theory of state-business relations: The Malaysian case (inspired by Bonn Juego, AAU) • Transformation of state-business relationships: Phase 1 Phase 2 Phase 3 Phase 4? (1957-69) (1990s-2000s) Authoritarian developmentalist state Small state Authoritarian Liberalism Developmentalist state Capital Capital GLCs,TNCs & Bumi SMEs TNCs Social group Small business & foreign resource exporters Small Chinese business Social group Small Chinese business

  33. Varieties of capitalism and IR: LME, CME, HME and Malaysia (inspired by Schneider, various articles)

  34. Varieties of capitalism LME, CME, HME and Developmentalist (D)ME (Malaysia 1971-2010)

  35. Varieties of capitalism & labour markets: LME, CME, HME and MalaysiaSource: Schneider 2009, 562 (LME, CME, LA). Malaysia: Union density (own calculation); Job tenure: MHR 2008, 28; Labour market regulation index: Botero et al. 2004, 1663 (Malaysia 1997); Informal economy (percent of households surveyed 2006): DOS 2009.

  36. Industrial relations: From ’high control’ to ’high commitment’ system (source: Todd, Lansbury, Davis 2004)

  37. Varieties of capitalism: Transition of Malaysia to LME or CME

  38. Advantages: Sustained economic growth per capita. Sustained industrialisation. Poverty alleviation. Political stability &semi-democratic political system. Planning for technological transition. Defending Third World interests internationally. Drawbacks: Dual economy Low-tech industries TNC & FDI dependence Weak R&D Weak policy implementation Strong executive power and weak judiciary system. Civil society exists, but it is controlled or suppressed. Conclusion:Malaysia - success and failure

  39. If Malaysia stalls halfway, why? • Colonialism: established an export-sector for raw material & a multi-ethnic society. Resource abundance. • Post-colonialism: Mainstream to start ISI. • Potential civil war: prevented by authoritarianism and NEP (incl. FDI-driven EOI) /ethno-nationalism. Internal pressures contained. • Political-economic cycles: adaptation during recession and upgrading during boom. External economic, not security vulnerability. • Political structure: the hegemonic party prevails among the ethnic majority and includes other parties in a broad developmental, cross-ethnic coalition (Malaysia Inc., Vision 2020, NEM). • Co-optation or repression of civil society groups (religious communities, trade unions, NGOs). • Development model: ‘authoritatian-developmentalist’ with limited relative autonomy and embedded in ethno-nationalism. Soft repression of organised labour.

  40. Appendix: Systemic vulnerability – Malaysia (Doner, Riche & Slater 2005)

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