AGRICULTURE AND FOOD GLOBAL PRACTICE & POVERTY AND EQUITY GLOBAL PRACTICE Public Disclosure Authorized NOVEMBER 2019 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES Agricultural Transformation and Public Disclosure Authorized Inclusive Growth The Malaysian Experience Public Disclosure Authorized Public Disclosure Authorized CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY NOVEMBER 2019 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES Agricultural Transformation and Inclusive Growth The Malaysian Experience AGRICULTURE AND FOOD GLOBAL PRACTICE & POVERTY AND EQUITY GLOBAL PRACTICE About KNOWLEDGE & RESEARCH The World Bank Group’s current partnership with Malaysia is focused on knowledge sharing. It is centered on support for Malaysia’s vision to join the ranks of high-income and developed economies through inclusive and sustainable growth, and to share its lessons with developing countries. In March 2016, the World Bank Group officially launched its Global Knowledge and Research Hub (the Hub) in Malaysia. The Hub is the first of its kind, serving both as a field presence in Malaysia and as a global knowledge and research hub. It focuses on sharing Malaysia’s people- centered development expertise and creating new innovative policy research on local, regional, and global issues. Knowledge & Research reports are flagship work emanating from the teams based in the Malaysia Hub. The Malaysia Development Experience Series captures key lessons from Malaysia relevant for emerging economies in Asia, Africa, and elsewhere that are transitioning out of poverty and into shared prosperity. Cover Photos attribution: © bigstockphoto.com The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory, or the endorsement or acceptance of such boundaries. Please contact Samuel Taffesse, the lead author of this report, at [email protected] if you have questions or comments with respect to content. Table of Contents Acknowledgements v List of Figures vi List of Tables vii List of Boxes vii List of Acronyms viii Executive Summary 1 Introduction 14 Conceptual framework of the report 15 Agricultural transformation from a macro perspective 17 Framing Malaysia’s agricultural transformation 18 I. Overall Policy and Institutional Context 23 The vision and its realization: Institutions as key instruments of policy implementation 24 Implementing the vision: Policies and institutions 25 Plans and budgets for agriculture, rural development, and poverty reduction 25 Plans, policies, and institutions 27 II. Value Chain Development with Inclusive Growth: The Tree Crop Subsector 30 Value chain development: Ideal vehicle for diversification to drive transformation 31 Dominance of the palm oil complex 32 Rubber and cocoa: Increased value addition in processing despite reduced planting 36 Achievements in the tree crop subsector 38 III. Value Chain Development in the Rice and Non-Rice Agri-Food Subsectors 40 Malaysia’s concept of food security 41 Paddy rice policy: Extensive subsidization of an entire value chain 42 Selected features of the non-rice agri-food subsector 44 Fundamental structural changes impacting food markets in higher-income Malaysia 45 IV. Smallholder Farming and Area Development in Malaysia’s Transformation 49 Smallholder agriculture: Definition and characteristics 50 Area development 52 Regional development 54 Agropolitan 55 Table of Contents V. Key Lessons from Malaysia Within a Comparative Perspective 56 Rationale and focus of comparative analysis 57 Similarities and differences between Malaysia and comparator countries 57 Robust pattern in experiences despite diverse contexts 58 VI. Main Achievements and Key Remaining Challenges: What’s Next for Malaysia 63 The new context of agriculture in Malaysia 64 Conclusion 71 Annex A. Institutions and their roles in implementing the government’s vision 74 Annex B. The tree crop subsector: Palm oil, rubber, and cocoa 82 The rise of palm oil: Selected features 82 Rubber and cocoa: Brief background 86 Annex C. Salient features of the rice and non-rice agri-food subsectors 90 Annex D. The drivers of transformation in Malaysia 97 Sources of agricultural growth 98 Conclusions 104 Annex E. Smallholder farming and area development in Malaysia 106 Smallholder agriculture: Definition and characteristics 106 Smallholder farms and agricultural transformation 107 Oil palm farms of smallholders 107 Felda, a model to transform the agricultural sector 108 Area development 110 Nonfarm income: The case of Kada 112 Regional development 112 Annex F. Quantitative comparisons, Malaysia and selected countries 116 Acknowledgements This report is a product of the World Bank’s Agriculture and Food Global Practice and the Poverty and Equity Global Practice. The main authors of the report are Samuel Taffesse and Isabelle Tsakok. The task team was led by Samuel Taffesse and Kenneth Simler, who worked under the supervision of Nathan Belete, Faris Hadad-Zervos and Firas Raad. Other team members included Francis Addeah Darko, Larry Wong Chee Yoong, Aziaton Binti Ahmad, and Tam Thi Do. Luc Christiaensen, James Floyd Tefft, and Holger Kray served as peer reviewers and the team highly benefited from continuous advice provided by Steven Jaffee. Kane Chong provided design and editorial support. Many people inside and outside the World Bank wrote background papers and provided helpful comments. Professor Fatimah Mohamed Arshad provided advice throughout the preparation of the report and during the consultation meetings held in Kuala Lumpur. Background papers for the report were prepared in collaboration with the Food and Agriculture Organization of the United Nations (FAO) and the Institute of Agricultural and Food Policy Studies (IAFPS) at Universiti Putra Malaysia. An FAO team comprising Steven Watkins, Alessandro Carraro, Diletta Parisi, Giovanni Federighi, D. Campus, Monica Paganini and Panagiotis Karfakis produced a background paper on the determinants of agricultural transformation in Malaysia. From IAFPS, Yeong Sheng Tey and Mark Brindal wrote a background paper on value chains and Shaufique F. Sidique and Ashraf Shaharudin produced a background paper on national food security. Asan Ali Golam Hassan, Ibrahim Ngah, Shri-Dewi Applanaidu, Chamhuri Siwar and Nor Diana Mohd Idris provided insights and relevant inputs on the role of smallholder farming and area development in Malaysia’s transformation process. Hezri Adnan wrote a background note on policies and institutions. The work was a collaborative task with Ministry of Economic Affairs and the team benefited from guidance from the officials at the Ministry. Dr. Zunika Mohamad was instrumental in the design of the study and facilitating access to data, Datuk Yatimah Binti Sarjiman provided important feedback and Norazura binti Tadzim and Nur Saleha binti Mohd Zuliaddin facilitated the work of the team. During the different phases of the report preparation, the team received invaluable feedback from officials and officers from the Ministry of Economic Affairs (especially the Agriculture Division), the Ministry of Primary Industries and the Ministry of Agriculture and Agro-based Industries. The report benefitted from extensive consultations and discussions with government practitioners, academicians, NGOs and CSO representatives. The findings, interpretations and conclusions expressed in this report are entirely those of the authors and do not necessarily represent the views of the World Bank, its affiliated organizations, its executive directors, or the governments they represent. Agricultural Transformation and Inclusive Growth: The Malaysian Experience v List of Figures Figure I.1 Agricultural transformation, main trends, Malaysia 17 Figure I.2 Agricultural value added, annual % growth 18 Figure I.3 Population growth (annual %) 19 Figure 1.1 The development trilogy and the role of agriculture 24 Figure 1.2 Agricultural transformation and policy trends 26 Figure 1.3 The development planning horizon, Malaysia 26 Figure 1.4 Key federal institutions involved in agriculture 27 Figure 2.1 Agricultural raw material exports (% of merchandise exports) 38 Figure 3.1 Rice production and paddy planted area, 1961–2016 43 Figure 3.2 Value of food trade, excluding oil and fat, 1990–2017 (RM, millions) 46 Figure 3.3 Value of food trade, including oil and fat, 1990–2017 47 Figure 5.1 Agricultural value added per worker, Chile, Indonesia, and Malaysia, 1980–2016 61 Figure 6.1 Rural population growth, Malaysia (annual %) 64 Figure 6.2 Contribution to value added, 2016 65 Figure 6.3 A tale of two states 69 Figure 6.4 Rural nonfarm income, farming households, KADA area (% of total income) 70 Figure C.1 Rice yield and production, comparison with the main rice producers, 2014 91 Figure D.1 Decomposition of productivity growth 98 Figure D.2 Growth of the ratio of capital to labor, selected sectors 100 Figure D.3 Rubber yield through the years 102 Figure D.4 Area replanted with natural rubber (hectares, 1,000s) 103 Figure D.5 Export of raw rubber and earnings (RM) 103 Figure D.6 Self-sufficiency in vegetables 104 Figure D.7 Yield of vegetable production 104 Figure D.8