From colonial land rights to Malay corporate shares Entrepreneurship and ethnicity in Malaysia before the New Economic Policy Kenny van der Loos (1023667) MA thesis Economic History Universiteit Leiden Dr. J. T. Lindblad 11 August 2015 1 Contents Abbreviations ............................................................................................................................. 2 Introduction ................................................................................................................................ 3 1. 1920-1941: rubber, rice, and indigenous rights ...................................................................... 9 Malay Malaysians ................................................................................................................. 13 Other indigenous Malaysians ................................................................................................ 17 Chinese Malaysians .............................................................................................................. 21 Indian Malaysians ................................................................................................................. 25 2. 1945-1957: diversification and rural development .............................................................. 28 Malay Malaysians ................................................................................................................. 32 Other indigenous Malaysians ................................................................................................ 35 Chinese Malaysians .............................................................................................................. 39 Indian Malaysians ................................................................................................................. 42 3. 1957-1970: independence and emergent affirmative action ................................................ 45 Malay Malaysians ................................................................................................................. 49 Other indigenous Malaysians ................................................................................................ 57 Chinese Malaysians .............................................................................................................. 65 Indian Malaysians ................................................................................................................. 68 Conclusion ................................................................................................................................ 69 References ................................................................................................................................ 73 2 Abbreviations BNB British North Borneo BNBCC British North Borneo Chartered Company CO Colonial Office EPU Economic Planning Unit FAMA Federal Agricultural Marketing Authority FELDA Federal Land Development Authority FDoI Federal Department of Information FMS Federated Malay States GDP Gross Domestic Product MARA Majlis Amanah Rakyat (Indigenous People’s Trust Council) MCA Malaysian Chinese Association MIC Malaysian Indian Council NEP New Economic Policy NLFCS National Land Finance Cooperative Society PERNAS Perbadanan Nasional Berhad (National Corporation) PFCE Private Final Consumption Expenditure RIDA Rural and Industrial Development Authority SFDC Sarawak Finance Development Corporation SPK Syarikat Permodalan Kebangsaan Berhad (National Investment Company) SS Straits Settlements UMNO United Malays National Organisation UMS Unfederated Malay States WDI World Development Indicators 3 Introduction When the ruling Alliance-coalition of Malaysia suffered a painful defeat in the 1969 general elections this led supporters of two opposition parties to organize celebration marches on the streets of Malaysia’s capital city, Kuala Lumpur. In response, the country’s largest party, the United Malays National Organization (UMNO), rallied its supporters to hit the streets as well. Initially, celebrations elapsed peacefully, but when rumours spread that a number of Malays were attacked by Chinese and Indian Malaysians while wanting to join the main group of UMNO-supporters ethnic riots erupted. As a consequence of these riots, lasting from 13 May until 15 May,1 approximately 600 Malaysians, the majority of whom were of Chinese origin, lost their life.2 The 13 May Incident proved a watershed moment in the history of Malaysia, since it convinced the country’s political leaders that more should be done for Malays in order to prevent similar events from occurring in the future.3 For this reason, the New Economic Policy (NEP) was adopted in 1971. The aims of the NEP were twofold: reducing and eventually eradicating poverty ‘by raising income levels and increasing employment opportunities for all Malaysians, irrespective of race’4 whilst ‘accelerating the process of restructuring Malaysian society to correct economic imbalance, so as to reduce and eventually eliminate the identification of race with economic function.’5 In theory, bumiputras, i.e. Malay Malaysians and other indigenous Malaysians, were to be the beneficiaries of restructuring, but in practice the latter group was largely ignored. Four different mechanisms were deployed for the redistribution of wealth to Malays. First, public enterprises bought shares from, in most cases, foreign-owned companies operating in the country. Subsequently, these shares were either sold on to individual investors or held in a trust fund on behalf of the Malay community. Second, the Industrial Coordination Act, enacted in 1975, required that 30% of equity in manufacturing companies were held by members of this community in 1990, the final year of the NEP. This did not apply to companies exporting more than a fifth of their production.6 Third, Malay entrepreneurs could 1 V. Matheson Hooker, A short history of Malaysia: linking east and west (Crows Nest, New South Wales 2003) 230-231. 2 Time, 23 May 1969. ‘World: Race war in Malaysia’. 3 C. M. Turnbull, A history of Malaysia, Singapore and Brunei (Revised Edition; Sydney etc. 1989) 268. 4 Economic Planning Unit, Second Malaysia Plan, 1971-1975 (Kuala Lumpur 1970) 1. 5 Idem. 6 E. T. Gomez and Jomo K. S., Malaysia’s political economy: politics, patronage and profits (Cambridge etc. 1997) 29-32 and 40-43. 4 obtain business premises and loans under favourable conditions. Fourth, a quota system was set up for the issuing of licenses and government procurement.7 As a consequence, Malay ownership in the plantation and tin mining industry constituted 45% and 50%, respectively, during the mid-1980s; in 1990 Malays owned 19.3% of total equity capital in Malaysia.8 This master’s thesis seeks to analyse whether the favourable competitive position that accrued to Malay Malaysian entrepreneurs under the NEP was historically unique. It addresses the following research question: to what extent did changes in the conditions for the development of entrepreneurship of varying ethnic origin during the period 1920-1970 anticipate the New Economic Policy? A differentiation is made between the four main ethnic groups: the Malay Malaysians, other indigenous Malaysians (primarily Dayaks in East Malaysia), Chinese Malaysians and Indian Malaysians. The term ‘Malaysian’ refers here to the citizenship granted to these groups since independence, not to ethnic origin. The definition of ‘Malay’ is the one given in article 160 of the Federal Constitution of Malaysia, namely ‘a person who professes the religion of Islam, habitually speaks the Malay language, conforms to Malay custom and was before Merdeka Day born in the Federation or in Singapore or born of parents one of whom was born in the Federation or in Singapore, or is on that day domiciled in the Federation or in Singapore; or is the issue of such a person’.9 Consequently, a person belonging to any of the ethnic groups in Malaysia, including the Chinese and Indian groups, may qualify for this status, but they rarely do so in practice. Malaysia has made a significant transformation between 1920 and 1970, both in economic and political terms. Regarding the latter, the geographical area now covering Malaysia, did not become a single constitutional entity until the establishment of the Federation of Malaysia on September 16, 1963. Anno 1920, it was divided into the Straits Settlements (SS) and nine British sultanates (four Federated Malay States (FMS) and five Unfederated Malay States (UMS)) on the peninsula, and two British protectorates on Borneo, Sarawak and British North Borneo (BNB). Not long after World War II, the SS, excluding Singapore and Labuan, FMS and UMS were merged into the Federation of Malaya which gained independence in 1957.10 Meanwhile, the territories on Borneo were brought under direct British control when Sarawak and BNB became Crown Colonies in 1946. Both these 7 S. Ratuva, Politics of preferential treatment: trans-global study of affirmative action and ethnic conflict in Fiji, Malaysia and South Africa (Canberra 2013) 208. 8 Gomez and Jomo, Malaysia’s political economy, 39 and 168. 9 Federal Constitution (15th Reprint; Putrajaya 2010) 153; the text of article 160 has remained unchanged from the 1957 Federal Constitution. 10 Matheson Hooker, Short history of Malaysia, 133-137 and 207. 5 areas remained under British control until 1963 when they first were granted independence, and subsequently were unified with the Federation of Malaya.11 Figure 1: GDP per capita (constant prices), 1920-1970