Unless the bonds of dependency are loosened, if not eliminated, Malaysia’s continuing economic growth may be jeopardised.

In August 1957, the twin pillars of the economy were rubber and tin. Today, of the top five export earners, four are commodities – palm oil and palm-oil based products, crude oil, liquefied natural gas (LNG) and petroleum products. This underscores the limitations of Malaysia’s industrialisation.

To be sure, this year, this dependency on commodities is richly rewarding for the economy and the government. A jump in prices of palm oil and oil has helped boost export earnings by 15.5% to RM326.9 billion in the first half of this year. Thanks to a smaller rise of 8.3% in imports during the same period, Malaysia’s trade surplus jumped by 54.7% to RM67.6 billion – the 128th month of consecutive surpluses since the Asian Financial Crisis.

Meanwhile, oil is the single largest contributor to federal government revenue. Petroleum income tax and petroleum royalties together with dividends from Petronas collectively totalled RM50.8 billion last year, the Finance Ministry estimates in its Economic Report 2007/2008, accounting for almost 36% of total federal revenue.

Further down the road, however, this dependence is unhealthy. Commodity prices are notoriously volatile and well beyond Malaysia’s ability to ameliorate. Furthermore, oil and LNG are depleting resources while land and labour are major constraints in expanding output, and therefore exports, of palm oil.

More worrying, although E&E products remain this country’s top export earner, growth is declining. In the first half of this year, E&E products totalled RM125.2 billion, 0.1% less than the same period last year.

While lower E&E exports this year are mainly due to the 8.8% drop in exports of electronic integrated circuits which, in turn, is due to weak global demand, going forward, the E&E industry faces several structural problems.

A major problem is failure to deepen this country’s E&E industry beyond low-cost, low-skill and low value-added manufacturing. For example, in manufacturing integrated circuits (ICs), design and fabrication account for 80% of revenue. However, MNCs are largely involved in assembly and testing – a process that generates just 8% to 12% of IC revenue.

This suggests Malaysia has swapped the production of commodities like rubber and palm oil for a manufactured commodity like integrated circuits that can be made by any country.

Another problem is the high level of MNC involvement in this country’s E&E industry. Foreign direct investment (FDI) in the E&E industry jumped from 46% in 1985 to 85.8% in 2006. Although this reflects Malaysia’s attractiveness as an investment destination, it also suggests future growth in the E&E sector will be held hostage to foreigners’ perception of this country’s political stability and economic growth prospects.

Furthermore, competition for MNC investment in E&E is intensifying. Countries like Thailand are rapidly narrowing the gap in infrastructure with Malaysia while new entrants like China and Vietnam – offering a large pool of labour and at lower wages than this country – pose a formidable threat.

Yet another factor of production also dependent on foreigners is labour. Malaysia’s workforce totals 10.9 million. As at Jan 31, there were 1.8 million legal foreign workers plus an estimated 300,000 to 500,000 illegals working in this country, totalling an estimated 2.1 to 2.3 million. Of legitimate foreign workers, 591,363 work in manufacturing, 412,923 in plantations and 319,383 as domestic maids.

Apart from potential social problems, depending on massive numbers of low-skilled foreign labour is a crutch. If unchecked, this could become a permanent handicap.

Allowing employers in the E&E industry to import large numbers of foreigners only masks the fact that Malaysia lacks competitiveness in this low-wage sector. More damaging, it also inhibits the push to venture into higher value-added design and fabrication work.

Equally economically misguided is enabling the plantation industry to rely on foreign labour. Planting crops like oil palm should be outsourced to countries like Indonesia that offer low wage costs as well as a plentiful supply of labour and land while managing plantations and undertaking research and development should remain a Malaysian endeavour.

Policymakers and share-holders of plantation companies must remember one simple fact – the British became rich, not because rubber was planted in Britain but through their ownership and management of rubber plantations in this country.

In short, 51 years after this country gained its independence, what is still missing in action is its economic independence.

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Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.