Palm oil and rubber raw material exports form the basis of Malayan economy. At the time of independence, there is no significant manufacturing industry. The desire to link the commercial power of Singapore with the raw material base of Malaya provides an economic impetus for the creation of the Federation of Malaysia in 1963.
Singapore's defection from the Federation in 1965 robs Malaysia of its busiest port. The first in a series of five-year plans calls for industrialization and diversification. It targets education, foreign investment, and infrastructure as keys to development, and sets out liberal trade policies. Bumiputras (ethnic Malays) are still bit players in a Chinese-dominated economy.
The New Economic Policy (NEP) promotes private entrepreneurship and local investment. Malaysia's stability and free-market policies attract investment primarily from Taiwan, Japan, and the United States. Low inflation and a high savings rate spur growth in the Malaysian economy. In 1974, in the wake of the OPEC oil crisis, Malaysia experiences its highest inflation rate (18 percent) of the decade.
Malaysia discovers significant oil and gas reserves in the South China Sea. Oil revenues help fuel the economic boom. Petronas, the state-owned oil company, runs all aspects of oil extraction and production. By 1979, the economy is growing at an annual rate of 5.2 percent, and the manufacturing sector at 8 percent, driven by light industry and electronics.
The government starts a campaign to reduce foreign ownership, including "dawn raids" to buy back Malaysian assets on the London Stock Exchange. Privatization begins and draws criticism as assets are sold to Malay businessmen with government connections. Mahathir says the buyers are proven business "winners." In 1985 Malaysia launches the Proton Saga, the first locally manufactured automobile.
High levels of education and low labor costs make Malaysia a magnet for foreign direct investment. The government undertakes a series of mammoth infrastructure projects, including the world's tallest buildings, the Petronas Towers, and the Cyberjaya high-tech city. Up to 1996, the economy enjoys an average GDP growth rate of more than 8 percent annually, earning Malaysia "economic miracle" status.
The Asian financial crisis of 1997 severely hurts the Malaysian economy. As the collapse of the Thai currency ripples throughout the region, the value of the Malaysian ringgit plunges sharply. Mahathir blames "foreign speculators" for the crisis. Malaysia rejects the IMF bailout package and instead imposes tight controls on all sectors of the economy.
Government controls succeed in averting a deep recession, despite initial foreign skepticism. A diverse economy and relatively low foreign debt provide a measure of stability. Malaysia is quickly back on the road to recovery; by 2002, growth is above 4 percent, exports are growing in double digits, and corporate taxes are cut. The government seeks to purge insolvent firms from the stock exchange.
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