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“The Malaccan Strait is the gateway to the East and the West; whoever controls it, controls the world.”

A sentiment shared during the Malaccan Sultanate which reflects the strategic importance of Malaysia being at the crossroads of global trade as seen from the strategic port of Malacca in the 15th century to the bustling trading hubs of today. Yet, Malaysia’s prime position meant it had to continually adapt to shifting international power structures and revolutions of all kinds, most notably the 4th Industrial Revolution that is ongoing, through innovative strategies and pragmatic management of our resources. Now, Malaysia must tread a narrow path to navigate new challenges through a delicate balancing act of shifting national focuses for the future while relying on the legacy of trade and STEM that we have built our foundations upon. In search of solutions, we must understand how Malaysia evolved, drawing insights from both our historical foundations and contemporary realities.

The Malacca Sultanate, at its peak, laid the building blocks of our ability to leverage geography for economic dominance in trade and became a vital nexus for traders from East Asia to the rest of the Old World and vice versa. However, this prominence led to major powers competing for control as the Portuguese, Dutch and later British colonial powers recognised the importance of dictating trade policies to serve their own interests. Under British colonial rule, Malaysia transitioned to a resource-driven economy, exporting tin, rubber and palm oil to fuel global industries. This historical legacy therefore established Malaysia’s position in global trade as a major exporter of palm oil and rubber. However, this also revealed the pitfalls of an economy overly reliant on commodity exports, making it susceptible to colonial exploitation, which limited local development and  global crises such as the Great Depression saw the aggregate value of imports fall on average by 60% whilst World War II destroyed pre-established trade networks as international order fell apart.

Where do we go from here?

This was the question posed to leaders of Malaysia after we gained our independence when it was a largely agrarian society with 45.4% of the GDP being contributed by the agriculture, forestry, and fishing industries in 1961 in statistics given by the World Bank. To bring forth major changes and start a shift away from primary sector industries, we embarked on the First Malaysia Plan, a 5-year plan aimed at developing infrastructure and consolidating our strengths first by developing the agricultural sector through major investments and introduction of new methods which resulted in a major boost in production of rubber and palm oil. One of the most important aspects was also the focus on education through vocational and technical schools which provided the necessary talent pool to draw from for future expansion. In spite of this, most targets were not met and there was unrest due to existing tensions with inequity and failure to alleviate poverty. 

This was one of the factors that spilled over into the disastrous May 13th incident which was largely amongst the lower strata of Malaysian society. Malaysia needed a new plan, and quickly. Thus, the Second Malaysia Plan and New Economic Policy was drafted which seeked overarching changes and significant economic restructuring while walking on a tightrope of socioeconomic demands. Inside the plans, two major operations are imperative to understand our current circumstances in trade and export.

Free Trade Zones and Petroleum.

A free trade zone provides exemptions from custom duties on  exports to foreign nations or other  free trade zones and offers pioneer tax incentives . The free trade zones being set up led to large scale foreign investments and the emergence of major textile, electronics and rubber industrial sectors. The most prominent of the free trade zones was the Bayan Lepas Free Industrial Zone in Penang, known as the Silicon Valley of the East,  which experienced major success as it focused primarily on electronics. This attracted multinational corporations, known as the Eight Samurai, to set up factories and led to the boom in the E&E industry whilst drawing on local talents in Malaysia to do so.

The Petroleum industry was dominated by foreign companies up to the early 1970s which meant that the Malaysian state had a lack of control and centralisation to plan out developments for the sector. This led to the creation of Petronas in 1974 which would secure control of all gas and oil reserves within Malaysia. From here, the rapid expansion of infrastructure such as oil rigs and refineries was imminent and sprung Malaysia into becoming a major player in the global energy market. It should be noted that in 1981 to 1988, 29% to 36% of the government revenue came just from Petronas. So why stop there? Beginning in the 1990s, Petronas represented the Malaysian energy sector and began expanding internationally in many developing nations by securing exploration rights, thus continually boosting our market share and exports.

As we marched into the new millennium, it became increasingly obvious which trump cards we relied on for success in trading and export that were ingrained into our economical structure: the Electrical and Electronics (E&E), palm oil, and energy sectors. Yet, just like a house of cards, it can all come tumbling down if measures are not taken to react to developments in the world. In the case of the E&E industry, the increased competition from Vietnam and Indonesia which can offer extremely competitive pricing would threaten our established position as a leading exporter. For the energy sector, a large global shift to renewables through climate agreements and the volatility of oil prices especially during the 2010s oil glut has shaken the once formidable Petronas which is scrambling to find new options to sustain itself. Regulatory bodies such as the European Union also have limited the usage of palm oil and energy from non-renewables has led to decreased demand and has exposed our economy to another case of over-reliance. All these events have thrown a spanner into the works of the national focus of Malaysia and forced our hand to find new plans.

Not only does Malaysia face issues with its major sectors, we also face broader modern challenges trying to continue staking our claim as a major player in the global economy. A long term issue will be the decline in interest in STEM among the younger generation which raises concerns about the nation’s ability to innovate and sustain the industrial growth we have experienced for decades. Additionally, the most pressing concern on everyone’s mind being climate change demands that Malaysia transitions to more sustainable practices, especially in energy and agriculture, which we still lag behind our competition in Thailand and Vietnam according to the Sustainable Development Goals ranking in 2023. The Fourth Industrial Revolution further complicates matters, as it requires Malaysia to invest heavily in digital transformation, workforce reskilling, and infrastructure upgrades to remain competitive, further stretching our list of priorities to catch up on. Trade partnerships, while vital, are also becoming more complex, with geopolitical tensions influencing supply chains and market access with the struggle for semiconductor production between competing major powers being the issue of our times. 

Malaysia stands at a critical juncture where our traditional strengths in trade and exports must evolve to meet the new technological frontier, spurred on by demands for sustainability and the development of Artificial Intelligence. The pitfalls of relying heavily on E&E, energy, and palm oil are clear, as these sectors face both internal and external pressures. This shows that we must be ready to embrace innovative ideas and diversification to future-proof our economy. However, as seen from our past, success will rely on careful planning and strong leadership as we leverage our rich legacy while preparing for an uncertain future. 

We have a narrow path to tread, lest we repeat the mistakes of our past.