Malaysia in the Era of Globalization #35

Chapter 5: Understanding Globalization

Foreign Investments in the Third World

Countries like Malaysia that were once colonized are rightly sensitive about their independence. Thus they tend to look upon foreigners, including investors, with suspicion. The typical Third World initial experience with foreign investors had been with companies of imperial powers. These companies were concerned primarily with plantations and extractive industries. In Malaysia they were involved in rubber plantations and tin mining. The exploitative nature of such investments was quite obvious. Rubber, tin, and other precious commodities were exported to Britain where they were turned into high-value manufactured goods and then sold back in Malaysia and elsewhere at exorbitant prices. Meanwhile the rubber tappers and tin miners were paid pittance for their efforts. The bulk of the profits were kept in Britain with little if any repatriated to Malaysia. No wonder such investments became easy targets for the nationalists.

Even though those early investments were clearly lopsided and exploitative (asymmetric, to use a modern phrase), nonetheless Malaysia benefited immensely. First, the country would never have known that it was capable of growing rubber had the British not started the plantations. Rubber is not indigenous to the country; the British brought the seedlings from South America via London’s Kew Gardens.

Second, such investments ushered the nation into the world economy. Thus events in other parts of the world impacted Malaysia. Conflicts in the Korean Peninsula in the 1950s resulted in a heightened demand for rubber and the consequent bonanza for Malaysian rubber producers. But it was short lived. With the discovery of synthetic rubber, the bloom was off. Tin too enjoyed an unchallenged market for a while until the ready availability of aluminum brought on by cheap hydroelectric power adversely affected the industry. Now “tin” cans are made of aluminum, and the market for tin collapsed.

For Malaysia these new industries also added a new and volatile political dimension: massive immigrations and the consequent race problems. Pressed by the need for cheap labor, thousands of penniless foreign coolies from China and India were imported, saddling the country with ethnic problems that it is only now beginning to come to terms.

As an aside, we should not blame the British in this regard; economic necessity dictated it. Decades later, independent Malaysia too had to import literally millions of cheap foreign labor to man its industries. Economic dynamics do not recognize race or ethnicity. Employers, local or foreign, native or colonial, always look for lowering the costs of production, and if that involves cheap foreign labor, so be it. In this regard present-day Malaysian political leaders are behaving very much like their earlier colonial masters whom they despised and severely criticized for making decisions based on short-term economic considerations and oblivious of the long-term social consequences.

With the lopsided nature of these early investments, it did not take long for ambitious native politicians to exploit the issue. These colonialists were now also hated as capitalists, out to exploit workers and natives (the two were often synonymous) all in the name of profits. All the good that these companies had done for the host country were forgotten in the nationalists’ rhetoric. The natives had conveniently forgotten that before those rubber plantations came into being, the landscape was nothing but impenetrable jungle. As for the tin, it remained buried underground.

Not surprisingly, with independence the first order of business for these new leaders was to nationalize these industries. They were visible reminders of colonial power as well as symbols of the exploitation of workers (read: natives). Besides, many of these leaders, having been trained at such elite institutions as the London School of Economics, were enamored with central planning and state socialism. They figured that they could run these industries better than the colonialists. The results, as we can now see so readily in Zimbabwe and Zambia, are disastrous. Once productive factories are now rusting under the tropical sun, and the ever-aggressive jungles now reclaim once thriving plantations.

Malaysia took a slightly more sophisticated route but the end results were the same. Instead of outright nationalization, it used its various state corporations to trigger corporate takeovers of these publicly listed colonial companies. Seasoned foreign managers were replaced by less-than-competent but politically powerful local operatives. To cite one particularly outrageous example, Ghaffar Baba, a top UMNO functionary but a man singularly lacking in experience or training in business or management, was made in charge of some of these blue-chip companies. Today not only is he a discredited politician, but he had been named in at least two personal bankruptcy suits. So much for his financial acumen! Sadly there are many Ghaffar Babas out there. Once great names in plantations (Guthrie, Socfin) and mining (Idris Hyraulic, Rahman) are today nothing but hollow corporations, more concerned with developing their real estate holdings than expanding their core expertise.

The next experience with foreign investors was during the pioneer industrialization phase in the decade following independence. These were aimed primarily at import substitution, to save foreign exchange. These second wave of investors were greatly welcomed as they were readily seen as contributing directly to the nation’s well being, first by producing much-needed consumer goods locally, and second for their export earnings. So enamored were Third World countries with these investments that they introduced various incentives to lure investors, including guarantees of a protected home market and generous tax incentives.

This Import Substitution Industrialization (ISI) mindset was popular in the 1950s and 60s in tandem with the dependencia thinking. This mindset looked upon trade as a “zero-sum” exercise: developed countries’ gain must of necessity be at the expense of developing countries. These “infant” industries were thus protected by tariffs to prevent “unfair” competition from well-established foreign firms. It did not take long for these protected industries to ante their demands, which were readily acceded to by a corrupt government. Insulated from the rigors and discipline of the marketplace, these companies would soon become flabby and non-competitive, their products expensively priced but shoddy.

Despite such outcomes, countries like Malaysia remain addicted to such protective instincts, inspired by the apparent successes of Japan and other East Asian countries that had instituted similar protective barriers. I say apparent because today these countries have lost much of their luster. The then prevailing view was that because of the protection afforded, their “infant” industries were able to develop gradually and learned from their mistakes. From those tentative steps in an insulated environment, they were then able to grow and then take on the world.

We all remember the crude jokes of the 1950s and 1960s on what “Made in Japan” implied! Today nobody remembers those ugly jibes anymore. If Japan had not protected those industries, so the argument went, they would not have had a chance to mature into their present highly competitive stature.

Indeed Japan’s success spawned many imitators, especially Malaysia. So impressed was Malaysia that Mahathir started a “Look East” policy in the early 1980’s to ape the Japanese. Come the 1990s however, Japan was a bust, its industries moribund and economy sputtering.

What gives? I will pursue this analysis in the next section.

Next: Missing the Japanese Lesson