AGRICULTURE AND FOOD GLOBAL PRACTICE
& POVERTY AND EQUITY GLOBAL PRACTICE
NOVEMBER 2019 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES
Agricultural
Transformation and
Inclusive Growth
The Malaysian Experience
A BRIEF November 20, 2019, Kuala Lumpur, Malaysia
2 A BRIEF | Agricultural Transformation and Inclusive Growth: The Malaysian Experience
Background The audience and the scope of the report: The primary
audience of the report consists of policy makers and
In a span of a half century, the economy of Malaysia has development practitioners interested in what Malaysian
been transformed from a low-income, vulnerable, primary policy makers did on the long march of transformation that
commodity exporter to an upper-middle-income and made it successful and how they did it. Specifically, the
diversified economy where extreme poverty has almost report discusses the major policy decisions and institutional
disappeared. The focus of this report is on the central role structures which enabled Malaysian leadership and its
that agriculture played in this transformation and how it government machinery to translate vision into instruments
was shaped and promoted. A sustainable reduction of that can be implemented and have an impact.
poverty and transition to a higher economic status cannot
be achieved without transforming the agriculture sector. This brief summarizes key findings of the main report,
Experience of Malaysia provides instructive lessons for lessons learned and remaining challenges facing the
countries striving to transform their agriculture sector. Malaysian agriculture. Specifically, the brief summarizes
Malaysia clearly offers a repository of experience on what is achieved and how it was made possible.
agricultural transformation from which other countries at a
lower level of economic development can learn and profit.
This study – Agricultural Transformation and Inclusive Malaysian agricultural transformation:
Growth: the Malaysian Experience – is a joint effort
harvesting the promise
between the Ministry of Economic Affairs (MEA) and the
World Bank to distill lessons from Malaysian experience
and identify remaining key challenges. By any standard of measurement, Malaysia’s agricultural
transformation is a success story. It is consistent with the
Malaysia’s agricultural transformation could be examined stages (or narratives) of agricultural transformation and
from the following perspectives: (figure 1). has delivered on all trademark contributions to economic
development, as postulated in agricultural development
• The share of agricultural GDP in total GDP declined theory.
from around 46 percent in 1961 to 7.7 percent in 2018.
• The ratio of agricultural employment to total First, agriculture has contributed to increased food
employment also declined from 37 percent in 1980 to supplies. This remarkable achievement was accomplished
27 percent in 1991 and 11.1 percent in 2018.1 In the in the face of mounting demand for food driven by three
1960s, it was nearly two-thirds of total employment. forces: high population growth (reaching 3.2 percent in
• In 1987, manufacturing overtook agriculture as the 1963), rising income (from US$1,354 per capita in 1960
major sector for the first time: 22.6 percent versus 21.7 to US$11,528 in 2017, an increase of 752 percent), and
percent, respectively.2 Manufacturing was around 9 urbanization (from 27 percent of the population living in
percent of GDP in 1961 (Yusof and Bhattasali 2008). By urban areas in 1960 to almost 76 percent by 2017).4 Before
2007, it was 30.1 percent of GDP.3 1960, 55 percent of the rice consumed domestically was
produced locally and fed a population of less than eight
Figure 1. Agricultural transformation, main trends, Malaysia million. By 1970, the country was producing 90 percent
50 35,000 of the rice consumed domestically and feeding almost
45 29,662
40
30,000 11 million people. By 2017, production had reached
35 25,000 70 percent self-sufficiency for a population of almost
30
20,000 32 million. This means, by 2017, the agriculture sector,
25
15,000 through domestic production, was able to satisfy the rice
20
15 8,146 10,000
consumption needs of almost three times the population
10
5,000
in 1960.
5
0 0
Second, agriculture has been one of the major sources of
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Agriculture, forestry, and shing, value added (constant 2010 million US$ – right column)
the country’s foreign exchange earnings. Between 1972
Agriculture, forestry, and shing, value added (% of GDP) and 2016, export earnings grew by almost 200 percent.
Employment in agriculture (% of total employment)
In fact, during periods of economic difficulty, agriculture
Source: Computed based on WDI data.
November 20, 2019, Kuala Lumpur, Malaysia 3
was the sector that the country resorted to in support of substantial, the contribution of agriculture throughout the
its export earnings, demonstrating the resilience of the value chain, plus primary agriculture, could reach 16-20
sector. Thus, the export-oriented part of the agriculture percent of gross domestic product (GDP).
sector is one of the pillars of the economy and a significant
contributor to foreign exchange earnings and, through Sixth, agriculture transformation played a determining
investment, to higher income and employment. role in poverty alleviation: The government invested
heavily in agriculture and developed supportive institutions
Third, agriculture was the source of labor supply for the to directly address poverty and inequality. The policy is
expanding sectors of the economy. At independence, justified by dominance of rural poverty – 58.7 percent in
agriculture was the major employment sector (58 percent) 1970. The actions taken to improve access to land and
as is the case in most other countries during the initial phase legalizing land ownership through titling was at the core
of agricultural transformation. As agriculture developed, of poverty alleviation through targeted growth supporting
it released labor to manufacturing, services, and other initiatives. The process of diversification generated
sectors of the economy. The infusion of labor from the the sustained agro-based growth that was essential to
growing working-age population into nonagricultural expanding the economic pie, thus facilitating redistribution
sectors was instrumental in Malaysia’s growth. aimed at alleviating poverty. Where it did not give title to
the rural poor, as in paddy areas, impact on alleviating
Fourth, capital transfers from agriculture to the poverty was not quick. Impact of agriculture on poverty
nonagricultural sector: At the initial stage, Malaysia was realized through many channels: the growth multiplier
depended on tin, timber, and fertile land and, later on, on from the integration of agriculture in the wider economy
oil, gas, and petroleum to finance and successfully harness through agroindustry has worked. Provision of food at
these resources to drive agricultural transformation. a reasonable price protected the poor both in rural and
Beyond financing infrastructure, institutions, projects, and urban areas. Expanding agriculture enhanced government
the development of new agricultural lands, investment revenue, allowing it to invest in targeted poverty
included the infusion of capital to buy equity in foreign alleviation projects. The government also supported a
agricultural firms, thereby taking a major stake in at least number of initiatives that are anchored on agriculture but
18 firms, including Sime Darby, one of the industry leaders. aimed at addressing poverty; e.g, agropolitan, outgrowers
This buyout was undertaken in 1978–82 by a government- schemes. Without the transformation of the agriculture
linked investment company. However, once the agricultural sector, Malaysia couldn’t have been able to drastically
sector transformation was mature, Malaysia’s agricultural reduce poverty.
firms not only became major investors in an array of
businesses, but these agricultural firms transformed
to become transnational companies investing across a Policy insights from the Malaysian
number of continents.5 experience
Fifth, the multiplier effect of a transforming agriculture
was substantial: As the incomes of farmers increased, The pivotal role of national leadership, the government,
their consumption level of goods and services expanded, and the public sector: The role of leadership asserted
creating a market for the growing manufacturing sector itself in the formulation of long-term policies to remake
and revitalizing rural areas and small towns. A study of the Malaysian economy and society. Malaysia’s vision for
the Muda River area found that, for every dollar created nation building required growth with equity and stability.
in the agricultural sector, 80 cents in value addition was Malaysia started on its long march of transformation and
generated in the nonfarm economy. Another study reports inclusive growth when the government launched the New
that, for palm oil, the composite output multiplier was Economic Policy (NEP 1971–90). After independence
3.1, the highest multiplier among the eight sectors with (August 31, 1957) and during the earlier years (1956–70),
high multipliers (tourism, financial services, health care, Malaysia followed a market-centered approach to growth.
education, communication content. and infrastructure, The economy grew at 6 percent a year, but poverty
Greater KL-Klang, and agriculture), and agriculture, without remained widespread, and interethnic tensions ran high.
palm oil, is estimated to have a 2.1 composite output The violent racial riots of May 13, 1969, were a wake-up
multiplier.6 Since Malaysian downstream processing is call. The policy insight is clear: markets alone can deliver
4 A BRIEF | Agricultural Transformation and Inclusive Growth: The Malaysian Experience
growth, but not inclusive growth, especially in a country, Value chain development as a major
such as Malaysia, characterized by dualism and by high
factor in Malaysia’s agricultural
income and wealth inequality.
transformation
Getting agriculture moving is basic to successful
transformation: The government made substantial and Malaysia successfully pursued diversification on at
sustained investments for decades in basic infrastructure for least two fronts in agriculture: The country diversified
agriculture and the rural sector that were critical to getting away from the then dominant rubber to other high-value
agriculture moving. A substantial part of the government’s crops, mainly palm oil, and developed downstream
revenue was invested back into the agricultural sector. activities. In palm oil, the tax on crude palm oil not only
In fact, in the 1970s, on average, 23 percent of the promoted domestic processing, but also attracted foreign
development budget was allocated to agriculture, and, in direct investment in the refining of palm oil. In rubber,
some years, for example in 1973, the share reached almost Malaysia became the largest exporter of medical latex
30 percent of the total development budget. The budget gloves. In cocoa, Malaysia is the largest cocoa grinder in
allocation was also in favor of the development and capital Asia, and the fifth largest in the world. The country also
budget relative to recurrent expenditure: the ratio between imports cereals and dairy products for value addition
development and recurrent expenditure was close to 4:1. and processes foods for export. Such diversification
has allowed value added per agricultural worker to be
Avoiding falling prey to the resource curse: Malaysia is enormously enhanced -- rising from US$6,294 in 1980 to
a resource-rich country (land, petroleum, natural gas, tin, US$19,231 in 2016 (in constant 2010 U.S. dollars), a 206
forests). The government did not squander resources, but percent increase.
created the Khazanah Nasional Berhad, a sovereign wealth
fund with the objective of diversifying revenue sources The government’s principal mode of diversification
and holding strategic assets for long-term economic was value chain development (VCD). In Malaysia, VCD
benefits. History is littered with countries abandoning the was pursued relentlessly in both tree crops (palm oil,
agricultural sector with the discovery of petroleum or other rubber, and cocoa) and food crops (paddy rice and non-
minerals. rice agri-food). VCD was most successful in tree crops
but less successful with paddy rice and other agri-foods,
except poultry. Despite the differential performance across
subsectors, the contribution of tree crop value chains,
including the palm oil complex (43 percent of agricultural
GDP in 2016) transformed Malaysia’s agriculture and agro-
based industry.
Systematic, sustained diversification advanced the
integration of primary agriculture into manufacturing
and the broader nonagricultural economy. Agriculture
indirectly contributed to employment and income
generation because it supplied intermediate inputs
to manufacturing and the industrial sector, including
agribusinesses, food processors, and outlets, such as
supermarkets. According to FAO (2019) agroprocessing
contributed around 10 percent of total value added in
manufacturing. Other estimates show that food processing
industry alone account for “12 percent of the country’s
manufacturing output and is growing at a pace of roughly
three percent per year.”7
Seen from the perspective of the total agricultural
contribution (including value addition along the supply
November 20, 2019, Kuala Lumpur, Malaysia 5
chain and processing) to the country’s GDP, the share is government, are supportive institutions in Malaysia.
much higher than the 8 percent reported. Another institution with substantial positive impact on
smallholder incentives and income is land administration.
The nature of the crop and the enabling policy and
market environment created conditions favorable to Monitoring and evaluation, an important tool in gauging
diversification through VCD for tree crops: This was true the performance of institutions. To maintain the focus on
particularly for oil palm, rubber, and cocoa, or, in general, results, Malaysian leadership periodically reviews how the
tree crops, and policy conditions that had not existed for institutions are performing to determine whether midterm
many operations in the agri-food subsector.8 Five sets of corrections or other realignments are required and to
policy decisions combined to propel VCD in oil palm: help in planning. In 2009, for example, the government
launched the Performance Management and Delivery Unit,
• The government’s strategic diversification into palm oil with convening power, to work with the building blocks
and also into end products of crude palm oil of the public sector to improve performance and design
• The government policy of promoting resource-based and implement the New Economic Model (2010–20). It
manufacturing vigorously and attracting foreign direct identifies mid-course measures to be taken to improve
investment by the late 1960s and early 1970s through performance.
the Investment Incentives Act (1968), the Free Trade
Zone Act (1971), the Promotion of Incentives Act (1986), Land titling, a critical national institution supporting
and the First Industrial Master Plan (1985–95) smallholder integration and addressing extreme poverty:
The government reformed the land administration system
• The tax on crude palm oil, which attracted foreign
in Peninsular Malaysia. Despite the complex institutional
direct investment into palm oil refining
and legal context in land administration, it succeeded in
• The decision to maintain Malaysia as an open trade
issuing provisional and full titles to guarantee property
economy as in colonial times; external tariffs were
rights and tenure security to all titleholders in Peninsular
modest; the mean ad valorem rate was 25 percent with
Malaysia.10 The government eventually undertook
narrow dispersion (Yusof and Bhattasali 2008)
measures to enable qualified titles to be upgraded to full
• Major public investments to promote marketing abroad. titles; thus, from December 2014 to June 2015, 85 percent
of qualified titles in Peninsular Malaysia were converted to
Malaysia did pick a winner in palm oil as palm oil proved full titles.11
to be ideally suited for diversification since palm oil can be
processed into multiple end products, food and nonfood.
Indeed, palm oil has been called “a miracle ingredient in
everything from biscuits to shampoo” (Tullis 2019).9 Inclusiveness of agricultural
transformation centered on strong
smallholder support
Mission-oriented institutions critical for
successful agricultural transformation In Malaysia, smallholders and small farmers dominate
the agricultural landscape. The government’s support for
smallholders and small farmers is not limited to a single or a
Malaysia was able to build competent, mission- couple of approaches. The government has experimented
oriented public institutions to support its agricultural with intervention mechanisms, including resettlement,
transformation: Malaysia’s experience clearly shows the in situ development, area development, agropolitans
critical importance of a competent public sector at federal and agricultural parks, rural urbanization, and economic
and project levels to achieve development results. Among corridors. The support covers both food and commodity
land development and resettlement agencies, the Federal crops. Palm oil, especially for those under FELDA scheme,
Land Development Authority (FELDA) stands out for has exerted a greater impact in improving living standards
successfully integrating smallholders in the palm oil value among the poor. In rice-growing areas, nonfarm income
chain. Commodity Boards, which in many developing is also an important contributor to the earnings of small
countries are infamous for being extractive tools of farmers, representing 30 percent to 50 percent of income.
6 A BRIEF | Agricultural Transformation and Inclusive Growth: The Malaysian Experience
Food security of primary importance to which constrain mechanization; (ii) tenancy problems on
most fruit and vegetable farms; (iii) limited access to R&D
agricultural transformation
and infrastructure; and (iv) inadequate institutional support
from cooperatives because of a lack of entrepreneurship;
Rice self-sufficiency is key to political stability and food this exacerbates the weak bargaining power in the non-rice
security: As in much of the rest of Asia, Malaysia views agri-food subsector relative to other large-scale market
adequate availability of rice as central to political stability, participants, such as millers and traders.
and the achievement of a high RSS level as virtually
synonymous with food security. The government views the
achievement of high RSS levels as a simultaneous advance Lessons learned
on three goals: (i) Food security: High levels of RSS is
viewed as synonymous to food security as rice occupies The time period required for agricultural transformation
a central place in the diets of low-income households, a is shorter if the correct policies are adopted and
vast majority in the early decades; (ii) Poverty reduction: fully implemented. Historical experience shows that
Improved equity through the poverty reduction of paddy earlier transformers required more than 100 years (for
growers, some of the poorest Bumiputera households, instance, the Netherlands and the United Kingdom) or
a priority stakeholder group; and (iii) Stability: Ensuring close to 100 (Japan and the United States). Post–World
price stability and thereby solidifying social peace. War II transformations are taking around 50 years or less
(for example, the Republic of Korea and Malaysia). So,
Bumiputera poverty reduction and price stability were countries involved in agricultural transformation should
achieved, but at a cost: Poverty among Bumiputera paddy take heart from the understanding that transformation can
growers in granary areas has been virtually eradicated, and be achieved in a relatively short time relative to the earlier
extreme poverty has been reduced throughout Malaysia.12 generation of transforming economies.
Paddy growers are among the bottom 40 percent of the
income distribution, but that is relative, not absolute Table 1.1. Malaysia’s agricultural structural
poverty (Omar, Shaharudin, and Tumin 2019). This was transformation was relatively rapid
achieved through high transfer of resource and in fact
Agricultural share of GDP Agricultural share of employment
in 2011-2013, the transfer exceeded the value of paddy
Year Year Years Year Year Years
Country
production. of 40% of 7% required of 40% of 16% required
Netherlands 1800 1965 165 1855 1967 102
Malaysia’s inward-looking and costly approach to food United Kingdom 1788 1901 113 1800 1868 68
security is in stark contrast to its export oriented and United States 1854 1950 96 1897 1950 53
profitable approach to tree crop development. Malaysia’s Japan 1896 1969 73 1940 1971 31
approach is however popular in some corners of the world. China 1967 2016 (8.6%) >45 2007 2016 (27.8)% >9
But the relevance of Malaysia’s experience is a cautionary Korea, Rep. 1965 1991 26 1977 1991 14
1960 2017 1980 2000/01
tale against the approach taken for the results are not Malaysia
(43.7%) (8.8%)
>57
(37.2%) (18.4/15.1%)
20/1
encouraging. The priority accorded to rice, especially
Source: Computed from WDI
domestic production, is currently misplaced given that
Malaysia is undergoing dietary diversification: less rice
consumption in favor of a more varied, protein-rich diet. Markets alone cannot deliver on agricultural
It is not the narrow focus on domestic rice production that transformation and inclusive growth: To get agriculture
has been most instrumental in promoting food security: moving, a sustained level of investment is needed.
it is the entire strategy and implementation of inclusive Unlike the rule-of-thumb approach that prescribes for a
growth through diversification which has transformed 10 percent government budget allocation to agriculture,
Malaysia from a poor country to an upper-middle-income at the early stage of transformation and until the private
country in a span of five decades or so. sector starts to engage substantially, the government has
to do the heavy lifting by committing substantial resources.
The non-rice agri-food subsector: remaining challenges Malaysia’s experience indicates that during the earlier
despite some achievements due to key structural stage of transformation at least 20 percent of the budget
weaknesses, including: (i) uneconomic sizes of farms, was allocated to agriculture.
November 20, 2019, Kuala Lumpur, Malaysia 7
Structural problems in agriculture cannot be effectively well and much better than the paddy rice value chain. On
addressed solely through a subsidy and import one hand this difference can be explained by the difference
substitution approach: The contrast in policy approach in the policy and marketing strategy within which value
to agri-food as import substitutes versus tree crops as chains operate. It is also true that some tree crop products
exports have resulted in different outcomes. The current possess specific characteristics that make them suitable for
import-substituting approach to food security does not value addition and processing into different consumer and
address the structural forces facing the agri-food sector, for industrial products. Tree crops, in most cases, are high-
example, limited land size; growth and evolution in demand value products with returns greater than annual crops.
patterns driven by population; urbanization and income The other major difference relates to the fact that tree
growth; dominance of a few agri-food supply chains; and crop subsector operates in an export-oriented framework,
expansion of supermarkets. Instead of addressing these within which being internationally competitive is essential
profound structural changes, the emphasis has been on to thrive. The agri-food subsector operates in an inward-
increasing self-sufficiency in mass consumption food items oriented, highly protected environment. The experience
to reduce Malaysia’s vulnerability to volatile imports. in Malaysia demonstrates that trade protection is not
necessarily an effective support for efficient development.
High population growth does not necessarily undermine This comparison again shows that the enabling policy and
agricultural transformation: In an environment of institutional environment in terms of public investment,
increasing population, engaging agriculture to reach higher the incentive structure, and competitiveness, and the legal
phases of transformation, particularly the surplus creation and regulatory framework do matter.
stage, is even more demanding because there are more
people to feed and more labor to employ. The significant Value chain success is not entirely due to their direct link
budgetary support to agriculture has helped develop both to global or domestic market structure. A determining
intensive and extensive agriculture, thus employing the factor is the policy environment within which value chains
growing population until the additional labor has been operate, and in particular, how smallholders are integrated
able to migrate to the expanding manufacturing and into the system. Consider the case of Nigeria on policy
service sectors. commitment: Nigeria had a palm oil sector well linked to the
global market and has earned the country up to 20 percent
Countries with more open trading regimes have of all its foreign exchange earnings. Until 1965 Nigeria was
transformed more quickly: Experience shows that earning more from foreign trade than Malaysia. By 2016,
countries with a relatively open trading system have fared the difference cannot be starker. Malaysia received 1,259
better during transformation: France through the enlarged times more foreign exchange earnings than Nigeria during
common market of the European Union, Chile through the same year (see Figure 2 below).
free trade agreements that reach 80 percent of the world
population, and Malaysia through trading arrangements.13 Figure 2. Palm oil exporting earnings – Malaysia and
As a result, agricultural transformation occurred relatively Nigeria (US$000)
more quickly in these countries than in Indonesia, for
20,000,000 25,000
example. For Malaysia, adopting an open economy policy
18,000,000
was critical given the limitations imposed by the size of the
16,000,000 20,000
domestic market. Trading allowed the agricultural sector
14,000,000
to expand by keeping pace with growing global demand,
12,000,000 15,000
which provided the opportunity for agricultural firms to 10,000,000
reach economies of scale, improve competitive efficiency 8,000,000 10,000
and quality, win market share, and meet international 6,000,000
standards. International trade has promoted the transfer of 4,000,000 5,000
knowledge and the flow of foreign direct investment, which 2,000,000
have both contributed to accelerating transformation. 0 0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
The nature of the crop and the overall policy environment Malaysia Nigeria
do indeed matter: It is striking that in Malaysia tree crop
value chains, namely palm oil, rubber and cocoa have fared Note: Left side column figure refers to Malaysia. Source: Computed from FAO STATA
8 A BRIEF | Agricultural Transformation and Inclusive Growth: The Malaysian Experience
Malaysia’s agricultural transformation benefited both Key considerations in advancing
from the green revolution and the recent tropical oil crop
Malaysia’s agricultural transformation
revolution:14 The green revolution resulted in production
and yield increases, mainly in rice, because of the use of
high-yielding varieties and double cropping, following the Going forward, the main policy issue facing the
development of irrigation. Palm oil cultivation expanded government is the sort of agricultural transformation
much more, on average, almost double and, in some cases, that should be sought as part of the stated goal of
almost triple the green revolution levels. The combined reaching high-income status: To reach the fourth stage
effect of these two revolutions generated sustained of agricultural transformation, the authorities need to
growth and poverty reduction in Malaysian smallholder consider a number of scenarios, as follows: (i) agriculture
agriculture. with a stable farming population; (ii) agriculture with the
farming population at a level comparable with high-
Institutions are critical to realizing agricultural income countries, that is, less than 10 percent of the total
transformation: While most institutions in Malaysia are population or even less than 5 percent; (iii) transformation
of the traditional type, such as ministries and research whereby small and medium towns become dynamic centers
agencies, Malaysia also built institutions that are fit for of economic activity aided by technology infusion both to
purpose. Probably the premier institution in this category farming (to reduce labor demand) and local processing
was FELDA. Other institutions specialized in tree crops are (to provide job opportunities to small farmers moving to
FELCRA, RISDA, and the Sarawak Land Consolidation and urban areas). The choice of policy will inevitably have major
Rehabilitation Authority. For in situ development, a number ramifications for the income differential between rural
of authorities were created with defined geographic area and urban sectors. Some insightful lessons are included
coverage such as the Muda Agricultural Development in the main report from France and Korea. At the highest
Authority (MADA) and the Kemubu Agricultural stage of agricultural transformation, income differentials
Development Authority (KADA). Further, Malaysian between agriculture and other sectors disappear. In some
institutions, specifically agricultural commodity and crop countries, the median household income is higher among
boards are supportive not extractive institutions. The list is agricultural households than among households in other
expansive, but the lesson is clear: agricultural transformation sectors as a reflection of higher productivity in agriculture
will require implementation by fit-for-purpose institutions in relative to nonagriculture.
smallholder support, area development, rehabilitation and
replantation, marketing, or crop-based specialization (for A reorientation of food security and agri-food subsector
instance, commodity boards). policy is needed: The lack luster performance of the rice
November 20, 2019, Kuala Lumpur, Malaysia 9
and non-rice agri-food subsector in comparison with the below expectations. It is well known that all regions in a
tree crop subsector shows that a fundamental rethinking country and all subsectors in agriculture do not transform
and reorientation of Malaysia’s policy approach is at equal speed. The various models that have been tested
required. The government’s approach to food security shed light on the design of future interventions in lagging
has to be reoriented from protecting rice as the main regions and subsectors.
consumption staple of a poor, low-income country to
adopting an export-oriented approach (which has worked Agriculture in Malaysia needs to reach a level of
so well in tree crops) to make the agri-food subsector productivity commensurate with high-income status:
internationally competitive in an increasingly globalized The essence of agricultural transformation is the sustainable
world economy. Rather, at issue for the government is the growth and enhancement of productivity. Key among the
need to reconsider how to achieve food price stability steps to be taken are narrowing the productivity difference
cost-effectively: how best to balance the desire to obtain between smallholders and estate farms and across regions;
100 percent domestic production through trade protection realizing the full potential of agriculture; and recording
and the need to complement the advantages of trade with productivity that is comparable with productivity in high-
efficient domestic production. income countries. As of 2017, agricultural value added per
worker in Malaysia was 45 percent of the average among
As consumer preferences change, more demand-side high-income countries. Investment in research should be
interventions are needed: At earlier stages of agricultural accelerated. The advent of the fourth industrial revolution
transformation, the focus was on the supply side to makes the need to enhance intensity in agricultural
produce adequate food to feed the growing population. research more pressing. Improvement of skills at all levels
Transformation has, however, generated fundamental commensurate with new technology needs will be required
changes in consumption patterns in Malaysia and to support productivity enhancement and diversification.
elsewhere; particularly in consumer preferences for more
ultra-processed foods and the trend in eating habits to Diversification is unfinished agenda: Expansion of
take meals away from home and perhaps also with high agricultural land was one of the factors that has contributed
sugar content. This has inflicted massive public health costs to the growth of agriculture. Commodity crops dominate
associated with noncommunicable disease, productive (palm oil accounts for more than 70 percent of the cultivated
hours lost, and other negative effects on productivity. area), and therefore diversification seems to have reversed
A pure market solution is not forthcoming, at least in and it remains as an unfinished agenda. Malaysia’s
the short run. Educated and informed consumers play a achievement in diversification is more at downstream level
critical part through their demand for healthy foods. There than at upstream; the country has developed world-class
is thus an important role for the public sector in enhancing research and processing capacity but in a limited number
awareness and educating the public to demand healthy of crops.
foods. The government has to utilize its regulatory power
and partner with private producers and processors. From agricultural transformation toward rural
transformation: Governments at all levels are striving
Transfer of lessons and models available within to create income-generating livelihood activities to spur
Malaysia to lagging subsectors and regions: One economic development in diverse localities. Settlement
important aspect of Malaysian experience in agricultural patterns have evolved around clusters in small towns and
transformation is government’s readiness to try different in peri-urban and urban areas. The growth prospects of
models of interventions. The FELDA model demonstrates agriculture and the rural space are highly intertwined and
clearly the government’s willingness to try a new model interlinked and therefore should be treated as a system.
and build on it. Integrated rural development programs, Such a holistic approach recognizes that agricultural
development corridors, agricultural parks, Halal, small town transformation at this stage of development requires a
development, millennium villages, outgrower schemes, package of economy-wide interventions. Policy directions
and agro-youth entrepreneurs are some of the intervention should therefore strive toward rural transformation through
mechanisms that have been implemented. They clearly a holistic approach to revitalize a given geographic area
show the depth of experience Malaysia has accumulated in with the aim of treating rural space as an economic entity
the last 60-plus years. Some have had outstanding impact; composed of different sectors wherein agriculture plays a
some have struggled; and the results of some have been major role.
10 A BRIEF | Agricultural Transformation and Inclusive Growth: The Malaysian Experience
A shift from extensive farming to an environmentally a major impact by reducing productivity. With this risk
and socially sustainable intensive farming system: looking in the background, the multifunctionality of the
There are four areas that raised environmental and social various agricultural systems needs to be defined more
concerns, mainly related to palm oil: (i) loss of biodiversity clearly to allow the country to craft a transformational
through the expansion of plantations in areas considered adaptation strategy in response to climate change. The
biodiversity hotspots, such as the Sundaland;15 (ii) customary government is fully cognizant of the problem and has
land rights and the land grabs that are affecting indigenous adopted important measures, but needs to build on
communities and ethnic minorities; (iii) greenhouse gas its actions as new evidence and technologies appear in
emissions, especially methane from palm oil mill effluent: support of adaptation toward climate smart agriculture.
the most common method of dealing with the effluent is to
discharge it into open ponds or lagoons, which is usually No country has made a transition to high-income
favored because it is the least costly solution (the private status without successful agricultural transformation:
cost only); and (iv) labor rights and disputes involving “Not taking advantage of the transformative role of
laborers, who are often poorly housed and experience agriculture slows and delays economic transformation
poor living conditions and who point to violations of to the detriment of the growth rate, poverty reduction,
basic international labor norms. The government is aware food security, and the broad welfare of urban and rural
of the challenges that this nexus of sustainability issues people.”16 Thus, at the heart of a country’s economic
poses. Progress has been made on some plantations. structural transformation is agriculture. Failure to ensure
However, there is a need to brand Malaysian palm oil as successful agricultural transformation is tantamount to
a custodian of sustainable management. As the reliance postponing (or delaying, at best) the overall economic
grows on intensive agriculture, especially through the transformation, exposing the whole economy to the risk
support of smart agriculture, some of these concerns can of the middle-income trap. It would also limit the capacity
be addressed as long as the government continues to to reduce dualism; address inequality between rural and
use its convening power, discharge its regulatory duties, urban, on one hand; and agriculture and other sectors,
and utilize incentives for sustainable management. All on the other; thereby increasing the risk of sociopolitical
producers must realize that sustainable management instability. The need to continue on the journey that
promotes a substantial gain in productivity. Malaysia started some 60-years back: for building on the
remarkable achievements made thus far is not an option,
Climate change poses a critical challenge for future but a necessity.
agricultural sector performance: Weather phenomena
and climate change have a history of negatively affecting
the agricultural sector of Malaysia. For instance, the recent Please contact Samuel Taffesse, the lead author of this
El Niño phenomenon has been considered the main factor report, at staffesse@worldbank.org if you have questions
in a fall in oil palm production. Climate change will have or comments with respect to content.
November 20, 2019, Kuala Lumpur, Malaysia 11
Notes
1. ILO data retrieved Sept 2018 by WDI, https://data.worldbank.org/ 12. Granaries are areas dedicated to paddy rice production. There are 10
indicator/sl.agr.empl.zs. granaries. They represent the hub of paddy production in Malaysia.
2. Ahmad, Tengku Moyd Ariff Tengku and Chubashini Suntharalingam. 13. The comparator countries are Chile, France, and Indonesia.
“Transformation and Economic Growth of the Malaysian Agriculture”,
14. The term tropical oil crop revolution was coined by Byerlee, Derek,
in Economic and Technology Management Review, Vol. 4 (2009):
Walter P Falcon, and Rosalind L Naylor (2016, Oxford University
1-10
Press). The revolution has brought major improvements in living
3. Rasiah, Rajah. 2011. “Industrialization: I. Industrialization and standards and in poverty reduction. In contrasting between the two
Export-Led Growth; II. MIDA: Sustaining the Momentum of Success, agricultural revolutions, they noted rice production increased by 84
Malaysian Investment Development Authority.” Ch. 6 (147–80; percent; wheat 162 percent during 1965-1985 green revolution, while
181–202) in Malaysia: Policies and Issues in Economic Development, the comparable figure for oil palm was an increase of 300 percent in
Institute of Strategic and International Studies, Kuala Lumpur. 1990–2010.
4. Data of WDI (World Development Indicators) (database), World Bank, 15. The Sundaland comprises over 17,000 islands belonging to both
Washington, DC, http://data.worldbank.org/products/wdi. Here, Malaysia and Indonesia; the two largest islands are Borneo and
gross domestic product (GDP) per capita is calculated in constant Sumatra; see https://enviroliteracy.org/ecosystems/hotspots-of-
2010 U.S. dollars. biodiversity/sundaland/.
5. For example, Sime Darby, which made its fortune in agriculture, 16. The quotation is on page 12 of Mellor, John W. (2017), Agricultural
invested first in agribusiness and then in car manufacturing, heavy Development and Economic Transformation: Promoting Growth with
equipment dealerships, supermarket franchising, health care, Poverty Reduction, Palgrave Studies in Agricultural Economics and
logistics, media, retail, and renewable energy in Malaysia and Food Policy Series, New York: Palgrave Macmillan.
across the Asia and Pacific region, while continuing to invest in its
primary palm oil and rubber industry businesses. Sime Darby is now
a transnational corporation and is not alone in reaching such a level
with roots in the agricultural sector. The website is at http://www.
simedarby.com/.
6. Ahmad Fuad, Siti Nadiah, and Ahmad Fauzi Puasa (2011), “National
Key Economic Area Multiplier Impact on Malaysian Economy: An
Input-Output Analysis,” International Journal of Management
Studies 18 (Special Issue): 34–58. Composite means the sum of
direct, indirect, and induced output changes resulting from a one-
unit output change.
7. https://www.export.gov/article?id=Malaysia-Agricultural-Sector.
8. Sultan Nazrin Shah (2019), Striving for Inclusive Development:
From Pangkor to a Modern Malaysian State, Kuala Lumpur: Oxford
University Press. The choice of what commodities to pick also matter
a lot for poverty reduction, but not in a uniform fashion. Local
circumstances matter at least as much as the nature of commodity
production.
9. Tullis, Paul, (2019), “How the World Got Hooked on Palm Oil,”
Guardian, February 19, https://www.theguardian.com/news/2019/
feb/19/palm-oil-ingredient-biscuits-shampoo-environmental.
10. The Torrens title system of land registration was introduced in
Malaysia by the British and is the tenure system implemented by the
National Land Code (1965). The code provided a uniform system
of tenure for the nine Malay States on Peninsular Malaysia and the
Federal Territories. There is a separate legal basis for land tenure
in Sabah and Sarawak, which have different land administration
structures.
11. World Bank (2017), “Enhancing Public Sector Performance: Malaysia’s
Experience with Transforming Land Administration,” Global
Knowledge and Research (November), Malaysia Development
Experience Series, World Bank, Washington, DC, http://documents.
worldbank.org/curated/en/928151510547698367/pdf/121243-
REVISED-World-Bank-Report-06-Land-Administration-FA-FULL-
Web-V2.pdf.