Report No. 1594-MA

Malaysia: New Perspectives onthe Third Malaysia PlanOctober 14, 1977

East Asia and Pacific Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Ringgit1M$ = US$0.401 US$ = M$2.50M$l million = US$400,000

Average rate prevailing in first quarter of 1977

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

This report is based largely on the findings of an economicmission that visited Malaysia in February 1977. The mission consistedof Kevin Young (mission leader) and Alice Calenson (economist).Mr. Willem Bussink (senior economist) participated in the concludingdiscussions of the mission and also took part in drafting the report.Mr. F. Dhanji (economist) also contributed to earlier drafts of thereport. The draft report was discussed with the Government in July 1977

.and updated at that time.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

MALAYSIA: NEW PERSPECTIVES ON THETHIRD MALAYSIA PLAN

TABLE OF CONTENTS

Page No.

COUNTRY DATA

MAP OF MALAYSIA - IBRD No. 3181R1

SUMMARY & CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . i-v

I. THE THIRD MALAYSIA PLAN IN THE LIGHT OFRECENT DEVELOPMENTS . .. . . . . . . . . . . . . . . . .1

Introduction .I... . . . . . . . . . . . . . . . . . . . .Plan Summary . . . . . . . . . .. . . . . . .... .. t ... 2Recent Developments ... . . . . . .. . . . . . .. . . . 6

Past Performance . . . . . . . . . . . . . . . . . . . . . 6Economic Performance in 1976 . . . . . . . . . . . . . . . 8Oil Production . . . . . . . . . . . 12

Implications of Recent Developments . . . . . . . . . . . . 13Foreign Resources ... . . . . . . ...... . . . . . 13Public Sector Resources . .. . . . . . . . . . . . . .. 16

2. INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . 18

Introduction . . . .... ...... ...... ...... ...... ....... ....... 18Private Investment: The Need for a Recovery . . . . . . . . 18Petroleum . . . ... .... .... .. ...... .... .... .... ........ 19Non-oil Investment . . . ....... .. ...... . 20Public Sector Role in Private Investment . . . . . . . . . 27

Public Investment: The Case for an Increase . . . . . . . . 28Overall Size of the Public Investment Program . . . . . 28Infrastructure .... . . . . . . . . . . . . . . . . . . 30

Transport . . . . . . . .. . . . . . . . . . 30Electric Power .... . . . . . . .. . . . . . . . . . 31Water Supply and Sewerage . . . ... . . . . . . . . . . 31Telecommunications. .. .. . . . ............... . . 31

Agriculture .... . . . ... .... . . . . . . . . . 32Social Sectors . . . . . . . . . . .. . . . . . . . .. . 34Housing .... ....... . ;. ... ........ . 34Education .... . . . . . . . . . . . . . . . ... 35Family Planning . . . . . . . . . . . . . . . . . . . . 35

Summary of Possibilities for Increased PublicDevelopment Expenditures ... . . . .... . . . . . . 35

3. PROSPECTS FOR DEVELOPMENT ........ .. . 38

- ii -

LIST OF TABLES IN THE TEXT

Table No. Page No.

1 TMP: Sector Growth Rates and Composition of GDP(in 1970 Prices) . . . . . . . ....................... . 4

2 TMP: Projected Employment 1975-80 . . . . . . . . . . . 53 National Accounts: Present (Interim) Estimates as

Compared to TMP Estimates . . . . . . . . . . .7

4 Balance of Payments. .... .. .. . 95 Income and Output Growth: 1975-76 . . . . . . . . . . . 10

6 Public Sector Consolidated Financial Position, 1975-76. 117 Federal Industrial Development Authority (FIDA),

Investment Applications and Approvals, 1971-76 . . . . . 21

8 International Comparison of Fixed Private Investment,1972-76 . . . . . . . . . 22

9 Prospects for Private Fixed Investment . . . . . . . . . 25

10 Public Investment and Development Expenditures . . . . . 2911 Areas for Additional Government Spending . . . . . . . . 3612 TMP Employment Projections . . . . . . . 42

ANNEX 1: TECHNICAL NOTES

A. Oil Production Sharing Agreement . . . . . . . . . . . . . . . IB. Export Projections ... . . . . . . . . . . . . . . . .. . . 3C. Public Sector Fiscal Projections . . . . . . . . .. . 4

ANNEX 2: SECTOR REVIEWS

Infrastructure . . . . . . . 1. Transport .... . . . . . .... . . . . . . . . . . .. . . 1Electric Power . .... .. ....... . . . . . . . . .. . . 3Water Supply and Sewerage ... . . . . . . . . . . . . .... 4Telecommunications . . . . . . ....... .. ....... . 6

Rural Development and Anti-Poverty Programs . . . . . . . . . . . 6Overview of Agricultural Programs . . . . . . . . . . . . . .. 7In situ Programs . .... ........ . . . . . . . . . . 8New Land Development ... . . . . .. . . .. . ...... . . 12

Priorities for Agricultural Development . . . . .. . . . . . . 15

Social Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . 16Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Education .... . . . . . . . ...... . . . . . . . . . . 18Family Planning . . . . . . . . . . . . . . . . . . . . . . . . 19

STATISTICAL APPENDIX

COUNTRY DATA - MALAYSIA

AREA POPULATION (1975) DENSITY

330 thousand sq km 12,308 (thousand) 37 per sq km

POPULATION CHARACTERISTICS (1970-75 average) HEALTH

Birth rate - 38.7 Population per physician (1973) - 4,400 /aDeath rate - 9.9 Population per hospital bed (1973) - 270 /aPopulation growth rate - 2.7

EDUCATION (1972) ACCESS TO ELECTRICITY (1970)

Adult literacy rate - 60X All dwellings - 432 /aPrimary school enrollment - 92% /a Rural dwellings - 30X /a

GNP PER CAPITA IN 1976: US$860 /b

GROSS NATIONAL PRODUCT IN 1976: ANNUAL RATE OF GROWTH (X in constant prices and M$)

US$ KMn X 1960-65 1965-70 1970-75 1976

GNP at Market Prices 10,561 100.0 6.9 5.6 7.0 11.3Gross Domestic Investment 2,111 20.0 9.4 7.7 6.2 6.6Gross National Saving 2,794 26.5 11.8 7.9 10.8 11.5Current Account Balance 683 6.5 .

Exports of Goods, NFS 5,555 52.6 4.1 6.5 5.8 20.1Imports of Goods, NFS 4,409 41.7 3.3 5.7 4.0 10.8

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1975

Value Added Labor Force V.A. Per WorkerUSS Mln X MIn. I -USS

Agriculture 2,367 29.1 1.9 45.2 1,246 59.7Industry 2,224 27.3 0.6 14.3 3,707 177.5Services 3,553 43.6 1.4 33.3 2,538 121.6Unemployed . . 0.3 7.2

Total/Average 8.144 100.0 4.2 100.0 2.088 100.0

GOVERNMENT FINANCE

General GovernmentM$ Mln X of GDP1976 1976 1973-75

Current Receipts 7,032 25.6 24.9Current Expenditures 6,490 23.6 22.9Public Authorities Surplus 193 0.7 0.6Current Surplus 735 2.7 2.7Development Expenditures 2,965 10.8 10.7Foreign Borrowing (net) 371 1.3 2.0

MONEY. CREDIT AND PRICES 1969 1970 1971 1972 1973 1974 1975 1976

(Million M$ outstanding en4 period)

Money and Quasi-Money 3,724 4,131 4,666 5,770 7,574 8,729 10,001 12,769Bank Credit to Public Sector 909 833 1,045 1,186 1,375 1,746 2,148 3,036Bank Credit to Private Sector 1,841 2,246 2,572 3,014 4,586 5,278 6,084 7,471

(Percentages or Index Numbers)

Money and Quasi-Money as X of GDP 33.1 33.3 36.0 40.4 40.0 37.8 45.1 46.4Consumer Price Index (1967 - 100) 99.4 101.3 102.9 106.2 117.4 137.8 144.0 147.7Annual Percentage Changes in:

Consumer Price Index -0.4 1.9 1.6 3.2 10.5 17.4 4.5 2.6Bank Credit to Public Sector 6.4 -8.4 25.5 13.5 15.9 27.0 14.6 41.3Bank Credit to Private Sector 9.0 21.9 14.6 17.2 52.2 15.1 15.3 22.8

/a Peninsular Malaysia.

/b World Bank Atlas.

not applicable

NOTE: All conversions to dollars in this table are at the average exchange rateprevailing during the period covered.

TRADE PAYMENTS AND CAPITAL FLOWS

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1974-76)

1974 1975 1976 US$ Mln %(US$ million)

Exports of Goods, NFS 4,420 4,076 5,555Imports of Goods, NFS 4,424 3,965 4,409 Rubber 1,087 24.8Resource Gap (deficit = -) -4 111 1,146 Tin 577 13.2Interest Payments (net) -50 -57 -115 Timber 677 15.4Other Factor Payments (net) -199 -172 -291 Palm Oil 441 10.0Net Transfers -58 - 52 -57 Petroleum 441 10.0Balance on Current Account -311 -170 683 All Other Commodities 1,160 26.6

Total 4,384 100.0Direct Foreign Investment 373 229 130Net MLT Borrowing La EXTERNAL DEBT, DECEMBER 31, 1976

Disbursements 182 589 390Amortization 52 75 105 US$ MlnSubtotal 130 514 285

Public Debt, incl. Guaranteed 1,530Other Capital (net) -5 (-502 (-185 Non-Guaranteed Private Debt Other items n.e.i. (_ (_ Total Outstanding & Disbursed 1,530Increase in Reserves (-) -187 -71 -913

Net Official Reserves DEBT-SERVICE RATIO FOR 1976 /b(end year) 1,615 1,695 2,504 %

Fuel and Related Materials Public Debt, incl. Guaranteed 4.3Imports 416 425 519 Non-Guaranteed Private Debtof which: Petroleum 215 .. .. Total Outstanding & Disbursed 4.3

Exports 345 402 744of which: Petroleum 281 355 688

IBRD/IDA LENDING (March 31, 1977)(US$ million)

RATE OF EXCHANGE IBRD

Average rate during period: Outstanding & Disbursed 313.4M$ per US$ US$ per M$ Undisbursed 365.1

Outstanding incl. Undisbursed 678.51971 3.05 0.331972 2.82 0.351973 2.44 0.411974 2.41 0.411975 2.40 0.421976 2.54 0.39

/a Medium and long-term capital flows are obtained from World Bank debt data andare not comparable with balance of payments estimates.

/b Ratio of debt service to exports of goods and nonfactor services... not available

I BRD-3181 Rl050 1100 Iso ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MARCH 1975

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MALAYSIA

NEW PERSPECTIVES ON THE THIRD MALAYSIA PLAN

SUMMARY AND CONCLUSIONS

1. In mid-1976 Malaysia released its Third Malaysia Plan (TMP),covering the period 1976-80. The basic thrust of the TMP is to continuethe effort to implement the country's New Economic Policy, which isdesigned to achieve national unity through the two-pronged objective oferadicating poverty and restructuring society to eliminate the identifica-tion of race with economic function. In this regard, some of the majorobjectives of the TMP are: (i) to reduce the incidence of poverty from 44%in 1975 to 34% by 1980; (ii) to increase the share of employment of Malaysand other indigenous people in the modern sectors of the economy from 32%in 1975 to a significantly higher percentage in 1980, on the way to the1990 goal of 50%; and (iii) to increase the Malay share in the equityownership of the corporate sector from 8% in 1975 to 16% in 1980.

2. The TMP goals are set out in a framework of substantial economicgrowth. The target average growth rate for real GDP is 8.5% per annum.However, a significant further loss in the international terms of trade isassumed, equivalent to a loss in GDP growth of 1% p.a. Given an annual popu-lation growth rate of 2.7%, the result is that per capita real income wouldincrease by 4.8% a year. Investments in fixed assets, in real terms, areprojected to grow in pace with GDP, but with private investment growing sig-nificantly faster (10%) than public investment (6.2%). The overall investmenttarget is M$44 billion, in current prices, over the TMP period. In the macro-economic framework, public investments are set at M$17.4 billion, and developmentexpenditures at M$20.0 billion. The Plan indicates, however, that this levelwill only be reached if more resources become available; the present financingplan provides for development expenditures of only M$18.6 billion, financedby a projected public sector current surplus of M$1.7 billion, domesticborrowing of M$11 billion, and net foreign borrowing of M$5.8 billion.

3. The fundamental strategy of the TMP therefore is to provideoverall growth in incomes and employment via rapid growth in the privatesector. This would be augmented to some extent by public sector investmentin land development and some participation by public corporations in directlyproductive projects. The rest of the public sector program would focus onreducing poverty, on restructuring the distribution of assets and on providingthe social and physical infrastructure for a rapidly growing economy. Withregard to poverty redressal, the TMP allocates one quarter (M$4.7 billion)of. the total public development expenditures to agriculture (compared with22% or M$2.1 billion in the Second Malaysia Plan), M$0.7 billion to low-costhousing, and significant amounts to other essential services in both rural andurban areas. To achieve the restructuring target, almost a fifth (M$3.5 bil-lion) of the total TMP public development expenditures can be related tothe objective of increased Malay participation in the modern sector ofthe economy.

- ii -

4. In view of the essentially favorable outlook for Malaysia seconomy, the basic strategy of the Third Malaysia Plan is well suited toMalaysia s social and economic circumstances. However, improved inform-ation on economic developments during the Second Plan period and eventsduring 1976 throw new light on the policy issues confronting the Government.First, a greater than expected recovery in traditional exports and in theterms of trade in 1976, as well as higher present and prospective levelsof oil production, not only have increased Malaysia s national income sig-nificantly, but also have further eased the two constraints that limit growthin most developing countries: the shortage of foreign exchange and theshortage of public revenues. Second, it now appears that while real privateinvestment increased very sharply during the boom of 1973/74, it fell backconsiderably in 1975 and declined further in 1976. To achieve the TMP targets,private investment would now have to increase on average by 24% a year duringthe four remaining years of the Plan, compared to the average TMP projectionof 10% a year. For 1977, however, investment approvals to date do notindicate an upsurge in private investment.

5. With regard to the first new element in the situation, the magnitudeof the export improvement is considerable. Depending on alternative assumptionson oil production and rubber prices, exports over the five years of the Plancould be M$10-17 billion higher than assumed in the TMP. Largely as a resultof this, public revenues are expected to be higher by M$7-12 billion. (Bycomparison, the country s 1975 GNP is about M$21 billion.) Of particularnote is that about half of the additional revenues accruing to the publicsector would be accounted for by Petronas, the state oil company. Whilethese numbers are of course only projections, the large magnitudes involvedprovide considerable room for error without altering the basic conclusionthat the additional resources available are likely to be significant. Inaddition, the improved export base provides opportunities for increasedforeign borrowing, if necessary.

6. The most likely primary effect of the higher exports on privateincomes is to increase them by about M$5 billion over the Plan period. Theadditional private incomes will have secondary effects on imports, domesticdemand and savings. By 1980 the total result would be a level of privateincomes about 10% higher than forecast in the Plan. If the Government didnot adjust its expenditures to its increased resource level, so that theadditional revenues were saved and there were no secondary income or importeffects, the total effect of the higher exports would be to increase nationalincome by 12% over the TMP forecast for 1980. Under those assumptions, therewould also be a large foreign resource surplus. Compared to the TMP s forecastof a current account deficit of 5% of GDP by 1980, the higher net exports(after allowing for higher imports induced by the increase in private incomes)would result in a surplus of 2.5% of GDP.

- iii -

7. Given Malaysia's still widespread poverty and its restructuringobjectives, it is highly unlikely that the above scenario will be the preferredone. This, then, in the first place raises the question of the possibleimplications of the improved public resource picture for the operationsof the public sector. In the very short run there will be considerableconstraints on the way the new public resources can be spent, with regardboth to implementation capacity and to the overall management of the economy.However, given that the improved resource position is likely to persistthroughout the TMP and beyond, there is no reason to postpone new planningefforts to absorb the resources in an optimal manner. In this regard itseems clear that the two prongs of the NEP could be furthered considerably byan increase in the level of investment, both public and private. The publicsector development program is one of the most direct instruments with whichthe position of the poor can be improved on a sustained basis, in particularthrough programs to improve the productivity of rural households and providehousing and essential services to the urban poor. Thus, on the publicinvestment side the Government may, as a matter of priority, want to reviewthe sector programs and implementation capacities of the various agencies todetermine where additional resources could be productively spent. While thisprocess is normally undertaken at the mid-term review (mid-1978), it would beappropriate to start the review now so that additional appropriations couldbe made as soon as possible. At the same time agencies could be asked tobegin preparing larger programs.

8. Some of the major areas where the Government is considering addi-tional appropriations during the TMP are power, sewerage, telecommunica-tions, and highways. Additional allocations in these areas would increasethe development progam to about M$20 billion. It may be argued that theadditional expenditures in these areas may not be of the highest priority,especially in their direct effect on poverty groups or in their capacity tocreate permanent jobs. While in the Malaysian context, a project thatconcentrates directly on rural poverty ceteris paribus should receive ahigher priority than, for instance, a telecommunications project, theseprojects are not mutually exclusive alternatives under present circumstances.Moreover, the higher incomes resulting from the brighter export prospectswould result in a greater demand for infrastructure. As would be expected,the sectors that can most readily absorb additional funds are the relatively"hard" infrastructure sectors where projects are somewhat easier to design,and consultants and foreign contractors can be used extensively in implement-ation. It would seem appropriate, therefore, in the short term, to allocateadditional money to sectors that can productively absorb it, thus creatingadditional assets as well as providing employment during the constructionperiod. Short-term measures should, however, not be limited to the implement-ation of such projects. To increase the country's medium- and long-termimplementation capacity in other sectors, it will be necessary immediatelyto intensify efforts to identify and prepare additional poverty and employ-ment oriented projects, so that in the medium term additional funds can beallocated to this area. Areas where an expanded program is justified interms of its poverty impact, and where project planning and implementationcapacity could probably be improved significantly to include larger programsduring the TMP, include land development, rural electrification and family

- iv -

planning. In still other areas, it may not be possible to do more during the

TMP than gradually build up the implementation capacity.

9. Since efforts to build up the development program are unlikely, at

least for a few years, to absorb the additional resources available to the

public sector, other areas where additional funds may in the meantime bequickly absorbed may be investigated. There may be good opportunities to

alleviate poverty through capital transfers to the poor, e.g. subsidies for

low income housing and expansion of agricultural credit. Likewise, considera-

tion could be given to reducing or limiting the export duty on rubber,

especially if this measure could be specifically targeted on the poor small-

holders. In addition, expansion of the investment program of a number of

public corporations would also absorb some of these additional resources. In

particular, Petronas, the state oil company, is considering large investments

in the petrochemical industry. Investment decisions have yet to be made, and

would need to be considered in light of other public sector investments, but

the projects being considered at the moment could require an investment of

about M$1.5 billion by Petronas during the TMP. Further, the Government may

consider increasing allocations to other public corporations as a means ofboth accelerating the equity restructuring program and promoting private

investment.

10. While accelerated programs in the public sector are very important,especially in the field of poverty redressal, the success of employment

restructuring will depend largely on developments in the private sector.

Specifically, the more rapid the growth of manufacturing industry, the more

modern employment can be provided to all segments of the growing population.

If additional resources could be used to achieve an acceleration in the

overall growth rate, and especially in manufacturing, it would become easier

to achieve the restructuring objectives of the Government, through the greater

availability of more desirable jobs. The poor performance of private investment

in 1975 and 1976 offers the disquieting possibility that the private sector

will fall short in its contribution to the broad objectives of the Plan. In

this context, the Government is seeking ways to ensure that, in implementing

the Industrial Coordination Act, the announced policy of flexibility and

common sense is followed in practice. If there is an actual or perceived

failure by the Government to be flexible, and private investment does not

recover from its present low level, the restructuring targets could only be

achieved at the expense of increased unemployment and underemployment among

non-Malays. Because of the socially disruptive consequences of such a

development, this would probably not be allowed to happen. Moreover, in viewof the prospect of higher purchasing power, the scope for private investment

opportunities, from the demand side, may be greater. This would allow an

acceleration in the pace of restructuring and thus reduce the need for

Government intervention.

11. If, at the worst, private investment remains at its present low

level (as a percentage of GDP), this would have serious consequences for

both incomes and employment. In terms of private income, it would soon

erode the 10% gain made through higher exports. In terms of overall GDP,it would reduce the 1980 improvement over the TMP forecast from 12% to 4%.

Even this net gain would be shortlived, however, since the lower investmentrate would put the economy on a significantly lower growth trend which, evenwith the higher exports, would be surpassed in a few years by the TMP highinvestment - low export scenario. Perhaps more significant, however, wouldbe the effect on the growth rate of employment. Here a stagnant level ofprivate investment in relation to GDP would mean, even with higher exportgrowth, that the growth of employment would fall substantially short ofthe 3.5% p.a. forecast in the Plan. The decrease in employment growth in themodern sector would seriously hamper the Government's efforts to reducepoverty, as well as its ability to carry out its objective of restructuringthe racial composition of employment without restricting opportunities fornon-Malays.

12. While, thus, a much higher level of private investment will beessential to attain the longer-term employment and income targets, vigorouspublic expenditure policies can also continue to play a major role in Malaysia'sdevelopment, both by providing employment through its projects and by increasingthe incomes and welfare of Malaysia's poor. In addition, the Government willbe instrumental in promoting the restructuring of equity ownership throughits purchase of shares to be held in trust for Malays. Given the availabilityof resources and the significant contribution that higher levels of bothpublic and private investment would make towards reaching the restructuringand poverty eradication goals of the Government, an investment maximizationstrategy would be appropriate. Such a strategy would mean attempting inthe short- and medium-term to promote a recovery of private investment, whichimplies more than doubling the current level in real terms, and attempting toexpand the public development program as rapidly as can reasonably be done,consistent with the available resources.

13. Even this strategy would fail to exhaust the resources availableto Malaysia during the Third Plan period. For the long term, therefore,given the widespread poverty in Malaysia, as well as the need to achieve abetter racial balance, there is a strong case for adopting a strategy thatwould absorb more resources. On the private investment side, this wouldimply going beyond the doubling necessary to achieve the TMP objectives to amuch higher level that would rapidly transform and modernize the economy aswell as the structure of employment. On the public expenditure side, thereis every reason to search agressively for and implement policies that willrapidly expand public services and assist the poor in reaching a moresatisfactory standard of living.

1. THE THIRD MALAYSIA PLAN IN THE LIGHT OF RECENT DEVELOPMENTS

Introduction

1.01 Economic planning is a well established practice in PeninsularMalaysia, with the first attempt at planning beginning in 1950. The ThirdMalaysia Plan (TMP), which covers the period 1976-80, is the third five-yearplan to cover both Peninsular Malaysia and the North Borneo states of Sabahand Sarawak. The sophistication of planning has increased considerably duringthe past 25 years from little more than plans to expand various governmentdepartments to the use of interindustry input output models in the currentplan. While the plans have increased their quantitative analysis, theemphasis has been and continues to be on determining an appropriate policymix. Though numerical targets are presented, they are viewed more as guide-lines than as specific quantitative targets that must be achieved for theplan to be a success. To maintain flexibility in the system, the Governmentreviews and revises the plan at its mid-term to allow for changes in externaland internal circumstances that were not anticipated when the plan wasoriginally drafted. Perhaps the most important feature of planning inMalaysia is that it is taken seriously both by the public and private sectors,and policies are not only reflected in the plan but appear to be determined,in large measure, during the planning process.

1.02 The last World Bank economic report ("Malaysia: Second Plan Per-formance and Third Plan Issues," September 20, 1976, Report No. 1177-MA)focussed on the issues for the TMP and in that context offered suggestionsand made comments while the Plan was being developed. The report was largelywritten and discussed with the Government before the Plan was drafted andtherefore was able to make only passing references to the finalized Plan.The present report was initially designed to review the TMP, as finalized,and also to discuss economic events in Malaysia during the past year.However, in the course of its preparation it became clear that circumstanceshad changed significantly, and the emphais of the report shifted towards theassessment of the implications of these developments for the Plan. Thus,Chapter 1 has three principal objectives. First, a brief summary of the mainelements of the TMP is provided, to give a point of reference for the furtherdiscussion in this report. Second, the new information that has becomeavailable since the TMP was drafted and that has important implicationsfor the longer term prospects of the Malaysian economy is appraised. Amongother things, this section includes a brief review of the performance of theeconomy in 1976. In the final section of this chapter the prima facie im-plications of the increased availability of resources for the rest of thedecade is analyzed in light of the economic growth prospects outlined in theTMP. Chapter 2 then discusses the possibility of absorbing these additionalresources through higher levels of investment, both public and private.Chapter 3 summarizes briefly the alternative strategies that the Governmentmay pursue for the rest of the TMP and beyond and their implications. Annex 1provides three technical notes on the assumptions used in export and fiscalprojections. Annex 2 reviews the TMP programs for the principal sectors anddiscusses ways in which these programs may be increased. These reviews arebriefly summarized in Chapter 2.

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Plan Summary

1.03 The basic thrust of the TMP is to continue the effort to implementthe country's New Economic Policy (NEP) which is designed to achieve nationalunity through the two-pronged objective of eradicating poverty and restructur-ing society to eliminate the identification of race with economic function.With regard to the poverty objective, the TMP allocates 38% (M$7.1 billion)of the public development expenditure to poverty redressal. At the end ofthe Plan it is hoped that the incidence of poverty would have declined by 10percentage points from 44% of all households to 34%. This is to be comparedwith the 5 percentage point decline achieved during the Second Malaysia Plan(SMP), which was, however, unfavorably influenced (just as the success ofthe Third Plan will be enhanced) by the fact that the SMP ended in recession.The movement across the poverty line also implies that a significant, al-though undetermined, increase in incomes below the poverty line is likelyto be achieved.

1.04 The need to transform the Malaysian economy into one which isrepresentative of the ethnic origins of the Malaysian people is the other majortheme of the TMP. The Plan addresses itself to restructuring on two fronts.It seeks to encourage the assimilation of Malays into the modern sector by:(a) requiring greater Malay employment in commercial and industrial spheresand (b) increasing Malay shares in the management and ownership of assets.It is proposed that by 1990 employment by sector and by occupation will bebroadly representative of the racial compositon of the population and that by1980 Malays will own 16% of corporate capital compared to 8% in 1975 and theeventual 1990 goal of 30%.

1.05 The Plan argues that the broad objectives are attainable and willnot inflict heavy costs on non-Malays. Both the employment and ownershiptargets are to be achieved through growth. It will not be necessary toredistribute the existing stock of assets and employment. In practice thismeans that a greater proportion of the growth of modern sector employmentand of asset ownership will be reserved for Malays than for non-Malays.Whilst non-Malay groups will experience declines in their relative shares ofemployment and asset ownership, their absolute participation in the economyis expected to increase. (The largest relative decline in ownership ofcorporate assets will be by foreigners.) In short, the economy is expectedto grow at a sufficient pace to yield benefits to all. In this context, theTMP sets as an objective a real GDP growth rate of 8.5% a year. With a fore-cast 9% decline in the terms of trade over the period, the TRP estimates realgross national income to increase by about 7.6% a year and on a per capitabasis by 4.8%.

1.06 This overall growth forecast implies a slight deceleration in theunderlying trend as compared with the SMP./1 The forecast is based on a

/1 As the previous economic report (No. 1177-MA) noted, if a correction ismade for the abnormally low level of economic activity in 1975, the SMPgrowth is 8% p.a. and the TMP growth 7.7% p.a.

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continuation of rapid growth of manufacturing (12% per annum) together witha continued significant growth in agriculture (6%). The major new ele-ment is the acceleration in mining due to higher oil production (see Table 1).

1.07 Real exports of goods and nonfactor services are projected to growat 8.4% p.a. compared to 8.1% p.a. for imports. However, the projecteddecline in the terms of trade results in only a 6.8% p.a. increase in thecapacity to import /1 during the period. As a result, the current accountdeficit in the balance of payments is projected to increase from 1.0% of GNPin 1975 to 4.8% in 1980. The cumulative current account deficit during theTIP is projected at M$5.2 billion or 3.3% of GNP. To finance this gap aswell as to make provision for some accumulation of reserves and normalshort-term outflows, the TIP estimates that the capital inflow required wouldbe M$9.5 billion (net) of which M$5.8 would be official long-term capitalinflows.

1.08 In order to attain the TMP growth targets, as well as to continueexpansion beyond 1980, the TMP sets a target level of investment of M$44billion over the period, of which M$17.4 billion would be public investmentand M$26.6 billion private. In real terms gross investment in fixed assetswould grow at 8.4% a year, in line with the growth of real GDP. This meansa continuation of the high rate of fixed investment of over 20% of GDP whichwas achieved by the end of the SMP. Within the total, private fixed invest-ment is targeted to expand significantly faster than public investment, 9.9%p.a. compared to 6.2%. However, for the time being, development expenditurehas been allocated at a lower level than is consistent with the investmenttarget; on the basis of development expenditures actually allocated, publicinvestments over the TMP period will be nearly 10% lower than indicatedabove, implying an average annual growth rate of about 3% for public invest-ments, and one of 7% for total investments. The Plan states that it will bethe Government's strategy to ensure that, as more resources become available,the size of the development expenditure program is increased (to M$20 billion)so that the investment target is fully realized.

/L Exports of goods and nonfactor services divided by the import price index.

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Table 1: TMP: SECTOR GROWTH RATES AND COMPOSITION OF GDP(in 1970 prices)

AverageAnnualGrowth Percent of GDP

1970-75 1975-80 1970 1975 1980

Agriculture 5.9 6.0 32.1 29.8 26.5Mining 0.0 5.7 5.7 4.0 3.5Manufacturing 10.9 12.0 12.2 14.3 16.8Construction 8.1 8.7 4.5 4.6 4.7Utilities 10.4 9.2 2.3 2.6 2.7Transport 12.6 8.3 5.7 7.2 7.1Trade 7.9 8.4 13.3 13.6 13.5Business Services 5.8 8.4 7.8 7.2 7.2Government Services 8.6 9.6 7.4 7.8 8.2Personal Services 7.2 9.5 8.2 8.1 8.4

GDP at factor cost /a 7.4 8.5 100.0 100.0 100.0

/a Includes statistical discrepancy.

Source: TMP and supporting EPU tables.

1.09 Based on the sector growth rate projections discussed above, theTMP estimates that employment will grow at 3.5% a year during 1975-80 comparedto 3.3% a year achieved during the SMP (see Table 2). The overall employmentelasticity is estimated at 0.42, which is slightly less than the elasticityof 0.45 which prevailed during the SMP period. Four sectors would accountfor over 80% of the increase in employment. The large existing employmentin agriculture tends to offset its low absorptive capacity (employment growthof only 1.3% p.a.) and results in this sector accounting for 17% of the addi-tional employment. On the other hand, the rapid growth in manufacturingcombined with a high employment elasticity (0.63) results in manufacturingaccounting for 23% of the additional jobs. Wholesale and retail trade andpublic administration, education, health and defense would together accountfor 42% of the new employment. Overall, with an estimated 3.3% growth in thelabor force during the TMP, the slightly faster growth in employment wouldresult in a reduction in the rate of unemployment from the 7.0% estimated in1975 to 6.1% in 1980. Unemployment would increase slightly in absolute terms.

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TABLE 2: TMP: PROJECTED EMPLOYMENT1975-80

Estimated Employment Share in Average Implied('000) job annual elasticity of

creation increase employment1975 1980 1975-80(%) 1975-80 1975-80

% p.a.

Agriculture /a 1,937 2,063 17.0 1.3 0.22Manufacturing 398 568 22.9 7.4 0.63Wholesale and retail

trade 496 649 20.6 5.5 0.67Public administration

education, healthand defense 508 668 21.4 5.6 0.60

Other /b 589 723 18.1 4.2 0.45Total 3,928 4,671 100.0 3.5 0.42

Labor force 4,225 4,973 - 3.3Unemployment 297 302 - 0.3

/a Includes forestry and fishing.

/b Consists of mining and quarrying, construction, utilities, transport,storage and communications, banking, insurance and real estate, andother services.

Source: TMP

1.10 While the TMP does not provide 1980 employment restructuring targets,these employment projections should allow restructuring to proceed at leastas rapidly as during the SMP, when Malays increased their share of employmentfrom 31% to 37% in the secondary sector and from 38% to 42% in the tertiarysector. The TMP employment growth projections for the secondary and tertiarysectors are both somewhat higher than was achieved during the SMP, while asignificantly lower rate of absorption by the agriculture sector is assumed.However, the input-output estimates made in conjunction with the previousWorld Bank economic report (Annex V, Report No. 1177-MA) suggest that theEconomic Planning Unit (EPU) estimates for employment in services may be toohigh for both 1970-75 and 1975-80, and therefore employment in the agriculturalsector, which is largely a residual employer, too low. The model estimatesagricultural employment growth at 2.3% p.a. and service employment growth of5.0% during 1975-80 for Peninsular Malaysia, compared to EPU's estimates of1.4% and 5.4% respectively.

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Recent Developments

1.11 Since the Plan was prepared, three significant events have occurredthat have considerably altered the macro and resource outlook. First, recentre-estimates of the national accounts for 1970-75 significantly change theeconomic picture of that period, including that of the benchmark year 1975.Second, there was a greater than expected recovery in the economy in 1976,except for private investment which failed to recover significantly from itslow 1975 level. Third, the prospects for oil production are now more favorablethan was previously projected, largely as a result of the recent conclusion ofa production sharing agreement between the Government and the oil companies.The following paragraphs discuss these new developments in some detail.

Past Performance

1.12 The Department of Statistics in Malaysia has decided to adoptthe new United Nations' system of national accounts and is currently re-estimating Malaysia's historical national accounts to conform to the newsystem. This process will probably take at least another six months tocomplete. In the interim the Department of Statistics has made available thepartial results of this exercise to date. While not a complete finalizedseries, these data provide the core of the new series which the authoritieshave indicated they will eventually adopt. On the basis of these numbers,an interim set of national accounts was estimated by the World Bank (seeTable 3 and Table 2.1 in the Statistical Appendix)./l

1.13 The new estimates not only use an improved methodology, but alsolead to quite different results in that they show a much better outcomeduring the 1970-1974 period than do the figures that were used in the TMP.Conversely, the new figures show a large decline in fixed investment in 1975.For the period as a whole, the major difference is that the new estimatesshow a much smaller increase in import prices during the SMP: 62% comparedto the TMP estimate of 94%./2 As a result, the real growth of imports

/1 The data for 1970-1975 consist of the latest (July 1977) Departmentof Statistics estimates for Peninsular Malaysia, combined with older datafor Sabah and Sarawak. The data for 1976 have been estimated by theWorld Bank on the basis of indicators supplied by the Department ofStatistics.

/2 The reason for this substantial difference between the old and newestimates of import price changes is due to significant differences inthe way these indices measure price change rather than any revisions ofactual import prices. The old index (the one used in the TMP) is a unitvalue index which is obtained by dividing import value bv the quantityimported. The danger inherent in using such average unit values is thatthe unit value can change due to changes in the composition of the itemsimported. The new import price index, on the other hand, is a muchbetter reflection of true price change. This index, which was developedin conjunction with the new system of national accounts, insures that theprices of similar brands of a commoditv are computed.

is higher and appears more consistent with the growth of GDP registeredduring this period./l The decline in the terms of trade is estimated to havebeen only 15% compared to 33% estimated in the TMP, and the average annualgrowth in GDY per capita is estimated to have been 2.8% compared to the TMPestimate of 1.7%. There also is a somewhat higher real growth of consumptionin the new estimates (resulting in higher levels in 1975).

Table 3: NATIONAL ACCOUNTS: PRESENT (INTERIM) ESTIMATES AS COMPAREDTO TMP ESTIMATES

(M$ millions, 1970 prices)

Growth Rate p.a.Present (Interim) Estimates TMP Estimates 1970-751970 1974 1975 1970 1974 1975 Interim TMP

GDP 12,425 17,109 17,282 12,510 17,207 17,538 6.8 7.0T of T adj. - 371 -1,102 - -1,201 -2,082 - -GDY 12,425 17,480 16,180 12,510 16,006 15,456 5.4 4.3

Exports(GNFS) 5,367 6,909 7,125 5,367 7,002 7,151 5.8 5.9

Imports(GNFS) 4,807 7,315 5,860 4,807 5,829 4,899 4.0 0.4

Consumption 9,374 12,996 12,655 9,483 11,941 12,106 6.2 5.0Investment 2,491 4,519 3,362 2,467 4,093 3,180 6.2 5.2

Private 1,403 2,456 1,760 1,459 2,140 2,062 4.6 7.2Public 693 1,582 1,943 693 1,438 1,560 22.9 17.6Stocks 395 480 -341 315 515 -442 - -

Price Indices

Imports 100.0 146.3 162.4 100.0 183.6 194.0 10.2 14.2Exports 100.0 154.2 137.3 100.0 152.1 137.5 6.5 6.6Terms of

Trade 100.0 105.4 84.5 100.0 82.8 70.9 -3.2 -6.9GDP 100.0 134.5 130.3 100.0 126.9 127.1 5.5 4.9Investment 100.0 136.3 142.5 100.0 148.1 162.6 7.3 10.2

Source of Interim Estimates: Department of Statistics, working papers,and World Bank Estimates.

/1 The elasticity of real imports to real GDP for 1970-75 is now estimated at0.59. While relatively low because of the recession in 1975, it is muchmore reasonable than the elasticity of 0.05 which is implied by thenational accounts used in the TMP.

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With regard to investment, the lower estimate of import prices leads toa lower increase in the investment price index and obversely a highergrowth in real investment until 1974. The large fall in investment in 1975had however not yet been fully perceived when the Plan was finalized. As aresult, the investment ratio (fixed assets in % of GDP in current prices)in 1975 now appears to be appreciably lower (23%) than in the TMP (26%). Thedifference is due mainly to the fact that the 1975 price index (1970=100) forfixed assets is now estimated to be 12% lower than in the TMP document.

Economic Performance in 1976

1.14 Although the final tabulations have yet to be made, it is nowclear that Malaysia achieved a substantial economic recovery from the 1975recession. Preliminary estimates are that real GNP increased by about 11% in1976 compared to the virtual stagnation in 1975. This growth was sufficientto return the economy approximately to its underlying trend line. The recoverywas led by a sharp increase in exports, which increased by about 19% in realterms, equal to 70% of the growth of GDP. On the production side, there weresignificant increases in most agricultural products, especially in forestryproducts. The manufacturing sector also recovered sharply from its stagnationin 1975 and registered a significant overall increase (possibly as much as20%). The other significant element in the economic picture for 1976 was thelarge increase in oil production (67%).

1.15 On the expenditure side, however, this recovery in 1976 had onemajor weakness: it did not include private investment. All the investmentindicators, imports of machinery and equipment, building and constructionactivity, investments approved by FIDA, and investments from abroad, confirmthat there was a further fall in private investment in 1976. On the basis ofthese indicators, total fixed investment probably fell by 2% in 1976. Givena real increase in public investment of about 5%, private investment probablyfell by about 10%.

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Table 4: BALANCE OF PAYMENTS(M$ million)

1975 1976

Trade account 941 3,715Exports 9,042 13,265Imports 8,101 9,550

Services (net) -1,225 -1,835

Transfers -125 -145

Current account -409 1,735

Long-term capital 1,380 933

Private monetary capital,including errors & omissions -800 -614

Overall balance 171 2,054

Source: Bank Negara. See Table 4.1 in the StatisticalAppendix for details of the balance of payments,1963-76.

1.16 The recovery in exports combined with low investment activity ledto an almost unprecedented balance of payments performance (see Table 4).There were significant increases in the export prices of rubber (14%), tin(20%), saw logs (50%), and sawn timber (25%), as well as increases in volumeof most export commodities, especially petroleum (89%) and forest products(47%). Manufactured exports also increased significantly in real terms(18%), although somewhat less than the impressive 25% average annual growthof the previous five years. Imports, however, increased by only 6.2% inprice and 10.8% in volume, so that a substantial current account surplus ofM$1.7 billion, equivalent to 6.2% of GDP was achieved./l Despite a reductionof market borrowing by the Government, as well as a fall in net corporateinvestment, largely due to the purchase of non-resident shares of London Tinby Pernas, Central Bank reserves increased by M$2.3 billion. As a result, atthe end of 1976, official gross reserves were the equivalent of about sevenmonths of imports of goods and nonfactor services. In addition, Petronasincreased its holdings of foreign exchange by about M$200 million during 1976.

/1 This compares to a cumulative current account deficit over the previousten years of about M$l billion. Only in 1969, when there was also asharp improvement in the terms of trade, was there a current accountsurplus of a similar relative size.

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1.17 As noted in the previous paragraph, one of the major reasons for thelarge increase in foreign exchange earnings in 1976 was the increase in exportprices. Overall export prices are estimated to have increased by 20.1% in1976./I Combined with only a moderate increase in import prices of about6.2%,/2 the terms of trade increased by 13.1%, recovering all the losses thatoccurred during the Second Plan. As a result of both this improvement in theterms of trade as well as the increase in domestic production, national incomeincreased by 17% in 1976 (see Table 5).

Table 5: INCOME AND OUTPUT GROWTH: 1975-76(M$ million, constant 1970 prices)

% Change1975 1976 1975/76

GNP 16,943 18,858 11.3

Terms of trade adj. -1,102 -375 _

GNY 15,841 18,483 16.7

Source: Mission estimates.

1.18 The resource position of the public sector in 1976 also showed animprovement over the previous year and was markedly better than had beenforecast during the preparation of the TMP. The public sector currentsurplus rose from M$466 million in 1975 to M$735 million in 1976, well abovethe M$100 million foreseen in the drafting of the TMP (see Table 6)./3

LI Because the export price index is based on current year weights, oil, theprice of which increased radically after 1970, receives a large weight inthe index. The large increase in the volume of oil exports in 1976 by it-self therefore resulted in a significant increase in the export priceindex. Still, even excluding oil, export prices increased by 17.6% in 1976.

/2 Most of this increase is due to an effective 5.8% devaluation of theMalaysian ringgit in 1976.

/3 The TMP estimates for 1976 are found in a background table to the TMP;since the totals for the plan period in the table differ slightly fromthose in the plan document itself, the comparisons are approximate.

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Table 6: PUBLIC SECTOR CONSOLIDATED FINANCIAL POSITION, 1975-76(M$ Million)

1975 1976/a

Revenue and expenditure

Government revenue 6,272 7,032Government expenditures 5,902 6,490Government current surplus 370 542

Public authorities current surplus 96 193

Public sector current surplus 466 735

Public sector development expenditure 2,740 2,965

Overall deficit 2,274 2,230

Sources of finance

Net domestic borrowing 1,209 1,636Net foreign borrowing 912 371Special receipts 16 281 /bAssets changes /c 137 -58

/a Preliminary.

/b Includes IMF loan of M$265 million.

/c - = increase.

Source: Bank Negara Annual Report 1976; Treasury Economic Report 1976/77.

Government revenues grew by 12%, led by a 48% increase in export duties,while government current expenditures grew by only 10% in 1976, due to a fallin state expenditures./l

/1 These figures do not reflect the recent wage agreement, which will addan estimated M$600 million to expenditures in 1977, including M$300 mil-lion in retroactive payments for 1976. The added burden in subsequentyears is estimated at M$400 million per year. The impact of theseexpenditures on public resources during the TMP will be examined below.

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Public development expenditures rose by only 8.2% in 1976 to a level that isM$300 million (10%) less than the implicit TMP target for 1976./i As comparedto 1975, the increase in development expenditures approximately offset theincrease in the current account surplus, and as a result the overall publicsector deficit remained at about M$2.2 billion. The deficit however was20% lower than forecast in the TMP. To finance this deficit net domesticborrowing grew by 35% in 1976, much more rapidly than projected in the TMP,while net foreign borrowing fell by 60%, returning to the pattern prevailingbefore 1975, with domestic sources supplying several times as much as foreignsources. The Employees Provident Fund (EPF) is the main source of domesticborrowing, comprising 40% of the total. The high liquidity of the bankingsystem, resulting from the large balance of payments surplus and the sluggish-ness of private investment, led to purchases of government securities by com-mercial banks of M$400 million. Special receipts were very large in 1976,the result of a drawing on the IMF Compensatory Finance Facility of M$265 mil-lion. Since net financing more than covered the federal deficit, the federalGovernment accumulated M$360 million in assets. The public sector as a wholeexperienced an increase in assets of M$58 million in 1976, compared to a lossof M$137 million in 1975.

Oil Production

1.19 Another major event that occurred after the drafting of the Plan wasthe settlement between the Government and the Exxon and Shell oil companieson oil production sharing. The details of the agreement and the approximatesharing of production under various costs assumptions are summarized in PartA of Annex 1. The agreement implies that, with average costs of 20%, the oilcompanies would receive 11.5% of total production as profits plus 20% tocover costs, and the state and federal governments and Petronas would receive68.5% of the oil. With costs ranging from 15% to 40% of the oil production,the Malaysian public sector will receive between 72.6% and 59.5% of the valueof the oil produced.

1.20 Along with the conclusion of the production sharing agreement, anamendment to the Petroleum Development Act has helped to improve the invest-ment climate for foreign oil companies in Malaysia. The most controversialsection of the Act required that Petronas be issued at least 1% of paid-up capital at a price to be determined by the Prime Minister. On resolutionsrelating to the appointment or dismissal of a director or any staff of thecompany, each management share carried 500 votes (compared to one vote for anordinary share). This would have given the Government a 5:1 majority andraised fears among the oil companies that this was a step towards national-ization without adequate compensation. The recent amendment to the Actremo\ed this controversial section.

/1 Plan figures for development expenditures in 1976 are taken from back-ground tables to the TMP. Since the total development expenditures inthe documents is 10% below the M$18.6 billion appearing in the Plandocument, the annual figures in the tables were inflated by 10% toprovide a comparison with actual performance in 1976.

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1.21 As a result of the resolution of these two issues, explorationand production plans are proceeding on a firm basis, and oil productionforecasts are now higher than they were a year ago, when the TMP was in itsfinal stage of preparation. There was a substantial increase in productionfrom 99,000 b/d in 1975 to 165,000 b/d in 1976, and production is currentlyat a level of 180,000 b/d which is equal to the peak level that the TMPprojected for 1978-80. Petronas has recently projected a production level of240,000 b/d by 1980 and for the five-year period 1976-80, an aggregate outputof 50 million metric tons, 25% greater than the 40 million tons implied bythe TMP forecast. This forecast can perhaps best be described as a workinginterim estimate until the highest levels of Government are able to evaluatethe costs and benefits to the country of various production levels anddetermine the optimal rate of extraction. While there is no official esti-mate of what the physical production capacity will be by 1980, it is notunreasonable to assume that the oil companies could produce at a rate ofabout 400,000 b/d by then, if the Government were to decide to maximize-output. This faster extraction rate would result in close to 70 million tonsbeing produced during the Plan period. The final section of this chapterexamines the implications for the TMP of both sets of projections, which canbe regarded as the limits to a range of possible outcomes.

Implications of Recent Developments

1.22 The new developments discussed above have important implicationsfor the TMP and the future growth strategy of the Malaysian economy. Themajor implications are that the resource constraint on growth has beensignificantly relaxed and that the financial resource position of thepublic sector can be expected to ease considerably.

Foreign Resources

1.23 Because of the very dramatic growth in exports in 1976, and becauseof the higher level of oil production now likely, the Plan's export projec-tions now seem no longer valid. Two sets of projections have been preparedto reflect the uncertainity and significance of two assumptions: the levelof oil production and the price of rubber.

1.24 The "low" Alternative I projects oil production to increase accordingto the preliminary technical forecasts of Petronas, reaching 240,000 b/d by1980. In addition this alternative incorporates the Government assumptionthat the rubber export price will remain at M$2.00 per kg (this price is 4%higher than the average price projected in the TMP for 1977-80). The "high"Alternative II projects oil exports on the basis of a tentative estimate ofpotential capacity of 400,000 b/d by 1980, i.e. a level that roughly sets theupper capacity limit to the range of production choices that faces the Govern-ment. Alternative II also used the World Bank price forecast for rubber,rising to M$2.50/kg by 1980.

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With the exception of rubber in Alternative I, both alternatives incorporatethe latest World Bank price forecasts,/l and both project volume and pricechanges based on the new 1976 base.

1.25 As can be seen from Figure 1, under both alternatives, Malaysiawould have substantially more foreign exchange earnings than is forecast bythe TMP. Under Alternative I, expbrt receipts over 1976-80 (net of costs andfactor payments for oil) would be about M$10 billion, (6.1% of GDP over theperiod) and under Alternative II, M$17 billion (10.4% of GDP over the period)more than under the TMP. The increase in earnings of Alternative I over theTMP is largely accounted for by the better prospects for two commodities:petroleum and forestry products (M$4 billion each). Tin, rubber and palm oilshow smaller increases, while the outlook for all other exports together isnow somewhat less favorable. Looking at the major commodities, the highervalues for rubber, palm oil products and tin are predominantly due to higherprices, while the increases in the value of forestry and petroleum exportsare due to both higher prices and higher volumes./2 (Alternative II addsanother M$5 billion in oil and M$2 billion in rubber.)

1.26 It is worth noting that of the M$10-17 billion additional exportearnings projected for the TMP, M$2.5 billion have already been earned during1976, giving a growth rate of exports in that year of 43%. For the rest ofthe TMP period the projected growth rate of exports under the low alternativeis only 12.3% p.a., lower than the Plan projection of 13.5% p.a. over thefive-year period. Thus, the additional export earnings result from the largeincrease in 1976, rather than from a permanently higher growth rate thanprojected in the TMP.

/1 November 26, 1976

/2 Details of the estimates can be found in Part B of Annex I.

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FIGURE 1: NET MERCHANDISE EXPORTS1970/80 a/

(CURRENT PRICES)

30 0 _ _ _ _ _

KEYACTUAL

- A T -. TMP PROJECTIONS

-_ _ _ WORLD BANK PROJECTION ALTERNATIVE I (LOW OILIRUBBER). ....... WORLD BANK PROJECTION ALTERNATIVE II (HIGH OIL/RUBBER)

20.0 _ _ _ _ _

al Incude onl th-e oeg xhneerig foleprswihi

z -. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0

-j ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ --j -

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

a/I ncl udes on ly the net fo reig n excha nge earn ings of oilI expo rts wh i ch isestimated at 73% of gross oil export revenues

Source TMP, Mission Estimates. World Balk - 17932

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Public Sector Resources

1.27 On the basis of the recent oil agreement, and using the minimum andmaximum oil production forecasts discussed above, roughly 28-29% of TMP oilrevenues will accrue to the Federal Government through royalties and incometax, 5% to the state governments as a royalty, and 32-33% to Petronas afterits tax payments to the Government./l In all, 65-67% of the gross revenueswould accrue to the public sector during 1976-80. Excluding the Petronassurplus, the net effect on Government revenue of the revised oil forecasts isan additional M$1.1-M$2.8 billion of revenues./2 In addition, the new exportprojections for major commodities result in added export tax revenues amount-ing to M$1.4-2.4 billion during 1976-80. These increased revenues, togetherwith the better-than-expected fiscal performance in 1976, revised projectionsfor the rest of the period,/3 a cash surplus to be accumulated by FELDA, andan adjustment to current revenues and expenditures for a salary increasefor civil servants, result in the likelihood that the public sector currentaccount surplus, excluding Petronas, would be increased from M$1.7 billion,estimated in the TMP, to somewhere in the range of M$4.8-7.5 billion for theperiod 1976-80. In addition Petronas would receive M$4.4-6.4 billion in netincome during the period. In total, under the lower oil and rubber pricealternative, the current surplus of the public sector could be as much asM$7.5 billion more than the TMP estimate for the period 1976-80 (4.2% of GDPfor the five-years), while under the higher oil and rubber price alternativethe additional resources could amount to M$12.2 billion (6.8% of GDP)./4 Theimproved resource position of the Government in the low alternative isclearly illustrated in Figure 2.

/1 These estimates are the aggregate of separate production and costforecasts for the three producing companies: Exxon, Shell (Sabah) andShell (Sarawak). Different cost levels were assumed for productionfrom each company to reflect the different level of production maturityof each company. The public sector share is less than is implied byTable I of Annex I because two of the companies have high costs andtherefore pay no taxes in the early years and because there is a one-yearlag between production and payment of taxes.

/2 The small difference between the low revised estimate and the TMP esti-mate of oil revenue results from differences in the way in which therevenues were calculated (since the TMP projections were made before theproduction sharing agreement was signed), not from similar assumptionsabout oil production. The TMP assumes that oil production will reach ani.ximum of 180,000 b/d day, whereas the low revised estimate uses theletroaas technical forecast of 240,000 b/d by 1980.

/3 Reveaues, exclud- ig oil and export duties, are projected using the elas-ticities of the x\crious components with respect to GDP. Expenditures areprojected by applying the growth rates implicit in the TMP to the newlevel for 1976. A more detailed discussion of these projections is pre-sented in Part C of Annex 1.

/4 These figurs do not take into account expenditures by Petronas, whichare discussed below (para. 2.05).

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FIGURE 2: PUBLIC SECTORCURRENT ACCOUNT

SURPLUS/DEFICIT1970-80

(CURRENT PRICES)

KEY IACTUAL

.. TMP PROJECTION_ _-_ WORLD BANK PROJECTION (LOW ALTERNATIVE) EXCLUDING PETRONAS

....... WORLD BANK PROJECTION (LOWV ALTERNATIVE) INCLUDING PETRONAS

200L

z S.

19 70 1971 19 72 19 73 19 74 19 75 19 76 1977 19 78 19 79 198B0

Source TMP, Mission Estimates VWorlId Bank - 17934

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2. INVESTMENT

Introduction

2.01 As is clear from the previous chapter Malaysia will have access toconsiderably more resources than the TMP projected. Depending especially onthe level of oil production, but also on assumptions about the levels ofexport duties and the price of rubber, the public sector could have additionalnet revenues of from M$7 billion to M$12 billion and foreign exchange earningscould be higher by M$10 billion to M$17 billion during the TMP period,1976-80./1

2.02 Assuming that the forecast for additional resources is correct inits order of magnitude, how should the resources be allocated? In the veryshort run there will be considerable constraints on the way they can be spent,with regard both to implementation capacity and to the overall management ofthe economy. Given that this improved resource position is likely to persistthroughout the TMP and beyond, plans can be made now to absorb these resourcesin an optimal manner. In this regard it seems clear that the two prongs ofthe NEP could be furthered considerably by an increase in the level of invest-ment, both public and private. The public sector development program is oneof the most direct ways in which the position of the poor can be improved ona sustained basis, in particular through programs to improve the productivityof rural households and to provide housing and essential services to theurban poor. At the same time, rapid growth of the private sector is essentialto attain the general TMP goals of increasing incomes and employment as wellas the more specific objective of restructuring employment. This chaptertherefore will review the public and private investment strategies during theTMP period, with particular attention to the possibility of absorbing additionalresources by higher levels of investment.

Private Investment: The Need for a Recovery

2.03 Private investment has an essential part to play in achieving theobjectives of the TMP. The Plan projects that private fixed investment willincrease by about 10% a year, in real terms, and amount to M$13.7 billion in1970 prices (M$26.8 billion in nominal terms) during the TMP period. In viewof the considerable decline in private investment in 1975 and its small risein 1976 (see para 1.15), which were not anticipated in the TMP, and the re-cent information on Petronas' probable investment program,/2 a review of the

/1 As figures I and 2 in Chapter 1 show, the additional annual foreign andpublic resources increase over the Plan period. In addition there is theprospect of large exports of LNG in the mid 1980s which would furtheraugment this trend.

/2 Although Petronas is a public sector institution, and its investmentis actually undertaken by the public sector, it is included in theprivate sector in the TMP. For purposes of comparability the sameprocedure is adopted here.

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prospects for private investment warrants high priority. The followingdiscussion considers separately the prospects for investment in petroleumand petroleum based industries and private investment in other (non-oil)industries, concluding with a summary of the overall prospects for privateinvestment. In addition, there is a separate discussion of Governmentparticipation in private sector investment.

Petroleum

2.04 With the settlement of the production sharing agreement betweenthe oil companies and the Government last December, as well as the amendmentto the Petroleum Development Act in January of this year, which removed thecontroversial management share clause, there has been a marked improvementin the investment climate in this sector. Substantial investment by bothPetronas and the oil companies is therefore expected in the coming years.The actual investments and their costs, however, are still quite uncertain.

2.05 Petronas is also considering substantial investments in petroleumbased industries. A Master Plan on the future development of the oil andgas industry is currently being prepared for Petronas and should be completedby mid-1977. Preliminary indications are that the Government is consideringlarge investments, via Petronas, in a number of areas, including liquifiednatural gas, fertilizer, and petrochemicals./l The total cost of the invest-ments with Petronas participation is about M$6 billion. However, assuming someslippage and an average investment period of about five years, actual investmentduring the remaining years of the Third Plan would be more like M$2.0 billion,increasing from about M$35 million this year to M$1 billion by 1980. Includ-ing investment by the oil companies in exploration and production during theTMP, the total investment in the petroleum sector could be about M$2.5 billion

/1 The projects now under consideration include: (a) Liquified Natural Gas(LNG): This project will possibly be the largest single investment everundertaken in Malaysia, involving a total investment of about M$2.8 bil-lion (US$1.1 billion). It involves the setting up of a liquefactionplant to liquefy natural gas from Sarawak. The LNG would be shipped intankers, which have already been ordered by the government owned MalaysianInternational Shipping Company, to Japan. The potential shareholderswould be Petronas, Shell International Gas and Mitsubishi Corporation.Current estimates are that the project agreement may be finalized by 1977with production commencing by 1982; (b) Fertilizer. This would be anASEAN project to produce ammonia/urea for export, mainly to Thailand andthe Philippines. Preliminary cost estimates are about M$500 million witha start-up date of 1982; (c) Petrochemicals. The Master Plan includesa preliminary feasibility study on a petrochemical complex in Malaysia.The project cost is very roughly estimated at M$2-2.5 billion with atarget production date of 1982; (d) Refinery. The construction of afourth refinery is being considered to meet the expected domestic demandfor petroleum products. If the decision is made to develop the refinery,it could be on stream by 1982. The estimated cost is about M$250 million.In addition to the above investments, Petronas is also expected to invest

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during 1976-80. Since some of these projects may be financed on a joint basis(e.g. the LNG plant described above), Petronas' share of the M$2.5 billioninvestment would probably be about M$1.5 billion. It is not clear whatproportion of Petronas' share of investment would be financed as equity andwhat part by loan.

2.06 In considering such investments in petrochemicals it is importantthat their "recycling" nature be kept in mind. Such investments basicallyconvert current petro-dollars into future petro-dollars without creatingsignificant employment in the process. On the other hand they would helpfurther the goal of equity restructuring, since the additional assets heldby Petronas could be considered as assets held 'in-trust' for Malays.

Non-oil Investment

2.07 As noted above, during 1975 and 1976 private investment fell con-siderably from the levels prevailing during much of the SMP. From an averagelevel of 13% of GDP (in 1970 prices) during 1971-74, private (non-oil)investment had fallen to 7.8% by 1976./1 As further indicated below, thisdecline seems to be seriously affecting the modern manufacturing sector withpotentially damaging effects on employment creation.

2.08 Investment in the manufacturing sector is not measured directlyin Malaysia but investment approvals by the Federal Investment DevelopmentAuthority (FIDA) provide a good indication of investment activity in manu-

facturing. In real terms, the level of approvals is down 30% since the peakof 1974, and the 1976 level is 10% less than the 1971 level (see Table 7).Further evidence of the decline in private investment in manufacturing isprovided by data on imports of machinery and equipment. Recent estimates bythe Department of Statistics indicate that in real terms such imports fell by28% in 1975 and 18% in 1976./2 Further, within this total, imports ofmachinery for manufacturing per se indicate similar declines./3 While thelow level of FIDA approvals in 1976 and continuing low levels into 1977 arenot encouraging, there has been an upturn reported in capital goods importsin the last quarter of 1976 and the first few months of 1977. This mightindicate that although investment aprovals are still low, previously approvedprojects that had been postponed are now being implemented and privateinvestment might register a real increase in 1977.

/1 Non-oil private investment is estimated by subtracting from total privateinvestment the estimated oil investment. No exact data are available onthe amount of investment in oil exploration and production, but it isroughly estimated that investment in oil has been M$65 million a year inconstant 1970 prices for 1970-76. This would imply an investment of M$100million in current prices in 1976.

/2 These are estima ed by the Department of Statistics by excluding fromSITC Section 7 imports all items which go into final or intermediateconsumption.

/3 These imports include SITC 715-719: metal-working machinery, textile andleather machinery, machines for special industries and machinery andparts n.e.s. These declined in real terms by 28% and 13% in 1975 and 1976respectively.

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TABLE 7: Federal Industrial Development Authority (FIDA):Investment Applications and Approvals, 1971-76

Applications ApprovalsCapital investments

(M$ million) PotentialCurrent Constant 1970 employment

Number Number prices Prices /a (000')

1971 285 305 938 906 48.71972 423 355 621 577 56.4

1973 651 473 1,216 1,031 81.51974 628 525 1,590 1,166 71.41975 471 461 1,436 1,008 36.21976 394 425 1,220 816 32.3

/a Deflated by investment price index (1970=100) of the Department of

Statistics. No lags were used in deflating investment on the assumption

that investments were calculated at current year prices.

Source: FIDA Annual Reports; mission estimates.

2.09 Clearly the sluggish international economy has had a dampening

effect on the propensity to invest in Malaysia. Still, among countries in

the region Malaysia appears to have fared the worst (see Table 8). While a

number of countries (Korea, Thailand, and Singapore) experienced a slowdownor decline in private fixed investment in 1975, Malaysia had by far thelargest decline. Further, while other countries in the region appear to have

had some positive growth in 1976, Mlalaysia experienced a further decline to a

level significantly below even that prevailing in 1972. This relatively

poor performance of Malaysia seems to indicate that domestic factors are

also depressing the level of private investment.

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Table 8: INTERNATIONAL COMPARISON OF PRIVATE FIXED INVESTMENT, 1972-76

Rep. ofChina Hong Kong Korea Philippines/a Singapore Thailand Malaysia

(Fixed Prices)(1972 = 100)

1972 100.0 100.0 100.0 100.0 100.0 100.0 100.01973 119.8 110.9 144.7 101.2 110.1 119.0 114.61974 119.3 103.7 161.8 126.9 120.6 139.7 133.81975 142.3 104.4 175.9 164.1 111.3 145.7 95.91976 n.a. n.a. 190.1 169.2 115.8 153.0 86.0

(% Annual Change)

1973 19.8 10.9 44.7 1.2 10.1 18.5 14.61974 -0.4 -6.5 11.8 25.4 9.5 16.9 16.81975 19.3 0.6 8.7 29.3 -7.7 4.3 -28.31976 n.a. n.a.. 8.1 3.0 4.0 5.9 -10.3

Source: Mission estimates based on World Bank national accounts data.

/a For the Philippines, estimates are the sum of private investment inconstruction and total investment in durable equipment. Estimates maytherefore include some public investment in durable equipment.

2.10 These domestic factors may be summarized as the fears in the privatesector that increased Government control, under the aegis of the Government'sracial restructuring policies, will adversely affect the efficiency and henceprofitability of private enterprise in Malaysia. The principal focus of thesefears is the Industrial Coordination Act (ICA), passed in 1975, which strengthensand institutionalizes previously existing controls on new investment and extendsthese controls to existing firms and which will provide the central means of re-structuring employment and ownership.

2.11 The Government acknowledged the uneasiness in the business communityand appointed a ministerial committee to review this problem in conjunctionwith the private sector and to propose appropriate changes to the Act. InMarch of this year the Parliament approved the changes recommended by thiscommittee. Two important changes approved were the establishment of an appealsprocedure and an increase in the minimum size at which a firm will be expected

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to restructure its equity./l The basic intent of the Act, however, is unchanged.All existing companies above a certain minimum size are required to be licensedby May 1, 1977. While some conditions of the license have been deleted or modi-fied, the Act still attaches conditions that require, among other things, that30% of equity be reserved for Malays, that the composition of the Board ofDirectors reflect the equity structure of the company, that employment reflectthe racial composition of the population, that the company use services ofMalaysian enterprises with preference given to Bumiputra companies, that thecompany enter agreements only with written approval of the Ministry, and thatthe company appoint Bumiputra distributors to distribute at least 30% of domesticoutput.

2.11 It is still too early to judge the reaction of the private sector tothese changes. In the circumstances described above, however, where investmentis at a relatively low level and the prospects for a recovery are still clouded,a recovery in private (non-oil) investment to the level required to achieve thegrowth objectives of the TMP may require additional Government measures tostimulate private investment. The Government, for instance, might furtherreduce fears in the non-Malay communities by announcing that it will closelymonitor and publish the effects of restructuring on non-Malays, and indicatingthat the (possible) negative effects of its restructuring policies (forexample, on employment of non-Malays) will be as closely watched as thepositive ones.

2.12 In order to achieve the output and employment growth objectives ofthe TMP, it is estimated that investment would need to be about 10% higher in

/1 The principal revisions include: (a) all the functions previously performedby the Minister of Trade and Industry are transferred to a licensingofficer to be appointed by the Prime Minister. This allows the Ministerof Trade and Industry to perform the function of the appeals authority.(The amendments also stipulate that the Minister will continue to have theoverall responsibility for the implementation of the ICA); (b) manufac-turing enterprises with less thatn M$500,000 capital will not be requiredto restructure their equity participation under the Act (previously therequirement was set as M$250,000); (c) the requirement of a minimum fixedpercentage of production to be exported was deleted; (d) the provisionthat all new machinery must be approved by the Minister was deleted;(e) the definition of product has been broadened so that manufacturersneed not apply for a new license should they decide to change productsslightly; (f) the transfer of a license, which was previously forbidden,will not be allowed for bonafide reasons (e.g. bankruptcy, incapacity tocontinue operation, etc.); and (g) the requirement that suspension ofproduction requires the approval of the Minister has been eased to requireonly that he be formed.

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1980 in real terms than the 111P investment target./l Looking just at privateinvestment in the non-oil sectors, achievement of TMP targets would meanachieving an investment level of 13.7% of GDP by 1980. This would require aconsiderable sustained recovery in private (non-oil) investment, increasingat a rate of 24% p.a. during 1977-80, compared to the 10% p.a. projected inthe Plan (see Figure 3)./2 Assuming such a linear recovery and including anestimated investment in petroleum and related sectors of about M$1.4 billion,total private investment would be about M$13.6 billion (11.7% of GDP), comparedto the TMP target of M$13.7 billion (12.1% of GDP). If however, private(non-oil) investment continues at the present level (7.8% of GDP), then totalprivate investment would amount to only M$10.4 billion (9.0% of GDP) duringthe TMP (see Table 9)./3

/1 The input-output model for Peninsular Malaysia (see "Malaysia: SecondPlan Performance and Third Plan Issues," World Bank report tlo. 1177-MA)indicates that to achieve the long run growth of 8.5%, total fixedinvestment in 1980 would need to be M$5,073 million (in constant 1970prices) in Peninsular Malaysia, compared to the implied TMP investmenttarget of M$4,609 million for Peninsular Malaysia, or 10% higher. Ex-cluding an estimated investment of M$120 million in oil-related sectorsand M$1,900 million in public investment in 1980, the input-output modelindicates the required level of private (non-oil) investment is 13.7%of GDP. This implies that the capital output ratios used in the input-output model are higher than those used in the Plan.

/2 Because of the substantial differences noted in Chapter I between theTM1P and recent estimates of the investment price deflator, the discussionin this Section is in real terms.

/3 The effects of a continued low level of investment in GDP are examinedin Chapter 3.

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Table 9: PROSPECTS FOR PRIVATE FIXED INVESTMENT(% GDP in Constant 1970 Prices)

Average Level Average Level /a1971-74 1976-80Actual TMP Recovery No Recovery

Non-oil private investment 12.6 11.8 10.5 7.8

Oil based private investment 0.4 0.3/b 1.2 1.2

Total private investment 13.0 12.1 11.7 9.0

/a These percentages are calculated in terms of a GDP growing at 8% p.a. from1977 to 1980. This ignores the fact that GDP would be lower in the "norecovery" alternative. The investment levels implied assume a linearrecovery with private (non-oil) investment growing by 24% a year from the1976 level of 7.8% of GDP to 13.7% in 1980.

/b The TMP does not distinguish investment in oil and related sectors fromother private investment. The 0.3% figure is thus a mission estimatewhich assumes a base level of investment in oil exploration of M$65 mil-lion per year in 1970 prices.

Source: Third Malaysia Plan; mission estimates.

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Figure 3: PRIVATE FIXED NON-OIL INVESTMENT (EXCLUDING OIL SECTOR)1970-1980

(CONSTANT 1970 PRICES)

4000 1 I

WORLD BANK ESTIMATES OF PRIVATE INVESTMENT (NON-OIL), 1970-76.

_ _ _ _ TMP (IAPG SERIES) ESTIMATES OF PRIVATE INVESTMENT, 1970-76

............ TMP PROJECTION l

* TARGET 1980 LEVEL OF PRIVATE INVESTMENT (NON-OIL) CONSISTENTWITH TMP GROWTH OBJECTIVES (SEE PARAGRAPH 2.11)

3000

100 0 _ _ _ _ _ _ _ -

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Source Thetrd Malaysia) Plain Department of Stat siICs and Missioti Estimates

Wo1ld Bk - 17933

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Public Sector Role in Private Investment

2.12 The TMP has allocated M$1.7 billion of development expenditures tocommerce and industry, about 10% of the development program during the ThirdPlan. This is less than the proportion actually spent during the Second Planperiod (16.5%) and constitutes a drop of 19% in real terms over Second Planlevels. Of the total allocation, 80% or M$1.4 billion, can be related to theintention of encouraging greater Malay participation in the modern economy.Significant allocations under this head include those to Pernas (M$250 million),Majilis Amanah Rakyat (MARA) (M$315 million), the State Economic DevelopmentCorporations (SEDCs) (M$425 million), the Urban Development Authority (UDA)(M$200 million) and the Bumiputra Investment Fund (M$200 million)./l Theprincipal uses to which this money will be put are: (a) to train and providetechnical assistance to Malay businessmen; (b) to provide loan credit to Malaybusinesses; and (c) to undertake direct investment, thereby acquiring equity"in trust" for Malays. Given that many of these agencies perform multiplefunctions and also that the TMP does not distinguish in great detail thespecific projects that will be undertaken to secure restructuring objectives,a meaningful review of this program is difficult. It is clear, however, thatmost of the TMP allocation would be used by these institutions to accumulatecapital stock on behalf of Malays by creating or expanding subsidiary enter-prises either wholly owned or in joint venture, as well as by acquiring stockin existing enterprises in the private sector. During the Second Plan periodthis was the principal means used to increase the Malay ownership share ofthe corporate sector which increased from 2.4% in 1970 to 7.8% in 1975. Ofthe total change in ownership, 78% was due an increase in the share held "intrust" by Malay interests./2

2.13 In this context it is important to note that the TMP allocation foracquiring assets covers only part of the financial requirements, set outelsewhere in the Plan, of reaching a Malay share of ownership of 16% by 1980.The funds required to purchase equity 'in-trust' over the period, if the targetis to be met, are estimated in the Plan at just over M$2 billion. As notedabove, the Plan explicitly mentions M$1.4 billion allocated to public agenciesto promote Malay participation in the public sector. Since not all of thisfigure is to be directed towards share purchase, the shortfall could be quite

high, perhaps as much as M$l billion./3 The proposed Petronas investmentprogram, however, would create substantial amounts of equity 'in trust' for

/1 The principal functions of these institutions are described in Annex 1to the World Bank Report of September 20, 1976, No. 1177a-MA.

/2 Shares held by MARA (excluding Amanah Sahem) Pernas, UDA, SEDC's,Bank Bumiputra and Bank Pembangunam.

/3 The funds would also be used to provide credit and technical assist-ance to Bumiputra entrepreneurs.

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Malays, and would make up much if not all of this shortfall (Petronas' invest-ment program could amount to M$1.5 billion during 1976-1980, but it is notclear how much of this would be financed as equity and how much as loan).Even so the Government may consider increasing allocations under this head asa means of promoting rapid growth in private investment. Such increasedallocations, if made, should be designed to make the maximum increase in thelevel of investment in fixed assets. This in turn would require an evalua-tion of the capacities of the various public sector institutions to expandtheir operations.

Public Investment: The Case for an Increase

Overall Size of the Public Investment Program

2.14 The TMP projects an overall public investment level of M$17.4 bil-lion during 1976-80, which implies a development program of M$20 billion (seeTable 10)/1. The actual development program proposed in the Plan, however,amounts to only M$18.6 billion (equivalent to M$15.8 billion of public invest-ment), which in real terms is about 42% larger than the actual level ofexpenditures in the SMP./2 The TMP notes, however, that as more resourcesbecome available, public investment will be increased to try to reach thehigher target of M$17.4 billion set out in the macro framework of the Plan.The M$18.6 billion development expenditures are 11.3% of GDP, higher than the10.7% of the SMP development expenditures, but slightly lower than the averagein the years 1974-76. The high variant, with M$20 billion of development expen-ditures, continues the upward trend of the last few years, averaging 12.2% overthe TMP.

/1 The difference between the two is largely due to non-capital expendituresin the development program, such as transfers to public corporations thatare subsequently invested in or lent to private sector enterprises anddefense expenditures, and to capital expenditures included in currentexpenditures.

/2 This estimated real increase is based on the revised investment pricedeflators and national accounts discussed in Chapter 1.

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Table 10: PUBLIC INVESTMENT AND DEVELOPMENT EXPENDITURES(Current prices)

M$ billion % of GDP /aSMP TMP SMP Average TMP

1971-75 1976-80 Actual High LowActual /a High variant Low variant 1974-76

Public investment 8.2 17.4/b 15.8 9.0 10.3 10.6 9.6Development

expenditures 9.8 20.0 18.6/b 10.7 11.5 12.2 11.3

/a Based on revised national account estimates discussed in Chapter I andpresented in Table 2.1 of the Statistical Appendix.

/b Official TMP targets.

Sources: TMP and World Bank estimates.

2.15 The sectoral allocation of the development program is set out inTable 7.1 of the Statistical Appendix. The major individual sector programs(except for commerce and industry, which is discussed in the section on pri-vate investment) are reviewed in the of remainder of this chapter. As waspointed out in Chapter I of this paper, it is now clear that sufficientresources will be available to enable the Government to undertake a substan-tially larger development program than planned. Prima facie there is then astrong justification for increasing the size of the public development pro-gram. First the development program provides one of the most direct waysof assisting poverty groups. The TMP concentrates much of its program onthe reduction of poverty, as is evidenced by the allocation of 38% of theprogram to areas related to poverty reduction, by the increased allocation toin situ agriculture and to housing and by the increased relative allocationsto the poorest states. In addition to its ability to assist the poor, thepublic program has a vital role to play in providing the basic infrastructurefor a rapidly growing economy.

2.16 While the justification for a larger development program may be

clear, the ability of the Government to implement it and the areas wherethe program may be expanded are less so. These questions can only be fullyanswered by a planning exercise by both the EPU and the implementing agenciesto determine priority areas, the status of preparation of projects in theseareas, the capacity of individual agencies to implement additional projectsand ways to improve the project preparation and implementation capacity of thepublic sector. With this qualification, the sector reviews below indicatesome areas where - on the basis of the limited information available in theBank - increases in the development programs appear justified and which areprobably within the implementation capacity of the Government. (More detail

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is provided in Annex II). Overall, the TMP projects a relativelylow growth in public development expenditures compared to the past fiveyears. During 1970-75 public development expenditures increased by 15.7% perannum, more than double the 6.2% rate projected for the TMP. This gives somesupport to the view that, despite strains in some areas, a significantlylarger program could probably be implemented, and that, at the moment,the pressing constraint to a larger program is the shortage of additionalprojects that have been identified and prepared.

Infrastructure

2.17 Several of the infrastructure sectors were underfunded in the TMPas a result of the resource constraint that appeared to exist at the timethe Plan was drafted. A portion of the additional resources available tothe Government should therefore be devoted to larger infrastructure programs.In general, the infrastructure sectors have fewer short-run implementationbottlenecks than do other sectors, since consultants can easily be used forspecific new projects. In addition, the provision of infrastructure can havea significant impact on poverty, through both the provision of services andthe creation of jobs in the construction stage. A review of the transport,electric power, water supply and sewerage, and telecommunication sections ofthe TMP reveals some areas in which immediate increases in allocations couldbe made, for an additional public investment of up to M$l.4 billion.

2.18 Transport. The TMP recognizes that in Peninsular Malaysia thetransport networks serve economic activities well and that, except for thecompletion of three new roads on the east coast and the new port of Kuantan,started under the SMP, there will not be any major new investment in thesector. Thus, objectives for the transport sector in the TMP are to improveand upgrade the existing transport network; expand the networks in the lessdeveloped states, both in the eastern part of Peninsular Malaysia and inSabah and Sarawak; improve access to rural communities to contribute to theoverall goal of eradication of poverty; and develop public transport services.The objectives of the TMP for the transport sector are well in line with thegeneral thrust of Government policy for this plan period which focuses onimproving the condition of the lower income groups.

2.19 There are, however, a number of projects for which additionalfunding is being considered or has already been approved. These include anincrease in the highway allotment for Sabah by about M$80 million to financethe proposed Japanese-financed Crocker Range Crossing, the World Bank's ThirdHighway Project (the Government has conditionally approved additional fundsto undertake this project) and other projects now underway in Sabah; and anadditional allocation of about M$120 million for the supporting infrastructureat the ports of Kauntan and Johore. In addition, other projects not yetfunded merit consideration for inclusion in the TMP transport program. Theseinclude the expressway between Seremban and Ayer Hitan; an increase in thesize of the road maintenance and strengthening program in Peninsular Malaysia(M$40-180 million, depending on how much of the unallocated TMP allotment forimprovement and upgrading is assigned to general maintenance); constructionand improvement of roads in existing land development schemes in Kelantan

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(M$30 million); and improving the condition and orientation of the airportrunway at Sandakan (M$45 million).

2.20 Electric Power. The projected growth in demand for power inPeninsular Malaysia for the TMP period is 13% p.a. To meet this demand,the total generating capacity of the National Electricity Board (NEB) willbe expanded from 863 megawatts in 1975 to 2,016 megawatts in 1980, enoughto ensure adequate power supplies for the continued expansion of industryand commerce. However, the capital expenditure requirements for a numberof projects were underallocated in the TMP. They are now under review bythe NEB and are likely to require about M$1.4 billion in additional funds,of which perhaps M$600 million could be spent during the remainder ofthe TMP. In addition, the slow pace of rural electrification in Malaysiawarrants an acceleration in this program. Since the western part of PeninsularMalaysia already has an interconnected system, a program to reach the villagesstill without electricity could probably be mounted quite rapidly. Such aprogram might cost approximately M$450 million, of which about M$200 couldprobably be spent by 1980. The consultants' study now underway for NEB couldthen concentrate on rural electrification in the eastern part of PeninsularMalaysia.

2.21 Water Supply and Sewerage. The water supply sector in Malaysiais much further developed than the sewerage sector, largely as a result ofdifferences in operational responsibility and in the allocation of fundsfrom the public development program. In an effort to remedy this situationthe Ministry of Health recently created an Environmental Health EngineeringUnit (EHEU). In addition, at the request of Government, WHO carried out inMarch-April, 1976, under the World Bank/WHO Cooperative Program, a survey ofthe sewerage subsector in the country. Since the TMP was prepared andapproved well in advance of the survey, the sewerage allocation in the TMPdoes not reflect the results of the survey and is still small relative tothat of water supply. The Plan makes provision for M$592 million for watersupply and only M$139 million for sewerage. The Government, however, intendsto increase the sewerage allocation to by a substantial amount in the FourthPlan (1981-86), and it is prepared to increase the funds for sewerage at themid-term review of the Third Plan. TMP expenditures could be increased byabout M$150 million.

2.22 Telecommunications. The Malaysian Telecommunications Department(TDM) achieved or exceeded most of its Second Plan targets. TDM's Third Plansubmission requested M$2,082 million for the extension of national long dis-tance and international facilities, the installation of about 632,000 addi-tional local exchange equipment lines, and the connection of about 305,000new subscribers to meet new demands during the TMP period. The Governmentapproved an investment of only M$1,080 million, and TDM has scaled down itsprogram. It is understood, however, that the Government will provide morefunds in the last two years of the Plan if TDM satisfactorily uses itscurrent allocation by that time. From its progress during the SMP and theaction already taken to obtain equipment towards achieving the TMP targets,

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TDM appears able to achieve its TMP targets without difficulty. In view ofthis, the Government might consider giving TDM approval to implement itslarger program and finance the additional expenditures as they fall due.A reasonable supplementary allocation might be around M$250 million.

Agriculture

2.23 The TMP programs in the agricultural sector aim to increase outputand productivity, thereby raising incomes and reducing the incidence ofpoverty. The 1975-80 average annual growth rate in the agriculture, forestryand fisheries sector is projected to be 6.0%, the same as in the SMP. Thisgrowth will be based largely on investments in tree crops that have alreadyoccurred. Although much of the investment during the rest of the TMP periodwill have little effect on production during this time, it is vital both forfuture growth in the agricultural sector and for continued progress in theeradication of poverty. The major change in emphasis from the SMP to the TMPis in the increased emphasis on in situ agriculture relative to new landdevelopment. The next few paragraphs review the major TMP programs foragriculture and suggest areas where they might be increased, adding aboutM$1.1 billion to public investment.

2.24 Poverty among rubber smallholders is expectd to fall from 59% in1975 to 40% in 1980, largely as a result of the replanting under the SMPprogram, as well as of a one third increase in the price of rubber. Usingthe World Bank price projection, which is 35% higher than that used in theTMP, poverty in 1980 would be reduced by a further 7 percentage points.Replanting in the TMP is planned to cover 450,000 acres, 13% above the SMPachievement. After completion of the TMP program, about 300,000 acres willstill remain under old, low-yielding trees in 1980, and if the Rubber In-dustry Smallholder Development Authority (RISDA) could increase its imple-mentation capacity, a larger program could be undertaken. Replanting all300,000 acres would reduce poverty by an additional 4 percentage points, or,using the higher World Bank prices, by about twice that amount. RISDA willprobably be unable to increase its TMP program, since the area to be

covered will involve increasingly small holdings, which are harder to handlethan the larger holdings. RISDA may need to develop new approaches to reachthe smallest farmers. Aside from old rubber trees, poverty is due to poorfarming practices and the small size of holdings and could be eliminatedonly by improved practices achieved through increased extension servicesand by land consolidation (combined with resettlement) or by increasingthe effective rubber price to the smallholder. In this context it shouldperhaps be mentioned that inflation has increased the real tax on rubber,and -hat a reduction of this tax (especially if aimed specifically at small-hol :rs) could also reduce poverty by a few percentage points.

2.25 The major goverrnment program to assist paddy farmers is the provi-sion ot irrigation -d drainage facilities to permit double-cropping. Duringthe TMP, 240,000 acres will be provided with new or improved irrigationfacilities, comparec to 324,000 under the SMP. Although the inability toraise two crops per year is one of the major causes of poverty among paddyfarmers, further extension of the area under irrigation is increasingly

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limited by lack of water and unsuitable topography. Further improvement ofexisting facilities is still possible, but the program could probably notbe greatly increased during the TMP. Three other causes of poverty amongpaddy farmers are the small size of holdings, tenancy, and low yields. Landconsolidation could ameliorate the first problem, but this would mean re-locating farmers on a large scale. Enforcement of tenancy and rent controllaws might improve the situation. The third problem could be be attackedthrough an increase in the supply of rural credit to accompany the improvedextension services called for in the Plan, as well as by continued researchinto higher yielding varieties.

2.26 Coconut replanting and rehabilitation under the TMP will covertwice as many acres as during the SMP. However, intercropping will beinstituted on less than one quarter of the land scheduled for replanting orrehabilitation, even though it can increase incomes from the land by over100%. Additional funds could be devoted to the development and promotion ofsuitable intercrops for coconut farmers, but implementation capacity mayprove to be the binding constraint. If that is indeed the case, the next fewyears could be used to develop and apply a plan to increase the implementationcapacity so that such a program could be included in the Fourth Plan.

2.27 A major problem for these and other in situ agricultural groups isthe small size of holdings, which leads to underemployment and low incomes.While improved yields will result in higher incomes, many farmers and laborerswill remain in poverty unless they can find more land to work. Land develop-ment attacks this problem directly by taking landless rural families andproviding them with about 10 acres of land planted in rubber or palm oil,/lthereby raising them above the poverty line and reducing the pressure ofpopulation in the areas from which they came. The TMP land development pro-gram is very similar in size to that of the SMP. However, against the back-ground of the Second Plan performance, the TMP targets appear to be conservative.The various government land development programs are capable of expansion, withthe exception of RISDA, which should strengthen its rubber replanting programrather than experiment with land development. The Federal Land DevelopmentAuthority (FELDA), the Federal Land Consolidation and Rehabilitation Authority,and the state land development agencies could increase their TMP targets byaround 25% and spend approximately M$400 million over their allocations.This increase in the land development program would eventually allow for thesettlement of an additional 25,000 families, or 5% of the agricultural fami-lies expected to be in poverty in 1980. Because of the opportunities thisopens for consolidation in the area which the settlers leave, and the reducedpressure on available jobs and land, the total effect will be substantiallylarger. Further increases in the level of settlement could be accomplishedby increased settler participation in the early stages of land development

/1 The size of allotments was reduced recently from 12-14 to 10 acres, afterit was concluded that the latter size could produce adequate incomes forsettlers. The current allotment of 10 acres still produces incomes wellabove the poverty line.

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(this would be a once and for all increase) and possibly by reducing below 10acres the size of allotments to settler families if the need for creation ofnew employment becomes more urgent (for example, if private sector employmentcreation falls below projected levels).

2.28 The Government is well aware of the potentially harmful environmentaleffects of land development. In 1974 the Environmental Quality Act was passed,and in 1975 the Department of the Environment was established (now in theMinistry of Science, Technology, and the Environment). In the future, a varietyof pollutants will be monitored, including the effluents from oil palm, rubber,and other agro-processing industries. In addition, the TMP calls for anassessment of the environmental impact of all projects where this is a relevantconcern. Ministries, Departments, and the private sector will be required toidentify all likely environmental effects as well as the means to counter thembefore projects may be implemented. Pollution from palm oil processing hasbeen a matter of particular concern, and the Government has imposed waterquality standards which will be enforced in two stages at two year intervals.A study prepared for private palm oil producers has suggested a number of waysin which the standards can be met at costs which are not prohibitive.

2.29 FELDA has accumulated financial reserves of close to M$400 million,due to the differential between the easy financial terms from the Governmentto FELDA and the much harder terms from FELDA to the end user, the managementlevy and replanting reserves, and interest on accumulated reserves. Thesereserves could be used in a number of ways, including reducing the chargeson settlers, which would make possible a reduction of holding size withouta reduction of income, lending by FELDA to the Treasury through the purchaseor bonds, or simply retaining the funds as insurance against future calamities.In any case, these funds should be recognized as public sector resources andtreated as such by the Government in its decisions on the size of a developmentprogram.

Social Sectors

2.30 Housing. The TMP housing program calls for about 500,000 housingunits to be constructed during the TMP, nearly double the number of unitsconstructed during Llie SMP. An analysis of the housing situation over thenext five years indicates that the TMP target is set at about the right levelto meet housing needs arising from new household formation, normal replacementand elimination of the existing backlog. Of the total, about 220,000 will beconstructed by the public sector, of which about half will be low cost units.An important element of the housing program is the objective of reducing theunit cost (f houses financed through the Ministry of Housing and VillageDevelol ent (MHVD) dramatically, from M$17,700 during the SMP to M$7,700durinig the TMP. Even this reduction, however, would still leave housessubstantially beyond the means of the lower 40% of the population whichcannot even afford houses costing M$3,000. While it is essential that theGovernment continue its efforts to reduce the unit cost of housing, it couldconsider the institution of capital subsidies for low-cost housing. If ahousing subsidy were introduced to reduce the unit costs of the all housingdesigned for low income families from M$7,700 to M$3,000, the total cost of

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the program (covering 122,000 houses) would be about M$350 million. Since thefinancing of these houses is already included in the Plan, subsidies wouldonly influence future repayments. The financial cost to the Government duringthe TMP would therefore depend upon the extent to which the Government holdsthe equity in these houses. At the most it is unlikely that such a subsidyprogram would require more than M$200 million in additional development ex-penditure during the Plan period. Whether or not such a subsidy is undertaken,it is important to continue the effort to reduce the unit cost of housing forlow income groups.

2.31 Education. Malaysia has a comparatively strong system of formaleducation and spends a high proportion of its budget and GNP on it. The TMP

allocates M$1.7 billion, or about 10% of the development program, to education,with the emphasis on further strengthening the formal system of education bymaintaining the universality of primary education and continuing to increaseenrollments in secondary, post secondary and tertiary education. The Plan

also stresses the need to continue integrating Sabah and Sarawak into thenational system and to reduce inequalities between urban and rural areas.While it may be argued that there should be a shift in the relative emphasisin the program from formal to nonformal rural and on-the-job training, thereis little economic justification for any overall increase in expenditures oneducation beyond the level proposed in the TMP.

2.32 Family Planning. Malaysia's current population growth rate isabout 2.8% a year, one of the highest in Asia. The overall objective ofMalaysia's family planning program is to reduce that rate to 2% by 1985.To achieve this target, the TMP allocates M$27 million to family planning.In view of the average costs per new acceptor, this allocation appears toolow, and achievement of the TMP target would probably require a total expendi-

ture of about M$50 million. Furthermore, Malaysia's population growth ratewarrants consideration of an expansion in the TMP targets for new acceptors.

Summary of Possibilities for Increased Public Development Expenditures

2.33 The preceding review identified a number of areas where the publicdevelopment program could be expanded. The programs and amounts suggestedare shown in Table 11. The additional expenditures classified as Phase Iinclude programs which could be expanded quickly, without serious implemen-tation constraints. In fact, in several of them the agencies concerned are,with the approval of the Government, proceeding under the assumption that

their allocations under the TMP will be increased and that additional fundswill be available to them in the second half of the Plan period. The expandedprograms are easily justified in the light of the improved resource positionof the Government, since they all expand basic infrastructure, which isnecessary to the continued rapid growth of the economy.

2.34 The programs grouped under Phase II are those which might requiresome time to accomodate higher spending. They include some infrastructurespending, in areas where specific needs have been identified and which couldbe considered for funding now that additional funds are available. The bulkof the spending in the second phase, however, would be for direct anti-povertyprograms, which are generally given high priority by the Government. The

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suggested expansion of land development and rubber replanting programs, aswell as the housing subsidy, would help to ensure that the poor share in thebenefits resulting from higher public investment.

Table 11: AREAS FOR ADDITIONAL GOVERNMENT SPENDING(M$ million)

Phase I Phase II

AgricultureLand development, FELDA 250

FELCRA 50States 130

Social sectorsHousing 200Family Planning 25

InfrastructureRoads 80 70Ports 120Airports 45Electric power 600Rural electrification 200Sewerage 150Telecommunications 250

Total 1,200 970

2.35 The total additional expenditures suggested amount to approximatelyM$2.2 billion, about half in Phase I and half in Phase II. In Chapter I itwas seen that the public sector's surplus for the TMP period, excludingPetronas' revenues, is likely to be M$3.1-5.8 billion greater than antici-pated during the drafting of the Plan, depending upon the assumptions aboutoil production and the rubber price. Thus, the expenditures called for underboth Phase I and Phase II could easily be met by the public sector. At aminimum, under Phase I, development expenditures could reach M$19.8 billion,while adding Phase II could raise them to M$20.8 billion. Public investmentunder Phase I would approach the TMP target level of M$17.4 billion (seeTable 8). Of the M$1 billion in Phase II, about M$0.8 billion could beclassified as investment and would therefore increase public investment toabout M$18 billion./l

/1 The remaining M$200 would be a housing subsidy.

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2.36 Petronas will accumulate M$4.4-6.4 billion during the TMP. Becausethe Petronas revenues are derived from petroleum, there may be a tendency toearmark such funds for further petroleum related investments. While developingthe petro-chemical industry in Malaysia may turn out to be a sound investment,the size of the investment should not be determined by how much Petronas re-ceives from oil revenues. The obvious danger of tying oil revenues to petro-chemicals is relative over-investment in petro-chemicals and under-investmentelsewhere. One way to ensure this does not happen is for Petronas revenuesto be included in the normal review and allocative procedures of the publicsector. This would not only help determine the appropriate level of investmentin petro-chemicals, but might also prevent a situation in which some parts ofthe economy would have surplus resources, while in others worthwhile projectswould not be undertaken because of shortages in resources. Planned Petronasinvestments for the TMP could amount to about M$1.5 billion, which could befinanced from public sector revenues and still leave an overall surplus ofM$7.7-12.4 billion.

2.37 Given the abundant resources that will be available to the publicsector during the TMP and the strong stance of the Government on povertyeradication, a good case can be made for additional expenditures in poverty-related areas. Some of the programs discussed above, such as land develop-ment, housing subsidies, and rural electrification, fall into this category,but others could probably be identified as well. For example, the ruralroad system could be expanded, so as to provide inhabitants of the more in-accessible areas easier access to markets where they can sell their output.Such roads would generate increased production of agricultural goods. Perhaps,in addition, the Government could use the tax system to increase the incomesof the poorer segments of the population. Because of its commitment to theelimination of poverty, the Government may want to consider these and otherpossibilities for the use of its extra resources during the TMP.

2.38 A recent Government regulation set state ceilings on developmentexpenditures to prevent too many funds from going to the richer states withbetter implementation capacity. This need to maintain the shares of thestates in the federal Government's development program may complicate effortsto increase the size of the program. Simply raising the ceilings for allstates would not ensure that all shared equally in the extra resources.Although some of the suggested programs may be flexible as to their loca-tions, many of them are not, and their execution could lead to a change inthe geographical allocation of funds. It is beyond the scope of this reportto deal with this obviously important issue.

2.39 Short-term implementation constraints are likely to arise in someareas. The Government has been investigating the implementation capacityfor construction and building projects, which constitute about 45% of thetotal allocation under the TMP, and has identified problems particularly inthe areas of financial and manpower planning at the state level and thesupply of key material resources. One step taken to increase implementationcapacity is a World Bank/UNDP project which is helping to improve the planningcapabilities of two of the poorer states. The Implementation and Coordina-tion Unit (ICU) in the Prime Minister's Department is responsible for coordi-nating the implementation of development activities, identifying deficiencies

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in the process, and overseeing the implementation of the New Economic Policy.Toward this end, the ICU is setting up a computerized system designed tomonitor the physical and financial performance of projects and public sectorcorporations. The monitoring of scarce resources, such as skilled manpower,is not included, but is being considered for inclusion. While these aresteps in the right direction, the importance of increasing the public develop-ment program warrants the introduction of measures to overcome the problemsalready identified. In those cases where immediate expansion of programs isimpossible, it will be important to develop a concrete phased plan to increaseplanning and implementation capacity. These plans for the various areas andsectors should then be integrated into a national plan for the expansion ofpublic sector development planning and implementation capacity, which shouldbe monitored as closely as the financial plans. In the interim, it isimportant to signal the agencies that more funds are available so thatthey can begin to increase their capacity as soon as possible for largerprograms in the future.

3. PROSPECTS FOR DEVELOPMENT

3.01 There are three important considerations to take into account ina discussion of Malaysia's future development. First, there will be a muchgreater availability of foreign exchange and public sector resources thanpreviously anticipated. Second, these additional resources offer the potentialfor a significantly faster rate of growth and intensification of efforts toreduce poverty. Third, there is still some uncertainty about the climate forprivate investment. If private investment were allowed to stagnate, thiscould offset to a considerable extent the brighter prospects offered by therecent surge in exports. This chapter attempts to provide rough estimates ofthe economic consequences of higher resources and of various investment levels.In the first instance, the effects of higher exports and of different levelsof public and private investment will be traced on the growth of output viatheir effects on demand. Subsequently, the effect of a higher level ofpublic investment on the reduction of poverty will be discussed, and finally,the effect on employment of a lower level of private investment will bedetermined via its effect on supply capacity. A full discussion of all theimplications of alternative investment levels for employment and incomedistribution is beyond the scope of this report. One tool that should proveuseful in deriving the economic implications is the Social Accounting Matrix(SAM) model being developed by the Economic Planning Unit together with theDevelopment Research Center of the World Bank. Unfortunately, this model is notyet at a stage where it could be employed in this analysis. When the modelis fully operative, perhaps by late 1977, it is proposed that derivation ofthe long-run implications of the alternatives be one of its first applications.As for the political and social trade-offs of the alternatives, they are moreappropriately addressed by the Government.

3.02 Of the three variables being considered, exports, public investment,and private investment, the mission considers that the first is largelyexogenously determined and that, further, the prospects of higher exportearnings are certain enough to treat them as given. There is considerably

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more doubt about public and private investment levels. Two basic decisionsmust be made regarding them. The first is whether, given the improvedresources, the public development program should be increased beyond its TMPtarget, and the second, how the Government should promote the recovery ofprivate investment.

3.03 Starting with the TMP forecast of income for 1980,/i let us firstconsider the impact of an increase of exports of the magnitude forecast inChapter 1,/2 i.e. about M$4 billion in 1980. Even assuming a ratherlarge import leakage,/3 the primary private incomes created (about one halfof the total, or M$2 billion) will generate a considerable second-orderincrease in the level of income. If the public sector does not spend itsextra revenue so that no second order effects of these incomes are created,it is roughly estimated that the higher exports could generate a totalincrease in income of over M$5 billion or 12% in 1980. Notwithstanding asignificant import leakage, the effect on Malaysia s external balances wouldbe considerable. The 1980 balance-of-payments changes from a negative 4.6%of GDP in the TMP to a positive 2.5% of GDP. In effect, gross domesticsavings exceed gross domestic investment by this amount and offer considerablepotential for an even higher investment rate. It is also worth noting thatof the additional income generated, three-quarters is from the higher exportsper se while only one-quarter is due to greater consumption of domesticoutput. Further, it is likely that the increase in domestic consumptionwould be directed to the traditional service sector where output could beincreased without significant capital investments.

3.04 While the impact of the higher exports on income is considerable,and offers the potential for even higher investment and output, thisincome effect could be considerably negated if private investment failsto recover from its current low level. In that instance, the combinedeffect of higher exports and low private investment would result in a GDPonly 4% higher than the TMP estimate for 1980. There would be a netnegative effect on employment, since the capacity effects of a reduction ininvestment would significantly decrease employment opportunities in modernsector employment. This problem is discussed further in paras. 3.08-12below. Because investment has a high import content, its lower level wouldresult in an even greater foreign resource surplus, amounting to 6-7% of GDPin 1980 including multiplier effects. This makes even more dramatic the unused

/1 The TMP forecast (except for investment) for 1980 is employed in thisanalysis. For investment, the higher private investment level, discussedin Chapter 2, necessary to achieve the TMP growth targets is used. TheGDP estimate is based on the 1976 estimated actual GDP and a real growthof 8% p.a. plus inflation of 5% p.a.

/2 The low oil/high rubber alternative.

/3 The marginal propensity to import out of consumption is assumed to be 0.6.Also, assuming a marginal tax rate of 0.3 and a marginal savings ratio(out of disposable income) of 0.2, the multiplier implied is 1.33.

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potential such a low investment level would imply. Furher, despite thehigher level -of income in 1980, this alternative puts the economy on a lowergrowth path than the TMP alternative. This is because the higher income dueto higher exports is basically a once and for all upward shift in GDP whichis being slowly eroded by lower private investment. By 1980, some of theexport effect is still being felt; however, within one or two more years,the TMP forecast of GDP (low exports, high private investment) would surpassthis alternative.

3.05 Another element which can affect income growth is public investment.Chapter 2 identifies areas for increased public investment of about M$2 billionduring the Plan, and suggests further expenditures of an unspecified amount.For the purpose of this analysis, it is assumed that government spending wouldbe increased by M$3 billion. One-half of this however would just compensatefor the under-funding of the public development program in the Plan. Whilethe effect of the increase of investment on supply capacity would not begreat during the Third Plan, its demand effects would add 1-2% to GDP in1980. This addition would help make greater use of the available resources.In the case of lower private investment, it would reduce the resource surplusto 9% of GDP, and in the case of the higher level of private investment, theresource surplus would be similarly reduced.

3.06 While this analysis indicates some of the income effects of varyinglevels of exports and investment, it does not adequately examine the incomedistribution benefits of a higher level of public investment nor the employ-ment and income distribution impact of different levels of private invest-ment. These are discussed in the remainder of this chapter.

3.07 The suggested increased public spending in the agricultural sectorcan be directly linked to the reduction of poverty and the increase ofproduction. Development of an additional 250,000 acres during the TMP couldeventually accomodate about 25,000 settler households that would otherwisebe in poverty. This means that the expanded programs could eventuallyreduce the number of agricultural households in poverty by almost 5% of the1980 poverty level, reducing the incidence of poverty by about a fifth asmuch as is expected to occur during the entire TMP period. In addition tocreating jobs for settler families, land development creates about as manytemporary jobs for the workers who clear the land and build the settlementsand may well induce approximately the same number of permanent jobs inthe surrounding area, as a result of the income generated by the settlement.Aside from its spending in the agricultural sector, the public developmentprogram has a relatively minor direct impact on the growth of income oremployment.

3.08 As noted in Chapter II, the 1980 level of non-oil private investmentrequired to achieve the TMP growth and employment objectives is about 13.7%of GDP, compared to the current rate of about 8% of GDP. A continuation ofthis difference could significantly affect the overall growth of the economy.Based on an estimated overall incremental capital-output ratio (ICOR) for

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Malaysia of about 2.6,/1 continuing stagnation of investment would imply thatGDP growth would be about 2.0 percentage points less than it would otherwisebe. /2

3.09 The effects on employment of a lower investment level would alsobe considerable. Interpolating employment estimates from the Outline Pers-pective Plan (OPP, 1970-90)/3 provides a broad view of the employment prospectsthrough 1985, assuming the economy stays on the growth path outlined in theTMP (see Table 10). In this context, it would be useful to determine theeffect on long-term employment if non-oil private investment failed to recoverfrom its current level of 8% of GDP which is about 40% less than the invest-ment required to generate the empoyment growth outlined in Table 12./4

3.10 Assuming that private investment acounts for virtually all theincrease in output and employment in the manufacturing, construction, andmining sectors, about a third in transport and communications sectors andabout two-thirds in services, a stagnation in private investment could resultin a long-term employment growth in industry of 3.3% p.a. (instead of theOPP projection of 5.4% during 1976-85) and in services of 3.8% (instead of5.2% during 1976-85). Assuming further that the reduction in privateinvestment has no significant effect on agriculture, then the overall growthof employment during 1976-85 would be reduced to about 2.4% per annum,significantly less than the 3.2% growth in the labor force. As a result theunemployment rate would increase from the present level of 7% to over 13% by1985. While this represents a considerable deterioration in the employmentsituation, it is a conservative estimate since only the direct employmentimpact was calculated. Of course, if the absorptive capacity of the modernsector were reduced, the excess labor would probably be absorbed in agricultureor in the traditional service sectors, resulting in a smaller increase inopen unemployment at the expense of an increase in underemployment.

/1 The overall ICOR of 2.6 is being used in the Social Accounting MatrixModel referred to above.

/2 This is a conservative estimate since the ICOR for private investment islikely to be significantly lower than the average ICOR since the ICORs insectors where public investment is concentrated are typically higher thanfor other sectors. For example,. the ICORS used in the input-output model(see Annex V of World Bank Economic Report No. 1177-MA) for sectors witha significant public sector participation are: rubber replanting, 5.0;oil palm, 4.5; transport, 4.4; and utilities, 7.5.

/3 The Outline Perspective Plan presents the Government s broad socio-economic framework within which the objectives of the NEP are beingpursued. It covers the period 1970-90 and is summarized in Chapter IVof the TMP.

/4 Under this assumption private investment will still be increasing at8% p.a. from its 1976 base.

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Table 12: TMP EMPLOYMENT PROJECTIONS(Basic Alternative)

Employment ('000) Growth rate (% per annum)1970/a 1975/a 1980/b 1985/c 1970-75 1975-80 1980-85

Primary /d 1,787 1,937 2,063 2,168 1.6 1.3 1.0

Secondary /e 620 801 1,047 1,349 5.3 5.5 5.2Tertiary /f 933 1,190 1,561 1,978 5.0 5.6 4.9

Total employment 3,340 3,928 4,671 5,495 3.3 3.5 3.3

Labor force 3,607 4,225 4,973 5,765 3.2 3.3 3.0Unemployment rate 7.4 7.0 6.0 4.7 - - -

/a Estimated actual (TMP).

/b TMP projections.

/c Interpolated from Perspective Plan in TMP.

/d Agriculture forestry and fisheries.

/e Mining, manufacturing, construction, utilities and transport.

/f Wholesale and retail trade, banking, public administration, health,defense and other services.

Source: Third Malaysia Plan and mission estimates.

3.11 Such a reduction in employment opportunities in the modern sector

would substantially hamper efforts to reduce poverty. It would mean that by1985 over 300,000 workers would either be added to the unemployed or absorbed

in low productivity jobs in subsistence agriculture or in the traditional

service sector. While all such workers may not be in poverty, they wouldobviously be earning significantly lower incomes than if they were employed

in the modern sector. The increase in either open unemployment or tradi-tional employment would obviously compound the problems Malaysia faces inreducing its high incidence of poverty.

3.12 While such a deterioration in new income and employment opportunities

is serious in itself, the problem is exacerbated in the Malaysian context by

the Government's efforts to restructure employment. As one of the main aims

of the New Economic Policy, the objective of restructuring the racial compo-sition of employment in each sector is a serious concern of Government. The

long-term (1990) aim is to have racial shares in employment in each sector

reflect the racial composition of the society. An important element of this

restructuring effort is the Government's desire to ensure that it does not

occur at the direct expense of non-Malays. Thus, a target of the PerspectivePlan is to generate sufficient employment in the modern sector for non-Malays

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so that their employment grows at a faster rate than their labor force. Theoverall restructuring of employment will require substantial intersectorallabor movements, and when the constraint of providing simultaneously a minimumgrowth rate for non-Malays in modern sector employment is added, a rapid andsustained growth in overall employment is essential. The significant reductionin employment caused by a lowered investment level would therefore makemeeting these dual targets impossible. Either the progress of restructuringwould have to be slowed or the employment opportunities for non-Malays inindustry would be less than the growth in the labor force. Thus, an invest-ment level about 40% lower than necessary to attain the TMP objectives wouldreduce the annual growth rate of employment in industry for non-Malays fromover 3.0% to 1.6% if the restructuring target were maintained. If, on theother hand, growth of non-Malay employment in industry were maintained at thelabor force growth rate, then by 1985 Malays would constitute only 38% of theemployment in that sector, about 8 percentage points below what might beexpected based on the 1990 target of 52% representation.

3.13 Even though the estimates in the foregoing discussion are only roughapproximations, they nevertheless indicate quite clearly that a prolongedstagnation in private investment will seriously undermine the economic andsocial objectives of Malaysia. While it is difficult to measure preciselythe impact of various rates of recovery, the adverse consequences will be indirect proportion to the speed of recovery. If private investment doesrebound during the next few years, there may be a temporary stagnation inemployment, poverty reduction and employment, but in the long term theeconomy and the NEP will be on course.

3.14 The means of generating a recovery are not clear. First ofall, it is not known with any degree of precision to what extent the drop ininvestment in 1975 and 1976 was caused by international factors and to whatextent by domestic factors. Second, the functional relationship between theinvestment climate and Government policy and action can be specified in onlythe most general terms. As noted in Chapter II, the Government is aware ofconcern in the private sector over the implementation of the IndustrialCo-ordination Act and the Petroleum Development Act and has modified bothActs to alleviate such fears. It is too early to assess the impact thesechanges might have on the private sector. The Government, however, should beable to gauge the reaction by keeping a close watch on a number of investmentindicators in the coming months. These include investment applications toFIDA, imports of capital goods, the construction index, and business attitudesurveys undertaken by the Central Bank. It may in fact be warranted for theDepartment of Statistics to develop an overall index of private investmentwhich can be reported with a minimum time lag, as well as indicators formanufacturing investments for important subsectors. If, in light of suchmonitoring, the Government determines that investment activity is notpicking up to the extent desired, and that therefore its long-term fundamentalpolicy objectives are in danger, it may want to reassess its policy mix.

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3.15 Even a recovery to the level suggested in this report, however,does not exhaust the resource availabilities of the economy. The level ofimports required to finance this investment level would be similar to theimport level projected in the TMP, and given the substantially higher exportearnings now forecast, the low debt service and the high reserve level, thebalance of payments could easily accommodate higher levels of private invest-ments than the 13.7% of GDP discussed above. Given the substantial impactindicated by the above discussion of private investment on poverty, employmentand restructuring, there is strong justification for the Government toencourage a continued increase in the rate of private investment beyond 1980.

ANNEX IPage 1

TECHNICAL NOTES

Part A: Oil Production Sharing Agreement

1. An oil production sharing agreement was signed in December 1976between the Government and the Exxon and Shell oil companies. The agree-ment specifies the way in which production is to be divided among stateand federal governments, Petronas, and the oil companies. Of the totalproduction, 10% goes to royalties: 5% to the state where the oil is minedand 5% to the federal Government. Then the companies can keep up to 20%of total production to cover their costs./l The remaining 70% (or more)is split between Petronas and the oil companies, 70% to the former and 30%to the latter. Thus, the companies receive up to 41% and Petronas at least49% of gross production. The oil companies then pay a 45% income tax (witha one-year lag) after deducting their full costs. This means that in theearly years of production, when costs may be over 41%, a company may pay noincome tax. Royalties and the Petronas share, however, must always be paid.Petronas also pays a 45% income tax on its share. The approximate sharingof production at four possible cost levels is shown in Table 1.

2. In addition to the basic sharing arrangements, the agreement alsospecifies that:

(a) if the price of Malaysian oil exceeds a base value set atUS$12.72 per barrel and to be escalated at 5% per annum,Petronas will receive 70% of additional revenue accruing tothe companies on their share of production after cost recovery;

(b) bonus payments by the oil companies to Petronas of US$1 millionbe made upon making a commercial oil discovery and US$2 millionwhen production reaches 50,000 b/d on a continuous basis; and

(c) a contribution of 0.5% on the proceeds of sale of the contractor'scost oil and profit oil to Petronas' research fund.

Although the magnitudes involved in these additional clauses appear relativelysmall, their implications are difficult to determine precisely in the absenceof further details on the agreement and on the oil companies. The agreement,which was signed in December 1976, also covers the sharing of gas production.

/1 It is not clear whether companies are allowed to carry production costsforward in the event such costs exceed 20%.

ANNEX 1Page 2

Table 1: APPROXIMATE REVENUE SHARES UNDER VARIOUS COST LEVELS /a

Share of Revenue (%)Costs Costs Costs Costs15% of 20% of 30% of 40% of

production production production production

Total Production 100.0 100.0 100.0 100.0

1. Royalties: federal 5.0 5.0 5.0 5.02. Royalties: state 5.0 5.0 5.0 5.03. Cost allowance 15.0 20.0 20.0 20.04. Net = Production -(1)-(2)-(3) 75.0 70.0 70.0 70.05. Share of companies = 30% of (4) 22.5 21.0 21.0 21.06. Share of Petronas = 70% of (4) 52.5 49.0 49.0 49.07. Tax base for companies =

(3) + (5) - actual costs 22.5 21.0 11.0 1.08. Taxes on companies 45% of (7)/b 10.1 9.5 5.0 0.59. Taxes on Petronas 45% of (6) /b 23.6 22.1 22.1 22.1

Companies' share of total production 27.4 31.5 36.0 40.5Costs 15.0 20.0 30.0 40.0Profits = (5)-(8)+(3)-actual

costs 12.4 11.5 6.0 0.5Profits for Petronas = (6)-(9) 28.9 26.9 26.9 26.9Federal Government revenues =

(1)+(8)+(9) 38.7 36.6 32.1 27.6State government revenues = (2) 5.0 5.0 5.0 5.0Total production 100.0 100.0 100.0 100.0

/a These calculations are based on the Production Sharing Agreement, butignore the additional miscellaneous clauses described above in the text.

/b There is a one-year time lag between production and payment of taxes.This lag is not, however, taken into account in this breakdown, whichonly shows the disposition of a given amount of oil. Because the levelof production increases over time, these theoretical shares will not beobserved in any given time period.

Source: Mission estimates based on the Production Sharing Agreement ofDecember 1, 1976.

ANNEX 1Page 3

Part B: Export Projections

3. Two alternative sets of export projections have been preparedwhich reflect the uncertainty about two factors: the level of oil produc-tion and the price of rubber. The two alternatives are presented in Table 2.Alternative I projects oil production to increase to 240,000 b/d by 1980 (thepreliminary Petronas technical forecast) and a ceiling price of rubber exportsof M$2.00/kg. Alternative II projects oil production to reach 400,000 b/d by1980 (an upper capacity estimate), and uses the World Bank rubber price pro-jection, which reaches M$2.50/kg in 1980. For all commodities other thanrubber, both alternatives incorporate the latest World Bank price forecasts(November 26, 1976), and both project volume and price changes from the new1976 base.

Table 2: COMPARISON OF EXPORTS PROJECTIONS, 1976-80(million M$)

Revised estimatesTMP Alternative I Alternative II

Rubber 16,825 18,093 20,132Palm oil products 8,966 9,768 9,768Saw logs 5,320 8,137 8,137Sawn timber 3,372 4,883 4,883Tin 6,991 8,488 8,488Petroleum [net] /a 5,451 9,373 13,712Manufactures and other misc. 23,699 22,287 22,287

Total merchandise 70,624 81,029 87,408

Nonfactor services 5,326 5,460 5,460

Goods and nonfactor services 75,950 86,489 92,868

/a Assumes that 73% of gross oil revenues are net foreign exchange earningsand that 27% are lost through imports of goods and services and dividendpayments. This ratio is also applied to the gross oil estimate in theTMP of M$7,468 million to allow comparison on an equivalent basis.

Source: TMP and mission estimates.

ANNEX 1Page 4

Part C: Public Sector Fiscal Projections

4. The public sector current account surplus for the TMP periodhas been estimated under two different sets of assumptions for oil productionand rubber prices and using two methods. The alternative assumptions arediscussed in para. 10, and the two methods in this paragraph through para. 9.The base revenues and expenditures, which are the same for both sets ofassumptions, exclude oil revenues, export duties, and the effects of therecent wage increases. Method 1, the results of which are presented inTable 3, applies the year-by-year growth rates for revenue and expendituresfound in background tables to the TMP to the actual data for 1976. Thetotals for 1976-80 are shown, with the TMP numbers presented for comparison.The difference between the revised base revenue and expenditure estimates andthe corresponding numbers in the Plan is the result of applying the samegrowth rates to higher values in 1976. Since 1976 turned out more favorablythan was predicted during the drafting of the Plan, state and federal baserevenues come out M$2.6 million higher than expected over the five-year period,while base expenditures come out only M$0.4 billion higher. Governmentrevenues, excluding oil revenues and export duties, rise from 20.5% of GDP in1976 to 21.2% in 1980. A total of M$1.8 billion is added to expenditures totake into account the estimated cost of the recent wage agreement (M$600million in 1977 and M$400 million per year thereafter)./1 Including theseamounts, state and federal expenditures increase from 23.5% of GDP in 1976 to25.0% in 1980./2 Income tax from the wage payments is added to revenues ata marginal tax rate of 10%.

/1 This method of projecting expenditures may result in an overestimate,since the growth rates implicit in the TMP, which are used to project baseexpenditures, may already include a factor reflecting wage inflation.

/2 If half of the M$600 million in 1977 is included in 1976, for which itis a retroactive payment, then expenditures are 24.7% of GDP in 1976,and their share stays nearly constant during the TMP.

ANNEX IPage 5

Table 3: FISCAL PROJECTIONS, CONSOLIDATED PUBLIC SECTOR, 1976-80, METHOD 1(billions of M$)

Revised estimateTMP Alternative I Alternative II

State and federal current revenue, 43.3 48.6 51.3of which: base revenueja (34.9) (37.5) (37.5)

oil revenue (3.6) (4.7) (6.4)export duties (4.8) (6.2) (7.2)income tax from

additional wages - (0.2) (0.2)

State and federal current expenditure 42.5 44.7 44.7of which: base expenditures (42.5) (42.9) (42.9)

additional wages - (1.8) (1.8)

Government current surplus 0.8 3.9 6.6Public authorities current surplus 0.9 1.0 1.0FELDA surplus /b - 0.4 0.4Public sector current surplus 1.7 5.3 8.0Petronas revenues Ic - 4.4 6.4Public sector current surplus,

including Petronas revenues 1.7 9.7 14.4

/a These projections are based on preliminary estimates of public accounts.More recent estimates (Bank Negara Quarterly Economic Bulletin, March/June1977) show the federal government current revenue for 1976 to be M$ 222 mil-lion higher than in the earlier estimates. If this higher figure wereused in the base year for the projections, the five-year totals shown inTables 3 and 4 would be even higher than they are.

/b If this surplus is not spent, an additional M$0.2 billion will be accumu-lated in interest.

/c Excludes interest earned on the unused balance.

Source: Bank Negara, TMP and World Bank estimates.

5. The use of 1976 as a base for the projections of public sectorresources may bias the results upwards, since 1976 may not reflect thelonger-term trend. Method 1 uses the Plan growth rates for 1977 through1980,even though the high growth in 1976 may actually be followed by lowerthan projected growth rates in subsequent years. Method 2 corrects for thebias by adjusting the base used for projections downwards so that it representsthe trend value in 1976. Since only income taxes appear to be well above thetrend in 1976, the adjustment is made only for this component of revenue.The 1976 trend value of income taxes is calculated by taking the average

ANNEX 1Page 6

value of the tax (excluding taxes on oil production) for the period 1971-75and applying the elasticity of income tax with respect to GDP to the growthrate of GDP between its 1970-74 average and 1975./1 The Plan growth ratesmay not be applicable even to the adjusted base year revenues, since revenuesare closely related to GDP, and the growth rate of GDP has not so far followedthe pattern predicted in the TMP. More accurate projections can be made basedon the long-term relationship between revenues and GDP. Method 2 projectsthe various components of revenue using their elasticities or buoyancies withrespect to GDP (see para. 7). The results are summarized in Table 4, whichalso shows the TMP numbers for comparison.

Table 4: FISCAL PROJECTIONS, CONSOLIDATED PUBLIC SECTOR, 1976-80, METHOD 2(M$ billions)

Revised estimateTMP Alternative I Alternative II

State and federal current revenue, 43.3 48.0 50.7of which: base revenue La (34.9) (36.9) (36.9)

oil revenue (3.6) (4.7) (6.4)export duties (4.8) (6.2) (7.2)income tax from

additional wages - (0.2) (0.2)

State and federal current expenditure 42.5 44.7 44.7of which: base expenditures (42.5) (42.9) (42.9)

additional wages - (1.8) (1.8)

Government current surplus 0.8 3.3 6.0Public authorities current surplus 0.9 1.1 1.1FELDA surplus /b - 0.4 0.4Public sector current surplus 1.7 4.8 7.5Petronas revenues /c - 4.4 6.4Public sector current surplus

including Petronas revenues 1.7 9.2 13.9

/a See footnote /a to Table 3.

/b If this surplus is not spent, an additional M$0.2 billion will be accumu-lated in interest.

/c Excludes interest earned on the unused balance.

L1 A lag of one year is used, since income taxes are paid in the yearfollowing that in which the income is earned.

ANNEX IPage 7

6. Method 2 results in an estimate of base revenue for the TMP periodwhich is M$0.6 billion lower than the estimate of Method 1. A look at reve-nues as a percentage of GDP indicates that the lower estimate is reasonable,since, although income taxes grow from 7.5% of GDP in 1976 to 8.2% in 1980(with GDP lagged one year), total government revenues stay nearly constantat about 20.5% of GDP. Method 2 is more precise than Method 1, and thereforeits revenue projections are used in the main text of this report. Currentexpenditures are not re-estimated under Method 2, since they are, if anything,overestimated by Method 1. Combining the lowest reasonable projection ofrevenues with the highest projection of expenditures results in the mostconservative estimate possible of additional public sector resources.

7. Table 5 presents the elasticities or buoyancies used to projectthe various components of govermuent revenue and the public authorities'surplus for Method 2./i Tobacco, petroleum, alcohol, and motor vehicles taxelasticities are based on the real growth of GDP, and the rest on its nominalgrowth. For the projections of all federal taxes other than the income tax,the sales tax, and the import surcharge, the growth rates implied by theelasticities and the projected growth of GDP were calculated and averaged togive a weighted average growth of 10.1% p.a. in nominal terms. The sales taxand import surcharge projections are based on their proportions to GDP in themost recent five-year period for which the data are available. These propor-tions are 1.12% and 0.87%, respectively.

Table 5: REVENUE ELASTICITIES AND BUOYANCIES

Elasticity Buoyancy

Income tax 1.41Tobacco import duties & surcharge 0.2Petroleum import duties & surcharge 0.93Alcohol import duties & surcharge 0.39Motor vehicles import duties & surcharge 1.18Textile import duties & surchage 1.08Other import duties 0.75Other federal taxes 1.23Federal non-tax revenue 0.48State revenue 1.13Public authorities surplus 0.59

Source: "Malaysia: Second Plan Performance and Third Plan Issues,"Annex IV. World Bank Report No. 1177a-MA, Vol. II.

L/ Buoyancies were used only when estimates of elasticities were notavailable.

ANNEX 1Page 8

8. The surplus of public authorities under Method 1 is the same asthat in the Plan, adjusted for the actual surplus in 1976. In Method 2the public authorities' surplus is projected using the buoyancy shown inTable 5.

9. The TMP does not discuss the Petronas or FELDA revenues, andtherefore no surplus is listed for these two agencies in the TMP case. Inthe revised estimates, FELI)A's surplus is the same under both methods and hasbeen calculated on the basis of the difference between the easy financialterms from the Government to FELDA and the harder terms from FELDA to the enduser, receipts of the management levy, and the reserves for replanting. IfFELDA continues to hold these reserves, they will be augmented by aboutM$0.2 billion in interest, increasing the total to M$0.6 billion. Petronas'revenues are calculated, as were govermnent oil revenues, by applying theproduction sharing agreement to the low and high oil alternatives.

10. Within each method of projecting revenues are two alternativeestimates, which differ in two respects. The low alternative (I) estimatesoil revenues by applying the December 1976 production sharing agreement toPetronas' technical forecast of oil production, estimated to reach 240,000 b/dby 1980, while the high alternative (II) uses the estimated capacity forecastof 400,000 b/d by 1980. Secondly, the estimates of export tax revenues, cal-culated from the export duty schedules for rubber, palm oil and tin, are basedon two different assumptions about the price of rubber: The low estimate placesa ceiling price on rubber exports of M$2.00/kg, while the high estimate incor-porates the World Bank price forecast, which rises to M$2.50/kg by 1980. Bothestimates of export duties are reduced by 15% to correct for unexplaineddifferences between estimated and actual figures that occurred in the pastand in 1976.

11. The overall results of the projections of public sector resourcesshow a substantial increase over the amounts projected in the TMP. UnderMethod 1, the public sector current surplus, excluding Petronas revenues,ranges from M$5.3 billion under Alternative I to M$8.0 billion projected inthe Plan. Petronas revenues add an additional M$4.4 billion in Alternative Iand M$6.4 billion in Alternative II. Under Method 2, the one presented inthe main body of this report, the public sector current surplus, excludingPetronas, ranges from M$4.8 to 7.5 billion. Petronas revenues add an extraM$4. 4-6. 4 billion.

ANNEX 2Page 1

SECTOR REVIEWS

Infrastructure

1. Transport. The objectives for the transport sector in the TMP areto improve and upgrade the existing transport network; expand the networks inthe less developed states, both in the eastern part of Peninsular Malaysia andin Sabah and Sarawak; improve access to rural communities to contribute tothe overall goal of eradication of poverty; and develop public transportservices. The TMP recognizes that in Peninsular Malaysia the transport net-works serve economic activities well and that, except for the completionof three new roads on the east coast and the new port of Kuantan (all worksstarted under the SMP), there will not be any major new investment in thesector. The objectives of the TMP for the transport sector are thus well inline with the general thrust of Government policy for this plan period whichfocuses on improving the condition of the lower income groups.

2. Public investment programs in the transport sector under the SecondPlan (SMP) were based largely on the findings and recommendations of theGeneral Transport Survey (GTS.) The achievement, measured by the level ofexpenditures, exceeded the original plan targets by about 21% in real terms.The shortage of professional and technical staff in the implementationagencies remains a problem as in most sectors. However, in highways it isfairly easily remedied by the use of consultants, both for the preparation ofprojects and for the supervision of their execution. While this reliance onconsultants is acceptable for work on specific projects, it is less desirablefor overall transport planning and coordination. One major study every tenyears, such as the GTS in 1968 and the forthcoming transport/railway study in1977, is not enough to keep abreast of developments and needs in the sector.Planning is a continuous process.

3. The total TMP allocation for public investment in the transportsector amounts to M$2,820 million in current prices and accounts for 15.2%of the total public investment for the Plan period./l The proportion was17.5% in the SMP and 12.8% in the FMP. In constant prices the TMP allocationfor the sector is 20% higher than the SMP expenditures.

4. The proposed road investment program for Peninsular Malaysia isestimated at M$1,278 million and represents 45% of the total TMP investmentin the transport sector in Peninsular Malaysia. M$30 million would beassigned to initiate a road maintenance and strengthening program on thebasis of recommendations made in the 1974 Highway Maintenance Study. Whileroutine maintenance in Peninsular Mialaysia is generally adequate, the problemidentified by the maintenance study is the critical condition of pavements.The consultants suggested a 5-year program costing M$215 million. The M$30million allocated for a pilot maintenance program would, of course, allow onlya very modest start. However, in the M$380 million allocated for improvementand upgrading of the federal network, M$146 million are not assigned to

/1 This proportion is comparable with the transport allocation in othercountries of the region.

ANNEX 2Page 2

specific projects but to the widening, strengthening and realignment of majorfederal roads. If this figure is added to the M$30 million specificallyallocated for maintenance and strengthening, the amount available for thestrengthening program would be 80% of the sum recommended by the consultantsand would allow expansion of the program beyond the pilot project stage. Anadditional M$40 million would be needed to implement the consultants' recommen-dations. Another project not yet funded, which could be commenced in the TMPperiod, is the expressway between Seremban and Ayer Hitam, for which thestudies are not yet complete.

5. For Sabah and Sarawak, which are at a much earlier stage of develop-ment, 50% of the Plan's expenditures are assigned to developing trunk roads,compared to less than 20% in Peninsular Malaysia. The TMP allocation forSabah and Sarawak roads is M$250 million each. It is obvious that in Sabahthis will not be enough to carry out the Third Highway Project, the proposedJapanese-financed Crocker Range Crossing and continued work on other projectsnow underway, such as the Sandakan-Lahad Datu road. An additional M$80 millionwill be needed for these projects. The allocation will probably be reviewedupwards at mid-plan as was done in the previous two plans. A rather largeallocation of M$80 million has also been made for the acquisition of plant andequipment for the two states (as much as for all 11 Peninsular Malaysia states).This indicates the Government's concern with improving road maintenance inSabah and Sarawak.

6. At this time the role and condition of the railway is the main issuein the transport sector. The tonnage carried has remained virtually unchangedsince 1963 at around 3 million tons per annum,and the number of passengers hasonly recently regained its 1964 level of 6 million per annum. To assess thesector development since the 1969 General Transport Study (GTS), make new pro-jections, and examine the future role of the railway, the Government decidedto commission a transport/railway study./l The draft final report should beready in December 1977. The TMP allocation for the Malayan Railway (MR) is$200 million, which is only 10% of the sector allocation and half of what theMR requested. The Government has stated that the allocation will be reviewedat mid-term in the Plan period when the results of the transport/railwaystudy will be available. Meanwhile the MR will proceed only with unavoidableinvestments to maintain the system. The TMP traffic forecasts for the MRappear reasonable for passengers with a 2.3% p.a. growth over the period.However, the 12.5% p.a. growth in ton miles for freight traffic appearsrather optimistic in view of the MR's past performance. The transport/railwaystudy should give a better base for future traffic projections.

7. Investment in ports will continue at a fairly high level throughthe TMP, receiving M$630 million or 22% of the allocation for transportation.The TMP indicates that during the Plan the combined handling capacity of themajor Peninsular Malaysia ports will be almost doubled from 6.8 million tons

/1 The GTS had forecast a 150% increase in ton-miles moved by rail between1967 and 1975.

ANNEX 2Page 3

in 1975 to 11.4 million in 1980./1 Over half the allocation will go toexpanding the existing port of Penang and to completing the new port ofKuantan which is expected to be commissioned in 1978. In addition, the newport of Johore Bahru is expected to be commissioned in 1977. However, anadditional allocation of about M$120 million is needed for the constructionof housing, roads, and commercial areas for the ports at Kuantan and Johore.Sabah and Sarawak are allocated M$155 million, or 25% of the total.

8. The TMP allocates about M$120 million for Peninsular Malaysiaairports, of which M$100 million will go to Penang and Kuala Lumpur forupgrading to cater to wide-bodied aircrafts. East coast airports in Kuantan,Kuala Trengganu, and Kota Bahru will also be improved to receive medium-rangejets, in line with the policy of furthering the development of the eastcoast, which has lagged behind the historically more advanced west coast.

9. Allocations for Sabah and Sarawak airports are respectively M$47million and M$46 million. In Sabah investment will be concentrated onKota Kinabalu, and some funds will go to new rural aerodromes in the interior.The Plan also mentions a study for Tawau in the later years. However, nomention is made of Sandakan, where the runway is in very poor conditionand poorly oriented. Sandakan is the largest city in Sabah, and, even whenthe road over the Crocker Range is improved in a few years, it will stilltake the better part of a day to reach the capital of Kota Kinabalu by road(250 miles). Flights to Kota Kinabalu take only 45 minutes enabling passen-gers from Sandakan or Kota Kinabalu to conduct business in the other town andbe back the same day. An earlier draft of the TMP included about M$90 millionfor airports in Sabah, and the Government might consider restoring thisamount and improving the airport at Sandakan.

10. Electric Power. The projected growth in demand for power inPeninsular Malaysia for the TMP period is 13% p.a., a rate lower than the13.5% p.a. experienced in the SMP. To meet this demand, the total generatingcapacity of the National Electricity Board (NEB) will be expanded from 863 mega-watts in 1975 to 2,016 megawatts in 1980. This large increase in capacitywill ensure the continued expansion of industry and commerce without theconstraint of inadequate power supplies. The program aims to expand thenational grid to the east coast of Peninsular Malaysia. The total cost of theTMP program for Peninsular Malaysia is estimated at M$1,356 million. Thestructure of tariffs for various categories of consumers will be examined witha view to making prices reflect costs, except in the case of subsidies for thepurpose of poverty redressal. The demand for power in Sabah is projected togrow at 14.7% p.a. over the TMP. The Sabah Electricity Board has been allocatedM$126 million, with which it will increase its generating capacity by about133%. Sarawak has been allocated M$98 million and will expand its generatingcapacity by about 120%.

/1 This appears to be inconsistent with an earlier estimate that in1973 Penang and Klang already handled 10.3 million tons.

ANNEX 2Page 4

11. Except for the exception noted in the next paragraph, the policyoutlined in the TMP for the power sector in Malaysia is sound, and the tar-gets are likely to be achieved. However, the capital expenditure require-ments for a number of projects (most notably Pasir Gudang new thermal powerstation and Trengganu multipurpose development and transmission systemexpansion) were underallocated in the TMP. They are now under review by theNEB and are likely to require additional funds, amounting to some M$1.4billion. Of that amount, perhaps M$600 million could be spent during theremainder of the TMP. Although NEB is facing a shortage of manpower,the use of consultants should prevent this constraint from restricting theTMP program.

12. Malaysia has been quite slow to promote rural electrification. InPeninsular Malaysia, only about 30% of rural households have electricity, andin Sabah and Sarawak, the figure is probably closer to 15%. A country witha similar level of per capita income, the Republic of China, is nearly totallyelectrified. Rural electrification has been allocated M$158 million in Penin-sular Malaysia, 12% of the total power allocation, and M$16 million in Sabahand Sarawak, 8% of the total for these two states. The number of villagesreached in Peninsular Malaysia will be close to 9 times that reached duringthe SMP, but still only about 20% of the total number without electricity.The NEB has commissioned a study on rural electrification which will providea long-term plan and also identify areas for short-term projects in the TMPperiod. The study will be completed in a year and a half. However, sincethe western part of Peninsular Malaysia already has an interconnected system,a program to reach the villages still without electricity could probably bemounted quite rapidly. It might cost approximately M$450 million to electrifyall of the western part of Peninsular Malaysia, of which about M$200 could bespent by 1980. The study might then be confined to the eastern part ofPeninsular Malaysia and to Sabah and Sarawak, where the electric power systemis much less developed./l

13. Water Supply and Sewerage. As a result of differences in opera-tional responsibility and in the allocation of funds from the public develop-ment program, the water supply sector is much further developed than thesewerage sector. Water supply is primarily a state responsibility, exercisedmostly through the State Public Works Departments, under the supervision ofthe federal Government's Public Works Department. By law, sewerage is localgovernment business, but its implementation is not mandatory. The localservices suffer from shortages of both staff and funds. On the expenditureside, the First and Second Malaysia Plans spent M$151 million and M$297million respectively for water supply, and M$10 million and M$21 millionrespectively for sewerage.

14. In 1974 about 60% of the whole Malaysia population enjoyed pipedwater; virtually the whole urban population has access to a public watersupply, with generally more than 70% served through house connections.Because the water supplies are handled by state departments, rural areas are

/1 The study as now conceived probably covers only Peninsular Malaysia,since it was commissioned by the NEB, which does not operate in Sabahand Sarawak.

ANNEX 2Page 5

often included in the distribution systems. Connections are metered; chargesfor water reflect its cost and are an accepted burden. Tariffs vary withtypes of consumers but remain low by world standards, and average consumptionis fairly high. By contrast, sewerage is less well developed. In 1970, only9% of the urban population, all in a couple of cities, were served by water-borne sewerage, and there has been little change since then. The rest of thepopulation dispose of their waste through different systems, all unsatisfactory.For the last few years, new housing schemes have included sewage collection,but generally lack adequate sewage disposal. Staffing and funds for themunicipal services are inadequate, and technical equipment is non-existent.

15. In an effort to remedy the lack of development of the seweragesector the Ministry of Health recently created an Environmental HealthEngineering Unit (EHEU), which, with the help of the WHO resident engineer,has endeavored to develop sewerage. However, EHEU lacks staff and funds. Inaddition, at the request of Government, WHO carried out in March-April, 1976,under the World Bank/WHO Cooperative Program, a survey of the sewerage sub-sector in the country.

16. The major constraints identified in the WHO report are lack ofadequate central and local institutions, staff, funds, and updated studies tostart projects. The corresponding recommendations are:

(a) the strengthening of EHEU in its role of planning, preparation andconstruction supervision of projects; supervision of local opera-tions; training and even seconding staff to local units, in orderto make best use of the scarce expertise which would be available;

(b) ad hoc solutions for the local sewerage units (whether withinstrong municipalities or as regional units, or joint water supplyand sewerage operations in state departments or Water Boards);

(c) increased appropriations of funds (which have to come primarilyfrom the federal Government's budget), starting at the mid-termreview of the Third Plan and for the Fourth Plan; and adequatecost recovery from users; and

(d) updating available studies for priority areas, to start projectsas soon as possible./l

17. Since the TMP was prepared and approved well in advance of thecompletion of the survey, the sewerage allocation in the TMP does not reflectthe results of the survey and is still small relative to that of water supply.

/1 Due to a postponement of discussions with Government on WHO's report ofthe Sewerage Sector Survey, the preparation of sewerage projects will bedelayed by several months. Sewerage projects should be started as earlyas possible, (possibly in calendar year 1979), on a limited scale,primarily to build up the necessary central and local institutions, apre-requisite to the anticipated faster development of sewerage duringthe Fourth Malaysia Plan period.

ANNEX 2Page 6

The Plan makes provision for M$592 million for water supply (of which $100million is for rural areas) and only M$139 million for sewerage, the bulk ofwhich is for the Bank financed Kuala Lumpur Project (M$135 million). TheGovernment, however, intends to increase the sewerage allocation by a substan-tial amount in the Fourth Plan (1981-86), and it is prepared to increase thefunds for sewerage at the mid-term review of the Third Plan. TMP expenditurescould be increased by up to M$150 million.

18. Telecommunications. The Malaysian Telecommunications Department(TDM) achieved or exceeded most of its Second Plan targets. About 119,000local exchange equipment lines were installed and 106,000 new connectionsmade, at a cost of M$541 million, or 5% over the SMP target. TDM's ThirdPlan submission requested M$2,082 million for the extension of national longdistance and international facilities, the installation of about 632,000additional local exchange equipment lines, and the connection of about305,000 new subscribers to meet new demands during the TMP period. TheGovernment approved an investment of only M$1,080 million, and TDM has scaleddown its program. Of the 396,000 additional local exchange lines now planned,61,000, or 15%, will be in Sabah and Sarawak, compared to only 18,000 linesinstalled during the SMP. Other projects include the laying of a submarinecable system between Peninsular Malaysia, Sabah and Sarawak, the expansion ofthe telex networks, the construction of a second satellite communications earthstation at Kuantan, and the installation of equipment designed to overcomeshort-term delays.

19. It is understood that the Government will provide more funds in thelast two years of the Plan if TDM satisfactorily uses its current allocationby that time. From its progress during the SMP and the action already takento obtain equipment towards achieving the TMP targets, it appears fairly cer-tain that TDM will be able to achieve its TMP targets without difficulty. Inview of this performance, the Government might consider giving TDM approvalto implement its larger program and financing the additional expenditures asthey fall due. Some constraints arise from the fact that some of the work iscarried out by the Public Works Department, which has an implementation capa-city problem. A reasonable supplementary allocation might be around M$250million. If the Government waits until mid-1978 to approve the larger program,the time required to gear up for the increase would probably mean that littleadditional expenditure would actually occur until 1980 and beyond.

Rural Development and Anti-Poverty Programs

20. TMP programs in the area of rural development have two basic andinterrelated aims: to increase productivity and output in rural areas andto raise incomes and thereby reduce the incidence of poverty. The rural poormake up 87% of all poor families in Peninsular Malaysia, and nearly fourfifths of the rural poor are principally occupied in agriculture./l

/1 The poverty data in this chapter refer to Peninsular Malaysia only,since the data are not available for Sabah and Sarawak.

ANNEX 2Page 7

21. Over the SMP, the incidence of agricultural poverty fell from 68%to 63%, while the incidence of nonagricultural rural poverty was virtuallyunchanged at 35% (see Statistical Appendix, Table 7.2). These facts reflectthe concentration of anti-poverty programs on agriculture, an emphasis to becontinued through the TMP. Thus by 1980, the Plan forecasts that agriculturalpoverty will decline further to 49%./1 On the other hand, despite a smalldecline in the incidence of poverty among nonagricultural rural households,the number in poverty will rise by over 20,000. According to the Plan, ofthe 150,000 new rural households during the period 1976-80, 42,000 will beemployed in agriculture and the rest in nonagricultural activities./2 Theprovision of employment for the latter group should be a high priority goalin Malaysia. However, since 70% of the poor families rely primarily on agri-culture for their income, and since the Government accords high priority topoverty eradication, it is fitting that over a quarter of all TMP developmentexpenditures will go to this sector, more than to any other. The rest ofthis section will concentrate on an analysis of the agricultural programs inthe TMP and the possibilities for increasing their impact on rural poverty.

22. Overview of Agricultural Programs. The 1970-75 annual growth ratein production for the agriculture, forestry and fisheries sector for Malaysiais estimated by the Government at 5.9%. A projection of 6.0% has been madein the TMP for 1975-80, based largely on investments in tree crops thathave already occurred. Although much of the investment during the rest ofthe TMP period will have little effect on production during this time, it isvital both for future growth in the agricultural sector and for continuedprogress in the eradication of poverty.

23. The major change in emphasis from the SMP to the TMP is in thedistribution of investment resources between in situ agriculture and new landdevelopment. In terms of acreage, land development will be continued atabout the same level as was achieved during the SMP, whereas in situ programs,

/1 The figures on poverty incidence probably understate the average gainsduring the SMP, since rubber prices fell by 25% in 1975, and rubbersmallholders are the largest poverty group. During the TMP period, gainsshould be greater than forecast in the Plan, since prices are now pro-jected to increase by more than the TMP projected.

/2 The estimate of an additional 42,000 agricultural households is basedon a growth in agricultural employment that is quite low, only 1.4%p.a., compared to a growth in agricultural output of 6% p.a. Thesefigures imply a significant change in employment elasticity from 0.31during the SMP to 0.22 during the TMP. If, instead, the elasticityremains at 0.31 during the TMP, agricultural employment would grow at2.3% p.a.

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excluding drainage and irrigation, will be doubled (see Statistical Appendix,Tables 7.4 and 7.5.)./1 In terms of resources, expenditures on land developmentwill be 50% higher in real terms in the TMP than in the SMP, and expenditureson all other agriculture will be 108% higher, mainly as a result of largeincreases in the rubber replanting and crop diversification programs./2 Thischange in emphasis results from the conviction that although land developmentis a necessary and dramatic way of reducing rural poverty, it can affect arelatively small number of people compared to those covered by in situ devel-opment. The rest of this section reviews the TMP programs for agriculturewith an emphasis on their anti-poverty component. An attempt is made tosuggest ways in which this component can be strengthened, using some of theadditional resources likely to be available to the Government.

24. In Situ Programs. Rubber smallholders are the single largest groupof farmers in Malaysia. They number close to 400,000 households in PeninsularMalaysia, of which 234,000 are in poverty, contributing 28% of the total poor.Over the SMP, poverty within this group was reduced from 65% to 59%, duelargely to the rubber replanting program. In fact, the incidence of povertyin 1975 would have been much lower had it not been for the 25% decline inrubber prices in 1975. Calculations based on constant prices for the period1970-75 show a drop in the percentage of households in poverty approximatelythree times as great as the one that actually occurred.

25. Expenditures on rubber replanting will more than quadruple in theTMP, while the area covered will be 450,000 acres, only 13% higher than inthe SMP. The high expenditures are partly the result of increases in thesize of the grant given to smallholders to cover the costs of replanting.The Plan anticipates that, as a result of its program, the incidence ofpoverty will fall to 40% by 1980./3 However, the area still remaining at the

/1 A doubling of the acreage covered by in situ programs does not necessarilyimply a doubling of the output resulting from such programs. The effective-ness of the programs varies considerably, depending, for example, on whethersufficient extension aid is included with input subsidies. Nonetheless,measurement of programs by acreage and expenditures gives some indicationof their size, particularly in comparison to previous plans.

/2^ The TMP uses a broad definition of in situ agriculture. It includesr.11 -griculture except land development and hence includes forestry,veterinary services, fisheries, agricultural research, credit andmarketing advice, all of which are excluded in the definition used inthis paper.

/3 World Bank proje.tions of rubber prices in 1980 are 35% above those onwhich the TMP poverty analysis is based. These higher prices wold reducethe incidence of poverty in 1980 by about one third.

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end of the TMP in old, low-yielding trees will be large, 300,000 acres, andif constraints in implementation capacity could be overcome, the rubber re-planting program could be greatly expanded. If all 300,000 acres could bereplanted, an additional investment of approximately M$400 million would berequired. However, RISDA is unlikely to be able to carry out this higherprogram during the TMP. The additional replanting would, once the treesmatured, reduce poverty among rubber smallholders by roughly a further 4percentage points./1 The only smallholders remaining in poverty would bethose with holdings smaller than 3 acres, for whom the only solution wouldbe land consolidation or resettlement. Even these hardcore poor wouldbenefit from an expanded program, however, since their incomes, even thoughstill below the poverty line, would be higher than without replanting. Poorfarming practices reduce the yield on rubber smallholdings below its poten-tial level. Increased extension services by RISDA could help to raise theincomes of all smallholders, both those above and those below the povertyline.

26. Another possible government measure to reduce poverty would be areduction of taxes on rubber. In 1976, export duties on rubber amounted toM$500 million, equivalent to 16% of the total value of rubber exports, or aboutM 14i per pound. For a smallholder family with 3 acres of rubber trees,assuming the tax is borne entirely by the producer, export duties amounted toroughly M$350 for the year, or over 10% of the poverty line income. Thereplanting cess of 4-1/2i per pound places an additional burden on the small-holders of about M$110 per year. Of course, a general reduction of rubbertaxes would affect all rubber producers, not just those in poverty. Small-holders produce just under 60% of Peninsular Malaysia's rubber, and probablysomewhat over half of that is produced on holdings of less than 10 acres.Thus only about one third of the tax reduction would accrue to poor rubberfarmers. The measures would be more attractive if a way could be found todirect it exclusively towards the small producers.

27. Paddy farmers constitute the second largest group of agriculturalhouseholds in Peninsular Malaysia, numbering close to 150,000. One of themajor constraints on incomes of many paddy farmers is their ability to raiseonly one crop per year. The incidence of poverty among single-crop householdsis more than one and a half times that among double-crop households. Thelargest government program designed to assist this group is therefore irri-gation and drainage to provide for double-cropping. During the SMP theincidence of poverty in this sector fell from 88% to 77% as a result of arise in the proportion of double-croppers from two-fifths to over two-thirdsand a sharp rise in the price of paddy. The TMP targets about 240,000 acresof paddy for new or improved irrigation facilities, compared to 324,000 under

/1 Much of the discussion of poverty in this chapter is based on backgroundpapers to the TMP that use a different definition of poverty from thatin the Plan. Therefore the numbers will usually be given in relative,rather than absolute terms.

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the SMP. This will result in a 16% increase in acreage that can be doubledcropped, and an estimated decline in the incidence of paddy farmer poverty to73%. In addition, 359,000 acres will be provided with new or improveddrainage facilities for crops other than paddy, compared to 247,000 acresunder the SMP.

28. If all farmers growing only one crop could shift to double-croppingby 1980, the incidence of poverty among all paddy farming households wouldfall by about a further 10 percentage points. Unfortunately, such a goal isunattainable, because the land best suited to double cropping is already in-cluded in planned programs, and the further expansion of drainage and irri-gation facilities will be limited by lack of water and unsuitable topography.The emphasis now is on improvement of existing facilities, but, the TMPprogram could probably not be greatly expanded.

29. Two other causes of paddy farmer poverty call for specific atten-tion, although the relationship between government spending in these areasand the reduction of poverty is not clear. The first concerns land holdingarrangements: paddy farms are small and often rented rather than owned. Anowner-occupied double-cropped holding must be around three acres in size togenerate a poverty line income, but 55% of all holdings contain less thanthree acres. The incidence of poverty for single-crop and double-crop farmersis increased by 5% and 14% respectively in the change from owner occupancy totenancy, assuming the same size distribution of holdings. If all tenantswere to become owners by 1980, the incidence of poverty in this sector woulddrop by 6 percentage points. The evidence thus argues for land consolidationaccompanied by a move from tenancy to ownership. The Third Plan envisagessome consolidation as a result of resettlement of excess population in newlyopened lands, but while the Plan acknowledges the problem of existing tenancyarrangements, there is no explicit indication that they will be changed.

30. Another major cause of poverty among paddy smallholders is the lowyield obtained by farmers. In contrast, yields obtained at well managed andclosely supervised schemes run some 25% above the national average, due to theuse of higher yielding seeds, more fertilizer and pesticides, and bettermanagement. If the low productivity states of Johore, Kelantan, Pahang andTrengganu could be raised to an average level, poverty among paddy farmerscould be reduced by 4 percentage points. High yielding varieties, fertilizerand pesticides are available to many smallholders, but their adoption oftendepends on the quality and intensity of extension work and the availabilityof credit. Inasmuch as all paddy farmers, including those still remaining inpoverty, stand to gain from increased yields, poverty redressal programsshould include the improvement of extension services as well as continuedresearch into high yield varieties. While the Third Malaysia Plan recognizesthe importance of encouraging the farmers' efforts to improve yields throughimproved extension services, the provision of additional funds for creditalso needs to be stressed. Large amounts of additional credit could beabsorbed productively in this sector if they were available. If the deliverysystem for rural credit could be built up, some of the extra resources avail-able to the Government could be channeled into this area.

31. Over 50% of Peninsular Malaysia's 34,000 coconut smallholder house-holds were in poverty in 1975. Coconuts are a low yield crop, and over 7acres are needed to keep a family above a poverty level income. Close to

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three quarters of smallholding acreage is in the four main coconut growingstates of Perak, Selangor, Johore, and Kelantan. In the last of thosestates, approximately 86% of farmers have less than 7 acres, and 90% are inpoverty, and in Johore 55% hold under 7 acres and 60% are in poverty.During the SMP poverty fell by less than 2 percentage points, the result ofreplanting and rehabilitating old coconut stands and intercropping them withcocoa, pineapples, and coffee. Under the TMP the acreage to be rehabilitatedor replanted (100,000 acres) will be double that under the SMP, and povertyis expected to decline by 4 percentage points. The rate of replanting(20,000 acres over the TMP) will still be well below the 8,000 acres per yearneeded to maintain a stable age structure of trees. Replanting increasesyields by about 40-55%, reducing the acreage needed for an above poverty levelincome. The replanting of all old trees would reduce the incidence of povertyto 80% in Kelantan and 40% in Johore. Rehabilitation is also an effectivemeasure, increasing yields by 25-30%. Intercropping is a potentially powerfulanti-poverty measure, since it can increase incomes by more than 100%. Underthe TMP, however, less than one quarter of the land scheduled for replantingor rehabilitation will be intercropped. Given the potentially large impact of

this measure, a strong case exists for the Government to investigate thepossibility of devoting additional funds to developing suitable intercropsand promoting their wider use.

32. Next to rubber smallholders, the residual category of "otheragriculture"/l constitutes the largest number of agricultural households.The incidence of poverty in this group is 65% or 184,000 households. Thelargest identifiable groups within the category are the estate workers, whonumbered 127,000 in 1975, and the New Villagers, a group of people, 90%Chinese, who were moved during the early 1950s from remote rural areas tovillages where they could be better isolated from insurgents. '[n 1970 theNew Villagers numbered about 130,000 households. In addition, 125,000 house-holds of agricultural laborers are included in "other agriculture." Someoverlap exists among these groups.

33. The number of estate worker households declined by 14% over theSecond Malaysia Plan, while the number in poverty remained constant at 59,000,or 46% of the total in 1975. Over the Third Plan period, the number of estateworker households is expected to decline by another 12%, while the incidenceof poverty is projected to fall to 38%. Poverty among estate workers is duemainly to underemployment, rather than to low daily wages. The expectedemigration of 15,000 households during the Plan period will contribute to areduction in poverty, but the distribution of employment opporttnities amongthe remaining households will be instrumental in determining the level ofpoverty. The emigration of households from the estate sector has resultedfrom the increasing mechanization of estate work and the more recent shiftin labor requirements caused by replanting substantial acreages of rubberwith the relatively less labor-intensive oil palm. Both open unemploymentand underemployment exist, most commonly among Indian workers. During theThird Plan period, more estate acreage may be turned over to oil palm, thusaccentuating unemployment pressures. The TMP hopes to resettle some of theIndian youths on new land development schemes. Otherwise, the Plan relies on

/1 Agriculture excluding rubber, oil palm, coconut and paddy smallholders.

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nonfinancial means to aid estate workers. It proposes that the Government bemore strict in ensuring that employers provide basic amenities for theirstaff, and, for households remaining in the rubber estates, it projects thatprice-linked wage increases and the smaller labor force will result inimproved household incomes.

34. The factors that lead the New Villagers into poverty are readilyidentifiable and have shown little improvement over the years. Very fewown land, less than half have access to any land at all, and most of themsuffer insecurity of tenure. The New Villagers have little access to newland developments, and there is reason to believe they prefer to work innon-agricultural employment. The TMP allocates few funds to New Villages,asserting that improvements in income among their residents can be expectedthrough trickle-down effects of growth in the nonagricultural sectors inwhich they work. The Plan does, however, propose to develop and modernizeexisting New Villages on a multi-racial basis, to educate village youths and,where possible, to use unencumbered land to increase the land holdings of thevillages.

35. A final rural sector in which poverty is a serious problem is fishing.In 1975, 63% of the 42,000 fishing households were in poverty, compared to 73%in 1970. The problem is the most acute on the east coast of Peninsular Malaysia,where poverty is almost universal. Output of the fisheries in that region hasstagnated since 1968 and is unable to provide adequate incomes for all of thefamilies employed in the sector. The TMP provides for five new fishing harbors,several jetties, shore facilities, and additional boats, and projects theincidence of poverty to fall to 52%, but the problem of poverty must also beattacked through provision for emigration of fishermen to other occupations.Attempts to place fishermen on land development schemes have had some success,and continued efforts in this direction are essential.

36. The TMP calls for streamlining the administrative machinery for agri-cultural development. To this end, the Farmers' Organization Authority willestablish 75 additional Farmers' Development Centers (FDCs) to serve as thefocal points for farmers to gain access to the inputs, knowledge, and facilitiesnecessary for improvements in productivity. These FDCs are still in the experi-mental stage, and their performance should be closely monitored. In addition,some streamlining of administration at the national level should be considered,in particular the concentration of all land development in the Federal LandDevelopment Authority and better coordination of extension services. The Planraises these issues, but makes no concrete proposals for their resolution.

37. New Land Development. As discussed above, a central thrust of theGovernment's agricultural strategy is to accelerate improvement in the use ofexisting agricultural land. The improvement of yields through irrigation,replanting, and improved inputs and farming practices will contribute signif-icantly to the goal higher rural incomes. However, a large number ofpeople in the rural aoeas are either landless and cannot earn an adequateincome as laborers, c they own or operate too little land to attain incomesabove the poverty line. In all of the sectors discussed above, a recurrenttheme was that the small size of holdings and underemployment were majorcauses of poverty. Until more jobs become available in the other sectors ofthe economy, most of the very poor agricultural workers must depend on

ANNEX 2Page 13

finding additional land to work. Furthermore, the number of people needingagricultural employment will increase over the next five years as an estimated125,000 new laborers, unable to find other employment, enter the agriculturalsector./l The proposed land development program for the TMP is very similarto that of the SMP, with a continuation of all the existing programs (seeTable 7.5 in the Statistical Appendix). Against the background of the SecondPlan performance, the Third Plan new land development targets appear somewhatconservative. If the targets are not increased, the contribution of the programto the growth of total crop production and, more important, to the rate ofgrowth of job opportunities can increase during the Third Plan and after onlyif the rate of settlement is accelerated. In the longer term the industrialsector should be able to provide a much greater proportion of incomes andemployment, thereby reducing the need for new land development.

38. The various government land development agencies are capable offurther expansion, with the exception of the Rubber Industry SmallholderDevelopment Authority (RISDA) which is discussed below. The largest singleprogram, the Federal Land Development Authority (FELDA), has expanded rapidlyover the last few years and should be able to maintain its recent annual rateof 90-100,000 acres, carrying it well above the current five-year target of350,000 acres. This could entail roughly M$250 million additional investmentduring the rest of the TMP. The fringe alienation schemes of the FederalLand Consolidation and Rehabilitation Authority (FELCRA) are in principlewell designed to relieve land shortages by providing additional land toexisting smallholdings; development is restricted to areas fringing existingvillages where no new settlements are required. Unfortunately, FELCRA canonly respond to state requests for developing specific land areas and mustcompete for land with other agencies. Much more land could be developed ifthe states would make it available: the agency indicates that it has thecapacity to alienate twice as much land as targeted, or up to 20,000 acresper year, possibly increasing its TMP planned expenditures by M$50 million.

39. State land development agencies are expected to develop 100,000acres in Peninsular Malaysia and 140,000 acres in Sabah and Sarawak, comparedto an achievement of 350,000 acres during the SMP. Increasing the targetsfor the rest of the TMP to the level achieved in the SMP could increasestate land development expenditures by M$130 million.

40. A further opportunity for expansion of land development appears tobe in the joint-venture schemes, combining both private and public sectorresources and expertise. Private sector development was much more importantin the past when foreign-owned estates pioneered the introduction of tree

/1 This number is a Plan estimate, based on a very low employment elasticityin agriculture. The actual need for agricultural employment will probablybe greater.

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crops. Under the SMP, joint ventures accounted for the development of130,000 acres in Peninsular Malaysia. Recent policies favor public sectordevelopment, but this trend should not lead to a neglect of the large reserveof private sector management ability, especially since state agencies havelimited management and implementation capacity. The TMP calls for the develop-ment of only 100,000 acres by joint ventures, and the annual target could pro-bably be at least doubled for the rest of the TMP.

41. The number of families expected to be settled during the TMPis 60,000, as compared to perhaps 38,700 settled during the SMP. Becauseof the lag between land development and settlement, many of these familieswill be settled on land included in the SMP program, but not yet settled.The increased programs suggested above would eventually accommodate roughly25,000 additional families, or 5% of the agricultural families expected toremain in poverty in 1980. Further acceleration in settlement could also bederived from changes in the method of land development and from a decrease inthe land allocation per family. In the last few years, the rate of settlementof families has fallen increasingly below the potential for such settlement.The lag between the start of development and settlement has increased recentlyfrom three to as much as five years. An increase in settler participationin the early stages of the schemes would lead to an initial upward jump ofsettler intake as settlers enter the schemes sooner to undertake some of thework which is now done on contract. It would also free contractors to com-plete work on existing schemes whose productive assets have been completed,but whose settlement areas remain incomplete. The TMP includes pilot projectsto test the benefits from greater self-help in the development and maintenanceof schemes, but does not call for such projects on a large scale.

42. The acreage allotment per settler family is an important determinantof the rate of settler intake on a scheme. It was, until recently set at12 acres for rubber and 14 for oil palm. This size of holding generates incomesthat are high relative to those earned in either urban or rural areas by indivi-duals with similar qualifications. Recently the average monthly net incomeper settler family was M$800-900 on oil palm schemes and M$300-400 on rubberschemes. On oil palm schemes, 10-15% of the settlers own cars, 80% ownmotorcycles, and 50% own television sets. Land allocation in FELDA schemeswas recently reduced to 10 acres per family, and further reductions areprobably possible. Smaller land allocations would not only provide a moreequitable distribution of land and income, but would also increase the intakeof settlers and reduce the program's per capita costs. Smaller acreageallotments would also reduce the ability of the settlers to repay FELDA, butthe agency has large reserves (about M$300 million) and might consider sub-sidizing the settlers, especially if employment creation proceeds too slowlyin the private sector, increasing the need for more publicly created jObs.Intercropping and possibly the introduction of livestock could accompanythe reduction in holding size. Supplemental earnings from such activitiesraise incomes during the early development years of a settlement and therebyreduce the size of loans necessary for a settler's subsistence. An increasein the rate of settlement, both through greater self-help and through reductionsin land allocations, is particularly important if employment elsewhere in theeconomy does not increase as rapidly as foreseen in the Plan.

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43. The Plan states that in the selection of settlers greater weightthan in the past will be given to the landless and to farmers with small,uneconomic holdings, regardless of present location. Since the best land fordevelopment schemes is often located in states with the least amount of ruralpoverty, this change in selection criteria will be an important element in theattempt to eradicate poverty.

44. Finally, the Plan calls for RISDA to develop 100,000 acres throughits block newplanting program. This expenditure does not appear to be justified,in view of FELDA's demonstrated superiority in land development and RISDA'salready strained capacity for rubber replanting. The replanting of 500,000acres of rubber during the TMP will still leave about 300,000 acres of treesabove 25 years of tapping age, many of which are planted in low-yieldingvarieties. Therefore, RISDA's first priority should be to strengthen itsreplanting program as much as possible.

45. Priorities for Agricultural Development. The unexpected increasein resources available to the Government for the TMP could be used, at leastin part, to raise the level of expenditures on agriculture and bring about amore rapid reduction in poverty than has been planned for. The variousadditions to TMP agricultural programs suggested in this section would addroughly M$1.1 billion to TMP expenditures. About 60% of those expenditureswould be on additional land development and the rest on rubber replanting.Additional expenditures on other in situ programs, such as credit expansionand coconut replanting and intercropping, would add an unspecified amount.

46. In terms of implementation capacity, the programs most easilyexpanded are the large land development and irrigation schemes. Theseprojects present the fewest problems in execution and the most dramaticresults. Irrigation schemes may reach their practical limit in the programalready planned for the TMP, but land development could be significantlyincreased. The cost per family of land settlement is well above that of thein situ programs. A crude measure of costs, found by dividing total expendi-tures on a program by the number of households reached, shows, for example,that rubber replanting averages only about one-half as much per family asdoes FELDA's land settlement program. However, the effect on incomes is muchmore dramatic in the case of settlement. Replanting enables rubber small-holders to more than double their incomes, but many of the poorest ones willremain in poverty. Land settlement, on the other hand, takes landlesslaborers and gives them incomes above the poverty line. Although the landavailable for development is ultimately limited, there is no reason to delayits use. As Malaysia's economy grows, the industrial sector will absorb anincreasing share of the population, and the need for new land will diminish.Meanwhile, any increase over the planned level of settlement will speed thereduction of poverty, both by providing above poverty level incomes for allsettlers and by easing the population pressure on the land they vacate.

47. In the longer run, the more dispersed programs, aimed at improvingthe incomes of smallholders in situ, will become the most important in eradicat-ing rural poverty. Within the TMP period the institutions involved can bestrengthened so that by the end of the TMP they, too, can handle expandedprograms. Institutions such as the Department of Agriculture, RISDA, and theState Planning Units need more technical staff and policy coordination if they

ANNEX 2Page 16

are to increase their effectiveness. The World Bank/ UNDP state and ruraldevelopment planning project will place experts in various agencies, with thegoal of training counterparts to take over their planning functions at thesame time as they develop new projects. In conjunction with such efforts,the Plan stresses the importance of technical training as a prerequisite forthe effective planning and implementation of agricultural programs.

Social Sectors

48. Housing. The TMIP housing program calls for nearly double thenumber of housing units constructed during the SMP. This increased emphasisis well justified, since expenditures in the housing sector can have a majorimpact on poverty. While the size of the program, in terms of the numberof units planned, is sufficient to meet the demand for new houses, the unitcosts may be too high for a large portion of the population. In addition,the high target may result in problems of implementation.

49. The TMP indicates that at least 515,000 units will be requiredfor Peninsular Malaysia during the plan period to meet housing needs arisingfrom new household formation, normal replacement and the backlog of 68,000units from the SMP period. The actual need is likely to be less than that.As indicated in Table 18, the maximum need during the TMP could be no morethan 674,000 units, based on inter alia the following key assumptions/objectives:(a) there were 81,000 dilapidated units in 1975, all of which will be replacedduring TMP; (b) there were 162,000 more households than housing units in 1975,and by the end of TMP there will be one household per unit; (c) average house-hold size will drop from 5.60 in 1970 to 5.21 in 1980; and (d) normal annualreplacement will amount to 1% of the housing stock. If, however, the averagehousehold size remains constant at 5.6 (with the other assumptions unchanged),the 1975 "housing shortage" would be 159,000 units and total TMP needs wouldbe only 516,000 units. If, furthermore, we use the TMP's estimate of the 1975"housing shortage" as 68,000 units rather than 159,000, total TMP needswould drop to 425,000 units (which still is 60% above the official SMPachievement). Pending further investigations, and taking Sabah and Sarawakinto account, the present TM4P target of about 500,000 units should be viewedas an upper limit.

50. The drastic reduction in unit costs for public housing financedthrough the Ministry of Housing and Village Development (MHVD) is striking,from M$17,700 during the SMP to M$7,700 during the TMP (see StatisticalAppendix, Table 7.6). This reduction is to be achieved mainly by includingsites and services and squatter improvement schemes in the TMP. Sites andservices and slum improvement schemes for about 3,500 households are alreadybeing carried out in Kuala Lumpur, and other schemes are under preparation inKuantan, Kota Kinabalu and Penang.

51. In spite of the reduction in the unit cost of housing financedthrough MHVD, most households cannot afford to pay the full cost. At least60% of all households (urban and rural) have incomes of less than M$400 permonth, an income which indicates an affordable house cost of about M$6,000(assuming 10% down and the balance over 20 years at 12% annual interest,with 15% of the income allocated for housing). Forty percent of all house-holds can not even afford houses costing M$3,000; in urban areas, about 40%

ANNEX 2Page 17

cannot afford houses costing M$6,000, /1 and 15% cannot afford houses costingM$3,000. With this in mind, the housing chapter of the TMP document stressesthat standards and costs must be lowered to provide housing affordable forthe lowest income groups, but even if the Government is able to achievethe dramatic reduction in unit costs to M$7,700, the cost is still too highfor the poor. Given therefore larger than expected resources available tothe Government during the TMP, a subsidy program might be considered./2

52. Although the use of housing subsidies is not normally recommended,because to institute them on a large scale in most less developed countriesis beyond the financial capacity of the Government, Malaysia may be an ex-ception. The TMfP indicates that the public sector will build 130,000 lowcost units. Although the breakdown of this total is not given, it probablyincludes all the housing undertaken through the Ministry of Housing andVillage Development (MiHVD) (62,200 units), by 11 federal agencies and regionaldevelopment authorities (53,100 units) and by the Sabah and Sarawak LandDevelopment Boards (6,900 units) (see Statistical Appendix, Table 7.6). Ofthese, the average unit costs of the public housing to be built by some ofthe federal agencies and regional development authorities and by the Sabahand Sarawak Land Development boards are within or close to the purchasingpower of many of the poor. Other agencies, however, have higher unitcosts; MHVD, for example, has a unit cost of M$7,700, which is beyond thereach of the poor. If a subsidy were introduced to reduce the costs ofall such housing to M$3,000 per unit, the total amount of subsidy would beabout M$350 million, equivalent to about 12% of the public housing program.It is not likely, however, in the event such a subsidy were undertaken,that this would be the financial requirement during the TIP period. Theactual requirements would be significantly less to the extent that themortgage is held by the public sector and only paid back gradually by thepurchasers. The financial cost of the subsidy to the Government wouldtherefore be spread over the life of the mortgage, i.e. about 20 years.Viewed only in light of the Government's emphasis on improving the welfareof the poor and the total size of the proposed development progam of M$18.6billion, such a subsidy program would merit examination. When the addeddimension of a possible M$6-10 billion accruing to the public sector duringthe TMP is considered, the institution of some type of housing subsidyprogram merits high priority. It is also important that the Governmentvigorously continue its efforts to reduce the cost of unit housing. Al-though it has been demonstrated in a pilot project that the unit cost ofhousing could be significantly reduced,/3 the MHVD faces a formidable task

/1 The 70% figure shown in the TMP, para.1125, is probably for 1973.

/2 A background paper on poverty estimates indicates that the Governmentmight plan a subsidy for housing up to 20% of household budgets by 1990.However, the TMP does not refer to this possibility.

/3 Experience with the Sabah South project and initial revision of thelayout and housing prototypes proposed for Kuantan indicate that itis technically feasible to reduce unit cost to M1$3,800-M$4,000 forland, infrastructure and structure.

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in trying to reduce unit costs on a large scale from the average unit costof M$17,800 achieved during the SMP to the target level.

53. Housing is a state responsibility, and more than half of the TMPhousing program would be implemented by the state governments themselves(mostly by the SEDCs). Compared to the SMP, an increase of more than 600%in the number of housing units constructed by the states is implied. Thisis unlikely to be achieved without strengthening the SEDCs substantially.It also appears as if Kuala Lumpur City Hall would be responsible for aM$115 million housing program in spite of the fact that it has only limitedexperience in the housing sector; the Selangor SEDC was responsible for mosthousing construction in Kuala Lumpur until the creation of the FederalTerritory in 1974.

54. The Housing Department of the MHVD was established in 1975 mainlyto formulate housing policies; to coordinate the housing programs of otherpublic agencies, including the SEDCs, and the private sector; and to extendloans to the states. The Housing Trust and its staff and housing estateswere taken over by the Housing Department which, however, was to minimizeits direct involvement in implementation. A Bank project was to providetechnical assistance to assist the Department to organize itself, to recruitand train staff, to prepare guidelines for project preparation by the SEDCs,and to identify projects for early implementation, with the emphasis onsites and services and squatter improvement. In addition, the Departmentagreed to take the lead in improving the relationship between the housingprogram and small-scale business development and other social programs.However, the assistance has been delayed. In view of the above, implemen-tation of the housing program is likely to be a serious problem.

Education

55. Malaysia has a comparatively strong system of formal education andspends a high proportion of its GNP (7%) and Government budget (28%) on it.The system has competent administration, high enrollment ratios (99% primary,64% lower secondary, 26% upper secondary), high female participation rates,and comparatively low drop out rates. Significant progress was made duringthe SMP towards establishing a common national language in schools, towardsintegrating the state education systems of Sabah and Sarawak into the nationaleducation system and towards extending educational opportunities to the dis-advantaged. Further the system has a program designed to improve educationalquality by an extensive textbook loan scheme, growing use of mass media and anactive curriculum development center. Despite these strengths the system couldbe improved in several key areas. Important variations exist in educationalquality between urban and rural areas (for example in the provision oftrained teachers and school facilities). Skill training, which has beendeveloped largely in isolation from industry, needs to become more flexibleand closely linked with employers. Higher education, with its growth inenrollments, also needs to be more responsive to the demand for various typesof education.

56. The Third Plan has allocated M$1.7 billion or almost 10% of thedevelopment program to education. Some of the principal objectives include

ANNEX 2Page 19

increases in primary education to maintain universality there, with specialemphasis on improving facilities in rural areas and the less developedstates; moderate increases in lower secondary enrollment ratios to 74% inPeninsular Malaysia, 49% Sarawak, and 79% in Sabah; sharp increases in uppersecondary enrollment ratios, especially in Sabah and Sarawak; rapid increasesin sixth form enrollments; and less rapid increases (8.7% p.a.) in tertiarynon-degree enrollments, compared to the very rapid increase of the SMP, andincreases of 10.5% p.a. in degree enrollments.

57. A breakdown of these figures makes it clear that continued progresswill be made in integrating Sabah and Sarawak into the national system. On aper capita basis Sabah and Sarawak are allocated 117% and 35% respectivelymore than the average for Peninsular Malaysia. It is not as clear that thePlan allocations favor disadvantaged states in Peninsular Malaysia. Whileone of the poorest states, Trengganu, will receive substantially more (50%)on a per capita basis then the average for Peninsular Malaysia, other poorstates such as Perlis, Kedah and Kelantan receive significantly less than theaverage.

58. The rates of expansion of post primary education, as noted above,are quite rapid and may not be justified on solely economic grounds. An EPUstudy in the early 1970s concluded that there was growing overinvestment ineducation. The study found that returns were near or under the opportunitycost of capital and that there was little economic justification for continuingrapid rates of post-primary schooling. In terms of manpower requirements,the justification of the expansion is also not clear, and it would be usefulto review the 1973-74 manpower survey to determine whether the expansion ofpost primary education can be justified in terms of the demand for manpower.The expansion may be justified, however, in relation to basic social objectives,viz. by the extent to which they broaden educational opportunites for bumiputrasand promote national unity. As for remedying some of the other deficienciesin the educational system, the TMIP shows an awarness of the need to improvethe relationship of manpower requirements to vocational/technical trainingas well as to higher levels of education. Perhaps the most serious lacuna inthe TMP is its failure to address the need for expanding non-formal schooling,especially in the rural areas.

59. Family Planning. The overall objective of Malaysia's family planningprogram is to reduce the annual rate of population growth from 3% in the mid1960s to 2% by 1985. The current population growth rate is about 2.8% a year,which is one of the highest growth rates in Asia. The objective of the TMP isto reduce the birth rate from about 31 (per 1,000) in 1975 to 28 (per 1,000)by 1980 by covering one million new acceptors (of whom half will be recruitedthrough non-program sources). To achieve this target, the TMP allocates M$27million to family planning programs. In view of the average costs per newacceptor this allocation appears too low. During 1973-76 it has been estimatedthat the average cost per new acceptor in Malaysia was about M$72./l Allowingfor some inflation during the TMP period as well as for the likelihood thatthe marginal cost of new acceptors will increase in real terms as the programis increasingly directed towards more reluctant segments of the population,

/1 Estimated by the UNFPA in a country brief on Malaysia (mimeo, datedJanuary 21, 1977).

ANNEX 2Page 20

the average cost per new acceptor could be about M$100 during the TMP. Thiswould require an allocation of M$50 million, almost double the present allo-cation in the TMP, to meet the TMP target of half a million new acceptors.Even the larger amount would represent only 0.3% of the development program.

60. Because of the current high rate of population growth in Malaysiaand the possibility that the second round effects of the post-war baby boomwill increase the population growth rate even further in the coming years,there is strong justification for the Government to consider an expansion inits TMP objectives for new acceptors. Besides an increase in the allocationin the development program, in view of the disappointing performance duringthe SMP, an evaluation of the capacity of the family planning agencies tocarry out a larger program and efforts to break the constraints on a largerprogram are also needed.

STATISTICAL APPENDIX

1. Population and Employment

1.1 Mid-Year Population, 1960-19751.2 Population by Race and Region, mid-19701.3 Malaysia - Estimated Employment Growth, 1970-751.4 Peninsular Malaysia - Employment by Race and Sector,

1970 and 1975

2. National Accounts

2.1 National Accounts: Expenditure on GDP and GNP, 1970-752.2 Peninsular Malaysia: Index of Industrial Production, 1968-76

3. Public Finance

3.1 Public Sector Consolidated Financial Position, 1966-19763.2 Public Sector Develpment Expenditure, 1966-19763.3 Summary Account of the Federal Government, 1964-19763.4 Federal Government Current Revenue, 1964-19763.5 Federal Government Current Expenditure, 1964-19763.6 Federal Government Gross Development Expenditures, 1964-19763.7 Summary of Net Borrowing and Lending of the Federal Government,

1964-19763.8 Federal Government Net Domestic Borrowing, 1966-19763.9 Public Authorities Consolidated Account, 1964-19753.10 State Governments Consolidated Accounts, 1964-1976

4. External Sector

4.1 Balance of Payments: Summary Statement, 1961-764.2 Balance of Payments: Current Account, 1961-764.3 Exports of Selected Commodities, 1960-764.4 Gross Imports by Commodity Section, 1960-764.5 Terms of Trade, 1962-764.6 External Reserves, 1960-764.7 External Public Debt as of December 31, 19764.8 Service Payments, Commitments, Disbursements and Outstanding

Amounts of Public Debt, 1971-764.9 Key Exchange Rates, 1966-77

5. Money and Banking

5.1 Money Supply and its Determinants, 1959-19765.2 Liquidity Position of Commercial Banks, 1960-19765.3 Classification of Loans and Advances of Commercial Banks,

1961-19765.4 Interest Rates of Commercial Banks, 1957-1977

-2-

6. Prices

6.1 Peninsular Malaysia - Consumer Price Index, 1970-1976

7. Third Malaysia Plan

7.1 Sectoral Allocation of Development Expenditures, SMP and TMP7.2 Peninsular Malaysia: Poor Rural Households, 1970-19807.3 Public Development Expenditure for Agricultural Programs,

1971-19807.4 Development of Existing Agricultural Land, Excluding

Irrigation and Drainage Programs, 1971-19807.5 New Land Development, 1971-19807.6 SMP and TMP Housing Construction Programs

Table 1.1: MID-YEAR POPULATION, 1960-1975

Peninsular All

Malaysia Sabah Sarawak Malaysia Growth rate

Year population /a population /b population /b population per year

('OOOs) ('OOOs) ('OOs) ('OOOs) (%)

1960 6,919 454 745 8,118

1961 7,147 470 762 8,379 3.2

1962 7,384 486 782 8,652 3.3

1963 7,614 501 805 8,920 3.1

1964 7,822 520 826 9,168 2.8

1965 8,046 539 852 9,437 2.9

1966 8,295 559 878 9,732 3.1

1967 8,521 582 905 10,008 2.8

1968 8,724 601 927 10,252 2.4

1969 8,928 624 948 10,500 2.4

1970 9,147 649 972 10,768 2.6

1971 9,390 680 1,000 11,070 2.8

1972 9,635 718 1,024 11,377 2.8

1973 9,874 758 1,046 11,678 2.6

1974 10,114 790 1,072 11,976 2.6

1975 /c 10,379 830 1,099 12,308 2.8

/a 1970-74 population estimates adjusted on basis of Post-Enumeration Survey

of Under-Enumeration in the 1970 Census of Population.

/b 1970-74 population based on "census revised estimates."

/c Estimate based on unadjusted population growth rate in 1975 for Peninsular

Malaysia and on the average annual growth rate for 1970-74 for Sabah and

Sarawak.

Source: Department of Statistics; mission estimates.

Table 1.2: POPULATION BY RACE AND REGION, MID-1970

PeninsularMalaysia /a Sabah /b Sarawak /b Total('000) % ('000) % ('000) % ('000) %

Malays 4,822 53 - - 180 19 5,002 47

Other indigenous /c - - 417 64 440 45 857 8

Chinese 3,274 36 139 22 292 30 3,705 34

Indians 950 10 - - - - 950 9

Others 101 1 93 14 60 6 254 2

Total 9,147 100 649 100 972 100 10,768 100

/a 1970 census population as adjusted by the Postenumeration Survey.

/b "Revised" 1970 census population.

/c Kedazans, Murut, Bajaw, Melanaus, Sea Dayaks, Land Dayaks and "other indigenous"peoples.

Source: Department of Statistics.

Table 1.3: MALAYSIA - ESTIMATED EMPLOYMENT GROWTH, 1970-75

1970 1975 Average annualEstimated Share of Estimated Share of Increase Share in growth rateemployment total employment total 1971-75 job creation 1971-75

('000) (%) ('000) (%) ('000) (%) (%)

Agriculture, forestry and fishing 1,786.8 53.5 1,936.8 49.3 150.0 25.5 1.6Mining and quarrying 87.3 2.6 86.6 2.2 -0.7 -0.1 -0.2Manufacturing 289.9 8.7 398.2 10.1 108.3 18.4 6.6Construction 90.6 2.7 113.2 2.9 22.6 3.9 4.6Utilities 18.6 0.6 23.9 0.6 5.3 0.9 5.1Transport, storage and communications 133.4 4.0 179.4 4.6 46.0 7.8 6.1Wholesale and retail trade 379.9 11.4 495.9 12.6 116.0 19.7 5.5Banking, insurance and real estate 26.8 0.8 32.7 0.8 5.9 1.0 4.1Public administration, education,

health and defense 403.9 12.0 508.8 13.0 104.9 17.8 4.7Other services 122.3 3.7 152.3 3.9 30.0 5.1 4.5

Total 3,339.5 100.0 3,927.8 100.0 588.3 100.0 3.3

Population 10,777.0 12,249.0Labor force 3,606.8 4,225.0Unemployment 267.3 297.2Unemployment (%) 7.4 7.0

Source: Third Malaysia Plan, p. 140.

Table 1.4: PENINSULAR MALAYSIA - EMPLOYMENT BY RACE AND SECTOR, 1970 AND 1975

Malay Percentage of Chinese Percentage of Indian Percentage of Others Percentage of Total Percentage of('000s) sector total ('000s) sector total ('000s) sector total ('000s) sector total ('000s) sector total

1970Agriculture, forestry and fishing 951.1 67.6 300.9 21.4 142.0 10.1 12.0 0.9 1,406.0 50.3Mining and quarrying 21.1 24.8 56.3 66.0 7.2 8.4 0.7 0.8 85.3 3.0Manufacturing 76.3 28.9 172.6 65.4 14.0 5.3 1.0 0.4 263.9 9.4Construction 16.8 21.6 55.9 72.0 4.7 6.1 0.2 0.3 77.6 2.8Utilities 8.0 48.2 3.0 18.1 5.4 32.5 0.2 1.2 16.6 0.6Transport, storage and

communications 50.9 42.6 47.3 39.6 20.4 17.1 0.8 0.7 119.4 4.3Commerce 82.5 23.5 229.1 65.3 37.5 10.7 1.8 0.5 350.9 12.6Services 229.9 48.5 169.2 35.7 66.4 14.0 8.5 1.8 474.0 17.0Total 1,436.6 51.4 1.034.3 37.0 297.6 10.7 25.2 0.9 2,793.7 100.0

Population 4,822.0 52.7 3,274.0 35.8 978.0 10.7 73.0 0.8 9,147.0 100.0Labor force 1,563.0 51.5 1,111.6 36.6 334.4 11.1 26.0 0.8 3,035.0 100.0Unemployment 126.4 77.3 36.8 0.8 241.3Unemployment (%) 8.1 7.0 11.0 3.1 8.0

1975Agriculture, forestry and fishing 1,032.6 67.3 317.6 20.7 170.3 11.1 13.8 0.9 1,534.3 46.2Mining and quarrying 27.7 33.1 47.6 56.9 8.0 9.5 0.4 0.5 83.7 2.5Manufacturing 120.1 33.1 217.3 59.9 24.3 6.7 1.1 0.3 362.8 10.9Construction 28.1 28.8 58.6 60.2 10.2 10.5 0.5 0.5 97.4 2.9Utilities 13.1 61.2 3.0 14.0 5.1 23.8 0.2 1.0 21.4 0.7Transport, storage and

communications 76.0 47.2 60.4 37.5 23.5 14.6 1.1 0.7 161.0 4.9Commerce 145.2 31.6 281.8 61.3 32.3 7.0 0.5 0.1 459.8 13.9Services 302.0 50.6 217.8 36.5 68.0 11.4 9.0 1.5 596.8 18.0

Total 1,744.8 52.6 1,204.1 36.3 341.7 10.3 26.6 0.8 3,317.2 100.0

Population 5,510.0 53.1 3,687.0 35.5 1,105.0 10.6 83.0 0.8 10,385.0 100.0Labor force 1,873.1 52.2 1,297.9 36.2 389.0 10.8 30.0 0.8 3,590.0 100.0Unemployment 123.3 93.8 47.3 3.4 272.8Unemployment (%) 6.9 7.2 12.2 11.3 7.6

Source: Third Malaysia Plan, p. 142.

Table 2.1: NATIONAL ACCOUNTS: EXPENDITURE ON GDP AND GNP, 1970-76

(New SNA - World Bank Interim Estimates)(M$ million)

1970 1971 1972 1973 1974 1975 1976

Current prices

Consumption 9,374 10,260 11,417 13,594 16,827 17,488 19,582

Government 1,970 2,183 2,777 2,987 3,569 3,983 4,380

Private 7,404 8,077 8,640 10,607 13,258 13,505 15,202

Cross investment 2,491 2,676 3,105 4,146 6,236 4,774 5,363

Gross fixed capital formation 2,096 2,663 3,286 4,030 5,505 5,277 5,413

Public 693 852 1,308 1,552 2,157 2,769 3,052

Private 1,403 1,811 1,978 2,478 3,348 2,508 2,361

Increase in stocks 395 13 -181 116 731 -503 -50

Exports GNFS 5,367 5,208 5,083 7,738 10,651 9,782 14,110

Less imports GNFS 4,807 5,037 5,246 6,682 10,702 9,516 11,200

Gross domestic product 12,425 13,107 14,359 18,796 23,012 22,528 27,855

Net factor incomes from abroad -355 -363 -378 -659 -600 -550 -1,030

Gross national product 12,070 12,744 13,981 18,137 22,412 21,978 26,825

Constant (1970) prices

Consumption 9,374 9,965 10,581 11,569 12,996 12,655 13,810

Government 1,970 2,093 2,453 2,588 2,952 3,149 3,383

Private 7,404 7,872 8,128 8,981 10,044 9,506 10,427

Gross investment 2,491 2,579 2,813 3,504 4,519 3,362 3,583

Gross fixed capital formation 2,096 2,573 3,048 3,418 4,039 3,703 3,618

Public 693 823 1,213 1,316 1,582 1,943 2,040

Private 1,403 1,750 1,835 2,102 2,456 1,760 1,578

Increase in stocks 395 6 -235 86 480 -341 -35

Exports GNFS 5,367 5,390 5,531 6,408 6,909 7,125 8,555

Less imports GNFS 4,807 4,839 4,642 5,468 7,315 5,860 6,493

Gross domestic product 12,425 13,095 14,283 16,013 17,109 17,282 19,455

Net factor incomes from abroad -355 -349 -335 -539 -410 -339 -597

Gross national product 12,070 12,746 13,948 15,474 16,699 16,943 18,858

Source: Mission estimates: 1970-75, based largely on new national accounts estimates for Peninsular

Malaysia (preliminary data published July 7, 1977) and separate estimates for Sabah and

Sarawak; 1976, estimates based on a number of individual economic indicators. These estimates

will be revised in late 1977 when Government issues preliminary new national accounts for Pan-

Malaysia for 1970-75.

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Table 3.1: PUBLIC SECTOR CONSOLIDATED FINANCIAL POSITION, 1966-1976(M$ million)

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /a

Revenue and Expenditure /b

Government revenue 1,964 2,187 2,289 2,514 2,877 2,961 3,482 4,146 5,654 6,272 7,032Government current expenditure 1,804 1,991 2,010 2,142 2,424 2,737 3,529 3,886 4,967 5,902 6,490Current surplus 160 196 279 372 453 224 -47 260 687 370 542Public authorities' current surplus 54 58 67 80 95 141 144 177 147 96 193Public sector's surplus /c 214 254 346 452 548 365 97 437 834 466 735Public sector development expenditure 841 821 854 867 969 1,427 1,650 1,607 2,582 2,740 2,965

Federal and State Governments 724 698 728 761 888 1,271 1,498 1,362 2,192 2,508 2,612Public authorities /c 117 123 126 106 81 156 152 245 390 232 353

Overall deficit 627 567 508 415 421 1,062 1,553 1,170 1,702 2,274 2,230

Sources of Finance

Net domestic borrowing /d 287 349 428 379 308 676 826 877 826 1,209 1,636Net foreign borrowing 35 135 104 180 3 345 313 118 295 912 371Special receipts /e 93 57 46 29 20 41 68 33 12 16 281Asset changes /f 212 26 -70 -173 90 0 346 142 569 137 -58

/a Preliminary./b The telecommunications account is included in public authorities and no longer in central Government accounts from

1971 onwards./c Adjusted for transfers between Government and public authorities./d Includes borrowing from federal funds./e Defense and economic grants; 1976 includes M$265 million from an INIF loan./f - = increase. Because of some accounting discrepancy, asset changes for the consolidated public sector do not

equal the sum of the changes from federal and state governments and public authorities.

Source: Treasury; Bank Negara.

Table 3.2: PUBLIC SECTOR DEVELOPMENT EXPENDITURE, 1966-1976(M$ million)

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /a

Federal Government Development Fund /b 651 625 619 615 725 1,085 1,242 1,128 1,876 2,151 2,235

of which:Direct development expenditures 547 519 496 504 565 754 801 759 1,107 1,266 1,560Loans (gross) 104 106 123 111 163 331 441 369 769 885 675(Repayments) (6) (7) (8) (14) (13) (15) (19) (22) (24) (38) (35)

State Governments, gross 163 165 198 221 250 271 395 355 509 610 629of which:

Development fund 142 153 182 216 241 240 371 332 480 570 580Water supply and public works 21 12 16 5 9 31 24 23 29 40 49

Less:Federal reimbursements 63 57 64 56 51 46 62 69 85 101 103Federal loans 27 35 25 19 36 39 78 52 214 152 149

Net State development expenditures 73 73 109 146 163 186 255 234 210 357 377

Public authorities, gross /c 168 167 163 130 100 203 184 266 451Less:Government loans and grants 51 44 37 24 19 47 32 21 61

Net public authorities' developmentexpenditure 117 123 126 106 81 156 152 245 390 232 353

Public sector development expenditure 841 821 854 867 969 1,427 1,650 1,607 2,582 /d 2,740 2,965

/a Preliminary./b Including loans and grants to state governments and public authorities./c The Telecommunications Authority was separated from federal Government accounts beginning 1971 and established as public

authority./d Federal plus state expenditures do not equal the totals in Treasury Table 5.1. Therefore, total public sector

expenditures (from Treasury 5.1) do not equal the sum of Federal, State and public authorities in this table.

Source: Treasury; Bank Negara.

Table 3.3: SUMMARY ACCOUNT OF THE FEDERAL GOVERNM4ENT, 1964-1976 /a(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /b

Current revenue 1,458 1,580 1,669 1,842 1,893 2,093 2,400 2,418 2,920 3,398 4,788 5,117 6,072

Current expenditure /c 1,387 1,540 1,619 1,801 1,796 1,930 2,161 2,398 3,068 3,341 4,315 4,900 5,570

Current surplus/deficit 71 40 50 41 97 163 239 20 -148 57 473 217 502

Development fund (net) 495 577 645 618 611 601 715 1,070 1,223 1,106 1,852 2,113 2,200

Direct developmentexpenditures 413 509 547 519 496 504 565 754 801 759 1,107 1,266 1,515

Net governmentlending /d 82 68 98 99 115 97 150 316 422 347 745 847 685

Overall deficit 424 537 595 577 514 438 475 1,050 1,371 1,049 1,379 1,896 1,698

Sources of Finance

Net domestic borrowing 192 404 287 349 428 379 308 677 836 876 828 1,209 1,636

Net foreign borrowing -6 72 -10 83 63 155 -2 344 306 69 227 912 364

Special receipts /e 54 49 77 41 37 24 17 40 66 28 38 9 273 /f

Change in assets a -184 12 241 104 -14 -120 153 -11 163 76 316 -234 -575

/a Since 1971 the TelecQmmunications Account has been outside the Federal Government Sector and included in PublicAuthorities.

/b Preliminary./c Certain defense items were shifted from development to current expenditure as from 1973./d Lending to states and public authorities./e Primarily foreign grants.If Includes M$263 million IMF compensatory finance.

/g - = increase

Source: Treasury; Bank Negara.

Table 3.4: FEDERAL GOVERNMENT CURRENT REVENUE, 1964-1976 /a(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /b

Tax revenue 1.048 1,208 1.343 1.47Z 1.536 1,730 ~2000 2.081 2,394 3,043 4,347 4_575 5,487

Direct taxes 256 328 391 462 487 539 701 713 801 887 1,390 2,021 2.166Income tax /c 248 302 360 426 452 500 657 689 741 830 1,299 1,924 2,070Estate duty 8 8 6 10 8 8 33 11 36 27 24 - -Payroll tax - 18 24 26 28 31 11 7 2 1 1Petroleum royalties - - - - - - - 6 23 25 46 - -

Export duties 200 241 223 195 197 279 258 231 232 437 943 625 1,O10Rubber 76 86 73 48 52 117 80 50 49 233 384 12ITin 96 118 117 114 111 122 130 127 127 130 271 195Palm oil - - 9 10 7 12 18 28 32 50 228 282Timber - - - - 8 9 10 10 15 11 32) 27 -Others 28 37 24 23 19 18 9 16 9 13 28

Import duties 367 388 381 466 499 526 558 582 589 745 892 801 974Petrol and oil 43 45 45 64 69 69 74 81 83 99 86 -Spirits and malt liquors 39 44 32 33 33 35 39 32 38 43 39 - -Tobacco 131 133 129 133 133 127 131 124 110 110 130 - -Sugar 25 26 33 46 49 55 33 6 6 4 1 - -Textiles 23 25 24 25 29 32 38 41 42 57 57 - -Others 107 115 120 122 139 155 178 177 193 276 358 - -Import surtax - - - 43 47 54 65 121 117 156 221 181 -

Excise duties 90 102 134 151 165 182 249 307 367 407 438 450 550Petrol and oil 69 76 89 105 113 120 118 144 188 193 200 -Spirits and malt liquors 17 17 21 29 30 34 37 35 36 45 53 - -Tobacco 2 2 14 14 15 16 21 21 23 27 30 - -Sugar - - - - - - 18 43 40 25 5 - -Motor vehicles - - - - - - 35 40 51 82 114 - -Others 3 3 2 2 8 11 19 24 29 35 36 - -

Sales tax - - - - - - - - 101 195 297 272 323Road transport fees 91 106 136 142 144 157 169 176 194 224 257 241 275Other tax revenue /d 44 43 78 56 44 47 65 72 110 148 130 165 189

Nontax revenue 410 372 312 362 354 361 394 336 526 357 449 542 585Commercial undertakings 81 102 107 117 127 136 159 55 63 77 80 78 91Currency surplus /e 120 88 40 72 57 61 62 82 235 25 10 50 80Interest receipts 62 60 52 48 46 57 53 61 75 70 129 109 153Other receipts and adjustments /f 147 122 105 130 127 102 97 138 153 183 230 305 261

Total revenue 1.458 1.580 1,669 1.842 1,893 2,093 2,400 2,418 2,920 3,398 4,790 5,117 6,072

/a Excludes the Telecommunications Account from 1971 onward.

/b Preliminary.

/c Includes tin profit tax and development tax, excess profits tax. Components do not add up to total in 1974.

/d Includes turnover tax, gaming tax, stamp duties, film rental tax, lotteries tax and business registration fees.

/e Malaysia's share of the distribution of the Currency Surplus Fund of the Board of Commissioners of Currency, Malaya and British Borneo and profits fromBank Negara Malaysla.

/f Includes rents on Government property, receipts from lotteries board and miscellaneous receipts and adjustments, as well as from the Federal Territoryof Kuala Lumpur from 1974.

Source: Treasury; Bank Negara.

Table 3.5: FEDERAL GOVERNMENT CURRENT EXPENDITURE, 1964-1976

(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /a

Security (defense and police) /b 317 373 377 388 384 418 496 592 774 904 1,103 1,314 1,318

Economic services 165 186 179 189 184 201 217 196 223 206 422 358 578of which:

Natural resources 45 47 47 50 48 54 52 61 74 56 161 108 178Commerce and industry /c 4 4 3 4 5 7 10 12 18 23 42 75 98Transport 37 35 37 38 37 34 46 57 48 30 95 45 93Post and broadcasting 45 47 43 45 46 46 51 61 83 41 124 130 209Telecommunications /d 34 42 38 40 42 47 53 - - - - - -

Social services 404 461 507 553 564 603 672 778 1,080 1,109 1,413 1,645 1,641of which:

Education 283 334 360 403 404 439 477 536 798 805 1,051 1,158 1,271Health 108 116 130 135 144 139 155 209 234 257 313 361 305

General administration L58 145 150 208 203 191 242 262 273 410 434 479 526

Transfer payments 177 190 198 237 210 214 196 195 269 181 273 316 592of which:

Grants and loans to State

Governments 125 143 156 163 178 189 170 153 169 170 258 272 299

Fixed changes 166 185 208 226 251 303 338 376 449 531 670 788 915

Pension and gratuities 70 73 74 74 78 110 101 98 125 118 177 169 -Debt servicing /e 96 112 134 152 173 193 237 278 324 413 493 619 -

Total 1,387 1,540 1,619 1,801 1,796 1,930 2,161 2,398 3,068 3,341 4,315 4,900 5,570

/a Preliminary.

/b Includes certain defense items which were shifted from development to operating (current) expenditures in 1973.

/c Including forestry and mining.

/d From 1971 onward, the Telecommunications Administration is a separate public authority no longer included in the federal budget.

/e Domestic and foreign, excluding repayments.

Source: Treasury; Bank Negara.

Table 3.6: FEDERAL GOVERNMENT GROSS DEVELOPMENT EXPENDITURES, 1964-1976 /a(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /b

Defense and security 72 120 179 134 99 105 172 217 211 110 tc 242 229 257

Economic services 309 317 335 367 375 376 451 703 836 786 1,313 1.496 1,455Agriculture and rural development 105 120 137 162 200 198 198 235 307 334 436 506 675Industry and commerce 11 7 27 39 25 39 100 260 177 180 462 321 262Transport and communications /d 131 137 107 118 116 125 133 177 310 223 360 551 386Utilities 62 53 64 48 34 14 20 31 42 49 55 118 132

Social services 87 104 123 111 136 114 81 146 171 200 278 328 420Education and training 51 66 63 52 53 43 44 86 112 142 187 212 244Health and family planning 18 23 36 35 26 18 20 23 27 34 42 57 100Housing 16 13 19 20 53 48 11 27 24 13 38 47 71Social and community services 2 2 4 3 4 5 5 8 8 11 11 12 5

General administration 14 20 14 13 9 20 21 19 24 32 43 98 102

Total 482 561 651 625 619 615 725 1,085 1.242 1.128 1,876 2.151 2,234

/a Including Federal Government lending to State Governments, statutory authorities and public corporations with substantial Government participation.

/b Preliminary.

/c As from January 1, 1973, certain current defense items are no longer defined as development expenditures; these have been incorporated into currentexpenditures.

/d Since 1971, the telecommunications department is counted as a separate public authority.

Source: Treasury; Bank Negara.

Table 3.7: SUMMARY OF NET BORROWING AND LENDING OF THE FEDERAL GOVERNMENT, 1964-1976

(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Net Borrowing (I + II) 2I5 486 315 513 555 571 363 1,072 1,142 776 1,037 2,136 2,000

I. Domestic 210 413 325 487 493 416 365 728 836 877 832 1,210 1,636

Government bonds /a 136 215 197 421 358 380 388 570 787 886 722 910 1,326

Treasury bills 74 198 128 66 135 36 -23 158 49 _9 110 300 310

II. Foreign -5 73 -10 26 63 155 -2 344 306 -101 205 925 364

Market loans - 77 -8 -3 0 92 -85 248 152 -119 28 639 126

Project loans -5 -4 -2 29 63 63 83 96 154 18 177 286 238

Net Lending (I - II) 86 73 98 99 115 97 150 316 422 347 745 847 685

I. Disbursements 90 78 104 106 123 111 163 331 441 369 769 885 -

State Governments 51 32 26 35 24 19 36 39 78 52 214 292 -

Others /b 39 46 78 71 99 92 127 292 363 317 555 593 -

II. Repayments 4 5 6 7 8 14 13 15 19 22 24 38 -

/a Including government securities bought by the Federal Government.

/b Public authorities and companies with government participation.

Source: Treasury; Bank Negara.

Table 3.8: FEDERAL GOVERNMENT NET DOMESTIC BORROWING, 1966-1976(M$ million)

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1976 /a

I. Government bonds (net) 199 421 358 380 388 569 786 886 722 911 1.327 S.681

1. Public sector /b 36 106 53 73 89 58 56 76 6 24 -63 664

(a) Federal Government funds ( 40) (137) ( 65) ( 38) ( 59) ( 51) ( -) ( 1) ( 5) ( 1) ( 1) (439)(b) State Governments ( 2) ( -2) ( 0) ( 36) ( 23) ( - ) (-19) ( 12) (-19) (-24) ( 0) ( 13)(c) Others ( -6) (-29) (-12) ( -1) ( 7) ( 7) ( 75) ( 87) ( 20) ( 47) (-64) (212)

2. Provident and trust funds 146 197 163 212 259 340 362 399 371 489 679 4,813

(a) Employees Provident Fund /c (133) (182) (145) (191) (232) (320) (350) (384) (358) (478) (665) (4,595)(b) Teachers Provident Fund ( 8) ( 9) ( 11) ( 13) ( 15) ( 16) ( 7) ( 4) ( 2) (-3) ( 0) ( 102)(c) Others ( 5) ( 6) ( 7) ( 8) ( 12) ( 4) ( 5) ( 11) ( 11) ( 14) ( 14) 116)

3. Banking sector 28 132 133 93 6 139 244 290 340 321 383 2,344

(a) Bank Negara ( 3) ( 54) (-23) ( 21) (-18) ( 43) ( 21) ( 86) ( -2) ( 37) (-86) ( 166)(b) Commercial banks ( 7) ( 58) (110) ( 46) ( 3) ( 64) (163) (128) (243) (238) (401) (1,533)(c) Post Office Savings Bank /d ( 18) ( 20) ( 46) ( 26) ( 21) ( 32) ( 60) ( 76) ( 99) ( 46) ( 68) (645)

4. Nonbanking private sector andothers /e -11 -14 -9 2 34 32 124 121 5 77 328 860

II. Treasury bills 128 66 135 36 -23 158 49 -9 110 300 1,310 1,710

1. Bank Negara 12 6 -17 0 19 -39 23 24 -24 161 -40 1652. Commercial banks 120 214 171 14 -81 149 -53 -6 87 132 400 1,2533. Others /f -4 -154 -19 22 39 48 79 -27 47 7 -50 293

III. Total net domestic borrowing(I + II) 327 487 493 416 365 727 835 877 832 1,211 1,637

IV. Total net domestic borrowingExcluding borrowing from FederalFund (III - I.1 (a)) 287 350 428 378 306 676 835 876 827 1,210 1,636

V. Repayments (principal only) /g 91 57 46 53 7 88 260 243 230 177 511

/a Government securities and treasury bills outstanding as at December 31, 1976./b Includes public korporations, local and statutory authorities, but excludes social security funds./c Includes Employee Provident Fund in Sabah and Sarawak./d Includes Post Office Savings Banks in Sabah and Sarawak./e Includes nominee and trust companies, cooperative societies, commercial firms, individuals, foreign holders, insurance,

and borrowing companies.If Iricludzs State Governments, foreign banks and nonbank private sector.

/g Memorandum item.

Note: This table is not fully consistent with Table 3.7, which uses Treasury as a source for 1964-1975.

Source: Bank Negara.

Table 3.9: PUBLIC AUTHORITIES CONSOLIDATED ACCOUNT, 1964-1975 /a

(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 /b

Revenues and Expenditures

Revenue 303 355 383 405 435 471 529 569 634 733 857 979

Current expenditure 240 270 286 300 318 338 268 420 495 556 709 853

Current surplus 63 85 97 105 117 133 161 149 139 177 147 126

Development expenditure 137 153 187 186 184 173 141 204 245 266 407 589

Overall surplus/deficit (-) -74 -68 -90 -81 -67 -40 20 -55 -107 -89 -260 -464

Sources of Finance.

Federal grants 23 17 37 31 14 9 3 - - - 1 1

Net borrowings from theFederal Government 44 15 14 13 23 15 16 47 /c 32 21 61 91

Net foreign borrowing 15 29 44 52 41 31 5 3 75 49 72 169

Change in assets /d -8 7 -5 -15 -11 -15 -44 -5 - 18 126 201

/a Including the telecommunications account for all years.

/b Estimates.

/c Includes M$23 million transfers from Federal Government after separation of accounts of telecommuni-

cations and its inclusion in public authorities.

/d - = increase. Most assets are deposits with commercial banks, the Central Bank and in government

securities.

Source: Treasury.

Table 3.10: STATE GOVERNMENTS CONSOLIDATED ACCOUNTS, 1964-1976(M$ million)

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 /a 1975 /a 1976 /a

Revenue and Expenditure

Total revenue 378 414 466 525 580 608 641 694 739 926 997 1,162 1,190Ordinary revenue 369 409 462 524 579 605 636 688 731 919 991 1,155 1,182Special receipts /b 8 5 5 2 1 3 5 5 8 7 6 7 8Own resources 241 256 300 351 394 410 461 522 536 702 841 813 987Federal grants 128 156 162 173 185 195 175 166 195 217 158 342 195

Total expenditures 509 501 512 560 599 636 692 776 1,043 1,071 1,411 1,612 1,549Current expenditures /c 303 315 349 395 401 416 443 505 647 715 910 1,002 920Development expenditure 205 186 163 165 198 221 250 271 395 355 509 610 629Development fund (183) (162) (142) (153) (182) (216) (241) (240) (371) (332) (480) (570) (580)Water supply (23) (24) ( 21) (12) ( 17) (5) ( 9) ( 30) ( 24) (23) (29) (40) (49)

Overall deficit 131 87 46 35 19 29 51 82 304 145 414 450 359

Sources of Finance

Federal reimbursements 70 67 63 57 64 56 51 46 62 69 85 101 103Federal loans 47 33 26 35 24 19 36 39 78 52 214 152 149Change in assets /d 14 -12 -43 -57 -69 -47 -36 -3 163 24 116 197 107

/a Estimate./b Special receipts from state sources credited to Development Fund (excluding loans and.transfers from revenue)./c Excluding contributions to Development and Water Supply Fund but including current expenditures from Water Supply Fund,

loan repayments and interest payments./d - = increase.

Source: Treasury.

Table 4.1: MALAYSIA BALANCE OF PAYMENTS: SUMMARY STATEMENT, 1963-76(M$ million)

1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 /a 1975 /a 1976 /a

Trade account 283 272 522 533 475 637 1,613 1,067 686 365 1,594 755 941 3,715Exports (f.o.b.) 3,296 3,346 3,753 3,808 3,679 4,070 4,921 5,020 4,884 4,736 7,263 9,991 9,042 13,265Imports (f.o.b.) /b 3,013 3,074 3,231 3,255 3,204 3,433 3,308 3,953 4,198 4,371 5,669 9,236 8,101 9,550

Services (net) -321 -326 -341 -407 -351 -400 -702 -862 -878 -906 -1,197 -1,365 -1,225 -1,835

Transfers (net) -181 -74 -58 -106 -142 -143 -180 -180 -137 -157 -151 -140 -125 -145

Current Account Balance -219 -128 122 40 -18 94 731 25 -329 -698 246 -750 -409 1,735

Long-term capital (net) 416 394 324 388 495 245 505 325 714 1,169 586 1,109 1,380 933Official capital 146 229 174 218 365 152 265 35 409 692 120 276 848 440Commercial loans /c - - - - - - -5 3 -1 157 46 -67 -18 163

Corporate investment /d 270 165 150 170 130 93 245 287 306 320 420 900 550 330

Private monetary capital andunrecorded transactions (net) -153 -204 -337 -363 -518 -162 -742 -282 -182 -82 -256 93 -800 -614Commercial banks 59 - -102 33 8 115 -126 -16 68 -15 259 65 -108 66Other /e - - - - - - -27 6 5 9 -5 36 25 -241Errors and omissions including

short term -212 -204 -235 -396 -526 -277 -589 -272 -255 -76 -510 -8 -717 -439

Overall Balance 44 62 109 65 -41 177 494 68 203 389 576 452 171 2,054

Allocation of SDRs - - - - - - - 64 61 60 - - - -Drawing on IMF - _ _ _ _ _ _ _ - - - - - 265

Net Change in Cental Bank Reserves(increase -/decrease +) -44 -62 -109 -65 41 -177 -494 -132 -264 -449 -576 -452 -171 -2,319

/a Preliminary./b Includes nonmonetary gold.Ic Net loans inflows of the Malaysian International Shipping Company and the Malaysian Airlines System.Id Includes direct private investment, borrowing by the private sector, and reinvestment of retained earnings by foreign companies

operating in Malaysia./e From 1976 onwards, this item is largely comprised of Petronas earnings that are deposited abroad.

Source: Bank Negara.

Table 4.2: BALANCE OF PAYMENTS: CURRENT ACCOUNT, 1961-1976

(M$ million)

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 /a 1975 /a 1976 /a

Merchandise f.o.b.Receipts 3,208 3,232 3,296 3,346 3,752 3,808 3,679 4,070 4,921 5,020 4,884 4,736 7,263 9,991 9,042 13,265Payments /b 2,697 2,895 3,013 3,074 3,231 3,255 3,204 3,433 3,308 3,953 4,198 4,371 5,669 9,236 8,101 9,550

Merchandise balance 511 337 283 272 521 553 475 637 1.613 1.067 686 365 1.594 755 941 3,715

Services

Receipts 388 420 455 517 558 546 542 584 598 582 589 555 731 1,060 1,070 1,215Freight and insurance 5 5 5 6 6 5 5 5 5 5 10 35 60 120 130 150Other transportation 37 41 42 45 48 57 60 70 64 74 79 90 149 200 220 245Travel 10 12 17 20 22 28 42 47 30 32 37 47 62 110 140 170Investment income 133 165 172 170 170 167 189 209 221 235 265 208 256 400 330 370Government n.i.e. 162 155 175 228 262 237 189 188 180 129 97 72 90 100 110 120Other services 41 42 44 48 50 52 57 65 98 107 101 103 114 130 140 160

Payments 722 730 776 843 899 953 893 984 1,300 1,444 1,467 1,461 1,928 2,425 2,295 3,050Freight and insurance 138 150 160 160 168 170 175 191 252 309 332 344 480 790 680 800Other transportation 45 49 51 60 64 68 69 82 78 95 113 125 100 140 170 185Travel 77 82 86 94 102 106 111 120 126 137 143 148 156 200 240 280Investment income 364 342 367 400 425 435 333 363 555 590 628 586 915 1,000 880 1,400Government n.i.e. 17 24 25 31 37 48 57 63 75 61 45 47 61 75 85 95Other services 81 83 87 98 103 126 148 165 214 252 206 211 216 220 240 290

Service balance -334 -310 -321 -326 -341 -407 -351 -400 -702 -862 -878 -906 -1.197 -1,365 -1,225 -1,835

Transfers

Receipts 67 60 67 260 251 154 103 97 84 74 107 75 93 95 95 95Private transfers 12 12 15 24 25 29 30 30 31 31 32 33 35 35 30 30Government transfers 55 48 52 236 226 125 73 67 53 43 75 42 58 60 65 65

Payments 260 254 248 334 309 260 245 240 264 254 244 232 244 235 220 240Private transfers 217 219 221 225 220 225 215 210 240 230 220 209 220 210 190 210Government transfers 43 35 27 109 89 35 30 30 24 24 24 23 24 25 30 30

Transfers balance -193 -194 -181 -74 -58 -106 -142 -143 -180 -180 -137 -157 -151 -140 -125 -145

Balance on current account -16 -167 -219 -128 122 40 -18 94 731 25 -329 -698 246 -750 -409 1,735

/a Preliminary.

/b Including nonmonetary gold.

Source: 1961-62: Department of Statistics, August 1975; 1963-72: Treasury Report, 1976; 1973-76: Bank Negara estimates, February 1977.

Table 4.3: EXPORTS OF SELECTED COMMODITIES, 1960-1976(M$ million)

Commodity group 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 /a

RubberVolume ('000 MT) 852.3 874.9 871.0 922.1 928.3 966.0 1,011.1 1,043.3 1,171.6 1,354.9 1,345.4 1,390.4 1,365.0 1,638.8 1,570.L 1,459.6 1,620.1Value (M$ million) 2,001.0 1,566.9 1,476.9 1,475.7 1,395.8 1,461.8 1,473.9 1,274.7 1,353.2 2,031.1 1,723.7 1,460.3 1,298.3 2,507.2 2,887.7 2,025.5 3,097.8Unit value (cts/kg) 234.8 179.1 169.6 160.0 150.4 151.3 145.8 122.2 115.5 149.9 128.1 105.0 95.1 153.0 183.9 138.8 191.2

TinVolume (MT) 77,944.0 75,985.0 83,387.0 86,657.0 72,985.0 75,273.0 73,535.0 75,607.0 88,157.0 92,017.0 92,631.0 87,142.0 89,609.0 81,541.0 85,714.0 77,940.0 81,532.0Value (MS million) 507.7 533.1 620.3 642.5 728.3 871.8 793.0 755.6 829.6 939.8 1,013.3 905.8 924.0 897.0 1,515.0 1,206.1 1,524.0Unit value ($/MT) 6,513.2 7,281.4 7,438.9 7,144.4 9,978.4 11,608.2 10,784.4 9,993.2 9,410.7 10,212.8 10,939.1 10,394.7 10,311.2 11,000.0 17,675.4 15,475.1 18,691.5

Petroleum, crude andpartly refined /b

Volume ('000 MT) 2,515.1 1,909.8 1,902.0 1,590.3 1,711.1 1,747.4 2,240.5 2,670.4 3,859.4 3,993.2 4,778.2 7,926.7 4,240.1 3,834.6 3,167.8 3,763.2 7,143.9Value (M$ million) 146.7 107.2 106.7 89.1 84.6 86.7 104.2 124.0 173.1 168.2 201.5 389.9 222.5 268.7 678.1 852.8 1,746.5Unit value ($/MT) 58.3 56.1 56.1 56.0 49.9 49.6 46.5 46.4 44.8 42.1 42.2 49.2 52.5 70.1 214.1 226.6 244.5

Sawn 10RS

Volume ('000 cu m) 2,088.0 2,581.6 2,936.5 3,642.6 4,045.4 4,780.7 6,432.4 7,090.9 8,240.3 8,768.2 8,913.8 8.772.2 9,118.5 10,122.2 9,553.1 8,473.2 12,172.1Value (M$ million) 118.6 136.6 163.1 204.9 205.4 263.3 385.1 475.6 549.5 604.3 643.6 642.0 592.5 987.2 1,032.8 669.5 1,471.9Unit value ($/cu m) 56.8 52.9 55.5 56.3 50.8 55.1 59.9 67.1 66.7 68.9 72.2 73.2 65.0 97.5 108.1 79.0 120.9

Sawn timberVolume ('000 cu m) 582.2 453.8 481.1 569.8 725.6 753.0 712.8 857.6 1,114.1 1,234.7 1,414.9 1,343.7 1,798.6 2,229.8 1,998.3 1,889.6 3,055.3Value (MS million) 75.1 51.3 60.2 65.2 92.4 96.9 82.6 106.9 149.3 172.4 208.1 197.7 287.7 574.4 507.3 441.5 887.3Unit value ($/cu m) 128.9 113.0 104.4 114.5 127.5 128.7 115.9 124.7 134.0 139.6 147.0 147.1 160.0 257.6 253.9 233.7 290.4

Palm oilVolume ('000 MT) 97.6 94.9 107.4 116.8 126.1 143.2 184.6 188.9 286.0 356.7 401.9 573.4 697.1 797.8 901.2 1,162.8 1,345.7Value (M$ million) 60.6 61.3 65.1 70.0 81.1 107.2 120.0 116.0 124.5 153.0 264.3 380.4 362.7 466.5 1,085.6 1,317.5 1,220.2Unit value (S/MT) 620.9 645.6 606.6 590.7 643.3 748.8 649.9 614.0 435.3 428.9 657.5 663.5 520.3 584.7 1,204.5 1,133.0 906.8

Manufactured goods /cValue (M$ nil) 109.7 146.4 146.3 152.4 170.6 189.3 188.0 192.0 231.1 287.4 334.1 377.3 502.7 858.8 1,326.3 1,600.1 2,031.7

Other exports /dValue (M$ million) 613.2 615.4 620.9 630.2 623.7 705.5 699.0 678.9 712.3 698.5 773.8 663.4 663.8 813.6 1,161.9 1,118.1 1,440.0

Total exports f.o.b. /d(M$ million) 3,632.6 3,238.2 3,259.5 3,330.0 3,381.9 3,782.5 3,845.8 3,723.7 4,122.6 5,054.7 5,162.4 5,016.8 4,854.2 7,373.4 10,194.7 9,231.1 13,419.4

/a Preliminary.

/b Includes re-exports of crude petroleum imported from Brunei.

/c SITC 5-8 excluding tin.

/d These export figures are based on trade data and differ from those adjusted for valuation and coverage to a balance of payments basis in Tables 4.1and 4.2. Other exports" are estimated as a residual.

Source: 1960-75: Bank Negara Quarterly Bulletin; 1976: estimate based on 11 months' actual trade data. Total exports is a balance of paymentsestimate as for the years 1960-75.

Table 4.4: GROSS IMPORTS BY COMMODITY SECTION, 1960-76 /a

Miscel-Animal/ Machinery laneous

Food and Beverages Crude vegetable Manu- and manu-live and materials Mineral oils factured transport factured Other

Period animals tobacco inedible fuels and fats Chemicals goods /b equipment articles imports Total

1960 651.9 109.3 378.7 416.2 15.4 164.9 423.7 395.8 150.1 80.4 2,786.41961 665.2 127.4 310.9 358.6 15.7 181.9 473.2 458.0 160.7 64.1 2,815.71962 670.1 125.6 361.2 376.0 15.7 173.3 534.8 561.4 171.7 66.5 3,056.31963 783.1 130.5 307.3 355.5 14.4 189.9 545.3 613.0 187.4 66.2 3,192.61964 835.4 114.3 241.4 364.8 15.3 201.3 544.2 631.3 191.3 66.0 3,205.31965 749.6 123.5 237.7 388.5 18.2 233.9 597.6 728.6 206.3 72.2 3,356.11966 748.0 90.6 163.7 437.2 15.2 252.0 608.4 799.7 188.9 76.2 3,379.91967 762.1 90.2 165.8 446.6 15.2 248.2 592.5 735.8 193.5 75.1 3,325.01968 766.2 77.9 284.2 500.7 21.9 239.5 613.5 792.7 188.4 66.6 3,551.61969 727.5 87.0 302.6 485.7 19.2 274.7 624.2 840.9 182.8 60.4 3,605.01970 787.8 96.7 322.3 518.8 24.0 314.7 773.1 1,231.5 204.2 67.0 4,340.11971 734.8 92.1 266.9 572.8 23.1 349.0 780.9 1,363.3 194.9 56.0 4,433.81972 812.1 82.2 310.0 370.3 22.9 381.5 852.9 1,607.6 199.6 56.2 4,695.31973 1,079.0 103.9 371.3 397.0 28.5 534.0 1,257.9 1,888.7 341.4 68.2 6,069.91974 /c 1,585.0 114.9 543.1 1,003.5 44.1 879.0 1,864.6 3,269.4 559.7 90.3 9,953.61975 /c 1,401.6 119.3 557.7 1,021.1 26.0 709.2 1,389.3 2,881.8 465.4 67.0 8,638.41976 /c 1,435.9 121.9 525.0 1,319.3 22.2 937.6 1,636.6 3,477.3 513.3 77.0 10,066.1

/a Imports classified by commodity sections, based on the Standard International Trade Classification have been adjustedto exclude intraregional trade. Include imports of ships and aircraft but military imports have been excluded.

/b Refer to manufactured goods classified chiefly by materials.

/c Revised.

Note: There is a discrepancy between the total imports reported in this table and the total reported in Table 4.4 for theyears 1970-71 and 1974-76 since the two series were issued at different times. It is likely the discrepancy is dueto revisions in the later series (Table 4.5).

Source: 1960-76: Bank Negara Quarterly Bulletin.

Table 4.5: TERMS OF TRADE, 1962-1976 /a(1970 = 100)

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Export price index 103 101 103 108 103 95 89 103 100.0 96.6 91.9 120.8 154.2 137.3 165.7

Import price index 95 95 96 96 97 95 99 100 100.0 104.1 113.0 122.2 146.3 162.4 172.5

Terms of trade index 108 106 107 1I3 106 100 90 103 100.0 92.8 81.3 98.9 105.4 84.5 96.1

/a In Malaysian currency for goods and nonfactor services.

Source: 1962-69: Department of Statistics.1970-75: Implicit deflators for exports and imports estimated in the national accounts in Table 2.1.1976: Based on Department of Statistics estimated unit value index for SITC 0-4, World Bank estimates of

international price index for SITC 5-8 as adjusted for effective devaluation of Malaysia's ringgitof 5.8% in 1976. Export price index based on weighted price index of major commodities.

Table 4.6: EXTERNAL RESERVES, 1960-76($ million)

External reserves /a of the Central Bank of Malaysia Net foreignSpecial IMF gold Gold and Other Gross assets of Net

End of drawing tranche foreign official official Net official commercial externalPeriod rights /b position /c exchange /d Total reserves /d reserves reserves banks reserves

1960 - - 1,089.0 1,089.0 1,164.5 2,253.5 2,253.3 335.4 2,588.71961 - - 1,068.4 1,068.4 1,338.0 2,406.4 2,406.3 258.3 2,664.61962 - 10.4 1,149.4 1,159.8 1,298.4 2,458.2 2,458.1 235.0 2,693.11963 - 22.0 1,183.4 1,205.4 1,239.2 2,444.6 2,443.0 176.3 2,619.31964 - 22.6 1,278.1 1,300.7 1,037.8 2,338.5 2,303.1 176.5 2,479.61965 - 42.1 1,397.3 1,439.4 963.1 2,402.5 2,337.6 278.8 2,616.41966 - 61.9 1,450.2 1,512.1 766.9 2,279.0 2,206.6 246.2 2,452.81967 - 97.0 1,302.1 1,399.1 512.9 1,912.0 1,911.8 55.3 1,967.11968 - 101.0 1,477.9 1,578.9 424.1 2,003.0 2,000.4 -59.7 1,940.71969 - 109.0 1,787.3 1,896.3 515.8 2,412.1 2,402.1 66.0 2,468.11970 71.6 155.7 1,807.0 2,034.3 489.0 2,523.3 2,507.1 82.2 2,589.31971 132.7 120.1 2,054.7 2,307.5 478.8 2,786.3 2,760.6 14.0 2,774.61972 193.2 120.1 2,421.7 2,735.0 166.2 2,901.2 2,897.1 29.1 2,9Z6.21973 185.6 142.3 2,990.8 3,318.7 136.4 3,455.1 3,443.5 -229.5 3,214.01974 175.9 141.3 3,448.0 3,765.2 132.9 3,898.1 3,892.3 -294.6 3,597.71975 186.9 162.9 3,593.4 3,943.2 138.6 4,081.8 4,069.3 -186.7 3,882.61976 191.8 158.4 5,922.2 6,272.4 111.3 6,383.7 6,360.6 -252.2 6,108.4

/a Refer to the gross external reserves of the Central Bank comprising gold and foreign exchange, gold tranchte position in theInternational Monetary Fund and special drawing rights.

/b Relate to Malaysia's allocations of special drawing rights plus net acquisition of special drawing rights.

/c Refers to Malaysia's quota in the International Monetary Fund less the Fund's holdings of Malaysian currency.

/d Data as from 1969, published since March 1973, are a revised series. With the termination of the legal tender status of theMalayan dollar in January 1969, Malaysia's estimated share of the residual assets of the Board of Commissioners of Currency,Malaya and British Borneo, is reflected since that date in the accumulated foreign assets of the Federal Government instead ofthe Central Bank's gold and foreign exchange holdiags.

Source: Bank Negara.

Table 4.7: MALAYSIA: EXTERNAL PUBLIC DEBT, AS OF DECEMBER 31, 1976(US$'000)

Type of Creditor Debt OutstandingCreditor Country Disbursed Undisbursed Total

Suppliers CreditsAustralia 1,278 1 1,279France 528 - 528

India 7,760 - 7,760

Japan 20,193 - 20,193Korea, Republic of - 3,579 3,579United Kingdom 495 - 495United States 24 - 24

Total Suppliers Credits 30.278 3.,580 33,858

Private Bank CreditsBelgium 39 - 39

France 9,489 557,538 567,027Germany, Federal Republic of - 5,780 5,780Japan 86,580 - 86,580Sweden 25,261 7,953 33,214Switzerland 20,404 - 20,404United States 613,263 168,973 782,236Multiple lenders 50,000 - 50,000

Total Private Dank Credits 805,036 740.244 1,545,280

Publicly Issued BondsGermany, Federal Republic of 27,090 - 27,090United Kingdom 10,962 - 10,962

Total Publicly Issued Bonds 38,052 - 38,052

Privately Placed BondsNetherlands 20,350 - 20,350

Total Privately Placed Bonds 20.350 - 20,350

Other Private DebtUnited States 1,170 - 1,170

Total Other Private Debt 1.170 - 1.170

Loans from International OrganizationsAsian Development Bank 90,971 152,862 243,833IBRD 305,506 375,970 681,476

Total Loans from International Organizations 396,477 528,832 925,309

Loans from GovernmentsAbu Dhabi - 8,360 8,360Austria - 1,103 1,103Brunei 10,083 - 10,083Canada 7,245 54,138 61,383Denmark 4,581 - 4,583France 6,877 10,454 17,331Germany, Federal Republic of 15,742 34,692 50,434Japan 168,879 68,220 237,099Kuwait 1,181 25,304 26,485Netherlands 329 485 814Saudi Arabia - 75,935 75,935United Kingdom 48,563 2,344 50,907United States 64,345 27,509 91,854

Total Loans from Governments 327.827 308.544 636.371

Total External Public Debt 1,619.190 1,581,200 3.200,390

Notes: (1) Only debts with an original or extended maturity of over one year areincluded in this table.

(2) Debt outstanding includes principal in arrears but excludes interest inarrears.

(3) The following uncommitted parts of frame agreements and standbys are notincluded in this table.

Loans from GovernmentsJapan 17,291

Total 17.291

Total uncommitted frame agreements and standbys 17,291

Source: World Bank, External Debt Division, Economic Analysis & Projections Department,August 29,1977.

Table 4.8: SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS ANDOUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT, 1971-77

(US$' 000)

Debt outstanding atbeginning of period Total transactions during period

Disbursed Including Commit- Disburse- Service paymentsYear only undisbursed ments ments Principal Interest Total

(1) (2) (3) (4) (5) (6) (7)

1971 363,589 554,797 243,168 142,228 23,624 22,433 46,057

1972 501,790 810,740 237,142 202,866 21,890 30,222 52,112

1973 649,563 987,896 240,909 86,172 31,263 42,175 73,438

1974 687,825 1,177,735 1,102,706 218,338 64,817 54,370 119,187

1975 829,802 2,244,019 852,518 589,364 84,971 59,917 144,888

1976 1,303,632 2,967,903 423,230 444,452 117,533 119,800 237,333

1977 1,619,190 3,200,390

Source: World Bank, External Debt Division, August 24, 1977.

Table 4.9: KEY EXCHANGE RATES, 1966-1977 /a

Exchange rate of Malaysian dollar per:US$1

End of PeriodY 100 S$100 Period /b Averaged /c b Stg. I A$1 DM 100 F 100 SDR 1

1966 0.85 100 3.08 8.59 3.43 77.45 61.791967 0.85 100 3.07 7.39 3.44 76.77 62.551968 0.86 100 3.08 7.34 3.39 76.06 62.251969 0.86 100 3.09 7.42 3.42 82.87 55.60 3.081970 0.86 100 3.08 3.06 7.37 3.41 83.90 55.80 3.081971 0.92 100 2.90 3.05 7.40 3.42 87.61 55.51 3.131972 0.93 100 2.81 2.82 6.59 3.57 87.56 54.83 3.061973 0.88 98.57 2.45 2.44 5.69 3.63 90.74 50.07 2.951974 0.76 99.65 2.31 2.41 5.41 3.05 96.19 51.79 2.831975 0.84 103.65 2.58 2.40 5.22 3.23 98.46 57.76 3.031976 . . 2.54 2.541977 June . . 2.48 . . .

/a All exchange rates are for end of period except column 4, US$ period average.

/b Corresponds to the IFS exchange rate par/market rate (de), end of period rate.

/c Corresponds to the IFS exchange rate per/market rate (df), period average

Source: Treasury, Economic Report, 1975-1976 and IFS.

Table 5.1: MONEY SUPPLY AND ITS DETERMINANTS, 1959-1976(M$ million)

Money supply Determinants of money supplyQuasi- Broad money

Money money la supply /b (Changes during period)Demand Percentage Foreign Credit to pri- Claims on Coverni-

End of period Total /c Currency Xc deposits Total change assets /d vate sector ment (net) /e(1) (2) (3) (4) (5) (6) (7) (8) (9)

1959 1,111 646 464 375 1,486 - - - -1960 1,170 682 488 484 1,654 1.3 71 110 -81961 1,197 691 506 560 1,757 6.2 -98 168 401962 1,254 716 537 622 1,876 6.8 68 86 -401963 1,342 749 593 713 2,055 9.5 -15 142 601964 1,417 797 620 804 2,221 8.1 61 144 -671965 1,514 846 668 943 2,457 0.6 212 59 81966 1,652 909 743 1,084 2,736 1.4 33 148 1151967 1,525 772 753 1,300 2,825 3.3 -232 135 751968 1,697 805 892 1,568 3,265 15.6 62 285 1211969 1,882 931 952 1,842 3,724 14.1 436 151 -1771970 2,033 1,000 1,032 2,098 4,131 10.9 84 404 01971 2,120 1,061 1,060 2,554 4,674 13.1 135 326 1201972 2,716 1,269 1,446 3,056 5,772 23.5 404 443 2871973 3,735 1,718 2,017 3,838 7,573 31.2 318 1,571 1291974 4,055 2,030 2,026 4,674 8,729 15.3 400 692 3931975 4,349 2,239 2,110 5,653 10,002 14.6 269 799 3541976 5,257 2,628 2,629 7,514 12,771 27.7 2,258 1,434 491

(Outstanding as of December 31, 1976)5,818 7,511 822

/a Fixed and savings deposics; deposits against letters of credit, guarantees, open contracts; and rental and safedeposits. (All refer to private sector.) Includes private sector holdings of fixed deposits with the Central Bank.

/b Sum of "Money" and "Quasi-Money".Ic Up to the end of 1968, the series includes estimated amount of Malayan currency issued by the Board of Commissioners

of Currency, Malaya and British Borneo, which ceased to be legal tender since January 16, 1969.td Central Bank and commercial banks. Includes Malaysia's estimated share of the Currency Board's external assets up to

end of 1968, IMF gold tranche position and since January 1970, SDRs allocated. For commercial banks, includes billsdiscounted on purchased and bills receivable which are payable abroad.

/e Federal and State Governments only.

Source: Bank Negara.

Table 5.2: LIQUIDITY POSITION OF COMMERCIAL BANKS, 1960-1976 Ia

End of Total Liquid Liquidity Cashperiod liabilities assets ratio /b ratio /c

------- (M$ million…------- --------- (X)----------

1960 1,370 - - -

1961 1,517 - - -

1962 1,719 - - -

1963 1,885 - - -

1964 2,136 - - 5.2

1965 2,264 402 23 5.2

1966 2,761 562 28 5.0

1967 3,016 859 38 4.8

1968 3,644 912 42 4.0

1969 4,080 876 35 3.3

1970 4,460 845 30 3.5

1971 5,042 1,064 34 2.8

1972 6,033 1,261 33 4.1

1973 8,481 1,589 32 4.3

1974 9,609 2,003 35 2.6

1975 10,811 2,367 36 2.2

1976 14,017 2,417 40 2.4

/a End of period.

/b As of October 1968, commercial banks were required to maintain aminimum liquidity ratio of 20% against deposits, excluding savingsdeposits. Before that date, the liquidity ratio applied to totaldeposit liabilties. The minimum liquidity ratio was increased to25% as of August 16, 1973.

/c Ratio of cash and balances with Central Bank (net of statutoryreserves) to total deposits.

Source: Bank Negara.

Table 5.3: CLASSIFICATION OF LOANS AND ADVANCES OF COMMERCIAL BANKS, 1961-1976 /a(M$ million)

End of period 1961 /b 1965 1970 1971 1972 1973 1974 1975 1976

Federal and State Governments 31.8 3.0 0.3 0.5 32.4 102.6 143.4 182.9 274.8

Statutory authorities - 18.2 4.6 1.7 8.9 32.2 43.8 76.6 174.8

Agriculture of which: 56.6 97.5 240.3 278.2 347.5 406.1 416.5 483.8 535.8

Rubber 52.9 66.0 114.6 105.4 123.9 147.3 109.8 133.7 135.5

Palm oil 0.8 2.1 35.0 39.4 36.4 64.3 51.9 74.5 101.6Forestry 0.5 23.4 62.7 105.7 159.8 158.6 216.3 217.6 207.7

Mining and quarrying of which: 18.5 31.9 51.2 53.9 72.0 98.9 97.9 106.7 105.7

Tin 3.9 11.0 36.3 31.2 50.3 65.1 56.0 55.3 46.2

Manufacturing of which: 63.1 174.2 465.6 569.9 610.3 883.5 1,057.0 1,265.6 1,382.0

Rubber products 22.3 36.9 41.7 32.6 35.6 62.0 44.4 75.9 82.5Tin concentrates 4.5 3.0 15.1 8.2 6.6 15.1 3.3 0.8 0.8Rice milling 13.2 22.1 27.2 22.8 16.5 10.5 21.7 15.9 24.2Food, beverages and tobacco 5.1 27.0 40.7 57.9 62.9 72.6 82.6 118.0 101.3

Soap and oils 3.4 12.4 35.5 46.8 37.6 56.7 29.3 43.2 76.9Textiles and clothing 0.8 3.2 12.2 28.2 61.3 91.8 150.7 187.7 199.5Woodwork and furniture 1.4 4.4 15.1 19.4 28.7 26.7 34.1 48.7 69.7

Metal products and machinery 2.1 7.5 99.5 134.3 129.0 178.9 203.6 229.1 264.1

Building materials 3.3 12.3 33.9 33.8 32.3 69.7 91.2 108.8 116.2

Building and construction 25.7 83.4 206.5 222.0 240.2 431.7 463.0 480.2 513.1

Commerce /c 171.6 423.7 756.1 793.6 924.9 1,331.5 1,602.0 1,722.2 2,172.3

Professional and private individuals 149.6 206.9 376.9 441.6 566.3 905.4 951.9 1,095.9 1,345.0

Other 65.3 102.3 258.1 305.8 376.8 675.2 800.1 1,054.5 1,557.9

Total 582.2 1,141.1 2,359.6 2,667.2 3,179.3 4,867.1 5,575.6 6,468.4 8,061.4

/a End of period.

/b Peninsular Malaysia only.

/c Include bills discounted or purchased and bills receivable as from 1964.

Source: Bank Negara.

Table 5.4: INTEREST RATES OF COMMERCIAL BANKS, 1957-1977(Percent per annum)

Fixed deposits by original maturity in months /a Minimum advance rates

Date of change 1 3 6 9 12 24 36 Savings Against Gov't. Against stocks Againstdeposits /b securities, etc. and shares property

1957 - n.a. n.a. n.a. n.a. - - 2.50 n.a. n.a. n.a.

1958 - 3.00 3.00 3.00 3.00 - - 2.50 5.00 5.50 6.00

1959 - 3.50 3.50 3.75 3.75 - - 2.50 5.00 5.50 6.001960 Jul. 1 - 4.00 4.00 4.00 4.00 - - 2.50 6.00 6.50 7.00

1961 Jul. 28 - 5.00 5.00 5.00 5.00 - - 2.50 7.00 7.50 8.00

1962 Feb. 2 - 4.50 4.50 4.50 4.50 - - 2.50 6.50 7.00 7.50

1962 Aug. *30 - 4.00 4.00 4.00 4.00 - - 2.50 6.25 6.75 7.25

1964 Jan. 1 2.00 4.00 4.00 4.00 4.00 - - 2.50 6.25 6.75 7.25

1964 Nov. 25 2.50 5.00 5.00 5.00 5.00 - - 2.50 7.00 8.00 8.00

1965 Aug. 1 2.50 5.00 5.00 5.00 5.00 - - 3.00 7.00 8.00 8.00

Prime Preferentialrate rate /c

1966 Oct. 1 2.50 5.00 5.00 5.00 5.00 - - 3.00 7.50 7.00

1967 Nov. 20 3.00 5.50 5.75 6.00 6.00 - - 3.00 8.00 7.50

1968 May 1 3.00 5.50 5.75 6.00 6.00 - - 3.50 8.00 7.50

1971 Jan. 2 3.00 5.50 5.75 6.00 6.00 6.25 6.75 3.50 8.00 7.50

1972 Jan. 19 3.00 5.00 5.25 5.50 5.75 6.00 6.50 3.50 7.50 7.00

1973 Apr. 26 3.50 5.50 5.75 6.00 6.25 * * 4.50 8.00 7.50

Aug. 1 3.50 5.50 5.75 6.50 7.00 * * 4.50 8.00 7.50

Dec. 18 4.00 6.00 6.25 7.00 8.00 * * 5.50 9.00 8.50

1974 Apr. 24 4.50 6.50 7.00 8.00 9.00 * * 6.50 10.00 9.00

1975 Feb. 3 4.00 6.00 6.50 7.50 8.50 * * 6.50 9.50 9.00

May 2 3.50 5.50 6.00 7.00 8.00 * * 6.00 9.00 8.50

Aug. 9 3.50 5.50 6.00 6.50 7.50 * * 5.50 8.50 8.00

1977 June 2 3.00 5.00 5.50 5.75 6.50 * * 5.00 7.50 7.00

/a From January 19, 1972, fixed deposits with maturities of 4 and 5 years with commercial banks were introduced, the

terms and conditions of which are subject to individual negotiation. Commercial banks also accepted fixed deposits

of 18 months and 30 months at 6-1/8% and 6-3/8% respectively from January 2, 1971 to January 18, 1972.

/b The Post Office Savings Bank paid the same rate of interest on deposits until April 30, 1968. The POSB interest

rate was increased to 4% effective May 1, 1968, 4-1/2% per annum effective January 1, 1973, 5-1/2% per annum

effective January 1, 1974, and 6-1/2% per annum effective May 1, 1974.

/c Preferential rate applies to advances to Federal and State Governments and public authorities, and advances against

government or municipal securities and against local agricultural produce.

* Rates are negotiable.

Source: Bank Negara.

Table 6.1: PENINSULA-R MALAYSIA - CONSUMER PRICE INDEX, 1970-1976(1967 - 100)

Jan.- Jan.- Per- Jan.- Per- Jan.- Per- Jan.- Per- Jan.- Per- Jan.-Dec. Dec. centage Dec. centage Dec. centage Dec. centage Dec. centage Dec. Percentage

Average annual index 1970 1971 change 1972 change 1973 change 1974 change 1975 change 1976 change

Food 99.1 100.6 1.5 103.8 3.2 120.3 15.9 151.7 26.1 157.4 3.8 160.5 2.0Rice, bread and other

cereals 90.0 89.0 -1.1 91.0 2.2 112.0 23.1 154.0 37.5Meat 99.0 100.0 1.0 101.0 1.0 119.0 17.8 151.0 26.9Fish 110.0 115.0 4.5 122.0 6.1 142.0 16.4 179.0 26.1Milk and eggs 97.0 98.0 1.0 103.0 5.1 113.0 9.7 126.0 11.5Oils and fats 109.0 110.0 0.9 103.0 -6.4 115.0 11.7 179.0 55.7Fruits and vegetables 99.0 100.0 1.0 102.0 2.0 118.0 15.7 139.0 17.8Sugar 110.0 122.0 10.9 136.0 11.5 141.0 3.7 159.0 12.8Coffee and tea 100.0 102.0 2.0 103.0 1.0 108.0 4.9 117.0 8.3Other goods 110.0 112.0 1.8 113.0 0.9 117.0 8.5 130.0 11.1

Beverages and tobacco 102.8 103.5 0.7 107.2 3.6 108.6 1.3 110.7 1.9 121.2 9.5 122.8 1.3

Clothing and footwear 102.3 103.0 0.7 105.8 2.7 129.0 21.9 144.1 11.7 143.3 -0.6 146.9 2.5

Gross rent, fuel and power 101.1 102.0 0.9 102.8 0.8 104.3 1.5 111.5 6.9 118.9 6.6 125.6 5.6

Furniture, furnishings andhousehold equipment 105.5 108.2 2.6 114.0 5.4 128.6 12.8 150.5 17.0 157.8 4.9 161.7 2.5

Medical care and health 101.8 102.6 0.8 103.4 0.8 107.8 4.3 116.4 8.0 122.4 5.2 135.2 10.5

Transport and communication 102.8 103.8 1.0 106.5 2.6 109.4 2.7 119.7 9.4 127.1 6.2 133.3 4.9

Recreation, entertainment,education and culturalservices 106.3 111.1 4.5 115.5 4.0 119.8 3.7 126.9 5.9 129.5 2.0 130.3 0.6

Miiscellaneous goods andservices 103.5 106.1 2.5 112.8 6.3 122.5 8.6 140.4 14.6 147.9 5.3 151.3 2.3

Total 101.3 102.9 1.6 106.2 3.2 117.4 10.5 137.8 17.4 144.0 4.5 147.8 2.6

Source: Department of Statistics; Bank Negara.

Table 7.1: SECTORAL ALLOCATION OF DEVELOPMENT EXPENDITURES, SMP AND TMP(billions of current M$)

SMP (actual) TMP (target) % changeM$ % of Total M$ % of Total TMP/SMP

(in real terms)

Economic 7.1 72.2 12.7 68.3 34.8

Agriculture and RuralDevelopment 2.1 21.8 4.7 25.5 66.7

Land Development 1.1 11.3 2.0 10.9 50.4In situ 1.0 10.5 2.7 14.6 107.9

Commerce and Industry 1.6 16.5 1.7 9.5 -19.1Transport 1.8 18.3 2.8 15.2 20.5Communications 0.6 6.0 1.2 6.4 48.1

Utilities 0.9 9.2 2.1 11.6 73.6

Social 1.3 13.7 3.1 16.6 71.1

Education and Training 0.7 7.0 1.7 9.0 86.2

Health and Family Planning 0.2 1.8 0.4 2.0 62.2

Housing 0.2 2.0 0.7 3.8 128.8

Social and Community Services 0.3 3.1 0.4 2.1 -4.2

General Administration 0.3 3.6 0.6 3.2 30.5

Security 1.0 10.4 2.2 11.9 57.7

Total 9.8 100.0 18.6 100.0 42.2

Sources: Second and Third Malaysian Plans and World Bank Estimates.

Table 7.2: PENINSULAR MALAYSIA: POOR RURAL HOUSEHOLDS, 1970-80

1970 1975 1980Total Percent- Total Percent- Total Percent-

Total poor Incidence age Total poor Incidence age Total poor Incidence agehouse- house- of among house- house- of among house- house- of amongholds holds poverty poor holds holds poverty poor holds holds poverty poor('000) ('000) (%) ('000) ('000) (%) ('000) ('000) (%)

RuralAgriculture 852.9 582.4 68.3 73.6 915.1 576.5 63.0 69.0 957.5 471.8 49.3 61.4Rubber smallholders 350.0 226.4 64.7 28.6 396.3 233.8 59.0 28.0 423.4 169.4 40.0 22.0Oil palm smallholders 6.6 2.0 30.0 0.3 9.9 0.9 9.1 0.1 24.5 2.0 8.2 0.3Coconut smallholders 32.0 16.9 52.8 2.1 34.4 17.5 50.9 2.1 34.0 16.0 47.1 2.1Padi farmers 140.0 123.4 88.1 15.6 148.5 114.3 77.0 13.7 150.1 109.6 73.0 14.2Other agriculture /a 285.9 185.6 64.9 23.5 284.4 183.8 64.6 22.0 283.0 152.7 54.0 19.9Fishermen 38.4 28.1 73.2 3.5 41.6 26.2 63.0 3.1 42.5 22.1 52.0 2.9

Other industries 350.5 123.5 35.2 15.6 433.4 153.4 35.4 18.4 543.2 174.9 32.2 22.8

Total 1,203.4 705.9 58.7 89.2 1,348.5 729.9 54.1 87.4 1,500.7 646.7 43.1 84.2

/a Includes agricultural households in urban areas, agricultural labor, estate workers and mixed farmers.

Source: Third Malaysia Plan.

Table 7.3: PUBLIC DEVELOPMENT EXPENDITURE FORAGRICULTURAL PROGRAMS, 1971-80

(M$ million)

Second Plan Expenditure Third Plan Target1971-75 1976-80

M$ % of Total M$ % of Total

I. In Situ 641 30.1 1,793 37.9

Pineapple replanting 4 - 22 0.5Coconut replanting 27 1.3 62 1.3Crop diversification 23 1.1 286 6.0Extension and services 158 7.4 127 2.7Rubber Replanting 158 7.4 675 14.3Drainage and irrigation 271 12.7 621 13.1

II. Land Development 1,139 53.5 2,010 42.4

FELDA 645 30.3 985 20.8FELCRA 49 2.3 86 1.8Other 445 20.9 939 19.8

III. Other 349 16.4 933 19.7

Forestry 31 1.5 55 1.2Veterinary 70 3.3 179 3.8Fisheries 32 1.5 276 5.8Agricultural research 29 1.4 61 1.3Credit and marketing 132 6.2 295 6.2Other 55 2.6 67 1.4

Total 2,129 100.0 4,736 100.0

Source: Third Malaysia Plan.

Table 7.4: DEVELOPMENT OF EXISTING AGRICULTURAL LAND, EXCLUDINGIRRIGATION AND DRAINAGE PROGRAMS, 1971-1980

('000 acres)

Second Plan Third PlanAchievement Target

1971-75 1976-80

Peninsular Malaysia 698 1,265

Crop subsidy & diversification 202 631

RISDA 432 500Replanting (397) (450)Newplanting (35) (50)

Coconut 50 100Rehabilitation (42) (80)Replanting (8) (20)

Pineapple replanting 5 26

FELCRA rehabilitation 9 8

Sabah 30 60

Crop diversification 14 15

Coconut - 10Rehabilitation (6)Replanting - (4)

Sabah Rubber Fund Board 16 35Replanting and newplanting

in rubber (8) (35)Other crops (8) -

Sarawak 133 343

Crop diversification 59 177

Rubber planting 15 /a 62Replanting (15) (56)Newplanting - (6)

Pepper 20 44Mature (14) (25)Newplanting (6) (19)

Paddy planting 39 60

Total 861 1,668

/a Scheme was discontinued in 1972.

Source: EPU, Working Paper on Land Development Strategy, August 6, 1975.

Table 7.5: NEW LAND DEVELOPMENT, 1971-80('000 acres)

Second Plan Achievement Third Plan Target1971-75 1976-80

Peninsular Malaysia 805 700

FELDA 412 350Current model (412) (300)New model -) ( 50)

FELCRA 58 50Youth (19) (25)Fringe alienation ( 39) ( 25)

RISDA (block planting) 57 100

Other Schemes 278 200State (151) (100)Private (116) ((100)Joint venture /a ( 11) {

Sabah 74 150

State 74 70Private - 30Joint venture /a - 50

Sarawak 131 150

State 131 70Private and joint venture /a - 80

Total 1,010 1,000

/a Projects undertaken jointly by the public and private sectors.

Source: EPU Policy Paper, "Land Development Strategy".

Table 7.6: SMP AND TMP HOUSING CONSTRUCTION PROGRAMS

Third Malaysia Plan 1976-80 Second Malaysia Plan 1970-75Public Public

Number development Unit Number development Unit

of expenditure cost of expenditure cost

units (M$ million) (MS) units (MS million) (M$)

A. Public Sector:1. Public housing (through Ministry of

Housing and Village Development):(a) Peninsular Malaysia 56,800 426.6 7,500

(b) Sabah 1,900 18.4 9,700

(c) Sarawak 3,500 35.0 10,000

Subtotal A.1 62.200 480.0 7,700 13,244 234.8 17,700

2. Public housing by federal agencies and

regional development authorities:(a) FELDA and FELCRA 35,100 73.8 2,100

(b) DARA (Pahang Tenggara) 9,200 60.0 6,500

(c) KJHT (Johor Tenggara) 5,800 16.2 2,800

(d) LKTT (Trengganu Tengah) 3,000 18.0 6,000

Subtotal A.2 53,100 168.0 3,200 41,965

3. Institutional quarters and other staffaccommodation 41,300 778.7 18,900 24,240

4. Sabah and Sarawak Land DevelopmentBoards, Jabatan Orang Asli 6,900 15.8 2,300 |

5. SEDCs commercial housing 1,300 26.3 20,200 |

6. SEDCs own-funded/joint venture

projects, other state projects, } 6,627

Government Officers' Housing

Company, other minor programs:

(a) Shah Alam 22,900 442.2 19,300 |

(b) Rest of Malaysia 33,100 556.6 16,800 |

Subtotal A.6 56,000 998.8 17,800 |

Subtotal A. 220,800 2.467.6 11,200 86.076 825.0 9, 600

B. Private Sector:1. Private developers 100,000 64,862

2. Cooperative societies 12,000

3. Individuals and groups 150,000 108,872

Subtotal B. 262.000 173,734

Total 482,800 259,810