Assessment of the State's Role in Import Substitution Industrialization

in agriculture to improve labor productivity, carry out crop restructuring towards serving industrialization.

- The Malaysian government established the following agencies: the Federal Land Development Authority (FELDA) in 1956, the Federal Agricultural Marketing Authority (FAMA) in 1965, and the Agricultural Bank in 1969. These agencies played a very important role in implementing land reclamation programs, expanding cultivated land areas, and providing credit for agriculture.

- The state budget for agricultural and rural development accounted for about 24% of budget expenditures during the period 1966 - 1970 [47, p. 83]. The policy of the Malaysian state aimed to expand land area through reclamation to increase food production and export crops, thereby reducing imports and achieving food self-sufficiency.

- The Malaysian government has taken active measures to regulate agricultural market prices and subsidize certain agricultural products, especially those serving domestic needs such as rice and vegetables. The government does not impose import taxes on agricultural machinery to encourage farmers to use machinery in production.

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With the above policies and measures, agricultural development has contributed significantly to economic growth in the early period of industrialization. On the one hand, it meets the employment needs of the majority of workers in Malaysia. On the other hand, it also plays a role in providing food and raw materials for the processing industry for export. Agricultural and rural development also contributes to creating stability in the rural economy and society.

* Industrial development policy

In 1958, the Malaysian government took the first step to encourage industrial development by promulgating the "Pioneer Industries Ordinance" which initiated the implementation of the import substitution industrialization strategy. The industries prioritized for development during this period were:

are food, vegetable and tobacco processing industry; rubber and wood processing industry; chemical industry, textile industry, mechanical industry, metallurgy and electronic machinery and household appliances manufacturing industry.

- Capital mobilization policy for industrial development investment.

Due to limited budget revenue, the state's investment budget for industrial development in Malaysia was very small, accounting for only 3% of total budget expenditure in the period 1966 - 1970 [47, p. 83]. Therefore, the Malaysian government had a number of policies and measures to encourage investment in industrial development.

+ The Malaysian government both encourages domestic investment and attracts foreign direct investment. In attracting FDI, Malaysia has stipulated that projects with more than 70% foreign ownership must have the remaining part reserved for Malaysians. If foreign ownership is less than 70%, the remaining 30% must be reserved for local people and the remaining part will be reserved for other Malaysians of Chinese, Indian, etc. [91, p. 4]. This shows that the Malaysian government pays great attention to the interests of local people by actively increasing their ownership ratio in foreign-invested projects.

The State has introduced preferential measures as reflected in the Income Tax Law (1967) and the Investment Promotion Law (1968). Investment promotion policies are implemented on the principle of not eliminating incentives that have been announced within the prescribed period and are applied to all enterprises investing in Malaysia. At the same time, the State also exempts income tax for 3 years for enterprises with investment capital from 100,000 -

RM250,000 and 5-year exemption for businesses with investment capital above

250,000 RM. Later, to further encourage investment, the Malaysian government stipulated that the tax exemption period would be extended by 1 year for enterprises with investment capital from 250,000 - 500,000 RM, 2 years for enterprises with investment capital from 500,000 - 1,000,000 RM and over 5 years for enterprises with investment capital over 1 million RM [53, p. 83].

On the other hand, the Malaysian government encourages the establishment of mixed enterprises (domestic and foreign capital), ensuring that these enterprises will not be nationalized, and that appropriate compensation will be given in case of nationalization. Foreign capital has the right to freely repatriate profits. Insurance and reinsurance regimes for foreigners are clearly regulated. Therefore, British, American, Japanese, Western European monopolies... established a series of new enterprises in Malaysia in the years 1963 - 1965.

+ In 1960, the Malaysian Industrial Development Finance Commission was established with the task of providing finance for industry, and at the same time developing infrastructure, especially transportation, electricity, water, factories, etc., creating a favorable environment for industrial development. State budget expenditure for transportation, telecommunications and public services accounted for 33% [47, p. 83].

- Establishment of industrial parks

The Malaysian government established industrial parks to attract foreign investment. In 1970, major industrial parks were established in Western Malaysia such as Mark Madin (Plinang State), Kamunting and Tasek (Perak State), Tanah Puteh (Pahang State), Petaling Jaya and Batu Tiga (Selangor State), Senawang (Legiri Sembilan State), Lakkin and Tampol (Johor State). These industrial parks attracted the majority of the workforce in Malaysia. During the period 1965-1970, 25,000 new jobs were created in the industry. New factories were established in the industrial parks to produce import-substituting products.

Foreign direct investment capital is directed to the manufacturing industry to meet domestic production and consumption needs.

* Foreign trade policy

The Malaysian government implemented a series of domestic market protection measures and many financial incentives to encourage domestic production to replace imports. In 1961, the Tariff Advisory Committee was established (later changed to Tariff Advisory Council (1963) and the Industrial Development Authority (IDA) was established.

The Federal Industrial Development and Tariff Action Committee (1966) was established to help the government approve effective tariff-protected projects. In 1965, the government established the Tariff and Industrial Development Action Committee to protect and promote the development of newly formed domestic industries. The government raised import tariffs with an average effective protection rate across industries from 25% in 1962 to 50% in 1966 and 65% in 1969 [53, pp. 64-68].

Compared to other ASEAN countries, Malaysia has a more moderate industrial protection policy, and the government has an early liberalization policy for foreign investment. That is also the reason why Malaysia switched to an export-oriented industrialization strategy earlier. At the same time, even during the import substitution industrialization phase, Malaysia still took advantage of foreign investment capital.

2.1.3. Assessment of the role of the state in import substitution industrialization

* About the positive aspects:

- The choice of import substitution industrialization strategy is suitable to the specific situation of Malaysia after gaining national independence. That has brought initial positive impacts on Malaysia's economic development.

In fact, the Malaysian economy has made some significant achievements. From 1961 to 1965, GDP grew at an average of 5% per year and from 1966 to 1970 it grew at an average of 5.4%.

In agriculture, the crop area has increased from 2,050,206 hectares to

2,589,176 ha. The crop structure changed, the rubber area decreased from 85% to 78% and the oil palm area increased from 3% to 11% of the total export crop area from 1960 - 1970. The export crop output also increased from 0.8 million tons to 1.7 million tons from 1960 to 1970. Palm oil output in 1957 was

58,507 tons, reaching 320,755 tons by 1969 [47, pp. 86-87]. By the end of the 1960s, food production had fundamental changes. Western Malaysia stopped importing rice, and Eastern Malaysia reduced rice imports.

In terms of industry, the production of goods to serve domestic demand increased rapidly. The processing and manufacturing industries in this period developed at a fairly rapid pace, with the proportion of the processing industry in GDP in 1957 being about 8%, increasing to 13.9% of GDP in 1970. In addition, Malaysia produced a number of new products from petroleum and chemical products.

- Reduce the economy's dependence on imported consumer goods, expand the exploitation of domestic development resources, and create more jobs.

In fact, cigarette production met 60% of domestic consumption demand, in 1966 it met 90%. Confectionery production in 1960 met 93% of domestic demand, in 1966 it was 108% and began to show an export trend. In 1966, bicycle spare parts production met domestic demand, reaching 125% compared to 97% in 1960. Cement production, the index of meeting domestic demand: 1960 was 89% and 1966 was 108%. Agricultural labor has decreased. In 1960, up to 67.6% of the Malaysian population lived on agriculture and still depended on agriculture, in 1970 the number of workers in agriculture and forestry was only 53.2%.

* About the limitations:

- Domestic industrial protection policies have created obstacles to industrial development.

+ By the late 1960s, Malaysian industries were facing major obstacles due to the limited domestic market and low competitiveness in the world market. In addition, the dependence on imported machinery, equipment and raw materials did not create economic linkages between protected industries and other sectors of the economy. In fact, there was a monopoly situation in some protected industries, resulting in poor product quality and high prices of domestically produced products.

+ Industrial protection policies have attracted foreign investors to invest in import-substituting industries, but have not encouraged other industries whose products require

highly competitive. Therefore, in the manufacturing industry, foreign companies do not need to innovate technology to be able to sell their products in the Malaysian market.

- Import substitution industrialization also causes imbalance in development between regions and increasing income disparity between ethnic groups.

Most of the large and privileged industrial establishments were concentrated in the West while other regions remained underdeveloped and backward. The industries that enjoyed the most privileges were mainly owned by the Chinese. The indigenous shareholding in companies was only 2.4%, while that of other Malaysians was 34.3%; that of foreigners was 63.3%. Therefore, the ethnic Malays believed that the benefits of import substitution were essentially for the Chinese. This led to the ethnic conflict in 1969.

In general, by 1970, the import substitution industrialization strategy had revealed its limitations. The economic structure had not changed much and agriculture still accounted for a large proportion. In 1965, agriculture accounted for 31.5% of GDP, services accounted for 44.6% of GDP and new industry accounted for 23.9% of GDP. Per capita income increased slowly: in 1968 it reached 370 USD, in 1969 it was 380 USD, in 1970 it was 390 USD. Besides, the demand for jobs for the population was increasing.

That forced Malaysia to seek new strategies to address the pressing needs of socio-economic life in development.

2.2. THE ROLE OF THE STATE IN MALAYSIA'S EXPORT-ORIENTED INDUSTRIALIZATION (1971 - PRESENT)

2.2.1. Period 1971 - 1996

2.2.1.1. International and domestic context

Entering the 1970s, the industrialization process posed many problems that had to be solved in response to the country's socio-economic development requirements. Malaysia

promulgated the New Economic Policy (NEP) and changed the industrialization strategy to suit the new situation. During this period, Malaysia's political stability was a very important factor contributing to the implementation of the socio-economic goals set out in the new period.

In the early 1970s, the prices of raw materials for export in the world market were volatile and unfavorable for raw material exporting countries such as Malaysia. Therefore, in Malaysia, there was a need to develop raw material processing industries to export finished products. Also during this period, international investment and trade activities increased rapidly. This allowed Malaysia to promote FDI attraction to develop the economy, especially the manufacturing industry.

In the 1990s, the trend of globalization took place strongly in most of the world. That created conditions for Malaysia to increase export promotion and attract foreign investment thanks to a higher level of economic liberalization policy.

2.2.1.2. Objectives of export-oriented industrialization strategy

In the early 1970s, Malaysia shifted its strategy from import substitution industrialization to export-oriented industrialization. The goal of Malaysia's export-oriented industrialization strategy was to promote the development of industries, especially manufacturing, as the engine of economic growth. During this period, promoting exports was the top goal for economic development. The Malaysian government continued to have policies and measures to promote the development of export-oriented industries. At the same time, the government still focused on encouraging agriculture to develop in the direction of concentrated production and diversifying crop structures to create resources to support industry and export.

The content of the strategy was specified in Malaysia's five-year economic development plans. In the 1970-1975 and 1976-1980 five-year plans, the export-oriented industrialization goal focused on the following issues:

economic growth, reducing unemployment and increasing the ownership rate of indigenous Malaysians. The focus was on prioritizing the development of industries that use a lot of resources, labor and appropriate technology to be export-oriented such as textiles, electronics assembly, wood processing and rubber. However, in the 1981 - 1985 five-year plans, the Malaysian government paid attention to developing a number of heavy industries to replace imports.

In the early 1980s, the world economic crisis caused the economies of developed capitalist countries to decline and strongly affected Malaysia's export activities, especially exports from the manufacturing sector. To overcome the newly arising difficulties, the Malaysian government decided to readjust its development strategy. The Malaysian government launched the Industrial Master Plan - IMP (1986 - 1995) with the following objectives:

- Accelerate the growth of the manufacturing industry, ensure continued rapid expansion of the economy and facilitate the implementation of the social goals of the new economic policy.

- Take advantage of opportunities to maximize and effectively use national resources.

- Build the country's foundation before entering the information age by enhancing technological capacity and industry competitiveness.

The master plan for industrial development also sets out 12 key outward-oriented industrial groups. Of these, seven are based on the use of natural resources: food processing, rubber, palm oil, non-metallic materials, wood products, chemicals and petrochemicals, non-ferrous metal products, and five are non-natural resources industries: electronics, electrical equipment and transport, machinery and mechanical engineering, iron and steel, and textiles.

In the fifth five-year plan (1986 - 1990), Malaysia focused on reviewing its export production strategy; focusing on promoting rapid and stable economic growth. In 1991, Malaysia announced its sixth five-year plan (1991 - 1995) within the framework of the "National Development Policy (1991 -

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