The Malaysian miracle

August 31 marked the 50th anniversary of Malaysia's Merdeka: independence after more than 400 years of colonialism. Malaysia's peaceful, non-violent struggle may not have received the attention that Mahatma Gandhi's did in India, but what Malaysia has accomplished since then is impressive - and has much to teach the world, both about economics, and about how to construct a vibrant multi-racial, multi-ethnic, multi-cultural society.

The numbers themselves say a lot. At independence, Malaysia was one of the poorest countries in the world. Though reliable data are hard to come by, its GDP (in purchasing power parity terms) was comparable to that of Haiti, Honduras, and Egypt, and some 5% below that of Ghana. Today, Malaysia's income is 7.8 times that of Ghana, more than five times that of Honduras, and more than 2.5 times that of Egypt. In the global growth league tables, Malaysia is in the top tier, along with China, Taiwan, South Korea, and Thailand.

Moreover, the benefits of the growth have been shared. Hard-core poverty is set to be eliminated by 2010, with the overall poverty rate falling to 2.8%. Malaysia has succeeded in markedly reducing the income divides that separated various ethnic groups, not by bringing the top down, but by bringing the bottom up.

Part of the country's success in reducing poverty reflects strong job creation. While unemployment is a problem in most of the world, Malaysia has been importing labour. In the 50 years since independence, 7.24 million jobs have been created, an increase of 261%, which would be equivalent to the creation of 105 million jobs in the United States.

There were many reasons not to have expected Malaysia to be a success. Just as Malaysia was gaining its independence, the Nobel Prize winning economist Gunnar Myrdal wrote an influential book called Asian Drama, in which he predicted a bleak future for the region.

Malaysia is rich in natural resources. But, with few exceptions, such countries are afflicted with the so-called "natural resource curse": countries with an abundance of resources not only do not do as well as expected, but actually do worse than countries without such benefits. While natural resource wealth should make it easier to create a more equalitarian society, countries with more resources, on average, are marked by greater inequality.

Moreover, Malaysia's multiracial, multi-cultural society made it more vulnerable to civil strife, which has occurred in many other resource-rich countries, as one group tried to seize the wealth for itself. In many cases, minorities work hard to garner the fruits of this wealth for themselves, at the expense of the majority - Bolivia, one of the many rich countries with poor people, comes to mind.

At independence, Malaysia also faced a Communist insurgency. The "hearts and minds" of those in the countryside had to be won, and that meant bringing economic benefits and minimizing "collateral" damage to innocent civilians - an important lesson for the Bush administration in Iraq, if it would only listen to someone outside its closed circle.

And Malaysia had a third strike against it: for all the talk of the "white man's burden," the European powers did little to improve living standards in the countries they ruled. The dramatic decline in India's share of global GDP under Britain's rule, as Britain passed trade laws designed to benefit its textile producers at the expense of those in its colony, is the most visible example.

The colonial powers' divide-and-rule tactics enabled small populations in Europe to rule large numbers outside of Europe, pillaging natural resources while investing little in the physical, human capital, and social capital necessary for an economically successful, democratic self-governing society. It has taken many of the former colonies decades to overcome this legacy.

How, then, does an economist account for Malaysia's success? Economically, Malaysia learned from its neighbors. Too many of the ex-colonies, rejecting their colonial heritage, turned to Russia and communism. Malaysia wisely took an alternative course, looking instead to the highly successful countries of East Asia. It invested in education and technology, pushed a high savings rate, enacted a strong and effective affirmative action program, and adopted sound macroeconomic policies.

Malaysia also recognized that success required an active role for government. It eschewed ideology, following or rejecting outsiders' advice on a pragmatic basis. Most tellingly, during the financial crisis of 1997, it did not adopt IMF policies - and as a result had the shortest and shallowest downturn of any of the afflicted countries. When it re-emerged, it was not burdened with debt and bankrupt firms like so many of its neighbors.

This success was, of course, not only a matter of economics: had Malaysia followed the policies recommended by the IMF, it would have torn apart the social fabric created over the preceding four decades.

Malaysia's success thus should be studied both by those looking for economic prosperity and those seeking to understand how our world can live together, not just with toleration, but also with respect, sharing their common humanity and working together to achieve common goals.