This document analyzes inequality in economic distribution and poverty eradication among Malaysian states under the New Economic Policy (NEP) from 1970-1990. It finds that while the NEP succeeded in reducing poverty and creating a Malay middle class in peninsular states, the state of Sabah experienced much less improvement and still had high poverty rates and lower incomes despite its contributions to the national economy. The document concludes that failure to address regional imbalances between Borneo and Peninsular Malaysia poses a risk to Malaysia's unity and stability going forward.

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MASTER OF PUBLIC POLICY
INTERNATIONAL INSTITUTE OF
PUBLIC POLICY AND MANAGEMENT (INPUMA)
UNIVERSITY OF MALAYA
KUALA LUMPUR
2ND
TERM PAPER:
AN ANALYSIS ON THE INEQUALITY IN ECONOMIC DISTRIBUTION AND
POVERTY ERADICATION AMONG MALAYSIAN STATES UNDER THE NEW
ECONOMIC POLICY (NEP)
PREPARED BY:
MOHD HASIM UJANG (ZGA110011)
Submitted to: Prof. Tan Sri Sulaiman Mahbob
ZIGP 6119: ECONOMICS FOR PUBLIC POLICY 2
Date: 22/5/2013

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I. Introduction
This paper aims to deliver a brief analysis on the inequality in the distribution of
economic developments and poverty eradication programs in Malaysia under the
New Economic Policy (NEP) with special attention to regional imbalances between
Sabah and Peninsular Malaysia. This will be followed by an attempt to explain the
reasons behind these inequalities based on observations from inferential and
descriptive statistics.
II. Background
The New Economic Policy was introduced back in 1970 following the infamous racial
riot of 13th
May 1969. The NEP had two primary objectives which were1
:
1. To eradicate poverty in the Malaysian society regardless of race; and
2. To restructure the society by eliminating the identification of race by economic
function.
Before the introduction of NEP, the Malaysian society was characterized by
economic segregation between the indigenous Malay population and the migrant
Chinese and Indian races2
. Majority of the Malays lived in rural areas and worked as
traditional farmers and fishermen while few of them lived in urban areas taking lower
jobs such as supporting staff in the civil service and policemen. The Indians mainly
worked in estates and plantation industry as manual labourers while few of them
became lawyers and professional civil service. Whereas the Chinese who were the
most well off Malayan ethnic at that time mainly lived in the urban areas and they
control virtually almost all form of business, from small enterprises such as retails
and industry suppliers to major businesses such as construction and mining.
These economic imbalances between the three major ethnic races were mainly
caused by the protracted divide-and-rule policy under the British colonial
administration that kept the major races economically and socially divided. The
discontent and frustration especially between the Malays and the more affluent

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Chinese became the bone of contention that sparked the racial riot in 13th
May 1969
and the government were forced to introduce remedies in the form of affirmative
actions under the NEP.
III. Objectives of the New Economic Policy and its continuation under
subsequent economic policies.
Affirmative actions under the NEP aimed to give preferential treatment for
bumiputera ethnics in business opportunities, education, government scholarship
and appointment into the civil service. The main rationale behind this was since
ethnic bumiputera were lagging behind, priority should be given to them to climb up
the economic ladder so that they could be on par with their ethnic Chinese
counterparts. The time frame for NEP was stated as 20 years (1970 – 1990) and
among the targeted outcome of this policy were:
1. To increase bumiputera equity in national economy from a mere 2.4% in 1969 to
at least 30% by year 1990. The equity ratio between the bumiputera, non-
bumiputera and foreign ownership was going to be restructured from 2.4:33:63
to 30:40:30 by 1990;
2. To expand the overall economy to allow the wealth of the non-bumiputera
community to grow in absolute terms albeit with a decreased share in terms of
equity percentage; and
3. To achieve greater national integration and racial harmony once the inter-
community economic disparity has been successfully diminished.
However, by 1990 the government found out that the targeted economic equity for
the bumiputera community had not been achieved which only stood at 19% out of
the overall economy instead of the 30% target. This has led to questions on the
effectiveness of government’s pro-bumiputera policies in view of the economic gap
between the bumiputera and non-bumiputera community that were still existing NEP
was supposed to end. Furthermore, the non-bumiputera community especially the
Chinese continued to dominate the overall economic share in various industries

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despite the government’s efforts to increase bumiputera participation in the economic
sector.
As a result, the government launched National Development Policy (NDP) on 17th
June 19913
which was essentially a continuation of NEP itself. The main objectives
of the NEP continued to be given emphasis under the NDP such as to rectify social
and economic imbalances by giving special attention to the hard core poor (many of
them were of bumiputera ethnicity). The creation of ‘bumiputera industrial and
commercial community’ was also envisaged under the NDP.
The NDP was then replaced by National Vision Policy (NVP) in 20014
under the 8th
Malaysia Plan and continued to remain in force to this day. The NVP continued to
carry over the ‘economic restructuring agenda’ and ‘continuous efforts to eradicate
poverty and create a more prosperous and equitable society’ that were first mooted
under NEP. The continuation of NEP’s socioeconomic goals even after its official
expiry date happened mainly because the government felt that the targeted
objectives under the NEP has not been successfully achieved yet5
, hence the need
for its continuous implementation.
IV. Affirmative actions under New Economic Policy and subsequent
national agenda
Government affirmative actions under NEP and subsequent policies are mainly
characterized by pro-bumiputera policies that gave various economic advantages to
the community as explained in the examples below:
1. To improve the livelihood of the bumiputera community, the government gave
generous opportunities and assistance for them to undergo education until
tertiary level. Exclusive university scholarships for bumiputera students were
given out by government agencies such as People’s Trust Foundation (MARA)
and special institutions for them were created, namely MARA Institutes
Technology (now MARA Universities of Technology) and MARA Lower Science
Academy, which are basically specialized boarding schools for bumiputera.
These institutions have numerous campuses around the country which catered

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exclusively for bumiputera community. In addition, over 30 boarding schools
were also set up with bumiputera quota fixed as high as 90% at each school.
Government also offered scholarships via various institutions such as MARA,
Public Service Department and state foundations for outstanding bumiputera
students to continue their tertiary educations locally and abroad. Much of these
benefits remain in force to this day except for government scholarships that has
become extremely competitive resulting in many bumiputera students having to
secure loans for tertiary education.
2. To increase bumiputera participation in the economy, government devised
various assistances and coaching programmes to develop bumiputera
entrepreneurs. They are groomed to become successful merchants and
industrialists via agencies such as MARA and TEKUN (National Economic Fund
for Bumiputera Entrepreneurs). In addition, Malay farmers and fishermen are
also assisted via relocation programmes and allocations of various assistances
to lift them out of the poverty line via agencies such as Federal Land
Development Authority (FELDA) and Malaysian Fisheries Development Board
(LKIM). A special agency called Federal Agricultural Marketing Agency (FAMA)
was also set up to help them market their agricultural products. Besides special
financial institution were created to dispense special credit facility for them via
financial institutions such as Malaysian Agro Bank and Malaysian Bank of
Bumiputera (defunct since 1998).
3. To create a pool of successful bumiputera conglomerates, government
embarked on a massive privatization policy under national industrialization
initiative and Look East Policy. Generous private concessions were awarded at a
discretionary basis6
to a handful of selected bumiputera corporate figures while
top bumiputera executives were appointed to spearhead many GLCs such as
National Energy Corporation (TNB), National Telco (Telecom), National
Petroleum Limited (Petronas) and Malaysia Airline System (MAS).
4. To ensure competitive advantage for bumiputera suppliers and entrepreneurs,
the government enforced rulings that small and medium procurements by
government agencies should be offered exclusively to bumiputera entrepreneurs

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while major procurements should primarily be awarded to any company with at
least 51% bumiputera ownership. These policies were clearly spelt out in earlier
government circulars such as the Treasury Circular Letter Number 7/1974,
Number 4/1995 and Number 12/2007.
5. All states also mandate by law the provision of bumiputera discounts for all
housing projects carried out in Malaysia. Under this provision, a portion of the
housing lots (around 30%, percentage may vary from state to state) constructed
in any area within Malaysia must be sold to any bumiputera buyer at a discount
of 5% to 10% off the normal prices. This policy was introduced to give a better
opportunity for bumiputera ethnic to buy houses at urban areas so that their
concentrated population in rural areas can be reduced gradually. Government
also built houses for hard core poor in rural, urban and semi-urban area under a
special program called PPRT (now SPKR) which is open to all citizens
regardless of race. Most of the buyers are of ethnic bumiputera and Indians
since they constitute the most number of hard core poor in Malaysia.
Much of the abovementioned affirmative actions are still in force until today and they
still become a subject of intense debate between the proponents and critics of the
government pro-bumiputera policies.
V. The imbalance in socioeconomic development in Sabah and a few other
states under the NEP and its derivatives
Despite the generous allocations and pro-bumiputera initiatives carried out by the
government, the socioeconomic benefit was not equitably distributed among the 14
states under Malaysian Federation. The table below shows the reduction of poverty
in percentage wise from year 1970 to 2002:
State/Year 1970 1976 1984 1987 1990 1995 1997 1999 2002
1. Johor 45.7 29.0 12.2 11.1 10.1 4.2 1.6 2.5 1.8
2. Kedah 61.0 61.0 36.6 31.3 30.0 12.2 11.5 13.2 10.7
3. Kelantan 74.1 67.1 39.2 31.6 29.9 22.9 19.5 18.7 12.4
4. K. Lumpur 0.0 0.0 0.0 0.0 0.0 9.5 0.1 2.3 0.5
5. Melaka 34.1 32.4 15.8 11.7 12.4 3.2 3.6 5.7 2.7
6. Negeri 9 50.5 33.0 13.0 21.5 9.5 5.3 4.5 2.5 2.2

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State/Year 1970 1976 1984 1987 1990 1995 1997 1999 2002
7. Pahang 56.1 28.9 15.7 12.3 10.3 6.8 4.1 2.7 3.8
8. Perak 52.2 43.0 20.3 19.9 19.3 4.9 4.5 9.5 7.9
9. Perlis 63.2 59.8 33.7 29.1 17.2 11.8 10.6 13.3 10.1
10. Pulau Pinang 52.7 32.4 13.4 12.9 8.9 9.1 1.6 2.7 1.4
11. Sabah 0.0 58.3 33.1 35.3 34.3 26.2 22.1 20.1 16.0
12. Sarawak 0.0 56.5 31.9 24.7 21.0 10.0 7.5 6.7 5.8
13. Selangor 42.7 22.9 8.6 8.9 7.8 2.2 1.3 2.0 1.1
14. Terengganu 65.1 60.3 28.9 36.1 31.2 23.7 17.3 14.9 10.7
National 49.3 37.7 20.7 19.3 17.1 8.7 6.8 7.5 5.1
Table 1: Incidence of poverty by state for selected years between 1970 – 2002.
Source: Jomo K.Sundram for UN Research Institute for Social Development – The
New Economic Policy and Interethnic Relations in Malaysia, Sept 2004 page 4.
Table 1 clearly shows that Sabah has had the highest incidence of poverty at 16.0%
followed by the states of Kelantan (12.7%), Kedah (10.7%), Terengganu (10.7%)
and Perlis (10.1%). Out of these states, Sabah and Terengganu are major
contributors to national economy mainly through exports of crude oil and other
petroleum-based products. As of 2010, statistics from the Economic Planning Unit
suggests that as much as 47% of the Malaysian Economy depends on the export of
crude oil and other petroleum-based industries and this makes Sabah, Sarawak,
Terengganu and possibly Kelantan as main contributors to national coffers.
In addition, Sabah contributes more to the nation’s coffer compared to most other
states through other industries and commodities such as tourism, fisheries, FDI,
exports of palm oil and cocoa6
. However despite these contributions, Sabah is still
lagging behind most peninsular states and its which did not contribute as much as
Sabah did to the national GDP. A more recent statistic from Malaysian Department
of Statistics shows that as of 2009, Sabah still has one of the lowest average and
median income compared to other states as shown below:

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Figure 1: mean and median monthly income by states in year 2009. Source:
Malaysian Department of Statistics.
From the chart above, Sabah had the 6th
lowest mean income at RM 3,102 per
month and the 4th
lowest median income at RM2,066 per month. In addition, Sabah
had the slowest growing economy in Malaysia with GDP growth of mere 2.4% in
year 2010 as shown in the chart below:

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Figure 3: 2010 GDP growth by state. Source: Malaysian Department of Statistics
Thus, while ethnic non-bumiputera in Peninsular Malaysia laments about NEP’s
affirmative actions that favours ethnic bumiputera too much, the Sabahan
bumiputera are lamenting about socioeconomic marginalization that they have
experienced for decades. Furthermore, it has been reported that the participation of
Sabah bumiputera in the economy and professional services are still very low,
especially in federal civil service where as much as 85% of top posts in Sabah’s
federal agencies and ministries are dominated by officers from Peninsular Malaysia7
.
Huge numbers of teachers and doctors from outside Sabah are continuously posted
to the state while many qualified native Sabahans had to migrate elsewhere just to
make a decent living.
VI. Conclusion
Looking from the national context, the NEP has undoubtedly met some of its
specified objectives by creating a huge number of urban middle class Malays in
industrialized states within Peninsular Malaysia such as Selangor, Johor, Perak,
Melaka, Negeri Sembilan and Federal Territories of Kuala Lumpur and Putrajaya
(Putrajaya recorded the highest mean and median income in 2009 as shown in
Figure 2 and about 90% of the city’s population are Malays). However the more
important issue that needs immediate addressing is to rectify the socioeconomic

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imbalances not only between different ethnics in Peninsular Malaysia, but more
importantly between the regions of Borneo and Malaya. With Sabah’s economy and
standard of living still lagging far behind Peninsular Malaysia despite the state’s
contribution to the national economy, such regional imbalance serves as a ticking
time bomb for Malaysia and federal policymakers in Peninsular must take note of
this.
Recent socio-political activism before and after the 13th
general election saw a
revival of calls for a revision to the Malaysia Agreement and a new desire for self-
determination via autonomy or complete independence are not distant possibilities.
Numerous precedence have already taken place whereby former subjects of
sovereign states have successfully demanded for autonomy or total independence
due to misallocation of socioeconomic resources and political power; Singapore,
Acheh, Mindanao, Timor Leste and South Sudan among others. Therefore, the
demands for greater emancipation of citizens and empowerment for Sabah in the
aspects of economy, security and political power has been long overdue and the
people of Sabah are determined to pursue these goals no matter how long it will
take.

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1. Jomo K.Sundram for UN Research Institute for Social Development – The
New Economic Policy and Interethnic Relations in Malaysia, Sept 2004
(http://www.unrisd.org/80256B3C005BCCF9/httpNetITFramePDF?ReadForm
&parentunid=A20E9AD6E5BA919780256B6D0057896B&parentdoctype=pap
er&netitpath=80256B3C005BCCF9/(httpAuxPages)/A20E9AD6E5BA9197802
56B6D0057896B/$file/jomo.pdf) retrieved on 22nd
May 2013).
2. Ibid page 3.
3. ‘Dasar Pembangunan Nasional’
(http://www.moe.gov.my/bppk/pdf/penerbitan/DASAR%20PEMBANGUNAN%
20NASIONAL%201.pdf) retrieved on 22nd
May 2013.
4. ‘Dasar Wawasan Negara’ by Implementation and Coordination Unit, Prime
Minister’s Department (http://www.icu.gov.my/pdf/artikel/DWN.pdf) retrieved
on 22nd
May 2013.
5. New Straits Time, 6th
September 2007
(http://www.nst.com.my/Current_News/NST/Thursday/National/20070906082
916/Article/index_html).
6. Oxford Business Group Economic Update – ‘Sabah: Year in Review 2011’
published on 3rd
January 2013, retrieved on 23rd
May 2013
(http://www.oxfordbusinessgroup.com/economic_updates/sabah-year-review-
2011).
7. The Sabah Civil Service – ‘The Chief Secretary is lying’
(https://www.freemalaysiatoday.com/category/nation/2012/08/13/sabah-civil-
service-chief-secretary-is-lying/) published on 13th
August 2012, retrieved on
23rd
May 2013.
References