Introduction

Malaysia, then Malaya, gained independence from British rule on 31 August 1957. Unlike any other colony, the process of securing independence was peaceful and almost completely devoid of conflict or violence. Another unique feature of this process was that it was realized by three peoples of different ethnic origin, each with their own culture, religion and identity. To a large extent, the process of building the new independent Malaysia has been a struggle to maintain peace and social harmony in a plural society inherited from a colonial past, while pursuing economic development and prosperity.

In this paper, we examine the role that macroeconomic policy management has played in the Malaysian development experience. Given the multiracial nature of Malaysian society, macroeconomic policy has not only been about economic stabilization, but also about addressing income disparities along racial lines in order to preserve social harmony. Thus, the Malaysian experience provides an interesting case study of macroeconomic management amid ethnic diversity. This is one challenge facing Malaysian policymakers. Another relates to the nature of the economy itself. As a small, open economy,¹ Malaysia has always been exposed to exogenous influences and cyclical changes in world economic activity. Thus, the employment of counter-cyclical macroeconomic policy has been particularly important in cushioning the economy against such external shocks. In this context, macroeconomic management in Malaysia has necessarily been a balancing act, involving income redistribution on the one hand, and economic stabilization on the other.

We begin in 1957 and examine the whole period of independence. In terms of major policy shifts, we divide the post-independence period into four phases, and the paper is organized around them. Section II starts with Independence, or Merdeka, and examines major policy changes leading up to the May 1969 riots. This upheaval led to the introduction of the New Economic Policy (NEP), from 1970 to 1987, and this is the subject of Section III. Section IV covers the decade from 1987 up to the 1997 Asian financial crisis, when policy veered from the NEP, which emphasized redistribution, to the National Development Policy (NDP), which focused on market-oriented development policies. The last period that we identify starts with the crisis, when Malaysia bucked orthodoxy and resorted to capital controls as a crisis management tool, and traces policy changes through the recovery period leading up to the present. This section also examines the dramatic result of the elections of 8 March 2008, with a view to its likely impact on the economy and policy, going forward. This is the subject of Section V. A final section concludes.

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