Introduction

Industrialization has transformed Malaysia into an emerging economy that is on its way to becoming a high-income or a developed one. This is a straightforward argument, and the association between industrialization and wealth creation is almost a truism even. Viewed from this perspective, Penang is one of the most industrialized, and economically advanced states in the Malaysian federation. This chapter seeks to look at the journey that Penang undertook to industrialize as part of the larger Malaysian economy, and how this has improved incomes and virtually eliminated poverty in the last 40 years or so.

This journey commenced under Lim Chong Eu's stewardship of the Gerakan state government after the 1969 elections. One of the objectives of this chapter is to look at how Lim Chong Eu made that transition possible. Another objective of this chapter is to simplify this very complex story by linking Penang's industrialization with the country's broader journey to economic development, and to offer an insight into the dynamics of the socio-economic and political choices that were “on the table”.

Part I: The National Context

a. Import-Substituting Industrialization and Growth

Independent Malaya inherited a characteristically colonial export economy, where primary commodity exports, particularly rubber, tin, timber, and iron ore made up a very significant portion of the GDP. In 1960, exports contributed 55 percent of the GDP (Malaysia. 1965:24). Thus, the fall in price of rubber and the sluggish growth of other primary commodities for much of the 1960s posed a very serious challenge to the economy.

Diversification of the economy was clearly the way forward. After outlining the challenges and opportunities facing the newly independent nation and the long-term objectives of the country's development, the First Malaysia Plan that followed the Second Malaya Plan reiterated that the most important resolution was “the need for economic diversification, which includes both agricultural diversification and industrialization” (Malaysia.1965: 15). However, agricultural diversification would have needed a prolonged gestation period.