Lessons for the Gulf in Malaysia's steady success

Malaysia provides an interesting example of an oil-based economy which has escaped the resource curse

From the viewing deck of the Petronas Towers, the modern city of Kuala Lumpur spreads out in all directions.

The towers, until 2004 the world's tallest, are named for Malaysia's successful national oil company. Tin mining, the reason for the city's foundation, has left lakes that add to the attractive tropical vista.

Malaysia is now a wealthy and successful country, much like the other "Asian tigers" Singapore, Hong Kong, South Korea and Taiwan. But it is unique because unlike those others, it is rich in natural resources.

This is where it holds lessons - some cautionary - for the Gulf in escaping a dependence on oil.

On the formation of the federation of Malaysia in 1963, Kuala Lumpur, the name of which unpromisingly means "muddy place", was the capital of a nation facing many challenges.

A long war against communist insurgents had ended only three years earlier. Infrastructure had been neglected during the struggle.

The economy was largely dependent on three commodities: Malaysia was at times the world's largest producer of tin, rubber and palm oil. But prices were volatile and a third of the workforce was employed in the rubber industry, threatened by synthetic rubber production.

In the early 1970s after the discovery of significant oilfields, Malaysia established Petronas as its national oil company. But the country was fortunate that during the heyday of oil nationalism in the 1970s, output was not significant enough for it to join Opec. Retaining the services of international oil companies such as Exxon and Shell, it is now Asia's largest oil exporter.

From the mid-1980s, Malaysia became one of the pioneers of liquefied natural gas exports, with Shell's help, but it also built a domestic gas network covering all of Peninsular Malaysia, and invested heavily in petrochemicals.

Petronas became a technically capable organisation that expanded abroad, enjoying great success in Sudan in particular. One of the largest winners in the Iraqi oilfield auctions in 2009, it is one of only three national oil companies from exporting countries that have been really successful internationally, the others being Brazil's Petrobras and Norway's Statoil.

Unlike many other oil states, Malaysia was successful in "sowing the petroleum". Rather than consuming its oil windfall, it invested heavily. And instead of import substitution, it focused on export-oriented manufacturing and steadily moved up the value chain.

Through the 1970s the economy grew at 7 per cent a year, with low inflation. Growth was so fast that large numbers of foreign workers entered the country, many of them illegally. As with the other Asian tigers, and indeed like most of the Gulf countries, the economy followed a state capitalist model.

But from 1983, under the prime minister Dr Mahathir Mohamad, and accelerating after the 1985 collapse of the international tin cartel and the 1986 oil price crash, the government emulated the UK's Thatcherite policies of privatisation.

Almost half of state-owned enterprises were unprofitable. Privatisation aimed not only to raise money and to force the enterprises to become commercially minded, but also to generate jobs for Malay citizens.

However, the state usually retained a stake in the enterprises. In contrast to Norway and Brazil, Malaysia still holds all the shares of its national oil company. And unlike countries such as Russia and Argentina, which went through privatisation about the same time, Malaysia's programme was measured and steady. One side-effect has been a vibrant stock exchange.

Now it is one of the world's largest semiconductor exporters, with the biggest stock of industrial robots in the Muslim world, and is a centre of Islamic finance. And it was able to bounce back from the 1997 Asian economic crisis.

With barely half of the per capita GDP of the rich Arab oil exporters, Malaysia scores better on human development indexes such as infant mortality and school enrolment. It spends a respectable 0.64 per cent of GDP on research, compared with barely 0.1 per cent for the UAE.

Nevertheless, allegations of corruption and political favouritism swirled around the privatisation programme. Tycoons control too much of the economy and the state bureaucracy has been overstaffed in an attempt to create jobs. Tensions over the distribution of wealth, employment and land exist between ethnic Malay, Chinese and Indian communities.

The environment has suffered from deforestation and pollution, despite dramatic improvements in Kuala Lumpur's air quality since the 1980s.

Malaysia has found it politically hard to reduce US$14 billion (Dh51.42bn) of annual oil and gas subsidies, despite gradual replacement by targeted payments. Petronas still supplies more than 40 per cent of the government budget.

Malaysia does not have all the answers. Yet, more like the Gulf than models such as Singapore, it might be an example for policymakers: a country that managed to escape the "resource curse" on its way to becoming a modern, diversified economy.

A Robin Mills is an energy economist based in Dubai and is the author of The Myth of the Oil Crisis and Capturing Carbon