0341-A1

Sustainable Development of the Forest-Based Industries in Malaysia: Lessons to Be Learned

H. Norini^[1] and P. Midmore

Abstract

Past development of the forest-based industries (FBIs) in Malaysia was strongly supported by the availability of cheap timber resources coupled with an aggressive export strategy (AES), which was introduced under the Investment Incentives Act of 1968. The Malaysian Industrial Master Plan 1 (IMP1) and Industrial Master Plan 2 (IMP2), which covered the years between 1986 and 1995, and 1996 and 2005, respectively, have helped the FBIs expand into other production, such as furniture, joinery/moulding, and rubberwood products, and further strengthened the growth already experienced by those sectors. Even though much emphasis has been placed on product and market diversification in order to encourage further growth of the FBIs under the two IMPs, these sectors still face problems, especially when dealing with the international timber market. Clearly, emphasis on product and market diversification cannot guarantee the sustainable and future growth of the FBIs. This paper, therefore, highlights the importance of the final-demand components and the input content of interest through an input-output model, in an effort to further sustain the development of the FBIs in Malaysia.

Introduction

The forest-based industries (FBIs) in Malaysia have long been known as one of the major contributors to the development of the national economy. In fact, early development of the Malaysian economy owed greatly not only to FBIs, but also to two other contributors, namely, agriculture and mining. If one were to trace the development of the FBIs, one would see that early activities, which involved primary processing, such as logging and sawmilling, started way back in 1940s. It was only in the 1960s that the FBIs in Malaysia started to diversify into the manufacturing of plywood/veneer and moulding.

The transformation of the Malaysian economy from a commodity-based to a manufacturing-based orientation started to take place in 1959. In fact, the transformation of the economy itself began when the Government of Malaysia (GoM) placed more emphasis on the expansion of the so-called manufacturing sector. Among the earliest methods used for industrial expansion are the aggressive export (AE), and free zones (FZs) strategies. The AE strategy, which was introduced under the Investment Incentives Act of 1968, provides investors with export allowances and investment tax credits. The FZ strategy was introduced in 1971. In addition to those two strategies, another incentive, called the Promotion Investment Act (PIA), was introduced in 1986. Under this act, foreign investors were allowed to have up to a 100% share of equity in any newly established company (Malaysian Industrial Development Authority 1986). To further encourage the development of manufacturing industries in Malaysia, Industrial Master Plan 1 (IMP1) and Industrial Master Plan 2 (IMP2), which covered the years between 1986 and 1995, and 1996 and 2005, respectively, were introduced.

The remarkable achievements of these strategies and industrial plans are discernible from the sector’s gross domestic production (GDP) contribution to the national economy, export earnings, and number of employment created. According to published statistics, as a result of investment from a large number of multinational corporations, the value-added in most manufacturing sectors grew over the years. For instance, agriculture, livestock, forestry, and fishing, as a group, indicated upward and downward trends in GDP contribution over the years, i.e., from 22.9% in 1980 to 33.3% in 1990 and slightly more than 9.0% in 2000 and 2001 (Table 1).

Table 1. Gross domestic product (GDP) of selected sectors, Malaysia, in 1987 constant prices (RM million)

Source: Malaysia, Ministry of Primary Industries (2001).

Note: ¹Includes storage, ²Includes real estate and business; ^eDenotes estimates

In terms of employment, the number of workers engaged in the forestry and FBIs rose from 211 thousand in 1996 to more than 256 thousand in 2000. The total employment figure reached almost 280 thousand in 1997, before declining to 234 thousand in 1998 (Malaysia, Ministry of Primary Industries 1996, 2001). On average, the number of workers hired in the forestry and FBI sector constituted more than 3% of the total workforce in the national economy.

To date, the most significant success of the FBIs in Malaysia is the development of industries related to high value-added products, such as wooden furniture, laminated products, medium-density fibreboard, and others; i.e., a structural change has occurred in the sector itself. The number of mills also has increased over the years, especially those that deal with tertiary processing. For instance, the number of export-oriented furniture mills increased from only 55 in 1980 to more than 2,800 in 2001(Malaysia, Ministry of Primary Industries 2001).

If one were to detail out the structure of the export earnings, one would see that collection from the timber products alone stood at more than RM 14.7 billion in 1997, even though it decreased slightly to RM 14.2 billion in 1998 because of the Asian economic crisis. However, the value of export earnings started to climb again, reaching almost RM 16.6 billion and RM 17.1 billion in 1999 and 2000, respectively (Malaysia, Ministry of the Primary Industries 2001). It is difficult to estimate the full effect on Malaysian external trade of the tragic incident of September 11, 2001, that hit the United States of America (USA) because the records for 2001 are incomplete. Nevertheless, the outlook for the global economy is still viewed as uncertain because the tragedy has implications not only for the USA directly but also for other trading partners worldwide. The likely impact of any shocks in an economy depends highly on one’s trading partners. In the case of products such as furniture and furniture components, Malaysia’s major trading partners include the USA, Japan, and Singapore. For instance, the USA imported more than RM 1.2 billion (32.1%) worth of furniture and furniture components in 2001, whereas Japan and Singapore, individually, imported some RM 654 million (17.3%) and RM 243 million (6.4%) that same year, respectively (Malaysian Timber Council 2002). The total export earnings from furniture and furniture components in 2001 totaled RM 3.78 billion (Malaysian Timber Council 2002).

The impact of such an unexpected shock affects not only the export earnings of a nation but also the production of goods that are highly dependent on imports. Because the production of any good uses inputs not only from itself but also from other sectors in the economy, any problem faced by producers would also affect other consuming sectors. To be able to sustain if not encourage further development of any industry, a more holistic strategy needs to be adopted. At this juncture, understanding the interdependence of the immediate sectors and the final-demand components is crucial. This paper, therefore, highlights the importance of the final-demand components and the input content of interest through an input-output model, in an effort to further sustain the development of the FBIs in Malaysia.

The Input-Output Model

The analytical framework to analyze the final demand components and the primary input content of interest in the economy is the input-output (I-O) model. Basically, an I-O model is constructed to examine the interdependence or technological relationship of industries in a given economy. In connecting industries, Leontief (1951) formulated production equations relating the level of output in each sector to the level of production in all sectors of the economy. Based on these equations, Leontief then worked out a set of simultaneous linear equations relating the relationships of the various sectors in the economy. A simple Leontief simultaneous linear equation can be presented as follows:

(i=1,2,3...n)

where

X_i = total output of sector i
x_ij = output of sector i used as input in sector j
Y_i = total final demand for sector i's product

The two matrices of concern in an I-O model are the make matrix, which records the value of commodities by all activities, and the use or absorption matrix (Table 2), which exhibits the value of commodities purchased to produce outputs. When combined with the purchases of primary inputs by activities and sales of outputs to the final demand sector, the absorption matrix becomes an I-O table.

Altogether, there are four main quadrants in the absorption matrix (Table 2). The first quadrant is called the transaction matrix. In this matrix, the rows mark the allocation of output from each sector, whereas the columns mark the input by that sector. For instance, sector 2 in row 2 sells x₂₂, x_23, through x_2n units of output to all of the other sectors in the economy while reserving some x₂₁ for its own use. Simultaneously, sector 2 in column 2 also receives or purchases inputs x₂₂, x_32, and x_n2 from other sectors and x₁₂ from itself as inputs of production. In Table 2, W₂ represents the total intermediate use of sector 2’s products, whereas the total purchases of inputs of sector 2 are given by U₂. Similar interpretations are also applicable to the remaining intermediate sectors.

The second quadrant in Table 2 is called final demand. The final-demand quadrant includes private and government consumers, changes in inventory, gross capital formation or investment, and export sectors. The total final demand for the output of sector 2 in Table 2 is represented by Y₂. Total sales to final demand/users also represent gross domestic product (GDP).

The third quadrant, which is also called value-added or primary inputs, consists of labour, capital, imports, and others. For instance, the symbol V₂ in Table 2 represents the entry for sector 2's value-added input, whereas other Vs represent other sectors’ value-added inputs. The fourth quadrant represents the direct input of primary factors to final use (e.g., domestic services and government employment).

Table 2. Example of an absorption or interindustry matrix of an I-O model

Source: Norini (2000).

Final Market/Demand Analysis

Final market/demand analysis involved the inverse matrix and a column vector of the final demand component of interest. Mathematically, the equation can be presented as follows:

where,

(I-A)-1 = an inverse matrix
C₁ = a column vector of the final demand sector

The primary input content of final demand can be calculated by multiplying the technical coefficient of the sector of interest by the inverse matrix. The same procedure is repeated for the rest of the sectors. The amount of imported inputs needed by a particular sector, for instance, is obtained by summing the values derived from the multiplication processes.

Materials and Method

Two I-O tables developed for 1987 and 1990 by the Department of Statistics, Malaysia, and the Institute of Developing Economics (1997) were used in the analyses. Using survey-based data, a partial I-O model for the forestry and FBI sectors, which include forestry and logging, sawmilling and others, plywood/veneer, moulding, laminated board, and furniture and fixtures was developed (Norini 2000). The partial I-O model was later incorporated into the existing I-O tables of 1987, developed by the Department of Statistics, Malaysia (1994). As for the I-O table of 1990, because of the highly aggregated data, analyses of the final-demand quadrant and primary input content for 1990 were based entirely on information that was available.

Results and Discussion

Analyses carried out on the final market/demand in 1990 indicated strong reliance on exports by the forestry and logging, sawmilling and others, and furniture and fixtures sectors in Malaysia (Table 3). For instance, forestry and logging as a sector recorded more than 90% of its total production being destined for the export sector in 1990, whereas furniture and fixtures indicated a much lower percentage-51%-for that same year (Table 3).

Table 3. Final market/demand of FBIs in 1990, Malaysia (in percent)

Note: ¹Includes other wood products.

Such high dependence on the export sector may place a sector in a difficult position should something go wrong in the international market. Similar reliance on exports was also observed for the forestry sector and a majority of the subsectors of the FBIs in 1987. Of the six FBIs identified in 1987, three indicated strong dependence on exports, namely, the moulding (97.07%), plywood/veneer (72.44%), and sawmilling (69.5%) sectors. On the other hand, furniture and fixtures indicated only 26% dependence on the export sector of final demand in 1987.

Results from the analyses of primary inputs of interest indicated that two of the FBI sectors, except forestry and logging, had high import requirements per unit of final demand. For instance, furniture and fixtures as a group needed 0.3978 imports per unit of final demand in 1990 (Table 4), as compared to 0.2130 in 1987. Both figures indirectly indicate that, to obtain an increase of one unit of final demand, imports had to rise the same amount. In other words, the production of furniture and fixtures would become less competitive if imports continuously increased. On the other hand, other FBIs such as forestry and logging, and laminated board, showed somewhat lower import requirements per unit of final demand of 0.0957 and 0.1650 in 1987, respectively.

Table 4. Primary input content of final demand of FBIs, Malaysia (1990)

Note: ^aIncludes other wood products. ^bIncludes salaries and wages.

A recent survey-based study indicated that machinery and equipment, together with hardware such as sandpaper, glue, stains, laminates, hinges, railings, and others, as imported inputs for the production of furniture (Malaysian Timber Council 1998). Obviously, if all of these items are locally produced, outflow of currency from the country could be reduced.

Table 4 also indicates that, in 1990, the forestry and logging industry had high value-added input content of 0.8456 for every unit of output, compared with the rest of the FBIs. In this context, value added is the difference between the value of gross output and the cost of input. The value added of 0.8456 in 1990 was higher than the value added of 0.6541 in 1987 for the forestry and logging sector.

Conclusion

Various analyses carried out on the 1990 and 1987 I-O tables have shown that, to be able to sustain if not encourage further development of the FBIs, attention must not be focused on product and market diversification alone. More emphasis needs to be placed on understanding not only the relationships between sectors involved in production, but also the importance of sectors in final demand and primary input content. Such an approach would help provide a more holistic approach to decision making, especially to policy decision makers.

The analyses for 1990 and 1987 have also shown that the furniture and fixtures industry is heavily dependent on imports. A similar observation was also made in a recent survey-based study conducted by the Malaysian Timber Council. It is important at this juncture to further understand the types of imported machinery and equipment through empirical research. In other words, besides promoting the growth of the industry, efforts should also be focused on reducing the level of imports by understanding more about the imported goods. Besides paying more attention to the final demand sectors, issues such as timber certification, caution in changing consumer preferences and substituting products, and promotion of more forest plantations also need to be considered in order for the FBIs to stay competitive in the international arena.

References

Department of Statistics Malaysia, 1994. Malaysian Input-Output Table 1987.

Institute of Developing Economies, 1997. Malaysia Input-Output Table 1990. Asian International Input-Output Series No.48

Leontief, W., 1951. The Structure of the American Economy 1919-1939. New York: Oxford University Press.

Malaysian Industrial Development Authority, 1986. Industrial Master Plan 1 and 2.

Malaysia, Ministry of the Primary Industries, 1996. Statistics of commodities.

Malaysia, Ministry of the Primary Industries, 2001. Statistics of commodities.

Malaysian Timber Council, 1998. Furniture Industry in Malaysia. 223 pp.

Norini, H., 2000. Structural interdependence of Malaysian industries with special emphasis on the forest-based industries. Unpublished P.hD Thesis, The University of Wales, Aberystwyth United Kingdom.