Turning turbulence into opportunity: How Malaysia can thrive in an age of uncertainty — Nur Fareza Mustapha
JUNE 25 — In 1973, the decision by the United States to support the Israeli military in the 1973 Arab-Israeli War (also known as the October War) led to an oil embargo on the US and other countries supporting Israel. Arab Opec nations ceased exports to these countries and began a series of production cuts which led prices of oil to increase four-folds in less than three months, from US$2.90 a barrel before the embargo to US$11.65 a barrel in January 19741. While the embargo was lifted in March 1974, higher oil prices remained.
The broader economic impact of these developments was far-reaching and continued well beyond the initial period of crisis. For many industrialised nations, the decade in the 1970s were marked by a period of excessive inflation (i.e. stagflation), severe unemployment, and slowed economic growth2. For Malaysia, the effects of oil shocks in the 1970s were transmitted through various channels. The country experienced adverse effects from crisis primarily through the increase in food import prices (which rose over 37 per cent in 1974, causing a 41 per cent increase in overall imports prices for the year) as well as very large increases in the prices of fuel, fertilizer and chemicals required for domestic food production3. Economic growth for the country slowed to 3.5 per cent in 1975 compared to a higher average growth rate of 8.4 per cent annually between 1971-74.4
The current global energy crisis bears a striking resemblance to the turbulent years in the 1970s, for both the world as well as for Malaysia. The longstanding effective closure of the Strait of Hormuz as well as attacks on energy facilities have raised concerns that a concrete resolution of the current stalemate (if it happens) may not result in any immediate relief or recovery of the global supply shocks which has and will ensue from the current geopolitical standoff. In designing policies responses to the current oil shock crisis, it is essential to prioritize policy initiatives that can enhance the quality of life for Malaysian households as well as the productivity of Malaysian firms. Malaysia must look beyond immediate crisis management and plan strategically for its long-term future.
The events in the 1970s provides a cautionary example of how we can navigate through the current crisis. The 1970s energy crisis provides a glimpse into the second order effects of the oil shock, beyond mere supply disruptions and inflationary pressures. The realignment of global institutions as well as macroeconomic frameworks and their supporting ideologies (i.e. free market and neoliberalist approaches to development) originating from the period have resulted in long lasting repercussions even today.
A direct consequence of the 1970s energy crisis is the establishment of the International Energy Agency, a multilateral organization which aimed to establish long term cooperation and coordination amongst OECD members to institute structural changes to the global energy market. This initiative paved the way for a coordinated approach to lower the reliance over oil from Opec/Arab countries, both reshaping the geopolitical relationships existing during the period and at the same time, solidifying the economic and political hegemony of the United States and European nations for decades to come5.
For Malaysia, the 1970s marked the beginning of the federal government’s own attempt at nationalizing the petroleum industry in the country. In 1974, during the midst of a supply shortage of oil products, the overwhelming support by members of parliament for the ratification of the Petroleum Development Act of 1974 led to the corporatization of Petronas under the 1965 Companies Act. By doing so, Malaysia staked claim over the control and sovereignty of natural resources within the country’s territory and jurisdiction. This, alongside the ratification of the National Petroleum Policy of 1975, paved the path for Petronas to lead the growth and expansion of Malaysia’s petroleum industry as well as contribute to the overall economic development of the country as one of its biggest sources of income for development6.
Crises often provide an avenue for policy makers to take actions that may usually be politically difficult. These periods of flux may generate ‘critical junctures’ that determines a nation’s path of development for years to come. As we forge our way through this crisis, it is imperative that we identify and pursue developmental paths/trajectories that can yield lasting improvements to the country’s overall well-being, to enhance the quality of life for Malaysian households and the productivity of firms alike. Short-term relief measures — such as the demand management of subsidised fuel — while necessary, are not sufficient on their own. Malaysia must also pursue strategic interventions that are aligned with the broader developmental goals and objectives that have been outlined in our 13th Malaysia Plan as well as under the Malaysia Madani framework.
* Dr Nur Fareza Mustapha is a Senior Research Associate at the Khazanah Research Institute (KRI). The views expressed here are solely the writer's own and do not represent the official views of KRI. All errors remain the authors’ own.
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
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