From Free Port to Modern Economy. Economic Development and Social Change in Penang, 1969 to 1990

By Ooi Kee Beng

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Tun Dr Lim Chong Eu (left).

Introduction (Abridged)

Published by Penang Institute and ISEAS (Singapore) 2019

WHILE Tun Dr Lim Chong Eu (1919-2010) was undoubtedly a major actor in the early history of Malaya and Malaysia, the role that gave him lasting fame in history books about the country is most undoubtedly that as the Architect of Modern Penang.

In his long political life, he did seem plagued by adversity whenever he managed to reach what seemed a critical point in his career. For example, soon after he became president of the Malayan Chinese Association, having passed on the chance to become the first Chief Minister of Penang, he threw a challenge to the president of the ruling Alliance coalition and founding Prime Minister Tunku Abdul Rahman for an increased number of seats for his party in the upcoming 1959 elections. The Tunku refused to budge and Lim’s failure saw support for him dissipate and Lim himself neutralised within his own party.

After leaving the MCA in the early 1960s, he formed the United Democratic Party, and on being elected on that ticket in the 1964 elections, joined with the Singapore-based People’s Action Party, the People’s Progressive Party and the Sarawak United People’s Party to form in early 1965, the Malaysia Solidarity Convention to challenge the Alliance. The separation of Singapore from Malaysia in September that year ended that attempt.

Not one to give up, Lim was instrumental in forming the Parti Gerakan Rakyat in time for the 1969 general elections. The Gerakan did incredibly well in the elections and managed to gain power in Lim’s home state of Penang. He became that state’s Chief Minister on May 12. A day after that auspicious event, racial rioting broke out in Kuala Lumpur and emergency rule was declared throughout the country.

The great dilemma for the Gerakan then was how it was to relate to the idea of the Barisan Nasional, the expanded coalition planned by Prime Minister Tun Abdul Razak Hussein to minimise political disagreements and to centralise power under the Malay-first agenda that was being implemented nationwide. Tensions within the party saw many key members leaving as Lim took his party into the new political configuration. Being now part of the federal government, Lim gained the blessings of Tun Razak to initiate measures in Penang to reboot its economy and establish free trade zones on the island’s rural east coast. Indeed, Bayan Lepas became home to the first-ever such zone in the country in 1972.

Penang Institute’s Role

Part of Penang Institute’s mandate is to analyse and capture, as much as possible, the multifaceted history of Penang, and in lieu of a thorough biography of Tun Dr Lim Chong Eu, has decided to produce a book highlighting particulars of how his administration managed so successfully to turn a once-thriving free port that had fallen on bad times into a modern economy that could contribute quickly and crucially to Malaysian nation-building as a whole.

Exhibiting a profound understanding of Penang’s economic quandary then which was most clearly symbolised by the termination of its free port status in the late 1960s, Lim pushed for export-led manufacturing by attracting foreign direct investments, following the budding wisdom of the day. Singapore, for example, had by then expressly rejected the import-substitution model that was popularly tried, often to great detriment, among many newly independent countries in the 1950s and 1960s.

But let us first hear in Lim’s own words what was accomplished in the 1970s and in the early 1980s. Speaking on 25 August 1985 at the Annual General Meeting of the Associated Chinese Chamber of Commerce and Industry of Malaysia, indeed at a time when the world economy was again in crisis, Lim found it a good occasion to remind the people of Penang of the difficult times they not long ago faced – just a decade earlier, in fact – and how they, now, with “the same determination and purpose… can overcome the problems of the present day”.

“In 1970, Penang was faced with an unemployment crisis when our employment rate was between 15 and 16 per cent. This was aggravated further by the entry into the employment market of at least 8,000 school leavers per year. […] During the period 1970-1985, against the background of the economic doldrums prevailing in the State, particularly following Confrontation and the withdrawal of the Free Port Status, the State Government launched a programme of economic recovery based upon the introduction of Free Trade Zones and the emphasis upon developing the manufacturing and industrial sector in the State. This has successfully made Penang a leading economic growth centre in Malaysia today.

“Between 1972 to 1980, Penang registered a growth rate of 16.9 per cent. Although the growth rate fell to 7.3 per cent from 1980 to 1985, nevertheless throughout the entire 1970 to 1985 period, the average growth rate prevailing in the State was higher than the average national growth rate, and in absolute terms there was an increase of $836.5 million between 1971 to 1985.” *

But even as sons and daughters of many Penang families were leaving the country for opportunities overseas, the remedy was already starting to work in their hometown, although perhaps a little too late for many of them. The manufacturing sector in Penang, which contributed about 21% to the State GDP in 1971, had by 1980 grown to account for as much as 34.2% of the State GDP. That figure would continue to grow to ensure that the sector would, together with the tourism sector, form the two legs that hold up Penang’s economy today.

This volume of articles starts with a poignant account of Lim Chong Eu’s strategical stance, not only in moving from the national political stage to the local Penang stage, but also in grasping what he must have seen as a last chance to seize whatever strategic initiative could be seized in the aftermath of the racial riots of 1969 when the new prime minister Tun Abdul Razak’s “New Economic Policy proclaimed the political to be economic, and vice-versa”. Khoo Boo Teik and Toh Kin Woon manage to capture much of the wider complexities of the post-colonial political and economic arena through their insightful examination of the choices Lim made in order to “protect Chinese interests” but with the aim of improving Malaysian society as a whole.

Koay Su Lyn and Wong Yee Tuan contribute to our understanding of Penang’s economic revival through a study of the two development masterplans that set the scene, for better or worse, for the state’s future. The Munro Report came at the end of 1964. It offered advice to the chief minister then, Wong Pow Nee, to continue with import substitution industrialisation, a strategy that the country as a whole had adopted. Apart from flaws in the strategy, the vanishing of the entrepot trade after independence and the subsequent repeal of Penang’s free port status did not allow for any easy reversal of the state’s economic fortunes. The second masterplan came in 1970. This was the Nathan Report, whose advice that Penang should cater to the global market, both in manufacturing and tourism was accepted by Lim Chong Eu’s newly installed government.

Now, the vehicle that Lim Chong Eu constructed to realise his dream to turn Penang into a vibrant and globally relevant manufacturing hub in the face of institutional lethargy and resistance was the Penang Development Corporation. As the man who effectively led the PDC for two decades through its most trying times, Chet Singh is indeed the person most knowledgeable about the history of this pivotal organisation.

The PDC came into being under great pressure to perform, and so “the decision was taken to break away or move away from the prevailing bureaucracy and have in place administrators thinking and operating like private sector personnel who had to be constantly proactive rather than reactive.”

The founding of the PDC and its assumption of many of the functions of local governance took place alongside a transformation of the system of local government in Penang. Most importantly, a management board replaced elected representatives in the local authorities who were now granted financial autonomy. Power was also given to state governments to reconstitute these local authorities. For Lim, what was compelling about these changes was that they allowed for a redistribution of state resources, specialisation in staff, and uniformity of by-laws. All these boded well for his plan to restructure the economy of the state.

Electronics is, of course, the sector that has been the foundation for Penang’s industrialisation. Francis H. Hutchinson, who has done comparative studies of Bangalore and Penang, provides the reader here with a thorough understanding of how the developmental process at the subnational level may unfold. Electronic firms may have made up a relatively small portion of companies in Penang’s industrial zones, but they employed almost half the workers in these zones. In industrialising Penang in the 1970s and 1980s, the Penang State Government, though subnational, did, in Hutchinson’s view, resemble “the Developmental State ideal”.

The next chapter, written by Muhammad Ikmal Said, takes a broader view of Penang’s industrialisation and looks at the national context in which the story unfolded, focusing on issues of poverty, income levels and inequality, and their relation to urbanisation.

Raja Rasiah, Yap Xiao Shan and Kamal Salih focus on Penang’s impressive transformation into “the nucleus of integrated circuits firms in Malaysia”. Lim Chong Eu’s government managed that enviable act, the authors conclude, because it “organised the productive management of its industrial development to first attract MNCs, and subsequently, stimulate technological upgrading by collaborating productively with MNCs and the federal government”.

The final chapter in this collection, written by Prema-Chandra Athukorala, analyses Penang’s success in promoting itself as an investment destination and in attracting MNCs not merely to invest in the state but to do so to such an extent that they became deeply rooted in the local economy as well.

Penang Institute is proud to present this volume to the world, on the centenary of Tun Dr Lim Chong Eu’s birth. Scholars will find it informative, economists will find it inspiring and Penang lovers will feel pride in the achievements of one of the island’s most illustrious sons.


* Lim Choon Sooi (Ed): Towards the Future. Selected Speeches and Statements of Lim Chong Eu 1970-1989. Penang: Oon Chin Seang. 1989: 140-149.

Photo courtesy of From Free Port to Modern Economy. Economic Development and Social Change in Penang, 1969 to 1990.

Ooi Kee Beng

is the Executive Director of Penang Institute. His recent books include The Eurasian Core and its Edges: Dialogues with Wang Gungwu on the History of the World (ISEAS 2016). Homepage: