The modern history of Penang began when it was acquired by the British East India Company in 1786 to serve its expanding global trade. The island boasted a fine sheltered harbour, and was perfectly located at the northern end of the Straits of Malacca. It served the British well in business and as a military base. Penang’s many geographical advantages allowed it to function for over two centuries as a trading, administrative, travel and educational hub. And since the 1970s, it has also been the industrial centre for the globalising economy of Malaysia. Despite such strong foundations, the island has nevertheless failed to live up to its potential. Its economic hands have been strongly tied by excessive federal control.
The Challenge For Penang
The problem with Penang … is that she, like all states in the country, is permanently dependent on the Federal Government. Malaysia embraces a federal system of government with a “Centre” that is so strong that some have dismissed it as a “flawed federation”. — Holzhausen, 1974
Nowhere is this more obvious than in the conduct of financial relations. The Centre has retained for itself all major revenue sources, rights of undertaking expenditures and powers of borrowing. The states, on the other hand, have such limited revenue sources and borrowing powers that they are forced to rely on the Centre for development funds.
Prior to the March 8, 2008, general election (where Barisan Nasional lost its two-thirds majority in Parliament and Pakatan Rakyat gained control over five of the 13 states), such reliance was not a big issue because the Centre and the majority of the states were under a single coalition party.
Last year’s political tsunami that saw Penang, Kedah, Perak and Selangor fall to the Opposition led to initial optimism that the old tactics of bullying a state (and thereby, punishing the voters) by cutting down or delaying development allocations would no longer work—these were, after all, developed “key states” and any drop in economic growth would adversely affect the growth and economic performance of the national economy as a whole.
However, an analysis of Penang’s financial records reveals that the optimism is misplaced. This leaves the Penang State Government with no option but to persist in convincing the Centre to play fair, while at the same time improve its revenue management and cash inflow so that it will no longer be heavily dependent on the Federal Government for its economic future.
