In 1957 Malaysia gained political Independence, but did she gain financial Independence as well?
by Wan Ahmad Fayhsal
Many Malaysians especially among the laity have heard about the entity called World Bank along with its infamous brother the International Monetary Fund (IMF), especially during the tumultuous period when the whole East Asian region succumbed to the financial crisis in 1997.
This year the World Bank Group is setting up their knowledge and research office in Malaysia which will be based in Sasana Kijang, Bank Negara’s (Malaysia’s central bank) center of excellence in Kuala Lumpur.
It is a ground breaking development for both World Bank and Malaysia as before this they were having an acrimonious relationship during the premiership of Dr. Mahathir Mohamad who is regarded by many to be a staunch critique against the Washington-based international monetary and financial institutions of World Bank and IMF.
Malaysia’s relationship with World Bank is not recent. The earliest recorded agreement that was signed between the two parties was ratified as early as 1958 – a year after Federation of Malaya gained Independence from the British. But the counter party that Malaya had dealt with was not exactly the World Bank as we knew today.
To understand this, first we must answer the question what really is the World Bank?
World Bank is not a solitary body. It consists of five financial institutions that make up the ‘World Bank Group’. The first to be established (1944) is International Bank for Reconstruction and Development (IBRD). Originally served as the main banker for post-World War II Europe, IBRD offers development loans, guarantees loan and provides analytical and advisory services to middle income developing countries.
In 1956, came International Finance Corporation (IFC), which is the largest multilateral source of loan and equity financing for private sector in the developing world.
By 1960, International Development Association (IDA) was established to provide loan assistance to countries that are not creditworthy.
The other two minor institutions are Multilateral Investment Guarantee Agency (MIGA) which provides investment insurance and International Centre for Settlement of Investment Disputes (ICSID) which facilitates the settlement of investment disputes between governments and foreign investors.
When the name World Bank or in short ‘the Bank’ is referred to in the news it specifically means the dynamic duo of IBRD and IDA. If the news included the other three they would normally mentioned them all as World Bank Group. Its membership consists of all 193 UN members minus the “pariah states” the likes of Cuba and North Korea. Just like in the United Nations, the US wields massive influence in deciding the direction as well as the leadership of World Bank.
Malaya joined World Bank
Malaysia or to be exact the Federation of Malaya became member to World Bank right after the Independence when both IFC and IBRD ratified Malaya's admission as member of the Bank.
In the authorized public disclosure of IBRD's Resolution no.113, the Federation of Malaya was required to "subscribe to 250 shares of the capital stock of the Bank at the par value of $100,000 per share." Membership of the Bank came with the condition that Malaya must first became a member of IMF as well.
Malaya was instructed to pay for the subscription in the form of (i) gold or US Dollars equal to 2% of its subscription and (ii) an amount in the currency of the Federation which must be based on prevailing exchange rate that equal in value to 18% of its subscription.
Other conditions stipulated are the need for Malaya to deposit with the Government of the US an instrument of acceptance, pledge and commitment to the Articles of Agreement and the resolution and the Articles of Agreement shall be signed and held in the Archives of the US government.
The first loan granted by World Bank via IBRD amounted to 35.6 million USD, dated on the 22nd September. It was borrowed by Malaya via its statutory body Central Electricity Board (CEB) for the Cameron Highlands hydroelectric Project.
The project was recommended earlier from the findings made in IBRD inaugural mission to Malaya and Singapore in 1954 and was first financed by Colonial Development Corporation of United Kingdom (CDC), a corporation established under the United Kingdom’s Overseas Resources Development Act, 1948 that managed the post-war economy and development of British colonies and protectorates including Malaya prior to her Independence.
In the loan agreement it was spelled out clearly on the transfer of debt from CDC to the new independent government of Malaya. It is stated in the agreement that Malaya “has entered, or is about to enter, into arrangements to refinance debentures” once held by the CDC. On top of that Malaya was to borrow a sum of 500,000 Pound Sterling from Commonwealth Development Finance Co. Ltd (CDFC) and to raise 38 million Malaysian Dollar (before ringgit was made currency) for the project which the World Bank through IBRD agreed to lend. The loan term spanned for 25 years with a grace period of 5 years at a rate of interest of 5.75%. For a country that just came out of the colonial yoke where its economy and financial infrastructures back then were still small, servicing the loan was a tall order for the novice post-colonial government of Malaya.
Not to mention in span of a decade, few more loans were requested by Malaya (then after 1963 as Malaysia) from the World Bank as part of development projects especially for the capital-intensive infrastructure projects that are important for rapid economic growth. To manage the loans is no small feat but judging from the record of our Malaysian government, we did perform well in servicing the debt relative to other former British colonies that gained Independence within the same period as ours.
Still there are few more important things left unanswered. Why and how did we get involved with the World Bank in the first place?
Some serious questions worth to ponder
We shall wonder who actually made the decision to become a member of World Bank? Did Tunku Abdul Rahman who led the Malaya’s delegation to negotiate terms for Independence was made to involve in this financial and economic matter? Was it part of the necessary requirement or a form of “concession” to be ratified before British gave the political Independence to Malaya?
Perhaps some glimpse on the answers could be traced from written record of the president of World Bank, Eugene R. Black who served from 1949 till 1963 where he wrote a recommendation report dated 11th September 1958 to the Bank’s executive directors about the loan requested by CEB.
Stated in that report, the formal negotiations of the loan between Malaya via CEB and the Bank were done in 2nd September 1958 and concluded on the 8th September of the same year. A month before, a non-formal negotiations were conducted in London between CEB, CDC and CDFC and representatives of World Bank.
The results of non-formal negotiations were made to be part of the loan agreement mentioned earlier where parties involved were the lender, the World Bank via IBRD and the borrower, CEB while the Federation of Malaya acted as guarantor.
During the formal negotiation, CEB was represented by its chairman, Oscar Spencer and its general manager, John Sharples while the government of Malaya was represented by A.H.P Humphrey, secretary to the Treasury of the Federation.
All of the representatives from CEB and government were still under the directive of British colonial office and solely serving their interests in the colony. None stated in the reports where native leaders especially from UMNO who were leading the negotiations of terms for Malaya’s Independence were involved in these financial negotiations.
Prior to 30th August 1957, the executive power solely rest on the shoulder of British High Commissioner where he was assisted and advised by the Executive and Legal council of the Federation of Malaya.
About a month after the Independence, on the 25th September 1957, the resolution for Malaya's membership was adopted. As stated in World Bank chronological record, the mission and appraisal to assess Malaya’s economy as well as for the first loan was done during the period when the Federation of Malaya was still part of the British colony where involvement from the natives especially in decision makings like economy and finance were basically nil.
We can safely adduce here that the decision made to be part of World Bank was not thoroughly and genuinely democratic in nature as the natives – the Malay leadership – were left in the dark.
Exit British, enter World Bank
Malaya had always being regarded as a periphery to the British colonial interest. It had always been overshadowed or referred in tandem with India – the real Jewel in the Crown of British Empire – as the “Eastern” domain to British colonial center which is India. The name of the company that colonially administered Malaya back then – the British East India Company (BEIC) – very much indicated the real status of Malaya to the British imperialist.
Despite of gaining political Independence from British, Malaya was left straddled with debentures of her colonialist. Through the CDC, as reported by Eugene R. Black, among the British themselves decided that the newly independent Federation of Malaya must refinance the loan (read: clean the mess) originally made by the former envoys of British Colonial Office who administered the economy of colonial Malaya in the form of loan conversion that was included in the IBRD loan package for the Cameron Highland hydroelectric project.
By right, shouldn’t the British in their goodwill, after siphoning the rich resources of tin and rubber from Malaya for years, to just write-off the debt rather than transferring it to the new natives leadership who were in the first place, not party to the loan negotiations?
The real answers – both political and moral – might lie somewhere in the series of negotiations between Tunku Abdul Rahman and the British en route to Malaya’s Independence.
Wan Ahmad Fayhsal is a Fellow at Putra Business School. This article was originally published in two parts by The Malaysian Reserve.