The Malaysian economy and society has changed significantly for the better over the last half-century. The current challenges that the economy is facing can be better understood and dealt with if seen against the background of its past. This chapter will therefore analyse Malaysia's economic development and transformation over a long term historical perspective, and look at what has happened to the Malaysian economy, as well as at how it has changed over time.

The transformation of Malaysian society has been noteworthy. Malaysian society has become increasingly urbanized over the decades, as indicated by Table 2.1. In 1957, over 90 per cent of Malaya's population lived in rural areas. By 2010, only about 37 per cent of the Malaysian population lived in the countryside.

In terms of structural change or sectoral transformation, manufacturing and services contributed more than 80 per cent of total output of the economy in 2009 (see Table 2.2); both sectors only contributed about half of total output in 1970. Malaysia has seen a dramatic transformation of its economy in terms of the rapid growth of manufacturing and services as agriculture continued to expand, as well as the shift of its population from rural to urban areas over the past half century.

This is, of course, very much reflected by employment patterns. Table 2.3 shows that the transformation has been very significant, especially in terms of the share of services (Khong with Jomo 2010).

The official poverty rate has also fallen, although there is some debate on its measurement. Nevertheless, these figures suggest significant improvements in general living standards in Malaysia, not only in urban areas, but also in the countryside, as indicated in Table 2.4 and Figure 2.1.

Unlike many other developing countries, official Malaysian data suggest not only a decline of poverty, but also a decline in inequality — of overall inequality, not just of inter-ethnic disparities. Most other countries in the West, the former Soviet Union, China and most developing countries have experienced rising inequality over the same period. Only Northern Europe and Northeast Asia (Korea and Japan) have maintained low inequality, while some countries in South America have seen recent declines in inequality in the last decade after decades of rising inequality.

The share of wage earning Malaysians among those working has significantly increased from slightly over half to over three-quarters of the labour force, as shown in Table 2.5.