In 1963, the British colonies of North Borneo, Sarawak, and Singapore joined the Federation of Malaya to create a new state, the Federation of Malaysia. Yet the former colony of North Borneo – now called Sabah – retained many of the powers of a sovereign state, including special control over immigration, religion, language, and land use. It also kept control of its forests, which remained exempt from the federal government's national forestry laws and taxes.

The Sabah government had good reasons to retain authority over its forests: they were densely packed with trees from the Dipterocarpaceae family – the same type that the Philippines so profusely exported. In 1953, Sabah held 2.7 percent of world hardwood market; by 1973, it had captured 20.1 percent of a much larger international market. Sabah was the world's second largest supplier of hardwood logs from 1959 to 1990 – second to the Philippines, then to Indonesia, and finally to its East Malaysian neighbor, Sarawak. Sabah's tiny city of Sandakan became one of the world's leading timber ports. Locals claimed it had more millionaires per capita than any city in the world.

Sabah's spectacular growth as a timber exporter, however, went hand-in-hand with the deterioration of its forestry institutions.