Changing from a post-war commercial slum to a modern industrial state, Penang has undeniably come a long way. Once a thriving port and settlement under the colonial government, Penang suffered an economic downturn after the Second World War. The emergence of economic nationalism at the federal centre following Malaysian independence precipitated the erosion of her free port status, and gravely sapped her entrepot trade, until then the mainstay of the state.

In order to salvage the economy, the Penang state government adopted a master plan in 1964, known as the Munro Report. But this quicky proved a failure. It was succeeded by the Robert Nathan Report 1970, which is given the credit for successfully turning Penang into an industrial economy.

This paper outlines the economic woes Penang faced in the post-war years, and discusses how and why the Munro Report failed where the Nathan Report succeeded in charting a new economic trajectory for the state.

Penang's Post-war Economic Condition (1948-1963)

Penang's vibrant entrepot trade with the surrounding areas like Perak, Sumatra, Thailand and Burma never really recovered after the Second World War. The Malayan Union structure that the returning British imposed on the peninsula soon after their return ended for good the Straits Settlements that the Japanese had overwhelmed. Despite official recognition of Penang's free port status, the post-war regime imposed trade regulations that contravened the interests of Penang. An example was the Prohibition of Export Order 1946, which prevented Penang from exporting to the lucrative markets of Sumatra and Siam. Merdeka in 1957 saw Penang turn another difficult corner. The nationalistic wish for greater centralization of trade and commerce restricted further Penang's entrepot trade.

In the early 1960s, economic nationalism hit Penang's entrepot partners in Sumatra, Thailand and Burma, and this led to further economic decline for Penang. Most of the newly independent countries were seeking economic dependence in one way or another, and building up import-substitution industries. Nothing seemed to be going Penang's way. Malaysia sought to industrialize it economy and began to develop Port Swettenham (now Port Klang), and this weakened further the trade volume in Penang. The first Five Year Plan (1956-1960) and the second Five Year Plan (1961-1965) highlighted the importance of manufacturing industries to the Federation's long-run development.