Despite being the second smallest Malaysian state by land mass, Penang is one of the country's most developed economic powerhouses. It has a tertiary-based economy primarily driven by services and manufacturing. Penang is known as a popular tourist attraction and has also been dubbed the Silicon Valley of the East due to its leading role as a destination for foreign direct investment, attracting hundreds of multinational corporations. Additionally, Penang is the top exporting state in the country.
Overview
Penang's economy is largely propelled by the services and manufacturing sectors, with each constituting more than two-fifths of the state's GDP.[2] It is the largest exporter in Malaysia, contributing over 31% of the country's exports in 2023.[6]Export-oriented industrialisation has made electronics the backbone of Penang's industry, with integrated circuitry, piezoelectric crystals, scientific equipment, and other electric and electronic components forming the bulk of the state's exports.[6][7] The Penang International Airport (PIA) handles the highest export volume in Malaysia.[6]
Apart from its traditional strengths in tourism and finance, Penang has increasingly become a centre for health care, business events, ecotourism and cruise arrivals.[8] Its industrial and business ecosystem have allowed it to serve as a hub for shared services and outsourcing (SSO), along with a growing startup community.[9][10] The booming economy has also led to a considerable interest in real estate in Penang.[11][12]
Originally founded as an entrepôt by the British East India Company (EIC) in 1786, Penang suffered economically following the revocation of its capital George Town's free port status in 1969.[13] This caused a change in governance and prompted a massive restructuring of the state's economy.[7] Massive industrialisation and infrastructural developments played a crucial role in reversing Penang's economic decline and led to the state's rapid economic growth until the late 1990s.[14][15]
Macroeconomic statistics
The following table shows the main economic indicators between 2010 and 2023. Inflation below 5% is in green.
Following the founding of Singapore in 1819, George Town began to lose its prominence.[20] By 1832, Singapore had replaced George Town as the capital of the Straits Settlements.[24] Penang's location to the north limited its ability to attract more maritime trade beyond the Bay of Bengal, unlike Singapore, which was strategically positioned for China-bound trade.[20] By 1863, George Town contributed 24% of the total trade volume of the Straits Settlements, second only to Singapore.[20]
In spite of its secondary importance to Singapore, George Town remained a crucial feeder port. The opening of the Suez Canal in 1869 and a tin mining boom in the Malay Peninsula transformed the Port of Penang into a leading tin exporter.[25][26] In the end of the 19th century, George Town became the primary financial centre of British Malaya, as mercantile firms and international banks opened along Beach Street.[25][27][26] By 1910, Penang's annual export volume matched or even exceeded that of Singapore and by 1917, Penang contributed one-fifth of the tax revenue of the Straits Settlements.[20][28]
In the years leading to Malaya's independence from Britain, British administrators dismantled the Straits Settlements and merged Penang into the nascent Malayan federation. This alarmed George Town's business elites, who feared that the merger would result in the loss of the city's free port status and increased federal interference in Penang's economic affairs. A secession movement was launched but ultimately dwindled due to British disapproval.[28][29] Nonetheless, by 1957, Penang‘s economic status was said to have far outpaced the rest of Malaya, putting it on par with Singapore and Hong Kong.[7]
Penang's state government, which was under the control of the Alliance at the time, attempted import substitution industrialisation to counter the economic decline. New industries were set up in mainland Seberang Perai in 1964. However, most of these industries failed within a few years. By the late 1960s, Penang‘s per capital income was 12% lower than the national average, while unemployment rose to 9%. This triggered unrest and strikes among the population.[7]
The period of relative prosperity vis-à-vis the rest of Malaysia came to an end in 1969, when the federal government revoked George Town's free port status.[13][32] Unemployment and brain drain worsened, along with growing discontent with the Alliance-led state government. In the state election that year, opposition party Gerakan succeeded in seizing power from the Alliance.[7]
Robert R. Nathan Associates was commissioned to formulate a master plan to revitalise Penang's economy.[7][33] The resulting Nathan Report of 1970 recommended an export-led growth strategy and the strengthening of linkages with the global economy. It also foresaw the start of an international division of labour, at a time when the electronics industries in developed nations started seeking access to more cost-effective labour. The report recommended a shift in development strategy from Seberang Perai to Bayan Lepas, where the Penang International Airport is sited, to capitalise on readily-available logistics and a substantial labor force.[7]
Although the Alliance retained federal power, the 1969 race riots in Kuala Lumpur forced the federal government, led by Abdul Razak Hussein, to introduce the New Economic Policy (NEP). The NEP's policies favouring ethnic Malays posed a challenge for the Chinese-dominated Penang state government.[7] Malaysia's centralised power structure also made Penang susceptible to federal-state conflicts.[35] Lim, however, was able to secure autonomy and freedom to implement economic reforms, by maintaining ties with Abdul Razak and ensuring order within Penang.[7] In 1973, Gerakan joined the Alliance (renamed Barisan Nasional) to guarantee Penang's inclusion in national development policies.[36]
The FIZs played a critical role in reviving Penang's economy and driving the state's economic growth in the late 20th century.[15][37] By the mid-1980s, Penang, with its well-established electronics ecosystem, emerged as the world‘s largest exporter and the third largest assembler of semiconductors after the United States and Japan.[7] Penang's rapid industrial growth propelled it to a "similar stage of technological development" vis-à-vis Singapore, leading to competition between the two territories for expertise.[7][38] Industrialisation significantly contributed to the rise in Penang's GDP per capita and a substantial reduction in unemployment rates, ultimately resulting in a shortage of skilled labour.[7] Between 1976 and 1990, Penang consistently achieved double-digit annual growth in GDP.[15]Economic spillover to parts of neighbouring Kedah and Perak catalysed the growth of the George Town Conurbation, which became the second largest contributor to Malaysia's GDP after the Klang Valley by 2010.[39][40]
In 1990, Koh Tsu Koon assumed the position of Chief Minister, succeeding Lim. Under Koh's tenure, the Penang Strategic Development Plan was introduced, aiming to enhance economic diversification by focusing on the expansion of higher-order service sectors such as finance, education, information technology and medical services. However, Penang's economy was adversely affected by the 1997 Asian financial crisis, precipitating a deceleration in the state's economic growth in the early 21st century.[15]
In the 2008 state election, Pakatan Rakyat (now Pakatan Harapan) wrested power in Penang from the incumbent Barisan Nasional administration.[15][41] Newly-elected Chief Minister Lim Guan Eng abolished the NEP within the state, initiated open tender for state projects, adopted a more business-friendly approach to investments and intensified efforts towards economic diversification.[42][43] Penang has since witnessed an economic revitalisation, boosted by growth in the private sector.[43][44] The state's economic resurgence, particularly since 2008, was described by Bloomberg as Malaysia's "biggest economic success", despite the federal government's focus on other states such as Johor and Sarawak.[45]
Aside from electronics and engineering manufacturing, Penang is Malaysia's main jewellery finishing hub, contributing 85% of the nation's gold and jewellery exports as of 2016[update]. The state's gold and jewellery industry originates from the founding of the Penang Goldsmith Association in 1832. Jewellery from Penang is exported to over 20 foreign markets, including Singapore, Hong Kong, Japan, Canada and the United States.[53]
Services
Services subsectors in Penang by GDP share (2023)[2]
Wholesale and retail trade, accommodation, food and beverage (32.3%)
Utilities, transport, storage and communication (25.0%)
Finance, insurance, real estate and business services (18.7%)
Other services (10.9%)
Government services (13.1%)
The services sector contributed 48% of Penang's GDP as of 2023[update] and employed almost 3⁄5 of the state's workforce.[2][4] Major subsectors in the state include logistics, communications, retail, food and beverages (F&B), tourism, financial, real estate and business services.[4]
George Town was formerly the financial centre of British Malaya. In the late 19th century, international banks such as Standard Chartered, HSBC, and the Royal Bank of Scotland established themselves in the city, leading to the clustering of mercantile trade around the northern end of Beach Street.[54][55] Post-independence, George Town continues to function as the commercial hub of northern Malaysia.[56] As of 2023[update], finance and ancillary services contributed 9% of Penang's GDP.
Penang is one of Malaysia's vital logistics hubs. The Penang International Airport (PIA) is the country's third busiest in passenger volume and in 2023, handled RM365 billion (US$93 billion) worth of exports, the largest of all entry points nationwide.[6] In the same year, the Port of Penang processed over 1.4 million TEUs of cargo, the third highest among Malaysia's seaports.[57]
Economic diversification measures have led to Penang expanding its tourism offerings in areas such as health care, business events, ecotourism and cruise arrivals.[8] The state has emerged as the leading destination in Malaysia for medical tourism, attracting over half of the medical tourist arrivals prior to the COVID-19 pandemic.[63][64][65] George Town is the country's second most popular destination for meetings, incentives, conferences and exhibitions (MICE) after Kuala Lumpur, with the industry had an economic impact of about RM1.3 billion (US$0.31 million) throughout the state in 2018.[66][67] Among the major venues for business events in the state are SPICE Arena, Straits Quay and Prangin Mall.[68]
In 2004, the Bayan Lepas FIZ and the adjacent township of Bayan Baru were granted Multimedia Super Corridor Cyber City status, galvanising Penang's growth as a shared services and outsourcing (SSO) hub.[72] By 2016, the state attracted the second largest share of investments for global business services (GBS) in the country after Kuala Lumpur, creating over 8,000 high-income jobs in the process.[73][74] Newer office spaces at Bayan Baru have attracted multinational firms including Cisco, Citigroup, Clarivate, Swarovski and Teleperformance to open GBS offices at the area.[75][76][77] In addition, Penang is home to a thriving startup community, driven by home-grown companies like Piktochart and DeliverEat.[78][79]
Agriculture
As of 2017[update], agriculture made up nearly 44% of Seberang Perai's land use.[80] Known as the "rice bowl" of Penang, the city had approximately 12,472 acres (5,047 ha) of paddy fields as of 2008[update].[81][82][83] Despite limited land availability, Penang has consistently recorded the highest average rice yield in Malaysia since 2018, with a total yield of RM190.8 million in 2022.[84]
Mining
Penang's minuscule mining sector contributed a mere 0.1% of the state's GDP in 2022.[85] The state mainly produces granite, sand and limestone. However, in 2023, it was reported that Penang holds an estimated RM100 billion worth of untapped rare-earth elements.[86]
As of 2023[update], Penang is home to six free-trade zones.[88] Free industrial zones were first introduced by the Malaysian federal government through the Free Trade Zone Act 1971, designating secure areas where manufactured goods are exempt from taxes and businesses operate with minimal customs inspections. Building upon this concept, free commercial zones were introduced as a variant under the Free Zones Act of 1990.[89]
The Penang state government, like other Malaysian states, has limited ability to generate revenue due to constraints imposed by the federal constitution. Each state is constitutionally only authorised to generate revenue from land, natural resources and forests within its jurisdiction, as well as from receipts related to applications and development plans. The centralised power structure in Malaysia restricts states from borrowing and necessitates their reliance on the federal government for infrastructure funds. In comparison to larger and more resource-rich states, Penang faces challenges in generating revenue due to its small land area and lack of natural resources.[35]
Prior to a change in federal government in 2018, Penang's financial position was further complicated by strained relations between the Barisan Nasional-controlled federal government and the Pakatan Rakyat-led state government. Partisanship during Najib Razak's administration exacerbated fiscal imbalances, with Penang receiving only RM162.7 million in federal grants in 2013, which accounted for a mere 2.85% of the state's tax revenues to the federal government. These have prompted calls for decentralisation.[35] In 2024, Chief MinisterChow Kon Yeow stated that he intended to demand a larger portion of the state's tax revenue to be returned to Penang.[90]
Financial position of the Penang state government, 2020 to 2022[4][91][92]
^Sue-Ching Jou, Hsin-Huang Michael Hsiao, Natacha Aveline-Dubach (2014). Globalization and New Intra-Urban Dynamics in Asian Cities. National Taiwan University. ISBN9789863500216.
^ abLangdon, Marcus (2014). George Town's Historic Commercial and Civic Precincts. George Town World Heritage Incorporated (published 2015). ISBN9789671228128.
^ abWong, Yee Tuan (2015). Penang Chinese Commerce in the 19th Century: The Rise and Fall of the Big Five. ISEAS-Yusof Ishak Institute. ISBN978-981-4515-02-3.
^Hockton, Keith (2012). Penang: An Inside Guide to Its Historic Homes, Buildings, Monuments and Parks. MPH Group. ISBN978-967-415-303-8.
^ abBarber, Andrew (2010). Penang At War : A History of Penang During and Between the First and Second World Wars 1914–1945. AB&B.
^Lim Yoke Mui; Nurwati Badarulzaman; A. Ghafar Ahmad (20–22 January 2003). "Retail Activity in Malaysia : From Shophouse to Hypermarket"(PDF). School of Housing, Building and Planning, University of Science, Malaysia. Pacific Rim Real Estate Society (PRRES). Archived from the original(PDF) on 24 January 2016. Retrieved 24 January 2016.