By Datuk Ts Dr. Hj Ramli Amir, former President of the Chartered Institute of Logistics and Transport (CILT) Malaysia and Vice-President of CILT International for Southeast Asia
KOTA KINABALU: Prologue: The Promise Unfulfilled In 1963, Sabah entered the Malaysian Federation with grand promises embedded in the Malaysia Agreement—special rights, autonomy, and equitable development that would harness the state’s vast natural wealth for its people’s prosperity.
Sixty-two years later, despite being blessed with oil, gas, palm oil, timber, and strategic geography, Sabah remains Malaysia’s second-poorest state. Its economy is trapped as a raw material supplier, while manufactured goods flow in from Peninsular Malaysia at premium prices—a direct consequence of federal policies that have systematically suppressed its potential.
This is the story of how shipping policy became both the symptom and the cause of Sabah’s economic stagnation, and how understanding this relationship reveals the path forward—not through government ships or endless subsidies, but through a fundamental reimagining of what industrial development means in the 21st century.
Episode 1: The False Dawn of Industrialization (1960s-1995)
The Early Struggles
In the mid-1960s, Sabah’s industrial landscape was almost barren—simple shoemaking, basic wood processing, and rudimentary food packaging. When the federal government introduced Import Substitution Industrialization (ISI), Sabah seemed poised to join Malaysia’s manufacturing revolution.
The strategy emphasized private sector development and aimed to address the state’s weak industrial base.
But geography was compounded by policy. Critical infrastructure was chronically underdeveloped, with shipping logistics emerging as the most insurmountable barrier. The high cost of moving goods, dictated by federal policies, rendered Sabahan products uncompetitive. As one academic noted, “the price, quantity and variety from ISI were no match to those of Peninsular Malaysia’s.” While the nation’s manufacturing sector grew to 20% of GDP by 1987, Sabah’s manufacturing remained stuck at a meagre 4.6%—a divergence rooted in the cost of connection.
The Resource Curse
The 1980-1985 boom period offered a fleeting hope. State-owned enterprises established sugar refineries, flour mills, integrated wood-based industries, and simple vehicle assembly plants. For a moment, an economic transition into industrial activities seemed within reach.
But this boom was built on extractive industries—petroleum, timber, palm oil. The controversial Petroleum Development Act of 1974 effectively transferred control over oil and gas resources to the federal government, stripping Sabah of the very revenues needed to fund its industrial ambitions. The pattern was set, Sabah would remain a raw material supplier, while value-added manufacturing concentrated in Peninsular Malaysia.
Political Upheaval and Lost Decades
The state’s response was the ambitious Sabah Action Blueprint in 1987 under Parti Bersatu Sabah (PBS). It represented the state’s clearest vision for industrialization—linking agro-based sectors with manufacturing and high value-added activities. But politics delivered the final blow. In 1990, PBS withdrew from Barisan Nasional, placing Sabah under opposition rule.
The consequences were swift and devastating. Federal support evaporated; infrastructure projects stalled; financial assistance dried up. Industrial development was forced to narrow its focus to basic timber processing, hampered by limited fiscal capacity and a federal government that deprioritized Sabah’s projects. The state government, isolated and under-resourced, had no choice but to retreat to low-tech agriculture and village industries.
The transition into an industrial-based economy had stalled completely.
Episode 2: The Cabotage Trap (1980-2017)
The Chokehold of Cabotage
As Sabah grappled with political isolation in the 1990s, the roots of its economic malaise traced back to a federal policy enacted a decade earlier: the cabotage policy of 1980. This policy would systematically cripple the state’s economic potential for decades.
Ostensibly designed to protect the domestic shipping industry, in practice it erected a devastating bottleneck for East Malaysian commerce.
The rule was deceptively simple and profoundly destructive: all cargo moving between Sabah and Peninsular Malaysia had to be carried on Malaysian-flagged vessels, typically routed through the central hub of Port Klang regardless of operational efficiency. For any manufacturer considering Sabah, this imposed an insurmountable cost barrier in Storage fees for cargo waiting in Port Klang, Transhipment charges adding 10-15% to total logistics costs, Extended delivery times that rendered just-in-time manufacturing impossible and Artificial protection for inefficient West Malaysian shipping operators
The cabotage policy did not just increase costs; it made competitive manufacturing in Sabah structurally unviable from the outset.
The Vicious Cycle Takes Hold
Academic research quantified the policy’s destructive effects in stark terms. Studies revealed persistent price disparities, with goods costing 20-30% more in Sabah than in Peninsular Malaysia. But the deeper damage was structural, creating a self-reinforcing cycle of underdevelopment: high shipping costs prevented industrial growth, which resulted in low export volumes, which in turn justified reduced shipping frequency and capacity, thereby keeping costs permanently high.
For 37 years, this cycle operated with mathematical precision, systematically stripping Sabah of its industrial potential. Each year, manufacturing became marginally less viable, diverting investment and economic activity toward Port Klang and the western hinterland. What began as economic protectionism had morphed into a form of internal colonialism—forcing East Malaysian consumers and businesses to subsidize West Malaysian shipping lines and manufacturers.
The Belated Awakening
By 2017, the evidence was overwhelming. The federal government’s own studies concluded that the cabotage policy had failed in its core objectives: it had not fostered a competitive domestic shipping industry, while simultaneously imposing crippling costs on East Malaysia.
The decision to finally exempt Sabah, Sarawak, and Labuan from the policy was a tacit admission of four decades of catastrophic failure.
But the exemption was a classic case of too little, too late. The damage was irrevocably done. Sabah’s manufacturing sector had weakened during the critical decades—the 1980s through the 2000s—when global supply chains were solidifying. When the logistical chains were finally loosened, Sabahno longer possessed the industrial base, the skilled workforce, or the supply chain ecosystems to capitalize on its improved connectivity. The window of opportunity had closed.
In part 2, we will be looking at episode 3: The Block Exemption Paradox (2014-Present), episode 4: The Manufacturing Deficit and its Consequences, and episode 5: The State Shipping Solution—A Seductive Dead End.
