It is a country of tropical splendor. Shrouded in its humid heat is an abundance of natural resources including seemingly unending rows of palm and rubber trees. Malaysia is one ''underdeveloped country'' often voted ''most likely to succeed.''
But this country is also an example of how the world recession and falling commodity prices can affect even the best endowed of third-world countries.
With a relatively small population of 14.7 million, Malaysia has many reasons to be grateful. This multiracial combination of peninsular Malaya with the north Borneo provinces of Sarawak and Sabah is the world's leading exporter of palm oil, rubber, tin, tropical timber, and pepper. Malaysia is also a net oil exporter, and there are substantial natural gas reserves.
Today, under Prime Minister Mahathir Mohamad who took office in July 1981, the country has had to accept slower growth rates, a growing trade deficit, and a reduction in tax revenue. The resulting belt tightening includes a slowdown in government development expenditures, and an increase in taxes.
Still there is widespread confidence, both in government and business circles , that Malaysia's many assets will in time overcome the current slump in commodities prices. The difficulties have emphasized the need for diversified exports, less reliance on export of raw materials, and stepped up manufacturing at home to reduce dependence on price fluctuations abroad. Manufacturing for export is already taking place at ports like Malacca.
The revenue shortage caused by world recession is a challenge for the country's prime minister. Dr. Mahathir is an Islamic Malay, who favors controlled modernization that will not excessively weaken religious and social traditions.
One government dilemma is how to satisfy the younger generation's desire for improved living standards and consumer goods without letting in what are seen as social abuses from the West. Drug use and a growing appearance of insensitivity to family, religion, and tradition could help create a backlash from Islamic fundamentalist extremists. That would further alarm the country's Chinese minority, which is already concerned over Malay political dominance.
Economic squeezes highlight the delicate task of controlling communal rivalries. Since 1969 when Malays rioted against Chinese in Malaysia's capital, Kuala Lumpur, various Malaysian prime ministers have sought to cool feelings between the often rural and poorer Malay majority (53 percent of the population) and the more urban, economically advanced Chinese (at least 35 percent, with the remainder largely Indian). One hope was that an ''expanding economic pie'' benefiting the Chinese would help reduce their unhappiness with the government's policy of favoring ''bumiputras'' (sons of the soil, or native Malays). This policy has given educational, business, and other advantages, including job quotas to the Malays.
But now the expansion of the ''pie'' has slowed a bit, with reduced world demand for palm oil, tin, and timber. The resulting price cuts have reduced export earnings and raised the trade deficit from $2.24 billion last year to an estimate of $3.66 billion for 1982. One result: Malaysia's rate of economic growth rate slipped from an enviable 8 percent in 1980 to 6.9 percent in 1981. Finance Minister Razaleigh Hazah estimated the 1982 rate at just 3 percent, and calculated 4.9 percent for next year.
Belt-tightening countermeasures to raise more revenue will double the sales tax to 10 percent on ''nonessential'' goods including food in restaurants and similar establishments. Taxes will also rise in January on tobacco, alcohol, and cars (especially imports).
Another task is to help often backward Malay-run businesses and households obtain capital without violating Islamic prohibitions on certain banking practices. Malaysia's parliament has approved plans to open Southeast Asia's first Islamic bank next year. With the government as the largest shareholder, the bank will neither charge interest on loans, nor pay interest on accounts.
In public statements, the prime minister stresses the need for better roads, harbors, and airports. He declares that financial support for needy individuals that traditionally has come from the extended family should not be replaced with Western-style institutions like the public dole. But he also declares that traditionalists overly romanticize the rural Malay ''kompongs'' or villages. Although these looked pretty on postcards, he explains, many of the villagers were unhappy there and want a better life.
''One of the big tragedies is that until now we have not paid much attention to developing resource-based industries here in Malaysia,'' Tun Tan Siew Sin, chairman of the Sime Darby Corporation, has been quoted as saying. He urged that Malaysia itself manufacture more rubber goods, thus following the example of South Korea, Japan, and Taiwan.
Indeed, in an attempt to improve eventually the country's balance of payments , the Malaysian government has announced a plan to produce a ''made-in-Malaysia car.'' The plan would at first use mostly foreign-made parts, but gradually increase the proportion of domestic parts until at least 51 percent are Malaysian-made by the 1986 target date.