The Malay Peninsula and indeed Southeast Asia has been a center for trade for centuries. Various items such as porcelain and spice were actively traded even before Malacca and Singapore rose to prominence.

In the 17th century, large deposits of tin were found in several Malay states. Later, as the British started to take over as administrators of Malaya, rubber and palm oil trees were introduced for commercial purposes.

Over time, Malaya became the world's largest producer of tin, rubber and palm oil. These three commodities along with other raw materials firmly set Malaysia's economic tempo well into the mid-20th century.

In the 1970s, Malaysia imitated the footsteps of the original four Asian Tigers and committed itself to a transition from being reliant on mining and agriculture to an economy that depends more upon manufacturing. With Japan's assistance, heavy industries flourished and in a matter of years, Malaysian exports became the country primary growth engine. Malaysia consistently achieved more than 7% GDP growth along with low inflation in the 1980s and the 1990s.

During the same period, the government tried to eradicate poverty with a controversial race-conscious program called New Economic Policy (NEP).

A healthy economic environment helped drive Malaysia to upgrade its infrastructures and indulge in many huge national projects such as Putrajaya, a new international airport (Kuala Lumpur International Airport) and a hydroelectric dam (Bakun dam). Despite the prosperity of the 90s, certain factions within Malaysia were worried that the government was spending beyond its means. That concern became more than apparent when the Asian Financial Crisis hit in 1997.

The year 1997 saw the drastic changes in local scenarios. Foreign direct investment fell at an alarming rate and the Ringgit depreciated substantially from MYR 2.50 per USD to much lower levels (MYR 4.80 per USD at its worst) as capital flowed out. The Kuala Lumpur Stock Exchange's composite index fell from approximately 1300 to almost 400 points in just a few short weeks. In response, the Malaysian government imposed capital controls and pegged the Malaysian Ringgit at 3.80 to the US dollar while refusing economic aid from International Monetary Fund (IMF) which came with austere lending conditions. By refusing aid and thus the conditions attached thereof from the IMF, Malaysia was not affected to the same degree in the Asian Financial Crisis as Indonesia, Thailand and the Philippines. While scathed for choosing this road (notably by the US), time proved this painful decision to (in general) be the right one.

In order to rejuvenate the economy, massive government spending was made and Malaysia continuously recorded budget deficits in the years that followed. Later, the country enjoyed faster economic recovery compared to its neighbors though in many ways, the level of pre-1997 affluence has yet to be achieved.

The fixed exchange rate regime was abandoned in July 2005 in favor of managed floating system within an hour of China's announcing of the same move. In the same week, Ringgit strengthened a few percent against various major currencies and is expected to appreciate further.

In September 2005, Sir Howard J. Davies, director of the London School of Economics, at a meeting Kuala Lumpur, cautioned Malaysian officials that if they want a flexible capital market, they will have to lift the ban on short selling created in 1997.