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The research attempts to explain the character of Malaysia’s political economy. By adopting a historical institutional analysis it explains that British colonial administration persistently made rational choices within a short-term horizon that encouraged the growth of two autonomous groups – Malays and Chinese - whose political, economic and social organisation, at the point of Malaya’s independence in 1957, had made it inevitable for them to embark on some form of consociational arrangement. British policies engendered two processes; first, a less-than-full incorporation of Chinese as new actors in Malaya’s political economy and second, a less-than-full retrenchment of Malay political dominance by preserving Malay de jure power. In sum, British decision to preserve Malay de jure power while at the same time incorporate Chinese economic and political presence created two communities with mutually exclusive institutions that increasingly competed for access to political and economic resources. The self-reinforcing nature of these exclusive institutions and the flux that came with the demands for Malaya’s independence made it necessary for these two communities to attempt various institutional options that could best reconcile exclusive institutions and negotiate competing political and economic demands. Three institutional options were tried: consociationalism, integration and partition. The research will explain that among the three, the path-dependent nature of Malaya’s political economy had necessitated a particular institutional logic, the consociational logic. Integration failed because attempts to establish common institutions and do away completely with longstanding mutually exclusive ones proved over-ambitious. Partition also did not materialise as it proved politically and financially costly. In sum, the research highlights Malaysia’s consociationalism as a product of small incremental policy steps which proved to be no less transformational in the long run that gives Malaysia’s political economy a quite different character than it had had at the start of British official rule in 1874.