Political economy could be seen as interactions between and among political players―the state, capital, and civil society―surrounding a certain economic policy for growth and distribution. Such interaction could be affected by the power relations among the political players, which is formulated and changed by endogenous factors such as history and socio-economic stratification and exogenous factors such as international political economic trends. This article analyzes the political economy of Malaysia in a historical perspective. By doing so, the economic crisis of 1997 finds its place in the context of political economy of Malaysia. Malaysia has been a model case of East Asian developmental state, which is characterized by strong state that has orchestrated economic growth and distribution. Changing internal socio-economic structure and emerging international political economy of neo-liberalism, however, urged Malaysia to change and adjust itself to the new environment. The economic crisis of 1997 provided Malaysia a clear momentum for heading straight forward to a neo-liberal state.