Economic reform in Malaysia

Out with the new

Najib wavers over undoing affirmative-action policies

Mar 11th 2010 | KUALA LUMPUR | From The Economist print edition

WHEN Najib Razak took office last April as Malaysia’s prime minister, the timing could hardly have been worse. The export-led economy was in recession. The ruling coalition was in the dumps after an unprecedented near-defeat in elections in March 2008. Opponents warned that Mr Najib’s government would crack down on political dissent to save its skin.

Against the odds, though, Mr Najib, a British-educated economist, has emerged as a more sure-footed, and less scandal-prone, leader than many expected. He has stimulated the economy back to life and liberalised some financial services. Growth is likely to exceed 4% this year—reaching 6%, in his own optimistic forecast. There are ambitious new targets for cutting crime and building roads, among other populist policies. Foreign businesses have been encouraged by Mr Najib’s promises to liberalise the broader economy, spur innovation and raise productivity. Everyone agrees that Malaysia needs to move beyond run-of-the-mill electronics and focus on knowledge-based industries.

This, however, is where Malaysia’s political realities start to bite. Any serious overhaul has to tackle the perks given to Malays and other indigenous races, who make up about 65% of the population. The system saps Malaysia’s competitiveness, and has driven some frustrated members of the minorities—mainly Chinese and Indians—to decamp to more meritocratic countries. Mr Najib has signalled a readiness to pare back the privileges for so-called bumiputras (sons of the soil). They were introduced, as the “New Economic Policy” by his father, Abdul Razak, Malaysia’s second prime minister, after race riots in 1969. The idea was to redress the imbalance under which the Chinese minority in particular dominated the economy.

Investors have been waiting eagerly for Mr Najib’s “New Economic Model” (NEM). Officials say that the NEM will be unveiled in the next few weeks. But details may be sketchy, as Mr Najib tries to contain a backlash, including from the ranks of his own party, the United Malays National Organisation (UMNO). Some members are siding with Perkasa, a new Malay-rights group led by Ibrahim Ali, a former UMNO MP. Mr Ibrahim, who is accused by opponents of race-baiting, says Malays are still not ready to compete on a level playing field. “We just want our fair share,” he insists.

None of this comes as a surprise. Bumiputra perks yield a stream of uncontested, negotiated contracts and other forms of patronage to UMNO politicians. Last year Mr Najib seemed to win the argument that renewed economic growth, essential to stem the ruling coalition’s slide in the polls, demanded some sacrifices. Now, however, UMNO heavyweights are siding with Perkasa in a rearguard action. Nor Mohamed Yakcop, a minister in charge of economic planning, says that the NEM is still being fine-tuned and declines to elaborate. Pressed on the phase-out of racial quotas, he says that, for the model to work properly, growth must be “inclusive”.

One way to stimulate the economy would be to sell stakes in government companies, which might also catch the eye of foreign investors, whom Mr Najib is trying to lure back. Wai Ho Leong, an analyst at Barclays Capital, an investment bank, believes that besides cutting the fiscal deficit, which rose to 7.4% of GDP last year, privatisation could put Mr Najib’s target of 6% annual growth within reach.

That still falls short of the 8% annual average that the government says it needs to achieve its “2020 vision” for Malaysia of developed status by that date. But this requires action on the structural impediments to private investment, which has never fully recovered from the 1997-98 Asian crisis. Chief among these is a poorly educated workforce that is no longer cheap when compared with Vietnam and Indonesia, and is short of the skills needed for innovation, as a brain-drain accelerates. Mr Ibrahim takes the long view, arguing it might take another 100 years for Malays to catch up with other races. Few investors have as distant a horizon.