April 23, 2010

Second Malaysia: Economic Reform for a New Malaysia

Posted in Economics, Malaysia, Tricia's Writings at 9:17 pm by egalitaria

Sometime last year (I think it was the first quarter of 2009), I was asked to write a piece on economic reform for a “Second Malaysia”. It was for (at the time) a new and upcoming Chinese alternative website called The Rock News. Today, the site is flourishing- congratulations is owed to its facilitators. They were doing a series of articles focusing on different areas such as culture, history, the arts, judiciary, and the topic requested of me was economics. The target audience was for a very pop-heavy reading group (if I remember correctly) hence kept as general reading. 

Of course, me being me (a “Cina murtad”), I cannot read Chinese and hence never knew if my article finally got translated and published. [Aside: As far as I know, my maternal great grandmother came from Java and blended into the Peranakan society upon reaching Peninsular Malaya, so no feelings of guilt here!]

Second Malaysia:

Economic Reform for Birthing a New Malaysia

Tricia Yeoh

Ordinary Malaysians like you and I know that Malaysia’s economic performance has only been lacklustre in recent years. We have gone past the stage of convincing ourselves that those announcements painting a glowing picture of financial health and vibrancy had anything substantial about them. The frustrating thing about it is that Malaysia had all the right factors to make the equation work: abundant natural resources, strategic location, perfect weather conditions with no natural disasters, good soil, and a generally stable political climate. Perhaps it is possible to state that Malaysia had good economic growth in the past two decades, yes. But to pat ourselves on the back claiming that we outdid ourselves is farcical; Malaysia has never lived up to its true economic potential, and this will not change unless some drastic economic reform is undertaken immediately.

March 8th 2008 marked the birth of a new political Malaysia, one in which individuals finally saw the potential of their decisions in changing a leadership landscape. With the Pakatan Rakyat controlling five state governments (now reduced to four with the recent onslaught on Perak) and denying the Barisan Nasional its traditional two-third majority at Parliament level, citizens finally felt the political impasse had broken through. Subject to debate, the ground conditions for democracy have been ripe and raw for the consuming, people more willing and eager to express themselves. Except for the rule of law that the present Federal Government seems too ignorant of, Malaysian society is experiencing a new chapter in its political history.

The same cannot be said of the economic system of the nation. Where freedom of expression has prospered, economic principle has faltered. For forty years Malaysia has tasted stale, irrelevant policy crafted in a manner intended to pacify instead of liberate, break down instead of build up for the most part. What is needed to carry the country forward is a breakdown of our current economic model and a revolutionary reconstruction of a new one.

New Economic Policy

Much talk has already been generated, many words spent to criticise the New Economic Policy that was implemented in 1971 as part of the Second Malaysia Plan. Just two years after racial clashes in 1969, the NEP was intended to eradicate poverty irrespective of race and secondly restructure society to eliminate the association of job function with race. Nevertheless, as Murphy’s Law dictates, the worst possible outcome tends to emerge. In this case, the second prong outweighed the first, with emphasis placed on the restructuring of society, and Malaysia has suffered as a consequence ever since.

This article will not delve into the details of what the NEP entails, but rather I would like to spend time contesting the basic philosophy of this policy, giving reasons for why such a policy is untenable in the 21st century and proffering suggestions for what a new economy could be based upon instead. Malaysia exists in a globalised world today, and relies very much on the international market, seeing as trade as a ratio to the country’s Gross Domestic Product (GDP) is 200 per cent. To be considered worthy as a world-player, Malaysia cannot any longer rely on outdated, parochial and insular policies that were flawed at its very inception. Why is such a policy framework unsustainable to bring the nation forward in the next several decades?

The NEP or what it has evolved into today (first the National Development Policy and then the National Vision Policy along with many other circulars and regulations that used the NEP as its anchor reference point) was inherently flawed and is doomed for failure.

Unequal opportunity for equal outcome

First, its philosophy of ensuring equal outcome backfired, because in order to achieve this, unequal opportunity was used.

Malaysia is a multiracial country, with a Malay majority, a significant Chinese minority, and a minority of others including Indians, Eurasians and natives of the land. In any country that consists of such a wide-ranging milieu of individuals, it is true that the potential for conflict abounds. Hence, in Amy Chua’s bestseller, “World on Fire”, she postulates that ethnic genocide occurs in countries where ethnic minorities happen to own the majority share of national wealth, and hence are targeted for that very reason. She cites countries like Philippines (Chinese as 10% of the population but owning 80% of the wealth), Indonesia, and others. By those standards, one would apparently argue in favour of an ethnically oriented affirmative action policy. In these situations, it is argued, that it is safer to allow for a policy that spreads the wealth and ensures no unequal outcome.

I beg to differ as it is for the very reason that nations dictate economic outcome of their citizens that they fail to consider the adverse effects of the processes leading to those outcomes.

The NEP was a policy used to restructure society with the express objective of changing what was an unequal society into one whose outcomes would ultimately be equal. It was based on a philosophy that there should be equal outcomes in society, regardless of race. This sounds altruistic but the devil lies in the detail. It happened to be that in the years leading up to 1971, the Malay community was the one most lacking in economic wealth. The disparity existed, no doubt, and the gap needed to be closed.

However, in the act of wanting to create a society of equal outcome, numerous tools were utilised that were tantamount to the provision of unequal opportunities. The ends justified the means, so it seemed. Examples of unequal opportunity included unequal access to university entrance, scholarship receipt, business opportunities, and housing loan rates and so on.

Race-Coloured Policies

Second, the unfortunate result of the NEP was it broke down already vulnerable race relations even further than they were. Added to an unpleasant recipe was the fact that the affirmative action policy had ethnicity tied to its base. At the centre of it all, race coloured the exercise. Even if an affirmative action policy was favourable to alleviate the suffering of the poor, it should not have starkly placed ethnicity as a defining factor. As the non-Malay community observed that unequal opportunities were being presented to them, resulting in their needing to achieve more in order to gain similar outcomes, they began to increasingly alienate themselves. Tense ethnic relations cannot work for the good of the country.

As the young generation begins to question the existential realities of “race” today, especially with the dawning of a significant political front that places emphasis on citizenship above ethnicity[1], such an economic policy may not sit well in the long run.

In response to the above two points, recent debates have emerged, questioning whether perhaps the philosophy of equal economic opportunity should have been the key instead of equal economic outcome. This would also solve the problem of ethnicity, where equal opportunity should have been given to all regardless of race. This promotes a spirit of competition, a matched and fair fight amongst equals.

Some may argue then that this may result in unequal outcomes, where different people in society have different socioeconomic statuses. In a situation of unequal outcomes, then it would be the responsibility of the State to provide aid and assistance to those needing it. Accepting that there will always be variances in society is necessary. These differences should not be classified according to race but according to meritocracy as well as a means-based system of socioeconomic backgrounds and educational levels. To those deserving of it – whether through ability or plain needs – just measures would be rewarded. Such a model would be ideal in promoting competition yet equitable outcomes.

Self-Fulfilling Prophecy

Third, the current economic framework has seemed to perpetuate a culture of dependency. Without a doubt the NEP has successfully managed to create an entire class of intellectual and entrepreneurial Malays, sweeping practically every sector. The emergence of the middle-class Malay in Malaysia is a story matched by no other even around the world.

However, it becomes somewhat of a self-fulfilling prophecy when the manner in which it is implemented creates an expectation from the Malay community that all and sundry would be provided for every step of the way. This has been termed the “crutch” syndrome, where goodies handed out continue to be expected, hence perpetuating mediocrity instead of promoting excellence and a spirit of competitiveness. Countless Ministers have raged on about the need to enhance human capital, but for human potential to flourish there must be an incentive to do so. Where a carrot instead of a stick is awarded for poor performance, how can potential be maximized?

Taking advantage of policies dictating that Bumiputera-companies would be favoured for projects and tenders, non-Malays would consistently nominate Malay sleeping partners in their businesses. This was a pragmatic approach but one that meant a system of patronage, closely-knit networks and relationships especially that within political circles was what drove business. It came to be that ethnicity, politics and business were so closely intertwined that it was difficult to extricate what was considered to be corrupt and what not.

By setting preferences for Bumiputera community in any sphere of society, be it education or business, a self-fulfilling and self-perpetuating trend was set where mediocrity was encouraged. It was perfectly acceptable to be second-best, since one could be well remunerated for it. This is not to say there are none who excel – on the contrary, as mentioned many are in high society – but the system that exists does not compel their community to thrive and excel.   

Privatisation Policy

An additional feature was the nation’s infamous privatization policy driven largely by former Prime Minister Tun Dr. Mahathir Mohamed, who in the 1980’s encouraged privatization of infrastructure and utilities industries amongst others. It was based on the premise that private companies would be able to deliver more efficient services through professional means, and the burden on Government to provide for these goods would be reduced, ultimately benefitting the people.

None of the above objectives were fulfilled, unfortunately, and instead resulted in a long list of corporations going bust. Government eventually had to step in and bail out these failed companies from the massive debts incurred, like Indah Water Konsortium (IWK), National Steel Company, Tenaga Nasional Berhad, Proton, amongst others. When the private companies failed, the Government eventually began to buy their shares, resulting in a gamut of Government-Linked Companies (GLCs). A convenient system of nominating select Bumiputera individuals to sit within the Boards of these companies occupying all key positions took place. Before long, these large publicly listed companies harnessed substantial business power and influence.

More recently, the water restructuring exercise is an admission of the failure of privatization. In efforts to renationalize the water industry nationally, the Federal Government will eventually own all water assets leaving the states to run and operate the services industry. These policy mistakes have cost the nation substantial loss and leakage, resources that could have been contributed positively towards the economy instead. Public goods must be provided by the State – healthcare, water, sanitation are examples that should not be privatized.

Blatant inefficiencies and poor implementation of every policy in Malaysia can be anchored upon the greed, corruption, insecurities and obsession with fast-tracking the creation of an elite Malay community. Economic issues have been communalized for far too long, with deep rifts separating the races.

Innovative Solutions?

The policy framework highlighted above is rife with systemic and structural errors that must be addressed and reversed. The question to ask ourselves as Malaysians is how the system should feed incentives for the future. In answering this, the ultimate objective is determined: to lay the groundwork for a futuristic economy in the next twenty years – and what systemic changes need to be made to that end.

After having stressed upon the flaws of the existing system, immediate changes must be made to correct these explicitly. First, the standard which is used to measure how accomplished each of the ethnic groups is in the country is not accurate. For example, one indicator is that of “corporate equity” held nationally. This takes into consideration shareholdings of companies, either those publicly listed or listed with the Registrar of Companies. Only a particular group of any ethnic group would be fortunate enough to have corporate equity – with the majority of the population not accounted for. In addition, the arbitrary manner in which a 30 per cent mark was chosen as a target for the Bumiputera group is questionable; why 30 and not 20 or 40? A better indicator would be to use personal income, and even so only household income is currently made available within official statistics. Additional standards to substantiate the status of any ethnic community should be used, like expenditure and socioeconomic indicators of quality of life. International poverty measures could also  be used. 

Second, equal opportunities should be granted to all regardless of race, based on principles of meritocracy and need. It is far too archaic to rely upon policies that differentiate based on ethnicity. For the sake of a common citizenship, and global competitiveness, the process to weed out discriminatory standards must begin. This has started, where university entrance now does not have ethnic quotas. The stock market guidelines, although still having some Bumiputera quotas to fulfill, no longer have to be strictly followed – all signs towards greater liberalization. When these rules are loosened, the international community would be more favourable to conducting business with Malaysia.

Third, the system of patronage and politics-business linkage needs to be addressed. There must be enforced laws that politicians are not allowed to hold any Board positions (especially within GLCs) within five years of retirement. Other similar regulations should be in place to avoid any sleazy ink-dealings between cronies. An extremely close-knit web of high-powered individuals exists, and to break through this will be difficult. Hence institutional changes must complement any economic reformation – the independence and highest integrity of the judiciary, anti-corruption commission, finance and banking regulators, securities commission, and all other agencies.

Fourth and finally (because the article has a word limit), the entire concept of economic development must change. In a world where the Internet is used by children, open source software dominates, social networks being a major source of information and communication across borders (think Facebook, MySpace, YouTube and so on), constraints are no longer relevant. Economic development begins with enhancing human capital – this means creation of a thinking, critical, open-minded generation who can innovate and create. While basics are important where economic theory dictates the need for infrastructure, the software needed to equip the hardware is most urgent. Quality investment into research, development, education and innovation – regardless of political consequences – is needed. Any restrictions on freedoms of expression, information, students’ involvement in sociopolitical causes, must be removed to facilitate this. You want a generation of young Malaysians who are brave, outspoken, creative and unfettered by anchors of the past. For the services industry to thrive, for example, an out-of-the-box worldview must be adopted, for example having all languages taught at school instead of one medium servicing all subjects.

The problems weighing down Malaysia seem aplenty, but not without recourse. Those addressing it – policymakers, civil society, academics, and the public at large – must begin doing so systemically and structurally. A new framework is needed, one solid enough a foundation in order for the second Malaysia to emerge stronger and better. Although the country, along with the rest of the world, is experiencing great economic distress, steps must be taken to prepare the country for its potential future rebound.

Ultimately, the economy belongs to the people who contribute to it. As long as principles of fairness and justice are adhered to, economic development will come not as an expense to its communities but as rewards. Bleeding the many to prosper the few has been an unfortunate culture in the past, made worse and justified by ethnic politics. In reframing the country’s economic system, any policy with the potential to corrupt or leak the nation must be disposed of – and in this case it has been the NEP. Let us look towards the birthing of a new Malaysia through economic reform.


[1] Reference is made here to the Pakatan Rakyat, which is made up of three political parties, none using ethnicity as membership qualifyers: the Democratic Action Party (DAP) and Parti Keadilan Rakyat (PKR) as multiracial and Parti SeIslam Malaysia (PAS) as Islamic.

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