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Malaysia’s New Economic Model:
Risks and Rewards
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AseanAffairs Magazine May - June 2010

Prime Minister Najib Razak vows to take Malaysia forward and transform it into a high income nation through economic and social reforms. Initial responses to this ambitious drive are mixed, details are scarce and investors play wait-and-see.Yet, Najib insists he’s got support to push ahead.

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Getting the Tough Going

The launch of the New Economic Model (NEM) in late March found Malaysian Prime Minister Najib Razak making headlines across the region and beyond, and subsequently prompted comments - both for and against – on his ambitious, and to some extent, controversial, national reforms.

Mid-April, PM Najib was in Washington, just days after announcing his all-encompassing reform drive, briefing on the “Four Pillars” (see Box) of his National Transformation that will lift the country from a middle income economy that is heavily dependent on trade and commodities to developed nation status in 2020 through economic liberalisation and a greater focus on services. At the briefing, organised by the Center for Strategic and International Studies, a US think-tank, Najib admitted that it would be difficult to realise the goals, but added, “When things get tough, the tough get going!” But how will he get the tough going?

Diehard critics of the Malaysian government called the NEM just another set of just broad-brushed motherhood statements. Investors were left watching for the detailed, well laid out plans that had been thoroughly thought through, and which were unlikely to be reversed as had become commonplace of late.

From NEP to NEM

It was Najib’s father Tun Abdul Razak, Malaysia’s first prime minister, who, in 1971, set out to move Malay society into a modern economy through what was known as the New Economic Policy (NEP). He aimed to end, within 20 years, the structural deficiencies of an economy, after an original 10-year period of Malay special privileges provided by the 1957 constitution, which had been wasted in directionless policies.

He mandated a specific programme with specific economic targets, to lay the foundation on which a modern economy could take shape, to provide social justice by reshaping a largely agricultural society. Unfortunately, that policy was hijacked after his death by an easy-money culture of those who believed that to get rich quickly, by any and all means, was glorious.

Will Najib Razak be able to recognise the failure of his predecessors, face up to the future and do justice to his father’s ambitions?

Tweaking Affirmative Action

There are those who said they are not sure that the latest reform efforts can overcome the formidable domestic political obstacles that will arise as affirmative action (see Box) policies are tweaked, which could result in a much more watered-down proposal. Affirmative action policies in their current form breed inefficiencies and promote rent-seeking behaviour, they said.

Yet, there are some positive changes that are forthcoming, but those expecting a big bang and immediate radical changes may be disappointed. While there is a positive sentiment arising from the cyclical recovery, a meaningful structural change will only play out over a longer period of time.

Undoubtedly, investors will be looking for the government to make major decisions on further liberalisation of the economy.

They could probably recognise genuine efforts at structural reform but many remained sceptical and preferred to adopt a “waitand- see” approach for now. That was due largely to Malaysia’s poor track record of implementation. It will take some time to be fully convinced even after a detailed plan is announced.

The announcement of the New Economic Model followed the 1Malaysia campaign Najib Razak launched a few months after assuming the premiership last April. He has said he will keep rolling back policies that favour bumiputras (see Box), the country’s biggest ethnic group and sell stakes in state companies to lure investment and boost the stock market.

However, the proposed bumiputra reforms are trapped in a heated debate between liberal Malays, who argue that bumiputra preferences are hampering business, and defenders of Malay interests by the group Perkasa, (meaning a warrior in Bahasa Malay), who says Malays need to make more economic progress before affirmative action can be scrapped.

Others think Najib can bring back confidence that at least his leadership recognises what needs to be done to tame the deficit as well as to bring back fiscal prudence and discipline if he shows the political will to cut back on affirmative action and government subsidies.

The majority of the people, Malays included, agree that these An oil tanker is loaded with 500 tonnes of RSPO-certified sustainable palm oil in Port Klang, Selangor, Malaysia policies need to be restructured so that it becomes more needsbased rather than ethnic-based. Affirmative action programmes include cheaper housing loans, quotas for university places and civil service jobs, and preferential treatment in competitions for government contracts and for permits required to operate businesses. Many companies must set aside 30 per cent of their shares for bumiputra owners.

Race relations are a political tinderbox in Malaysia, where rioting between Malays, who make up about 53 percent of the population, and ethnic Chinese following elections in 1969 left hundreds dead. While that violence was unparalleled, there have been intermittent flare-ups involving Indians demanding more rights in 2007 and more recently, religious tensions between Christians and Muslims over the use of the word ‘Allah.’


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