Malaysia's Phony War on Affirmative Action.... by John Lee

Malaysia's Phony War on Affirmative Action

Policies favoring the Malay majority over Chinese and Indian Malaysians must change, but progress so far has been slight, writes columnist John Lee

By John Lee  March 3, 2011

When then-Prime Minister Mahathir Mohamad launched his Vision 2020 in 1991, Malaysia's reputation as a prosperous and harmonious multi-ethnic country was the envy of much of Asia. One of the key pillars of the blueprint to propel Malaysia from a rapidly developing to a fully industrialized country was to accelerate and deepen policies that transferred economic power and resources to indigenous Malays in order to ensure the "fair and equitable distribution of wealth."

Since then a number of World Bank experts and veteran Malaysia watchers, such as Professor Hal Hill from the Australian National University, are becoming increasingly worried about the country's long-term future. Even the current Prime Minister, Najib Razak, admits that reform in the sensitive but critical area of affirmative action appears to have stalled. In Najib's New Economic Model (NEM), which he announced in March 2010, a Malaysian leader for the first time criticized important aspects of these decades-old policies and linked them to many of the country's structural problems.

Najib is correct that Malaysia cannot make the transition from a middle- to high-income country without winding back these long-standing affirmative action policies. But there are significant barriers working against the possibility of meaningful reform.

As any Malaysian will tell you, the 1969 race riots between indigenous Bumiputra (the Muslim Malays who were then 50 percent of the population and constitute 65 percent of the current population) and Chinese-Malaysians remains the defining event in the country's history. The acceleration of affirmative action policies from 1971 onward was an understandable response to the national trauma of the violence. Even so, given that the race riots were largely caused by social-economic racial divisions within the country, many believe Malaysia's leaders could have responded by attempting to move the country away from ideologies and policies that emphasized and entrenched racial differences.

But one has to concede that in important indicators, such as poverty reduction among Bumiputra Malays, much progress has been made over 40 years. It is arguable that overall national economic growth is as much, if not more, responsible than pro-Malay policies in raising the living standards of Bumiputras. Nevertheless, the number of Malays living in absolute poverty has fallen from 60 percent in 1971 to between 5 percent and 10 percent today.

A Legacy of Deficits

The obsession, however, with improving the lives of Bumiputra-Malaysians rather than all Malaysians has come at a heavy price. Improving the lot of the poorest—the majority of whom remain Malays—is essential. But implementing an ever-expanding program of state-led economic "restructuring" and "redistribution" initiatives is a seductive but dangerous path for governments to take. The National Economic Policy (NEP) began in 1971 and formally ended in 1991. Many NEP affirmative action policies are still in place today (and some have even been extended). This living legacy is behind much of the pessimism surrounding the country today.

There are several major reasons for this. First, many economists are rightly skeptical of the benefits of an ever-expanding role of the state within a "free market" economy—particularly when interventionist policies are designed to engineer social objectives rather than promote growth. The primary problem is one of numbers.

In a global policy environment rightly wary of ballooning budget deficits, the fact that the Malaysian government has been in deficit every year since the introduction of the NEP in 1971 (except for a period from 1993 to 1998) is troubling. This is particularly the case since Kuala Lumpur spends much less on social services than do Western governments. The economic numbers look even more troubling when one considers that around 40 percent of the government's revenue comes from the state-owned oil and gas giant Petronas. This is the case for two reasons.

First, Petronas is forced to pay a massive 60 percent to 70 percent of its profit in dividends each year—74 percent in 2010—just to sustain the government's spending programs. And second, the company's Malaysian-based reserves (which constitute the majority of Petronas' known reserves) are due to expire in around 15 years.

Second, an essential pillar of any successful economy is the emergence of a strong, independent entrepreneurial corporate class capable of competing with the best in the world. This is where Malaysia potentially has a problem. Although it is overreach to damn all Bumiputra-run businesses as lacking creativity and dynamism, there is no doubt that economic protection in the name of affirmative action can lead to unproductive and wasteful habits. If nothing else, foreign perceptions that Malaysia's affirmative action economic environment makes the country an uncompetitive place to invest is damage enough.

Decline in Foreign Direct Investment

Much of Najib's tough talk in his NEM is to make Malaysia once again a preferred destination for foreign capital. Malaysia's net foreign direct investment (FDI) fell from $2.56 billion in 2004 to negative $7.67 billion in 2008 and recovered to only $1.95 billion in 2009—the worse decline among its developing and developed neighbors. The U.N.'s World Foreign Investment Report 2010 revealed that Malaysia's net FDI trailed such neighbors as Thailand, Vietnam, Singapore, Indonesia, and the Philippines.

Indeed, in an embarrassing comedown for the former rising star, Cambodia, Myanmar, Brunei, Laos, and East Timor are the only countries in the region attracting less FDI than Malaysia. Worryingly, even domestic entrepreneurs are voting with their capital, as public investment exceeds private investment in the economy.

Third, just as companies seek to retain their best talent, Malaysia has a reputation for pushing away its best Chinese and Indian citizens. More than 250,000 people left Malaysia from March 2008 to August 2009 (not including students studying abroad). There are no figures on the racial mix of those leaving, but overwhelming anecdotal evidence suggests that a high proportion of ethnic Chinese and Indians are in this group. Once again, not all exits can be blamed on affirmative action policies, but even Najib has admitted it is a priority to make the country more attractive so as to encourage thousands of the skilled (non-Malay) diaspora to return.

The honest appraisal of not just Malaysia's problems but the reasons behind these is admirable. But formidable obstacles block Najib. Most significant is the ruling United Malays National Organization (UMNO) reliance on such an affirmative action political and social contract between the party and Malay elites to remain in power. Among countries that hold elections, UMNO has been in government longer than any other party in the world. It is not surprising that Najib has few supporters in his own cabinet to revise and wind back existing policies significantly.

In 2004, UMNO gained 63 percent of the popular vote. After the party's shellacking in the 2008 general elections, when it gained only 50.6 percent of the popular vote and lost its two-thirds majority in Parliament for the first time since Malaysian independence (and with it the capacity to make amendments to the constitution), it is even more unlikely that the UMNO's brain trust would seek to alienate its strongest supporters—or precipitate an all-out civil war over reform.

One such manifestation of early internecine strife is the rise of Perkasa after the 2008 election. Perkasa is a nongovernmental, nationalist group lobbying to preserve and extend the economic, social, and cultural privileges of Bumiputras, and it claims to have more that 300,000 members—at least 60 percent of whom are UMNO members. Many Malays abandoned UMNO not because they wanted to abolish the affirmative action policies but because they wanted a larger slice of the affirmative action pie.

Furthermore, the role of Malaysia's 1.2 million public servants in implementing any reforms is critical. The problem is that these civil servants are the strongest supporters of affirmative action, since many of their jobs were created by a growing state apparatus designed to implement these policies. In the current political climate, Najib can hardly afford to alienate this constituency. The Prime Minister is also relying on these civil servants—95 percent of whom are Malays—to overcome the deeply entrenched pro-Bumiputra culture.

It is still too early to assess the capacity of the Malaysian government to introduce genuine reform. So far, little has been done to roll back pro-Bumiputra restructuring and redistribution policies or initiatives that would reduce the role of the state in the economy. Significantly, Najib has backed away from abandoning the four-decade-old sacred tenet that Malays own at least 30 percent of all corporate assets in the country. The Prime Minister's NEM is a brave political gamble—and a necessary economic one. But the battle has only just begun.

John Lee, who was born in Ipoh, Malaysia, is a research fellow at the Centre for Independent Studies in Sydney, Australia, and the Hudson Institute in Washington, D.C. His paper, "Malaysian Dilemma: The enduring cancer of affirmative action," was released by CIS this week.

malaysiakini: Conquer fear? Yes, we can... by Josh Hong

Conquer fear? Yes, we can

Josh Hong
malaysiakini, Oct 1, 10
1:27pm

In rolling out the Economic Transformation Programme (ETP), encompassing a great variety of projects totaling US$44 billion, Prime Minister Najib Abdul Razak is pinning his hopes on securing an electoral victory over the opposition with impressive economic performance.

But would any economy in the world achieve transformation without deep-rooted reform? I am afraid not.

In fact, the experiences of the developed nations strongly indicate several key factors in sustainable economic growth: openness to the world economy, extensive freedom of private business, stable and efficient regulations (including well-defined property and intellectual property rights), considerable infrastructure investments, a competent, professional and honest public administration, strong commitment in human capital, as well as a vibrant civil society.

As Najib celebrates the 18th month of his government this weekend, the public is yet to hear about root-and-branch reforms in the judiciary, police, bureaucracy, press and media and, of course, the political sector.

Instead of feeding the people with dazzling but unrealistic figures and statistics, the government will do well to spell out concrete measures - if any - to root out corruption, improve public integrity and enhance transparency. Any attempt at China's Great Leap Forward will likely end in bitter disappointment at best and catastrophic failure at worst.

Recent developments show that the government may on one hand be trying doubly hard to prove that it does have in mind a gigantic economic pie to keep everyone satisfied, it is also seeking to tighten up control over the public on the other.

Of late, there has been a series of blatant assaults on voices and views that do not go down well with the powers-that-be, the latest casualties being Zunar, the popular cartoonist who was briefly detained last week, and Kim Quek, whose title The March To Putrajaya is now officially banned. The government's weird and desperate acts have got Zunar and many wondering if one, under Najib's 1Malaysia, now needs a licence even to laugh.

Umno's politicking is so intense and its attacks so profane that they have prompted one Hata Wahari to brave the potential reprisal by urging both the government and the top management of Utusan Malaysia to stop exploiting the Malay daily as a political tool.

Nearly five decades to the year when the once progressive Malay nationalist newspaper was forcibly taken over by Umno amid much public outcry and protest, a conscientious voice that resembles that of the fearless Said Zahari is finally heard, however feeble it may sound.

Writing already on the wall

Like it or not, the end of the Barisan Nasional era is nigh. Even if it does not happen at the next general election, the writing is already on the wall. The strange emergence of Perkasa cannot be more ominous. In failing to distance itself from the ultra-Malay group, Umno is alienating non-Malays, with the MCA, MIC and Gerakan being among those hit by collateral damage.

Even moderate and fair-minded Malays will be alarmed by the incivility pervasive among Perkasa members, whose abusive language and vulgarity have outdone Namewee's poor taste. Both Perkasa and Namewee can now go back conceited, safe in the knowledge that they have strengthened their respective support bases.

All this is part and parcel of Umno's cunning plan to strike great fears in the public, for no authoritarian government will take defeat lying down, especially when so much vested interest is at stake.

Knowing that all the dodgy deals and mega scandals have widened the trust deficit between the people and itself, the BN government has no option but to do its utmost to ensure minimal punishment at the ballot box, hence the paradoxical combination of economic hopes and political fears.

Whether the oft-used tactic will work is dependent on us. Malaysians must remember our dreams will be blocked or even shattered if we allow our fear to grow bigger than our faith in creating a peaceful and trustful society.

Fear makes strangers of people who would otherwise be friends. For years, Malaysians of all races have been frightened into thinking the other party would never understand us, so we choose not to talk directly to avoid unpleasantness. But are Malaysians really so immature in handling differences that we must constantly look to the government for guidance?

The Germans cannot have put it more succinctly: fear makes the wolf bigger than it is (Angst macht den Wolf größer, als er ist), so the onus is on us to reject BN's politics of intimidation and bullying. National life is nothing if it is based on fear, rather than genuine hopes and understandings.

It is either that we rise up and overcome the fear, or wait to be devoured by it. What do you think the authorities can do if thousands of people take to the streets to protest against the government's inertia in institutional reforms across the board? Put us all behind bars?


JOSH HONG studied politics at London Metropolitan University and the School of Oriental and African Studies, University of London. A keen watcher of domestic and international politics, he longs for a day when Malaysians will learn and master the art of self-mockery, and enjoy life to the full in spite of politicians.

Reuters: Sovereign debt maths show risk of vicious circle — Hugo Dixon

Sovereign debt maths show risk of vicious circle — Hugo Dixon

APRIL 10 — How can a country support debt of over 100 per cent of Gross Domestic Product (GDP) for many years and then suddenly start spiralling towards insolvency? That question of sovereign debt maths is not merely academic. It is highly relevant to the likes of Greece and Italy.

The answer is that size of the sovereign debt burden is not everything when it comes to keeping up with interest payments. No matter how high the ratio of debt to GDP may be, it does not need to increase as long as the government has two factors going its way: the “primary” budget balance — the balance before interest payments — and the growth rate of nominal GDP.

To see how these play out, consider two countries. One has a moderate debt load, 50 per cent of GDP, which carries a four per cent average interest rate. If the budget is in primary balance, the government will still run a deficit of two per cent of GDP, which is four per cent (the interest rate) of 50 per cent (the debt). As long as nominal GDP grows by four per cent, the ratio of debt to GDP stays the same.

The other country is highly indebted, with a debt/GDP ratio of 100 per cent. Assume it also pays an interest rate of four per cent. With a primary budget balance, its fiscal deficit is four per cent of GDP. However, as long as nominal GDP keeps growing at four per cent a year, the ratio of debt to GDP stays the same — 100 per cent.

In effect, the highly-indebted government doesn’t pay a penalty for its profligacy, as long as growth
keeps up and interest rates stay low. Greece and other heavily indebted countries benefited from such a happy environment for years.

But the equilibrium is fragile. It can be disturbed in three ways: nominal GDP growth can decline, interest rates can go up or the country can start running a primary deficit. The pain is much worse for highly indebted countries like Greece, which has managed all three at once.

Start with growth. Imagine nominal GDP growth drops to zero. If nothing is done, the debt/GDP ratio will rise by two percentage points in the moderately indebted country, but by four percentage points in the highly indebted one.

Countries can keep that key ratio from increasing, by running compensating primary surpluses. That means moving from balance to a surplus of two per cent of GDP for the moderately indebted and from zero to four per cent for the heavily indebted. The higher the debt level, the more the government’s belt will have to be tightened.

But such budgetary squeezes tend to put further downward pressure on GDP — making the debt burden even heavier. Imagine that actual GDP falls by a quarter of a percentage point for every budget surplus increase of one percentage point of GDP. The four per cent fiscal squeeze would then knock GDP by one per cent in the profligate country, while the modestly indebted country’s GDP would fall half a per cent.

Next, interest rates. Investors jack up interest rates to compensate for the risk that the population will not stomach a humungous budget squeeze. Foreign buyers are likely to be more demanding than patriotic domestic ones. As the proportion of expensive debt increases, the government’s interest bill rises, potentially starting a debt snowball.

Finally, the government’s budget. While the state would ideally be aiming for a budget surplus, recessions normally lead to higher deficits. As business activity drops off, tax revenue falls and more people qualify for government benefits. This is the worst moment for markets to turn hostile.

When all three factors — economic contraction, higher rates and rising deficits — come at once, they easily start fuelling one another in a vicious cycle. If the profligate country has to pay a six per cent interest rate instead of four per cent and recession and belt-tightening have cut nominal GDP by two per cent, a primary surplus of just over eight per cent is required just to keep the ratio of debt to GDP stable.

That is a huge move, and may be too much to bear politically for the sort of country which has historically run big deficits. Investors have good reason to fear some sort of debt work-out. They then don’t push up the interest rate they are prepared to lend at — they stop lending completely. — Reuters