Malaysia has found its footing once more. It is thriving economically and attracting major foreign direct investment under the leadership of Prime Minister Abdullah Ahmad Badawi, who assumed power in 2003. Unfortunately for Badawi, his most acerbic critic nowadays is Mahathir Mohamad, his former political mentor and ex-Premier.
Not one for understatement, Mahathir has described his successor as "ineffective" and even a "traitor" for not dealing forcefully with sometime-rival Singapore. He has declared that Badawi should resign.
Until recently, Badawi has maintained what his aides and associates describe as "elegant silence"—refusing to retaliate against the man who anointed him and voluntarily handed over power three years ago. But last week, Badawi finally defended himself on national TV. BusinessWeek.com Southeast Asian correspondent Assif Shameen caught up with the prime minister at his office in Putra Jaya, the administrative capital outside Kuala Lumpur. Here are edited excerpts from the 40 minute interview:
You mentioned you've been hurt by some of the comments that your predecessor Dr. Mahathir has made against you in recent weeks, including asking you to step down. True?
All I can say is I am not losing any sleep over all this. It doesn't make me go berserk. We are a democracy, and in a democracy these things happen. Two years ago, we won the biggest mandate in the history of this country. I have a mandate from the people and I am focused on the job I was elected to do.
People will always say things. They have a right to say what they want. But I have my own vision for the country. We have a very ambitious development plan and I am carrying out my programs. [As for Mahathir's allegations] I have nothing to hide. We just need to explain to the people. We are focused on long-term national goals. Whether people want us to continue after the next elections is up to them to decide. What we need to do is put the right policies in place. Eventually, I believe we will prevail.
How has Malaysia changed in the three years since you have been in office?
Certainly, the mood has changed. I don't want to say this myself, but you can go around the country and ask. People tell me Malaysia is now a more open, free, and inclusive society. The media is now a lot freer than before. Even the parliamentary debates have changed a lot because we encourage people to participate and express themselves.
What is your economic vision for Malaysia? How different is your vision from the one espoused by your predecessors?
My vision is not different from the long-term vision articulated before to make Malaysia a developed nation by 2020. I share that vision with Dr. Mahathir and the previous Prime Ministers. We now have less than 15 years to go [to achieve that goal], and we need to move faster than we have so far. The government recently announced the [five-year economic blueprint] Ninth Malaysia Plan which is one of many steps we are taking to achieve that vision.
In my first two and half years, we have tried to change the mindset and stress things like education, developing human capital, and preparing the country as we move toward developed status. We still need to work in area of human capital development and get our software side ready. In the last 20 years, we built all the hardware, the infrastructure, all the buildings and bridges that you see here. Now it is time to get the software right.
Our people need the skill sets, training, and education to enable us to move to the next level. Unfortunately, human capital development and education are not as visible in the way roads and tall buildings are visible so people say "we don't see what you are doing." But in this current stage of development, we need to emphasize areas like skills and education and software.
With China becoming the factory to the world and India becoming the back office of the world, where is Malaysia's place in the sun?
We have been trying to move the economy up the value chain. We realize we no longer have the low-cost advantage. I come from Penang, which used to be a key center of electronics industry. We can't compete with China or even India, especially in labor-intensive, low-cost manufacturing. But we can develop our niches where it would be difficult for China and India to have competitive advantage for many years.
We are still getting foreign investors in semiconductors, contract manufacturing, and electronics components. They tell us that while we may not have the low costs of China or India, we do have higher skills, experience, motivation, and discipline. Multinationals like us because we have a strong economy, good infrastructure, as well as stability. Our people understand English. They are computer-literate. We have a strong independent legal system. We have had large multinationals like Intel operating here since the '70s. They are still expanding. China and India can't do everything. Not all companies want to have all their operations only in China and India.
How successful has your drive been to reduce Malaysia's huge dependence on manufacturing
We have been dependent on the manufacturing sector for a long time. Actually, manufacturing was a big part, nearly 30% of our economy until recently. It's not just that China is becoming the factory to the world or that India is coming up that has forced us to look beyond manufacturing. But we have to diversify and broaden our economy. That's why we have been trying to focus on growing our services sector.
One of the areas we have been successful in recent years is tourism. We have worked hard to attract tourists from the Middle East. Malaysia is the biggest Asian destination for Arab tourists. We are trying to develop Malaysia into a health services hub and an education hub attracting not just people from the Middle East but also from India and China. People come to Malaysia to study and to get medical treatment or surgery. We are also a big exporter of professional services like accounting, architecture, and so on.
We are exporting construction services. Our construction companies are among the most active [compared to] China, India, Indonesia, Pakistan, and the Middle East. Over the past 20 years, we have built very good infrastructure so our companies can now help build toll roads, bridges, and other infrastructure in India or Indonesia or China. We built a whole new city here [the administrative capital of] Putra Jaya. The experience we have gained here is helping our companies expand abroad and export their services.
Malaysia has become a key center for Islamic finance and recycling the petrodollar riches of the Middle East. Does Kuala Lumpur fancy itself a global Islamic financial center?
Kuala Lumpur is already an important international Islamic financial center. As chairman of OIC [Organization of Islamic Countries] Malaysia got the master plan for Islamic finance approved last year. Other Islamic countries are trying to learn from our experience.
We have a niche advantage in Islamic banking. We have built a niche in Islamic insurance. Now we are trying to build up expertise in Islamic investments like REITS [real estate investment trusts]. We have given new Islamic banking licenses to foreign institutions. The Islamic Financial Services Board is based here in Kuala Lumpur. Our Sukuk or Islamic bond market is the biggest in the world. As an Islamic country we have certain advantages that other financial centers don't have and we are building on that.
You have been pushing the biofuel and biotech sector, which many other countries have identified as growth drivers. Why?
This is a period of diversification for our economy. It is a time when we are restructuring the economy: moving upscale, getting into new areas, putting new growth drivers in place using higher skills since we no longer have low-cost advantage. We are looking at new sectors where we have some advantage. We have identified biotechnology. We are also looking at pharmaceuticals.
We need to move into more value-added manufacturing and services. We are blessed with natural resources—oil, gas, palm oil. India and China are the biggest buyers of our palm oil. Now with oil prices so high, we are going into biofuels like palm diesel. We have several biofuel plants under construction. Both India and China have expressed interest in having joint ventures with us in biofuels.
Malaysia is negotiating a Free Trade Agreement with the U.S. now and has in recent years embraced the idea of bilateral and multilateral deals with China and India.
How would the U.S.-Malaysia FTA benefit Malaysia?
Malaysia is one of world's most open and trade-dependent economies. Our annual trade now is over one trillion ringgit ($275 billion). We are among the world's top 20 or so trading nations. Throughout history, we have been a nation of traders. While we are committed to multilateral agreements, we are also trying to negotiate some bilateral free trade agreements with our major trading partners.
We are still negotiating the FTA with the U.S. It is a tough negotiation. There are a lot of national interests involved. We are still a developing country whereas the U.S. is the world's biggest economy. As a developing country, there are some sectors we are nurturing that we'd like to protect for a little while longer. We are allowed to do that under the WTO rules. But we'd like to have a level playing field when it comes to trade.
The U.S. is one of our largest trading partners, one of our biggest export markets. It is also among our biggest investors. We have a long history of trade and investment ties with the U.S. and we are keen to build on that. We see these agreements as a way of expanding our trade with the rest of the world.