July 4 (Bloomberg) -- Malaysia should stop giving preferential treatment to its ethnic Malay majority, former deputy prime minister Anwar Ibrahim said, arguing the affirmative action policy deters foreign and local investors.
Ethnic Malays, or Bumiputras, which literally means "sons of the soil," get easier access to housing, education and government jobs under the 35-year-old New Economic Policy, aimed at protecting their interests relative to the Chinese and Indian minorities.
"We must be prepared to shift from this obsolete thinking," Anwar, 58, an opposition leader who was fired as deputy prime minister in 1998, said in a June 29 interview in Kuala Lumpur. "It is important for us to think anew, discard the discriminatory practices of this new economic policy and use this to propel growth for all Malaysians."
Affirmative action has lifted wealth among Bumiputras, who account for 65 percent of the population, and diffused tensions between them and the 25 percent of Malaysians who are ethnic Chinese and comprise the wealthiest segment of the population. Still, critics say the system discriminates against minorities and even hampers progress by creating a sense of entitlement that stifles initiative among ethnic Malays.
"If somebody has to park foreign direct investment, this sort of policy would clearly be viewed as a negative rather than a positive factor in helping to make that decision," said Joseph Tan, an economist at Standard Chartered Plc in Singapore. "What they are hoping to see, moving forward, is a liberalization of such policies."
The quotas run the gamut of Malaysian society, from governing university entrance to business ownership, and include a requirement that developers sell at least 30 percent of new units in their projects to ethnic Malays at a discount to the market price. Companies planning initial public offerings must sell 30 percent of stock to the grouping.
The program has helped diffuse tension between ethnic Chinese and ethnic Malays, who clashed in pitched street battles during the 1960s. In neighboring Indonesia, anti-Chinese riots occurred as recently as the 1990s.
"This bitter episode in the nation's history was the result of discontentment between 'the haves' and 'have nots' as well as the strained relations between different ethnic groups caused by inequitable distribution of the country's economic cake," Prime Minister Abdullah Ahmad Badawi said in March, when he extended the quotas to 2020.
Still, critics say the quotas have allowed corruption to fester in the nation of 26 million people. The affirmative action policy has been "raped" and "absconded to enrich the few," Anwar said.
"It's become a source of disunity in the country," Lim Kit Siang, the leader of Malaysia's Democratic Action Party, said in a June 28 interview. "We should be moving away from such divisions, but it seems to be moving the other way," said Lim, whose party is predominantly supported by Malaysians who are ethnically Chinese.
As of 2004, the Chinese community owned 39 percent of businesses in Malaysia, the government said in a March report, with ethnic Malays owning 18.9 percent. Ethnic Chinese owned 69 percent of the country's hotels at the end of last year, while ethnic Malays owned 14.3 percent.
Abdullah, whose United Malays Nasional Organization, or UMNO, gets most of its support from ethnic Malays, in March pledged to raise the share of companies owned by ethnic Malays to 30 percent by 2020. When privatizing companies, 30 percent of shares will continue to be reserved for Bumiputras, he said.
The move will "generate balanced development especially in under-developed areas and create more opportunities for direct participation in the country's economic development," Abdullah said in March.
Abdullah has been embroiled this year in a spat with former premier Mahathir Mohamad, who ruled Malaysia for more than two decades, and the decision to extend the program may have been because his government isn't strong enough to scale back populist policies, Anwar said.
"We have lost the impetus," Anwar said. "We seem to be bogged by the old obsolete thinking in the economic policy."
Anwar, an ethnic Malay, was fired by Mahathir in 1998 and imprisoned for almost six years on corruption and sodomy charges, which he said were politically motivated. The Federal Court, the highest court of appeal, quashed the sodomy conviction in September 2004, though upheld the corruption charge.
Scrapping the quotas would attract foreign investment and fuel annual economic growth of 7 percent to 7.5 percent, Anwar said, higher than the central bank's 6 percent target for this year.
In "my limited experience and my discussions with the Malays, they're prepared to see this change as long as you're not going to forsake the Malays," Anwar said. "You're not going to ignore the plight of the poor or marginalize the rural heartland."
Mahathir in 2002, at the UMNO political party conference, criticized the Malays for being "still weak" and "lazy." If the government didn't have to support them, "the development of the nation would be easier, higher and faster," he said then.
Marina Mahathir, a rights activist and daughter of former prime minister Mahathir, also says the policy should be modified.
"The original intentions were good; it was about equality, bringing up people so that there was a level playing field, but I think maybe nobody foresaw some of the psychological side effects," she said, citing the "sense of entitlement."
"Making a level playing field should be really about economic levels rather than based on race," she said.
Still, Joseph Stiglitz, a former World Bank chief economist and now professor of economics and finance at Columbia University in New York, has said Malaysia's affirmative action program is among the most successful in the world.
"Because it's successful, they're now in a position to say, "we've redressed some of the imbalances, and now what we need to focus on is trying to make our country as open, or more open, than we were in the past," Stiglitz said in October 2003.