Edition of JULY 29, 2002

Mahathir's Change of Heart?

He's hinting that 30-year-old rules favoring Muslim Malays should be phased out

By Michael Shari in Kuala Lumpur

For more than three decades, anyone doing business in Malaysia has needed to understand at least one word of Malay: Bumiputra. Literally, it means "son of the soil," but it refers to Muslim Malays, who make up just over half of Malaysia's population and who enjoy big advantages over the country's ethnic Chinese and Indian minorities under sweeping affirmative-action regulations. Universities reserve seats for Bumiputras. When you set up a company in Malaysia, Bumiputras must own 30%. When a Malaysian company goes public, 30% of the shares must go to Bumiputras--at a discount. Can't find a partner? The International Trade & Industry Ministry will give you a list of "approved Bumiputras" to whom you must sell--or give--a stake.
Affirmative action, better known as the New Economic Policy (NEP), has been carved in stone in Malaysia for 32 years. It was implemented in 1970, the year after Malays in Kuala Lumpur rioted for five days, attacking ethnic Chinese businesses and killing nearly 200 people. A primary cause of their rage: Virtually every sizeable Malaysian company was under ethnic Chinese ownership or management.
That bedrock policy may now be shifting. In June, Prime Minister Mahathir Mohamad stunned Southeast Asia by disclosing his plans to retire next year. But a Mahathir speech two days earlier has kept Kuala Lumpur equally abuzz: On June 20, he hinted it may be time for affirmative action to give way to "meritocracy." Why? Because the NEP hasn't created the economic advancement he had hoped. "I feel disappointed because I achieved too little of my principal task of making my race a successful race, a race that is respected," Mahathir said. Mahathir's office didn't respond to calls, e-mails, and faxes seeking comment for this article. Yet analysts, executives, and diplomats in Kuala Lumpur have been parsing the meaning of his speech. The general conclusion: Mahathir wants to phase out the NEP.
Weaning 11 million Bumiputras off affirmative action is likely to be a delicate task. For starters, the program hasn't been a total failure, despite Mahathir's dismay. The World Bank credits it with reducing poverty among Malays to 8% in 1995, from 50% in 1973. The NEP "was a partial success, [but] not a complete success. There is still a lot of unfinished work," says Mohamed Ariff, executive director of the Malaysian Institute of Economic Research.
Then there's the political dimension. Malays are probably not angry enough to take to the streets and attack ethnic Chinese. But some still fear that the youth wing of Mahathir's party, the United Malays National Organization (UMNO), could foment unrest. If the NEP were to be dismantled, "there would be a lot of resistance from the Bumiputra community," says the head of research of a Malaysian brokerage.
Yet if Mahathir can pull it off, phasing out the NEP could do Malaysia far more good than harm. Many argue that the NEP has discouraged investment and stifled job creation. And it hasn't helped raise the profile of Bumiputra businessmen. Of the top 10 companies listed on the stock exchange, seven are state-controlled and three are ethnic Chinese family businesses. Only 19% of corporate equity in Malaysia is in Bumiputra hands--far shy of the NEP's 30% target.
The NEP has also cost the government plenty. Since its inception, Malaysia has spent billions of dollars on public-works projects in Bumiputra-dominated rural areas. Discounts given to Bumiputra shareholders on equity in state-owned enterprises that went public in the 1980s cost billions more. But few of the companies are internationally competitive. "We did not create businessmen who could cope with the crisis that emerged in 1997," says Edmund Terence Gomez, professor of economics at the University of Malaya. Privatized state companies such as Malaysia Airlines and automobile assembler Perusahaan Otomobil Nasional (Proton) have been driven into the ground by CEOs whose chief qualification appeared to be that they were Bumiputras. The recent near-collapse of engineering company Renong--a bastion of Bumiputra patronage--spurred a purge of Bumiputra businessmen by Mahathir himself.
Mahathir has long recognized that foreign investors might object to the Bumiputra rules. In the late 1980s, the government created special export manufacturing zones where multinationals such as Intel Corp. and Motorola Inc. set up shop. Among the attractions: They don't require Bumiputra partners.
Raising enough support from within Mahathir's party to dismantle the NEP may be tough. Half of Malays voted against UMNO in the last election, in November, 1999. Today, party leaders fear losing even more ground by revoking the NEP, Western diplomats say. And with Mahathir stepping down, his anointed successor, Deputy Prime Minister Abdullah Ahmad Badawi, may not be strong enough to take the political heat for such a dramatic change.
But Mahathir has started dismantling the NEP on his own. In April, he shot down a proposal that private universities--mainly serving non-Bumiputras--reserve 10% of their seats for Bumiputras. At the same time, he proposed that the language of instruction in math and science be changed from Malay to English. Mahathir also discontinued quotas that guaranteed Bumiputras 55% of the seats at national universities. But in June, on the first day of classes for the new academic year, professors were dismayed to find that 60% of their students were Malays. That led some to conclude that even if Mahathir wants to ditch affirmative action, bureaucrats--virtually all ethnic Malays, due to the NEP--are still clinging to it.
Even with reform in place, it will take years to reverse the policy's effects. Many young non-Bumiputras simply don't bother to apply for higher education. Other ethnic Chinese and Indians go to school overseas--and sometimes don't come back. Those who do return are often unhappy that they had to leave in the first place. "You tolerate the situation partly because you look for an excuse not to hate it," says Stephen Gan, an ethnic Chinese who studied in Australia and is now editor-in-chief of Malaysiakini, a Kuala Lumpur-based news Web site.
Once young Malaysians, whatever their race, graduate, their opportunities can be limited by the NEP. Some foreign companies are forced to put their projects on hold because they can't find a suitable Bumiputra partner, says a Singapore lawyer who works in Malaysia. And some initial public offerings have been postponed because the companies can't find enough Bumiputra investors to absorb 30% of the issue.
The toughest battle lies ahead. But Mahathir has taken a major step simply by pointing out the failings of affirmative action in a country where he may be the only person with the political clout to even broach the subject. Of course, Mahathir won't be around when the time comes to dismantle the NEP. "That's for future prime ministers to deal with," says a Western diplomat. "His role is to start the debate." Start it he has.