PENANG - Malaysian leaders are facing a delicate dilemma in the crackdown against suspected alleged Muslim militants while at the same time trying to project a "moderate" image.
On the one hand, the political fortunes of the ruling coalition have changed after last year's September 11 terrorist attacks on the United States thanks to their projected "moderate" image and their co-operation with the United States in the "war against terrorism". The ruling coalition has subtly implied through the arrests of dozens of unknown alleged Muslim militants that Malaysians - and outsiders - have reason to be wary of any alternative to its rule.
But on the other hand, as the crackdown against the alleged militants continues, the country's image as a safe haven had already taken a dip even before the deadly bombings in neighboring Indonesia on Saturday.
This is seen in the increased checks that visitors from Malaysia - and those from other Muslim nations - have been subjected to at airports in the United States. The prime minister and his deputy have not been spared such heavy-handed checks. Others in the ruling coalition have complained too, but their concern appears to center on the lack of diplomatic immunity for national leaders as opposed to the singling out of Malaysians and those from Muslim-majority countries for extra scrutiny.
To add insult to injury, Canada has imposed a visa ruling on Malaysian visitors. Thousands of Malaysian students study in both Canada and the United States and many other Malaysians have settled in Canada.
Far more serious is the drop in foreign direct investment in Malaysia in recent months - attributed by the government to the drying up of foreign funds available for investment in Southeast Asia.
Malaysia posted a drop in approved foreign direct investments last year, from US$5.5 billion in 2000 to $5.0 billion in 2001. The drop was said to be due to cutbacks in multinational companies' investments as a result of lower global economic growth prospects last year.
Indeed, officials argue that this small drop should be viewed against the backdrop of a drying up of global funds available for investment. They point out that global foreign direct investment (FDI) was estimated to have dropped by 40 percent to $760 billion last year from $1.3 trillion in 2000.
The United Nations Conference on Trade and Development (UNCTAD), however, reports that although FDI inflow into Southeast Asia was stagnant at $13 billion in 2001, Singapore, Thailand and the Philippines all recorded increases. By contrast, FDI inflow for Malaysia in 2001 was "stagnant".
More worryingly, for the first six months of this year, approved FDI in Malaysia was barely $600 million, according to the Malaysian Industrial Development Authority. It is a cause for deep concern and has prompted the government to step up efforts to boost domestic demand.
In a survey of the top 10 favored manufacturing FDI destinations for Japanese transnational corporations over the next three years cited by UNCTAD, Malaysia fell to ninth position in 2001 from fifth the previous year, being overtaken by countries such as India, Vietnam, Taiwan and South Korea.
Of course China remains a top rival for drawing in FDI away from Southeast Asia. While countries like Malaysia and Thailand offer a better investment package, China has the edge when in comes to such factors as domestic market growth potential, labor supply and production costs.
But it is the perception of investors from the United States that is of prime concern. In 2001, the United States continued to maintain its lead position in Malaysia's FDI with $900 million in investments, followed by Japan, China and Singapore. How that would change post-September 11, 2001 - and now post-October 12, 2002 - is crucial, as Malaysia is heavily dependent on the United States for technology transfer and growth in such key sectors as electronics and information technology.
If the perceptions of US security and immigration officials rub off on US investors interested in Southeast Asia, then the investment prospects for countries such as Malaysia are likely to look less than rosy.
To a certain extent, the Malaysian leadership must share some of the responsibility for this slide in investor interest. Out of the more than 60 suspected militants detained since the middle of 2001, none has been brought to trial. They continue to languish in a security camp north of Kuala Lumpur, along with political and other detainees, adding to the uncertainty as to whether and to what extent militant extremism is a threat to national security.
Investors hate uncertainty, and this also includes the security angle. Malaysia can go a long way toward dispelling such jitters by giving the detained alleged militants a fair trial.
The other uncertainty is about the extent of popular support for the conservative Islamic Party (PAS), which made sharp inroads during the last general election after the sacking and jailing of ex-deputy premier Anwar Ibrahim. By not embracing broad-based democratic reforms and instead clamping down on basic freedoms, the ruling coalition is unlikely to win back lost support from PAS and Anwar's National Justice Party (Keadilan) in the next election due by 2004.
Though there is no imminent threat of Malaysia falling under a fundamentalist central government, it is perceptions that matter - and right now, it appears that the alleged Southeast Asian links to terrorism must be worrying more than a few prospective investors.