In Malaysia, Najib's Reform Dilemma

By Prashanth Parameswaran
(From World Politics Review of April 21, 2010)

On March 30, Malaysian Prime Minister Najib Razak unveiled a new growth strategy designed to transform Malaysia into a high-income economy by 2020. But while the New Economic Model (NEM) contains much-needed reforms to boost Malaysia's economy and political image in the face of dwindling foreign investment and rising competition, severe doubts remain about whether Najib can actually implement them.
The NEM pledges to boost Malaysia's per capita annual income from the present $7,000 to $15,000 through a raft of measures, including enhancing the role of the private sector, improving worker skills and productivity, and reducing the dependence on foreign labor. It also promises to make the government's decades-old affirmative action policy, the New Economic Policy, more inclusive and market-friendly. As it now stands, the policy gives preference to ethnic Malays (who make up almost 60 percent of the country's population) over minority Chinese and Indians. Najib's plan will shift the focus to supporting the poorest 40 percent of all families, regardless of race.
The proposed reforms come not a minute too soon for Malaysia. Economic growth rates have declined from 7 percent in the late 1980s to 5.5 percent today, as the country's labor-intensive exports have lost out to growing competition from newly emerging low-wage economies like China and Vietnam. The country's ruling Barisan Nasional (BN) coalition also saw a soaring budget deficit hit an alarming 7.4 percent of GDP, with foreign direct investment reduced to a trickle of just $7 billion last year.
While part of this can be attributed to the global economic downturn, foreigners have also been spooked by the domestic ethnic and religious tensions that erupted earlier this year, including the firebombing of almost a dozen churches by Muslim protesters. If the changes are enacted, Mr. Najib may be able to lure foreign investors back into a more competitive and business-friendly Malaysian economy, and perhaps even increase his domestic popularity for the next nationwide election to be held before 2013.
Yet few expect that the 56-year-old British-trained economist will be able to do so much, so soon. His BN coalition, reeling from an unprecedented drubbing in the 2008 national elections and losses in seven of the nine parliamentary and state by-elections since then, is too weak to undertake bold national reform when its own future is in peril. Plans for trimming subsidies, raising electricity prices, and introducing a goods and services tax (GST) have already been derailed by concerns over domestic unpopularity. The NEM itself, announced after two delays, was devoid of any specifics, triggering widespread skepticism amongst analysts and investors alike, and barely registering on markets.
The structural impediments to reform are also significant. For instance, the NEM contains no serious plan to eradicate corruption and cronyism, much of which takes place within Mr. Najib's own party, the United Malays National Organization (UMNO). Without addressing "the greatest malaise" of the Malaysian economy, the opposition argues, meaningful change cannot take place. In addition, introducing inclusiveness in a country where race-based economic and social policies have dominated, and where the ruling coalition itself has long been comprised of parties representing their respective racial groups, will also be quite a task.
The current climate of racial and religious polarization also makes introducing more-inclusive social policies difficult. Najib may win back some of the ethnic Chinese and Indian voters that deserted BN in the 2008 elections if he moves ahead to reform affirmative action policies that have historically disadvantaged and alienated the country's minorities. But he will also alienate some Malays, who are the UMNO's core voters. Already, the NEM has galvanized right-wing Malays to form the Malay nationalist group, Perkasa, led by an independent but UMNO-linked parliamentarian and officially launched by former Premier Mahathir Mohammad.
Upcoming electoral contests will provide a litmus test as to Najib's popularity and the extent to which he can move on reforms. The most recent surveys by the Merdeka Center for Opinion Research put Najib's approval ratings at around 66 percent. But it will probably take strong wins in by-elections in Hulu Selangor and Sarawak, coupled with months of robust economic growth and favorable opinion polls, to give the usually cautious administrator enough confidence to call for an election sometime next year. Najib is scheduled to provide more details about his reform plans this June. But only if he secures a general election mandate will he be likely to begin pushing NEM measures through.
Yet the clock is ticking for Malaysia. The World Bank, in its latest report on the Malaysian economy, released on April 19, said that Kuala Lumpur "cannot afford to go slow on the implementation of structural reforms," since current economic policies restrict its innovative potential, leave poverty and inequality issues unaddressed, and keep the government's debt level high. Foreign investors are also growing discontented. In an April 8 research note, Citigroup warned that Malaysia "cannot afford too many execution delays and policy flip-flops. The country needs to understand that too many U-turns make a roundabout."
But even if Najib fully grasps his nation's dilemma, it remains to be seen whether he can summon the courage and will necessary to finally give Malaysia the reform it deserves.

*Prashanth Parameswaran is research assistant at the Project 2049 Institute, a Washington-based think tank that covers Asian security issues. He is also a research fellow for Asia Chronicle, a daily online journal, and blogs about international affairs at GlobalEye.