Malaysia's squandered reform chance

By Ooi Kee Beng* (From Asian Times Online of December 20, 2006)

SINGAPORE - Ever since Malaysian Prime Minister Abdullah Badawi announced soon after taking power in October 2003 that the country was in dire need of deep-reaching economic reforms, the soft-spoken leader has had no peace.
His cautious and consensual style of leadership has made many Malaysians not only impatient with the pace and direction of his government's once highly touted reform program, but increasingly worried that the export-dependent economy is falling behind its regional rivals in the competition for global market share.
On the surface, the Malaysian economy is growing at a respectable clip, expanding 5.8% in the third quarter compared with a year ago, in effect putting the country on track to meet the government's 2006 growth forecast of about 6%. But an expected global economic slowdown, including forecast slower growth in the United States, will put Abdullah's reform spirit to an important test - one he seems poised to fail.
Average global economic growth is expected to fall from 5.3% in 2006 to as low as 4.6% in 2007, according to projections prepared by the Economist Intelligence Unit. Exports account for about 130% of Malaysia's gross domestic product (GDP), and slowing global growth would hit the country's electronics producers particularly hard. Economists note that belt-tightening structural reforms are most needed when economic growth tails off - though that is precisely the time tough changes are politically most risky.
This is especially the case in Malaysia, where deep-reaching reforms would inevitably alter the infrastructure of the New Economic Policy (NEP), an affirmative-action program implemented in 1971 to lift the economic fortunes of the majority Malay community. The controversial NEP has since aimed to redistribute economic opportunities and national wealth within the context of a fast-expanding economy.
That's why the government led by the United Malays National Organization (UMNO) has since the 1970s prioritized fast economic growth, frequently propped by huge government spending on infrastructure and other big-ticket projects. One of Abdullah's biggest reform challenges in succeeding former fast-spending premier Mahathir Mohammad was to trim the huge national deficit while at the same time maintaining healthy growth rates.
Earlier, Abdullah moved to suspend various projects initiated under Mahathir's tenure, including the termination of the US$170 million bridge project designed to connect the southern province of Johor with the island republic of Singapore. Other belt-tightening measures have included the shelving of a scheduled $4 billion railway project. Since Abdullah took office, the national deficit as a percentage of GDP has been trimmed from about 8% to 4%.
Nevertheless, a number of signs are emerging that his administration's policymakers may have mishandled the country's macroeconomic balance. Inflation is expected to rise to about 3.6%, the highest level since the 1997-98 Asian financial crisis, and economists predict it will gallop at similarly high levels over the next two years.
Less optimistic forecasters believe growth will come in closer to 5.5% than 6%, much lower than the annual average growth-rate target of 7% needed to meet the government's long-term goal of developed-nation status by 2020. That ambitious goal, first promulgated with great fanfare during Mahathir's tenure, is being carried forward by Abdullah.
If achieved, the government's so-called 2020 vision would provide the economic cushion finally to dismantle the controversial affirmative-action programs, which have been criticized broadly as wasteful and have over the years arguably caused more tension than harmony among Malaysia's diverse races and religious groups.
Meanwhile, the NEP's shoddy planning, its loose implementation and the absence of monitoring mechanisms have been broadly blamed for the culture of unaccountability and cronyism that has long plagued the country. The government admitted recently in Parliament that as much as $3 billion had over the years been used to bail out seven failed NEP-related privatization projects, including the Putra Light Railway System, the Starlight Railway Transit System and former national carrier Malaysia Airline System.
The recently released United Nations Conference on Trade and Development's (UNCTAD) World Investment Report showed that Malaysia has slipped from being ranked the fourth-most-attractive country for foreign direct investment in 1990 to 62nd in 2005. US financial-services giant Citigroup recently wrote in a research report that "Malaysia is quickly dropping out of the radar screen of global investors".
Weak government management, of course, is more politically volatile when the broad economy starts to slow - as is likely to happen next year. Moreover, inter-ethnic and inter-religious tensions, kept in check during Mahathir's authoritarian rule, are rising under Abdullah's more consensual administration. And the issues of contention are being articulated more clearly and more publicly in Malaysia's traditionally subdued society.
For instance, opposition to the continuance of the NEP is mounting, particularly in the wake of a recent independent research report that showed ethnic Malays now hold more than the NEP's goal of 30% of the country's total equity. The report has sparked a politically charged debate concerning the technicalities of measurement. More worryingly, inter-faith conflicts are breaking out into the open, involving highly charged cases where non-Muslim families are increasingly being taken to sharia (Islamic law) courts.
To his credit, Abdullah is acutely aware of the fractious and potentially destabilizing nature of the domestic and international problems Malaysia now faces. He has in his public speeches repeatedly implored the country's Malays to shed their reliance on state "crutches" for their economic livelihoods. So far, though, his rhetoric has not been matched with enough tough action: his government extended the NEP indefinitely in its latest five-year economic plan.
As the global economy starts to slow early in the new year, some political and economic analysts believe that Abdullah's window of opportunity to push through tough and potentially unpopular economic reforms has already closed. That's particularly true in light of the bruising public row he has fought with his predecessor Mahathir, who has frequently complained about Abdullah's leadership style and alleged cronyism and nepotism among his administration's top ranks.
But as Abdullah tarries, political opponents, including former deputy prime minister and until recently political prisoner Anwar Ibrahim, are seizing the reform high ground. Anwar has recently stated his desire to dismantle large parts of the NEP - though most analysts believe his chances of trumping UMNO at the next polls are practically non-existent.
Rather than pursuing a virtuous cycle of reform-led economic growth, Abdullah's administration appears poised to wait for the next global economic upswing or expanded trade through new free-trade agreements, including potential pacts with the US, China and India. Still, these negotiations are proceeding slowly, and tellingly are bogging down because of foreign concerns about restrictions and encumbrances arising from the NEP and other protectionist policies.

*Ooi Kee Beng is a fellow at Singapore's Institute of Southeast Asian Studies. The views expressed here are his own.

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