A brief review is in order to understand how the nation got to the precarious point best amplified by a Minister sternly warning that Malaysia is heading towards bankruptcy by the end of the decade.

Malaysia is more integrated into the global economy than many other countries of a similar size and at a comparable stage of development. Globalization is a fact of life. It has contributed both positively and negatively to Malaysian development. On the upside, integration with the global economy permitted the nation to prosper through trade and flows of FDI in the years prior to the East Asian Crisis of 1997. There was rapid economic growth, rising income levels, declining poverty and unemployment and a somewhat more egalitarian distribution of wealth. A contributing factor was the fact that Malaysia was blessed with a rich resource base – its forests and oil and gas. It had reasonably well functioning institutions in the form of an established public service, a modestly independent judiciary and institutions that measured well against those in other developing countries. The nation progressed despite creeping corruption, growing race polarization, authoritarianism and a general deterioration in the delivery of public services. The early 1990s saw a degree of deregulation and the privatization that gave momentum to modest reforms. The economic fundamentals were essentially sound with the budget largely balanced, and low inflation and robust growth. These outcomes occurred despite the constraints and distortions imposed by the NEP.

The 1997 East Asia crisis provided a rude awakening. Absence of accountability, lack of transparency and the growing cronyism, nepotism and the megalomaniac obsession with mega projects contributed to the creation of conditions that left Malaysia vulnerable to external forces. Capital flows that had sustained Malaysian growth reversed; the currency plummeted; the banking system was near collapse because of the portfolio of bad loans; confidence in the Government fell. The markets recognized these flaws and punished Malaysia. Compounding these factors was the adoption of authoritarian measures to silence dissent. The show trials of Anwar Ibrahim resulted in increasing the loss of confidence, both globally and domestically. The abuse of human rights and the destruction of judicial independence earned Malaysia the odium of the global community, to the extent that the Government had to resort to getting the private sector to bribe unscrupulous lobbyists in Washington DC to “buy” an entry ticket for the Prime Minister to visit the White House in an attempt to gain respectability. To boot, payments were made to third rate columnists to write op-ed pieces to create a synthetic image for Malaysia. Confidence declined and FDI flows began to plummet.

Malaysia survived and partially recovered from the East Asian crisis. Much of this was at a heavy cost. That cost included the adoption of an exchange rate that carried the seeds for the loss of competitiveness and the eventual importation of inflation to Malaysian shores. It included massive bail outs, a resort to unsustainable fiscal deficits, a growing debt burden for future generations to bear, and the diversion of resources away from the provision of public services and the effort to reduce poverty to feather the nests of a band of robber barons. To the extent that economic growth returned, credit must be given to the favorable trading environment. Yet the favorable circumstances were dissipated: Malaysia lost competitiveness over the past decade; FDI flows were reduced to a trickle; the stock market has under-performed virtually every other stock exchange in the region. Capital flight has reached levels that cause alarm. Outward FDI from Malaysia was RM 50.2 billion in 2008 and RM 27.9 billion in 2009 far exceeding the inflows. These numbers only reflect part of the capital flight. In addition to these, the sizable errors and omissions figure in the Balance of Payments incorporates an element of other parts of capital flight. The Human capital stock has been eroded as thousands upon thousands of Malaysian youths have left these shores to seek a living in distant lands in the face of discriminatory employment policies in both the public and private sectors. Paradoxically, while Malaysia is in need of a better skilled labor force to sustain growth, it is losing talent.

This then is the lost decade of the opening years of the new millennium. The rather bleak portrait painted above is not in dispute. There is some belated acknowledgement of these adverse trends on the part of the Government. Nor are the remedies difficult to find. What is wholly lacking is the political will to seek solutions by moving away from the distorting effects of the NEP. The Plan misses an opportunity to put right past missteps and to change course from the policies set in place by Tun Dr Mahathir in the aftermath of the East Asia crisis of the late 1990s.