By Peter Drysdale | East Asia Forum

Malaysia’s recently presented New Economic Model is, on paper, a hugely ambitious strategy for changing the country’s economic and social direction and, hopefully, its economic and political fortunes.

The government of Prime Minister Najib seems inclined to embrace its principles and try to forge a new direction in Malaysian economic and social policy. In the 1980s Malaysia was among the brightest stars in the Southeast Asian economy, with growth around 8 per cent a year and a huge transformation away from its comfortable plantation and minerals past towards a new industrial future, driven by foreign investment and rapidly growing exports of consumer electronics to regional and global markets. Mahathir reigned supreme, dispensing patronage and securing UMNO’s political base under the camouflage of the long-established New Economic Policy, put in place after the racial disturbances of the late 1960s to lift up the bumiputera Malay population and in the process embedding race-based politics into the fabric of political culture.

After the Asian Financial Crisis Malaysia has faced a far less certain future, not only because of the political dark-side that it exposed under Mahathir, but also because of the way that cosy politics had come to sap the vibrancy out of the economy and good economic policy. Economic performance has gradually stagnated, Global Financial Crisis aside. A race-base political culture has become less and less tenable: it’s not only Anwar Ibrahim that challenges with an alternative political model; the government itself is grappling within itself and against the ghosts of its past for a new way, ditching the old New Economic Policy. Malaysia is on the cusp of a profound turning point in its national development.

As Shankaran Nambiar explains in this week’s lead the New Economic Model, were it implemented, would seek to sweep aside many of the shackles that have held Malaysia back, economically and politically. It would tackle the failure of economic policy to provide a foundation for lifting Malaysia out of its lower middle-income malaise. It would also, necessarily, tackle the related problem of Malaysia’s suppression of civil and political freedoms. The most important problem, he argues, centres on ‘the institutional framework in Malaysia. The way people interact, their expectations, and the norms and conventions that govern these interactions must change. The norms, habits and conventions in society must support efficiency and competitiveness, and not give way to lassitude and indifference…There is evidence that civil liberties and a more liberal political and social fabric helps promote economic development. Institutional reform of this nature involves guaranteeing: freedom of speech; freedom of assembly and demonstration: equal opportunity; freedom from excessive governmental intervention; respect for minorities; and a fair, independent judiciary.’

It’s a brave call but if heeded there is promise of realising the Malaysian dreams of once again being the strong country of Southeast Asia and a future among the industrial democracies of the OECD.

——

What’s behind Malaysia’s New Economic Model
June 27th, 2010
By Shankaran Nambiar, MIER

Malaysia’s New Economic Model (NEM) is a framework that promises to bring the country out of its middle-income status, and push it into the realm of a high-income economy. The NEM proposes to do this through eight Strategic Research Initiatives (SRIs). These SRIs include re-energising the private sector, developing a quality workforce, and creating a competitive domestic environment. Growth is also considered, both in terms of enhancing the sources of growth and ensuring the sustainability of growth. Other initiatives target the public sector, affirmative action and building Malaysia’s knowledge-base and infrastructure.

Given the multiplicity of the SRIs, if one were asked to select the key factors, what would they be? These key factors must be foundational in driving the economy to higher growth, and have a sufficiently far-reaching effect to influence other factors contributing to the rapid shift of the economy.

The three most important issues for the NEM, I would suggest, are: education, entrepreneurial skills and institutional reform.

Education is a pervasive factor that lies at the source of many problems that plague the Malaysian economy. This is also an issue that stifles the growth of investment.

For its success, the NEM depends on technology upgrading, the creation of a knowledge-economy and the development of a highly skilled workforce. It also hopes to move up the value-chain by emphasising technology-intensive methods of production and by relying on innovation and research and development (R&D). All of this depends on a sound system of education.

When it comes to the question of reforming education in Malaysia, tertiary education receives the bulk of the focus. Indeed, innovation and R&D require good universities. Moreover, if the private sector is to be energised, benefiting from high quality human capital, and drawing upon R&D, universities must be the root source.

But, universities only have about three years to work on students who have been formed by their primary and secondary education over a period of 13 years. If intellectual curiosity and creativity have not been instilled during this period, the chances of acquiring them in university are bleak.

There are more basic problems that need to be sorted out. Students need to learn to effectively read and write in English. Teachers, it has been commented, need to be taught to teach English correctly and with confidence. Presently, the focus is on safeguarding ethnic interests and the government is preoccupied with the difficult task of balancing the demands of different ethnicities, leaving little time to worry about fundamental issues.

The second crucial issue pertains to entrepreneurial skills. This is the concern of SRI1, which at its core has the re-energisation of the private sector as its goal. The growth of small and medium enterprises will not flourish in the absence of entrepreneurship.

A more sensitive and important issue relates to the presence of entrepreneurship among bumiputera (indigenous Malay). Their lack of ownership of equity is a nagging concern that threatens ethnic stability. The New Economic Policy was put in place to address the lack of bumiputera representation in national wealth. Indeed, the NEM will not be safe unless this issue is adequately addressed. This implies the creation of a corpus of skilled bumiputera entrepreneurs, who can flourish, but without resorting to dependence on government handouts. This, truly, would be a challenge.

The third and most important problem centres on re-orienting the institutional framework in Malaysia; the way people interact, their expectations, and the norms and conventions that govern these interactions must change. The norms, habits and conventions in society must support efficiency and competitiveness, and not give way to lassitude and indifference. This ambitious goal, because it involves the fabric of society, could well take more than a decade to achieve.

Institutional reform of a more limited, but no less significant order, should also be initiated. There is some evidence that civil liberties and a more liberal political and social fabric helps promote economic development. Institutional reform of this nature involves guaranteeing: freedom of speech; freedom of assembly and demonstration: equal opportunity; freedom from excessive governmental intervention; respect for minorities; and a fair, independent judiciary.

The NEM is silent on state capture. State capture is a form of corruption that may be defined as the undue and illicit influence of the elite in a country formulating or influencing the laws, policies and regulations of the government. The zero-tolerance for corruption that the NEM propagates is only one of a longer list of concepts that good governance subsumes. It may be argued that state capture is not present. Nonetheless, a broader notion of corruption and governance is required.

Education, entrepreneurship and market-friendly institutions demand reform. These are core but extremely slippery issues that have to be caught by their horns. The NEM is right in correctly identifying them, but they have to be adequately addressed if the NEM is to be meaningfully implemented.

Shankaran Nambiar is a Senior Research Fellow and the Head of Policy Studies Division at the Malaysian Institute of Economic Research.

The views mentioned in this article are his own and do not reflect the official position of MIER.