Malaysia stumbling

Eric Ellis
September 23, 2010

ONE of Australia’s key partners in Asia is struggling. Given the way its leaders have taunted Australia over the years, schadenfreude at its plight would be understandable. But this should be resisted, for if Malaysia stumbles, the effects may ripple across the region.

Erstwhile sponsor of the Carlton Football Club, a cash cow for the Australian education sector, Australia’s 10th largest trading partner and a champion of ”Asian values” – whatever they are – Malaysia seems to be brimming with sky-is-falling Chicken Littles. And their analyses are alarmist; ”failed state”, ”deep pit”, ”national decay”, ”ocean-going corruption”, ”useless mega-projects”.

While some of these could be used to describe the Delhi Commonwealth Games – a massive undertaking Malaysia successfully pulled off 12 years ago by the way – it is about a country oft-regarded as an Asian success, whose rampant economy inspired a cockiness among its leaders to take racially tinged potshots at the ”decadent and immoral” West, and at Australia in particular.

And then there was the International Monetary Fund and the World Bank to demonise, indeed anyone its mercurial then prime minister Mahathir Mohamad didn’t like on any given day. And there was 23 years of it, the Mahathir monopoly on Malaysian power.

So what’s prompted such painful hand-wringing from a tigerish economy that likes to boast how it ditched traditional models to virtually promise endless riches? The answer is some of the nastiest foreign direct investment (FDI) statistics an Asian economy has served up in a generation.

FDI into Malaysia slumped dramatically last year, falling a whopping 81 per cent. In 2009, Malaysia took in just $1.38 billion of new investment, barely enough to build a half-decent bridge in a land where pork-barrelling infrastructure projects are de rigueur. By contrast, India averaged almost double that in any given month. Malaysia’s FDI take was even less than that lured by the Philippines, long the region’s economic basket case.

This worries Malaysians greatly. For all of Mahathir’s bluster, he was careful to suck up to big business, and his less-poisonous successors since 2003 have done much the same. Foreign investment underpinned the Malaysian ”miracle”, transforming sleepy Penang into an Asian Silicon Valley and industrialising the Klang Valley that surrounds Kuala Lumpur to OECD levels, with $40,000 a year average incomes to match.

So has the sky fallen in? Some of the fall can be explained by the 2008 ”trans-Atlantic financial crisis”, as many like to call it in Asia. Malaysia’s reliance on foreign investment made it one of Asia’s most globally connected countries. So when Europe and North America tightened their belts after the subprime meltdown, Malaysia naturally was jolted. But the same external dramas affected just as connected Thailand – which endured a crippling political crisis to boot – and more so globalised Singapore, and both far outperformed Malaysia in ongoing FDI, as did Indonesia.

Malaysian fingers point at Prime Minister Najib Tun Razak and his on-again, off-again will to reform a lop-sided economy Mahathir tilted to favour his bumiputra franchise, the ethnic Malays who comprise about half Malaysia’s 28 million people.

Mahathir advantaged Malays with an aggressive ”new economic policy (NEP)”. Mahathir’s thinking went that Malays were less commercially inclined than their compatriot Chinese and Indian Malaysians and thus needed the state’s help. The NEP’s affirmative action aimed to lift Malays out of poverty, but many analysts have likened it to economic apartheid, a meal ticket that many Malays have got too used to.

The NEP anchored Mahathirism and helped keep him in power for two decades. Malays were lifted but NEP side effects are many and cancerous; corruption, cronyism and an oversized sense of entitlement. Much of Malaysia’s economy is controlled by ethnic Chinese, who pragmatically chummed up to Mahathir. To some, the NEP meant simply installing well-paid and influential Malay placemen on boards to fulfil quotas.

Anti-NEP rancour has been building for years and in 2008, five years after Mahathir retired, voters registered disgust by handing his Malay-centric United Malay National Organisation-led coalition its worst result in history, losing its two-thirds parliamentary majority in a gerrymandered assembly. The UMNO faithful toppled Mahathir’s successor, Abdullah Badawi, and now, as support wavers, his successor, Najib, says he wants to replace the NEP with a ”new economic model”, which he pledges to ”execute or be executed”. There’s a rising fin de regime tint about the UMNO empire, which has never been out of office and has absorbed Malaysia’s critical facilities of state; the civil service, military, media and the education system. Abolishing the NEP is a particular cross for the aristocratic Najib to bear; it was conceived in the early 1970s by his then prime minister father Tun Abdul Razak.

Najib has a big problem, and it is not just the allegations of corruption and even murder that swirl around his circle. Like Julia Gillard, Najib doesn’t have a popular mandate to govern. Also like Gillard, he got handed office when his party’s faceless men knifed an elected PM, Badawi, in office. Malaysians expect Najib to go to the polls soon to get that mandate, but he doesn’t seem sure it’s a good idea, as a confident opposition calls him to account.

In shades of Gillard’s Labor still, party hardliners are in revolt. While most moderate Malays accept the NEP needs tweaking, if only to keep UMNO breathing and in power, a virulent core of party heavies has organised under the banner of a movement called Perkasa, which means ”mighty” in Malay.

Perkasa claims to be defending the Malaysian constitution, which guarantees Malay ethnic primacy. It says it is fighting for Malay rights against the rising challenge of minorities. But Perkasa feels like a supremacist movement, something a Pauline Hanson might recognise. A former US ambassador to Kuala Lumpur has described Perkasa as ”militant”, while non-Malays condemn it for racial divisiveness. That’s emotive language in a country where people still define themselves by ethnicity over nationality and where the deadly race riots of the 1960s are never far away in thinking and policy – not just in Malaysia but among neighbours alert to ethnic tension.

As he dithers over rolling back the NEP and over an election timetable, Najib seems to think he can spend his way to popularity. Last week, he outlined a Mahathir-esque $500 billion investment plan to transform the economy with mega-projects. He appealed to foreign investors to help. But as China, India and Indonesia boom, they will need convincing it is money well spent.

  1. #1 by Jeffrey on Friday, 24 September 2010 - 10:55 pm

    “Mahathir advantaged Malays with an aggressive ”new economic policy (NEP)”…. “The NEP anchored Mahathirism and helped keep him in power for two decades” – Eric Ellis of the Age.

    Surely I would ascribe to Dr Mahathir the intelligence and knowledge to know that the NEP is one of the main contributory factors why “FDI into Malaysia slumped dramatically last year, falling a whopping 81 per cent”, and that it is in the interest of the country for the implementation of the NEP be tweaked to a more merit based one to mitigate its negative effects. Why else would PM Najib want to suggest doing it (ie the cut back on the NEP) at great political risks of face-off with his own party’s members and warlords having vested interest in it and wanting it continued unabated? (After all as the PM said in the Bumiputra Economic Congress, his father Tun Razak was main architect of the NEP, also his legacy).

    Dr Mahathir is retired and no more (officially) in power.

    If “the NEP anchored Mahathirism and helped keep him in power for two decades” (as Eric Ellis says), then his present support for the continuance of NEP/ Mahathirism (in spite of its obvious disadvantages) has nothing to do with keeping him in power but keeping him from accountability, as is otherwise the case if Pakatan Rakyat (PR) led by his nemesis Anwar wins power in the next General Election!

    That he fears this is adjudged by his recent upping the ante on flashing the race card to say that Malays risk losing power if came to rule. He also implied that a Chinese or an Indian could become prime minister if PR took federal power because there was no constitutional restriction on race for the position. He further argued that the political marginalisation of the Malays had already become a reality in PR-controlled states even though those administrations were led by Malays (like Nizar).

    Much of what he said is not true – it exposes him to being calumnised as racist by many who do not think it befits his stature as former leader to fan and generate divisions and disunity amongst his countrymen.

    It appears that even the risk and cost of being so calumnised will not deter him to fight for the NEP and Ketuanan ideology (through vehicles of Perkasa).

    It is likely based on the simple belief – which again is not necessarily right – that these twin platforms, if pursued single-mindedly without distraction by UMNO will be the sure fixed deposit to secure the pivotal Malay vote behind it to make sure that the party survives at least long enough (for his personal purposes) to block a change of government in favour of PR led by his nemesis Anwar – a most nightmarish worst case scenario!

    It also means that he is convinced that the ‘danger’ of PR winning the election is present and clear. He must have already identified that the present attempts by Najib to reform will either fail for lack of support from his own party/its constituency confused by 1 Malaysia, NEM & GTP, perceived inimical to the very concept of NEP/Ketuanan and their vested interests – or, no mater how sincere, be not in time to recover the rest of Malaysia’s support to withstand the Opposition’s and Anwar’s march to Putrajaya; and that in the absence of alternatives, the better chance lies in the traditional stand of investing everything to canvass the solid support of the Malay vote bank.

  2. #2 by dawsheng on Friday, 24 September 2010 - 10:57 pm

    BN has been given too long time to govern, as a result Malaysia has become theirs and now they owned the country.

  3. #3 by zack on Friday, 24 September 2010 - 11:43 pm

    BN have done well. Of course those are envious of Malaysia success will go to any length to destroy Malaysia. But it would a pity when Malaysian themselves conspires with her enemies.

  4. #4 by raven77 on Friday, 24 September 2010 - 11:58 pm

    AS Gillard knifed a legitimate Rudd…so will Najib face a similar fate for turning a blind eye on Perkasa planning to slice Malaysia’s sizable minorities…..

    UMNO has forgotten the 1957 deal…..the minorities havent…

  5. #5 by Taxidriver on Saturday, 25 September 2010 - 12:11 am

    Certainly Malaysia’s present political, socio and economic climate is why foreign investors are putting on ‘reverse’ gear. Convincing them to shift to ‘drive’ is a colossal task for the Najib Administration as foreign investors have lost confidence in our investment policies that can change like the weather, compounded by the ever present possibility of a race riot. There need to have sort of a guarantee for the money they bring into Malaysia.

    Unless and until they see strong and positive signs that the government is moving on the right track; making sweeping reforms by taking concrete measures to sincerely implement its much talked-about Policies, foreign investors will choose to play safe and stick fast to their ‘tunggu dan lihat’ policy.

    Can Najib do it ? Will he do it ? Is he brave enough to do it ? Time and tide wait for no man.

  6. #6 by Taxidriver on Saturday, 25 September 2010 - 12:15 am

    correction; 3rd last line… safe should be play it safe

  7. #7 by boh-liao on Saturday, 25 September 2010 - 12:31 am

    Maha racist MMK played his dirty racist card again by saying Malays will lose political power if PR captures Putrajaya fr BN
    Same old lie 2 scare ppl
    Let’s VOTE 4 PR, kick out BN in GE13 2 prove maha racist wrong

  8. #8 by johnnypok on Saturday, 25 September 2010 - 1:11 am

    TDM talk like small kid, using “batu api” tactics to create hatred … that is why he is no longer respected, while his good old friend Sir LKY continues to enjoy world recognition and highest respect for his great brain … TDM brain is becoming watery, and will soon evaporate into thin air … “makin tua makin bodoh”.

  9. #9 by monsterball on Saturday, 25 September 2010 - 1:39 am

    Will Najib have the will to change?
    Yes…he will be opposed by many UMNO B racists members.
    No…he will be left alone to fence it out.
    Najib knows UMNO B time is up…so he will try new ideas.
    But vast majority Malaysians have enough of UMNO B double standards.

  10. #10 by HJ Angus on Saturday, 25 September 2010 - 6:43 am

    The main reason why any BN leader will fail is that most Malaysians believe it is TIME to change the Bankrupsi Negara regime.
    The extremists who are afraid a change in government will reveal all the crimes they committed against Malaysians for many years will do anything to prevent such a change.
    I am sure many past leaders are really worried now and a few will seek “medical treatment” and not return shortly before the next GE.

  11. #11 by HJ Angus on Saturday, 25 September 2010 - 6:45 am

    sorry typo:
    missing word

    “medical treatment abroad”

  12. #12 by yhsiew on Saturday, 25 September 2010 - 8:42 am

    Many successful economies had had political reform before embarking on economic reform e.g. China.

    If NaJib’s NEM is not preceded by political reform (e.g. abolish the NEP, review Malay privileges to fit in with global competition), how can there be successful economic reform?

    Political reform is usually painful but there is no choice if we want progress for the country.

  13. #13 by Jeffrey on Saturday, 25 September 2010 - 9:09 am

    Besides TDM’s increased ‘batu api’ racial rhetoric, the other indication or “writing on the wall” suggesting the real possibility of PR either winning the next GE or at least narrowing further the margin as compared to 308 GE, might well be the ‘whopping 81% drop in FDI’.

    Although NEP, systemic corruption, inefficient public service and bureaucratic red tapes or anti democratic governance are by themselves negative factors to FDI’s inflows, they could explain why Malaysia has been laggardly and caught in “middle income trap” as compared to other competing investment destinations in the region but not immediately explain the drastic drop of 81%!

    Foreign investors look long term and prioritize political stability. NEP inefficient public service or corruption pose a problem but not that great a problem that cannot situationally on a case by case basis, be mitigated when one gets the right politically connected bumi as partner, the right licence or the right exemption. Even during TDM’s time with him lambasting the West & picking quarrels with foreign leaders, the NEP being exulted and FIC regulating stringently every sizable transaction as compared to now (with Najib’s abolishing the FIC and liberalizing so to speak 27 sectors), FDI flowed in, not insignificantly, under TDM’s watch.

    I think investors feel that the kind of unique political and economic legacy bequeathed by TDM is one that only he, if in power, and not his anointed successors could hold together without exploding or imploding!

    Now the headquarters of foreign banks here have, when evaluating credit to local corporate borrowers, placed increased weightage on the variable, “political risk”. Hong Kong-based rsik consultant PERC in 2008 already rated us downwards in terms of increased political risks.

    With BN’s dominance over 50 years, investors who want to do business here have learned to work around the downsides of its mis-governance and leverage on the upsides.

    However since 308 running to the next GE or the next, they are not sure who they will soon be dealing with once they commit their money and resources. There’s a real risk of change of players. Imagine getting a bumi partner, co-investor of 30% equity and make him chairman because he has cables to ‘who and who’ in present BN administration who could be thoroughly ineffectual in terms of getting the contracts if not investigated for corruption, if ever PR wins the election with no offer of blanket amnesty. Then there’s a risk of sore electoral losers who don’t play by constitutional rules and would incite violence or civil commotion to negate an Opposition’s victory!

    Against this backdrop which foreign investor will not think twice before committing its resources for long term? Even a local investor like (say) Robert Kuok sees fit to take his PBB Oil & Jernih Insurance investments out to more stable investment jurisdictions. Besides Khazanah investing outside we have corporates like Sime investing and losing huge sums outside in Qatar. Then there’s also a competing pull of other places with bigger markets like India and China that draw French Carrefour to divest from here. More important, political cronies are also taking their ill gotten gains out and relocating just in case BN loses. The worst part, desperate attempts to shore up UMNO’s support by racist rhetoric might be counterproductive in terms of its intended objective as it serves to alienate/awaken the all important fixed deposit vote bank in East Malaysia, thus materialising the very risk of political change and uncertainty that such rhetoric intendes to avert.

  14. #14 by dagen on Saturday, 25 September 2010 - 9:58 am

    Malaysia is not stumbling. Umno is. And while umno is at it, foreign investors naturally would shun the country. Should pakatan win (a real possibility after 308 which I certainly hope would be carved in GE13 in decisive terms for stability sake) foreigner investors would surely return.

    Umno has proven itself to be incompetent, wasteful and corrupt and is fueled by a misplaced and overblown sense of pride. The delhi commonwealth games venue tells the world what incompetence and corruption and misplaced pride are capable of doing in a seemingly strong country. A 2000 ringgit laptop could balloon to 42,000 ringgit when it was supplied to the umno gobermen is beyond imagination. A theft of an apple would see one in jail but the supplier of those laptops were fully covered by signed agreements, purchase and delivery orders. The point is this. Should umno continue to stay on in putrajaya after GE13 (not impossible but if that should happen we would definitely see a very much weakened umno in parliament) then again foreigners would not want to touch our shores even with a long post.

  15. #15 by negarawan on Saturday, 25 September 2010 - 11:06 am

    I hope that Obama has not been fooled by Najip with all the hype on 1Malaysia. The truth is racial polarization and tension is on the rise and UMNO continues to cause damage the inter-racial and inter-religious harmony in Malaysia with its Malay supremacy agenda. The hypocrisy of UMNO is while Najip is in NY praising Obama, Utusan and RTM continues with its anti-US rhetorics. I hope that the US embassy in Malaysia is providing the true picture of UMNO’s racial policies and marginalization of non-bumis to the US administration. US citizens, the UN community, and the Obama administration must not let the UMNO entourage currently in NY get away with it. Pressure them, challenge them, ridicule and condemn their racial policies, and most of all their dishonesty and insincerity in painting a false picture of racial and religious harmony in Malaysia.

  16. #16 by k1980 on Saturday, 25 September 2010 - 1:49 pm

    Had Obama been born in bolehland, he would still be a red IC holder waiting for citizenship to be given to him in another 40 years, when he is in his eighties. His Kenyan father would had been arrested by Jakim for abandoning his religion and his mother would had left in disgust, leaving lil’ Obammi as an orphan.

  17. #17 by boh-liao on Saturday, 25 September 2010 - 2:28 pm

    B warned Eric! U outsider stay out of M’sia affairs, 1-BRA-him will go after U n BRA U!
    Worse still, d entire Perkosa may sodomise U
    Hell hath no fury like a BRA-him scorned

  18. #18 by Loh on Saturday, 25 September 2010 - 5:49 pm

    ///I think investors feel that the kind of unique political and economic legacy bequeathed by TDM is one that only he, if in power, and not his anointed successors could hold together without exploding or imploding!///– Jeffrey

    Investors in the 1980s and 1990s had not too many countries to choose from, and they took chance then. Some of them sell their 30% share cheaply but they were able to gain at the expense of Malaysian consumers.

  19. #19 by HJ Angus on Saturday, 25 September 2010 - 9:53 pm

    It has been a long series of abused policies that benefit BN cronies that will be uncovered under any new government.
    Hence the desperate moves to keep PR out of Putrajaya.
    Of course PR is not going to be perfect but to me it is really time for some new political leadership in Malaysia and PR deserves that chance.
    Rather we need to make that change.
    Political uncertainty is the most difficult aspect for foreign investors to evaluate and I don’t believe we can attract significant FDIs until a few years after a change of government.

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