The government still offers handouts instead of reforms to woo voters.

Wall Street Journal
12th Oct 2011

Malaysian Prime Minister Najib Razak has unveiled a budget full of freebies designed to win over voters in the next general election, expected in the next six months. In the process, he is dashing expectations of economic reforms needed to promote growth.

This contrasts with the political reforms Mr. Najib announced last month. A promised overhaul of the country’s colonial-era legal code would guarantee political and civil freedoms long denied to Malaysians.

Mr. Najib seems to have thought of a handout for nearly everyone in 2012. The country’s 1.3 million civil servants will see salaries and pensions rise, in many cases by as much as 30%; households earning less than 3,000 ringgit ($960) a month will receive one-off payments of 500 ringgit; parents will find many school fees abolished or reduced. Then there are the taxi drivers who get fat tax exemptions.

Worse, the government has not taken the necessary steps to wean Malaysia off food and fuel subsidies. Mr. Najib earlier pledged to phase them out, since they have skewed consumption patterns and strained public finances for many years. He even likened subsidies to “opium” and made small but noteworthy cuts last year. He could have continued that rehab this year by incrementally raising regulated prices to bring them closer to market levels.

This combination of temporary handouts and tax breaks on one hand and welfare spending on the other doesn’t help Malaysia’s competitiveness. The export-dependent economy is already hurting from weak markets abroad and a rising cost of living at home—GDP growth fell below 5% in year-on-year terms for the last two quarters—and needs long-term incentives to invest and build a stronger domestic consumer market.

Yet Mr. Najib offered no permanent changes to the tax structure and no guide to reducing regulation and spending. The 2012 budget proposes a 9.4% hike in expenditure from the 2011 budget. And considering the government spent 13 billion ringgit ($4.16 billion) more than it budgeted in the past year, it could well prove more profligate.

To its credit, one small of area of reform the government has kept pushing is liberalization of foreign investment in services. In 2009, Mr. Najib dismantled a long-time restriction that benefited “sons of the soil.” Foreigners were earlier forced to jointly venture with Malays, the country’s ethnic majority, but they can now own 100% stakes in businesses in 27 sub-sectors. Friday’s budget extends that reform to 17 more sub-sectors such as medical and education services.

However, these are small industries that don’t hire many Malays. The government needs to tackle bigger reforms in industries like manufacturing, where regulations still give Malays dominance. In the same vein, the labor market suffers from entrenched affirmative-action policies. Mr. Najib has spoken of enacting radical changes when he presented a “New Economic Model” last year, but he keeps disappointing voters by failing to follow through.