Malaysia’s Lost Decade

Barron’s Asia
November 17, 2015

The 1MDB scandal is a microcosm of what ails Malaysia. Prime Minister Najib Razak need only look in the mirror to find the culprit for its woes.

Najib Razak, Malaysia’s prime minister, attends prayers at the National Mosque in Kuala Lumpur, Malaysia. Photographer: Goh Seng Chong/Bloomberg
For journalists who love politicians who say wacky things, Mahathir Mohamad is the gift that keeps on giving. As the world mourned the dead in Paris over the weekend, the one-time Malaysian prime minister couldn’t help but share his latest nutty theory: blame Israel, not ISIS.

Students of the 1997 Asian crisis will recall Mahathir’s rants against George Soros and a shadowy cabal of Jews crashing Malaysia’s currency. His latest controversial comments are a reminder 18 years later of the challenges Malaysia faces marketing itself in a globalized age. Don’t take my word for it –- ask the brother of the latest leader tarnishing the national brand, current Prime Minister Najib Razak.

Najib’s brother, Nazir Razak, runs investment bank CIMB Group. For years, being helmed by the PM’s brother was a great business advantage for one of Southeast Asia’s homegrown success stories. But Nazir has recently taken to social media to express misgivings about the direction of his nation and the political coalition that’s held power for six decades. Ground zero for this perception crisis is 1Malaysia Development Berhad (1MDB), the scandal-plagued investment program Prime Minister Najib created in 2009.

Nazir recently posted a 22 year-old photo on Instagram, captioned: “London 1992 with CIMB colleagues, my first investor roadshow. I have been promoting Malaysia for a long time & it has never been tougher than now due to 1MDB and related issues.” By related issues, Nazir probably means the $700 million The Wall Street Journal traced to his brother’s private bank account.

Najib’s people have tried their best to explain away the controversy. They claim, for example, it was a donation from someone in the Middle East (without saying who, what it was for or when Najib might return the funds), not cash from 1MDB. They also suggest another shadowy overseas cabal is attacking poor Malaysia.

How about instead calling out the gang that’s really undermining Malaysia: the nation’s ruling party, Najib’s United Malays National Organization. The party that’s dominated since 1946 is now the engine driving Malaysia right off the road toward greater prosperity and global esteem.

Najib represented a fascinating bookend when he rose to the office his father held from 1970 to 1976. It was Abdul Razak Hussein who devised the “New Economy Policy” of racial preferences for the Malay majority. When it became his turn to lead in 2009, Najib pledged to dismantle a program that dents competitiveness, lowers productivity, turns off foreign executives and encourages many of Malaysia’s best and brightest to flee to neighboring Singapore. Instead, Najib doubled down on economic apartheid for the good of his increasingly embattled party.

What about the good of all of Malaysia’s 30 million people, including ethic Chinese and Indians? Najib’s UMNO took a page from Japan’s Liberal Democratic Party, figuring what’s best for the party is best for the people. This mindset isn’t even working out for Japan, which is suffering its second recession since Prime Minister Shinzo Abe took office in December 2012 (growth shrank 0.8% in the third quarter). With only a couple of short breaks, Abe’s LDP has run Japan for 60 years and still puts party before country.

Japan is a wealthy nation, though, and Malaysia is ensnared in the “middle-income trap” that bedevils developing nations that lose track of what’s important. Malaysia is stuck near the $10,000 per capita income level because leaders aren’t restructuring the economy. Of course, Najib’s spinmeisters will say the 4.7% third-quarter growth rate signals all’s well. But the challenge is to grow better, not faster. Only once the fruits of economic output are shared widely does rapid growth matter.

The reason Malaysia is such a cautionary tale is 1997, when Mahathir was blaming everyone but his government for the ringgit’s crash. Whereas South Korea, Indonesia, and at times even Thailand, fixed their economic cracks, Malaysia walked on the spot. Some of that complacency reflected smugness. Malaysia never went hat-in-hand to the International Monetary Fund for a bailout. The view Mahathir’s capital controls saved the day ignores how complacency may have lost Malaysia a decade, or more, of advance up the economic ladder.

THAT’S WHY THE RINGGIT IS DOWN 20% and global funds have pulled more than $7 billion out of Malaysian assets this year. The government – surprise, surprise! — is playing the blame game: it’s the fault of everyone from the Federal Reserve to commodity markets to shadowy international forces, of anything except that Malaysia significantly lagged in Asia’s post-1997 reforms. Had Malaysia merely kept pace in leveling the playing field, improving transparency, adopting meritocratic principles, tightening corporate governance and limiting the collusion between politicians and business there might not be a run on the ringgit.

The 1MDB saga is a microcosm of the problem. Its creation struck many as odd; Malaysia already had a government investment fund — Khazanah Nasional. But the lack of transparency, overlapping objectives, overly ambitious mandate and politically-tainted dealmaking bear all the hallmarks of Malaysia Inc., circa 1997. Government conspiracy theories can’t change the fact that, 18 years on, China’s slowdown and Fed rate hikes are a bigger threat to Malaysia than neighbors. Or global mistrust in Najib’s government.

Even Najib’s brother over at CIMB appears to be losing faith. And even the Federal Bureau of Investigation is probing allegations of corruption and money laundering. If I were among the advisors to U.S. President Barack Obama, who’s visiting Malaysia this week, I’d recommend a serious intervention: Time to look in the mirror, Mr. Prime Minister.

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