Malaysia's squandered reform
chance By Ooi Kee Beng
SINGAPORE - Ever since Malaysian Prime
Minister Abdullah Badawi announced soon after
taking power in October 2003 that the country was
in dire need of deep-reaching economic reforms,
the soft-spoken leader has had no peace.
His cautious and consensual style of
leadership has made many Malaysians not only
impatient with the pace and direction of his
government's once highly touted reform program,
but increasingly worried that the export-dependent
economy is falling behind its
regional rivals in the
competition for global market share.
On
the surface, the Malaysian economy is growing at a
respectable clip, expanding 5.8% in the third
quarter compared with a year ago, in effect
putting the country on track to meet the
government's 2006 growth forecast of about 6%. But
an expected global economic slowdown, including
forecast slower growth in the United States, will
put Abdullah's reform spirit to an important test
- one he seems poised to fail.
Average
global economic growth is expected to fall from
5.3% in 2006 to as low as 4.6% in 2007, according
to projections prepared by the Economist
Intelligence Unit. Exports account for about 130%
of Malaysia's gross domestic product (GDP), and
slowing global growth would hit the country's
electronics producers particularly hard.
Economists note that belt-tightening structural
reforms are most needed when economic growth tails
off - though that is precisely the time tough
changes are politically most risky.
This
is especially the case in Malaysia, where
deep-reaching reforms would inevitably alter the
infrastructure of the New Economic Policy (NEP),
an affirmative-action program implemented in 1971
to lift the economic fortunes of the majority
Malay community. The controversial NEP has since
aimed to redistribute economic opportunities and
national wealth within the context of a
fast-expanding economy.
That's why the
government led by the United Malays National
Organization (UMNO) has since the 1970s
prioritized fast economic growth, frequently
propped by huge government spending on
infrastructure and other big-ticket projects. One
of Abdullah's biggest reform challenges in
succeeding former fast-spending premier Mahathir
Mohammad was to trim the huge national deficit
while at the same time maintaining healthy growth
rates.
Earlier, Abdullah moved to suspend
various projects initiated under Mahathir's
tenure, including the termination of the US$170
million bridge project designed to connect the
southern province of Johor with the island
republic of Singapore. Other belt-tightening
measures have included the shelving of a scheduled
$4 billion railway project. Since Abdullah took
office, the national deficit as a percentage of
GDP has been trimmed from about 8% to 4%.
Nevertheless, a number of signs are
emerging that his administration's policymakers
may have mishandled the country's macroeconomic
balance. Inflation is expected to rise to about
3.6%, the highest level since the 1997-98 Asian
financial crisis, and economists predict it will
gallop at similarly high levels over the next two
years.
Less optimistic forecasters believe
growth will come in closer to 5.5% than 6%, much
lower than the annual average growth-rate target
of 7% needed to meet the government's long-term
goal of developed-nation status by 2020. That
ambitious goal, first promulgated with great
fanfare during Mahathir's tenure, is being carried
forward by Abdullah.
If achieved, the
government's so-called 2020 vision would provide
the economic cushion finally to dismantle the
controversial affirmative-action programs, which
have been criticized broadly as wasteful and have
over the years arguably caused more tension than
harmony among Malaysia's diverse races and
religious groups.
Poor planning, heavy
costs Meanwhile, the NEP's shoddy
planning, its loose implementation and the absence
of monitoring mechanisms have been broadly blamed
for the culture of unaccountability and cronyism
that has long plagued the country. The government
admitted recently in Parliament that as much as $3
billion had over the years been used to bail out
seven failed NEP-related privatization projects,
including the Putra Light Railway System, the
Starlight Railway Transit System and former
national carrier Malaysia Airline System.
The recently released United Nations
Conference on Trade and Development's (UNCTAD)
World Investment Report showed that Malaysia has
slipped from being ranked the
fourth-most-attractive country for foreign direct
investment in 1990 to 62nd in 2005. US
financial-services giant Citigroup recently wrote
in a research report that "Malaysia is quickly
dropping out of the radar screen of global
investors".
Weak government management, of
course, is more politically volatile when the
broad economy starts to slow - as is likely to
happen next year. Moreover, inter-ethnic and
inter-religious tensions, kept in check during
Mahathir's authoritarian rule, are rising under
Abdullah's more consensual administration. And the
issues of contention are being articulated more
clearly and more publicly in Malaysia's
traditionally subdued society.
For
instance, opposition to the continuance of the NEP
is mounting, particularly in the wake of a recent
independent research report that showed ethnic
Malays now hold more than the NEP's goal of 30% of
the country's total equity. The report has sparked
a politically charged debate concerning the
technicalities of measurement. More worryingly,
inter-faith conflicts are breaking out into the
open, involving highly charged cases where
non-Muslim families are increasingly being taken
to sharia (Islamic law) courts.
To his
credit, Abdullah is acutely aware of the fractious
and potentially destabilizing nature of the
domestic and international problems Malaysia now
faces. He has in his public speeches repeatedly
implored the country's Malays to shed their
reliance on state "crutches" for their economic
livelihoods. So far, though, his rhetoric has not
been matched with enough tough action: his
government extended the NEP indefinitely in its
latest five-year economic plan.
As the
global economy starts to slow early in the new
year, some political and economic analysts believe
that Abdullah's window of opportunity to push
through tough and potentially unpopular economic
reforms has already closed. That's particularly
true in light of the bruising public row he has
fought with his predecessor Mahathir, who has
frequently complained about Abdullah's leadership
style and alleged cronyism and nepotism among his
administration's top ranks.
But as
Abdullah tarries, political opponents, including
former deputy prime minister and until recently
political prisoner Anwar Ibrahim, are seizing the
reform high ground. Anwar has recently stated his
desire to dismantle large parts of the NEP -
though most analysts believe his chances of
trumping UMNO at the next polls are practically
non-existent.
Rather than pursuing a
virtuous cycle of reform-led economic growth,
Abdullah's administration appears poised to wait
for the next global economic upswing or expanded
trade through new free-trade agreements, including
potential pacts with the US, China and India.
Still, these negotiations are proceeding slowly,
and tellingly are bogging down because of foreign
concerns about restrictions and encumbrances
arising from the NEP and other protectionist
policies.
Ooi Kee Beng is a
fellow at Singapore's Institute of Southeast Asian
Studies. The views expressed here are his own.
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