On May 13, 1969 race riots broke out across Malaysia as the
country divided itself along ethnic lines. In the ensuing chaos
some 3,000 people lost their lives, and the burnt streets of
downtown Kuala Lumpur were described as resembling the bloody
battlefields of Vietnam, its neighbour to the north.
As an interim measure, the constitution was suspended for
two years. Prime Minister Tunku Abdul Rahman, who had led the
nation since independence in 1957, stepped down in favour of
Tun Razak, who was appointed prime minister in 1971.
The following year Razak unveiled the New Economic Policy
(NEP), a programme he and his ministers said would help pave
the way towards racial harmony and narrow the wealth gap
between the minority and richer Chinese and the majority
Malays, known as bumiputras (sons of the soil). Razak
introduced affirmative action for the Malays at all levels of
government and society.
Under the NEP, for example, Malaysian universities keep
places especially for Malay students. When companies make a
listing, a third of the shares must be allocated to Malays.
This March, Razaks eldest son, the prime minister
Najib Tun Razak, unveiled a successor to the NEP, called the
New Economic Model (NEM). In it Najib pledged to help the
country grow an average 6.5% a year in the next nine years to
hit former prime minister Mahathir bin Mohamads goal
launched in the 1990s, called Vision 2020 of
becoming a developed nation by 2020.
Last year the Malaysian economy shrank 1.7%. Bank Negara,
the central bank, forecasts that it will grow this year by
Najib says he will revive the economy by focusing on
attracting more investment from the private sector. His package
of proposals includes greater privatization as well as
improvements to the education system. He has also broached the
idea of needs-based affirmative action, as opposed
to a racial one.
Najib is aware that he must tread carefully in amending the
earlier New Economic Policy seen by some Malays as the
lynchpin of Malaysian society.
The debate over the NEP was sparked years ago by Mahathir.
He upbraided the Malays for what he saw as their
reluctance to work hard. As long ago as 2001 in Kuala
Lumpur, he said: How much longer must Malays depend on
the government and the privileges accorded to them? How much
longer must they remain mediocre?
But with Mahathir out of the picture, the difficult task of
revising the NEP has fallen to Najib.
He has established a National Economic Advisory Council
(NEAC), which is researching and working out the detail of the
NEM, which will be presented in June. The body is expected to
meet stakeholders such as non-governmental organizations and
business groups in the months to come. At present they are
setting up working groups for consultation and to look into the
finer detail of implementing the plan.
Danny Quah, an economics professor at the LSE and a board
member of the new council, says Malaysias current
predicament is due to many, many smaller things working
But, he says, for progress and prosperity, education
and the drive and skills it imparts to the younger generations
matter hugely. A government service that is efficient,
transparent and delivers the key public goods facilitates
economic value well beyond its size; a general understanding
among the population that when you put in the work, you acquire
the benefits and that life becomes materially better for
Once an economy allows each of these to decline, and
together to feed on each other, there is an easy spiral
This makes the stakes high for Najib, who became
Malaysias sixth prime minister last year.
He faces a challenge from the opposition Pakatan Rakyat
(Peoples Party) led by Anwar Ibrahim, a deputy
prime minister in the 1990s who admit that they even
surprised themselves when they denied the ruling Barisan
Nasional (National Front) coalition a two-thirds majority in
the 2008 elections.
Pakatan Rakyat is in control of four states and has managed
to reap unprecedented budget surpluses in Penang and Selangor.
The upcoming trial of opposition leader Anwar Ibrahim has
failed to dampen public support for him, and tens of thousands
of Malaysians turn out to hear him speak every week at rallies
around the country.
Najib,an economist educated at Nottingham University in the
UK, faces a litany of problems. Annual income per capita stands
at $6,970, according to the World Bank. Najib must retool
Malaysias faltering economy and also ensure that Umno
(United Malay National Organization), the leading member of the
BN coalition, manages to retain strong support amongst the
The economy is stuck in a middle-income trap and has also
suffered from an outflow of brainpower and capital. This has
left it with a workforce that is mainly unskilled and heavily
dependent on foreign labour.
But Malaysians are grappling with a lot more: wages have
stagnated, corruption, concerns about crime and a conservative
streak that is increasingly prevalent, as well as
dissatisfaction with the NEP, which the opposition charges has
mostly benefited the powerful and their cronies. This leaves
the country struggling to compete with neighbours such as China
Malaysia suffered the biggest foreign exchange reserve
losses in Asia last year. According to a report by economists
at UBS, the countrys reserves slumped by more than one
quarter on a valuation-adjusted basis. Private-sector
investment now lags public investment.
In addition, Malaysians struggle with rising costs even as
wage growth is close to non-existent. According to the World
Bank, real wages rose 2.6% in the domestic sector from 1994 to
2007, and just 2.8% in the export sector.
Quah of the NEAC says stagnant wage growth in Malaysia
was a symptom of stagnant productivity. He says the
NEAC will come up with policies to raise the rate of
productivity growth so that the structure of wages would
The stagnation in wages has played a key part in influencing
emigration. The number of Malaysians emigrating for
destinations including Australia, the US and Taiwan has soared.
From March 2008 to August 2009 over 304,000 Malaysians
registered as emigrants. The bulk of departures took place in
2009 alone, with 210,000 leaving in the eight months. That was
nearly double the total for all of 2007, of 139,696 emigrants.
That leaves the economy heavily dependent on unskilled foreign
labour estimated at 3040% of the workforce.
The topic has been broached by politicians on both sides,
with Najib pledging to improve opportunities for the diaspora
to return home.
The Malaysian economy is forecast to grow this year at
around 46% as it emerges from the global financial
crisis. But Anwar says Malaysia has deteriorated to the point
that it lags Indonesia, Thailand and Vietnam in terms of
foreign direct investment.
In the 1990s we were number one, he tells
Emerging Markets in an interview. There is a
need for structural reform. Malaysia is not on the radar of
investors. There has been poor economic management this past
decade, and government expenditure is bloated.
According to the Asean (Association of South-East Asian
countries) FDI (foreign direct investment) statistics database,
in 2006 Malaysia received inflows of $6 billion, against $4.9
billion for Indonesia and $2.4 billion for Vietnam. But by 2008
Malaysia was the laggard. FDI had shrunk to $7.3 billion while
in Vietnam it had risen to $8 billion and in Indonesia to $7.9
Anwars concern is shared by some government officials.
Last December second finance minister Ahmad Husni conceded that
Malaysia had stagnated and was now eclipsed by its neighbours,
China, Vietnam, Indonesia, Philippines and Thailand. He said:
While Singapore and Koreas nominal per capita GDP
grew within the last three decades by nine and 12 times
respectively, ours grew only by a factor of four.
Anwar has also warned of over-reliance on oil, which is
unsustainable. He says revenues from oil make up about 48% of
the budget, and Malaysias oil reserves are not expected
to last for many more years.
Former finance minister Tengku Razaleigh Hamzah lamented
recently that Malaysia has been an oil-cursed
country. The ex-vice president of Umno and founder
of Malaysian oil company Petronas says that oil has
become a narcotic that has left the country stuck in the
pattern of easy growth from low-value-added manufacturing and
component assembly and unable to make the leap to a
Oil revenue has been used instead to bail out failing
companies, buy arms, build grandiose cities amid cleared palm
oil estates, he says.
Anwar and Najib have rounded on corruption, a common
complaint for Malaysians who encounter it at many levels of
society, from policemen demanding bribes to the payment of
million dollar sums for contracts.
Malaysia is estimated to have spent RM100 billion on
financial scandals during Mahathirs 22-year rule,
according to Barry Wain, a former editor of the Asian Wall
Street Journal who has just published Malaysian Maverick:
Mahathir Mohamad in turbulent times.
Last year Malaysia ranked 56th out of 180 countries in a
ranking by Transparency International (TI). It fell from 47th
the previous year on perceptions that little had been done to
tackle corruption. TI says the Malaysian Anti-Corruption
Commission seemed to focus on opposition politicians and small
ANWAR ON TRIAL AGAIN
Meanwhile, as Malaysia struggles to advance, the nation is
distracted by the drama unfolding over new charges against
62-year-old Anwar, who is in the middle of a trial for sodomy.
Speaking in London recently, Anwar declared his innocence and
was adamant that he would not go to jail.
He is familiar with detention: Anwar was acquitted of the
same charges in 2004 after a six-year spell in jail. In the
style of a Hollywood movie sequel, Malaysian newspapers have
aptly titled Anwars latest legal problems Sodomy
II. Since his release from jail in 2004, and his
acquittal on sodomy charges, Anwar has so far proved
exceptional in his ability to unite a socialist and
predominantly Chinese party with the the Pan-Malaysian Islamic
party (PAS), and the multi-racial Parti Keadilan Rakyat (the
Peoples Justice Party).
Anwar seeks to present himself as a moral underdog pitted
against the omnipotent monolith of Prime Minister Najib and the
Barisan Nasional party, which has held power since the nation
was granted independence in 1957.
Ever since his expulsion from Umno in 1998, Anwar has sought
to define himself as a man concerned only with the fight for
political reform and the universality of rights such as freedom
of press, justice and equality.
For a time, both Najib and Anwar followed similar
trajectories. They served alongside each other in successive
cabinets, and both have held portfolios as ministers of
culture, education and finance, Najib usually following in
Anwars footsteps a few years later. Anwar, or Datuk Seri
as he is known among his followers, was seen as Mahathirs
Today Anwar is the outsider as he prepares to head into his
second trial. He insists on his innocence. But even as his
legal battle distracts from the prize of the countrys
most powerful post, Najib has just launched his own campaign to