487-01:Politics and Economics of Development

487-01 Politics & Economics of DevelopmentAjay Goel

487-01:Politics and Economics of Development

Professor Marvin Zonis

Country Report

Malaysia

Prepared by:

Sally deFina

Ajay Goel

Francisco Lepeley

Kartik Jayaram

Logan McDougal

Page 1

Acknowledgement

The Malaysia team would like to thank CNA Financial, Deutsche Bank, Diamond Technology Partners, and Pfizer for their generosity in supporting this research.

Table of Contents

1.Introduction......

2.Model and Variables......

3.Political Stability......

3.1.UMNO Elections will not change party policy......

3.2.National elections not likely to remove UMNO......

3.3.Anwar situation not a major concern......

3.4.No separatist tendencies in Sabah and Sarawak......

4.Social Stability......

4.1.Ethnic tension not likely to arise......

4.2.Religious tension not likely to arise......

4.3.Illegal immigration not an immediate threat......

4.4.Other social variables support stability......

5.Economic Growth & Recovery......

5.1.Government’s favorable policies spur growth......

5.2.Government is restructuring industries......

5.3.Transition to high value-added sectors gaining momentum......

6.Conclusions......

7.Appendix......

1.Introduction

We believe that Malaysia has the social structure, the political stability and the economic conditions that are necessary to be an extremely attractive prospect for future investment in the short term.

Over the last few years, Malaysia has been the focus of major outside attention. While Western journalists have focused on several key events in recent history to describe government policies, such as the Anwar incident[1], their viewpoints may in fact have been unreasonably parochial. For the investor, specific events should be secondary to issues of continued development. The key questions are: What are the reasons behind Malaysia’s success and whether this success is sustainable. Research and discussion suggest that the key to investing in Malaysia is understanding the political, social and economic impulses that shape government policy.

In the political arena, the key remains the strength of the United Malays National Organization (UMNO). Although there have been recent challenges to the power wielded by this party, such as the growth of fundamentalist groups, UMNO appears likely to be able to regroup and restore political appeal. Socially, the government has been extremely successful in minimizing ethnic and religious tensions through a judicious combination of affirmative action policies, such as the Bumiputera philosophy[2], relative autonomy in states, and the use of force. Although there are some lurking social concerns, such as immigration from other Asian countries, these are further on the horizon. Economically, the policies, developed and implemented by Prime Minister Mahathir, have allowed the country to achieve considerable progress while avoiding many of the negative aspects of the Asian Crisis that plagued the region. The government is slowly preparing the internal economy for additional foreign involvement in the future by pursuing development ‘with a social face.’

Overall, Malaysia is forward looking, and has attempted to address many of the most common problems in developing markets. Although there are clearly a number of areas in which it needs to improve, we are confident in the country’s ability to address these in the future.

2.Model and Variables

When we first started analyzing Malaysia, we began by brainstorming all the major variables that might be applicable to any country, regardless of location. This resulted in a host of variables that were broken into six major hypotheses, adding geography, the role of the military and history to the existing categories of social, political and economic change. Each of these six major hypotheses in turn had a number of secondary points.

Following the submission of our initial draft, however, we became convinced that we had not focused adequately on Malaysia as a unique country, and that we needed to restructure our list and reduce our scope in order to more effectively describe the country. We determined that we needed to focus more actively on the economy as a whole, and that to do so, we needed to evaluate the specific economic policies advocated by Mahathir given his central role in the government. We also realized that we had to consider the ethnic and social impulses that have shaped economic growth in Malaysia. We decided on the economy because of both the target audience of this report and our interest in how Malaysia has weathered the Asian crisis so successfully. Specifically, we became convinced that the Malaysian economic development had so benefited the average citizen that his or her concerns about political or social empowerment were diminished.

The following chart presents our hypotheses:

3.Political Stability

The United Malays National Organization (UMNO) has led the country throughout its post independence era. In particular, Prime Minister Mahathir has been in power for the last 19 years. In that period, he has concentrated power in the Office of the Prime Minister. Malaysia’s policies have been Mahathir’s policies as he heads the country more like a benign dictatorship than a vibrant democracy. Mahathir has generally had very definite beliefs on the future path for Malaysia and has used his immense resoluteness and power to bring his ideas to fruition. His influence on the country is pervasive but the belief in his power is even more so, leading to the influence becoming a self-perpetuating entity.

Mahathir will always be known as a visionary in Malaysia. His impact on Malaysia stems from the ambitious projects he has undertaken throughout his tenure. Vision 2020 - his plan to propel the country towards becoming a developed nation by the year 2020 - exemplifies this. Much of the concern about Malaysia resides in the future of Malaysia after Mahathir.

3.1.UMNO Elections will not change party policy

So, how long will Mahathir’s influence last? It is generally assumed that Mahathir will not run for another term in the next general elections, more than four years away. Hence, the impending internal UMNO elections take on added meaning. The UMNO leadership has already installed Mahathir and Deputy Prime Minister Badawi in the top two slots. The main contest, therefore, is for the three Vice Presidential slots.

This contest has to be examined in the context of UMNO’s position relative to other political parties in Malaysia. Since the beginning, UMNO has had to grapple with being a political party while being the government at the same time. This has posed the interesting challenge of doing what is best for the country while benefiting UMNO at the same time. For instance, despite being pro-Malay, UMNO has not allowed overall development to suffer just to advance Malay interests. UMNO considers itself to be a national party, partly because of its alliance with other ethnic-based parties under Barisan Nasional - the national coalition government headed by UMNO - and appears committed to depicting a secular face. On the contrary, Partai Islam Se-Malaysia (PAS), the main opposition party, has targeted disaffected Malay voters using religion as its main plank.

On the political front, it is expected that UMNO will remain committed to its current middle-of-the-road path, while PAS is likely to be more flexible in its electoral approach. It is important to note that PAS’ chances of becoming a national threat to UMNO depend on its ability to attract other ethnic communities since the Chinese and Indians constitute over 40% of the population. This will only be possible if PAS tones down its religious fervor and moves to a more centrist approach, especially important as it tries to extend its influence beyond its current regimes in certain conservative and rural states.

What about UMNO, under another leader, in government? In such a scenario, a more technocratic government with a less visible leader is likely. Currently, policy flows down from the Prime Minister’s office and only the implementation is done at a lower level. Institutions are entities that are used to exercise the Prime Minister’s will. In the future, the lack of such a strong personality in the Prime Minister’s chair will lead to more delineation of power. A technocrat-influenced government is likely to lead to other consequences. The importance of the bureaucracy and civil service is likely to rise as think tanks become more prevalent. In general, decision making and implementation are likely to take longer. Institutions such as the judiciary and the press are likely to gain more latitude. Economic policy is likely to be more market driven and less influenced by social impulses.

It is not certain that Badawi will become the next Prime Minister. Mahathir will have a huge role to play there and it seems foolish to speculate, considering that the past three Deputy Prime Ministers have fallen by the wayside. In fact, Mahathir’s next choice for prime ministership might be one of the Vice Presidents. Obviously, the individual is important in shaping a country’s future, Mahathir being an obvious example. However, in the next few years, it is unlikely that one of these individuals will adopt dramatically different viewpoints on major issues. All the likely candidates have risen through the UMNO ranks. They have all been inculcated with traditional government principles and positions. They have all bought into Mahathir’s Vision 2020. Hence, major differences on policy issues, be they economic or political, are not expected.

3.2.National elections not likely to remove UMNO

There are two reasons that point to an UMNO victory in the next election. First, the last election was a wake-up call for the UMNO leadership. It seems to have realized the threat posed by PAS and the loss of support among the youth. Hence, UMNO is likely to reorganize internally to attract the younger generation. Promotion of younger members for electoral approval is possible in the hope that fresh blood will attract disaffected voters. Second, the Chinese and Indian populations are very wary of PAS’ ideals and their views are unlikely to change. Bred on a potion of restraint and secularism, Malaysians still view religious sentiment with distrust and suspicion.

PAS is likely to make further inroads in other states in the next elections; however, it is very unlikely to wrest overall power away from Barisan Nasional.

3.3.Anwar situation not a major concern

Anwar’s fall from grace has become a focal point for the western media’s criticism of Malaysia’s democratic credentials. The western media has chosen to emphasize Mahathir’s heavy-handed approach towards Anwar. The local population, fed on government controlled media, is more willing to allow Mahathir latitude in interpreting democratic norms. This support for Mahathir stems from the belief that his overarching concern is for the good of the country, which itself is backed by an outstanding record as Prime Minister. Even though the western media continues to ignore this issue, it is an important stabilizing influence on the country. Consequently, the Anwar situation is not a major concern for continued political stability.

However, leadership after Mahathir is an impending issue. Leadership in Malaysia, as in many other Asian countries, has evolved such that a leader is assumed to have the moral authority to instruct others on how to lead their lives. With the loss of Anwar, the natural heir apparent, Badawi is being groomed as Mahathir’s successor. However, he lacks Anwar’s natural charisma and does not have a populist image. In particular, he lacks Anwar’s carefully cultivated persona of the ‘New Malay’ who is equally comfortable wearing an Armani suit as he is in a religious Islamic setting. This image, especially appealing to the younger generation, was particularly effective in maintaining support for the economic reforms while retaining support among conservative segments of the population. Anwar’s sudden fall has left a vacuum in UMNO suggesting a dire need for a leader who is both secular and Islamic.

3.4.No separatist tendencies in Sabah and Sarawak

Sabah and Sarawak, the two Malaysian states located in north Borneo (see Appendix 3), constitute eastern Malaysia and are physically separated from mainland peninsular Malaysia. Given the economic backwardness of the two states, their geographic isolation and proximity to Indonesia, the two states are ripe for separatist movements.

Surprisingly, the people of Sabah seem generally satisfied with the overall authority of the central government given the high level of autonomy granted to the state. In addition, Sabah and Sarawak have a much higher proportion of seats in the national parliament than their share of the population, which provides these states with a sense of ownership in influencing the future direction of national and local policies.

However, the economic downturn hit the eastern states far worse than peninsular Malaysia. That, and the depletion of the main natural resource (timber), has meant that the eastern states have had to scramble to find alternative sources of revenue. Increasingly, the central government is being asked for assistance in this regard. The worsening of the economic situation in the eastern states, or the lack of response from Kuala Lumpur could spark negative reactions from Sarawak and Sabah, but it is doubtful that this will escalate into a separatist movement, at least in the foreseeable future.

4.Social Stability

4.1.Ethnic tension not likely to arise

Malaysia is a country with three distinct races; the Malays constitute 50% of the population while the Chinese and Indians contribute 31% and 9% respectively. The country, historically and rather remarkably, has avoided ethnic eruptions. The only notable exception is the riots of 1969, resulting from the rise in social inequity. Those riots have had an enormous impact on the Malaysian psyche, making them extremely wary of social disruptions.

In order to understand the future of the ethnic issue in Malaysia, it is important to analyze and understand the past. It is stunning that a country with three distinct races has managed to restrain ethnic violence. Consider that 50% of the Malaysian population is Muslim and this population is entirely Malay. Therefore, the country is split along the same lines both ethnically and religiously. With such a divide, it is surprising to note very little racial discord. There appear to be two distinct reasons for the lack of ethnicity-based eruptions.

• First, Malaysia has had to follow a balancing act among the three races, which has led to distribution of resources and an acceptance of others’ motivations. There is a definite majority race, the Malays, that has been accorded preeminence in many issues. It is especially important to note that the other ethnic groups have accepted this preeminence. Such acceptance has allowed the concentration of political power among the Malays. Since the Malay majority is not overwhelming, the concentration of political power has been accompanied with the unstated belief that the Malay leadership would work for the benefit of all groups. Additionally, every Prime Minister has consistently reinforced this belief.
  The interesting fact, though, is that the Malays have traditionally been the most economically deprived ethnic group. This has allowed concentration of economic power among the second most populous group, the Chinese. Such a distribution of economic and political power has allowed both races to grow without colliding. Historically, the Malays have been pleased with control of the government while the Chinese have been satisfied with economic power.

• Second, Malaysia has instituted an affirmative action program that has certain distinguishing characteristics. In most countries, affirmative action is used to support an economically or otherwise challenged minority. However, due to the peculiar economic and education levels of the Malays with respect to the Chinese, affirmative action policies in Malaysia have been used to support the majority Malay population. This has allowed Malaysia to avoid the public outbreak against such policies, where a majority questions the need to support a minority even after many years of independence/equal opportunity, such as India in 1991. The obvious question is why the minority Chinese did not complain about the support to the Malays/Bumiputeras. We find two reasons: one, the wealth distribution in Malaysia is still disproportionately in favor of the Chinese; in effect, continuing their economic superiority. Two, the Chinese recognize the importance of ethnic contentment for the continued stability of the economy, which has been the backbone of their financial success.

The affirmative action policies, such as incentives for having Bumiputera partners, have not proved unduly restrictive to Chinese economic ambitions. These policies are only important for obtaining government licenses/contracts and are not required for other businesses. In cases where such contracts are needed, the Chinese seem to have taken a practical approach co-opting partners instead of opposing the policies themselves. Further, the Chinese appear more wary of infighting among the Malays than about inter-racial disputes. Since economic growth is dependent on political stability and by necessity, social stability, we believe that ethnic tension is unlikely to find fuel among the Chinese population. Overall, the other races seem to follow a relatively non-confrontational approach with respect to the Malays. There does not seem any reason for a change in this approach.