The unfortunate case of Malaysia’s prime minister

The feeling that Malaysia is now in an abyss is real. Malaysians fear terrible things are happening to them and their country because of poor leadership. The man who – rightly or wrongly – will be blamed for all of Malaysia’s woes will unfortunately be the current prime minister.

The feeling that Malaysia is now in an abyss is real. Malaysians fear terrible things are happening to them and their country because of poor leadership. The man who – rightly or wrongly – will be blamed for all of Malaysia’s woes will unfortunately be the current prime minister.

In June this year, the minister responsible for transforming the Malaysian economy – Idris Jala – in an open letter to Bloomberg , complained that he hardly recognised the country that Bloomberg columnist William Pesek was writing about. In the open letter, Idris Jala provided a robust rebuttal to William Pesek’s derisive commentary on Malaysia.

Last week, Prime Minister Najib Razak was compelled to assert that Malaysia is not a failed state as public outrage reached a crescendo. Some even suggested that Malaysia is heading towards both a dictatorship and a  failed state. Najib Razak countered with statistics and examples.

Both the prime minister and his minister for economic transformation are correct that – on balance – the available analyses suggests that the Malaysian economy is healthy and the prime minister is not yet a dictator. Yet, both men also know that despite evidence to support their arguments; and after spending hundreds of millions of ringgit to prosecute their case, and also improve the prime minister’s image, the majority of Malaysians still thinklittle of him, his administration and the country’s performance. After the fatal mistake where he admitted that he “accepted” $700 million from a foreign donor (after first denying it) for the ruling party’s political activities (a story that is still unfolding), significant portion of his own supporters (from the United Malays National Organisation/UMNO) have also lost faith in him. This is most unfortunate for Najib Razak, but also his cabinet and the Barisan Nasional. 

During the East Asian Financial Crisis of 1997/98, then Malaysian prime minister, Dr Mahathir Mohamad (Tun Mahathir) managed to successfully pin the blame for Malaysia’s economic woes on the Jews. Najib’s party, UMNO, Razak is attempting a similar tactic of deflecting attention elsewhere by describing the Democratic Action Party as being funded by Jews, a charge strenuously denied by party officials. There is/are no external force/s that he and his allies can pin the blame on. He is being attacked by people from within his own party for what they perceive as unforgivable mistakes that are weakening the Barisan Nasional and UMNO further; and that these mistakes are of his own making. The majority of Malaysians have long registered their preference for another coalition and leader.

The leadership of Barisan Nasional and the present cabinet strongly backs Najib Razak. Beyond that small but powerful circle, support is thin. He is now being made thescapegoat for the Barisan Nasional’s, the UMNO’s and the country’s poor performance. All calamities befalling Malaysia and Malaysians are now being placed at his feet.

Despite being a prized product of the UMNO and Barisan Nasional system, Najib Razak is now a curse to many within the system that produced him.  The son of the architect of  the New Economic Policy and an UMNOthoroughbred, Najib Razak once glorified, is now houndedby the very people who made him the king of the hill. He has become a plague. It is no longer 1MDB but the prime minister that is the symbol of everything that is wrong with Malaysia.

On the 29th and 30th of August, 2015, rallies have been organised not only in Malaysia, but all over the world by Malaysians calling for Najib Razak’s resignation.

Will Najib Razak survive the weekend?

Stay tuned.

This article first appeared in Forbes.

Note: (1) I am holding off my article on the intra- and inter-institutional fights for awhile as I await new information. (2) Videos of grassroot UMNO leaders openly (and sometimes rudely) calling for his resignation are available on the internet. Here is a selection: [Video 1;Video 2; Video 3]. While other videos[Video 4] have exhorted the importance to attend the rally to demand change [Video 5].

Low Yat Riot in Malaysia – Racial or something else?

Was the riot in Malaysia’s entertainment and commercial district racial?

Was the riot in Malaysia’s entertainment and commercial district racial?

According to reports, an estimated 200 Malaysians, mainly youths from Malaysia’s ethnic majority Muslims, demonstrated violently by destroying property and beating up members from a minority ethnic group, the Malaysian Chinese.

The riot reportedly started after a 22-year-old jobless man named Shahrul Anuar Abdul Aziz was accused of stealing a mobile phone worth MYR 800 (about $210) and handed over to the police. Afterward, rumors circulated on social media that that an ethnic Chinese trader had conned a Malay man by selling him a counterfeit phone.

While several forms of discrimination (particularly racism) is institutionalized (and accepted) by Malaysia’s minority groups, this is the first time that such a large scale riot has happened against them in an unlikely setting. Racial clashes in the past have occurred primarily in urban poor housing areas, the two most significant being the Kampung Rawa and Kampung Medan riots, but Bukit Bintang is an upmarket area, predominantly Chinese, and internationally known as the entertainment and commercial capital of Malaysia. A most unlikely place for a race riot to occur.

The incident and subsequent reactions raises several interesting questions.

The woeful inadequacy of the police in preventing the incident from escalating, raises questions. It raises questions because Malaysia’s police have sweeping powers to address threats to state and society. The irony is that the Malaysian police are notorious for their abuse of these powers, ranging from deaths in custody, extra judicial executions to violently disrupting legitimate and peaceful assemblies. In this case, they appear to have lost that “notoriety.”

The brazenness of the demonstrators does raise questions. Malaysians by and large are not known for mob violence. This behavior is associated more closely to supporters of the ruling party as they are known to be immune to prosecution. Investigations are on-going and it is worth watching what would happen to these demonstrators.

The authorities are also investigating several individuals for sedition. Most prominent is Mohd Ali Bahrom, the president of the Armed Forces Veterans Association, a known associate of key leaders from the ruling party.

The authorities have already denied that this was a racial riot. Segments of Malaysia’s political class and society, from both sides of the divide, have also supported this idea.

Sophie Lemiere, writing in New Mandala, suggests that this is not a racial riot but an unintended outcome of how the ruling party has been running the country. She terms this Politok — a combination of ruling party politics and amok. Individuals and groups that the ruling party procures for violence and used to the immunity are taking the law into their own hands to resolve disputes.

Race riots or not, Malaysia is certainly treading dangerous grounds.

This article first appeared in Forbes

Malaysia struggles to escape the middle-income trap

Malaysia’s economic reforms are under question.

The term ’middle-income trap’ possibly first entered Malaysia’s official policy lexicon when Premier Najib Razak referred to it as Malaysia’s greatest development challenge. He noted:

We have become a successful middle-income economy. But we cannot and will not be caught in the middle income country trap. We need to make the shift to a high income economy or we risk losing growth momentum in our economies and vibrancy in our markets.

The use of the term by the premier was courageous, as it was then still in its infancy. It had only been introduced into mainstream economics two years earlier through the World Bank publication, An East Asian renaissance: ideas for economic growth. This publication, timed to commemorate the 10th anniversary of the East Asian Financial Crisis (1997–98) and confirm East Asia’s return to a high-growth era, was overshadowed by the subprime crisis and the subsequent great recession (2008–09).

Nevertheless, the term and the concept gained traction. In the five years since, the middle-income trap has become shorthand to describe the challenges faced by rapidly growing economies.

It is not surprising that the middle-income trap (trap) hypothesis has gained traction, as more than 80 per cent of countries in the world are in that income band or lower, and it is a political imperative for all leaders and governments to raise the income levels of their citizens.

But becoming a high-income country is challenging and a long-term process. The majority of the countries that are now in the high-income level were in the middle-income level more than 100 years ago.

The Lead Economist with the Central and West Asia Department of the Asian Development Bank, Jesus Felipe (p.4), quoting the works of Angus Maddison, noted that the first country to reach $2000 per capita was The Netherlands in 1700, with Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States, moving into the middle-income levels (lower and upper) at the end of the 19th century (around 1870).

This same study covering 124 countries, between 1950 and 2010, demonstrated that in 2010 there were 40 low-income countries (below $2000), 38 lower middle-income countries ($2000–$7250), 14 upper middle-income countries ($7250–$11750), and 32 high-income countries (above $11750).

A further study identified there were 101 middle-income countries in 1960. Only 13 of these became high income in 2008—Equatorial Guinea; Greece; Hong Kong SAR, China; Ireland; Israel; Japan; Mauritius; Portugal; Puerto Rico; Republic of Korea; Singapore; Spain; and Taiwan, China.

Stated differently, moving into high-income is the exception rather than the norm. The norm is therefore, for an economy/country to be in the middle-income level.

The World Bank classifies countries according to incomes (which is the global convention): lower income ($1035 or less); lower middle-income ($1036-$4085); upper middle-income ($4086-$12 615); and high income ($12 616 or more). It is relatively simple to move from lower income but tedious to move from lower to upper middle-income levels. For example, it would take a country 19 years at 5 per cent annual growth rates to move from $400 to $1035. It would take the same country 50 years to move from $1035 to $12 615 at the same growth rates.

The more challenging aspect of the middle-income trap debate, beyond issues related to classification, is the ability to differentiate between countries that are experiencing temporary growth slowdown and those which are in a trap.

According to one approach, a country is in a trap if at its growth rate, it will spend longer than the median country in that same income category (lower middle income or upper middle income). A country avoids the trap if it crosses the lower middle-income segment in less than 28 years; the upper middle-income segment in less than 14 years and experiencing growth rates that are more than 3.5 per cent. According to this approach, Malaysia entered the lower middle-income economy in 1969 and joined the ranks of upper middle-income countries in 1996. In this conceptualisation, Malaysia is a borderline case as it has been in the lower income for 27 years, and 15 years in the upper middle-income (in 2010) with average growth from 2000–10 at 2.6 per cent.

Another approach examines the middle-income trap as a special case of conditional growth slowdowns—i.e. the contribution of institutions, demography, infrastructure, macroeconomic environment, and output structure and trade structure in to growth slowdown. The focus is also on relative, sustained growth slowdowns. The findings suggest that middle-income countries are more likely to experience growth slowdowns, and that Malaysia is experiencing growth slowdown caused by institutional factors.

Najib Razak was partially correct when diagnosing that Malaysia was experiencing a middle-income trap. Others are suggesting that Malaysia is experiencing a special case of growth slowdowns. The bigger question is whether in making this diagnosis the premier had identified the correct economic reforms, and measures to implement them.

The outcomes are just as contentious as the debates on the middle-income trap. While Malaysia continues to record credible rates of economic growth (4.3 per cent for the period 2009–13), the sources of this growth are being questioned.

It has been argued that growth is being driven by pump priming of the economy through populist measures financed through debt. Najib Razak’s flagship policies to address the middle income trap—1Malaysia, the Government Transformation Programme and the Economic Transformation Programme—have largely faded into the background as pressing issues on race and religion, corruption and crime have persistently taken centre stage. At the recent general elections, the majority of Malaysians rejected these policies.

Despite the rejection, the premier continues to insist that his policies are sound. Notwithstanding, he was correct however, when he warned that unless Malaysia undertook the reforms successfully, it would risk losing growth momentum in our economies and vibrancy in our markets’.

This article first appeared in Asian Currents

Malaysia’s development challenges

An excellent book narrating the challenges the Malaysian economy is experiencing.

Malaysia’s Development Challenges – Graduating from the Middle by Hal Hill, Tham Siew Yean and Ragayah Haji Mat Zin (eds) Routledge, London and New York, 2012, pp. xxvi + 348. ISBN 978 0415 63193 8

Any book on Southeast Asia that has Hal Hill’s name on it is likely to be interesting and thought-provoking. This book is no exception. Hal, together with Tham Siew Yean and Ragayah Haji Mat Zain returns to a familiar stomping ground – Malaysia, its economic growth and development challenges – at an opportune time, as Malaysia seeks ‘ideas and solutions’ to not only move to a high income economy but also to realign the interests of its political elites with the Rakyat.

In the past two decades, Malaysia has received several book length treatment as individuals and institutions investigate and attempt to identify the variables that have contributed to Malaysia’s spectacular economic growth story, as well as to identify ones that could/are contribute/ing to its growth slowdown. Volumes such as “Restructuring the Malaysian economy: development and human resources” (Lucas and Verry 1999),  “Industrialising Malaysia – policy, performance and prospects” (Jomo 2002), “Modern Malaysia in the Global Economy” (Barlow 2001), “Malaysian Economics and Politics in the New Century” (Barlow and Loh 2003),  “Sustainable Growth and Economic Development – a case study of Malaysia”(Mahadevan 2007) , and “Tiger economies under threat: a comparative analysis of Malaysia’s industrial prospects and policy options” (Yusuf and Nabeshima 2009) are among notable attempts to understand, explain and possibly forewarn Malaysians of the challenges that they face through either the discipline of economics and/or of political science.

This volume follows on in this tradition. It is comprehensive in its scope with a strong policy dimension. The volume contains 13 chapters, written by 17 authors addressing a multiple set of issues. Analysing a country involves many moving parts and possibly moving in various directions simultaneously. Hence making a coherent argument of the causality and organising it in a logical sequence can be challenging. To address that, this book takes the following logic. Chapter 1 by Hal, identifies 6 stylised facts about Malaysia [rapid economic growth; rapid structural change; consistent openness; competent macroeconomic management; social progress; institutional quality, and, political economy and ownership structures], and 3 broad and inter-related factors[microeconomic, macroeconomic and distributional] that are central to the Malaysian graduation challenge. The following twelve chapters then speak to these six stylised facts and provides the basis for analysis, assessment and then solution within the 3 broad factors on what needs to be done in Malaysia to overcome the middle income trap.

The volume begins with an excellent preface by one of Malaysia’s intellectual giants,Emeritus Professor Datuk Dr. Mohamed Ariff. He provides a broad sweep of Malaysia’s economic history since independence, identifying succinctly the theoretical basis to Malaysia’s economic and political development strategies, the inherent problems – internal and external – faced over time, and the policy success and failures that successive administrations had made which contributed to Malaysia’s economic growth as well as creating the challenges that it must now face. If one needed a fifteen minute in-depth introduction to the Malaysian economy and its challenges, this preface would be sufficient.

Chapter 1 is the most important chapter in the book, with all other chapters providing the supporting evidence. Chapter 1 not only provides the logic of the book, but also narrates Malaysia’s economic development path, summarises the key factors that has contributed to its success, evaluates which are the factors that will continue to put Malaysia in good stead as well as identify factors that will contribute to Malaysia being stuck in the middle income trap. Chapter 1 makes the analysis by bringing to bear the various growth theories (e.g. evolutionary economics, convergence theory, institutional theories, etc.) but also compares with the actual experience of other countries (e.g. Argentina, New Zealand, South Korea, Singapore, etc.) while identifying the unique issues that Malaysia faces.

The 12 chapters that follow then discusses the following aspects to articulate Malaysia’s development challenges in more detail. Each chapter provides a brief historical overview and then identify where policies have succeeded or failed: (i) Chapter 2 – political reforms; (ii) Chapter 3 – corporate ownership and control; (iii) Chapter 4 – economic crisis management; (iv) Chapter 5 – monetary policy and financial sector development; (v) Chapter 6 – public finance management; (vi) Chapter 7 – microeconomic reforms; (vii) Chapter 8 – services sector liberalisation; (viii) Chapter 9 – technological upgrading in the electronics sector; (ix) Chapter 10 – education sector reforms; (x) Chapter 11 – poverty and income inequality; (xi) Chapter 12 – demographic change and labour force issues; and (xii) Chapter 13 – sustainable development.

The problems identified in each of the chapter[i] appears to be many, multi-faceted, well-known and well-researched. Using’s Rodrik’s conceptualisation of growth factors into deep determinants (institutions, trade, and geography) and proximate determinants (factor endowments and productivity) as a way of classifying these problems (Rodrik et al. 2004), the usual suspects identified in this volume when traced to its root cause appears to be institutional in nature. Problems such as the debilitating effects of political patronage on a whole range of issues; poor quality human capital development; mismatches in the labour markets; protectionism in key services sector; technological level and innovation that is not keeping pace with the income level of the country; poor quality tertiary education system; underdeveloped private sector especially small and medium scale enterprises (SMEs); fiscal profligacy; mismatch between stated public policy objectives and implementation; and environmental degradation can all be classified as institutional failures.

The more interesting question which this volume appears to have neglected is why a government as successful as the Barisan Nasional – the world’s longest continuously elected government – has failed after more than a decade to address the growth slowdown Malaysia is experiencing. This question is all the more interesting as it has been researched extensively for more than a decade. The works of Professors’ Gomez (Gomez 1994; Gomez and Sundaram 1999), Narayanan (Narayanan 1996) and Rasiah (Rasiah 1996, 1995) are illustrative as more than a decade ago they had already breached these issues – Gomez on money politics and institutional degradation, Narayanan on fiscal profligacy and Rasiah on labour and technological upgrading. Furthermore, many studies – from individuals and institutions – have identified what Malaysia needs to do, as this volume does. But nothing much has changed in Malaysia, and some would argue that the situation has regressed further.

Here is where this volume could have done better especially with the array of Malaysia experts at hand. The million dollar question for Malaysia is not what needs to be donebut how to do, what needs to be done. Identifying the problems is often the easy bit. Prioritising, sequencing, implementing, monitoring and re-calibrating them when needed as it unfolds is the tough part. Intelligently, academics have left these to the politicians. However, a chapter which addresses the ‘how to’ would have been most beneficial and would have made this book a stand out.

As Malaysia’s challenges are institutional in nature implies that what is needed is reforms at the very top of the institutional hierarchy. One approach that comes to mind in addressing the ‘how to’ question would beMushtaq Khan’s revisit of political settlements or as he states it, finding ‘growth enhancing governance’ (Khan 2010). This growth enhancing governance is not the ideal but the practical; a settlement among the competing elites and important stakeholders that allows for institutional stability, while allowing for payments to powerful vested interests, does not negate the overall opportunities for growth and its distribution to the majority of its populace. The ruling coalition in Malaysia may have figured this out in the past but it is clear that this political settlement is not working anymore. It therefore necessitates a new political settlement to graduate into a high income country.

Malaysia can be a model for many countries for many reasons as this volume affirms. More importantly its attempts to reform peacefully is a distinctive feature among developing countries. This volume is much welcomed as it is one source which compiles in a comprehensive manner the issues, analyses them, and suggests reform measures. It should be read by all those who want to understand the challenges Malaysia face as a middle income country and does it in a forthright manner. Most importantly it also makes good reading.

This article first appeared in New Mandala.

References

Barlow, Colin. 2001. Modern Malaysia in the global economy: political and social change into the 21st century: Edward Elgar Publishing.

Barlow, Colin, and Francis Kok-Wah Loh. 2003. Malaysian economics and politics in the new century: Edward Elgar Pub.

Cooray, Arusha. 2012. “Malaysia’s Development Challenges: Graduating from the Middle, by Hal Hill, Tham Siew Yean and Ragayah Haji Mat Zin (Routledge, London, UK, 2012), pp. 376.” Economic Record 88 (283):597-8.

Gomez, Edmund Terence. 1994. Political business: Corporate involvement of Malaysian political parties: Centre for South-East Asian Studies, James Cook University of North Queensland Townsville, Queensland, Australia.

Gomez, Edmund Terence, and Jomo Kwame Sundaram. 1999. Malaysia’s political economy: Politics, patronage and profits: Cambridge University Press.

Hirschman, Charles. 2013. “Malaysia’s Development Challenges: Graduating from the Middle edited by Hal Hill , Tham Siew Yean , and Ragayah Haji Mat Zin (eds) PB – Routledge , London and New York, 2012 Pp. xxvi + 348. ISBN 978 0415 63193 8 .”Asian-Pacific Economic Literature 27 (1):163-5.

Jomo, Kwame Sundaran. 2002. Industrializing Malaysia: policy, performance, prospects: Routledge.

Khan, Mushtaq. 2010. “Political settlements and the governance of growth-enhancing institutions.”

Lucas, Robert E. B., and Donald Verry. 1999. Restructuring the Malaysian Economy: Development and Human Resources: St. Martin’s Press.

Mahadevan, Renuka. 2007. Sustainable growth and economic development: A case study of Malaysia: Edward Elgar Publishing.

Narayanan, Suresh. 1996. “Fiscal reform in Malaysia: Behind a successful experience.” Asian Survey 36 (9):869-81.

Rasiah, Rajah. 1995. “Labour and industrialization in Malaysia.” Journal of Contemporary Asia 25 (1):73-92.

———. 1996. “Innovation and institutions: Moving towards the technological frontier in the electronics industry in Malaysia.” Journal of Industry Studies 3 (2):79-102.

Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi. 2004. “Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development.” Journal of Economic Growth 9 (2):131-65.

Yusuf, Shahid, and Kaoru Nabeshima. 2009. Tiger economies under threat: a comparative analysis of Malaysia’s industrial prospects and policy options. Vol. 566: World Bank Publications.


[i] Those interested in a chapter by chapter analysis should read Arusha Cooray’s review of the same book (2012) while Charles Hirschman (2013) provides a more historical review.

Global, not Asian, focus is the key to growth

Australia’s success in the Asian Century should come from unilateral domestic reforms of trade policy, not preferential deals.

Asians love fireworks. So it was hoped the government’s Asian White Paper (WP) would be a cracker. Instead we got a fizzer, long on vague aspirations but short on good ideas.

Australia’s growing trade links with Asia are good. But so are our links with non-Asia. We should not be focusing policy attention in any particular direction, especially as the basis of reform. Our interests are to continue as a global player. Regional economic integration should be based on commercialism, and not be at the expense of global integration nor of policies that “place regional economic integration at the centre of decision-making processes”.

Remember the Asian financial crisis in the late 1990s. Our openness to the whole world enabled us to weather that storm as Australian exporters faced with declining regional competitiveness as the dollar appreciated against Asian currencies thankfully turned to non-Asian markets e.g. North America.

This global openness also undoubtedly contributed to Australia’s resilience to the GFC. When the next regional or global crisis occurs, or relative competitive positions change, Australian traders will hopefully again be able to respond accordingly. It is imperative that our businesses can quickly change markets globally as economic conditions change.

The WP’s national objective that “Australia’s trade links with Asia will be at least one-third of GDP by 2025” lacks sense.

Good trade policy is the opposite of that espoused in the WP, namely opening our market on a non-discriminatory (MFN) basis. That approach underpinned the Hawke-Keating unilateral trade-related economic reforms in the 1980s and 1990s which turned around our economic performance. MFN liberalisation is also the core of the WTO, which has stagnated as members, including Australia, rapidly embrace preferentialism.

Alarmingly, the WP drives yet another nail into the Hawke/Keating approach by endorsing discriminatory reform via preferential trade agreements (PTAs). The WP refers to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) as a “high-quality, truly liberalising agreement”. Where is the evidence for this?

It also endorses the ultimate goal of regional integration to be an APEC free-trade area, which the Trans-Pacific Partnership (TPP) and the Regional Economic Cooperation Agreement (RECA) could become. This would depart from the non-discriminatory foundation on which Australia formed APEC. Worse still, the TPP is being negotiated under US influence in a way to ensure China will not join.

The WP’s prescription for Australia to become “more open and integrated with Asia through comprehensive regional agreements” shifts the responsibility for decision making away from our domestic institutions towards a non-transparent bargaining process with other countries which the record shows will not deliver genuine liberalisation.

Instead, it will slow our domestic reform by generating new excuses to do nothing e.g. to retain tariffs as “bargaining coin” in PTAs. The government’s willingness to surrender our domestic policy to foreigners is evident in the WP stating that tariffs will only be reduced on a non-MFN basis as part of negotiating future PTAs.

This ignores the Productivity Commission’s (PC) policy advice in 2010 that PTAs do not work as advertised and are oversold. It urged Australia to revive unilateral (MFN) reforms since these provide larger, more certain gains.

Instead, the WP has endorsed the “competitive liberalisation” model of the US, using PTAs as the basis of reform without any credible policy evaluation. It also calls for more PTAs, including possibly joining the Pacific Alliance. The inefficiencies of creating such a “noodle bowl” of overlapping PTAs with multiple memberships are obvious.

Sadly, the WP seems unaware that PTAs undermine the WTO’s effectiveness. With the WP further supporting PTAs, it is not credible for the WP to claim as it does that the “WTO is the government’s preferred vehicle for pursuing trade liberalisation”.

The mockery of WTO principles is extended by the WP’s enthusiasm for Australia and the US co-chairing efforts to form an International Services Agreement. As the US will insist this be non-MFN, Australia should “walk away” from the whole idea.

Australia will handle the 21st Century (in Asia and elsewhere) if it focuses its trade policy on unilateral domestic reforms. Unfortunately, the WP advocates a trade policy that takes us as far away from that strategy as is imaginable.

This article first appeared in the Australian Financial Review.

Malaysia’s next general elections shaping up to be a battle of coalitions

The winner of the next general election will depend on their ability to address complex changes in Malaysian society.

Malaysia’s 13th general election, which must be held by April 2013, has been the most anticipated in Malaysian history, given the megatrends that are occurring in the country and the ability of the two main contenders to manage them.

Barisan Nasional (BN) and Pakatan Rakyat (PR) are the main contestants. BN — currently the longest-ruling coalition in the world — is a 13-party coalition based mainly around ethnic and regional interests. Umno is the single most important political party in the ruling coalition, dominating not only the coalition, but all major institutions in Malaysia except in the state of Sarawak. Najib Razak, son of Malaysia’s second prime minister, has led the coalition since becoming Umno president through an interparty compromise.

PR, in turn, is a new and informal coalition, set up in the euphoria of the opposition’s historical performance at the March 2008 12th general election. None of its three component parties has a clear majority, and all understand that their success is predicated on their ability to work together. PKR’s unelected leader Anwar Ibrahim leads the coalition by virtue of his ability to hold together three disparate groups — the Chinese-dominated DAP, the Islamists party PAS and his own band of largely ex-BN/Umno members.

Five critical megatrends face the contenders at the national level: economic performance, demographic changes, urbanisation, Islamisation and an island/peninsula divide.
The middle-income trap: The popular diagnosis for Malaysia’s stagnating economic performance is that Malaysia is caught in a middle-income trap, where it is unable to compete with low-cost producers on cost, but also by not having the institutions, human resources and technological capabilities to compete with advanced economies in innovative products and processes.

A young nation: 71 per cent of Malaysians are under the age of 40, with 34 per cent aged between 20 and 40.

An urban nation: 71 per cent of Malaysia is now urban, with only Kelantan, Pahang, Perlis, Sabah and Sarawak still being largely rural. Urbanisation rates are below 55 per cent.

An Islamic nation: The pervasiveness of Islam as a political tool and the increasing piety among Muslims have reached unprecedented levels.

Two nations: The politics of Peninsular Malaysia starkly differ from that of the island of Borneo. Political leaders and citizens in Sabah and Sarawak continue to distrust peninsula politicians, and all politics in these two states is local.

These trends translate into electoral issues in the following ways. Most critically for BN, its successful economic strategy is now being questioned on several counts. First, Malaysia’s low-cost, export-oriented economic model has seen wages for 80 per cent of Malaysian households stagnate for the past three decades. These households earn less than RM3 000 a month, in a country where the average monthly income is RM4,025. More critically, the bottom 40 per cent of Malaysian households earn RM1,440 a month. Seventy-one per cent of this bottom 40 per cent are Bumiputeras — a Malay term translated literally as “prince of the land”. The average monthly income of the top 20 per cent of households is RM10,000.

Second, in politicising education, BN has sacrificed quality for quantity. International benchmarks and surveys consistently show that the quality of education in Malaysia, at all levels, cannot match the successful East Asian economies. Eighty per cent of Malaysia’s labour force has no more than the Sijil Pelajaran Malaysia (SPM) qualification (SPM is equivalent to Year 10), and the 57 universities and the more than 500 colleges are producing large numbers of poorly equipped graduates. This has led to a poorly skilled labour force and unemployed graduates, with the economy facing severe skills shortages in a tight labour market.

This has had a significant impact on Malaysia’s young voters. The majority of local graduates utilise a government loan scheme. With limited employability and mediocre wages, they end up saddled with enormous debts. The problem is exacerbated by high unemployment. Graduates accounted for more than a quarter of those unemployed in 2007, while unemployment among new graduates was 24.1 per cent in 2008.

The public sector, at the federal and state level, and government-linked corporations (GLCs) have long been used to mop up Bumiputera graduates as part of an implicit contract between Umno and the Malays. With the country experiencing economic stagnation, rising public debt, depleting natural resource rents from fossil fuels, the bloated civil service and GLCs are now a severe drag on the Malaysian economy and can no longer function as a source of employment opportunity for the thousands of Bumiputera graduates. Many non-Bumiputera graduates also suffer the same predicament, as they are locked out of the public sector and the GLCs. Many are also ill-equipped to meet the demands of the private sector, especially in businesses exposed to international competition.

Increasing urbanisation has led to a greater interaction between Malaysians of different races and also between Malaysians and the outside world. Although there is still significant segmentation among the races and social classes in urban areas, this has meant greater interaction at work and global development that have produced varied results. Most importantly, the interactions have has forced Malaysians to focus more on the issues that affect their daily lives, such as the quality of life, the cost of living, or global events such as the Arab Spring.

Urbanisation also challenges the BN’s monopoly on information. In 2010, 65 per cent of Malaysians were using the internet. Cyberspace has been a boon for the opposition and civil society, and is an arena the BN has yet to effectively control. High urbanisation rates, which are driven primarily through rural–urban migration, also connect rural areas and urban centres more strongly through social networks. Families and individuals returning to their rural homes for festivities bring with them the latest political developments, made more accessible by the internet. This is further challenging the BN’s control in rural areas.

Islamisation of the public sphere — despite Malaysia’s secular constitution — has taken a concrete foothold in Malaysian society, due mainly to the contest between Umno and PAS for the Malay votes. Global developments have also influenced this trend. Islamic fundamentalism now pervades all aspects of Malaysian life, both public and private. While Islam had always mattered in the political and social sphere as an ideology, it is now also encroaching into the economic sphere.

Politics on the island of Borneo is based on local issues and mistrust of the federal government. The 2008 general election established the importance of Sabah and Sarawak in forming federal government. Sabah and Sarawak have become increasingly assertive since. As all politics on the island is local, and as a result of their strengthened bargaining position, Sabah and Sarawak — long considered fixed deposits for BN — are no longer a foregone conclusion.

The response from the contenders is influenced primarily by their incumbency — or lack of it.

The component parties of the BN, until the 2008 general election, had long-serving leaders, which impacted severely on inter and intraparty dynamism. The incumbency of these leaders and the BN resulted in a disconnect between entrenched party leaders and grassroots leaders, as well as members and supporters. Interparty competition for resource rents and for patronage has also resulted in leaders leaving the party or being put away in “cold storage”. The incumbency of these leaders has also limited the ability of the parties to attract new members and develop new and dynamic second-echelon leaders. Most damaging has been Umno’s increased strength: this has relegated other coalition partners to minions, effectively making elite bargaining redundant — the hallmark of the BN.

In contrast, PR, despite strong leadership, has marginally more democratic processes, due mainly to limited opportunities to access and distribute resource rents. The Reformasi, Bersih and Hindraf movements, Anwar Ibrahim’s charisma, and most importantly, the government’s inability to manage the megatrends, have seen young people flocking to the PR.

The two main contenders have framed their arguments for support in a contrasting manner. Umno, through the BN, has argued that social stability delivers economic growth and that only a strong Umno can guarantee social stability.

At the 13th general election, Umno will be arguing that it has the track record in delivering social stability and economic growth. PR, instead, is arguing that good governance and social justice are critical to Malaysia’s continued economic growth and social stability. PR argues that the persistent weakening of the Malaysian economy, and social unrest, are due to BN’s mismanagement of the economy, its divisive racial and religious politics, and the abuse of the rule of law.

The 2008 general election solidified the two-coalition system, and this is unlikely to be reversed. The surprising aspect of this development is that it took opposition parties 50-odd years to co-operate effectively, considering that Malaysians never given BN, on average, more than 57 per cent of the popular votes — with its best-ever result of 65 per cent achieved only in the booming ‘90s, at the 1995 general election.

Malaysians have demonstrated time and again that, despite its hegemony, the BN is not an overwhelmingly popular coalition. While the results of the 13th general election will depend mainly on the leadership abilities of Najib Razak and Anwar Ibrahim to manage their coalitions in addressing issues, neither coalition will remain in power for long—even with the support of a rigged electoral system—if it fails to address these megatrends effectively.

This article first appeared in Asian Currents

Prime Minister Najib – Fiscal discipline and efficiency for Malaysia first!

Malaysia will need to strengthen its fiscal discipline before expanding its tax base.

Historically, Barisan Nasional’s (BN’s) fiscal management has failed in two related ways.  They have displayed no fiscal discipline, and their public service expenditure has been highly inefficient and corrupt. Malaysian Prime Minister Najib’s decision to introduce a Goods and Services Tax (GST) is therefore premature. Before introducing a GST, Najib must first demonstrate to the Rakyat that he has the ability to reform BN by reining in fiscal deficits.

A historic lack of fiscal discipline

There are two conventional approaches to fiscal policy: a balanced budget approach, where the government spends only what it earns or a counter-cyclical approach, where the government accumulates surpluses during high growth periods to use as deficit spending during recessionary periods. Up until now, BN has chosen neither approach.

Malaysia has recorded high growth rates every year since independence in 1957 except for 1985, 1998 and 2009. With average annual growth rates of approximately 6.5 per cent, one would expect Malaysia to record a fiscal surplus over the period. But the converse is the case. Malaysia’s fiscal deficit hit a twenty-seven year high in 2009 at 7.4 per cent of GDP.

The primary reason for this huge fiscal deficit is that spending has exceeded revenue. Although federal government revenues have increased since 1957 by approximately 3 per cent per annum,  this spectacular rise in revenue has been exceeded by an even more spectacular rise in expenditure, which reached a colossal RM220 billion in 2009.

More specifically, this increase in spending corresponded to BN’s need to ‘finance’ its ‘New Economic Policy’. This ‘New Economic Policy’ began in the 1970s, when the government got involved in the economy through state owned enterprises (SOEs) to promote ‘Bumiputera’ interests. The SOEs were a colossal failure. Then, in the 1980s, Prime Minister’s Mahathir’s venture into heavy industries caused a fiscal crisis. Finally, since the financial crisis of 1997/98, the BN government has been pump priming the Malaysian economy to keep it afloat.

Highly inefficient and corrupt public fiscal management

BN has historically engaged in extremely inefficient public expenditure. There are two types of public expenditure – operating expenditure for the maintenance of existing goods and services, and developmental expenditure to create new goods and services that enhance the productive capacity of the economy. Despite extensive privatisation, in Malaysia operating expenditure has unacceptably kept pace with increased revenues, while development expenditure has not.

A key reason for this is that the public sector has expanded uncontrollably. Malaysia boasts the largest public sector in Southeast Asia. Yet it still faces shortages in critical areas like doctors, nurses, mathematics and science teachers, which suggests a serious misallocation of resources. There must be a serious reduction in the number of Malaysian ministries, agencies, statutory bodies and ultimately civil servants. Wages must be linked to productivity to extricate the public sector from the low-wage, low productivity trap that it finds itself in. This would also reduce the currently high level of income inequality afflicting the public sector.

Another important reason for ballooning public expenditure is the collusive behaviour among public sector, the BN and private sector – best illustrated by the ongoing Port Klang Free Trade Zone (PKFZ) scandal. The auditor general’s annual report reveals that all forms of government procurement – tender, open tender, quotations, and direct purchase – are currently prone to abuse. Kickbacks, rigged bids, the use of ‘shell’ or ‘front’ companies, excess payments and misrepresented facts seem to be the norm rather than the exception. The Performance Management and Delivery Unit (PEMUDAH), set up by BN to facilitate business, has estimated that corruption could be costing Malaysia approximately RM10 billion a year – about 1-2 per cent of GDP. In the book ‘Malaysian Maverick: Mahathir in Turbulent Times,’ Barry Wain reported that Mahathir squandered RM100 billion or more through corruption and mismanagement.

This evidence suggests that the BN cannot be trusted with the nation’s finances. Given the current problems afflicting the public sector, the benefits of any new tax would also be dissipated and so would not solve Malaysia’s fiscal problems. Furthermore, based on its past record, BN would likely raise the GST tax rates to meet unrestrained spending habits.

Prime Minister Najib must focus on putting his house in order before considering implementing the GST or any other new taxes. In discussing fiscal reforms, he must reach out to the opposition. After all, they represent half of Malaysia’s voting population. Only after this occurs should the introduction of a GST be countenanced.

This article first appeared in Malaysiakini.