To Modernize, Can Malaysia Move Beyond Race?

By Michael Schuman / Kuala Lumpur Sunday, Sept. 05, 2010
    • Photograph by Rahman Roslan for TIME

    Common cause Malaysia's three major races are reflected in one train carriage

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    Despite four decades of special aid, 3 in 4 of the poorest people in Malaysia are still bumiputra . Adli Ahmad Ghazi, the Malay co-owner of Malaysian Defensive Driving & Riding, a 70-employee driving school in Kuala Lumpur, complains that the pro-Malay policies do little to help a small businessman like himself. In 2008, Adli tried to get financing from three agencies tasked with supporting Malay businessmen or small enterprises, but got rejected. When he has to deal with the bureaucracy, Adli says, he faces the same red tape as any other businessman. It took him two years to buy a parcel of land for his company from the local government. "The [NEP] rules don't really apply to people on the ground," Adli says. "They say the NEP would help the Malays, but it only helps a small percentage of the Malays."

    Comfort Zone
    Affirmative action may not be helping the overall Malaysian economy either. Though Malaysia has been among the best-performing economies in the world since World War II and boasts a spectacular record of improving human welfare — the percentage of the population living in absolute poverty has plummeted from 50% in 1970 to less than 4% today — the story is now stuck on the same chapter. Malaysia has fallen into what is called the "middle-income trap." Having elevated itself to a comfortable level of income, Malaysia has been unable to take that next leap into the realm of advanced economies. While growth has slowed, Malaysians have watched other fast-paced Asian rivals zip by. In 1970, the gross national income per capita of South Korea, at $260, was below Malaysia's $380, but by 2009, South Korea's was almost three times larger, at $19,830 vs. $7,230, according to the World Bank.

    Malaysia's struggles reflect those facing Southeast Asia as a whole. The region's economies once seemed among the world's most promising emerging markets, but in recent years, progress in almost all of them has been stymied by upheaval and poor governance. Thailand remains rudderless as its fragile democracy has degenerated into perpetual factional strife. The promise of the Philippines remains unrealized as its feeble government has continually failed to enact the tough reforms needed to turn around the underperforming economy. Indonesia is only now returning to its place as one of the world's premier emerging economies after a decade of political uncertainty scared off foreign investors.

    If it is able to change its economic system, Malaysia could show its neighbors the way forward. Malaysia's essential problem is that its growth model — export-oriented manufacturing, often by foreign-invested factories — has become mismatched with its needs. Malaysia must become more innovative if its rapid development is to continue. But that's not happening. Private investment has fallen from a third of GDP in the mid-1990s to only about 10% today, labor-productivity growth has slowed, and R&D; spending remains anemic. Instead of developing new products with highly skilled technicians, Malaysia's manufacturing sector still too often assembles goods designed by others, using imported technology and low-skilled foreign workers. "There is a growing realization that Malaysia's relative position compared to other countries that are catching up very quickly is not improving," says Philip Schellekens, a senior economist at the World Bank. "Relative to where they want to be, there is still a long road."

    Though it would be incorrect to blame the pro-Malay policies for the economy's woes — Malaysia did, once, achieve remarkable rates of growth with the perquisites in place — they are nevertheless dampening business sentiment, scaring off talent, curtailing investment and stifling domestic competition. Chua Tiam Wee, president of the SMI Association of Malaysia, a small-enterprise organization, believes relaxing the NEP preferences would create a more level playing field on which the most capable firms could advance, making the economy more merit-based and upgrading Malaysian industry. The affirmative-action policy is "a source of a lot of distortions to the economic system," Chua says. By limiting the opportunities available to minorities, the NEP is likely contributing to a brain drain, in which some of the country's most talented people choose to work elsewhere. The government estimates that more than half of the 350,000 Malaysians working abroad have a college education. Stéphane Garelli, director of the World Competitiveness Center at IMD, a business school in Switzerland, believes that the affirmative-action regulations have made Malaysia less attractive to foreign investors. Malaysia's "bargaining power to put such restrictions on foreign investors is not as big as other nations'," he says.

    Chinese and Indian entrepreneurs in Malaysia certainly believe the pro-Malay policies cap their business opportunities. Pardip Kumar Kukreja, the Malaysian-Indian chairman of Grand Paradise Holdings, a Kuala Lumpur — based firm that manages and owns hotels and operates travel agencies, laments that he can't get access to lucrative contracts providing travel services to the government due to regulations that favor Malay-owned enterprises. Removing such restrictions, he says, can act as an incentive to invest. Kukreja recently decided to launch an Internet-based business to sell travel services worldwide because Najib's administration liberalized affirmative-action rules for the tourism sector last year. "There are many things we'd like to do, which we hope we'll be able to do in the near future," he says. "To a small and medium entrepreneur, he wants to make his own decisions."

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