Egypts fate could yet be Malaysias future

From the Australian February 25, 201112:00AM

ASKED to comment just days after the removal of Egyptian strongman Hosni Mubarak, Malaysian Prime Minister Najib Razak shocked local reporters by responding: Dont think that what is happening there must also happen in Malaysia. We will not allow it to happen here.

As Najib correctly reminded the press, Malaysia is very different to Egypt.

The United Malays National Organisation Party has been in power longer than any governing political party in the world.

But this unscripted display of insecurity is revealing. When announcing his new economic model last year, Najib became the first Malaysian prime minister to explicitly link the countrys economic and social problems with its four-decades long affirmative-action policies.

By his own admission, failure to wind back these policies will lead to a bleak future and even failure for one of the regions former tigers, meaning Egypts fate could yet be Malaysias future.

Affirmative-action policies were an understandable response to the 1969 race riots in Kuala Lumpur between ethnic Malays and Chinese, which led to the deaths of several hundred people.

Still the defining event for the country, the riots occurred as Malaysia was emerging as a new state with the majority Bumiputra population falling well behind the economic progress of ethnic Chinese and Indian Malaysians, and with Malaysian society divided along racial lines.

Given that the race riots were due to socio-economic racial divisions, Malaysian leaders could have responded by attempting to move the country away from ideologies and policies that emphasised and entrenched racial differences.

Instead, UMNO leaders went the other way, preferring to pursue national stability through granting special status and privileges to placate Malays.

From 1971 un! til the present day, successive five-year plans drew up pro-Malay affirmative action policies, each going further than the last. Schemes were implemented to reduce Bumiputra (rather than overall) poverty and initiatives were adopted to speed up the redistribution of the countrys corporate assets from Chinese-Malaysians and Indian-Malaysians to the benefit of Bumiputras.

One consequence is the government spending an ever-increasing amount of money to create employment opportunities exclusively for Bumiputras.

It is estimated about 60 per cent of Bumiputras who found employment from 1971 to 2000 were in jobs created through state-interventionist policies.

One legacy is the rise of a Malaysian civil service, which as a proportion of the population is the largest and best paid in Asia: Bumiputras, who make up 65 per cent of the population, hold more than 95 per cent of these jobs.

Another is that public investment exceeds private investment in the Malaysian economy.

Moreover, in attempting to raise the Bumiputra share of national wealth, onerous obligations have been placed on Malaysian businesses.

Firms in many sectors are obliged to reserve at least 30 per cent of their equity for Bumiputras and many require a Bumiputra business partner for registration.

Special categories of bank loans are created exclusively for Malay-owned businesses and all banks are required to earmark at least 20 per cent of all money lent to Bumiputras.

Generous government assistance is provided to Malay entrepreneurs, including preferential access to contracts, licences, franchises, technical assistance, management training, and reduced rent assistance.

Businesses with at least a quarter of Malay executives are entitled to a 10 per cent corporate tax reduction.

Especially galling for other Malaysians is the preference given to Malay firms in the government procurement sectors: a real prize given the size of the public sector in the economy.

Of all governm! ent cont racts, 95 per cent go to Bumiputras.

Finally, affirmative action policies have gone beyond the corporate sector into preferential schemes for Bumiputras seeking housing loans and personal loans to university entrance and scholarships.

It is now obvious the price of four decades of burgeoning affirmative-action policies is immense.

State-interventionist policies mean that, except for a brief period from 1993-1998, the Malaysian budget has never been in surplus since they were introduced in 1971.

Total government debt is 41.5 per cent of GDP, high for a regime that provides few social services.

Indeed, 40 per cent of the governments revenues come from state oil giant Petronas, even as known Malaysian oil reserves are due to run out in 15 years.

Rather than creating a critical mass of dynamic Malay entrepreneurs, Malaysia is plagued by the rise of rent-seeking Bumiputra elites dependent on state largesse and demanding the continuation of affirmative action.

Meanwhile, more than 250,000 citizens left Malaysia between March 2008 and August 2009, many of them highly skilled or rich Chinese-Malaysians and Indian-Malaysians.

A cable released by WikiLeaks from Singapores highly respected ambassador-at-large, Tommy Koh, speaks of the distinct possibility of racial conflict in Malaysia.

In November 2007, 40,000 protesters demanding free and fair elections were quelled by riot police, and several weeks later an estimated 20,000 Indians marched in Kuala Lumpur demanding greater ethnic Indian rights.

Malaysia might not yet be Egypt. But there are no longer any illusions of the country being the shining light of a prosperous and harmonious multi-ethnic example to the rest of Asia.

John Lee is a research fellow at the Centre for Independent Studies and the Hudson Institute in Washington DC.