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The Perils of Pro-Malay Policies

1 Sep 2005

Should Malaysia once again turn to affirmative action to promote social justice and the development of a Malay business class?

Hishamuddin Hussein, Minister of Education and leader of the youth wing of the United Malays National Organization, has stirred up this longstanding debate with a call to renew explicit policies of positive discrimination on behalf of Malays. However, Malaysians need to consider whether such policies would primarily benefit UMNO, rather than the country as a whole. Even though the country has made great strides in expanding economic opportunities since affirmative action was adopted 35 years ago, the heavy price paid in terms of economic inefficiency and lost growth suggests Malaysia should continue progressing toward a more meritocratic society.

Mr. Hishamuddin’s policy recommendation that UMNO commit itself to a goal of 30% Malay ownership of corporate equity by 2020 will appeal more to the party faithful than to the Malay electorate. This makes sense if, as is commonly believed, Mr. Hishamuddin aspires to a higher post in the party.

When affirmative action was introduced in 1970 through the New Economic Policy, the 30% goal was supposed to be achieved by 1990. But even in 2000, by one measure Malay ownership stood at only 19.1%. So the idea of readopting this goal would seem to have a certain appeal as a way to make good on an old commitment to Malays who have not fully participated in their country’s prosperity. After all, the NEP’s stated larger objective was to achieve national unity by eradicating poverty and achieving interethnic economic parity.

However, the history of the NEP shows that its record of promoting unity is mixed at best. Returning to a more interventionist form of assistance could have severe consequences for a more mature and slower growing economy.

The NEP originally entailed government intervention in the economy through public enterprises to accumulate capital on behalf of the Malays. After 1981, when Mahathir Mohamad took over as Prime Minister, he called for the state to retreat from the economy and shifted the focus to the creation of Malay entrepreneurs.

Dr. Mahathir’s grand vision was for Malaysia to achieve fully developed nation status by 2020, with the country ’s industrialization driven by a new breed of internationally recognized Malay-owned enterprises. He argued that the path to this goal lay through a process of targeting and preferential treatment. The government picked potential entrepreneurs and conferred on them—without open tender—concessions like licenses, contracts and privatized projects, financed by loans from banks owned by the government.

The tripartite link between the government, private capital and financial institutions would aid the rapid rise of well-diversified conglomerates. Dr. Mahathir was not wrong. By the mid-1990s, his dream of well-entrenched, influential Malays in corporate Malaysia was a reality.

Dr. Mahathir did it his way, but not without the aid of his close ally, businessman Daim Zainuddin, who he appointed as Finance Minister in 1984. For both men, the Kuala Lumpur Stock Exchange, now renamed the Bursa Malaysia, constituted another key avenue for the creation of Malay conglomerates. Their chosen clients would inject the government concessions they received into a company that would be involved in corporate maneuvers like shares-for-assets swaps and reverse takeovers to capture control of quoted firms.

Mr. Daim, who had little grassroots support, depended on Dr. Mahathir for all his political appointments—as UMNO Treasurer, Finance Minister, and later, as Government Economic Advisor, a post specifically created for him. Mr. Daim was seen as the most powerful figure in the corporate scene, as his business associates rapidly gobbled up Malaysia’s leading privatizations. Mr. Daim’s protégé, Halim Saad, for example, secured in 1990 control of the UMNO-owned multibillion ringgit privatized North-South highway project, and swapped it for majority ownership of Renong, a moribund but quoted company.

Within half a decade, Renong emerged as the leading Malay-owned conglomerate, with a place among the top 10 publicly listed companies. Although just one of many well-connected quoted firms, Renong was the symbol of Dr. Mahathir’s success in creating a class of “new rich” Malays through selective government patronage.

But it was also widely alleged that through the NEP, UMNO had found a mechanism to implement policies, regulate markets and distribute concessions to serve its vested interests. Mr. Daim’s influence in government and business was a major reason for a deeply fractious UMNO election in 1987 that almost led to Dr. Mahathir’s fall from power. UMNO subsequently splintered into two groups, with the losing faction allying itself with opposition parties to forge coalitions that seriously threatened to unseat the Barisan Nasional coalition government during the 1990 general election.

Not long after Dr. Mahathir’s protégé, Anwar Ibrahim, had replaced Mr. Daim as Finance Minister in 1991, he too was mired in controversy. Mr. Anwar was alleged to have practiced patronage, not to enrich himself, but to develop his power base in UMNO by creating his own breed of politicians-cum-businessmen to accelerate his rapid ascent up the party hierarchy. The use of money in UMNO elections subsequently intensified, creating what Dr. Mahathir later called a “culture of greed.”

Although Dr. Mahathir and Messrs. Anwar and Daim all exercised control over the distribution of government concessions, the different reasons why they selectively patronized businessmen had a significant bearing on corporate Malaysia. Since Mr. Anwar’s allies were politicians who had ventured into business principally to fund their political activities, their style of business was less productive, with many of them showing little capacity to build on their concessions. No Malay businessman linked to Mr. Anwar emerged as a major corporate figure by 1998, when he was sacked as Deputy Prime Minister.

Dr. Mahathir, for his part, distributed concessions much more selectively, and also to non-Malays, especially during the 1990s after he had strengthened his position in UMNO. The Prime Minister had a genuine belief in his ability to pick “winners” who would help him fulfill his vision of creating Malaysian industrialists.

It was unclear if his closest business associates, now corporate captains, were running enterprises ultimately owned by them, or Mr. Daim, or UMNO. This complexity of political-business links is reflected by one key issue. There is no evidence that Dr. Mahathir and Mr. Anwar were corrupt, legally speaking. Even when Dr. Mahathir used the entire prosecutorial machinery at his disposal to try to convict Mr. Anwar of corruption, no evidence was presented that could stand up in court to substantiate the charge.

When they resorted to selective patronage, Mr. Anwar did so primarily to secure the premiership, while Dr. Mahathir was driven by his longing to accomplish his economic goals. Both failed. Dr. Mahathir’s legacy is in tatters, with little to show for his vision. Mr. Anwar has admitted his folly and now talks of reforms, including a new agenda for Malaysia that transcends racial barriers.

It was the currency crisis in 1997 that exposed the true extent of problems with political-business ties. Since the rise of well-connected businessmen was linked to the patronage of influential politicians, their fortunes closely depended on whether their patrons remained in power. After Mr. Anwar was removed from office, most businessmen associated with him struggled to protect their corporate interests. Similarly, when Mr. Daim fell out of favor with Dr. Mahathir, the corporate chieftains he supported were divested of their assets and some came under investigation for corruption, though none have yet been prosecuted.

Prominent businessmen have lost control of large, in some cases even thriving, enterprises, after falling out with key leaders. Inevitably, businesses owned by those well-connected to the three leaders quickly dropped off the list of top 100 publicly quoted firms.

By 2000, the government had majority ownership of seven of the 10 largest KLSE-listed firms, an indication of the failure of privatization. These enterprises included the two largest domestic banks, two privatized utility companies, a shipping line and a gas producer. The other three firms in the top 10 were Chinese-owned. None of these 10 companies was owned by a Malay, and none was involved in the industrial sector.

The government’s failure to develop Malay entrepreneurs was due to the practice of selective patronage involving easy access to loans and other privileges. Individuals benefiting from selective patronage appeared to be more concerned with creating highly diversified conglomerates than their corporate groups’ gearing imbalances and lack of business focus. It was the government’s failure to check and discipline this style of growth that contributed to the rapid collapse of these firms when the currency crisis occurred. Moreover, the subservience of well-connected businessmen to their patrons meant that their corporate decisions were often influenced by politicians and affected by political crises.

Dr. Mahathir and Mr. Anwar have learned the lessons of selective patronage, and have publicly cautioned that treading down that path again would only serve to hinder Malaysia’s economic progress. But since these two powerful men are now consigned to the political margins, their views are largely unappreciated or ignored by UMNO members, possibly because of the culture of greed that has come to characterize the party.

This was evident during the last UMNO general assembly in July 2005 when the Minister of International Trade & Industry, Rafidah Aziz, was heavily criticized for dispensing to a select few companies approved permits to import motor vehicles. UMNO members lamented not the practice of targeting individuals as beneficiaries of the APs, but that they were not the people who were targeted.
The problem here is not that UMNO members are unaware of the lessons of their own past. The real tragedy is that, comfortable with UMNO’s sweeping victory in the 2004 general election, they have chosen to ignore these lessons. The kind of racial targeting that UMNO is proposing, history suggests, will lead to politicians usurping concessions created by the government for all Malays.

Malaysian history also shows racial targeting has the capacity to seriously divide UMNO, contributing to persistent allegations of corruption that eroded public trust in the party, creating serious intra-Malay class differences. Vast amounts of resources have been wasted. Had these funds been deployed transparently and based on merit, they would have generated a far stronger enterprise culture.

Malaysia may have been able to absorb such losses in the 1990s when the economy registered high growth rates. But it is unlikely that similar conditions can be replicated today. Another round of affirmative action could seriously harm the economy, as well as undermine efforts to promote social justice and national unity.

Mr. Gomez is research coordinator at the United Nations Research Institute for Social Development.

The present Viewpoint appears in the "Far Eastern Economic Review", by Edmund Terence Gomez, Volume 168, Number 8, September 2005.

The article is posted with permission of the Journal.