Malaysia Growth at Risk as Dagger-Waving Repels Ethnic Chinese

By Shamim Adam - Sep 9, 2010 12:50 AM GMT+0800 (Bloomberg)

Malaysia's Prime Minister Najib Razak speaks in Kuala Lumpur. Photographer: Goh Seng Chong/Bloomberg

Ethnic Malay workers walk to the Western Digital factory in Petaling Jaya, Malaysia. Najib pledged to boost growth by unwinding a policy of ethnic bias began four decades ago by his father. Photographer: Goh Seng Chong/Bloomberg

Veeramah, an ethnic Indian, works at her flower stall in Kuala Lumpur's Chinatown. Ethnic Chinese and Indians make up about 32 percent of the nation's citizens. Photographer: Goh Seng Chong/Bloomberg

Vikneswary, an ethnic Indian, displays clothing at the Ammas Fashion shop in Bricksfield, Kuala Lumpur. Photographer: Goh Seng Chong/Bloomberg

A shopper walks past a display of running shoes in Kuala Lumpur's Chinatown. Failure to win back Chinese voters could jeopardize Najib's Economic Transformation Program. Photographer: Goh Seng Chong/Bloomberg

A factory is demolished to make way for Icon City, a residential, office, retail, and hotel project by Mah Sing Group, in Petaling Jaya, Malaysia. Under the Economic Transformation Program, Najib wants to triple gross national income to 1.7 trillion ringgit in 2020 from 600 billion ringgit in 2009 and create 3.3 million jobs. Photographer: Goh Seng Chong/Bloomberg

Eric Chong, real estate agent with City Two Property, hangs up banners at newly completed factories available for rent or sale, in Petaling Jaya, Malaysia. Photographer: Goh Seng Chong/Bloomberg

Foreign investment coming into Malaysia fell 81% last year to $1.4 billion, companied with an outflow of $8 billion, according to the United Nations 2010 World Investment Report. Photographer: Goh Seng Chong/Bloomberg

Prime Minister Najib Razak is trying to build a Malaysian economy as powerful as in the 1990s, when stock prices almost quintupled in the decade through 1996. Now his efforts to lure investors are stirring opposition from some members of the ethnic-Malay majority that put him in office.
Najib has pledged to boost growth by rolling back key policies of ethnic favoritism that his father began four decades ago. Leslie C., an ethnic Chinese, responded by moving to neighboring Singapore, which has grown 81-fold since 1971, when the Malaysian ethnic measures were introduced. Malaysia’s economy expanded at half that pace.
“I don’t think any politician will be different,” said Leslie, 36, who left Kuala Lumpur in June and didn’t want his full name reported. His family will follow, at a time when Singapore’s Malaysian-born Chinese resident population has jumped 31 percent in the past decade. “I want a better future for the kids, an opportunity for them to start on even ground, not as second-class citizens.”
Removing curbs on the Chinese and Indian minority, a group that includes nine of Malaysia’s 10 richest people, is key to Najib’s New Economic Model, designed to turn Malaysia into a developed nation. The changes are opposed by some politicians who helped Najib gain power, including ex-premier Mahathir Mohamad. At a rally in March, former deputy law minister Ibrahim Ali brandished a traditional “keris” dagger as the crowd chanted “Long live the Malays.”
Discontent in Najib’s United Malays National Organisation, which dominates the ruling Barisan Nasional coalition, comes as Malaysia loses ground to its neighbors. Foreign investment in Malaysia fell 81 percent last year to $1.4 billion, according to the United Nations 2010 World Investment Report. Singapore, Indonesia and Thailand all fared better.
Right Things
“Najib appears to be saying all the right things, but the actions of many within UMNO are not necessarily in the spirit of what the prime minister is saying,” said Stephen Hagger, head of Malaysian equities for Credit Suisse Group AG in Kuala Lumpur. It will be up to politicians and the civil service to implement Najib’s plan, he said. “This is where our confidence falters.”
Malaysia’s growth fell to an average 4.7 percent a year in the past decade, from 7.2 percent in the 1990s, when then-Prime Minister Mahathir wooed foreign manufacturers and built highways, the world’s tallest twin towers and a new administrative capital.
In comparison, the economy of Singapore, which split from Malaysia in 1965, expanded 7.3 percent in the 1990s and 5.1 percent in the past decade. Singapore grew 18.8 percent last quarter from a year earlier, compared with Malaysia’s 8.9 percent pace.
Leaving Malaysia
More than 304,000 people left Malaysia between March 2008 and August 2009, including about 50,000 who went to study abroad, A. Kohilan Pillay, deputy foreign affairs minister, told parliament in November 2009. That compares with about 140,000 who left in 2007, he said, without giving an ethnic breakdown.
The government wants to persuade as many as possible of the 700,000 citizens living and educated abroad to return, Deputy Prime Minister Muhyiddin Yassin said in a June 15 interview in Kuala Lumpur.
Chinese and Indians make up 29 percent of Malaysia’s 28 million population. Eight of Malaysia’s 10 richest people are ethnic Chinese and one is Indian, according to Forbes Asia. Between them, they control or have interests in banks, satellite and mobile-phone operators, power and commodity producers, construction companies and property developers.
Sons of the Soil
Abdul Razak, Najib’s father, initiated the preferences in 1971 as the country’s second prime minister. He sought to raise the share of national wealth to at least 30 percent for the Bumiputeras, or “sons of the soil,” about 60 percent of the population. The plan gave Malays and some indigenous groups cheaper housing as well as priority for college places, government contracts and shares of publicly traded companies.
The measures followed post-election race riots between Malays and Chinese in 1969 that left hundreds dead.
“Malaysia has done very well in the past 30 years, and affirmative action was a strong contributor to political stability that allowed for such economic development,” said Masahide Hoshi, a director at Phalanx Capital Management HK Ltd. in Hong Kong, who helps manage $100 million. “However, these same policies could impede Malaysia in the long term. The government must make changes soon.”
Leslie, who works in the insurance industry, wasn’t eligible for housing discounts and some scholarships because of his ethnicity.
Behind Targets
Groups championing preferential treatment for Malays say they are protecting the constitution and want the policies to continue because targets haven’t been reached. Bumiputeras held about 22 percent of corporate equity in 2008, up from 2.4 percent in 1970, according to a government report.
“Malays have not gained for themselves the 30 percent target in corporate ownership,” Mahathir wrote on his blog on Aug. 9. “If a proper audit is made, their wealth is even less than 30 percent of total wealth of the people of Malaysia. Most of the wealth of the country belongs to the Chinese.”
In his first 100 days in office after taking over from Abdullah Ahmad Badawi in April 2009, Najib, 57, eased so-called affirmative action rules governing overseas investors, initial public offerings and property purchases. In June 2009, he told participants at an annual investment conference in Kuala Lumpur that the country is at a “critical juncture” and that failure or hesitation to act will have “long-term ramifications.”
Slowing Pace
In the nine years between the end of the 1997-1998 Asian crisis and the 2008 global financial turmoil, the benchmark stock index rose 147 percent, less than half the increase in the decade leading up to 1997.
Najib is trying to triple gross national income to 1.7 trillion ringgit ($546 billion) in 2020 from 600 billion ringgit in 2009 and create 3.3 million jobs. To do that, he says the country needs 2.2 trillion ringgit of funds, with 92 percent coming from private investment.
Central to the plan is his New Economic Model, announced in March, which aims to ensure that beneficiaries of affirmative- action policies are the bottom 40 percent of households by income across all ethnic groups. The government has yet to release details on how it will change the system.
Malay rights groups such as Pribumi Perkasa Negara won’t derail the prime minister’s agenda, Trade Minister Mustapa Mohamed said in Singapore last month while on a trip to attract investment.
Government Decides
“As a government, we’ve got to consult with various parties,” he said. “But in the end, the government will decide what’s best for the country.”
Mark Mobius, who oversees about $34 billion as executive chairman of Templeton Asset Management Ltd.’s emerging-markets group and invests about $1 billion in Malaysia, says Najib is moving Malaysia in the right direction.
“Malaysia is really going through a transformation with the political changes that we’ve seen,” Mobius said in an Aug. 16 interview. “They are now beginning to accept a wider array of alternatives.”
Foreign direct investment into Malaysia slumped to $1.4 billion in 2009 from $7.3 billion the previous year, according to the UN’s World Investment Report. That’s less than the $4.9 billion Indonesia attracted and the $16.8 billion received by Singapore. Foreign investment rebounded this year, helping Malaysia lure the equivalent of $1.6 billion in the first quarter, Mustapa said on July 26.
Competitive Position
“The issues of corruption and transparency continue to weigh on investors’ minds,” said Joseph Tan, Singapore-based Asian chief economist at Credit Suisse Private Bank. “Beyond commodities, it is difficult to see Malaysia’s competitive advantage vis-a-vis other Asian countries.”
The FTSE Bursa Malaysia KLCI Index has gained 13 percent in 2010, compared with a 27 percent increase in the Jakarta Composite Index and 25 percent for the Philippine Stock Exchange. Singapore’s Straits Times index rose 3.9 percent.
Najib’s successes include ending a requirement that listed companies set aside at least 30 percent of their stock for ethnic Malay and indigenous investors and trimming some fuel and food subsidies in July to save 750 million ringgit in government expenditure. Najib plans to narrow the budget deficit to 2.8 percent of GDP by 2015, from an estimated 5.3 percent this year.
Smaller Margin
In 2008, the Barisan Nasional coalition, of which UMNO is the biggest party, had its slimmest election victory in more than 50 years as the opposition criticized the government for ethnic bias and failing to tame poverty and corruption. Najib faces his first election as prime minister by 2013.
Perkasa has about 100,000 members, at least 60 percent of whom are UMNO members disillusioned with the party’s ability to protect Malay rights, Zubir Harun, vice president of the group that held the keris-wielding rally, said in a telephone interview in July. He said the dagger is a “ceremonial” symbol of Malay culture and displaying it wasn’t a message of violence.
“Any policy that erodes the rights of the Malays, we will fight,” said Zubir, 50, who said he’s an UMNO member.
Lim Guan Eng, secretary general of the opposition Democratic Action Party, said in a telephone interview that Perkasa was “a narrow, sectarian, racist group” harmful to national interests, and urged Najib to avoid what he described as pandering to them.
“It’s crunch time,” said Lim, also chief minister of the state of Penang, where companies such as Intel Corp. have factories. “Najib has been extremely political about it but it is time to get to the economic nuts and bolts. He has to be serious about meritocracy.”
Najib needs to speed up implementation, said Manu Bhaskaran, Singapore-based head of economic research at Centennial Group Holdings, which advises on emerging markets.
“If the follow-through is not there, then a lot of investors will say ‘That’s it, there are more interesting things to do than wait for Malaysia to get its act together,’” he said in an August telephone interview.