Malaysia
First sign of change
The new leader lifts some race discrimination in some jobs drawn up by his late father. Economist.
Apr 28, 2009

Malaysia's government is set to reverse parts of its long-standing policy of economic discrimination in favour of ethnic Malays and indigenous groups.

The move will have clear economic benefits, making it easier for foreign firms to operate and invest in the country.

It also has a political rationale: Prime Minister Najib Razak's UMNO is currently much less popular among ethnic Chinese and Indians than the opposition Pakatan Rakyat alliance headed by Anwar Ibrahim.

Minority groups have long criticised the policy and Mr Anwar has already pledged to reform the policy should he come to power.

Mr Najib announced on April 22 that the government will overturn regulations requiring most service-sector businesses to be at least 30% owned by Malays or indigenous people (known collectively as bumiputera, or "sons of the soil").

Malaysia's second prime minister, Abdul Razak (Mr Najib's father), introduced racial quotas for the ownership structure of companies in the 1970s, in an effort to narrow the economic gap between the Muslim Malay majority and the smaller, wealthier Indian and Chinese communities.

The policy was part of a broader package of policies that confer race-based preferential access to business licences, public-sector contracts, government grants, bank credit, share capital and jobs.

The recently introduced changes will undo a relatively small but significant part of the bumiputera policy framework.

Restrictions will be removed from some 27 sub-sectors of the services sector, including tourism, transport and business services.

However, they will continue to apply in several politically sensitive areas, such as utilities, aviation and retail.

The changes also do not cover financial services—although Mr Najib has said he will soon announce liberalisation measures in that sector as well.

Economic rationale

Mr Najib's announcement did not come as a complete surprise. In March the prime minister declared his support for a gradual reform of bumiputera policies, which have long hampered economic competition and are incompatible with bilateral trade agreements that Malaysia has signed with a number of countries.

However, the timing of the changes suggests that the economic downturn has forced the prime minister's hand. Malaysia is not yet suffering as badly as many other countries, but the economic outlook is deteriorating rapidly.

The Economist Intelligence Unit expects the Malaysian economy to shrink by 3% in 2009. A modest rebound in the global economy will inject momentum into the Malaysian economy in 2010, but the pace of recovery will be slow by historical standards.

If the economic crisis has made reform of bumiputera policies more urgent, such reforms are also in line with Mr Najib's long-term economic restructuring plans.

In policy statements the prime minister has proposed a "new economic model" that would steer the economy away from its dependence on manufactured exports and towards services.

Mr Najib emphasises that services offer tremendous scope for growth, as services exports currently account for just 15%

of total exports, compared with 73% for manufactured goods. Using government estimates, his medium-term goal is to raise the share of the services sector to some 70% of GDP (from the current 54%), and to establish a knowledge-based economy by 2020.

Political rationale

To the extent that changes to bumiputera policies bolster Malaysia's economy, they will also boost the political standing of the government.

Indeed, Mr Najib appears to be staking his political future on his ability to steer the economy through the roughest conditions it has encountered since the 1997-98 Asian financial crisis.

That Mr Najib has acted so soon after taking office in early April also signals that he will be a more decisive leader than his lacklustre predecessor, Abdullah Badawi.

The prime minister appears to be gambling that his more assertive style will enable him to stamp his authority on parliament—even though the relaxation of bumiputera policies could jeopardise support from Malay voters, who have been the main beneficiaries.

More fundamentally, there are powerful political arguments to reform or even abolish bumiputera policies.

Although designed to raise the standard of living of Malays, in practice the policies have restricted the economic opportunities of ethnic minorities.

Promises of reform could offer a strong incentive to the minority parties, which have yet to abandon the UMNO-dominated ruling Barisan National (BN) coalition, not to be tempted by the opposition's siren song of equal treatment.

If the BN is to have any hope of ever regaining a two-thirds majority in parliament, which it lost for the first time at the March 2008 general election, Mr Najib must win the confidence of the ethnic Chinese and Indian communities.

http://www.economist.com/daily/news/displaystory.cfm?story_id=13562131