Malaysia’s pursuit of economic reform to be tested

The proposed sale of stakes in Malaysia’s national carmaker and a local bank to foreign investors may test the prime minister’s ability to push ahead with economic reform in the face of resistance from the ethnic Malay majority.

Abdullah Badawi heard strong demands last week to preserve the affirmative action policies for Malays during the annual meeting of the United Malays National Organisation, the ruling party.

Malays have long complained that in comparison with ethnic Chinese, they control a disproportionately small share of the country’s economy. Some put Malays’ share of corporate assets at 20 per cent, even though the group constitutes 60 per cent of the population.

Critics, however, say the affirmative action policies have hampered Malaysia’s international competitiveness, with foreign direct investment falling 14 per cent last year to $4bn (€3.1bn, £2.1bn).

Mr Abdullah’s economic reforms could hurt Malay interests, such as an overhaul of the inefficient state industrial sector that is a big employer of ethnic Malay workers and subcontractors.

His reforms appeared under threat after Mahathir Mohamad, his predecessor, criticised publicly the change in direction. Analysts had warned that Dr Mahathir could undermine Mr Abdullah’s support in Umno severely.

However, the prime minister seemed to have weathered the storm when delegates at the party conference expressed support for him.

Mr Abdullah has suggested the government will proceed with plans to sell at least a minority stake in Proton, the carmaker, to a foreign investor, possibly Volkswagen. Proton is a main source of business for local car parts suppliers, many of which are Malay-owned. They have opposed a foreign takeover of Proton in the belief that a new owner might shift orders overseas. The issue of Proton’s future ownership helped prompt Dr Mahathir to speak out against his successor.

The proposed sale of a stake in AmBank, Malaysia’s fifth largest, to TPG Newbridge, the US equity fund, or to Australia & New Zealand Banking Group would also be seen as a relaxation of the government’s tight control over the financial sector, which is still subject to foreign ownership limits. Most of the banking industry is now controlled by ethnic Malay interests.

The successful conclusion of the deals would revive hopes that Malaysia might catch up with regional rivals in attracting foreign investment, which has been almost stagnant since the Asian financial crisis in 1998.

In a recent report, Citigroup said: “Malaysia today is a pale shadow of itself compared to 10 years ago. It is not that Malaysia is moving backward but simply that is not moving forward quickly enough.”

Foreign investors have complained about ownership limits, red tape, a lack of transparency in government decisions, market distortions caused by the affirmative action policies and a shortage of skilled manufacturing workers.

A perception of rising ethnic tensions also worries some investors.

The fiery rhetoric defending Malay rights at the Umno meeting shows Mr Abdullah still faces an uphill struggle in making significant changes. Umno delegates warned that any debate on the affirmative action policies would hurt race relations. Rafidah Aziz, the trade minister, said: “The constitution has enshrined the position and rights of the Malays. There’s no need to debate about it.”

The affirmative action policies were introduced in 1970 to narrow the wealth gap between Malays and Chinese in response to race riots the year before. Malays are given preference for government jobs and state contracts and are required to own at least 30 per cent of businesses in many sectors.

Although the policy has succeeded in reducing poverty among Malays, there is a growing debate on its continued effectiveness.

A Hong Kong-based economic consultant said: “Affirmative action has apparently failed to produce a large enough cohort of educated and skilled Malays who can compete on a global stage.”

Analysts believe that Mr Abdullah will have to play a delicate balancing act in terms of economic reforms, making some changes while continuing to give concessions to Malays.

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