New Economic Policy–Malaysia’s Deformative Action Progamme

May 20, 2017

Malaysia’s Deformative Action–Doing the Malays a Disfavour

Income-based benefits would work much better.

Najib Razak –A Spoilt Aristocrat and the Embodiment of Malaysia’s New Economic Policy introduced by his Father, Tun Abdul Razak and exploited by Tun Dr. Mahathir Mohammad to  retard and subjugate the Malays. Incentives Matter. Reward Performance and Discipline.–Din Merican

WHAT government would not like to reduce racial disparities and promote ethnic harmony? The tricky part is knowing how. One country that claims to have found a way is Malaysia. Since 1971 it has given preferential treatment in everything from education to investing to bumiputeras—people of indigenous descent, who are two-thirds of the population but poorer than their ethnic-Chinese and -Indian compatriots.

On the face of things, this system of affirmative action has been a success (see article). The gap in income between Malays (the biggest bumiputera group) and Chinese- and Indian-Malaysians has narrowed dramatically. Just as important, there has been no repeat of the bloody race riots of 1969, when Malay mobs burned Chinese shops in Kuala Lumpur, prompting the adoption of the policy. And the economy—typically an instant victim of heavy-handed government attempts at redistribution—has grown healthily.

Small wonder that some see Malaysia as a model. South African politicians cited it when adopting their plan for “Black Economic Empowerment” in the early 2000s. More recently Indonesian activists have been talking about instituting something similar there. Malaysia, meanwhile, keeps renewing the policy, which was originally supposed to end in 1991. Just last month Najib Razak, the prime minister (pictured), launched the latest iteration: the catchily named Bumiputera Economic Transformation Roadmap (BETR) 2.0, which, among other things, will steer a greater share of government contracts to bumiputera businesses.

Money for old rope

Yet the results of Malaysia’s affirmative-action schemes are not quite what they seem. Malays in neighbouring Singapore, which abjures racial preferences, have seen their incomes grow just as fast as those of Malays in Malaysia. That is largely because the Singaporean economy has grown faster than Malaysia’s, which may in turn be a product of its more efficient and less meddling bureaucracy. Singapore, too, has been free from race riots since 1969.

If the benefits of cosseting bumiputeras are not as clear as they first appear, the costs, alas, are all too obvious. As schools, universities and the bureaucracy have become less meritocratic, Chinese and Indians have abandoned them, studying in private institutions and working in the private sector instead. Many have left the country altogether, in a brain drain that saps economic growth.

Steering so many benefits to Malays—developers are even obliged to give them discounts on new houses—has created a culture of entitlement and dependency. Malays have stopped thinking of affirmative action as a temporary device to diminish inequality. As descendants of Malaysia’s first settlers, they now consider it a right.

The result is that a system intended to quell ethnic tensions has entrenched them. Many poorer Malays vote reflexively for UMNO, the Malay party that introduced affirmative action in the 1970s and has dominated government since then, for fear that another party might take away their privileges. With these votes in the bag, UMNO’s leaders can get away with jaw-dropping abuses, such as the continuing scandal at 1MDB, a development agency that mislaid several billion dollars, much of which ended up in officials’ pockets, according to American investigators. Minorities, in turn, overwhelmingly support parties that advocate less discrimination against them.

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http://www.economist.com/news/asia/21722208-government-reserves-even-mobile-phone-stalls-people-indigenous-descent-race-based

THERE is something odd about MARA Digital, a cluster of stalls selling laptops, mobiles and other gizmos on the second floor of a shopping centre in Kuala Lumpur, Malaysia’s multicultural capital. No ethnic-Chinese or -Indian entrepreneurs are allowed to do business here. Spots in the market are reserved for Malays, the country’s majority race. The year-old venue was set up with subsidies from the government, which insists that its experiment in segregated shop-holding has been a big success. It has already launched an offshoot in Shah Alam, a nearby city, and talks of opening at least five more branches this year.

This project is just one recent outcome of racially discriminatory policies which have shaped Malaysian society for more than 50 years. Schemes favouring Malays were once deemed essential to improve the lot of Malaysia’s least wealthy racial group; these days they are widely thought to help mostly the well-off within that group, while failing the poor and aggravating ethnic tensions. Yet affirmative action persists because it is a reliable vote-winner for the United Malays National Organisation (UMNO), the Malay party that has dominated government since independence. Malays are more than half of the population, so their views carry weight.

Last month UMNO launched a fresh batch of race-based giveaways. Harried by claims that it allowed billions to be looted from 1MDB, a state investment firm, and preparing for an election that may be called this year, the party looks disinclined to consider reform.

Affirmative action in Malaysia began shortly after the departure in the 1950s of British colonial administrators, who had opened the cities to immigrant merchants and labourers from India and China but largely preferred to keep Malays toiling in the fields. The practice accelerated after 1969, when a race riot in the capital killed scores. (Most of the victims were Chinese.) The New Economic Policy (NEP) of 1971 had two goals: to reduce absolute poverty across all races, and to boost in particular the prospects of Malays, whose average income at the time was roughly half that of their Chinese compatriots.

A temporary eternity

Although the NEP’s authors believed affirmative action would be needed for only 20 years, the practice has continued ever since, as such “temporary” policies typically have in other countries. Malaysia’s bumiputeras, which means “sons of the soil” and which refers both to Malays and to a number of indigenous groups deemed deserving of a leg-up, have accumulated a panoply of privileges. Some of these are enshrined in legislation; others are left unwritten. These include quotas for places at public universities; preferment for government jobs; discounts on property purchases and access to a reserved slice of public share offerings.

Since the NEP’s inception Malaysia’s economy has grown enormously. Its people are now the third-richest in South-East Asia, behind only Singapore and oil-soaked Brunei. Affirmative action has helped to narrow the difference between the incomes of Malays and other races. But pro-bumiputera schemes are almost never means-tested, so their benefits have accrued disproportionately to already wealthy urbanites, allowing poverty among the neediest Malays to persist.

Meanwhile the lure of the public sector—which was expanded to create more posts for bumiputeras, and in which Malays are now vastly over-represented—has sapped entrepreneurial vigour among Malays, as has a welter of grants and soft loans for bumiputera firms. Race-based entry criteria have lowered standards at Malaysia’s public universities; so has the flight of non-bumiputera academics who sense that promotions are no longer linked to merit. These days Chinese and Indians largely end up studying in private institutions or abroad, in effect segregating tertiary education. Many of those who leave the country do not return.

None of this is lost on the ruling party. For some years UMNO was split between hardline supporters of affirmative action (like the demonstrators pictured above) and moderates dismayed by the distortions it has brought. In an unusually candid paper published in 2010, the new government of Najib Razak, the prime minister, admitted that affirmative action had created an “entitlement culture and rentier behaviour”. It mooted swapping race-based policies for action intended to lift the incomes of Malaysia’s poorest 40%, regardless of ethnicity. Yet within months that suggestion was quietly abandoned.

Since then the party’s thinkers have grown more risk-averse. UMNO almost fell from power at a general election in 2013, when minority voters abandoned its coalition partners. Since early 2015 it has been trying to distract attention from the theft of billions of dollars from 1MDB (American investigators allege that $681m of the state firm’s money was paid to the prime minister, a charge Mr Najib denies). Neither of these near-death experiences appears to have prompted much soul-searching. Instead the party is trying to preserve support among Malay voters by reinforcing pro-Malay policies and by building bridges with PAS, an Islamist opposition party that is growing more extreme.

Optimists argue that the government has not completely abandoned reform. An efficiency drive has called attention to the public sector’s bloated state, even if the material gains from the effort are unclear. And whereas UMNO’s leaders once boasted of their desire to create Malay millionaires, recent schemes are more likely to aid small and medium-sized firms. But this is all rather modest—particularly when ugly racial rhetoric is on the rise.

Malaysia’s failing system of race-based preferences will probably not attract the criticism it deserves in the run-up to the next general election, which Mr Najib may call later this year and which he is likely to win. Opposition parties are keen to show poor rural Malays that UMNO’s policies have shortchanged them, but tend not to openly bash the notion of race-based affirmative action. Egged on by bigots, some Malays have come to see their economic privileges as a right earned by their ancestors when they first settled the territory, not as a temporary leg-up. Meritocracy and the distribution of benefits based on need remain distant prospects.

This article appeared in the Asia section of the print edition under the headline “Malays on the march”–The Economist

The ambition to improve the lot of Malaysia’s neediest citizens is a worthy one. But defining them by race is a mistake. It allows a disproportionate amount of the benefits of affirmative action to accrue to well-off Malays, who can afford to buy the shares set aside for them at IPOs, for example, or to bid for the government contracts Mr Najib is reserving for them. It would be much more efficient, and less poisonous to race relations, to provide benefits based on income. Most recipients would still be Malays. And defusing the issue should pave the way for more nuanced and constructive politics. Perhaps that is why UMNO has resisted the idea for so long.

This article appeared in the Leaders section of the print edition under the headline “Deformative action”