Welcome to Malaysia’s Brave New World


November 5, 2018

Welcome to Malaysia’s Brave New World

by: John Berthelsen

https://www.asiasentinel.com/econ-business/malaysia-brave-new-world/

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“Euphoria is dying off and bodies like Bersih, he continued, have started criticizing the new government. Many from civil society are keeping silent. “I suppose the saving grace is that Najib and his cohorts are gone. But that can’t console people forever.”_- J. Berthelsen

Six months into the rule of Malaysia’s new reform government, the bloom has started to fade as the Pakatan Harapan coalition attracts growing criticism while it seeks to find its feet against the political and economic debris left by the outgoing Barisan Nasional, driven from power on May 9 after six-plus decades in office.

The problems the government faces were starkly outlined on Nov. 1 by Finance Minister Lim Guan Eng in a marathon 14,000 word speech outlining the 2019 budget, in which he stated that the previous government, which he characterized as “kleptocratic,” had understated debt and liabilities by nearly 40 percent, rising to a stunning RM1.05 trillion (US$256.8 billion) in an effort to hide corruption, and that debts from the scandal-scarred 1Malaysia Development Bhd development fund could total as much as RM43.9 billion, not including RM7 billion in interest secretly paid on 1MDB debts using taxpayer money illegally.

To Malaysia’s credit, the frighteningly poisonous racial equation, in which ethnic Malays make up about half the population, the Chinese 23 percent and Indians 7 percent, with the rest split between expatriates and bumiputera tribes in East Malaysia, seems to have cooled markedly. The previous government’s attempt to use fundamentalists Islam to pound minorities has largely ceased although UMNO and the fundamentalist Parti Islam se-Malaysia continue to attempt to fan the flames. It remains to be seen what strains there are between the Chinese-dominated Democratic Action Party, Mahathir’s Parti Bersatu Pribumi, and Anwar Ibrahim’s moderate, urban Malay Parti Keadilan Rakyat – and what internal strains there are inside PKR.

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The country is faced with a long series of monumental tasks – rebuilding a judiciary that was thoroughly corrupted by the previous government’s 61 years in power. The education system is a shamble, built on Malay privilege instead of academic achievement.  Lim called attention to educational shortcomings with a long series of measures allocating funds to lower-income students, upgrading failing schools and educational infrastructure, training and vocational education programs. Other sources say the government is being hamstrung to a certain extent by a civil service loyal to the previous government.

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A series of murders including that in 2006 of Mongolian translator and party girl Altantuya Shaariibuu, AMBank founder Hussain Najadi and prosecutor Kevin Morais (pic above), all believed to be at the hands of high government officials, remain to be solved or even looked into.

The new government, caught by circumstances, has compounded its problems by campaigning against a deeply unpopular Goods and Services Tax (GST) implemented by the government of former Prime Minister Najib Razak, and then actually repealing it once in office, leaving a gigantic hole in government revenues.

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‘–at the same time it has agreed to go along with Mahahir’s ill-conceived hobby horse, another national car project.

…That is despite 30-odd years of his previous ill-conceived hobby horse, the Proton national car, which cost the treasury billions of ringgit and billions more to consumers in lost opportunity costs from paying through the nose for heavily tariffed competitors. “- J. Berthelsen

It is seeking to fill the hole with a variety of piecemeal taxes – at the same time it has agreed to go along with Mahahir’s ill-conceived hobby horse, another national car project. That is despite 30-odd years of his previous ill-conceived hobby horse, the Proton national car, which cost the treasury billions of ringgit and billions more to consumers in lost opportunity costs from paying through the nose for heavily tariffed competitors.

“There was a lot of euphoria when Pakatan won the elections, but expectations were also very high,” said a prominent business source in Kuala Lumpur. “They have a small window. If they don’t deliver, that window will start closing.  But unfortunately, politicians will be politicians. They are inexperienced, and the euphoria is wearing off. So far, we have had no exciting government programs. New Malaysia is like Old Malaysia, minus Najib Razak and his 40 thieves.”

Najib and his wife Rosmah Mansor have both been arrested and are expected to go on trial next year. Hundreds of millions of dollars have been confiscated by Malaysian and US authorities although hundreds of millions more, perhaps billions, remain outside he government grasp.  Jewelry, handbags, watches, cash and other riches belonging to Rosmah that have been confiscated total at least US$273 million, putting her in a league even above Imelda Marcos, the wife of the late Philippine strongman Ferdinand Marcos, who held the public record for corruption. It remains to be seen if the Najibs surpass it.

The businessman’s assessment could be a bit pessimistic.  The government has abolished with capital punishment and the press appears to remain largely free despite reluctance on the part of the government to abolish a “fake news” bill pushed through at the last minute by the previous administration in an effort to muzzle pre-election critics.

But a sedition act used against the previous government’s foes remains on the books and has been used against critics. Civic organizations including Suaram have called attention to government inactions on a variety of rights issues. There is also concern on the part of the Coalition for Free and Fair Elections, known as Bersih, and others that MPs from the thoroughly disgraced United Malays National Organization are migrating to Parti Pribumi Bersatu Malaysia, headed by once and current Prime Minister Mahathir Mohamad, diluting the reformist zeal of the Pakatan Harapan coalition.  Although as many as 40 UMNO MPs are said to be contemplating such a move, Mahathir said they would be vetted individually and known crooks would be kept out.

But, said Kim Quek, a spokesman for opposition leader Anwar Ibrahim’s Parti Keadilan Rakyat in an email, “I foresee mounting tension when UMNO MPs slip into Bersatu, one after another quietly, causing endless suspicion…and mounting public disapproval.”

The headwinds outlined by Finance Minister Lim paint a pessimistic picture for both business and government. With the Trump administration cracking down on trade in Washington, DC, and the global economy beginning to slow, the budget, at a record RM314.6 billion, is forecast to run 3.7 percent of GDP in the red with economic growth expected to slow to 4.8 percent from 5.9 percent in 2017.  The ringgit, Malaysia’s currency, has fallen by 10 percent against the US dollar, in line with troubles across the world as interest rates rise in the United States, causing a flight out of emerging markets.

Lim, in his speech, set out a series of measures designed to help business and vowed to get government out of commerce, saying “clearly, government owned companies have been competing directly with private companies in non-strategic sectors. The outcome was the apparent ‘crowding out’ of private sector investments where private companies are unable to grow and compete.”

The private sector, he said, must lead, and the finance ministry is expected to establish a task force designed to evaluate and reduce duplication of functions,  a ray of hope that the country’s notorious rent-seeking government-linked companies, which funneled millions from inflated contracts to UMNO, could be cut back and its even more notorious cronyism could be reduced.

“Going forward, the government will focus its expenditure and investments only in strategic sectors and areas where the markets are unable to meet the needs of the people,” he said..

Nonetheless, business investment remains lackluster while the sector tries to figure out which way the government is going to go.

“Malaysia will undoubtedly be affected by the US-China trade war given that both these countries are among our top three trading partners,” Lim said in his budget speech. Exports remain a significant driver of the economy, particularly including electronics, oil and gas and palm oil.

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Comeback kids: Like Dr M, other political figures have had second and even third acts during their careers, including (from left) Netanyahu, Abe, Berlusconi and Churchill    

Leadership remains somewhat unsettled, with Mahathir, at 93 the world’s oldest government leader, committed to staying for two years after the formation of the government. Anwar Ibrahim, now 71, has been waiting in the wing for decades, from the time when he was Mahathir’s chosen successor only to be fired and jailed after disagreements in 1998. Although he said he would study abroad and recover from his most recent imprisonment, he forced a by-election to return to parliament a few weeks ago, disconcerting some of his followers, who accused him of acting too quickly.

In the meantime, two of Anwar’s deputies – Mohamad Azmin Ali, the Minister of Economic Affairs, and Rafizi Ramli, the Parti Keadilan general secretary,  are staging their own internecine squabble to become deputy party leader with an eye to succeeding Anwar, raising concerns over party – and coalition – unity.  Pakatan Harapan remains a work in progress. Azmin is said to be aligned with Mahathir, Rafizi with Anwar.

That raises the spectre of Mahathir and Anwar continuing to try to do in each other despite public pledges of amity, including Mahathir campaigning for Anwar in the Port Dickson by-election that brought him back into the parliament.

“The Harapan guys thought that since they couldn’t get worse than Najib, people would continue to support them,” another source said. “They forget that there will always be alternatives; if not in the next five years, then in the next 10 maybe.  Inflation is creeping up; wages have not gone up; new taxes are being introduced and people still struggle to put food on the table. Business is slow; businessmen are not re-investing as they are unsure of this government’s policies.”

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Award winning Journalist John Berthelsen

Euphoria is dying off and bodies like Bersih, he continued, have started criticizing the new government. Many from civil society are keeping silent. “I suppose the saving grace is that Najib and his cohorts are gone. But that can’t console people forever.”

Malaysia: Pakatan’s First Budget will be a tough one


October 19, 2018

Malaysia: Pakatan’s First Budget will be a tough one

by P. Gunasegaram

http://www.malaysiakini.com

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Malaysia’s Finance Minister Guan Eng

QUESTION TIME | Pakatan Harapan’s first budget to be announced on November 2 is going to be a terribly tough one because there are not going to be many sources of extra revenue nor many avenues for cost-cutting.

There is a reason why the Harapan government does not have enough money – and it isn’t debt that they claim they didn’t know about until they came to power. The real answer is the scrapping of the goods and services tax.

The cash crunch that resulted from the abolition of the GST in favour of the inferior sales and service tax will result in a yearly tax revenue loss of a massive RM22 billion initially, rising as the economy expands. Add to this the cost of fuel subsidies of RM3 billion, and the yearly shortfall is RM25 billion at least.

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That is the kind of yearly gap in revenue that Putrajaya faces. Using projected 2018 figures, according to 2018 Economic Report, the RM25 billion loss of revenue represents 10.7 percent of the projected operating expenditure of RM234.3 billion for 2018.

No tax that the government imposes will come anywhere close to breaching the RM25 billion gap. If it were to impose substantial taxes to recover this money, it will result in hardship to the people along with rising prices – which Harapan said it intended to contain with the abolition of GST in the first place.

A wrong move

The truth is, the abolition  of the GST was a terribly wrong move, and has needlessly strait jacketed the Harapan government and led to a deterioration of its financial position.

As I have said before, it should not even have been a campaign promise as the consumption tax was no longer contributing to higher prices, having been implemented with considerable difficulty back in April 2015.

Also, the GST affected the poor very little because there was a very large list of exemptions which ensured that the prices of essentials would not rise as a result. It is a tax on consumption, and therefore those who consume more (the rich) will pay more, catching in the tax net those who evade income tax. Also, GST records can be used to investigate tax evasions.

If there was one manifesto promise that Harapan broke, it should have been the abolition of GST. That would have ensured that the government finances are in good shape as reforms are being implemented – which could even have included more targeted benefits for the low-income group.

The main reason for higher prices was currency depreciation, a problem that continues to plague us despite the removal of a kleptocratic government. In fact, abolishing the GST may have contributed to currency weakness because analysts and funds view the revenue shortfall as negative in terms of the financial condition of the country.

Finance Minister Lim Guan Eng actually said last month that the ringgit strengthened relative to most countries, despite the transfer of power and weak external demand, but the period he used was incorrect – beginning with end-2017. He should have used May 9, the date of the election.

The table below shows how the ringgit performed relative to the currencies of the Asean-5 from May 9 to yesterday.

The table clearly indicates that the Malaysian currency significantly under performed all the ASEAN-5 countries – barring Indonesia, which has considerable economic problems of its own.

Tightened belts?

Hopefully, the new government and Finance Minister can demonstrate through the budget that they have a proper grasp of the issues at hand and how to handle it to reverse the currency trend.

It won’t be easy. While Lim has argued that the national debt exceeds RM1 trillion – and this has become wrongly used as the debt figure now – it is not. The debt as revealed in the 2018 in Accountant General’s Report for 2017 is still RM687 billion, and increases to over RM1 trillion only if contingent liabilities and guarantees are included, as I have previously explained.

Even if some of the contingent liabilities and/or guarantees have materialised as debt and are not classified as such, the interest on them will still have to be paid. Therefore, there will be little material increase in the overall costs of interest, even if they are reclassified into debt. The problem remains the RM25 billion shortfall.

Some potential positives include increased oil prices and more dividends from government companies, but these are likely to be well under RM10 billion incrementally.

An examination of government costs shows that salaries, retirement benefits and debt service charges account for 57.6 percent of total operating costs of RM234.3 billion. These can’t be cut.

There is more room to cut ‘supplies and services’, and ‘subsidies and social assistance’ accounting for a total of RM60.2 billion, or 25.7 percent of total operating expenditure, but the cuts will have to be pretty sharp. Also, this will probably take away targeted aid to the poor if cash grants under the old BR1M are cancelled.

Harapan is finding out too late that they left themselves too little wriggle room when they abolished GST. Unless they reinstate it – and they aren’t likely to do that because it will be an admission of a major blunder – they have to find other ways to raise revenue or cut costs.

Since the best, broad-based, value-added tax which goes by the name of GST here and implemented in over 160 countries around the world seems no longer available to them, and revenue-raising measures are limited, tightening the belt and prudent cost-cutting may be the order of the day.

If they do a good job of it, and come with a plan of also stimulating the economy to put growth on an upward trajectory again, analysts, fund managers, and most of all Malaysians, will show more faith in them and start putting money into the country.

It would also help to put the ringgit back on an upward path and suppress rising prices, or even lower them over the longer term. That entails honesty, openness, consultation, competency and a willingness to put the country and people above all. Malaysians expect no less from the new government.


P GUNASEGARAM is disappointed that the new government has not always been honest and open. Email: t.p.guna@gmail.com.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

Malay anxiety, exclusion, and national unity


September 21,2018

Malay anxiety, exclusion, and national unity

A fragmented Malay society is making ‘Malay unity’ more urgent for those defeated by GE-14.

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The Current Account Counts


August 30, 2018

The Current Account Counts

https://www.project-syndicate.org/commentary/current-account-imbalances-precursor-to-crisis-by-stephen-s–roach-2018-08

Despite the US government’s recent upward revision to personal saving data, the overall national saving rate, which drives the current account, remains woefully deficient. And the major surplus countries – Germany, China, and Japan – have been only too happy to go along for the ride.

 

NEW HAVEN – In an increasingly interconnected global economy, cross-border trade and financial-capital linkages have come to matter more than ever. The current-account balance, the difference between a country’s investment and saving position, is key to understanding these linkages. The dispersion of current-account positions tells us much about the state of global imbalances, which are often a precursor of crises.

The same is true of trade tensions, such as those now evident around the world. Current-account disparities often pit one country against another.

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Economies running current-account deficits tend to suffer from a deficiency of domestic saving. Lacking in saving and wanting to invest, consume, and grow, they have no choice but to borrow surplus saving from others, which gives rise to current-account and trade deficits with the rest of the world. The opposite is the case for countries with current-account surpluses. They are afflicted by subpar consumption, excess saving, and chronic trade surpluses.

There is a long-standing debate over who is to blame for this state of affairs – the deficit countries, which draw freely on the saving of others to finance economic growth, or the surplus countries, which choose to grow by selling their output in foreign markets. This blame game, which has long been central to disputes over international economic policy and trade tensions, is particularly contentious today.

The United States has the largest current-account imbalance in the world. It has recorded a deficit for all but one year since 1982, the sole exception being 1991, when foreign contributions to its military campaign in the Persian Gulf underpinned a miniscule surplus (0.05% of GDP).

During the 2000-2017 period, the US amassed $9.1 trillion in cumulative current-account deficits. That is larger than the $8.9 trillion of cumulative surpluses run collectively by the three largest surplus economies – Germany, China, and Japan – over the same period.

Many observers believe that the US is doing the rest of the world a huge favor by running chronic current-account deficits – namely, supporting the large surplus countries, which tend to suffer from a shortfall of domestic demand. Others, including me, are more critical of America’s long-standing penchant for excess consumption and the role that surplus economies play in enabling it. While there is undoubtedly some validity to both points of view, I worry more about the destabilizing role of the US.

America’s consume-now-save-later mindset, which is at the heart of its current-account deficit, is deeply embedded in its political economy. The US tax code has long been biased toward low saving and debt-financed consumption; the deductibility of mortgage interest, the absence of any value-added or national sales tax, and a dearth of saving incentives are especially problematic.

So, too, are the wealth effects from a profusion of recent asset bubbles. Aided and abetted by the Federal Reserve’s über-accommodation since the late 1990s, there was no stopping the interplay between America’s asset-dependent economy and an equally pernicious leverage cycle underwritten by bubble-inflated collateral. Why save out of income when frothy asset markets can do the job? The preference for asset-based saving over income-based saving is central to America’s current-account deficit.

The surplus countries have been delighted to go along for the ride. It didn’t matter that the US consumption binge was built on a foundation of quicksand. Excess export growth in the large surplus economies enabled the excesses of the world’s largest consumer.

That was especially the case in China. Spurred by Deng Xiaoping’s “reform and opening up,” China’s export sector increased sixfold – from 6% of GDP in 1980 to 36% in 2006.

Mirroring America’s massive current-account deficit, China’s current account went from relative balance in 1980 (+0.1% of GDP) to a massive surplus of 9.9% in pre-crisis 2007. The same was true in major developed economies, albeit to a lesser extreme: Germany’s export share of GDP went from 19% in 1980 to 43% in 2007, while Japan’s went from 13% to 17.5% over the same period.

In many respects, a marriage of convenience between the surplus and deficit countries eventually blossomed into full-blown codependency. But then, with the wrenching global financial crisis in 2008, the music stopped. Since then, frictions between deficit and surplus countries have intensified, now risking the possibility of a full-blown trade war.

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President Donald Trump’s administration has played an especially antagonistic role in asserting that the US is being victimized by large trade deficits. Yet America’s trade gaps have, in fact, been spawned by a chronic deficiency of domestic US saving. Despite the government’s recent upward revision to a still-depressed personal saving rate, the overall US national saving rate, which drives the current account, remains woefully deficient, averaging just 1.9% in net terms (adjusted for depreciation) over the post-crisis 2009-17 period. That is less than one-third the 6.3% average during the final three decades of the twentieth century.

Large and growing federal budget deficits over the next several years will only exacerbate this problem. Blaming China misses the obvious and important point that the Chinese current-account surplus has fallen sharply in recent years, from 9.9% of GDP in 2007 to an estimated 1% in 2018. In 2017, China’s current-account surplus of $165 billion was well below that of Germany ($297 billion) and Japan ($195 billion).1

As China presses ahead with consumer-led rebalancing, it will continue to move from surplus saving to saving absorption, with the distinct possibility that its current account will shift into permanent deficit (a small deficit actually was recorded in the first quarter of this year). That will leave a deficit-prone America with one less surplus country to draw on in funding the growth of its saving-short, excess-consumption economy. Maybe the rest of the world will step up and fill the void. But with the Trump administration now disengaging from globalization, that seems less and less likely.

History suggests that current-account imbalances ultimately matter a great deal. A still-unbalanced global economy may be forced to relearn that painful lesson in the coming years.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

New York Times : Malaysia pushes back against China’s Vision


August 24, 2018

New York Times :Malaysia pushes back against China’s Vision on account of Najib Razak’s stupidity

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Tariq Ismail takes on The Economist for calling Dr. Mahathir Mohamad “Chief of Everything”


August 18, 2018

Tariq Ismail takes on The Economist for calling Dr. Mahathir Mohamad  “Chief of Everything”

By Tariq Ismail

http://www.freemalaysiatoday.com

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I refer to the article referencing an editorial in The Economist entitled “Malaysia’s New Leaders Have Found Their First 100 Days Tough”.

The Economist editorial board opined that although Dr. Mahathir Mohamad’s Pakatan Harapan (PH) government has made headway in fulfilling key election pledges, in effect Mahathir is hindered by a “novice” Cabinet.

The article further contends that this has resulted in Mahathir having to become the “chief of everything”, thus reverting to his old autocratic ways. The piece also claims this is why Mahathir is retaining “cronies” such as those in the Council of Eminent Persons (CEP) and Daim Zainuddin.

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Malaysia’s ” Chief of Everything (The Economist)” or a strong crisis Leader ?

Worse still, The Economist is mischievously insinuating that Mahathir has no intention of dismantling racial policies seen as favouring the majority Malays despite his unexpected move in appointing Lim Guan Eng as Finance Minister.

The Economist further, and I have to say very subtly, insinuates that this state of governance is hindering Malaysia’s economic growth, by comparing Malaysia’s expected growth rate of 5% for 2018 against 6% in 2017.

I have to say, this is a very mischievous and almost maligning piece by The Economist. I thus feel compelled to enlighten the public, both local and foreign, of the state of matters as it stands.

The Economist, as influential as it is, must surely understand the nature of change, particularly involving changes in government. Who can forget the case of the Missing W’s when President George W Bush took over from President Bill Clinton? Or even the debacle of the US Cabinet appointments under the leadership of President Donald Trump? Yet, The Economist expects immediate and absolute perfection in the new Malaysian Cabinet line-up despite a game-changing opposition win after 60 years of single-party rule.

The Economist apparently fails to understand that in situations of change, there will be learning curves and gaps in knowledge and experience. That is only to be expected.

I challenge The Economist to undergo an equally momentous change without similar issues, just within its own organisation.

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The Council of Eminent Persons is, in fact, a crisis management team. It is being led by former Finance Minister Daim Zainuddin who took Malaysia out of two serious economic recessions. His leadership of CEP and his steady stewardship of the economy (in 1986 and 1998) is welcome by the international and domestic business community, given the uncertain times ahead as the trade war between America and China heats up. –Din Merican

The appointment of the CEP was made in recognition of this gap in experience and knowledge, particularly given the anticipated challenges in cleaning up after the Najib Razak administration. Professionals in the field of change will know that in such situations of extreme challenges, it is important to establish a team focused on clearing and cleaning up while the existing managers ensure that business runs as usual.

Failure to do so will exacerbate the tremendous problems currently faced.

It is just good change management practice and should be more relevant given the situation the new Malaysia finds itself in.

As for becoming the “chief of everything”, I am surprised The Economist says this. After all, isn’t a CEO a chief of everything? Yes, under normal circumstances, a CEO approves by exception only. However, these are exceptional times for new Malaysia. A new ruling alliance and fresh-faced ministers are confronted with a corruption and money-laundering scandal which has inspired a new field of study in international money-laundering, and these same fresh-faced ministers have to contend with the fall-out of that scandal domestically.

I ask the CEO at The Economist, had you been the incoming CEO in such a situation, would you freely delegate as you would in more normal circumstances? Or would you keep tighter control on the reins of power?

I have to say that despite all this, Mahathir has been admirably receptive and flexible to the suggestions and objections of the coalition ministers in his crafting of policies and handling of issues.

I think The Economist and regrettably most Western commentators on the new Malaysia underestimate the fine balance between the PH coalition and the public support behind it. There is an assumption, especially in the international media, that change was imminent simply based on the change instigated by PKR 20 years ago, and that this meant the PH coalition partners are all cut from the same cloth, so to speak, and are thus of one mind. This is a simplistic and careless analysis of Malaysian politics.

The reality is that Malaysia’s voting demographics, whether by economic standing or ethnicity, is fractious at best. This extends to political party support as well. PKR would never have made it on its own without the other coalition partners who are more modest in comparison but who still commanded crucial support from the section of society that could push PH over the 50% mark to win the election.

At this juncture, everyone would do well to remember that a coalition by definition is “a temporary alliance for combined action, especially of political parties forming a government”. Massive amounts of negotiation and give-and-take are required to make a coalition work, and even more so to make it historically successful. This does not happen without a firm leader guiding the numerous coalition partners in thought and deed, such that everyone reaches a consensus. If this is mistaken for Mahathir reverting to his “old autocratic ways”, I can assure you, a significant number of voting Malaysians are happy for it to remain so for now.

I say this because The Economist, and probably many others, seem to have forgotten the most important lesson of the new Malaysia. It is this: ordinary individuals who share the same universal values and the desire to do what is right by their own selves have the power to effect change regardless of race, ethnicity, economic standing, gender, age and ideology.

As such, The Economist’s pathetic attempts at stoking the fire of dissent and racial enmity topped by a prediction of poorer economic performance will not work in the new Malaysia. The people of the new Malaysia have always been the drivers of our own economic and political fortunes, good or bad. We know this for certain. And we know that as we did before, we can do so again if need be. The power is in our hands.

Tariq Ismail is a member of the PPBM Supreme Council.

The views expressed are those of the author and do not necessarily reflect those of FMT.