MALAYSIA: Changing the rules

In March, Malaysia’s prime minister Najib Razak unveiled the latest blueprint for the country’s economic development. But he faces a litany of problems – not least retooling a faltering economy and retaining a popular mandate

  • By Liz Chong
  • 03 May 2010
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On May 13, 1969 race riots broke out across Malaysia as the country divided itself along ethnic lines. In the ensuing chaos some 3,000 people lost their lives, and the burnt streets of downtown Kuala Lumpur were described as resembling the bloody battlefields of Vietnam, its neighbour to the north.

As an interim measure, the constitution was suspended for two years. Prime Minister Tunku Abdul Rahman, who had led the nation since independence in 1957, stepped down in favour of Tun Razak, who was appointed prime minister in 1971.

The following year Razak unveiled the New Economic Policy (NEP), a programme he and his ministers said would help pave the way towards racial harmony and narrow the wealth gap between the minority and richer Chinese and the majority Malays, known as bumiputras (sons of the soil). Razak introduced affirmative action for the Malays at all levels of government and society.

Under the NEP, for example, Malaysian universities keep places especially for Malay students. When companies make a listing, a third of the shares must be allocated to Malays.

This March, Razak’s eldest son, the prime minister Najib Tun Razak, unveiled a successor to the NEP, called the New Economic Model (NEM). In it Najib pledged to help the country grow an average 6.5% a year in the next nine years to hit former prime minister Mahathir bin Mohamad’s goal – launched in the 1990s, called Vision 2020 – of becoming a “developed nation” by 2020.

Last year the Malaysian economy shrank 1.7%. Bank Negara, the central bank, forecasts that it will grow this year by 4.5–5.5%.

Najib says he will revive the economy by focusing on attracting more investment from the private sector. His package of proposals includes greater privatization as well as improvements to the education system. He has also broached the idea of “needs-based” affirmative action, as opposed to a racial one.

Najib is aware that he must tread carefully in amending the earlier New Economic Policy – seen by some Malays as the lynchpin of Malaysian society.

The debate over the NEP was sparked years ago by Mahathir. He upbraided the Malays for what he saw as “their reluctance to work hard”. As long ago as 2001 in Kuala Lumpur, he said: “How much longer must Malays depend on the government and the privileges accorded to them? How much longer must they remain mediocre?”

But with Mahathir out of the picture, the difficult task of revising the NEP has fallen to Najib.

He has established a National Economic Advisory Council (NEAC), which is researching and working out the detail of the NEM, which will be presented in June. The body is expected to meet stakeholders such as non-governmental organizations and business groups in the months to come. At present they are setting up working groups for consultation and to look into the finer detail of implementing the plan.

Danny Quah, an economics professor at the LSE and a board member of the new council, says Malaysia’s current predicament is due to “many, many smaller things working in tandem”.

But, he says, “for progress and prosperity, education and the drive and skills it imparts to the younger generations matter hugely. A government service that is efficient, transparent and delivers the key public goods facilitates economic value well beyond its size; a general understanding among the population that when you put in the work, you acquire the benefits and that life becomes materially better for you.

“Once an economy allows each of these to decline, and together to feed on each other, there is an easy spiral downwards.”

This makes the stakes high for Najib, who became Malaysia’s sixth prime minister last year.

He faces a challenge from the opposition Pakatan Rakyat (People’s Party) – led by Anwar Ibrahim, a deputy prime minister in the 1990s – who admit that they even surprised themselves when they denied the ruling Barisan Nasional (National Front) coalition a two-thirds majority in the 2008 elections.

Pakatan Rakyat is in control of four states and has managed to reap unprecedented budget surpluses in Penang and Selangor. The upcoming trial of opposition leader Anwar Ibrahim has failed to dampen public support for him, and tens of thousands of Malaysians turn out to hear him speak every week at rallies around the country.


Najib,an economist educated at Nottingham University in the UK, faces a litany of problems. Annual income per capita stands at $6,970, according to the World Bank. Najib must retool Malaysia’s faltering economy and also ensure that Umno (United Malay National Organization), the leading member of the BN coalition, manages to retain strong support amongst the Malays.

The economy is stuck in a middle-income trap and has also suffered from an outflow of brainpower and capital. This has left it with a workforce that is mainly unskilled and heavily dependent on foreign labour.

But Malaysians are grappling with a lot more: wages have stagnated, corruption, concerns about crime and a conservative streak that is increasingly prevalent, as well as dissatisfaction with the NEP, which the opposition charges has mostly benefited the powerful and their cronies. This leaves the country struggling to compete with neighbours such as China and Vietnam.

Malaysia suffered the biggest foreign exchange reserve losses in Asia last year. According to a report by economists at UBS, the country’s reserves slumped by more than one quarter on a valuation-adjusted basis. Private-sector investment now lags public investment.

In addition, Malaysians struggle with rising costs even as wage growth is close to non-existent. According to the World Bank, real wages rose 2.6% in the domestic sector from 1994 to 2007, and just 2.8% in the export sector.

Quah of the NEAC says stagnant wage growth in Malaysia was “a symptom of stagnant productivity”. He says the NEAC will come up with policies to “raise the rate of productivity growth” so that the structure of wages would change accordingly.

The stagnation in wages has played a key part in influencing emigration. The number of Malaysians emigrating for destinations including Australia, the US and Taiwan has soared. From March 2008 to August 2009 over 304,000 Malaysians registered as emigrants. The bulk of departures took place in 2009 alone, with 210,000 leaving in the eight months. That was nearly double the total for all of 2007, of 139,696 emigrants. That leaves the economy heavily dependent on unskilled foreign labour estimated at 30–40% of the workforce.

The topic has been broached by politicians on both sides, with Najib pledging to improve opportunities for the diaspora to return home.

The Malaysian economy is forecast to grow this year at around 4–6% as it emerges from the global financial crisis. But Anwar says Malaysia has deteriorated to the point that it lags Indonesia, Thailand and Vietnam in terms of foreign direct investment.

“In the 1990s we were number one,” he tells Emerging Markets in an interview. “There is a need for structural reform. Malaysia is not on the radar of investors. There has been poor economic management this past decade, and government expenditure is bloated.”

According to the Asean (Association of South-East Asian countries) FDI (foreign direct investment) statistics database, in 2006 Malaysia received inflows of $6 billion, against $4.9 billion for Indonesia and $2.4 billion for Vietnam. But by 2008 Malaysia was the laggard. FDI had shrunk to $7.3 billion while in Vietnam it had risen to $8 billion and in Indonesia to $7.9 billion.

Anwar’s concern is shared by some government officials. Last December second finance minister Ahmad Husni conceded that Malaysia had stagnated and was now eclipsed by its neighbours, China, Vietnam, Indonesia, Philippines and Thailand. He said: “While Singapore and Korea’s nominal per capita GDP grew within the last three decades by nine and 12 times respectively, ours grew only by a factor of four.”

Anwar has also warned of over-reliance on oil, which is unsustainable. He says revenues from oil make up about 48% of the budget, and Malaysia’s oil reserves are not expected to last for many more years.

Former finance minister Tengku Razaleigh Hamzah lamented recently that Malaysia has been an “oil-cursed country”. The ex-vice president of Umno – and founder of Malaysian oil company Petronas – says that oil has become a narcotic that has left the country “stuck in the pattern of easy growth from low-value-added manufacturing and component assembly and unable to make the leap to a knowledge-intensive economy”.

Oil revenue has been used instead “to bail out failing companies, buy arms, build grandiose cities amid cleared palm oil estates”, he says.

Anwar and Najib have rounded on corruption, a common complaint for Malaysians who encounter it at many levels of society, from policemen demanding bribes to the payment of million dollar sums for contracts.

Malaysia is estimated to have spent RM100 billion on financial scandals during Mahathir’s 22-year rule, according to Barry Wain, a former editor of the Asian Wall Street Journal who has just published Malaysian Maverick: Mahathir Mohamad in turbulent times.

Last year Malaysia ranked 56th out of 180 countries in a ranking by Transparency International (TI). It fell from 47th the previous year on perceptions that little had been done to tackle corruption. TI says the Malaysian Anti-Corruption Commission seemed to focus on opposition politicians and small names.


Meanwhile, as Malaysia struggles to advance, the nation is distracted by the drama unfolding over new charges against 62-year-old Anwar, who is in the middle of a trial for sodomy. Speaking in London recently, Anwar declared his innocence and was adamant that he would not go to jail.

He is familiar with detention: Anwar was acquitted of the same charges in 2004 after a six-year spell in jail. In the style of a Hollywood movie sequel, Malaysian newspapers have aptly titled Anwar’s latest legal problems “Sodomy II”. Since his release from jail in 2004, and his acquittal on sodomy charges, Anwar has so far proved exceptional in his ability to unite a socialist and predominantly Chinese party with the the Pan-Malaysian Islamic party (PAS), and the multi-racial Parti Keadilan Rakyat (the People’s Justice Party).

Anwar seeks to present himself as a moral underdog pitted against the omnipotent monolith of Prime Minister Najib and the Barisan Nasional party, which has held power since the nation was granted independence in 1957.

Ever since his expulsion from Umno in 1998, Anwar has sought to define himself as a man concerned only with the fight for political reform and the universality of rights such as freedom of press, justice and equality.

For a time, both Najib and Anwar followed similar trajectories. They served alongside each other in successive cabinets, and both have held portfolios as ministers of culture, education and finance, Najib usually following in Anwar’s footsteps a few years later. Anwar, or Datuk Seri as he is known among his followers, was seen as Mahathir’s favoured “son”.

Today Anwar is the outsider as he prepares to head into his second trial. He insists on his innocence. But even as his legal battle distracts from the prize of the country’s most powerful post, Najib has just launched his own campaign to keep it.

  • By Liz Chong
  • 03 May 2010

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