Once a regional powerhouse, Malaysia is rapidly losing its status. Bogged down by what many investors see as a lack of competitiveness, its stock market is falling behind its rivals, and last year, foreign direct investment fell to $4 billion, down $600 million from two years earlier.
None of this is lost on its prime minister, Abdullah Badawi. His administration is scrambling to lure back foreign capital, recently announcing it will ease rules on foreign investment, scrap property gain taxes and sell stakes in state companies in a bid to reverse economic descent.
The new measures come as Malaysia gears up to build what the government hopes will be the jewel in the crown of its investment ambitions: a special economic zone – the Iskandar Development Region – in the southern state of Johor, which could compete against neighbouring Singapore for service industries. Badawi has described it as the next Shenzhen, the special economic zone that helped transform China’s economy in the 1980s.
Most astonishingly, the new zone will also allow for a peeling back of affirmative action rules favouring the ethnic Malay majority, often seen as the biggest obstacle to attracting overseas capital. The notorious rule stipulates that ethnic Malays are given at least 30% participation in employment and equity.
Scrapping the rule for selected services industries – including healthcare, tourism and education – marks a dramatic new development for the country. “This is not just a national economics experiment,” as one local commentator puts it, but rather “a challenge to the long-held belief of ketuanan Melayu, or Malay supremacy, which has been the basis of policies styled on the New Economic Policy [NEP].”
The NEP was an ambitious and controversial socio-economic restructuring programme brought into effect in the early 1970s to help redress disparities between the Chinese minority and ethnic Malay majority. The policy is seen by some as having had undesirable side effects: despite having granted special privileges to ethnic Malays for more than 30 years, it has also made many Malay businesses uncompetitive on an international scale.
“It’s a major shift,” says Colbert Nocom, head of research at UBS in Kuala Lumpur, referring to the new policy measures. “The federal government realizes that to be globally competitive and to attract private investment, you have to have a level playing field. “It says two things: that Malaysia is less insecure about competing, and that policy-makers realize unless we make it a globally competitive economy, it’s going to be difficult to get investments in.”
Skin deep?
But according to some, the move remains superficial and fails to address the deeper problems facing labour mobility in Malaysia. Relaxing labour laws in a pocket of Johor is a long way from embracing the openness to foreign entrepreneurialism across much of the region – and in the broader context of Malaysian commerce and industry, the playing field is still anything but level.
Anwar Ibrahim, former deputy prime minister and finance minister, argues that Malaysia needs a much more sweeping reform of labour laws before it will be truly competitive. “The narrow, rigid interpretation of affirmative action based on race is no longer helpful,” he tells Emerging Markets. “We embarked on an industrialization programme in the 1970s, ahead of China and India, but we’ve not moved with the times.”
“We need to make sure Malaysia remains competitive,” says Anwar, who is now poised to re-enter local politics on an opposition ticket, having spent five years in prison convicted of sodomy and corruption after accusing his government colleagues of graft. “We underestimate the wisdom of our people. I don’t believe any racial group should be left out.”
Seen in the broader context of recent economic liberalization across the country, the Iskandar policy nevertheless marks something of an advance. The country still has a grim image with international investors, thanks to the radical capital controls implemented by former prime minister Mahathir Mohammed in 1998, but most have now been scrapped; the ban on short sales, one of the last, ended earlier this year when Bursa Malaysia, which runs the Kuala Lumpur Stock Exchange, launched its RSS/SBL (restricted short sales/securities borrowing and lending) programme to bolster its derivative markets. In March, capital inflows and outflows were eased, central bank limits on residents’ foreign currency accounts were lifted, and caps were removed on banks wishing to trade foreign currencies. Even the property market has been opened to foreigners.
Some confidence
Such developments suggest that Malay institutions feel they can finally compete with foreign competitors. There are success stories in the GLC (government-linked company) reform process being undertaken by Khazanah, the government’s investment holding arm; the banking group CIMB has aspirations to be a regional champion, and the turnaround of Malaysia Airlines from near bankruptcy to profitability within a year is striking.
But confidence among Malaysian institutions that they can withstand the onslaught of foreign competition has been badly bruised by the fate of the struggling national carmaker, Proton. An iconic project established in the 1980s to help transform Malaysia into an industrialized nation by 2020, Proton is now facing its own demise, with falling revenues, growing expenses and low production volume. It is also widely regarded as emblematic of Malaysian industry’s inability to cope with foreign competition – at the start of the decade it held 60% of the domestic passenger car market, but just 24% today.
Malaysia has little choice but to open up to foreign competition. How easily it can do so remains to be seen.