Globalization and National Autonomy: The Experience of Malaysia 9789812308184

Table of contents :
CONTENTS
LIST OF ABBREVIATIONS
LIST OF TABLES AND FIGURES
PREFACE
CONTRIBUTORS
Chapter 1. Introduction
Chapter 2. Developmentalist State in Malaysia: Its Origins, Nature, and Contemporary Transformation
Chapter 3. The Look East Policy, the Asian Crisis, and State Autonomy
Chapter 4. The Malaysian Success Story, the Public Sector, and Inter-ethnic Inequality
Chapter 5. Poverty Eradication, Development, and Policy 116 Space in Malaysia
Chapter 6. Trade Liberalization and National Autonomy: Malaysia’s Experience at the Multilateral and Bilateral Levels
Chapter 7. Malaysia’s Education Policies: Balancing Multiple Goals and Global Pressures
Chapter 8. Malaysia’s Healthcare Sector: Shifting Roles for Public and Private Provision
Chapter 9. Globalization, Islamic Resurgence, and State Autonomy: The Response of the Malaysian State to ‘Islamic Globalization’
Chapter 10. The National Culture Policy and Contestation over Malaysian Identity
Chapter 11. Conclusions
Index

Citation preview

Globalization & National Autonomy

The Institute of Malaysian and International Studies (IKMAS) was established on 1 April 1995 as a center for research in the social sciences within Univesiti Kebangsaan Malaysia (UKM). The Institute adopts a multidisciplinary perspective in its research, post-graduate teaching, and other academic activities. Staffed by a team of scholars from various disciplines (especially economics, sociology, political science and history), IKMAS’s work is focused on Malaysian and International Studies within the framework of globalization and social transformation. Among IKMAS’s objectives are to promote collaborative research and dialogue on various themes of mutual interest with scholars and institutions in Malaysia and other parts of the world, and contribute to the discourse on globalization and social transformation from the perspective of developing countries.

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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Globalization & National Autonomy The Experience of Malaysia

Institute of Southeast Asian Studies Singapore

Institute of Malaysian & International Studies Malaysia

First published in Singapore in 2008 by Institute of Southeast Asian Studies (ISEAS) 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: jointly with Institute of Malaysian and International Studies (IKMAS) Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor Darul Ehsan Malaysia E-mail: [email protected] Website: All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies and the Institute of Malaysian and International Studies. © 2008 Institute of Malaysian and International Studies The responsibility for facts and opinions expressed in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institutes, or its supporters. ISEAS Library Cataloguing-in-Publication Data Globalization and national autonomy : the experience of Malaysia / edited by Joan M. Nelson, Jacob Meerman and Abdul Rahman Embong. 1. Globalization—Malaysia. 2. Malaysia—Politics and government. 3. Malaysia—Economic policy. 4. Malaysia—Social policy. 5. Malaysia—Cultural policy. I. Nelson, Joan M. II. Meerman, Jacob. III. Abdul Rahman Embong. JZ1318 G562 2008 ISBN 978-981-230-816-0 (soft cover) ISBN 978-981-230-817-7 (hard cover) ISBN 978-981-230-818-4 (PDF) Typeset by International Typesetters Pte Ltd Printed in Singapore by Eutopia Press Pte Ltd

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CONTENTS

vii xi xiii xvi

List of Abbreviations List of Tables and Figures Preface Contributors Chapter 1

Introduction Joan M. Nelson

1

Chapter 2

Developmentalist State in Malaysia: Its Origins, Nature, and Contemporary Transformation Abdul Rahman Embong

27

Chapter 3

The Look East Policy, the Asian Crisis, and State Autonomy Lee Poh Ping

59

Chapter 4

The Malaysian Success Story, the Public Sector, and Inter-ethnic Inequality Jacob Meerman

76

Chapter 5

Poverty Eradication, Development, and Policy Space in Malaysia Ragayah Haji Mat Zin

116

Chapter 6

Trade Liberalization and National Autonomy: Malaysia’s Experience at the Multilateral and Bilateral Levels Tham Siew Yean

159

v

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vi

CONTENTS

Chapter 7

Malaysia’s Education Policies: Balancing Multiple Goals and Global Pressures Joan M. Nelson

189

Chapter 8

Malaysia’s Healthcare Sector: Shifting Roles for Public and Private Provision Joan M. Nelson

218

Chapter 9

Globalization, Islamic Resurgence, and State Autonomy: The Response of the Malaysian State to ‘Islamic Globalization’ Norani Othman

241

Chapter 10 The National Culture Policy and Contestation over Malaysian Identity Sumit K. Mandal

273

Chapter 11 Conclusions Joan M. Nelson

301

Index

331

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LIST OF ABBREVIATIONS

7MP 9MP ABIM ADB AFC AFTA AIDS AIM AL ARQAM AMCJA APEC ASEAN BCIC BN BOT CAHP CBUs CKD DID DNU EPF EPU FDI FELCRA FELDA FIDA FMM

Seventh Malaysia Plan Ninth Malaysia Plan Angkatan Belia Islam Malaysia (Malaysian Islamic Youth Movement) Asian Development Bank Asian Financial Crisis ASEAN Free Trade Area Acquired Immune Deficiency Syndrome Amanah Ikhtiar Malaysia Darul Arqam All Malaya Council of Joint Action Asia Pacific Economic Cooperation Association of Southeast Asian Nations Bumiputera Commercial and Industrial Community Barisan Nasional Build-Operate-Transfer Coalition Against Healthcare Privatization Completely Built-Up Units Completely Knocked Down Drainage and Irrigation Division Department of National Unity Employees Provident Fund Economic Planning Unit Foreign Direct Investment Federal Land Consolidation and Rehabilitation Authority Federal Land Development Authority Federal Industrial Development Authority Federation of Malaysian Manufacturers vii

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viii

ABBREVIATIONS

FTAA FYPs G20 GAPENA GATS GATT GDP GLCs GMP GNP GSN HICOM HIV IADPs IBRD ICA ICU IIR IKMAS IMF IRA JAKIM JIM JSEPA LDCs LEP MARA MARDI MAS MCA MERCOSUR MIC MISC MITI MJEPA MPF

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Free Trade Area of the America Five-year Plans 20 Developing Countries Gabungan Persatuan Penulis Nasional Malaysia General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross Domestic Product Government-Linked Companies Guaranteed Minimum Price Gross National Product Globalization Studies Network Heavy Industries Corporation of Malaysia Human Immunodeficiency Virus Integrated Agricultural Development Programmes International Bank for Reconstruction and Development Industrial Coordination Act Implementation and Coordination Unit Interethnic Incomes Ratio Institute of Malaysian and International Studies International Monetary Fund Industrial Relations Act Jabatan Kemajuan Islam Malaysia (Department of Islamic Advancement of Malaysia) Jemah Islah Malaysia (Malaysia Council/Congregation for Islamic Reformation) Japan-Singapore Economic Partnership Agreement Less Developed Countries Look East Policy Majlis Amanah Rakyat (People’s Trust Council) Malaysian Agricultural Research and Development Institute Malaysia Airlines Bhd Malaysian Chinese Association Southern Common Market Malaysian Indian Congress Malaysian International Shipping Corporation Ministry of International Trade Industry Malaysia Japan Economic Partnership Agreement Malaysian Professional Forum

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ABBREVIATIONS

MPF MPVs MUET NCP NDP NDPC NEAC NEP NFPEs NGOs NOC NST OECD OPPs PAS PERKIM PhD PKMM PKIPIM PNB PREM PUTERA PWD RISDA SCOA SEATO SET SOEs SOCSO SPKR SPM SRG

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Muslim Professional Forum Multipurpose Vehicles Malaysian University English Test National Culture Policy National Development Policy National Development Planning Committee National Economic Action Council New Economic Policy Non-Financial Public Enterprises Non-Government Organizations National Operations Council New Straits Times Organization for Economic Cooperation and Development Outline Perspective Plans Party Islam SeMalaysia (Islamic Party of Malaysia) Pertubuhan Kebajikan Islam Malaysia (Muslim Missionary and Converts Beneficent Society) Doctor of Philosophy Parti Kebangsaan Melayu Malaya (Malay Nationalist Party) Persatuan Kebangsaan Pelajar-Pelajar Islam Malaysia (National Muslim Students Association of Malaysia) Permodalan Nasional Berhad (National Equity Corporation) Poverty Reduction, Economic Management Pusat Tenaga Rakyat (Centre for People’s Forces) Public Works Department Rubber Industry Smallholder Development Authority Syariah Criminal Ordinances and Acts South East Asian Treaty Organization Scientific, Engineering and Technical State-Owned Enterprises Social Security Organization Skim Pembangunan Kesejahteraan Rakyat (Scheme for the Development of the People’s Well-being) Sijil Pelajaran Malaysia (Malaysian Certificate of Education) Social Research Group

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x

ABBREVIATIONS

STAM STPM TINA TNB TRIMs TRIPs TWN UKM UMNO UNITAR UPM UTM UUK VAT WTO

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Sijil Tinggi Agama Malaysia (Malaysian Higher Certificate of Religious Education) Sijil Tinggi Pelajaran Malaysia (Malaysian Higher Certificate of Education) There Is No Alternative Tenaga Nasional Berhad (Malaysia’s National Electricity Utility Company) Trade-Related Investment Measures Trade-Related Intellectual Property Rights Third World Network Universiti Kebangsaan Malaysia United Malays National Organization Universiti Tun Abdul Razak Universiti Putra Malaysia Universiti Teknologi Malaysia Universiti Utara Malaysia Value Added Tax World Trade Organization

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LIST OF TABLES AND FIGURES CHAPTER 2 Table 2.1 Malaysia: Number of Public Enterprises, 1960–92 CHAPTER 4 Table 4.1 Foreign Direct Investment in Malaysia, 1983–2005 Table 4.2 Majority Ownership of Largest 100 Firms Listed on the Kuala Lumpur Stock Exchange, by Ethnicity or Government, 2001 Table 4.3 The Three Sector Malaysia Economy, 2007 Table 4.4 Ten Largest Government-owned Firms Listed on Bursa Malaysia by Market Capitalization and Per Cent Owned, 2005 Table 4.5 Employment by Occupation and Ethnic Group, 2000 and 2005 Table 4.6 States with Average Poverty, by Urbanization, Ethnicity, Income and Population Table 4.7 Inter-ethnic and Urban/rural Ratios of Mean Monthly Household Income Table 4.8 Urban and Rural Bumiputera and Non-bumiputera Population Distribution, 2005 Annex Table Simulations of Bumiputera and Non-Bumiputera Relative Mean Monthly Household Income Ratios, for 2007 CHAPTER 5 Table 5.1a Malaysia: Incidence of Poverty by Rural-Urban Strata, 1970–2004

48 84 90 95 96 98 101 102 103 108

120

xi

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xii

LIST OF TABLES AND FIGURES

Table 5.1b Table 5.2a Table 5.2b Table 5.3a Table 5.3b Table 5.4 Table 5.5 Table 5.6

Incidence of Poverty and Hardcore Poverty, 1999 and 2004 (2005 Methodology) Poverty Incidence by States Monthly PLI, Poverty Incidence and Hardcore Poverty by State, 2004 Incidence of Poverty by Ethnic Groups, 1970–2002 Incidence of Poverty and Hardcore Poverty by Ethnic Group, 1999 and 2004 Poverty Eradication Phases in Malaysia during the Three Development Policies, 1970–2005 Total Development and Poverty Eradication Allocation by Plan Malaysia: Employment by Sector and Ethnic Group, 1970–1998

CHAPTER 6 Table 6.1 Trade Negotiations under GATT and the WTO Table 6.2 Overview of Results of the Uruguay Round Negotiations Table 6.3 Tariff Reductions in Auto; Auto Components and Parts; and Steel in Malaysia under the MJEPA CHAPTER 7 Table 7.1 Trends in Education Enrolment and Participation Rates, 1970–2005 Table 7.2 Trends in Federal Government Spending on Education, Selected Years, 1965–2005 CHAPTER 8 Table 8.1 Trends in Malaysian Health Indicators, 1970–2005 Table 8.2 Federal Government Spending on Public Health and Healthcare Selected Years, 1965–2005

122 123 124 125 125 127 131 135

162 168 180

191 193

219 227

LIST OF FIGURES CHAPTER 4 Figure 4.1 Malaysia’s Six Industrialization Policy Lines

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PREFACE

The idea for this book was initially conceived by IKMAS not long after the successful convening of the Third International Globalization Studies Network (GSN) Conference held at Universiti Kebangsaan Malaysia in August 2006. IKMAS hosted this conference as a member of GSN, which is a worldwide consortium of centres of globalization studies. Fellows at IKMAS brainstormed the idea with a view to start a new research project to be conducted under the auspices of the incoming holder of the Pok Rafeah Distinguished Chair in International Studies, Professor Joan Nelson, from the American University, Washington, D.C. and the Woodrow Wilson International Center for Scholars of the Smithsonian Institute. IKMAS’ first project on globalization had been conducted under the auspices of the first Pok Rafeah Chair, Professor J.H. Mittelman, who was at IKMAS in 1997 and 1999. That project resulted in an important publication by Routledge, London in 2001 under the title, Capturing Globalization, edited by J.H. Mittelman and Norani Othman. In that book, besides analysing a number of empirical cases, we explored the various theoretical perspectives on globalization and drew two important conclusions: first, developing countries like Malaysia need to adopt what is known as the ‘transformationalist approach’ in order to capture globalization, and second, we have to contribute to the debate on globalization to reflect the experiences of the South so that the globalization discourse can be made more global. Thus, when Professor Nelson arrived at IKMAS in early October 2006 to occupy the Pok Rafeah Chair for a period of nine months, we soon held a series of brainstorming sessions with her. While taking note of IKMAS’ first collegial project on globalization, started almost ten years earlier, and agreeing that any new project must build on this xiii

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PREFACE

achievement, we concluded that we had to move beyond the debate of the 1990s which tended to emphasize the retreat of the state, and incorporate insights from the literature that had emerged since we entered the twenty-first century. We took the position that the issue of globalization and national autonomy, particularly state autonomy, had to be re-visited, and that Malaysia presented an interesting and important case study for that purpose. We were extremely fortunate because Joan and her accompanying husband, Professor Jacob Meerman, a retired economist at the World Bank, were in full agreement with the idea. We benefited tremendously from Joan’s vast knowledge of the literature on social policies and globalization, particularly her reservoir of knowledge on, and experience in coordinating research in Latin America and Eastern Europe. Moreover, Jacob, who had studied and written a significant book on public expenditure in Malaysia (published by Oxford University Press for the World Bank in 1979) and with his valuable experience at the World Bank, was able to provide valuable insights on where Malaysia stood some decades ago when she embarked on industrialization and the mission of attracting foreign direct investment in comparison with other developing countries. Their views, and particularly the new literature on globalization that Joan drew attention to and her insights on it, synergized very well with IKMAS’ scholarly expertise on various dimensions of the Malaysian economy, society and culture. All these served as a powerful intellectual ballast to turn us into a close-knit research team to work together passionately on the new project which has now come to see the light of day on globalization and national autonomy. All the chapters in this book evolved from of a set of draft research papers presented and deliberated at a series of workshops organized by IKMAS from October 2006 until May 2007 before Joan and Jacob completed their sojourn at IKMAS. These chapters were thoroughly discussed and revised based on inputs given by all IKMAS’ fellows and other experts who were invited to participate. Subsequently, six of the draft chapters written by IKMAS’ fellows were also read at the Fifth International Convention of Asia Scholars (ICAS5) held in Kuala Lumpur on 2–5 August 2007, and received favourable and constructive feedback. This book would not have been possible without the support and assistance of a number of institutions and individuals. IKMAS and UKM afforded us time and material support for the research and workshops to be carried, while the publication in the form of this book is partially

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PREFACE

xv

funded by a grant from the Research University Operations Fund awarded to Universiti Kebangsaan Malaysia by the Ministry of Higher Education. We would like to express our gratitude and thanks for the support from the University and the Ministry. We also would like to thank our research assistants and the administrative and general staff at IKMAS who provided us with data and other technical support, and to scholars who participated in our workshop series and gave valuable comments and criticisms on earlier drafts. From IKMAS’ point of view, this project would not have got off the ground and taken the shape it has without the staunch commitment, intellectual guidance and collegiality provided by both Joan and Jacob. Their warmth and sense of humour, particularly Jacob’s, are infectious. It is always a pleasure and privilege to work with them, something we look forward to again in the future. Finally, we hope this book will be a small contribution to the ongoing debate on state autonomy and globalization. We also hope that it will be of use to researchers, students, policy-makers and the general public interested in how Malaysia had taken advantage of its autonomy and capacity to navigate its course of development during the fifty years since Independence in 1957 (and particularly from the 1970s to the present) and the constraints — internal and external — that it has had to manage in order to move forward. All the chapters in this book were completed well before the twelfth general elections held on 8 March 2008. Along with most observers and analysts of Malaysian affairs, we did not anticipate the substantial political shifts signaled and launched by the elections. It is much too early to predict the changes that will follow on these elections. We hope that they will address some of the tensions identified in our discussion, and heighten Malaysia’s capacity to maintain substantial autonomy while capturing many of the benefits of on-going globalization trends. Abdul Rahman Embong Co-editor and Principal Research Fellow Institute of Malaysian and International Studies (IKMAS) Universiti Kebangsaan Malaysia April 2008

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CONTRIBUTORS Abdul Rahman Embong, Ph.D. (Malaya), is Principal Fellow and Professor in Sociology of Development whose focus of research is on development, the middle class, democratization, pluralism, ethnicity and the nation-state within the framework of globalization and social transformation. His most important publications include Southeast Asian Middle Classes: Prospects to Social Change and Democratisation (editor, 2001); State-led Modernization and the New Middle Class in Malaysia (2002); The Nation-state: Processes and Debates (in Malay) (2006); Globalisation, Culture and Inequalities: In Honour of the Late Ishak Shari (editor, 2004) and Role and Orientation of Malaysian Social Science (in Malay) (2006). He is general editor for the Malaysian and International Studies Series of the Universiti Kebangsaan Malaysia Press and a member of the advisory board of the Kyoto Review of Southeast Asia. President of the Malaysian Social Science Association since 2000 and a member of the Permanent Subcommittee on Social Science of the Malaysian National Commission for UNESCO (Nat.Com), he is an expert resource person for UNESCO, UNDP and UNRISD, as well as to the Federal and State Governments of Malaysia. He was appointed by the Prime Minister’s Department in late 2003 as head of the team tasked with formulating the National Integrity Plan and the blueprint for the setting up of the Integrity Institute of Malaysia, both of which were launched by the Prime Minister on 23 April 2004. Lee Poh Ping, Ph.D. (Cornell), is Principal Fellow and Professor in Political Science whose areas of research are international relations and regionalism, with a focus on Japan and Southeast Asia. His publications include, The Emerging East Asian Community (edited with Tham Siew Yean and George Yu, 2006), Chinese Society in Nineteenth Century Singapore (1978); “Japanese Political Relations with Southeast xvii

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CONTRIBUTORS

Asia from 1952–1977” (2004) and Facing the Dragon: ASEAN and Japan, and the Rise of China (2005). He is President of the Malaysian Association of Japanese Studies (MAJAS) since 2000, and was Chairman of the Malaysian-American Council on Educational Exchange (MACEE) (2001 and 2003). Jacob Meerman, Ph.D. (Chicago), has had a career in development with the World Bank, USAID, and the Harvard Institute of International Development. He has done extensive work in rural development in Africa and evaluation of Bank programmes in agricultural structural adjustment. His earlier experience includes work in Malaysia and Latin America. He has been Adjunct Professor and Visiting Scholar at Johns Hopkins University, School of Advanced International Studies and has been most recently a Visiting Professor at the Institute of Malaysian and International Studies of Universiti Kebangsaan Malaysia in Kuala Lumpur. He is currently a Scholar in Residence at the American University in Washington where he is concluding a book on the economic mobility of five low-status minorities. He is the author of Public Expenditures in Malaysia, Who Benefits and Why (1979), Reforming Agriculture, the World Bank Goes to Market (1996), and one of the authors of the awardwinning “Berg Report”, Accelerated Development in Africa (1981). Joan M. Nelson, Ph.D. (Harvard), was the Pok Rafeah Distinguished Chair in International Studies at the Institute of Malaysian and International Studies (IKMAS), Universiti Kebangsaan Malaysia, for the period October 2006 to May 2007. She is also a Senior Scholar at the Woodrow Wilson Center of the Smithsonian Institution, and Scholar in Residence at the School of International Service, American University. Her primary research interest is the politics of economic reforms, and the interactions between market-oriented reforms and democratization in middle and low-income countries. Her current work focuses on the politics of education and health sector reforms. She received her doctorate from Harvard in 1960. She has consulted for USAID, the World Bank, the Inter-American Development Bank, and the IMF, and has taught at MIT, the Johns Hopkins School of Advanced International Studies, and the Woodrow Wilson School at Princeton. Among her publications are Crucial Needs, Weak Incentives: The Politics of Health and Education Reform in Latin America (co-editor with Robert Kaufman, and contributor, 2004); Reforming Health and Education: The World Bank, the IDB, and Complex Institutional Change (1999); Transforming Post-Communist

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Political Economies (co-editor with Charles Tilly, and contributor, 1998); A Precarious Balance: Democracy and Economic Reforms in Latin America (editor and contributor, 1994); Access to Power: Politics and the Urban Poor (1979); No Easy Choice: Political Participation in Developing Nations (with Samuel Huntington, 1976). Norani Othman, M.Phil. (Hull), is Principal Fellow and Professor in Sociology of Religion, specializing in issues related to Islamic societies, human rights, rights of women, democratization and globalization. Among her most important publications are: Shari’a Law and the Modern NationState: A Malaysian Symposium (editor, 1994), “Grounding Human Rights Arguments in Non-Western Culture: Shari’a and the Citizenship Rights of Women in a Modern Islamic Nation-State”, in The East Asian Challenge for Human Rights, edited by J.R. Bauer and D.A. Bell (1999); Capturing Globalisation (co-editor with J.H. Mittleman, 2001); and Elections and Democracy in Malaysia (co-editor with Mavis Puthucheary, 2005). She is a member of the committee evaluating the Malaysian AIDS Council’s programmes, and sits on the Asia Research Institute’s Academic Staff Appointment Committee as well as consultant to the German Parliament and Australian Government’s National Assessment Office. Ragayah Haji Mat Zin, Ph.D. (Vanderbilt), is Principal Fellow and Professor in Development Economics, with a special interest in income distribution and poverty as well as trade and industrial development, especially small and medium industries. Among her recent publications are “Earnings Differentials Determinants Between Skills in the Malaysian Manufacturing Sector” (with Rahmah Ismail, 2003); “Income Distribution and Poverty Eradication in Malaysia: Where Do We Go From Here?”, in Globalisation, Culture and Inequalities, edited by Abdul Rahman Embong (2004); and “China and India: Challenges and Opportunities for Poverty Eradication and Moderating Inequality in Malaysia” (2006). She is currently the Country Coordinator for the East Asian Development Network (EADN), member of the Interim Steering Committee on the Globalization Studies Network, and Vice President of the Malaysian Economics Association (since 2004). She has served as consultant to several international organizations like ESCAP, ILO and the World Bank Institute. Locally, she has served as an expert in the team to review the concept and measurement of poverty conducted by the Economic Planning Unit, the Prime Minister’s Department, and is a member of the Technical Working Group drafting the Ninth Malaysia Plan (2006–2010).

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Sumit K. Mandal, Ph.D. (Columbia), is Senior Fellow and Associate Professor at the Institute of Malaysian and International Studies (IKMAS), Universiti Kebangsaan Malaysia. As a social historian, his research centres on cultural diversity and cultural politics in Southeast Asia, focusing on Muslim societies. His publications include Challenging Authoritarianism in Southeast Asia: Comparing Indonesia and Malaysia (edited with A. Heryanto, 2003); “Transethnic Solidarities, Racialisation and Social Equality”, in The State of Malaysia: Ethnicity, Equity and Reform, edited by Terence Gomez (2004); “Forging a Modern Identity in Java in the Early Twentieth Century”, in Transcending Borders: Arabs, Politics, Trade and Islam in Southeast Asia, edited by H. de Jonge and N. Kaptein (2002). He is a recipient of the Asian Public Intellectuals (API) Fellowship and a member of the advisory board of the Kyoto Review of Southeast Asia. Tham Siew Yean, Ph.D. (Rochester), is the current Director of the Institute of Malaysian and International Studies (IKMAS) at Universiti Kebangsaan Malaysia. She is also Principal Fellow and Professor in International Trade with research interests in foreign direct investment, economic integration and competitiveness. She has served as a consultant in local and international agencies. Her recent publications include, “Prosper-Thy-Neighbour Policies: Malaysia’s Contributions after the Asian Financial Crisis”, (co-authored with Kwek Kian Teng, 2007); “Trade between Malaysia and China: Opportunities and Challenges for Growth”, in Emerging Trading Nation in an Integrated World: Global Impacts and Domestic Challenges of China’s Economic Reform, edited by E.K.K. Yeoh and E. Devadason (co-authored with Kwek Kian Teng, 2007). A member of the Technical Resource Group in drafting the Third Industrial Master Plan (2004/2005), she also authored the section on external trade. She is also a country member of ARTNet (Asia-Pacific Research and Training Network on Trade). In 2007, she was appointed a member of the ASEAN Economic Bulletin International Advisory Committee.

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1 INTRODUCTION Joan M. Nelson

Among the fears and concerns generated by recent globalization, the most basic is the perception that globalization progressively circumscribes the autonomy of governments, nations and peoples. Relentless global market pressures and the ever more pervasive influence and requirements of multilateral organizations and agreements limit the capacity of governments to pursue their own national priorities and their citizens’ preferences. This perception is shared by bitter critics of globalization and by many of those who argue that its potential benefits outweigh its risks.1 The charge that globalization reduces national autonomy underpins many other fears and criticisms, since it implies that governments and peoples cannot take countervailing actions to prevent, dilute or compensate for adverse effects. There is now widespread agreement, even among enthusiastic proponents of globalization, that it carries many risks. High on the lists of threats are environmental damage, erosion of workers’ rights, and growing inequality within as well as between nations. In principle, governments could adopt policies to regulate firms and groups that damage the environment, design programmes that promote workers’ welfare, or pursue strategies to reduce inequality. Many governments do attempt such corrective measures. But to the extent that their autonomy is indeed constrained, such countervailing measures cannot be carried far without incurring heavy costs. Globalization’s threats to the environment, labour rights, equality, and a range of other goals are severe in part because nations’ autonomy to counter the threats is limited. 1

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JOAN M. NELSON

Globalization also generates threats that cannot be effectively addressed at the level of action by individual nations. International financial crises, climate change, the cross-border spread of diseases and many other problems largely or partly caused by globalization can only be effectively addressed through international collaboration. Nevertheless, many impacts within nations could be eased by national policies and programs, if governments could take those actions without incurring large costs such as reduced trade, aid or investment; disapproval in regional or global organizations; or possibly even sanctions. A dissenting strand in the discourse regarding globalization challenges the “loss of autonomy” hypothesis. Since the mid-1990s, a growing number of analysts suggest that the impacts of globalization are filtered through the circumstances, policies and capabilities of each country’s society, economy and political system. Hence similar pressures and opportunities have different effects in different countries. This is particularly clear with regard to links between globalization and growth. Closer integration into global trade and investment networks has permitted unprecedented rates of growth over sustained periods in some countries (notably the “Asian Tigers”), while others, for whatever combination of reasons, have benefited little or slide backwards (Weiss 1998). These observations suggest that governments have substantial scope to shape globalization’s impacts. Indeed, if autonomy is understood not merely as freedom to pursue preferred objectives but also as possession of the resources and capacity to achieve those goals, then globalization can expand autonomy. Government strategies and policies can go beyond avoiding costs to capture opportunities offered by globalization. The most obvious illustration is the possibility for accelerated economic growth and increased government revenues as a result of effective integration into the global economy. The revolution in information technology and communications is also enabling, providing techniques and guidance in rapidly upgrading the efficiency of many aspects of government operations. For governments committed to reducing corruption, advice and pressure from multilateral organizations, transnational business and professional associations, and transnational or internationally affiliated non-governmental organizations (NGOs) like Transparency International can provide technical, moral and political reinforcement. An assessment of globalization’s impact on governments’ autonomy must encompass not only constraints but also enabling effects. These considerations suggest that balanced understanding of the effects of globalization on national autonomy requires detailed studies of varied national experiences. Case analyses should trace the impact,

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INTRODUCTION

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over time, on specific sectors and areas of state action, assessing how each country’s circumstances, institutions, and policies interact with the multiple influences and pressures of globalization. This volume undertakes such analysis, exploring the evolution of Malaysia’s national policies and strategies in the context of rapidly mounting global engagement, from 1970 to 2005. In several respects, Malaysia offers a particularly interesting case study of globalization’s multiple effects on autonomy. Before turning to Malaysia’s experience, however, it is useful to consider in greater detail the core concepts under discussion: globalization and autonomy. GLOBALIZATION SINCE THE 1970s: BROADENING AND DEEPENING

Globalization is an umbrella label for a wide array of trends intensifying interactions across national boundaries. Its most obvious economic dimensions include increased cross-boundary production and trade in goods and services, investment and flows of capital. Ever more rapid and less costly transportation and communications technologies support and encourage these economic dimensions, as well as expanded international travel and migration and immensely increased communications flows. Most concepts of globalization also include the proliferation of regional and global institutions to facilitate and regulate interactions, including high-profile organizations like the United Nations and its agencies, and an immense number of more specialized or smaller organizations, agreements, multilateral treaties and codes. The growth of international civil society is still another dimension of globalization, encompassing an intricate array of transnational organizations and networks. All these trends contribute to the less tangible, yet much noted and debated diffusion of ideas, values, styles and cultural expression ranging from concepts of human rights or democratic governance to tastes for fast food or popular music. Religious movements have also been galvanized by the challenges and opportunities of globalization, and have powerfully shaped responses in parts of the world. None of these trends are new to the world scene. History has seen both rapid rises in globalization and its unraveling (see, for example, Frieden 2006, Part I). However, the scope, depth, and geographic coverage of the combined trends since the last quarter of the twentieth century have been unprecedented. Globalization has evolved rapidly since the 1970s. Rapidly intensifying competition in global markets for trade and investment is dramatically

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heightening pressure on most governments. China’s exponential engagement in world trade and investment is the predominant recent element in this picture, but the sudden emergence of India and a number of smaller nations contributes to the pressure. During this same period, formal multilateral rules governing trade and related issues impinged increasingly on participating governments’ policy space. Before the Tokyo Round (1973–79), negotiations under the General Agreement on Tariffs and Trade (GATT) focused primarily on tariff reductions and quantitative restrictions of trade. Since that time, negotiations under GATT and its successor, the World Trade Organization (WTO), increasingly sought to restrict nations’ domestic regulations biased against imports, and have broadened into trade in services, investment, and intellectual property rights. Moreover, after the WTO was established in 1995, developing countries that had been exempted from the tariff reductions and other provisions negotiated under GATT were required to accept those adopted under the Uruguay Round (1986–93), with the sole exception of domestic regulations on government procurement. In short, multilateral agreements on trade have steadily encompassed more issues and more nations, while probing ever deeper into what used to be regarded as strictly domestic policy areas. Meanwhile, multilateral influences have reached far beyond trade issues. Following World War II, multilateral conventions on human rights have been articulated by a growing array of official regional and multilateral organizations and commissions, as well as by increasingly influential transnational networks and associations. By the late 1980s, the World Bank and other multilateral organizations were strongly emphasizing the crucial rule of better governance as the essential accompaniment to sound economic policies, in order to promote development, reduce poverty, and combat inequality. Spurred by the collapse of Communism in Eastern Europe and the former Soviet Union, aid donors and myriad nongovernmental associations energetically promoted democratic institutions and practices throughout the world. Regional and global organizations and the rapidly expanding international civil society organizations multiplied their efforts to reduce gender bias, protect the environment and the rights of indigenous peoples and other minorities, revive and strengthen labour rights, and promote a wide array of additional goals. All these initiatives were aspects of globalization in the sense that multinational and cross-border agencies and groups sought to influence and alter nations’ domestic policies. One high-profile aspect of globalization has become less rather than more restrictive in its content. Since the early 1980s, neo-liberal economic

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philosophy has been generally regarded as a key theme of the international financial community, particularly the International Monetary Fund (IMF) and the World Bank, in their policy advice and conditions for borrowing nations. Interpretations of neo-liberalism have shifted from the mid-1980s, when high-level policy pronouncements from those institutions verged on the classic liberal formulation, “That government is best which governs least.” While prescriptions still emphasize conservative fiscal and monetary management, ideas regarding effective growth promotion have moved far beyond “getting prices right” and privatization to encompass strengthened public sector institutions and practices, appropriate regulation as well as incentives for private sector growth, and heightened priority for human resource development. The Asian financial crisis of the late 1990s and the searing criticism of the initial IMF responses to that crisis spurred further reconsideration of aspects of macro-economic management, including a reversal of the earlier blanket disapproval of restrictions on capital flows (Stiglitz 2006, xiii, xv, and passim). By the 1990s, the Bretton Woods institutions had broadened their traditional concentration on growth per se to include a strong emphasis on poverty reduction while voicing growing concern regarding the destructive impact of inequality on growth and welfare. These issues had always been front and centre within the international NGO community and among many of the smaller bilateral aid donors and specialized agencies of the United Nations. The Millennium Development Goals adopted by the United Nations General Assembly in 2000 signalled an international consensus that these and related issues of education and health demanded much higher priority and more vigorous action. In short, while neo-liberal emphasis on the benefits of market-friendly policies is still a central element of globalization, international discourse and policies regarding growth and development strategy are far broader and more flexible than during the 1980s. Global religious movements constitute separate currents of globalization, with even more powerful individual and social impact for many of the world’s peoples. Two of these movements are particularly prominent. Evangelical Christian missionary groups are extremely active and rapidly winning adherents in Latin America, some parts of Africa, and scattered locations elsewhere in the world. Still more visible and influential is the global Islamic resurgence. That resurgence consists of a wide array of groups and schools of thought, ranging from moderate to radical, originating mainly in Egypt and the Middle East and spreading virtually throughout the world. Like other globalizing trends, these movements

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seek supporters and allies and establish networks, organizations and institutions. In contrast with many other groups and forces of globalization, they often do not focus their attention directly on national government policies. Instead, to the extent that they win widespread public support, they influence governments’ policies and actions indirectly, via internal pressures from domestic groups. In some countries, including Malaysia, such pressures have become powerful forces motivating or constraining government action in specific policy areas. Globalization is thus a multitude of forces, influences and trends, constantly evolving and interacting with each other. External pressures are certainly increasing, as market competition grows and a bewildering array of multilateral agencies and transnational groups and movements seek to influence an ever-wider range of government policies. However, governments and societies are not simply passive recipients of changing pressures and opportunities. Governmental capacities are growing in most countries, as are the scope and strength of civil society. Both are stimulated by aspects of globalization. Domestic policies and programs evolve, in response not only to external pressures but also to the shifting goals and priorities of political leaders, the demands and needs of internal groups, and as a result of lessons learned from earlier endeavors to maneuver amidst those pressures. And as noted earlier, aspects of globalization offer opportunities to enhance government capacity and policy space, through increased economic resources, information, and broadened political alliances. Hence autonomy is not a simple quantum that decreases as external pressures grow. It is far more complex, and indeed elusive. AUTONOMY: A SLIPPERY CONCEPT

At its core, the concept of autonomy refers to the degree to which an actor is free to choose and pursue a preferred course of action. The concept can apply to an individual, group, organization, government, or international institution. In the globalization debate, the term is most commonly used to mean the relative absence of externally imposed constraints. A closer consideration of the concept, focusing on its application to national governments, suggests a series of clarifications, caveats, and complexities. First, governmental autonomy or policy space cannot be assessed in the abstract or in general. Autonomy always refers to absence of constraints with regard to pursuit of specified goals. A government may face few

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or no external constraints with regard to health policies, but substantial constraints with regard to regulation of capital flows. Second, as already indicated, while “autonomy” is usually used with reference to (absence of) external constraints, a government’s freedom to define and pursue objectives is always constrained by domestic pressures and limits, including the demands and expectations of national and local economic, political, ethnic and religious interest groups and broader public opinion. Limits on the financial, administrative and technical resources available to the government and competing demands on these limited resources from other objectives are also obvious constraints. So too are constitutional and legal limits on executive authority. Internal constraints are often — perhaps usually — more binding than external ones, with regard to most objectives. Pursuit of most goals confronts a mix of internal and external constraints. The relative importance of external and internal obstacles varies among goals. Moreover, the degree and kinds of external and internal constraints change over time. External and internal pressures and forces intermingle and interact. Each contributes to changes in the other. Indeed, it is sometimes difficult to distinguish clearly whether pressures with regard to specific goals are largely external or internal, and how each is influencing the other. It is useful to distinguish two alternative routes through which external influences may constrain or impel government action. The more obvious route is direct pressure on governments from specific external agencies such as international organizations, other governments, transnational networks or corporations to adopt or refrain from specific policies. Systemic pressures that cannot be traced to specific agents — for instance, market pressures, or the influence of current ideas — may also bear directly on governments’ decisions and actions. However, external groups, trends and ideas may also influence or constrain governments via an indirect, bottom-up route. As noted above, the various global revivalist religious movements operate mainly through this route. In the medium and long run, so do many other aspects of globalization. Globalization influences a great many aspects of a country’s society and economy, including the structure of the labour force, class relations, aspirations and values, cultural trends, professional networks, civil society and non-governmental organizations. Each of these changes in turn can alter demands and pressures on the government from internal groups, classes, and organizations. While much discourse on globalization has focused on directly imposed external constraints on government policies, even

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more important longer-run external effects may flow through societal change that in turn shapes political pressures from below. Much of the discussion of constraints on policy space assumes or implies that the constraints are imposed, in opposition to the preferences of the government. Yet many constraints are voluntary, in the sense that they flow from the logic of chosen strategies or policies. With regard to economic policies, it is helpful to distinguish three categories of constraints, focusing on the questions of governmental volition and policy space. • The most problematic external constraints, and those most emphasized by many of globalization’s critics, are cross-border exogenous external economic constraints. These constraints are imposed by forces and agents that are external to the governments and countries that they affect. They include financial crises (usually involving foreign exchange and international movements of capital) and international business slumps which unexpectedly but severely impact on nations’ welfare and growth. Slumps may be caused by a sudden fall in key prices, as occurred in 1986, when the world prices of Malaysia’s natural resource exports collapsed (petroleum, tin, rubber, palm oil). Or they may be the result of unexpected inflation of key commodity prices, as in the international petroleum shortages of 1974 and 1979. They include, also, unexpected market restructuring, such as escalating product competition from low-wage countries that leads to loss of markets and destroys long-established industries, or new destinations and competition for foreign “greenfield” investment. • In contrast, endogenous contractual economic constraints result from initiatives and choices taken by governments themselves. The government takes voluntary decisions to constrain itself by entering into international contracts; for example, membership in trade pacts, agreements on international property rights, international government procurement agreements, and membership in international communications organizations such as post and telephones, etc. Governments enter into these contracts and accept the resulting constraints because they expect the benefits in increased prosperity to exceed the costs of fulfilling their obligations under the agreements, that is, of reduced policy space. • Endogenous unilateral economic constraints are also voluntary and initiated by the government itself. Like cross-border contracts, governments commit to these policies because they flow from (or are

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“endogenous to”) the logic of a chosen strategy or goal. They often reflect some combination of international and domestic pressures from stakeholders and pressure groups. For instance, a government may decide that while it would like to establish or strengthen social security provisions for workers, it will avoid requiring social security contributions from employers, because such taxes would discourage labour-intensive investment or reduce the price-competitive capacity of export industries. The concept of autonomy or policy space as “absence of external constraints” thus turns out to be much more complex and ambiguous than initially appears. WHY FOCUS ON MALAYSIA’S EXPERIENCE?

Malaysia’s experience is particularly interesting for an exploration of the effects of globalization on autonomy. Among developing countries, Malaysia is one of the most highly integrated into the world economy. The A.T. Kearney/Foreign Policy Globalization Index for 2007 (based on 2005 data) ranks seventy-two countries, combining indicators of economic integration, personal cross-border contacts, technological connectivity and political engagement. Malaysia scores twenty-third on this index, and third with regard to indicators of trade integration alone. Most of those scoring higher are OECD states. In comparison with the higher-ranking states, Malaysia’s score is unusually strongly influenced by economic components of the index, while technological components (mainly computer use) play a much smaller role than in the other high-ranking states. (Foreign Policy 2007, .) Consistent with the index, Malaysia also scores high on a number of correlates of high globalization. In 2005, its total exports were 109 per cent of GDP, although imports (many used as inputs for exports) were 88 per cent of GDP as well. In a nation of twenty-six million, about two million are recent immigrants, a high percentage compared to most countries. The number of tourists in 2007 was expected to exceed twenty million (Malaysia 2006, p. 195), or nearly one tourist for every member of the population. In short, Malaysia is highly exposed to the economic pressures of globalization. On the international political scene, Malaysia plays an active role in the Association of Southeast Asian Nations (ASEAN), ASEAN +3 (the ASEAN nations plus China, Japan and South Korea), and the

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Organization of Islamic Countries, and is also a member of the AsiaPacific Economic Co-operation (APEC), Asia-Europe Meeting, the East Asian Summit, and of course, the United Nations. Malaysia’s unusually stable political history also enhances its value as a case study in globalization and autonomy. For fifty years since Independence in 1957, Malaysia has been governed by a centrist coalition of mainly ethnically based political parties, led by the United Malays National Organization (UMNO). Party components of the coalition have shifted slightly from time to time, but have always included the Malaysian Chinese Association (MCA) and Malaysian Indian Congress (MIC), representing the nation’s largest minorities. Both because the alliance occupies the centre of the political spectrum and because most opposition parties have also been ethnically based, a credible challenge from outside of the governing coalition has never coalesced. The political system is highly centralized in most respects, although the thirteen states of the federation are responsible for certain functions including land issues. In many other countries, assessing the impact of globalization on government policies is complicated by frequent changes of government or periods of political instability. Malaysia, in contrast, has been characterized by remarkable continuity in broad objectives. Moreover, despite shifts in emphasis and a few U-turns, most of the basic lines of economic and social policy have been consistently pursued since 1970 (Jomo 1994). Malaysia offers interesting evidence regarding autonomy for an additional reason: its broad preferences with regard to economic policies have been consistent with the neo-liberal philosophy that permeates much of the globalization scene. In the 1970s, even outside of the Communist nations, many developing nations favoured extensive nationalization of commerce and industry and direct government ownership of the “commanding heights”, subscribed to import-substitution as the most promising route to industrialization, were wary or downright hostile to foreign investment and multinational corporations, and placed little emphasis on conservative fiscal and monetary management. At that time Malaysia already subscribed to a contrasting set of principles. For the first dozen years after Independence the government pursued essentially laissez-faire policies, including fairly cautious macro-economic policies and a broadly favourable attitude toward the private sector economy. By the early 1970s it began a concerted and very successful effort to attract export-oriented, direct foreign investment in manufacturing as the driving force in economic development. To the present, Malaysia has not wavered from this approach.2

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The governing elite’s policy leanings flowed in part from historical legacies. Between the end of World War II and Independence in 1957, the colonial government confronted an insurgency inspired both by anti-colonial and Communist objectives. Repressing this challenge was regarded as crucial not only to restore British control and (later) create conditions for an orderly and friendly transfer of power, but also to combat the larger regional and global challenge of rising Communist influence and a possible “domino effect”. In this context, not only the insurgents but also groups and individuals suspected of leftist sympathies were repressed or marginalized. The political elite that came to power in 1957 were, therefore, largely conservative and deeply imbued with British principles of governance and administration. From 1969 forward, however, Malaysia shifted away from laissezfaire toward an array of more interventionist policies. The character and intensity of these measures varied, as the government redefined its goals and priorities and sought to adjust to evolving international and domestic circumstances. The history of its shifting economic policies is briefly summarized a little later in this chapter. Chapter 2 further explores the emergence in Malaysia of many features of a developmentalist state, diverging sharply from strict neo-liberal principles. Chapter 4 examines the extent and character of aspects of state intervention from a growth perspective. Throughout the period examined in this volume, Malaysia sought to balance measures necessary to sustain an outward-oriented, business-friendly strategy with substantial state intervention to promote both economic and social goals. Globalization critics often argue that external pressures leave little or no space for goals other than economic stability and growth. Social policies are widely assumed to be among the earliest and most important victims of such constrained autonomy. While Malaysia’s freely chosen economic strategies were mainly compatible with the principles embedded in many aspects of globalization, the nation faced severe inter-ethnic tensions inflamed by a political crisis a dozen years after independence. The New Economic Policy (NEP) launched after the crisis, in 1971, placed at the centre of the national agenda measures intended to promote national unity, narrow economic and social disparities among ethnic groups, and reduce poverty. Malaysia’s emphasis on a far-reaching set of social policies, pursued simultaneously with an outward-oriented growth strategy, is a robust test of the hypothesis that globalization sharply constrains autonomy in pursuing social policies.

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Malaysia’s experience is interesting for still another reason. Malaysia has been one of the nations most profoundly influenced by global Islamic resurgence. Slightly over half of Malaysia’s population, from Independence to the present day, is Malay.3 Virtually all Malays are Muslim, and their sense of ethnic identity is deeply intertwined with religious affiliation. By coincidence, Malaysia’s Independence slightly preceded the early stages of the Islamic resurgent movements reaching throughout the world. Malay communities in Malaysia have absorbed certain of these currents, resonating with but also transforming older patterns of belief and practice and increasingly reaching into and altering the nation’s politics, laws, and aspects of its social and economic policies. In Malaysia, then, we can examine the effects on government policy-space not only of economic globalization, but also of Islamic global movements, and some of the interactions between these two sets of influences. MALAYSIA 1970–2005: A CONCISE OVERVIEW

Key points regarding Malaysia’s history provide a framework for the discussions of specific sectors and issues in the chapters that follow. At Independence in 1957, Malaya consisted of a federation of nine states ruled by traditional local royalty, plus the two Straits Settlements enclaves of Penang and Malacca. The new constitution established a parliamentary democracy combined with monarchy. The population of six-and-a-quarter million was predominantly Malay, Chinese, and Indian, plus some smaller indigenous groups. The Malays were largely rural, agricultural and poor; the northeastern states of the peninsula were overwhelmingly so. Most of the Chinese population, in contrast, lived in the towns and cities. On average, Malaysian Chinese were better educated and earned higher incomes than the more rural Malay. The much smaller Indian minority included both a fair number of professional and middle-class people (many brought by the British to fill intermediate and technical government posts) and a larger number of much poorer, uneducated Tamils, mostly imported as rubber estate workers. Long before Independence, the central issues of politics had been relations among major ethnic groups. Those relations were further strained by the Japanese Occupation of the peninsula during World War II. The British reoccupied the peninsula in 1945, but an anti-colonial insurgency with Communist links was launched in 1948 and was not fully suppressed until after Independence, in 1960. Meanwhile, nationalist leaders sought to create political parties to press for independence, with the formation

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of the anti-colonial Malay Nationalist Party (PKMM) in October 1945, the United Malays National Organization (UMNO) in May 1946, the Malayan (later Malaysian) Indian Congress (MIC) in the same year, and the Malayan (later Malaysian) Chinese Association (MCA) in 1949. With the suppression of the multi-ethnic PUTERA-AMCJA coalition4 (consisting of PKMM and other Malay organizations and non-Malay groups) formed in 1947, UMNO, MCA, and MIC became the only parties the British allowed to operate. UMNO worked closely with leaders and emerging parties based on other groups. A complicated tale of debates, manoeuvres and electoral incentives, both among Malay political elites and between them and Chinese and Indian leaders, led to the elaborate compromise package embedded in the Constitution of 1957. The core components of that package gave full citizenship to the Chinese and Indians, in exchange for their acceptance of guarantees of a special status for the Malay within the new state. In recognition of the historical position of the Malay as the indigenous population, the Constitution protected the position of the traditional Malay rulers as “constitutional monarchs”, established Malay as the national language and Islam as the official religion (while providing protection for free practice of other religions), stated the principle of reserving a proportion of jobs in the civil service for Malays, and provided for Malay land reservations. In 1963 the federation was substantially expanded to become Malaysia with the accession of the states of Sabah and Sarawak in North Borneo and, briefly, Singapore. Singapore, however, was expelled from the federation in 1965 due to sharp internal bickerings. One effect of expanding the federation was to create a solid majority of bumiputera — literally, sons of the soil — comprising Malays and indigenous tribal groups, in contradistinction to Chinese, Indians and other nonbumiputera groups. The first dozen years after Independence saw laissez-faire economic policies and reasonably brisk economic growth accompanied by modest industrial development and import substitution, as well as some dispersion away from heavy dependence on exports of rubber and tin. Primary education enrolment increased substantially, and the network of public health clinics in rural areas was rapidly expanded. While Malaysia received policy advice and economic assistance for a variety of projects from the World Bank and other aid agencies in these early years, economic aid was never a major component of investment, nor were broad policy conditions attached to the aid.

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Initial growth brought little change in prevailing socio-economic patterns. By the late 1960s, discontent was widespread, and was reflected in a sizeable drop in support for the governing coalition in the elections of 1969. Ethnic tensions fanned by the elections exploded in racialized political violence in May 1969. 1970 TO 1990: THE NEW ECONOMIC POLICY

The riots profoundly shocked all segments of Malaysian society, and triggered a period of intense analysis and debate regarding the direction and principles of national development. The discussions were broadly inclusive of domestic groups. They also incorporated ideas introduced by foreign consultants, including economists and other social scientists from the Harvard Institute for International Development. It was widely agreed that the most fundamental cause of the violence was the persistent gap in incomes, welfare and opportunities of the Malay population, especially compared with the Chinese. The NEP announced in mid-1971 sought to promote national unity through a two-pronged strategy: eradication of poverty and improved income and employment opportunities for all Malaysians, accompanied by a restructuring of Malaysian society so as to reduce and eventually eliminate “the identification of race with economic function”. More specific goals included an increase in Malay share ownership from less than 2 per cent to 30 per cent by 1990, ethnic proportionality in occupations, and increased Malay access to loans, government contracts, licences and franchises. A shift to the Malay language as the medium of instruction from primary schools through university and special programmes to encourage rural Malay schooling, plus ethnic quotas for university admissions were additional measures to narrow the ethnic gap. Rapid economic growth was a crucial component of the NEP strategy, so that no group would suffer losses of income or welfare. The NEP charted broad goals and strategy for twenty years, to 1990. Issues of cultural identity and dominance had always been central themes of Malaysian politics. But in the first dozen years after Independence, the expression of these issues had been somewhat muffled. The riots of mid-1969 and the NEP response spotlighted and tremendously accentuated these key issues. In terms of our theme of pressures on the government as constraints on autonomy, the events of “May 13” were a frightening “message from below” from some segments of the society. The colonial legacy of politics played in British secular and parliamentary style would no longer do.

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The NEP signalled this change in the rules of the game. It was now not only legitimate but imperative to adopt and implement affirmative action policies. Further, within the multiparty governing alliance Barisan Nasional (BN, or National Front), UMNO’s dominance was heightened. Within UMNO, leadership became increasingly responsive to pressures from supporters seeking much more assertive Malay orientation, including policies going beyond economic encouragement to express Malay cultural and linguistic identity. That change was accepted, however reluctantly, by all major ethnic communities. In the following decades, the shift to explicit Malay preferences and cultural expression colored both the design of many policies, and the patterns of implementing other less explicitly preferential programmes. However, as Chapter 10 explores, the question of how to build a unifying national culture remained hotly contested within both Malay and non-Malay circles. The upsurge of cultural identity expressed in the NEP also paved the way for the assertion of Islamic identity and values that emerged a few years later. Malay identity, as asserted in the discussions and formulation of the NEP in 1969 and 1970, was not explicitly linked to Islam. But within the Malay Islamic opposition party PAS (Parti Islam SeMalaysia, or Islamic Party of Malaysia), a younger and more radical group (later known as the Young Turks) was already attributing the lack of progress among Malays (and therefore the need for NEP preferential policies) as due to neglect of spirituality. In other words, there was an Islamic undercurrent to the more explicit cultural positioning. EVOLVING ECONOMIC POLICIES

Prior to the riots, in the late 1960s, government analysts had already concluded (and World Bank and United Nations Industrial Development Organization advisors had urged) that Malaysia should adopt an exportoriented approach to development, since the domestic economy was too small to sustain diversified industrialization. On the global scene, rising competition and production costs in developed economies were encouraging the relocation of assembly and processing operations to developing countries. Malaysia took vigorous measures to attract exportoriented foreign direct investment (FDI), including the Investment Incentives Act of 1968 and the opening of the first Free Trade Zone in 1972. In response, FDI-financed manufacturing employment and production rose rapidly, accompanied by massive rural-to-urban migration. Additional oil had been discovered in Sarawak in 1970; as it came on-line

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during the early 1970s, the revenues helped to fund rapid extension of infrastructure and government purchase of most of the largest foreignowned firms to provide employment and management opportunities for bumiputera. While foreign direct investment in manufacturing for exports drove rapid growth, the enclave industries it created stimulated only modest backward and forward linkages to spur growth elsewhere in the economy (Ritchie 2005). In the early 1980s, under the direction of the new Prime Minister Dr Mahathir Mohamad, Malaysia adopted the “Look East Policy”, seeking strategic guidance in the industrial policies and experience of Japan, Korea and Taiwan. As Chapter 3 discusses, a key feature of the shift was a more proactive economic role for government in collaboration with private industry. Simultaneously, for the first time, the state undertook major public investment in import-substituting heavy industry, including steel, cement, and auto-making. The new enterprises proved costly and inefficient. By the mid-1980s, the government again was emphasizing private firms as the engine of development. Many of the publicly owned firms purchased from foreign owners in the 1970s were now privatized, accompanied by renewed efforts to attract foreign direct investment. 1990: SOCIAL TRANSFORMATION, MORE AMBITIOUS OBJECTIVES

The year 1990 marked the end of the official NEP period. The transformation of Malaysian society and economy in twenty years had been remarkable. Despite setbacks in the early and mid 1980s mainly reflecting adverse global trends, per capita GNP increased from RM1,054 in 1970 to RM6,099 in 1990, in constant terms. Poverty had dropped from 52.4 to 16.5 per cent of the population, and from 65 per cent to 20.4 per cent among Malays (Ragayah, this volume, Table 5.3a). The population was now 63 per cent urban. Agriculture’s share in employment had dropped from 52.6 per cent in 1970 to 36.2 per cent in 1990. Manufacturing now employed 28.8 per cent of labour; services were expanding rapidly. A large and still rapidly growing Malay urban middle class had been created. Secondary school enrollment was close to universal; university enrollment was growing exponentially. The ethnic income gap was substantially narrowed, but not eliminated. As measured by the ratio of Chinese mean monthly household income to the corresponding income of bumiputeras (Malays plus other indigenous

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people of Malaysia), the disparity had decreased from a ratio of 2.25 in 1970 to 1.70 in 1990 (Meerman, this volume, Table 4.7). Growth strategy and social objectives in the post NEP period retained the broad goals but modified important aspects of the earlier approach. In a key “Vision 2020” speech in 1991, Dr Mahathir set an ambitious over-arching goal: by 2020 Malaysia was to be a fully-developed nation. That goal demanded an eight-fold increase in GNP, or a sustained annual growth rate of more than 7 per cent for the next thirty years. As competition increased from China and other nations for investment in low-wage industries, and as Malaysia’s supply of low-wage labour migrating out of rural areas dwindled, economic strategy needed to shift increasingly to more technologically sophisticated and higher productivity lines of activity. In response, education and manpower policies sharply increased emphasis on science and technology. By 2000, the “K[knowledge] Economy” was the favoured shorthand term to describe Malaysia’s economic future. However, implementation has fallen short of aspirations; Malaysia lags behind regional leaders with respect to technological expertise (World Bank 2005). Poverty targets shifted from broad reduction to more targeted eradication; by 2000 policy was focused on remaining “pockets of poverty”. The target of 30 per cent bumiputera ownership of equity shares was retained, while the target date was extended to 2010. Quotas for admissions to public universities also continued, notwithstanding the introduction of a modified system in 2002. The broad picture was one of extraordinarily rapid and sustained economic growth and societal change, coupled with a continued drive to bring Malay incomes, wealth and occupations to parity with those of the Chinese Malaysian population. THE GLOBAL ISLAMIC RESURGENCE AND ITS IMPLICATIONS IN MALAYSIA

From 1970 forward, the influences of the global resurgence of Islam became more widespread and intense throughout Malaysia. University students returning from study abroad were a major early channel of influence, bringing with them ideas and practices they had encountered among Islamic student groups in Western and Middle Eastern universities. Diverse foreign sources advocated varied interpretations of Islamic traditions and law, including some quite different from traditional approaches in Malaysian rural areas and among Malaysian Islamic scholars. These competing influences provoked sharp debates among

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Muslims within Malaysia. But the broad thrust of a more intense and purified observance of Islam in individual and public affairs was broadly welcomed among Malays, both in the “heartland” northern states and among the new urban Malay middle classes. The Islamic resurgence had important political repercussions. It strengthened the appeal of the major Islamic opposition party PAS. In the 1990 elections, PAS won control of Kelantan, one of the heartland states, and retained control through the next three elections; it also won the neighbouring state of Terengganu from 1999 to 2004. Within UMNO itself, a growing number of members favoured a stronger commitment to Islamist goals combining religious appeal with symbolic assertion of Malay dominance. UMNO leadership moved to co-opt the issue, supporting adoption of shari’a law applying to family matters among the Muslim population (which became legally binding with the Constitutional amendment of 1988), increasing attention to Islamic education for Malay students in the national schools, and in 1983 establishing an Islamic bank and the International Islamic University. In mid-2001, Prime Minister Dr Mahathir declared Malaysia an Islamic state. Within the national and state-level bureaucracies, many positions were created to guide and monitor programmes to promote and monitor Islamic principles. Pressure has continued to mount from Islamist officials and notables, with considerable Malay public support, for what the non-Muslim population perceives as more invasive programmes and policies. THE EVOLVING POLITICAL CONTEXT

The broader political context was fundamentally stable, as noted earlier, despite periodic disputes and even splits within and between the ruling party and its coalition partners. UMNO and the Barisan Nasional (BN), its multi-ethnic coalition, had been severely shaken by the events of 1969, but the enduring effect was to strengthen BN’s near-total dominance of the political system. Efforts to establish multi-ethnic opposition parties or coalitions were too fragile to offer credible alternatives to the status quo. Opposition parties based on ethnic support raised the specter of renewed ethnic clashes, prompting potential supporters to vote instead for the safe establishment. BN’s control was deeply and broadly entrenched. After 1970, it never held less than two-thirds of the national legislative seats, which gave it power to amend the constitution. The coalition also controlled all state governments in Peninsular Malaysia, until the

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Islamic party PAS took control of Kelantan in 1990. Within the BN, the dominant UMNO party was disrupted by serious factional conflict in the late 1980s, but Dr Mahathir successfully restored and strengthened his control by the 1990 elections. Over the decades, the coalition relied increasingly on massive patronage. Many of the conduits for allocating benefits were entwined with NEP ethnic preference policies. Widespread perceptions of growing patronage and corruption were confirmed during the Asian financial crisis in the late 1990s (Jomo 1998). The crisis hit Malaysia hard, but was much less damaging than in neighbouring Indonesia and Thailand. Nevertheless, its political and economic repercussions were considerable. It caused the collapse of many major banks and other firms owned and managed by politically well-connected bumiputera. Government bail-outs were accompanied by substantial forced consolidation and restructuring of banks and other firms. Disagreements, particularly over economic policies, triggered an open break between Prime Minister Dr Mahathir and his Minister of Finance Anwar Ibrahim, until that time tipped as Dr Mahathir’s likely successor. Anwar was tried and sentenced under questionable conditions, fuelling further public discontent. A serious but ultimately non-credible multi-ethnic opposition alliance contested the 1999 election. UMNO again emerged victorious, although with reduced control of the legislature and somewhat damaged legitimacy. In 2003, Dr Mahathir stepped down as prime minister after twenty-two years at the helm. His hand-picked successor, Datuk Seri Abdullah Ahmad Badawi, was overwhelmingly endorsed in the election of 2004, and promptly took initial measures to fulfil his pledge to reduce corruption and undertake other reforms. As Malaysia rejoiced on its fiftieth anniversary of Independence in 2007, it could celebrate tremendous achievements. It was now an upper middle-income country with annual per capita income of US$4,781 at the official 2005 exchange rate (Ragayah 2008, p. 133). The transformation already well under way by 1990 had continued: the rural population had dwindled to 36 per cent by 2005; the labour force employed in agriculture had shrunk to 13 per cent. At the beginning of the 1970s there had been one established and two brand new universities; in 2006 there were twenty public and twenty-eight private universities, plus hundreds of other public and private polytechnics and colleges. The Ninth Malaysia Plan set a target of 40 per cent of the appropriate age group enrolled in tertiary education by 2010 (Malaysia 2006, p. 256, para. 11.59). Serious poverty was now concentrated among the residual traditional

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rural population especially in the northeast of the peninsula, indigenous minorities, recent immigrants especially in Sabah, and Tamil workers and their children displaced from shrinking rubber estates. The Ninth Plan sought to completely eliminate hard-core poverty (defined as half or less of the official poverty line) by 2010 (Malaysia 2006, p. 34, para 1.39). Less happily, available data indicate that growing prosperity was accompanied by growing income inequality among the population as a whole, as well as within each major income group. The Gini ratio had dropped substantially from 1970 to 1990, but has been on an upward trend since the early 1990s, with the exception of 1999 reflecting the impact of the Asian financial crisis (Ragayah 2008, p. 157). At the same time, Malaysia faced a rapidly rising tide of competition for export markets and investment, from China, India, Vietnam and other countries in and beyond the region. The goals of increased technological sophistication and higher productivity lines of economic activity were becoming more and more urgent. In education, industry and services, government and many other fields, the key issues were no longer increased quantity but improved quality, demanding difficult institutional reforms. The challenges of a multi-ethnic society remain central to Malaysian social and political life. The compromises worked out at Independence, and their sustained yet flexible interpretations through the NEP and later periods succeeded in managing conflict and establishing a modus vivendi that has thus far proved sustainable. Especially in comparison with the protracted tensions and periodic explosions of ethnic violence in many other heterogeneous nations, that is a remarkable achievement. Yet as the Ninth Malaysia Plan notes, “By many accounts, racial polarisation is felt in schools, in the workplace, in residential areas and by society in general” (Malaysia 2006, p. 4, para. 4). The partially achieved goals of eliminating differences in average incomes between bumiputera and other ethnic groups and increasing the bumiputera equity share to 30 per cent remain politically potent symbols, though some now challenge whether these gaps are accurately measured and raise more fundamental questions whether these statistical goals are germane to equal opportunities and quality of life for the Malay majority. Ethnic preference policies and practices have become thoroughly entangled with UMNO political appeals and with the pervasive system of patronage that UMNO and its coalition parties use to perpetuate their control. Both the patronage system and the ethnic preferences may come into growing conflict with the drive to rapidly ramp up Malaysia’s economic competitiveness.

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INTRODUCTION

21

Throughout the entire post-independence history, but increasingly in recent decades, policy priorities have been established and the basic design of policies and programmes determined by a fairly small circle of top-level UMNO leaders. That group does not operate in isolation. It consults with the leaders of other parties in the governing alliance to some degree, especially where the specific concerns or interests of those parties or their constituents are at stake. Specific decisions are also sometimes discussed with representatives of business or professional associations and other major civil society groups. Top policy-makers draw for technical advice on various government agencies, particularly the Economic Planning Unit in the Prime Minister’s Department, which also usually formulates agreed policies. Research institutes and think tanks are occasionally tapped for ideas. The legislature, however, plays very little role in shaping policy. And despite some consultation, policy-making in Malaysia remains highly centralized. Policy autonomy (or lack thereof) is shaped by the priorities and perceptions of this inner circle. AUTONOMY AND POLICY SPACE IN DIFFERENT SECTORS

The chapters in this book examine the interaction between various aspects of globalization and Malaysian policies in an array of sectors and policy fields. They try to assess how and to what degree various kinds of policies have been constrained and/or enabled by external pressures, and they explore reasons for strong impact in some fields and modest effects in others. The approach is broadly inter-disciplinary, integrating economic, political, social and cultural factors and trends. All of the chapters take an essentially historical approach, tracing the evolution of external pressures and opportunities and their interaction with internal forces, in most cases from 1970 to the present. Our coverage, both of sectors and of issues, is incomplete. We explore the impacts of various aspects of globalization on policy space with regard to trade, education, and health, and touch obliquely on evolving industrialization policies. But major sectors and policy areas remain unexamined, including agriculture, banking and finance, housing, pensions and social assistance. Our analyses go into considerable detail with regard to poverty reduction, inter-ethnic income inequality, cultural policy and national unification and Islamization, but neglect the impact of globalization on policy choices on many other important issues, such as the environment, indigenous peoples, immigration, civil liberties, and

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political liberalization. Despite its partial coverage, the study does provide a reasonably broad-gauged survey and examination of globalization’s impact on Malaysia’s policy autonomy. The first four chapters following this Introduction analyse aspects of Malaysia’s economic and social strategies and results, cutting across and extending beyond specific sector trends. In Chapter 2, Rahman explores the origins and character of Malaysia as a developmentalist state, in which government plays a crucial role in guiding and promoting industrialization and social policies. Activist state policies, rooted in responses to the crisis of 1969, have evolved with shifting external and internal circumstances, but have maintained a broadly consistent direction. Lee Poh Ping, in Chapter 3, explores the influence of competing ideologies or growth models on Malaysia’s policy space. He argues that the Look East Policy adopted by Dr Mahathir in 1982 was essentially a rationale to justify his vision of the NEP and sharply increased state intervention in the economy. Drawing attention to the successful interventionist models of Japan, Korea and Taiwan broadened Malaysia’s policy options at a time when neo-liberal ideology was particularly dominant in the United States, the United Kingdom, and international financial circles. Jacob Meerman’s analysis in Chapter 4 is complementary to Rahman’s discussion of Malaysia as a developmentalist state. He starts with a paradox: how was Malaysia able to grow so rapidly, notwithstanding the costly social restructuring at the heart of the New Economic Policy? His answer emphasizes the crucial role of government in the Malaysian success story, particularly in exploiting globalization’s opportunities through export-oriented foreign investment. He assesses both accomplishments and costs of Malaysia’s pursuit of pressing social objectives, and concludes that growth and social policies were mutually supportive despite high costs. He also analyses the controversial issue of inter-ethnic income inequality, and concludes that the official indicator is misleading. In Chapter 5, Ragayah complements the discussions in Rahman and Meerman by focusing on poverty reduction policies and achievements. She surveys the array of policies directly targeting poverty reduction and notes the powerful impact of rapidly expanding manufacturing in drawing labour out of rural areas and into more productive and better paid employment. While globalization was both directly and indirectly an enabling factor in this story, globalization pressures also encouraged certain policies that slowed the process of increasing workers’ incomes.

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INTRODUCTION

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With Tham Siew Yean’s discussion, in Chapter 6, of Malaysian trade policies and multilateral and bilateral trade regulation, the focus shifts from broad perspectives on economic and social transformation to a more sectoral approach. Tham reviews the evolution of multilateral trade regulations and their application to developing countries, including Malaysia. She demonstrates that despite the striking rise in the scope and reach of international regulation, its actual impact on Malaysia’s trade policies has been modest thus far. Her chapter is particularly valuable in explaining and illustrating how globalization forces are channelled by international negotiations in ways that simultaneously constrain and expand national policy space. In Chapters 7 and 8, Joan Nelson explores the impacts of globalization on education and healthcare. The need for an ever more skilled labour force to support development and maintain competitiveness in the global arena has driven rapid expansion and broadening scope of the education system since Independence. At the same time, education has always been a central player in Malaysia’s drive for greater national unity (specifically, encouraging universal use of the Malay language) and, since 1970, an essential element in reducing the inter-ethnic gap in incomes and achievement. While not initially in tension, these multiple objectives increasingly conflict. Meanwhile, the global Islamic resurgence has steadily increased demand among Malays for the integration of Islamic instruction into national education, introducing additional tensions among goals and pressures on policy space. Economic growth and rising revenues underpinned the rapid expansion of the efficient public healthcare system. Economic growth also generated a burgeoning middle class, stimulating increased private healthcare provision and the emergence of large private healthcare corporations. Malaysia is now struggling with the impact of private provision on the public system and the exodus of doctors from public service to private hospitals and clinics, equity issues and fiscal concerns — issues not mainly driven by links to the international economy, but clearly influenced by globalization. With Chapters 9 and 10, the volume turns to less explored religious and cultural themes. In Chapter 9, Norani Othman traces the growing influence within Malaysia of the global Islamic resurgence. That influence stimulated growing demand from much of the Malay population for the Islamization of Malaysian institutions. The opposition party PAS champions this cause, heightening pressure on UMNO. Yet the state response is constrained by the constitutional parameters protecting the

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rights of non-Muslims and assigning primary civil authority in religious matters to the state governments. Moreover, too far-reaching incorporation of Islamic practices may frighten foreign investors concerned about fragile social stability. The state must maintain a moving balance between these pressures from different aspects of globalization. In Chapter 10, Sumit Mandal analyses the impact of globalization on the ability of a Malay cultural leadership to promote an exclusionary national identity. The 1970 Rukunegara or national creed promoted an inclusionary vision of Malaysian national identity in the wake of the political crisis of 1969. In contrast, a resurgent cultural leadership pushed for the National Culture Policy in the early 1970s as a means of asserting the primacy of Malay language and culture. Culture thereby became a significant site of political contestation. Mandal traces shifts in the perspectives of the Malay cultural leadership expressed in three sets of conferences and meetings in the early 1970s, 1980s, and 1990s. Over this period, the initial focus on asserting the dominance of Malay culture over “immigrant” (Chinese and Indian) traditions was joined and partly supplanted by concerns over the impact of external cultures and values in the wake of increasing international integration. Yet integration itself, as well as growing government commitment to policies supporting integration, reduced the influence of Malay cultural and intellectual leaders advocating a singular core identity and culture. These varied cross-disciplinary themes are drawn together in the Conclusions, to assess how and in what degree globalization in its varied forms has shaped and altered Malaysian policies. The broad conclusion is that economic globalization has constrained Malaysia’s economic and social policies only modestly. Rapid integration into the world economy has played a powerful enabling role, providing resources and policy space for simultaneous pursuit of growth and social goals. At the same time, the global Islamic resurgence has steadily intensified popular demand among Malay Muslims for the Islamization of social and governmental institutions. This challenge to its legitimacy and credibility has narrowed the government’s space to manoeuvre among these demands, constitutional restrictions, and economic imperatives. The conclusion then explores the factors that permitted substantial autonomy from pressures of economic globalization, and weighs the future prospects for continued or reduced room to manoeuvre. The final section draws on Malaysia’s experience to suggest some perspectives on the policy impacts of globalization and the concept of autonomy.

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Notes 1

2

3

4

For an eloquent statement of this set of concerns, see Stiglitz (2006, p. 20). More broadly, many of the issues explored in Stiglitz’ Making Globalization Work relate, at least in part, to the question of the ways in which globalization affects national autonomy. Thus central aspects of Malaysia’s policy preferences were in line with the Washington Consensus, which was not to be formulated for another twenty years. According to the 1970 Census, 53.2 per cent of the population was Malay. In 2000, the proportion was 53.4 per cent. Non-Malay bumiputera raise the proportion of bumiputera citizens in 2000 to 65.1 per cent. PUTERA was the acronym for Pusat Tenaga Rakyat or Centre for People’s Forces, and was Malay in composition. AMCJA was the acronym for the (non-Malay) All-Malaya Council of Joint Action.

References

Frieden, Jeffry A. Global Capitalism: Its Fall and Rise in the Twentieth Century. New York, N.Y.: W.W. Norton and Co, 2006. Jomo K.S. U-Turn? Malaysian Economic Development Policies after 1990. Cairns: Centre for Southeast Asian Studies, James Cook University, 1994. Jomo K.S., ed. Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia. London: Zed Books, 1998. Kearney A.T., “The Globalization Index”. Foreign Policy, (November– December 2007). Malaysia. Ninth Malaysia Plan, (2006–10). Putrajaya: Economic Planning Unit, Prime Minister’s Department, 2006. Ragayah Haji Mat Zin. “Explaining the Trend in Malaysian Income Distribution”. In Income Distribution and Sustainable Economic Development in East Asia: A Comparative Analysis, edited by Krongkaew, Mehdi and Ragayah Haji Mat Zin. Bangi: Penerbit UKM, 2008. Ritchie, Bryan K. “Coalitional Politics, Economic Reform and Technological Upgrading in Malaysia”. World Development 33, no. 5 (May 2005): 745–62. Stiglitz, Joseph E. Making Globalization Work. New York and London: W.W. Norton, 2006.

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Weiss, Linda. The Myth of the Powerless State. Ithaca, N.Y.: Cornell University Press, 1998. World Bank. Malaysia: Firm Competitiveness, Investment Climate and Growth. Washington D.C.: Poverty Reduction, Economic Management and Financial Sector Unit (PREM), East Asia and Pacific Region, Report No. 26841-MA June, 2005.

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2 DEVELOPMENTALIST STATE IN MALAYSIA Its Origins, Nature and Contemporary Transformation Abdul Rahman Embong

INTRODUCTION

Much of the literature on the fast growth economies of East and Southeast Asia in the last two decades has focused on the role of the state in development, and advanced the notion of what is known as the “developmentalist state” model. With Chalmers Johnson (1982) taking the lead in the early 1980s to expound the role of the developmentalist state in creating the Japanese “miracle”, a number of others have also taken up the same theme several years later. These included such scholars as Deyo (1987), Amsden (1989), Wade (1990), Appelbaum and Henderson (1992), Castells (1992), Fitzgerald (1994) and Weiss and Hobson (1995) who examined the rapid economic growth of the region by focusing, among other topics, on the role of the state in promoting industrialization and social transformation. On Malaysia, quite a number of works have also been written, mainly by economists, sociologists and political scientists, on the state’s involvement in the economy and industrialization (see especially Toh 1982, Jomo 1986, Jesudason 1990, Lubeck 1992, Faaland, Parkinson and Rais Saniman 2003, Gomez 1997, Ishak 2002) as well as the role of the state in 27

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creating the new middle class (Abdul Rahman 1996, 2002, 2004, Kahn 1996a, 1996b). The state’s role in the economy is considered especially crucial in ensuring the implementation of the objectives of the New Economic Policy, viz. the eradication of poverty and the restructuring of society. Although the literature is quite extensive especially on the New Economic Policy and the state’s involvement and its consequences, the question of the Malaysian state as a developmentalist state, its origins and nature, state capacity and its transformation over time has not been directly addressed except in an unpublished doctoral study submitted to Universiti Kebangsaan Malaysia by Sity Daud (2003). Sity deals with certain aspects of the question by examining it through the implementation of the NEP (1971–90) and the National Development Plan (1991–2000). This chapter is a modest attempt to deal with the question of the Malaysian state as a developmentalist state, its origins and nature, as well as the transformation of its capacity and autonomy in engaging with globalization from the 1970s to the present. It first seeks to explain the origins and nature of the Malaysian developmentalist state, and then examine some components of state capacity that enable the state to undertake development and advance the public good. Finally, it will briefly address the question of whether the state in Malaysia today is still developmentalist and whether it still possesses sufficient autonomy to address the new challenges of global competitition and governance brought out by the rapid processes of globalization. DEVELOPMENTALIST STATE: SOME CLARIFICATIONS

It is useful to begin with some clarifications regarding the question of the state in general and the developmentalist state in particular, to serve as the framework for the chapter. The concept of the “state” is used here broadly to refer to the whole complex of power institutions that not only exercises its jurisdiction over the terrority and its populace, but more importantly, its governance over citizens and various sectors of society, such as the economy, politics, culture and ideology. The state comprises various institutions such as the executive and its administrative machinery, the legislative and the judiciary, and other multifarious state apparatuses such as the military, police, prisons, as well as the official and semiofficial mainstream media. In a democratic state, the government of the day theoretically is not part of the state because it is elected by the people and can change from time to time. States tend to remain the same over

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the long term while governments tend to come and go depending on the political system in place, whether it is a democratic one holding regular elections, or other systems that do not practice the multiparty arrangement and general elections. Nevertheless, in practice, the government often speaks in the name of the state, and often conflates itself to be the state as a whole. This happens in countries that have powerfully entrenched governments spanning several decades without any break such as the case of the UMNO-led Barisan Nasional government in Malaysia and the People’s Action Party government in Singapore. The state as a whole is manned and managed by a ruling elite which often claims to rule on behalf of society, though in practice, it is biased towards certain classes, factions, and interest groups. However, as the state elite is not homogenous, the state becomes a site of contestation between the different state elite factions. Although the state elite may converge and put up a unified front when facing the public, the various factions often collide and contend against each other. The state as a site of contestation figures significantly when discussing the manoeuvres of various elite factions in times of regime crisis. It can be seen from the literature that while the focus on the role of the state in development has been triggered by the rise of the fast growth economies of East and Southeast Asia, several writers have drawn attention to the fact that the developmentalist state is not new, and has been in existence long before the debate on it started in the 1980s with the works of Johnson and others. Weiss and Hobson (1995), for example, show that states had been involved in promoting Western capitalism during the Industrial Revolution with the rise of the capitalist class and modernization. This position is also shared by other scholars. For example, in a recent overview essay on the role of the developmentalist state today, Bagchi (2006, pp. 227–28) gives a broad sweep of the history of developmentalist states, and argues that certain states during the era of the global spread of capitalism were already develomentalist. According to Bagchi, the developmentalist state puts economic development as the top priority and is able to design effective instruments to promote such a goal. The instuments [sic] would include the forging of new formal institutions, the weaving of formal and informal networks of collaboration among citizens and officials, and utilizing new opportunities for trade and profitable production. Whether the state governs the market or exploits new opportunities thrown up by the market depends on particular historical conjunctures.

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Bagchi goes further to argue that, “One feature of a successful developmental state is its ability to switch gears from market-directed to state-directed growth or vice versa, depending on geo-political circumstances, and combine both market- and state-direction in a synergistic manner, when opportunity beckons.” He then highlights three necessary attributes of a successful developmentalist state: a strong sense of inclusionary nationalism expounded by the state leaders in their beliefs and actions; the ability of such a state to learn from other countries, including its competitors and enemies and to put that learning to use for promoting economic and human development and keeping abreast of the effective competition; and finally, the elimination of feudal structures and institutions or other institutions that allow some private bodies to coerce others. Revisiting Johnson’s developmentalist state model (1982) based on the Japanese experience, the state’s focus and commitment are indeed on economic growth and development as highlighted by Bagchi. Johnson stresses that in a developmentalist state leaders prioritize productioncentred over consumption-centred goals. He also underscores the need for highly talented, cohesive, and disciplined economic bureaucracy (Weiss and Hobson 1995, p. 149) with the expertise to work out appropriate strategies, and identify industries for promotion and development. It must also have the necessary autonomy to undertake initiatives, and to resist political or interest group pressures. State intervention, a key ingredient in the model, must be market-conforming and friendly, using a formula such as Japan Incorporated which ensures public-private sector collaboration to develop selected industries. Besides all these characteristics, Johnson highlights another crucial element: a special agency, such as the Ministry of International Trade and Industry (MITI) to monitor industrial development. Underpinning all these, the state must have relative autonomy that enables it to be developmentalist. We should note here that while the term “relative autonomy” is often taken to mean the relative freedom of the state to take actions on behalf of the people as a whole, and not to be dictated simply by the interests of powerful classes or interest groups, we can extend the term further by referring to the space for the state to act on both the domestic as well as international fronts. Put in another way, autonomy here refers to the relative absence of constraints — both internal and external — that enables the state to chart a particular course of economic development it sees as necessary and urgent for the country. Thus, the issue of autonomy or space is critical in our discussion of the developmentalist

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state, particularly in an era when the space is believed to be heavily constrained by globalization. Scholars writing after Johnson draw attention to the principal element of the developmentalist state: derivation of its legitimacy from its ability to promote and sustain development. As Castells (1992, p. 6) puts it, “a state is developmental when it establishes as its principle of legitimacy its ability to promote and sustain development, understanding by development the combination of steady high rates of economic growth and structural change in the productive system, both domestically and in its relationship to the international economy.” Another crucial point highlighted by Castells is the meaning of development for the developmentalist state. He suggests that development per se is not the ultimate objective; rather, it is a means to break free from conditions of dependency and to uphold national interest in the international arena (Castells 1992, pp. 33–70). Here, what should be emphasized are not just the two ingredients to enable the state to play the developmentalist role, viz. high growth rates and a structural change of the system of production, but the further fact that development is seen as empowering and liberating, enabling the nation-state to stand on its own feet and project itself internationally with dignity, on par with others as a sovereign and competitive nation. Review of the literature also underscores that the developmentalist state cannot be studied in isolation, but must be analysed in the context of the nation’s political economy during different historical periods. As argued by Fine (2006, p. 115), “the role of the state in development, like development itself, needs to be situated in the context of class, power and conflict, each understood in both economic and political terms.” To summarize: a developmentalist state has to be seen as a product of a matrix of historical forces, emerging only at a certain stage of economic development that demands an active and specific state role. Very importantly, the state must be helmed by a national elite committed to a strong sense of nationalism and urgency for nation-building, with economic development as its top priority goal, as a means for national self-empowerment and to project itself internationally. The role of development ideology in mobilizing the various forces in society for development and as a basis for state legitimacy should not be understated. At the same time, the state not only uses market-conforming methods when intervening in the economy, but it is also a strong state possessing capacities and capabilities to command compliance and execute decisions,

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thus ensuring itself in the driver’s seat. Equipped with an efficient and expert bureaucracy, it has the capacity for national planning and a special agency or agencies to establish state-business partnership or alliance and monitor the relationship between the public and private sectors. The state also enjoys enough autonomy to marshall planning, administrative, fiscal, and political forces to formulate and implement development policies. It has the capacity to learn from others, realise its goals, and change gears from market-driven to state-driven approaches, or vice versa, or a synergy of both. The above framework will serve as the basis for the analysis here of the developmentalist state in Malaysia. As will be shown below, many of these elements existed in Malaysia, and led to the emergence and persistence of a developmentalist state at the helm of the country’s development, rapid growth and transformation. Nevertheless, the Malaysian case also has its own distinct features that make it rather different from the developmentalist states in East Asia. ORIGINS OF THE DEVELOPMENTALIST STATE IN MALAYSIA

In an attempt to explain the emergence and success of the developmentalist state model in East Asia, Hamilton (1983) (quoted in Preston 1995, p. 71) suggests that it was due to a mixture of several factors which can briefly be paraphrased as follows: first is historical circumstances, that is, the political-economic reconstructions of the immediate postwar period, for example, the removal of the Japanese colonial authority and the implementation of land reform in Korea and Taiwan; second, externally propitious circumstances, namely worldwide economic growth coupled with the local effects of U.S.-led wars (in particular Korea and Vietnam); third, the prioritization of industrialization over any other goal; and fourth, the implementation of such goal pursued in an authoritarian fashion by the government. While these arguments are generally true and applicable in some ways to Malaysia, also underlined is the fact that the emergence of a developmentalist state is contingent upon a matrix of historical conditions, and is stamped with the characteristics of the country’s history and society. In fact, as argued above, the developmentalist state was already in existence many years before the debate about the Asian miracle. Thus, it is necessary to look at the more specific factors, especially the internal conditions, that enabled the emergence and persistence of the developmentalist state and its development agenda.

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Comparing Malaysia’s experience with that of East Asia, two major differences emerge — one concerns land reform and the other statebusiness relations. With regard to land reform, landlordism was deeply entrenched in East Asia and hence, reform required land ownership restructuring and distribution to landless and poor peasants. In Malaysia, while there was landlessness and uneconomic size of holdings due to land ownership fragmentation among many peasants, landlordism was not a major issue. Land distribution took a totally different form. Vast areas of uncultivated land belonging to the state were parcelled out to land-hungry farmers through land settlement schemes run by the Federal Land Development Authority (FELDA). As Chapter 5 by Ragayah details, over a few decades, more than a million people belonging to more than 113,000 farmer families — overwhelmingly Malay — were resettled in FELDA schemes throughout Peninsular Malaysia.1 As for state-business relations, while Japan and South Korea already had well-developed domestic business enterprises with whom the state could form alliances and partnerships, in Malaysia, the domestic businesses were mostly in the hands of Chinese capital, with little Malay business enterprises. Even among Chinese firms, most were not industrial but rather small and medium enterprises in commerce, although several large business magnates owned rubber plantations and tin mines. In the years following Independence, most of the modern economic sector was owned and controlled by foreign capital. To implement the developmentalist agenda, the Malay elite used state power to attempt to create Malay businesses and forge alliances with them from the 1970s onwards. In short, state intervention in the economy was affirmative in nature in favour of the Malay majority while in Japan or South Korea, no such distinctions among ethnic groups were necessary. Notwithstanding these differences, a number of other features of the Malaysian case were parallel or comparable with Japan. The developmentalist state could not have emerged without certain necessary conditions. Several domestic and international factors together created both an enabling environment and the catalyst that propelled the Malaysian state to realign and reinvent itself. From a study of Malaysian politico-economic history, it can be seen that the developmentalist state evolved over time, and took fairly clear form only from 1970. From independence in 1957 to 1969, the state pursued basically laissez faire policies; its development philosophy was to leave growth and distribution to market forces, believing that general prosperity would come about through “trickle-down” effects. Nevertheless, some intervention did take

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place with respect to land and rural development as exemplified by the case of FELDA mentioned earlier. The government under the first Prime Minister Tunku Abdul Rahman (1957–70), having inherited the state institutions and the economic structure from the British, pursued a policy of non-interference by allowing both foreign and domestic capital to operate, left growth and distribution to market forces, and did not intervene to correct “market imperfections”. This policy resulted in a healthy economic growth of 5.7 per cent between 1957 and 1970, based principally on the export of rubber and tin. While there was economic growth under such a policy regime, there were also stark problems in the Malaysian political economy. The lopsided nature of the economy and glaring socio-economic imbalances between ethnic groups, as well as between rural and urban strata and regions were perpetuated and accentuated. The economy continued to be basically foreign owned. Foreign (mostly British) ownership and control were concentrated in plantation agriculture (rubber), mining (tin), commerce and banking (Puthucheary 1960). According to official figures on ownership of share capital, of a total of RM4,678 million (US$1,453 million) shares in Peninsular Malaysia in 1970, 62.1 per cent was in foreign hands, followed by 22.8 per cent owned by Chinese, 1.5 per cent in Malay control, and 0.9 per cent in Indian hands. Furthermore, poverty and inequality were very high, with overall poverty standing at 52.4 per cent of all households. While poverty and inequality are class problems, in Malaysia in that era they had a strong ethnic dimension. Most (75 per cent) of the poor households were Malays, the overwhelmingly majority in rural, traditional and non-commercial economic activities. At the same time, unemployment was an increasingly serious problem, rising from 6.0 per cent in 1960 to 8.0 per cent in 1970. Unemployment was highest among Malays, running at 11.2 per cent in 1965, compared with 5.6 per cent for Chinese and 9.6 per cent for Indians (Ongkili 1985, p. 221). What was worse, unemployment was very much a youth phenomenon, with 26 per cent of those aged fifteen to nineteen years old being unemployed. Such an economic structure, with attendant problems of poverty and inequality, was neither sustainable nor conducive to national unity and social cohesion; rather, these conditions led to the racialized political crisis of 1969. The riots, triggered by the regime crisis following the general elections on 10 May 1969, shook the political elite who saw that leaving distribution to market forces alone would not only exacerbate poverty and inter-

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ethnic imbalances but would seriously undermine nation-building and political stability. The crisis drew attention to the need for the state to be interventionist and to adopt the developmentalist ideology or developmentbased nationalism by focusing on nation-building in a more concerted way. This set the stage for the state to be actively interventionist since the 1970s, exhibiting the various features of a developmentalist state. It is noteworthy that the political and administrative elite that controlled UMNO and took over state power from the British in 1957 had little power over the private sector economy and thus the market, yet was able to transform the state from laissez faire to interventionist. Notwithstanding its relatively weak economic power, its strong desire to create the Malay business and middle classes became the propelling ideology serving as the impetus to move the nationalist agenda forward. Tunku Abdul Rahman was seen as being too much a defender of laissez faire to bring about the necessary changes. Simmering discontent among the other factions of the Malay elite was brewing. The regime crisis of May 1969 served as the watershed or the turning point leading to the emergence of a developmentalist state with massive state intervention in the economy and other sectors of the society. It put the spotlight on the state as a site of contestation between different elite factions. The regime crisis and the riots shook the nation and caused serious soul-searching regarding the future of the country. In the wake of the violence of “May 13” and after, the king declared a national emergency on 15 May, suspended parliament, and on 17 May set up the National Operations Council (NOC). He appointed Tun Abdul Razak, the deputy prime minister, as chairman and director of operations. With the state of emergency in force and the NOC vested with wide-ranging powers, the cabinet under Prime Minister Tunku Abdul Rahman was to all intent and purposes rendered ineffective. Tunku stepped down in September 1970, and was replaced by Tun Razak. During the state of emergency and NOC rule from May 1969 to February 1971, the way was prepared for the developmentalist state to eventually take shape and institute a firm hold on the economy and the country. The May 13 incident created the necessary space and opportunities for the elite faction led by Razak to assert itself through the NOC. Having control of state power, it harnessed the state apparatus for development goals, thus transforming the state from laissez faire to developmentalist. Minister for Special Functions Ghazali Shafie, a key figure in the nine-member NOC and one of Razak’s closest aides, wrote thus in his memoirs:

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We in the NOC realised that the state of emergency was an opportunity without which the Government in power would not have the chance to work out a long term programme for the nation as a whole. Democracy dictates that the political life was based on short term consideration of five year periods. This opportunity should not be missed and in the aftermath of the (May 13) incident the people were more amenable to changes than otherwise. (Ghazali 2000, p. 54)

In short, the historical and unprecedented conditions of that period created a space and opportunity to restructure “the rules of the game” in terms of strategies and policies — a space that was relatively independent of earlier constraints imposed by foreign and domestic forces. The state elite faction led by Razak effectively seized the opportunity. From the late 1960s into the 1970s, the external environment was also conducive to the emergence and consolidation of the developmentalist state. The earlier period of nationalistic assertion (resulting in the replacement of expatriates with Malaysian officers in the administration) had coincided with the era of realignment of forces — the British “East of Suez” Policy — which resulted in the withdrawal of the British forces in the East, including Malaysia, from 1969 onwards. At the same time, the United States was increasing its influence over investment, culture, and human resource education and training in the region. It is true that Cold War imperatives set external perimeters for the Malaysian state. Its foreign and security policies were constrained by its pro-Western stance, especially through agreements with Britain, the United States, Australia and New Zealand in the Anglo-Malayan Defence Agreement, the FivePower Defence Pact, and SEATO. Internally, however, the government was not similarly constrained in choosing desired policies, as these were not opposed to Western interests. Moreover, while between 1948 and 1960, the state had to deal with the Communists’ armed struggle, with the end of the Emergency in 1960 and the Communist threat under control, the state was relieved of serious domestic pressures from the armed guerilla movement, enabling it to focus on other agendas. While the interventionist state could not have emerged under Tunku Abdul Rahman’s leadership, certain enabling conditions already existed during that period that had a bearing on its future characteristics and the limits to its power. The arrangements of the Federal Constitution of 1957 (and subsequently of 1963, when Malaya was expanded to become Malaysia) spelt out certain legal provisions regarding interethnic accommodation and power-sharing, particularly regarding the

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positions of Malay sultans and of Malays in the civil service and on land matters, as well as the rights of the non-Malays. It had been recognized, from the very beginning, that no one ethnic group could rule Malaysia. The Malay elite undoubtedly required the cooperation of the non-Malays. They therefore promoted inter-ethnic cooperation, and institutionalized it in the form of the multi-party Alliance in the mid-1950s, later enlarged in 1974 to become Barisan Nasional or the National Front. Nevertheless, the Malay state elite enjoyed sufficient autonomy from the local bourgeoisie (mainly Chinese) and other domestic forces to enable it to formulate important policies designed to advance the position of the Malays. Also, the fact that the developmentalist state emerged at a time of regime crisis, and more specifically a state of emergency and suspension of parliament, permitted the ruling elite to use state power in the manner it deemed fit in pursuance of its agenda. NOC rule could have gone on indefinitely had the elite so desired. However, the NOC dissolved itself after less than two years, and restored parliamentary democracy in February 1971. In short, the state elite — while conscious of the need to be decisive, firm and strategic in its actions — took cognizance of the nation’s commitment to parliamentary democracy and power-sharing between the ethnic groups, a dearly held principle embedded in the Constitution. At the same time, it was acutely aware of the need to provide a new basis for its legitimacy as well as a new national consensus under the changed conditions. It was this contestation between the need for a strong hold on state power and the society on one hand, and the conscious need for multiethnic consociation and parliamentary democracy on the other, that foreshadowed the nature of the state that was to evolve in the 1970s and 1980s, continuing even to this day. This fact perhaps explains the dual nature of the state that evolved over the next thirty years which some scholars later described as “neither authoritarian nor democratic”, manifesting both repressive and responsive features (Crouch 1996). CHARACTERISTICS OF THE DEVELOPMENTALIST STATE

Eight key characteristics of the developmentalist state in Malaysia will now be examined. First, like the East Asian model, the state in Malaysia intervened in the economy in a big way from the 1970s. In terms of economic thinking and policy planning, by the late 1960s, there was growing recognition and belief that the state must intervene in the economy, not only by changing the rules of the game, but also

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by acquiring certain strategic sectors. Such intervention aimed not only to correct market “imperfections” so that distribution would be fairer in terms of class, but sought also to address inter-ethnic imbalance by removing the identification of ethnicity with economic functions. This was considered an absolute necessity to ensure the survival of Malaysia as a nation, and avoid a replay of May 13. Although there was resistance to such intervention, in the main it was seen as “marketfriendly” because no foreign or non-Malay assets were confiscated or nationalized, thus allowing a significant proportion of the non-Malay (mainly Chinese domestic) capital to accommodate and adjust to the new economic regime. It should be highlighted that state intervention in the economy was not something novel or sudden in Malaysia of that period. As explained earlier in this chapter, the state had intervened to resettle poor, landless Malay peasants into the FELDA land schemes from the late 1950s and 1960s. Moreover, the notion of more sweeping state intervention in strategic sectors of the economy had already been mooted, though admittedly as a minority view at that time. Several economists studying the political economy of Malaysia since the late 1950s and early 1960s were already pushing for state intervention, the most consistent and forthright being Puthucheary (1960; 2nd ed. 2004) and Wheelwright (1963). They not only called for such a policy, but also suggested special measures to correct ethnic imbalance in the economy and foster national unity. As noted by Brookfield (1994, pp. 3–4), “these writers, in particular, went against the already prevailing ideology of their own and later times in calling for a policy of developing an industrial economy through public enterprises.” Their views, particularly Puthucheary’s penetrating study of ownership and control of the Malaysian economy of the late 1950s based on class analysis,2 predated those advanced later by Just Faaland, the head of the Harvard University Development Advisory Service working in the Prime Minister’s Department who wrote a paper, “Policies for Growth with Racial Balance”, a few weeks after May 13, calling for state intervention to correct racial imbalance.3 It is unfortunate that not much official credit has been given to Puthucheary’s intellectual contribution that in many ways provided the foundational ideas for the NEP as a way forward for a united Malaysian nation. As stated by Ozay Mehmet (1998, p. 85), Puthucheary’s Ownership and Control of the Malayan Economy (1960) was in several respects a forerunner of the New Economic Policy (NEP) 1971–90. It provided the intellectual justification and the empirical evidence for equity

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restructuring objective of the NEP, the leading objective of that policy, which has made Malaysia into what it has become.”4 The strategy of state intervention in the economy and the specific formulation of the New Economic Policy (NEP) could not have emerged without a serious tussle between what Faaland, Parkinson and Rais Saniman (2003, pp. 25–73) called the two schools of thought in the government of the day. One view was advocated by the Economic Planning Unit (dubbed the “EPU school”), backed by the Treasury, Bank Negara (the Central Bank), the Statistics Department and the Federal Industrial Development Authority (FIDA). The competing view was championed by the Prime Minister’s Department and the Department of National Unity, dubbed the “DNU School”.5 The economic history of Malaysia would have been different had the “EPU School” prevailed. As summed up by Faaland, Parkinson and Saniman (2003, p. 28), the EPU School emphasized economic growth over other priorities, assuming that higher growth rates would lead to general prosperity, and that improved distribution would take place via the “trickle down effects”, leading to a rise in the standard of living of the people. Thus, it advocated a policy of “return to normalcy”, and more effective implementation of the policies and strategies pursued prior to May 13. The EPU School’s objective was a balanced budget, with development expenditure financed from savings. As again noted by Faaland et al. (2003, p. 28), “The word ‘deficit financing’ was taboo, never to be mentioned in the corridors of the Treasury or Bank Negara.” Given that the country had just emerged from the yoke of colonialism, with only a not-so-developed state of economic knowledge and expertise, it was understandable that the policy of “growth first, distribution later” gained currency in Malaysia of that era. That was the prevailing ideology in the World Bank and IMF, and the policy was endorsed by the latter. The approach was also strongly supported internally, especially by the powerful Chinese business community through their chambers of commerce and political party which was a member of the Alliance government. The large majority of foreign experts on secondment to the Malaysian government strongly supported this policy and advocated its extension (Faaland, Parkinson and Saniman 2003, p. 30). Moreover, since Independence, the strategy had been quite successful in achieving rapid growth. The DNU School, however, took a different position. According to Faaland et al. (2003, pp. 32–73), the school interpreted the May 13 riots as evidence of a fundamental defect in the country, namely the economic imbalances between ethnic groups, especially with regard to income,

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employment and ownership of capital and assets. All of these had to be corrected to avoid a repeat of the situation and ensure national unity and integration. The DNU group argued that the policy of relying on the private sector for economic development from which the Chinese businesses continued to derive the lion’s share was part of the problem, rather than the solution. It advocated an alternative policy to correct the imbalances, based on four elements: thorough-going land reform and support to smallholders; greatly accelerated land development; a redirected and increased educational effort; and rapid industrialization. This was the gist of the NEP as reflected in its twin objectives of eradicating poverty irrespective of race and restructuring society. Although the EPU and most of the foreign advisors attached to them thought differently about the new approach, the DNU position was fully supported by the minister with special functions, Ghazali Shafie, who was in charge of the DNU, the chief secretary to the government, and most importantly, supported by Tun Razak himself, who was the chairman and director of NOC. The National Consultative Council, consisting of representatives of political parties and leading public figures of all ethnic groups from various sectors of society, were also in favour of it and later endorsed the NEP.6 The New Economic Policy was launched by the government simultaneously with the Second Malaysia Plan 1971–75 as its first phase. In his “Foreword” to the Second Malaysia Plan, Tun Razak wrote thus: [The government] will spare no efforts to promote national unity and develop a just and progressive society in a rapidly expanding economy so that no one will experience any loss or feel any sense of deprivation of his rights, privileges, income, job or opportunity.… To achieve overall objective of national unity, Malaysia needs more than merely a high rate of economic growth. While devoting our efforts to the task of achieving rapid economic development, we need to ensure at the same time that there is social justice, equitable sharing of income growth and increasing opportunities for employment.

Clearly stressing the policy of growth with distribution and the state’s role in it, Razak placed great hope on the NEP when he emphasized that “The Plan must succeed as it is vital to our survival as a progressive, happy and united nation.”

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Continuing with the analysis of the eight traits of developmentalist states: the second characteristic highlights efforts at fostering inclusionary nationalism, forging a new national consensus and legitimacy. As indicated above, the Malaysian elite controlling state power had a sense of purpose and urgency to bring about development in the name of the whole nation through state-sponsored nationalism. Its members realized that by the late 1960s, the goal of “Merdeka” [Independence] had already begun to lose some of its lustre and was no longer able to inspire unity. Thus, a new national consensus was necessary to serve as a glue to hold the diverse nation together. As anti-colonial nationalism or even linguistic nationalism would not be able to play such a role, a new “development-oriented nationalism” was necessary. While linguistic nationalism would have less appeal to the multi-ethnic nation, “development-oriented nationalism” in which the non-Malays would have a place in the scheme of things would undoubtedly have greater appeal across the ethnic groups. This thinking took the form of Rukunegara [National Ideology] which was formulated by the DNU and deliberated and endorsed by the NOC. Proclaimed to the nation on 31 August 1970, on the occasion of the thirteenth anniversary of Merdeka, Rukunegara — regarded by its principal architect, Ghazali Shafie (2000, p. 55) as “national dedication towards the creation of a united Malaysian society” — contains the objectives of achieving greater unity of all ethnic groups, creating a just society in which wealth is equitably distributed; ensuring a liberal approach to Malaysia’s rich and diverse cultural traditions; and building a progressive society oriented towards science and technology. The principles of Rukunegara fed directly into development planning, viz. the NEP. As interpreted by Robertson (1984, pp. 253, 254), “the link between ideology and national planning … is thus more explicit in Malaysia than in many other countries. Profoundly liberal in posture, the Rukunegara seeks ‘a progressive society oriented to modern science and technology’ and pleads for ‘justice, equity, unity and democracy’” (quoted in King 1999, p. 57). Rukunegara was an attempt at fostering inclusionary nationalism needed to build a new national consensus, mobilise the people and move them forward together. Over the years, it provided ideological legitimacy for the state to push its development agenda as expressed through the NEP goals and strategies. Admittedly, however, the idea of inclusion later became problematic, since many of the ideals of Rukunegara remained largely on paper. The third feature of a developmentalist state, the need for a strong state, was self-evident to ensure the implementation of the state’s development

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agenda. A strong state can ensure social peace and political stability, and its access to resources is a necessary condition for sustained economic development. In Malaysia, strengthening various instruments of the state became part of the developmentalist agenda. The fight against the Communist Party of Malaya between 1948 and 1960 — a period known as the “Emergency” — saw the presence of tens of thousands of foreign, namely British and Australian, troops in Malaysia (then Malaya), while there was a simultaneous enlargement and restructuring of the local police and the military, a process of expansion and consolidation that continued into subsequent decades. While it is understandable that between 1956 and 1960, only 4.3 per cent of the government’s expenditure was for security (because there was already a large foreign armed presence in the country), government’s expenditure rose after that, especially during the following fifteen years with 11.6 per cent of government expenditure being allocated for security during the 1961–65 period, and 17.9 per cent for the period of 1971–75. This was part of the exercise of strengthening the Malaysian military and police, more so in anticipation of eventual foreign troop withdrawal which happened by 1969. Thus, elements of a strong state, already evident during the Emergency, continued after that despite British withdrawal. This was possible given the processes of strengthening and expansion of the local military and police and the retention until today of certain emergency provisions including the repressive Internal Security Act that allows detention without trial. The role of institutions such as the rule of law was crucial in ensuring a fairly strong and stable state. Malaysia had in place a comprehensive legal framework that ensured confidence not only among the public but also among the business community, including foreign investors. The judiciary was an institution of integrity that had earned the respect of the public thanks to its expertise and independence. The Finance Ministry also had instituted efficient and high-compliance tax collecting machinery, which ensured that the state would have more than sufficient funds for both recurring and development expenditure. The discovery of oil in the 1960s and the setting up of the state-owned Petronas (Perbadanan Petroliam Nasional or National Petroleum Corporation) added lush revenues for the state from petro-dollars. Indeed, from the late 1970s to the present, petro-dollars in Malaysian coffers contributed significantly not only in strengthening state capacity, but also in managing fiscal crises and public sector debt due to massive spending for hundreds of state-owned enterprises in the 1970s and 1980s (see below, and Chapter 4). It can be concluded that the need for a strong state to

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maintain law and order and ensure political stability on one hand, and the commitment to parliamentary democracy and the rights of citizens on the other as enshrined in the Constitution explains the repressiveresponsive duality in the nature of the state that persists until today. Fourth, expert bureaucracy: Another condition that enabled the emergence of a strong developmentalist state is that the political elite in control of state power must be backed by a strong and efficient administrative elite that could undertake planning and implementation. The Malaysian civil service inherited from the British was efficient, indeed one of the best in developing countries. As the period after Independence through the early 1960s was one of heightened nationalist sentiments, we could see a concerted drive towards Malaysianization of the state administrative machinery, a process leading to the replacement of expatriates at various levels with mostly Malay administrators or bureaucrats (known in Malaysian discourse as “administocrats”), many of whom were trained abroad. This paved the way for the emergence and expansion of a powerful English-educated administrative elite in the civil service, manning the ministries and departments, including powerful planning agencies such as the Economic Planning Unit (EPU) and the Implementation and Coordination Unit (ICU) of the Prime Minister’s Department. The new state elite, led by Tun Abdul Razak, had made development its rallying point and policy focus. Thus, besides making use of the existing human resource in the civil service, it was looking for new well-trained human resource to serve the administrative machinery and also the many newly-created government agencies. Schools, colleges and universities were aggressively expanded and their curricula were re-oriented to meet the national need for a well-staffed public service and an educated workforce (see Chapter 7). The important point to emphasize here is the professionalism of the civil service. As observed by Tilman (1964, p. 132), (quoted in Jomo 2001, p. 73), the civil service was “a career with few overt political appointees and very limited lateral entry. Bureaucrats seem imbued with the norms of national decision-making and empirical observation.” Throughout the 1970s, the service was still able to recruit “the best and the brightest”, although a shortfall in the country’s technical specialists was also becoming apparent (Jomo 2001, p. 73). Fifth, national development planning: Planning became a vogue after the World War II following the introduction of the Marshall Plan to rebuild Europe. Newly independent nations like India, which gained independence in 1948, also emphasized five-year plans. In Malaysia,

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the idea and practice of development planning was not entirely a postindependence creation. Malaysia’s foray into development planning started with a draft development plan in 1950 under the British, as part of the strategic objective of fighting the communist insurgency, and winning “the hearts and minds” of the people. From that time to the present day, an unbroken series of five-year national plans were formulated and implemented. However, for the first fifteen years, from 1950 to 1965, the Malayan Plans were primarily in the hands of expatriate economic advisors, while subsequent plans were developed and refined by Malaysian technocrats, planners, economists and administrators, most of whom were trained overseas (King 1999, p. 54), who took development planning like a “faith”. The first planning document, the Draft Development Plan (known as the “Yellow Book”) for the Federation of Malaya for the period 1950–55, was the only plan covering a six-year period. It was formulated by British colonial planners and officers of the Economics Department of the Financial Secretary’s Office. The British saw that sooner or later Malaya would gain independence as implied in the plan’s Foreword (dated 21 June 1950) by the then British High Commissioner, Sir Henry Gurney. As he put it, “a country that is becoming a nation must have a policy and a plan”. Based on the recommendations of the International Bank for Reconstruction and Development (IBRD), the forerunner of the World Bank, the First Malaya Plan (1956–60) (then known as the General Plan of Development 1956–60) was adopted in October 1956, almost a year before Malaya’s independence. This was followed by the Second Malaya Plan (1961–65), which emphasized “the big push” to meet social and economic needs of the nation. Subsequently, the First Malaysia Plan (1966–70) — following the formation of Malaysia in 1963 and Indonesia’s “Confrontation” — was projected by the government as a blueprint for “prosperity and security”. The Second Malaysia Plan (1971–75) sought to realize the goals in the first phase of the NEP. Subsequent plans including the most recent — the Ninth Malaysia Plan (2006–10) launched in March 2006 — have continued to chart evolving development policies and strategies, set sector goals, and provide guidance for line ministries and agencies. Sixth, an efficient and powerful planning agency. A very important institution that had its origins during the British period that is of direct relevance to our discussion here is the economic planning agency that later evolved into the Economic Planning Unit (EPU). According to EPU’s documents, the EPU’s origin and evolution can be traced to the

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Economics Department of the Treasury under the financial secretary (later renamed the Economics Division, in 1952). Based on the IBRD’s 1955 recommendations in its report, “The Economic Development of Malaya”, an Economic Committee was established on 24 April 1956 to prepare for the economic and social development of the soon-to-be independent Malaya, and the Economics Division served as the secretariat for the committee. After Independence, in line with the need for greater attention to economic development, the cabinet upgraded the Economics Secretariat and renamed it the Economic Planning Unit (EPU) within the Prime Minister’s Department. EPU was given authority to initiate policy and plan formulation, carry out development planning, and coordinate the whole spectrum of public sector economic planning of the country. The EPU was first headed by William T. Phillips, an economics professor from the John Hopkins University who was seconded to serve the EPU under the United Nations Opex Scheme. With his retirement in 1965, and in accord with the Malaysianization policy of the time, economist Thong Yaw Hong became the first Malaysian to lead the EPU; he served until 1978. The EPU enjoys the exclusive preserve of planning, and its director-general has the authority to advise, consult and receive policy directions directly from the prime minister and/or deputy prime minister. The country’s overall planning is guided by the National Economic Council (now known as the National Planning Council), chaired by the prime minister, under which there is the National Development Planning Committee (NDPC) headed by the chief secretary to the government. The EPU provides secretariat services to the NPDC. However, the first twenty years of Malaysia’s national planning after 1950 were not accompanied by state intervention or state-private sector alliance. The state played an increasingly large role in the economy only from 1971 onwards, with the implementation of the New Economic Policy (1971–90) and the push to create state-business partnerships. While national planning and state intervention do not necessarily bring about the desired results, Malaysia’s planning is regarded by many scholars as having one of the most successful and outstanding planning processes among the developing countries. As noted by King (1999, p. 52), “in many respects, [Malaysia] has enjoyed a considerable measure of success in these endeavours… [and its planning was] executed with flexibility and a not insignificant level of efficiency.” A seventh trait of developmentalist states is willingness and capacity to learn from others. In Malaysia, this element predated the NEP. “Learning from others” took various forms, including inviting foreign missions and

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experts to the country and sending Malaysian students and officers abroad. These programmes fed closely into Malaysian development planning. As indicated above, the ideological environment of planning in Malaya in the 1950s and early 1960s was strongly shaped by the Cold War as well as the “Emergency” declared by the British in 1948 to suppress the Communist Party of Malaya. In terms of theory, it was very much informed by the then hegemonic modernization paradigm advocated by a group of prominent American scholars such as Talcott Parsons, Walt Rostow, Bert Hoselitz, Manning Nash and others. The goal of development from the modernization perspective was to achieve “takeoff” into self-sustaining economic growth, spurring industrialization and the transition from “traditional” to “modern” social formations (King 1999, p. 54). Learning from others took additional forms later, such as bringing advisors from the Harvard University Development Advisory Service to work in the Prime Minister’s Department after the May 13 incident. One major contribution of this group was its report, “Social Science Research for National Unity,” formulated in May 1970 by a team of foreign experts from Harvard, University of Chicago, and MIT.7 Based on their recommendations, several new universities were set up and social science was introduced in the curriculum, augmenting the science-based curriculum and facilitating training of much-needed human resources for national development from the 1970s onwards. At the same time, social science was conceived to be a very important tool in promoting national unity through research and other activities. Another important component of “learning from others” was a massive government programme sending students abroad to study in the United Kingdom, United States, Australia, New Zealand, Indonesia, and other countries. The main emphasis of this programme was to train students in science and technology, though social science was also given attention. Besides undergraduates, the government also sent serving officers, mostly to the United States, to undergo training at both the Master and Ph.D. levels with emphasis mainly in public administration and management. The eighth and final characteristic of developmentalist states identified in the literature is the capacity to switch gears from market-directed to state-directed growth or vice-versa, or to combine both market- and statedirection in a synergistic manner. This particular feature of a successful developmentalist state is clear in the Malaysian case. It was evident in the 1970s during the first decade of the implementation of the NEP, when the state changed gears from largely market-driven to a substantially

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state-driven strategy. However, by the 1980s, the Malaysian state under Dr Mahathir switched gears again. In line with the second objective of the NEP, viz. the 30 per cent bumiputera equity participation and the creation of a bumiputera commercial and industrial community (BCIC), Dr Mahathir went a step further by making heavy industrialization and mega projects a top priority. Through this means, he envisaged a new class of bumiputera entrepreneurs would emerge. Thus HICOM (Heavy Industries Corporation of Malaysia) was set up in order to initiate the automobile industry through Proton and the steel industry through Perwaja. To move to that higher level of industrialization, Malaysia simultaneously changed orientation by adopting the “Look East Policy” and the concept of “Malaysia Incorporated”, based on the Japanese model (see Chapter 3 by Lee Poh Ping in this volume). Later in the decade, in response to disappointing experience with some of these policies and to recessionary pressures, Malaysia began to implement partial liberalization, deregulation and privatization, a move conforming to market-driven neoliberal prescriptions. What the government tried to do in this exercise of changing gears was to combine both market and state-direction in a synergistic manner. CHALLENGES AND CONSTRAINTS: THE DEVELOPMENTALIST STATE IN RETROSPECTIVE

This section analyses the growth of Malaysia’s developmentalist state since the 1970s, the challenges and constraints — both domestic and international — it faced, and how it has transformed itself through its engagement with those challenges and constraints. The state’s ability (or lack thereof) to deal with the challenges and adopt new measures, to retain control and steer development in accordance with planned goals, demonstrates that the state is a complex, dynamic and resilient entity. The extent to which it manifests the repressive or the responsive side of its dual nature depends on the intensity of challenges and constraints and on the goals it has set for itself. As indicated earlier, a principal feature of the Malaysian developmentalist state is its deep and varied involvement in the economy. The history of its performance ranges from success stories (for example, Petronas, FELDA Holdings, Permodalan Nasional Berhad or PNB8) to failures (for example, Perwaja, that is, the state’s steel corporation, and Bumiputra Malaysia Finance) as well as intermediate cases (for example, Proton Holdings, now struggling to survive competition

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after tariff protection was lifted following the implementation of the ASEAN Free Trade Area). The extent of the state’s involvement in the economy from the 1970s till the 1990s and how the state was able to change gears in engaging with the challenges and constraints it faced due to changed international and domestic circumstances will be looked at next. Under the NEP’s “state-as-entrepreneur” or “government-in-business” strategy, the government became heavily involved in the economy, leading to setting up many state-owned enterprises (SOEs) (Abdul Rahman 2002, p. 52). Table 2.1 shows the expansion of such enterprises. While there were only twenty-two government enterprises in 1960, the number rose to fifty-four five years later, and reached 109 by 1970. In the 1970s, it saw a phenomenal rise to 362 in 1975, 656 in 1980, and 1,010 by 1985. Most of these enterprises were in services and manufacturing, followed by finance and agriculture. The expansion of state enterprise participation in the commercial, industrial, and service sectors as well as in the emerging oil- and gas-based exploration sector was so rapid that the SOE sector grew at an average rate of over 100 enterprises per year in the mid-1970s (Adam and Cavendish 1995, pp. 16–17).9 However, conditions began to change from the mid-1980s. Although the absolute number of SOEs grew to 1,149 by 1992, the rate of expansion slowed following the down-sizing as part of Dr Mahathir’s move towards privatization, liberalization and deregulation. Nevertheless, such an extraordinary expansion of the SOE sector for more than a decade since the 1970s was indeed unusual for a fundamentally marketTABLE 2.1 Malaysia: Number of Public Enterprises, 1960–92 Industry

1960

1965

1970

1975

1980

1985

1992

Agriculture Building & construction Extractive industries Finance Manufacturing Services Transport Others Total

4 2 0 3 5 3 5 0 22

5 9 1 9 11 6 13 0 54

10 9 3 17 40 13 17 0 109

38 33 6 50 132 76 27 0 362

83 65 25 78 212 148 45 0 656

127 121 30 116 289 258 63 6 1010

146 121 32 137 315 321 68 6 1149

Source: Rugayah 1995 (in Gomez and Jomo 1997, p. 31)

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oriented economy such as Malaysia. In fact, according to some analysts, Malaysia’s SOE sector was among the largest in the world outside the centrally planned economies (Adam and Cavendish 1995, p. 15). The rapid development and expansion of the SOE sector meant billions had to be poured in by the state. There was tremendous expansion of public expenditure from RM4,242 (US$1,318 million) million in 1966–70 (First Malaysia Plan) to RM9,793 million in 1971–75 (Second Malaysia Plan), and further increased in subsequent plans to RM24,937 million in 1976–80 (Third Malaysia Plan) and RM42,830 million in 1981–85 (Fourth Malaysia Plan) (Jomo 1986, p. 266). A significant proportion of the development expenditures was invested in the SOEs. However, the state’s huge involvement in the economy had heavy costs. Net foreign borrowing financed soaring public expenditures. From a low of 6.3 per cent of total public development finance for 1961–65, foreign borrowing rose to 10.5 per cent (RM457 million) in 1966–70 and 21.1 per cent (RM2,100 million) in 1971–75. External debt ballooned. As highlighted by Gomez and Jomo (1997, p. 78–79), Malaysia’s accumulated public sector foreign debt in fact grew from RM4.9 billion in 1980 to RM28.5 billion in 1987. If we include loans from domestic agencies, total public borrowings almost quadrupled from RM26.5 billion in 1980 to RM100.6 billion in 1986. By 1987, the accumulated losses and costs of purchase of public enterprises accounted for more than a third of the public sector’s outstanding debt and over 30 per cent of total debt servicing. To make matters worse, there was mismanagement and weak financial discipline in many of the SOEs, the most serious being the RM2.5 billion scandal involving investment losses of Bumiputra Malaysia Finance, a subsidiary of the state-owned Bank Bumiputra. All these activities led to a drain on national resources, finance, and administrative capacity. The problem was not yet acute in the 1970s as it was a period of rising revenues, bouyed especially by rising prices of Petronas’ petroleum exports. However, by the mid-1980s, serious problems began to surface due to economic recession, fall in government revenues, yen appreciation, declining terms of trade, and capital flight. The fall in oil prices between 1982 and 1986, the collapse of the tin market in 1985, as well as the declining prices of Malaysia’s other major exports (rubber, cocoa and palm oil) after 1984 all contributed to the economy registering a minus 1 per cent growth rate in 1985 (Gomez and Jomo 1997, p. 77). All these worsened the debt crisis. These developments imposed serious constraints on the state, requiring it to reassess its strategies, and change gears. Thus, by the late 1980s, we

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saw a partial retreat of the state, especially after the recession, but this does not mean the state was not in control. According to King (1999, p. 59), “The 1980s … saw a shift back to certain ideas of the 1950s with the interest in achieving economic growth, delivering outputs and targets, and relaxing various economic controls in order to stimulate private sector activity.” Following the Look East Policy and Malaysia Incorporated, private sector involvement in the economy as well as private investment were given greater attention, privatization or partial privatization of various public enterprises and sectors was encouraged, joint ventures between private and public interests were promoted. In 1986, the Investments Promotion Act was passed, providing generous tax holidays and pioneer status to encourage foreign investment to help revive the recession-damaged economy. Foreign capital began to pour in, especially from Japan and other East Asian countries. The Industrial Coordination Act (ICA) was also amended in 1987, relaxing some stringent NEP rules in the earlier Industrial Coordination Act regarding the licensing of domestic manufacturing enterprises. According to Jomo and Edwards (1993, pp. 33–38, in Gomez and Jomo 1997, p. 79), these policy moves, including the suspension or relaxation of some NEP requirements for both foreign and domestic capital, together with the improved external market conditions, led to a rebound of exports. All these stimulated and placed the economy back on track to be able to register 8 per cent annual growth from 1988 to the financial crisis in 1997/98. From the mid-1980s too, the government undertook privatization through divestment of state-owned enterprises. Privatization was done primarily through such methods as liquidation or sale of equity, lease of assets, management contracts, and private financing of infrastructure projects. Among the most important state-owned companies that were privatized were Sports Toto (M) Bhd in 1985, the Malaysian International Shipping Corporation (MISC) in 1987, Malaysia Airlines Bhd (MAS), HICOM Holdings Bhd and Petronas Dagangan (Commerce) Bhd in 1994, and Petronas Gas Bhd in 1995 (Gomez and Jomo 1997, pp. 81–83). According to EPU figures, during the ten years between 1983 and 1993, seventy-two state-owned enterprises were divested, mostly through sale of equity (21), public listing (10), another ten through the BOT (build-operate-transfer), sale of assets (7), corporatization and listing (2), and management buy-out (2). At the same time, some private companies were licensed to undertake ventures in industries that were once the monopoly of state. Hence, the first private television station

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(TV3) was set up in 1983, and independent electric power producers were licensed in 1992, breaking the monopoly of the state-owned powerproducer, Tenaga Nasional Berhad (TNB). The privatization exercise, while relieving the state of certain pressures, created a new culture of patronage involving politically connected corporate figures who managed to obtain some prized state enterprises very much below the market price (a practice referred to in the literature as cronyism). Although the entities were privatized, the state still kept a controlling stake in many of them. The widespread practice of direct negotiation of state procurement, rather than open tender, in many cases not only curtailed competitiveness but also created spaces and opportunities for corruption and promoted shoddy work. (See Chapter 4 by Jacob Meerman in this volume.) By the 1990s, the state was ready for a new phase, preparing Malaysia to join the ranks of developed nations as proclaimed in Dr Mahathir’s Vision 2020 speech in February 1991. Like the announcement of Rukunegara two decades earlier, Vision 2020 again sought to promote inclusionary nationalism with the emphasis on building a united Bangsa Malaysia [Malaysian nation]. Growth was rapid until the 1997/98 financial crisis and slump. While the crisis imposed new challenges and constraints on the state, it had sufficient space and capacity to undertake unconventional measures of pegging the Malaysian currency to the U.S. dollar to avoid speculation, and to institute new capital controls. Privatized entities such as Malaysia Airlines in which the state had a controlling share were badly hit by the crisis, and many had to be bailed out. A new vehicle, called Khazanah Nasional Berhad, was established by the state to ensure control of these corporations (now known as government-linked companies or GLCs) and steer them back to recovery and resumed growth in the early 2000s. CONCLUDING REMARKS: THE FUTURE OF THE DEVELOPMENTALIST STATE

The Malaysian state’s response to the evolving challenges and constraints, and its ability to adopt new measures in order to remain in the driver’s seat and steer in accordance with planned goals demonstrate that it is complex, dynamic and resilient. In the contemporary period of the twenty-first century, it can be seen that the state continues with its developmentalist goals and aspirations, though the form and emphasis differ from those adopted during the earlier periods. This became especially evident after the change of leadership from Dr Mahathir to Abdullah

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Ahmad Badawi on 31 October 2003. While pursuing the objectives of Vision 2020, the new state leadership introduced what is known as the “National Mission” in the Ninth Malaysia Plan (2006–10). As has been explained by Abdullah on various occasions, the National Mission is meant to ensure the realization of the goals of Vision 2020 as well as to take the country to newer achivements beyond that stage. To take development to the next stage, the state has recently allocated RM200 billion under the Ninth Malaysia Plan (9MP) (2006–10) (or an average of RM40 billion per year) as public capital investment plus another RM20 billion under what is called the private funding initiative, that is, funds projected to come from the private sector. (Calculated as a proportion of the annual GDP for 2005, the annual capital investment for projects under the Ninth Malaysia Plan works out to be about 15.3 per cent). Under the Ninth Plan, new growth regions have been set up, the most important being the Iskandar Development Region (IDR) in southern Johor which is planned to attract major foreign and domestic investments. A special zone of less than 2 per cent of the IDR has been designated, in which the NEP regulations are being waived. For Malaysia to move forward, it has to draw appropriate lessons from the development experience of the previous decades. The last two decades prior to the current period were characterized not only by rapid growth but also by corruption, opaque practices, wastage of resources, and sweeping powers of the executive, all of which are serious drawbacks emanating from a strong developmentalist state. Indeed, the Malaysian experience has shown that some of the risks and downsides of certain kinds of state intervention in the economy — rather than external pressures — have compromised the autonomy and capacity of the developmentalist elite to push the economy up the value-chain, especially in terms of efficiency, productivity and innovation. The dependence of the ruling elite (in UMNO and Barisan Nasional) on maintaining support through patronage is in many ways impeding Malaysia’s competitiveness in the global arena. Prime Minister Abdullah Ahmad Badawi is aware of these problems and has instituted a number of governance reforms, packaged under the National Integrity Plan (Malaysia 2004) launched by him in April 2004.10 While external pressures coming from multilateral institutions such as the United Nations, World Trade Organization (WTO), World Bank, and international watchdogs such as Transparency International are important, domestic pressures from the private sector, public intellectuals and the civil society, are also highly crucial. The government

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is sensitive to external rankings (such as the Transparency International corruption perception index, the World Bank world competitiveness indicators, etc.) and other external pressures, a point noted by forces from within the Malaysian society, inducing them to act in tandem to push for good governance, integrity, anti-corruption and transparency as necessary imperatives for the growth of democracy and Malaysia’s global competitiveness. The Malaysian developmentalist state seems set to stay on course for the next decade or so, at least until 2020. However, faced with various challenges and constraints, it adapts and creates space for new policy initiatives. The global environment has created challenges and risks as well as opportunities. While the Malaysian state is being subjected to greater demands to be more transparent and accountable, because of the pressures emanating from both domestic and international sources, it has been able to retain substantial autonomy in deciding its own policies and plans. Also, while retaining its firm hold on the society, particularly on issues of security and interfaith relations, the state is attempting to be more responsive to demands for reform of the public delivery system affecting the business community in particular, and the citizenry at large. Nevertheless, the future very much depends on how the state addresses the problem of the culture of patronage and its attendant consequences of mediocrity and corruption. It has to deal effectively with the powerful vested interests that want to see the reform agenda being stalled and must get back into gear to carry through the reforms as outlined in the National Integrity Plan. Notes 1

2

It is pertinent to note that it was the then Deputy Prime Minister Tun Abdul Razak who was responsible for pushing forward FELDA land schemes, in his capacity as minister for rural development. For more insights into Tun Razak’s role in pushing for state intervention, see below. Puthucheary took the position that “exploitation and poverty are class problems, not communal problems” (2004, p. 174) and maintained that “We cannot get the development we need by relying on market mechanisms. But if the economic facts of life are not faced, and if nothing is done about poverty, then the sort of development that will take place will be lopsided and communal — with political consequences that will be dangerous (2004, p. 181).

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4

5

6

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Faaland (2003, p. 249) in his later footnote to the paper explains that “This paper … was only a personal first assessment. However, the paper was subsequently circulated widely within Government. It was instrumental in formulating issues for debate and became a reference document in subsequent elaboration of analysis.” James Puthucheary’s contribution to the NEP could be gleaned from his participation in the discussion consisting of those closely associated with the second prime minister, Tun Razak. In a volume dedicated to his memory published in 1998, titled James Puthucheary: No Cowardly Past (1998, p. 31), Dominic Puthucheary wrote: “James’ view on the political economy was well known in the political circles, and Abdullah Ahmad (Tun Razak’s political secretary since 1963) introduced James to Tun Razak and a small circle of friends who discussed some urgent issues that surfaced after May 13. The group included Abdul Samad Ismail, Abdullah Majid, Agoes Salim, Dr Ungku Umar and others. The group did not have any fixed number or agenda, but informally thrashed out ideas which were then passed on to Tun Razak to consider.” The EPU-DNU debate summarized in the following paragraphs is based on Faaland, Parkinson and Rais Saniman (2003). While the DNU undertook the task of drafting the New Economic Policy until end of 1970, their lack of capacity to sustain the work especially in terms of economic expertise eventually led to the task being taken over by the EPU. Faaland et al. (2003, p. 37) note the impact of this change in the following words: “In an environment where it was not welcomed in the first place, work on the imbalance problems was relegated to a role subordinate to the conventional planning priorities of the EPU. There were brave individual attempts, but as a guiding methodology of planning, it largely fizzled out. The statement of noble ideals and intentions were still there in all the major documents.” The authors of the report were Professors Nathan Glazer and Samuel Huntington from Harvard University, Professor Manning Nash from the University of Chicago, and Professor Myron Weiner of the Massachussetts Institute of Technology (MIT). PNB was formed in 1978 as an instrument to realize the objectives of the NEP. According to figures released by its management, PNB today handles a total fund of RM104 billion (US$32.3 million) contributed by 8.5 million unit-holders — of whom the overwhelming majority are bumiputera — through its various unit trust schemes. This agency

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10

55

has been able to distribute a cumulative sum of RM50.2 billion in dividends and bonuses to the unit-holders over more than two decades (Berita Harian, 9 April 2007, p. B1). Gomez and Jomo (1997, pp. 29–30) classifies government-owned enterprises into three major categories: “departmentmental” enterprises (providing public services, such as water supply, telecommunications, electricity supply, civil aviation, etc.); statutory bodies established by law at federal and state levels (examples include Urban Development Authority (UDA), Muda Agricultural Development Authority (MADA), Malaysian Rubber Development Corporation (MARDEC)); and government-owned private or public limited companies established under the Companies Act 1965 whose equities are fully or partially held by the government (for example, HICOM, Proton). The National Integrity Plan (Malaysia 2004, p. 26) sets five targets for 2008: (1) Effectively reduce corruption, malpractices and the abuse of power; (2) Increase efficiency in the public service delivery system and overcome bureaucratic red tape; (3) Enhance corporate governance and business ethics; (4) Strengthen the family institution; and (5) Improve the quality of life and people’s well-being. The Malaysian Institute of Integrity has been set up to shoulder the task of coordinating the various programmes and activities to implement the National Integrity Plan.

References

Abdul Rahman Embong. “Social Transformation, the State and the Middle Classes in Post-independence Malaysia”. Southeast Asian Studies (Kyoto University) 34, no. 2 (December 1996): 56–79. ––––––. State-led Modernization and the New Middle Class in Malaysia. Basingstoke: PalgraveMacmillan, 2002. ––––––. Development and Wellbeing. Bangi: Penerbit Universiti Kebangsaan Malaysia, 2004. Adam, C. and W. Cavendish. “Background”. In Privatizing Malaysia: Rents, Rhetoric, Realities, edited by Jomo K.S. Boulder, San Francisco & Oxford: Westview Press, 1995. Amsden, A. Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press, 1989. Appelbaum, R.P. and J. Henderson, eds. States and Development in the Asian Pacific Rim. Newbury Park: Sage Publications, 1992.

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Bagchi, Amiya Kumar. “The Developmental State under Imperialism”. In The Long Twentieth Century: Globalization Under Hegemony, edited by K.S. Jomo, pp. 227–77. New Delhi: Oxford University Press, 2006. Brookfield, H., ed. Transformation with Industrialization in Peninsular Malaysia. Kuala Lumpur: Oxford University Press, 1994. Brown, D. The State and Ethnic Politics in Southeast Asia. London & New York: Routledge, 1994. Castells, M. “Four Asian Tigers with a Dragon Head: A Comparative Analysis of the State, Economy and Society in the Pacific Rim”. In States and Development in the Asian Pacific Rim, edited by R.P. Appelbaum and J. Henderson, pp. 33–70. Newbury Park: Sage Publications, 1992. Crouch, H. Government and Society in Malaysia. St. Leonards, NSW: Allen & Unwin, 1996. Deyo, F.C., ed. The Political Economy of the New Asian Industrialism. Ithaca, NY: Cornell University Press, 1987. Faaland, J., J. Parkinson and Rais Saniman. Growth and Ethnic Inequality: Malaysia’s New Economic Policy. Second edition. Kuala Lumpur: Utusan Publications & Distributors Sdn. Bhd, 2003. Fitzgerald, R. The State and Economic Development: Lessons from the Far East. Singapore: Toppan, 1994. Fine, Ben. “The Developmental State and the Political Economy of Development”. In The New Development Economics: After the Washington Consensus, edited by K.S. Jomo and Ben Fine, pp. 101–22. New Delhi: Tulika Books; London: Zed Books, 2006. Ghazali Shafie. Ghazali Shafie’s Memoir on the Formation of Malaysia. Bangi: Penerbit Universiti Kebangsaan Malaysia, 2000. Gomez, E.T. and K.S. Jomo. Malaysia’s Political Economy: Politics, Patronage and Profits. Cambridge, U.K.: Cambridge University Press, 1997. Ishak Shari. The Earth for All Humanity: Managing Economic Inequality in the Era of Globalisation. Bangi: Penerbit Universiti Kebangsaan Malaysia, 2002. Jesudason, James V. Ethnicity and the Economy: The State, Chinese Business and the Multinationals in Malaysia. Singapore: Oxford University Press, 1990. Johnson, C. MITI and the Japanese Miracle. Stanford, California: Stanford University Press, 1982.

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––––––. Japan: Who Governs? The Rise of the Developmental State. New York & London: W.W. Norton & Co., 1995. Jomo, K.S. A Question of Class: Capital, the State, and Uneven Development in Malaya. Singapore: Oxford University Press, 1986. ––––––, eds. Malaysian Eclipse: Economic Crisis and Recovery. London: Zed Books, 2001. Kahn, J.S. “The Middle Class as a Field of Ethnological Study”. In Critical Perspectives: Essays in Honour of Syed Husin Ali, edited by Muhammad Ikmal Said and Zahid Embi. Kuala Lumpur: Malaysian Social Science Association, 1996a. ––––––. “Growth, Economic Transformation, Culture and the Middle Classes in Malaysia”. In The New Rich in Asia: Mobile Phones, McDonalds and Middle-class Revolution, edited by Richard Robison and David S.G. Goodman. London & New York: Routledge, 1996b. King, V.T. Anthropology and Development in South-East Asia: Theory and Practice. Kuala Lumpur: Oxford University Press, 1999. Lubeck, P.M. “Malaysian Industrialization, Ethnic Divisions and the NIC Model: The Limits of Replication”. In States and Development in the Asian Pacific Rim, edited by R.P. Appelbaum and J. Henderson, pp. 176–98. Newbury Park: Sage Publications, 1992. Mahathir Mohamad. The Malay Dilemma. Singapore: Asia Pacific Press, 1970. Malaysia. National Integrity Plan. Kuala Lumpur: Institut Integriti Malaysia, 2004. Mehmet, Ozay. “James Puthucheary: A Pioneering Intellectual of Malaysian Economic Development Strategy”. In No Cowardly Past: Writings, Poems, Commentaries, edited by Dominic Puthucheary and K.S. Jomo. Kuala Lumpur: INSAN, 1998. Ongkili, James P. Nation-building in Malaysia 1946–1974. Singapore: Oxford University Press, 1985. Preston, P.W. “Aspects of Complex Change in Asia”. Occasional Paper no. 7. Bangi: Department of Anthropology and Sociology, Universiti Kebangsaan Malaysia, 1995. Puthucheary, J.J. Ownership and Control in the Malayan Economy. With an Afterword by K.S. Jomo. First edition 1960. Kuala Lumpur: INSAN, 2004. Puthucheary, D. and K.S. Jomo, eds. James Puthucheary: No Cowardly Past: Writings, Poems and Commentaries. Kuala Lumpur: INSAN, 1998. Robertson, A.F. People and the State: An Anthropology of Planned Development. Cambridge: Cambridge University Press, 1984.

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Rugayah Mohamed. “Public Enterprises”. In Privatising Malaysia: Rents, Rhetoric, Realities, edited by K.S. Jomo. Boulder: Westview Press, 1995. Searle, P. The Riddle of Malaysian Capitalism: Rent-seekers or Real Capitalists? Sydney: Allen & Unwin, 1999. Sity Daud. “Negara Pembangunan Malaysia: Daripada Dasar Ekonomi Baru Kepada Dasar Pembangunan Nasional” [Malaysian Developmentalist State: From the New Economic Policy to the National Development Policy]. Unpublished Ph.D. thesis submitted to Universiti Kebangsaan Malaysia, Bangi, Malaysia, 2003. Tilman, R. Bureaucratic Transition in Malaya. Cambridge: Cambridge University Press, 1964. Toh, Kim Woon. “The State in Economic Development”. Unpublished Ph.D. thesis, Universiti Malaya, 1982. Wade, R. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. New Jersey: Princeton University Press, 1990. Weiss, Linda. The Myth of the Powerless State. Ithaca, N.Y.: Cornell University Press, 1998. Weiss, L. and J.M. Hobson. States and Economic Development: A Comparative Historical Analysis. Cambridge: Polity Press, 1995. Wheelwright, E.L. “Industrialization in Malaya”. In The Polotical Economy of Independent Malaya: A Case Study in Development. Canberra: Australian National University, 1963.

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3 THE LOOK EAST POLICY, THE ASIAN CRISIS, AND STATE AUTONOMY Lee Poh Ping

This chapter puts forth the argument that the Look East Policy (LEP) launched in 1982 was essentially a rationale by the then Prime Minister Dr Mahathir Mohamad, to justify his vision of the New Economic Policy (NEP), a rationale greatly influenced by developments in both the international and domestic arenas. The perceived need for such a rationale illustrates an aspect of globalization affecting other countries as well as Malaysia: international currents of opinion and ideology influence investors’ decisions regarding attractive investment opportunities. Countries seeking autonomy in their choice of growth strategies, yet also desiring to attract foreign investment, may need to find ways to justify their choices that are acceptable to international investors. Two aspects of the international situation had a great bearing on Malaysian policy: the ascendancy of the Thatcher-Reagan school advocating reduction of state involvement in the economy in order to promote economic growth, and the dazzling success of the Japanese model. These influences interacted with a domestic factor: the belief by Dr Mahathir that the NEP, which had been in existence for more than a decade, should enter a new stage. Dr Mahathir’s formulation of the LEP essentially consisted of the introduction of Malaysia Incorporated, along the lines of his perception of Japan Incorporated. The LEP was 59

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actually quite a clever response to these international and domestic developments. Malaysia Incorporated was presented as a system where a particular form of state intervention could not only bring about social stability but also great economic growth. It seemed a plausible alternative to the Thatcher-Reagan approach. On a domestic level, the LEP put the priority on the development of private Malay entrepreneurs. This was a departure from the previous emphasis on the use of state enterprises, which served mainly to expand Malay employment and were not efficient, to implement the ends of the NEP. Fifteen years later, the Asian crisis (AFC) in 1997 greatly eroded the Malaysia Incorporated rationale, because it brought about a contraction of the Malaysian economy (which should have been expanding according to the LEP rationale) and exposed the indebtedness of many high profile bumiputera businessmen created and developed as part of the LEP. However, the crisis did not undermine the ability of the Malaysian government to intervene in the economy for NEP ends; it only destroyed the belief that Malaysia Incorporated could bring about impressive economic growth. Thus the Asian financial crisis did not affect governmental autonomy with respect to state intervention in the economy. The limited impact of the crisis was due in part to the fact that the most exposed Malaysian businesses, particularly those involved in foreign borrowing, were not that large a part of the economy. Moreover, government attempts to stabilize the economy during the crisis were reasonably effective (and entailed intervention). However, a major reason was that large portions of the Malaysian economy, in particular the export of manufactures and petroleum production, were not affected by the crisis because these sectors were reasonably well managed. Nevertheless the crisis dealt a great blow to the belief that the developmental state, at least as exemplified by Malaysia Incorporated, could bring about both impressive economic growth and the achievement of the social goals of the NEP. The Malaysian case suggested that governmental intervention after the fashion of the developmental state would encounter great difficulties achieving rapid growth in the future, given global developments, even if the Malaysian government still retained some capacity to intervene in the economy for social ends. BACKGROUND TO THE LEP

When Dr Mahathir launched the LEP in 1982, the NEP had already laid some of the foundations of a developmental state in Malaysia (Rahman,

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this volume). The NEP had been introduced in 1970, and had as one of its main prongs enabling the economically disadvantaged bumiputeras to participate meaningfully in the economy, through state intervention in the context of economic growth. Chalmers Johnson (1982) considered the developmental state as one that was determined to influence the direction and pace of economic development by directly intervening in the developmental process, rather than relying on the uncoordinated influence of market forces to allocate economic resources. To do this, the developmental state took upon itself the task of establishing substantive social and economic goals with which to guide the process of development and social mobilization. The NEP fitted into this Johnsonian view of the developmental state in the sense that it departed from the laissez faire economic policies practised by the Malaysian government from Independence to 1970. The NEP sought to use state intervention to achieve substantive social and economic goals such as reducing economic inequality between the bumiputeras and other races and encouraging economic growth without too much disruption of market forces. To do this, the government did not resort to nationalization as many other countries such as Indonesia had done in the 1950s. Instead the government resorted primarily to the use of state enterprises, so much so that the number of these enterprises increased by almost six-fold during the 1970s. Thus there were 109 public sector enterprises in 1970. In 1980 there were 656 (Gomez and Jomo 1997, p. 31). In 1970 the concept of the developmental state of course was not yet in vogue, but in some sense, Malaysia already was a developmental state in substance if not in name. But it was not until the adoption of the LEP by Dr Mahathir in 1982 that one could say Malaysia was explicitly aspiring to be a developmental state. This NEP policy of growth with redistribution had been moderately successful in the decade or so before the LEP was launched. Yet there were international and domestic developments that necessitated Malaysia adopting the LEP to justify its state intervention for NEP ends. There were two significant developments on the international front in this respect. One was the powerful attack on state intervention in the economy as represented by the rise of the Thatcher-Reagan School. By 1982, Margaret Thatcher had been in power in Britain for three years and Ronald Reagan had been president of the United States since 1980. Both Thatcher and Reagan were strong advocates of the laissez faire approach and the reduction, if not the abandonment, of state involvement in the economy. (“The role of the state” as was sometimes humorously put out by the Reaganites, “is to defend the shores, deliver the mail,

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and get the hell out of the way!”) According to followers of ThatcherReagan, given the developments in the international economy, there was no alternative (TINA) to this Anglo-Saxon laissez faire approach, if economies were to grow. Liberalization, deregulation and privatization became the buzzwords of these followers. Dr Mahathir, himself much travelled and aware of Malaysia’s dependence on the world economy, could not have been unaware of the ascendancy of the Thatcher-Reagan School and its implications for the NEP. Dr Mahathir could have chosen to ignore the Thatcher-Reagan approach and continue with state intervention in the economy as had been practised before he came into power. Yet there was a strong reason why he and Malaysia could not totally ignore the Thatcher-Reagan approach. The NEP, as noted above, had to be achieved within the context of growth. Continued rapid economic growth was crucial to Malaysia’s economic and social strategy (Tham 2007). The industrial sector was regarded as the key engine for growth, and export promotion was identified as the means to accelerate this industrial development. Export promotion depended crucially on foreign direct investment (FDI). In fact, as an indicator of the importance of FDI in the economic development of Malaysia, FDI inflows into Malaysia as a percentage of gross fixed capital formation for the period of 1971–80 were quite high, in the upper range of 10 to 15 per cent (World Investment 1999, p. 168). It was thus clear by 1982 that FDI had been crucial to Malaysia’s economic growth. Yet, even if the NEP had not fundamentally jeopardized FDI to Malaysia, Dr Mahathir could not have been unaware that maintaining and increasing FDI depended not only on the specific incentives that attracted particular investors (cheap labour, attractive tax packages and so on) but also on the overall investment climate. This latter included the political climate and the overall economic strategy of the host country. The political climate in 1982 had not been a problem. Malaysia was politically quite stable and had not resorted to nationalization. In principle, foreign investors had not reacted adversely to the NEP, recognizing that it had contributed to political stability which was important for future investment prospects. But it was one thing to have state intervention in an economy when such intervention was not really under attack, and another thing when the Thatcher-Reagan School had become increasingly dominant in the West. Could Malaysia have maintained and increased FDI with an economic strategy of state intervention during the ThatcherReagan ascendancy? While one cannot answer this with absolute certainty, it was nevertheless clear that if some answer were to be found to the

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Thatcher-Reagan approach, it would go a long way to help increase, or at least prevent the diminution of the FDI so necessary for economic growth in Malaysia. It was, of course, open to Dr Mahathir to adopt the Thatcher-Reagan laissez faire school (also called the neo-liberal approach). However, under the circumstances at the time, this was no more than a theoretical option. A laissez faire approach, while it might lead to great economic growth, would do very little to aid in redistribution. In fact, it might increase further the wealth gap, which in the Malaysian context meant a gap between the races. UMNO, the dominant party in the ruling coalition which Dr Mahathir headed, would not have allowed this. There was the second alternative: Malaysia could carry on with economic restructuring along NEP lines based on growth from domestic sources, relying less on FDI. But that would be difficult unless the restrictions on the full expansion of domestic Chinese capital were to be lifted. That would require a reversion to some form of a laissez faire approach, which was not acceptable to UMNO. In theory, there was a third alternative. As an extreme move, Malaysia could adopt the approach of a command economy, after the fashion of the economies of the then Communist bloc. Under such an approach, the state intervened in the economy primarily for ideological ends (Johnson 1982) irrespective of the impact on the economy. Such an option was, however, not realistic. Dr Mahathir would have been aware that the command economy would bring about economic stagnation. This was evident in a speech to an International Monetary Conference in 1985 in Hong Kong, where he spoke of the “end of extreme socialist ideology” brought about by “the severe loss of faith in the efficiency of rigid, over-centralised state planning.” (Khoo 1995, p. 135). Economic stagnation in the Malaysian context, as he well knew, would likely result in political instability. Moreover, a command economy would mean an identification with the Communist bloc, which would not be acceptable to the Malays, since as devout Muslims they tended to equate Communism with atheism. The problem for Dr Mahathir, then, was finding a model that allowed for state intervention in the economy that could bring about both social restructuring (which the neo-liberal approach evidently could not provide) and economic growth (which the command economy could not bring about). Dr Mahathir found such a model in the Japanese experience. By the early 1980s, Japan had not only recovered from the devastation of the war but had developed into one of the largest economies in the world. It had been experiencing tremendous economic growth in the

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1960s and 1970s while dazzling the world with many of its exports such as cars, cassettes and computers. Moreover, Japan had achieved such economic development without much sacrifice of social stability and national identity. Unemployment in Japan was low and so were the crime, divorce and homelessness rates as compared to the rates in the United States. Japanese workers were hard-working and were loyal to their firms. The Japanese were also proud of the fact they were able to retain their identity in the face of modernization. All these Japanese achievements made a deep impression on Dr Mahathir, as can be seen from his adoption of the LEP in 1982 and his frequent extolling of Japanese work ethics and conversely, from his many disparaging remarks about deteriorating work ethics in the West. An example of his attitude can be seen in a speech he made to a joint gathering of Japanese and Malaysian businessmen and industrialists in 1982, where he stated that he had “been exhorting Malaysians to emulate the Japanese, particularly in work ethics and ethical values”. He went on to say that the West was no longer a suitable model for Malaysia. “They[the West]”, he continued, “have lost their drive. They still want the good life but are no longer prepared to face the realities of the world market, which they can no longer dominate. Consequently, if we emulate them we will land ourselves in the quaqmire they are in without ever passing through the golden period they went through” (Mahathir 1982). Dr Mahathir’s admiration for Japanese practices and negative view of Western work ethics notwithstanding, the heart of the LEP was the adoption of Malaysia Incorporated, after the fashion of Japan Incorporated. In essence, this meant the adoption of a particular form of state intervention in the economy. State and business in Malaysia Incorporated were not to be confrontational, as was claimed to be the case in Anglo-Saxon capitalism. Both were to be cooperative; (Dr Mahathir had always made much of the fact that the government depended heavily on revenue from business). And if the state intervened in the economy for social ends, it should be as much as possible in tune with the market economy, unlike command economies. Nevertheless, except for the emphasis on the development of private Malay entrepreneurs, the adoption of this Malaysia Incorporated did not differ essentially from the type of state intervention in the economy that had been previously practised under the NEP. Dr Mahathir could also have been encouraged to adopt the Japanese model by the worldwide fascination with Japan at the time. (Singapore, whose efficiency is said to have been admired by Dr Mahathir, had launched a “Learn from Japan” campaign in 1978.) He may also have

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been influenced by the increasing approval of the Japanese model (or the concept of the developmental state) by leading Western academics. In 1979, a few years before the adoption of the LEP, a Harvard academic, Ezra Vogel, published a book (Vogel 1979) in which he argued that the West could learn from Japan as Japan had learned from the West in the past. Vogel advocated, among other things, the adoption of an elite bureaucracy that could guide the economy. This book created great international interest. Another more rigorous book by Chalmers Johnson (Johnson 1982) came out around the time of the LEP. Johnson argued that an elite Japanese ministry, the Ministry of International Trade and Industry (MITI), had played a crucial role in the development of the Japanese economic miracle. It is not known if Dr Mahathir had read either book or had met Johnson (he probably had met Vogel). He probably would have been aware of the impact of the Vogel book and knew that the Japanese model he had adopted was increasingly a part of a respectable theory of political economy. On the domestic front, as noted earlier, the state under the NEP had been intervening in the economy through state-owned enterprises. Dr Mahathir saw the inefficiency resulting from such enterprises. While he acknowledged that the government had moved into business in the interests of the NEP because there were not enough capable bumiputeras both in terms of skill and capital, Dr Mahathir worried that “…the trend towards increasing government participation in business has led to competition with the private sector whereby due to its power, the government can easily dominate private businesses and enterprises.” (Khoo 1995, p. 131) Dr Mahathir did not, however, completely do away with such state enterprises. Instead, he believed that the pursuit of NEP goals should involve a new strategy of reducing the dominant role of these public enterprises and encouraging the development of private bumiputera entrepreneurs. Such encouragement, would involve, in addition to many other incentives, the privatization of many of these enterprises to bumiputera businessmen. This was where the Japan model was particularly relevant. Dr Mahathir interpreted the Japan model broadly as encompassing not only the post World War II model but also the much earlier Meiji era, where the state developed and then sold off many enterprises to private Japanese entrepreneurs. Drawing on this experience, he was able to justify privatization as a main prop of his economic policy after the LEP was introduced. By giving the privatized projects mainly to bumiputera businessmen, he was also able to assure UMNO that the LEP did not mean giving the store away to non-bumiputeras. At the same time the

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strategy was a clever response to the Thatcher-Reagan approach (by stealing its clothes as it were), as privatization was one of the key neoliberal tenets. As stated earlier, this emphasis on privatization did not mean Dr Mahathir did away totally with state enterprises. They still played an important role in the LEP, in particular in the development of heavy industries in Malaysia. Dr Mahathir believed the role of the state in promoting heavy industries had been crucial to the success of industrialization in Japan and South Korea. Thus in 1980, as minister of trade and industry, he had established the Heavy Industry Corporation of Malaysia (HICOM) as the vehicle for developing heavy industries. After becoming prime minister, he brought HICOM into the Prime Minister’s Department. HICOM, through joint ventures with Japanese and South Korean multinationals, made forays into car manufacturing, steel-making, and cement and motorcycle production. (Khoo 1995, p. 119) But these industries achieved nowhere near the success of their Japanese and South Korean counterparts. As Chapter 4 discusses in more detail, many of them survived only as a result of massive government subsidies. PREPARING THE GROUND FOR THE ADOPTION OF THE LEP

It has to be said that emulation of the Japanese political and economic system and the Japanese work ethic would constitute, at least in theory, something quite different from earlier Malaysian experience. Malaysians had been used to a political and economic system greatly influenced by the West, especially Britain. In addition, Malaysians had a great reservoir of goodwill towards Britain (which Dr Mahathir believed had not been reciprocated). To persuade the Malaysians to follow a model from another country, particularly one that reminded many Malaysians of its wartime atrocities, might not be easy. At the least, some preparation was needed. That was done by the presentation of a negative picture of the British, which could also serve as a criticism of the laissez faire approach: if the British were no longer the example that Malaysians should imitate, then by implication the laissez-faire model, associated with the British, was also not good for Malaysians. The criticisms of the British were based on two charges: not only had they lost the work ethic, as stated earlier and as demonstrated by the innumerable strikes Britain had been experiencing, but they were also uncaring and practised double standards in their dealings with Malaysians. An example of lack of friendship, as perceived by Dr Mahathir and

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many Malaysians, was the decision by the Thatcher government, upon assuming office, to charge full tuition fees for Malaysian students, who had previously been charged the same fees as British students because they were from the British Commonwealth. Dr Mahathir saw this as imposing a big economic cost to Malaysia by the resulting drain on foreign exchange. Moreover, he interpreted the British act as failing to take into account Malaysians’ goodwill towards Britain, which had predisposed them to many acts of friendship. The Thatcher government could have reciprocated such goodwill by not raising fees. An example of double standards was the so-called “Dawn Raid” in the early 1980s. When the Malaysian government decided to gain control of many of the Malaysian assets then listed in the London Stock Exchange, they had to use their wits to buy enough shares for control of these assets. One spectacular example of this was the acquisition of the Guthrie Company, which held many plantation assets in Malaysia. In anticipation of resistance to their taking over control, the National Investment Company (PNB) of Malaysia surreptitiously (in the early morning) but legally bought up enough shares to allow for control of the company. This caught many on the London Stock Exchange unawares. Subsequently, the exchange introduced rules to prevent such raids in the future. Dr Mahathir saw this as a clear example of the application of double standards. If a British company had executed a similar raid on the Malaysian or any other Asian stock exchange, it would have been praised by the British as a brilliant move rather than a sneaky one. Thus, to remind the British that they could not take Malaysia for granted, Dr Mahathir launched a “Buy British Last” campaign. Government institutions that had to purchase materials and equipment should exhaust requests from suppliers from other countries before they considered the British. THE LEP AND MALAYSIA INCORPORATED

Because of the varying statements of politicians, the politicized nature and the differing perceptions of many Malaysians and Japanese of what the LEP meant, it took on a wide range of meanings, becoming “all things to all men”. The various interpretations of the LEP included: a) emulation of Japanese work ethics; b) the perception that not only Japan but also the Asian Tigers such as South Korea and Taiwan were helpful models; c) adoption of the political and economic system of post World War II Japan; and d) emulation of certain strategies pioneered in Meiji Japan.

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There is some truth in each of these varying interpretations. For example, one of the steps taken by the Malaysian government under the LEP was the dispatch of students and trainees to Japanese universities and Japanese firms that would take them so that they could learn something, vague as it might be, as to what made the Japanese the hardworking and successful people they were. The Asian Tigers were also considered as models. For example, in addition to some governmental leaders extolling the Korean example, in the mid-1980s the Institute of Strategic and International Studies (ISIS) of Malaysia, an institute close to the government, also organized seminars on learning from the Korean and Taiwanese experience. It should be noted, however, that while South Korea and Taiwan as well as Japan might be regarded as developmental states, their strategies differed. The Koreans at that time placed far more emphasis on the role of large conglomerates, such as the chaebols, while the Taiwanese emphasized the role of small and medium industries. However, the heart of the LEP as conceived by Dr Mahathir consisted of the adoption of Malaysia Incorporated. His formulation of this strategy included elements from both the post-World War II Japanese model and Meiji Japan. Thus, the introduction of a Malaysian MITI after the fashion of the Japanese MITI to help guide industry, and Dr Mahathir’s encouragement of good relationships between business and government were guided by his perception of the post-World War II Japan model. So were his urgings to Malaysian business to emulate some of the more successful Japanese business institutions, such as the sogo soshas (general trading companies) and Japanese business practices such as in-house unions. However, his attempt to encourage the development of private Malay entrepreneurs entailed government action to purchase existing firms and create new ones that were handed over to bumiputera managers, and preferential policies in government procurement, contracting, and loans to strengthen these bumiputera firms. These measures harkened back to Meiji Japan rather than to post-World War II Japan, as it was the Meiji regime that placed strong emphasis on creating and developing a Japanese entrepreneurial class. While there were many individual Japanese who became very successful in post-World War II Japan, such as the founders of Honda (Soichiro Honda) and Sony (Akio Morita), these individuals often became successful without governmental encouragement. They developed their own businesses rather than taking over firms that were started by the government. Only after their businesses became successful did they develop the kind of Japan Incorporated relationship with the state

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already enjoyed by more established groups like the Mitsubishi, Mitsui and Sumitomo groupings. Therefore the Meiji period, rather than postWorld War II Japan, is the more appropriate parallel and inspiration for the Malaysian state seeking to encourage private bumiputera enterprise during the 1980s. This policy, however, was criticized by some as favouring certain businessmen rather than bumiputera businessmen as a whole. As the policy developed, it increasingly resembled “crony capitalism”, defined by one scholar “as referring to a pattern of business-government relations in which select business people who are very close to key policy-makers receive highly preferential treatment that enables them to capture spectacular profits — even to the point where they dominate the corporate landscape” (MacIntyre 2006). Dr Mahathir was able to ride out this criticism by pointing to the fact that the Malaysian economy had been enjoying a high growth rate and arguing that there was nothing wrong in creating rich businessmen. Moreover, there was general international approval of the kind of economic strategy the Malaysian government, along with the Asian Tigers, was pursuing. For example, in 1993 the World Bank included Malaysia with Hong Kong, Singapore and South Korea among eight high-performing Asian economies deserving praise. THE ASIAN FINANCIAL CRISIS

However, it must be said from the beginning many Malaysians harboured doubts as to the validity of the Japanese model. They questioned whether the differences between Japan and Malaysia in culture and historical experience would permit the transfer of the Japanese model to Malaysia. In the 1990s, a serious dent was made in the Japan model. Early in the decade, the Japanese economic bubble burst. The inefficiency and corruption in the Japanese political and economic system exposed by the burst bubble revealed to many Malaysians that the Japanese model had serious flaws. Many believed that if the model was not working in Japan, there was little reason to believe it would work in Malaysia or elsewhere. But it was the Asian financial crisis of 1997 that put paid to the rationale that the LEP, or state intervention in the economy under the formula of Malaysia Incorporated, could produce high economic growth and nurture good bumiputera businessmen. The crisis brought about a contraction in the Malaysian economy which had hitherto been enjoying a high growth rate. From growth of 7.3 per cent in 1997, Malaysian Gross Domestic Product (GDP) fell to a negative 7.4 per cent

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in 1998, a year after the crisis struck. The crisis also exposed the lack of sound management of many of the bumiputera enterprises aided by the government under the LEP. Many of these had to be rescued by the government. According to one scholar, Jomo K.S., such rescues created public outrage because many of the politically connected and influential sought aid from “government controlled funds (EPF) [Employees Provident Fund], Permodalan National Berhad ((PNB) and Khazanah) as well as diverted private resources” (Jomo 1998, p. 187). GLOBALIZATION AND STATE AUTONOMY

Despite the crisis-induced blow to the LEP, Dr Mahathir as late as 2000 said that he had not abandoned the strategy, as it had helped in fostering good relations between the races. What he meant was that while LEP policies were no longer capable of delivering high economic growth, the state would still intervene in the industrial economy for NEP ends, for example, development of a bumiputera business class. That raises two questions. Does the state still have sufficient autonomy, after the Asian financial crisis, to intervene in the economy? And if so, what are the consequences for economic growth? Specifically, will continued state intervention in the economy in the form of preferences and other policies focused on promoting bumiputera economic development be conducive to a climate that can attract and maintain FDI, in an era of the apparent worldwide triumph of the neo-liberal philosophy over the command economy and the developmental state? In other words, will Malaysia be in the same situation as just before adopting the LEP, but this time without the alternative options of the command economy and the developmental state? Before answering the first question, the link between the Asian financial crisis and globalization should be considered. Globalization can be seen at once as a general phenomenon and a series of processes. It is a general phenomenon in that it enhances the interconnectivity of various parts of the globe through economic interdependence, developments in communication and transportation and so on. The processes of globalization can take place in many arenas including finance, economy, and politics. The processes of financial globalization and liberalization, in particular, the opening of capital accounts urged on the Asian countries in the early 1990s by those in thrall to the “Washington Consensus”, played a key role in inducing the crisis. The financial liberalization undertaken by Malaysia and other Asian countries in the years before

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the crisis had led to large inflows of foreign capital (Cheong and Wong 2006, p. 159). Financial intermediaries proved inadequate to regulate this inflow. Much of it went into the stock market and property investment, creating a situation not unlike the Japanese bubble of the early 1990s. In 1997, when the money was hastily withdrawn from Malaysia and other Asian countries, prices plunged. The property, currency and stock markets were severely affected and the Malaysian economy as a whole contracted. Whatever the inadequacy of domestic Malaysian institutions to cope with the ingress of foreign money (contributing to the crisis), there can be no doubt that another main cause of the crisis was financial globalization with its emphasis on free movements of capital. Yet, despite the trauma resulting from the crisis, its impact was not as severe in Malaysia as in neighbouring countries such as Indonesia and Thailand. A very important reason for this was that major portions of the economy, including the petroleum sector and the export of manufactures, were little affected by the crisis because they were reasonably well managed, the former by a government corporation known as Petronas and the latter mainly by multinationals (Lee and Tham 2007). A second reason for the comparatively light impact was that even the affected sectors were better regulated than in neighbouring countries. Like other countries in the region, Malaysia was burdened with an over-valued currency, current account deficits and large external borrowings. Elsewhere, imprudent borrowing was a primary reason for the crisis. However, Malaysia’s foreign debt remained low as a proportion of the Gross National Product GNP (Case 2003). As Case points out, the fact that Malaysia was less badly affected than its neighbours could be attributed to the government having long operated a mixed economy of globalized enclaves, including petroleum and the export of manufactures, combined with protected but not unregulated local markets, generating economic growth and political stability (Case 2003). Relatively light impact meant that the crisis had not fundamentally affected the capacity of the state to intervene in the economy. The question remains whether the state can intervene in ways consistent with continued inflows of FDI so necessary to economic growth, particularly in the light of developments in the international economy. It is quite clear that, crisis or not, the government today has no intention of abandoning the restructuring of society through state intervention. Thus, it was reiterated recently that the NEP was still the official policy of the government. “In fact,” as one scholar, Pepinsky, wrote, “the regime’s (Malaysian government) continued emphasis on the NEP…provides ideological cover

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for much of the regime’s continuing involvement in the economy.” He suggests that one revealing document of this continuation of the NEP is the Ninth Malaysia Plan. It, “like its predecessors, places heavy emphasis on the government’s role in coordinating the redistribution of wealth and equity in favour of bumiputeras…” (Pepinsky 2007). Pepinsky is backed up by two very authoritative sources. One is Najib Tun Razak, the deputy prime minister, who said that the NEP spirit was still part of the Ninth Malaysia Plan, and the government was still committed to eradicating poverty, stimulating the economy and addressing the imbalance between the races (NST Online, 16 June 2007). The other is none other than the prime minister, Abdullah Badawi. At a dialogue with foreign investors and international business leaders, he reiterated that the NEP would be continued (The Star, 11 July 2007) Nevertheless, the continuation of the NEP has been controversial. Critics challenge not so much the goals of the NEP but whether those goals, as measured by the 30 per cent bumiputera ownership of the total volume of publicly traded shares, have not already been attained. The government insists that this goal has not been achieved, hence the continued need for preferential policies, while the challengers think otherwise. (The Sun, 9 October 2006 and The Sun, 29 November 2006). Will economic growth still be possible with these kinds of continuing state intervention? Specifically, will sustained government preferences and quotas for bumiputera firms still be compatible with the inflow of FDI? The government insists that FDI had not fallen as a result of this policy. Others argue that such intervention dampens FDI. For example, Jeff Hurst, the executive director of the American Chambers of Commerce in Malaysia, in a statement reflecting the thinking of many foreign investors, was quoted as saying that Malaysia’s equity share requirements were disincentives to investors. If companies were permitted to have fuller control, he said, “they are more able to make larger-sized investments and are more apt to put in higher-value operations like research and development” (Malaysiakini 2007). Whichever way the debate goes in Malaysia, the negative comments by foreigners and others about the effects of the NEP on foreign investment, even if exaggerated, can discourage foreign investors especially at a time when new powerhouses like China and India are proving attractive. This puts Malaysia in a bit of a bind, because in contrast to the period before adoption of the LEP, the apparent worldwide triumph of neo-liberalism over the command economy and the developmental state has removed these alternative options for Malaysia. Malaysia has increasingly to work within the neo-liberal system.

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Yet despite this triumph of neo-liberalism, it is possible that trends within neo-liberal philosophy could allow for some state intervention in the economy for social purposes. After all, neo-liberal globalization is not proving to be an unalloyed blessing even in the West. The threat posed by neo-liberal globalization to jobs and other benefits for workers might push Western governments to intervene in the economy to protect labour and promote other social ends, if they have not already done so. And in the process, a new theoretical justification would be put forward for governmental intervention in the economy for social ends under neo-liberalism. Indeed, there is already recognition by one of the leading institutions of neo-liberal thinking, the World Bank, that equity and development should go together, and that inequality of opportunity, both within and among nations, sustains extreme deprivation, results in wasted human potential and often weakens prospects for overall prosperity and economic growth (World Development Report 2006). Malaysia will likely adopt any convincing justification for ongoing state intervention proposed by Western proponents of neo-liberalism, for reasons similar to those that motivated the LEP in the early 1980s. Meanwhile it will likely adopt a pragmatic approach, trying to find the right mix between state intervention and state withdrawal from the economy in order to achieve specific social ends without discouraging economic growth. Malaysia has relaxed state control before. In the mid-1980s, in response to the collapse of commodity prices and the resulting economic contraction, the government suspended application of NEP requirements in certain zones so as to encourage export promoting industries. In the 1990s, Dr Mahathir, in his attempt to encourage a great technological leap forward by Malaysia, created a Multimedia Super Corridor in an area around Kuala Lumpur and did not apply the NEP to activities related to the functioning of this corridor. And very recently, the Badawi Government announced its intention to relax aspects of the NEP in parts of a massive property project in Johor, mindful that in an era of competition from countries like China and India foreign investment will only come to Malaysia if controls are few. The relaxation in the mid-1980s proved successful in attracting FDI while the Multimedia Super Corridor was less successful. The jury is still out on the project in Johor. CONCLUSION

The LEP was essentially a rationale used by Dr Mahathir to justify his vision of how to further the NEP. More specifically, it provided an

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alternative to the economic philosophy of Thatcher-Reagan and helped in the creation and development of private Malay enterprise. To help achieve this, the concept of Malaysia Incorporated was adopted, after the fashion of Japan Incorporated. Dr Mahathir interpreted Malaysia Incorporated as allowing government to help business, in particular bumiputera business, while at the same time sustaining high economic growth. The LEP was an extremely clear demonstration of Malaysian government autonomy in choosing a development strategy designed to serve its priority objectives, in part countering dominant global development ideology, while still taking care not to alienate foreign investors. The Asian crisis, an aspect of globalization, eroded the belief that Malaysia Incorporated or the developmental state could engender rapid growth, but it did not fundamentally affect the capacity of the state to continue intervening in the economy for social or NEP ends. However, with the apparent worldwide triumph of neo-liberalism over the alternative strategies of the command economy and the developmental state, such intervention has to be done within the neo-liberal approach. Malaysia is beginning to grapple with this new challenge. It remains to be seen whether it will be successful. Notes

I am much indebted to my colleagues Tham Siew Yean, Rahman Embong and Joan Nelson for some of the ideas in this chapter. References

Case, William. “Malaysia: New Reforms, Old Continuities, Tense Ambiguities”. Working Paper Series no. 51, SEARC, City University of Hong Kong. September 2003 (accessed 11 October 2006). Cheong, Kee Cheok and Wong Choong Kah. Asia’s Resurgence. Kuala Lumpur: University of Malaya, 2006. Gomez, Edmund Terence and K.S. Jomo. Malaysia’s Political Economy, Politics, Patronage and Profits. Cambridge: Cambridge University Press, 1997. Jomo, K.S., ed. “Malaysia: From Miracle to Debacle”. In Tigers in Trouble, Financial Governance, Liberalisation and Crises in East Asia. London: Zed Books Ltd, 1998.

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Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975. Stanford: Stanford University Press, 1982. Khoo, Boo Teik. Paradoxes of Mahathirism: An Intellectual Biography of Mahathir Mohamad. Kuala Lumpur: Oxford University Press, 1995. Lee, Poh Ping and Tham Siew Yean. “Malaysia Ten Years after the Asian Financial Crisis”. Paper delivered at Berkeley-Thammasat Conference on Ten Years After the Asian Crisis. Bangkok, 22–23 February, 2007. MacIntyre, Andrew. “Crony Capitalism in East Asia: Has Anything Changed?” Paper delivered at Conference on East Asia a Decade after the Crisis. ANU, Canberra, 20–21 July, 2006. Mahathir bin Mohamad. The 5th Joint Annual Conference of MAJECA /JAMECA, 1982 (accessed 1 August 2007). Malaysiakini. “Moves to Drop Ethnic Policies may Draw Backlash”. Malaysiakini, 4 April 2007. NST Online. 16 June 2007 (accessed 1 August 2007). Pepinsky, Thomas. “Institutions, Economic Recovery, and Macroeconomic Vulnerability in Indonesia and Malaysia”. Revised paper presented to a conference on the Asian financial crisis organized by Institute of East Asian Studies, University of California (Berkeley), Autumn 2006. The Star (Kuala Lumpur). “NEP Stays, Says Pak Lah”. The Star, 11 July, 2007. The Sun. “Muhyiddin: Asli’s Report Rubbish”. 9 October 2006 (accessed 1 August 2007). ––––––. “A Further Note on the CPPS Corporate Equity Study”. 29 November 2006 (accessed 1 August 2007). Vogel, E.F. Japan as Number One: Lessons for America. Cambridge: Harvard University Press, 1979. World Bank. “World Development Report 2006: Equity and Development”. 2006 (accessed 5 April 2007). World Investment Report. Foreign Direct Investment and the Challenge of Development. New York and Geneva: United Nations, 1999.

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4 THE MALAYSIAN SUCCESS STORY, THE PUBLIC SECTOR, AND INTER-ETHNIC INEQUALITY Jacob Meerman Let us focus on developing this country. God willing, we will achieve unity in the end. Dr Mahathir Mohamad, Prime Minister of Malaysia, 19911 INTRODUCTION

The unifying theme in this chapter is the crucial role of the state in Malaysia’s economic development and the effects of that role on interethnic income inequality. The story begins with a discussion of the state’s policy role in generating the Malaysian success story, that is, the simultaneous achievement of rapid growth and social restructuring, and the ways in which social goals both underpinned and yet attenuated economic growth. A subsidiary theme is the mixed impact of globalization on the government’s autonomy: while imposing constraints on specific social policies, the country’s rapid integration into the world economy greatly accelerated growth and generated revenues that supported an ambitious social transformation strategy. In part because of the crucial role of the state in this success story, the chapter also conceptualizes the public sector as one of three basic sectors of the Malaysian economy (the other two being the national private sector and the foreign-controlled export sector). It then explores 76

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how the three interacting sectors have affected inter-ethnic differences in occupations and incomes. The chapter closes with a discussion of the government’s measurement of inter-ethnic income inequality in an economy where the bumiputera (Malays and other indigenous peoples) are so closely associated with government and its works. The analysis concludes that the current official indicator of ethnic inequality is misleading; alternatives would be more constructive. When this essay was started, Malaysia’s recent growth history seemed like a paradox. How could a country grow at more than 6 per cent annually for over three decades (1970–2006) despite three recessions, while investing a sizeable proportion of its resources in redressing ethnic disparity? Seen from another perspective, how was it possible to evolve in one generation from a largely rural (70 per cent in 1970) primary producer to a partially industrialized, urban (64 per cent in 2006), middle-class country, while implementing a deep, invasive, and costly social policy? Malaysia did not make any fatal mistakes and, for reasons both fortuitous and deliberate, made some very good decisions, including the policy introduced in 1968 to encourage export-oriented foreign investment. This choice preceded recognition of globalization as a trend; it was made when socialism and the Soviet Union were very much going concerns and many developing countries were outright hostile to investment by multinational enterprises. In contrast, from the 1970s forward, Malaysia deliberately attracted sufficient export-oriented foreign investment to put itself on a rapid development path sustained to the present. On this dimension, at least, Malaysia was a true believer in the “Washington Consensus” long before the Washington Consensus had arrived. Notwithstanding the basics, several factors attenuated the success story. As spelt out later in the chapter, these grew in large part out of policies and practices resulting from implementation of the social goals of the New Economic Policy (NEP). The Malaysian success story came with some costly mis-steps. (Throughout the chapter, the term “period” refers to 1970 to the present, the time period covered in this volume.) GROWTH VERSUS SOCIAL POLICY Autonomy and Growth in a Globalizing World

Much of the critical literature on the globalization approach to development emphasizes its social disadvantages. Many fault it for development that

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increases poverty and inequality because a small part of the population may capture much or most of the benefits. Even if growth is rapid, those near the bottom may well remain there. Or those not at the bottom may find themselves propelled toward it because of the forces of competition in world markets. Further, unbalanced outcomes from development that stresses integration into world markets may be more frequent because of the imperative of the so called “level playing field”. To provide an environment conducive to production in rapidly evolving world markets, nations must keep returns high, particularly to attract firms undertaking direct investment and exporting. Such firms expect political stability, educated and disciplined labour at low cost, stable prices, and favourable exchange rates, low taxes, a supportive legal framework, and efficient infrastructure. In short, it is argued that globalization-oriented development strategies are frequently competitive with social policies, while social policies are often destructive of economic development. But does this conclusion apply to Malaysia? Have growth and the NEP been competitive or, possibly, substantially complementary? THE MALAYSIAN PARADOX: MALAYSIA BOLEH! 2 Content of the New Economic Policy

In answering the question, it helps to recapitulate salient features of the New Economic Policy. In response to the shock of the ethnic riots in 1969, Malaysia implemented the NEP with two overriding goals: eliminating poverty nationwide and social restructuring to remove long-standing disparities in occupation, income, and wealth between bumiputera and non-bumiputera. Many saw realization of these goals as a way to increase social cohesion, particularly between Malays and Chinese. To achieve the goals, the government instituted costly policies, including acceleration in provision of public education. It also increased adult education classes and rural residential high schools. Further, the government set preferential quotas for bumiputera admissions to public universities, and provided subsidies to cover bumiputera university costs, including full-cost coverage of those selected for study abroad. As Chapter 5 details, it also undertook many programs to support small farmers. Among the largest of these was distribution to poor farmers of hundreds of thousands of parcels pre-planted in oil palm, or irrigatedpaddy acreage. The government also supported farmers by supplying

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fertilizer at subsidized prices, as well as purchasing paddy above market prices and eliminating export taxation on agricultural products. These policies commanded wide support throughout the nation. The government also forced open the private business economy to bumiputera participation as workers, owners and managers. It bought firms and established new ones, then staffed them with bumiputera management and workers. Loans to bumiputera to buy or start firms became readily available. Moreover, the government required nonbumiputera firms to employ bumiputera and to bring them on board as partners. Less costly (both economically and socio-politically) was the large number of training opportunities for bumiputera in business management and skills. The NEP also formalized what had long been standard operating procedure, that is, it reserved procurement and other government contracts to bumiputera. Notwithstanding this pronounced concentration on bumiputera welfare, the growth policy associated with the NEP permitted all Malaysians to become better off financially. The entire undertaking was not intended as a zero-sum game, but was complemented by planning for a high rate of broad-based economic growth based on private investment and production, much of it in the export economy. The Outcome

The results were impressive both for growth and for the new, far-reaching social policy. In one generation, Malaysia evolved from a country with a traditional rural majority into a nation with a majority of the population working in the cities. During the Period (1970–2007), annual economic growth frequently exceeded 8 per cent and averaged more than 6 per cent so that national income increased more than six-fold. This rapid development was accompanied by a spectacular increase in “globalization” or integration into the international economy3 as well as a dramatic rise in educational achievement and development of physical infrastructure (electric power, ports, roads, etc.). Together these enabled the country to become extraordinarily successful at manufacturing for export by attracting export-oriented foreign direct investment. (See Table 4.1.) The social transformation policy has also been successful. In 1970, two-thirds of the population was rural and 68 per cent of the Malay population worked in agriculture, mostly traditional subsistence farming. By 2005, less than a quarter of the Malay population was engaged in agriculture.4 Similarly, in 1970, bumiputera managers, professionals,

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administrators and technical workers accounted for 6 per cent of total bumiputera employment. By 2000, the bumiputera “new middle class” of those in such occupations had increased ten-fold, and accounted for just under 17 percent of all bumiputera employment. An even larger urbanbased bumiputera lower middle class of salary earners and skilled workers developed (Abdul Rahman 2002, pp. 40, 56). Further, poverty has been largely eliminated. Estimated at 37 per cent of the citizen population in 1972, by 2005 it was less than 5 per cent. The change was most telling for the Malay community, where poverty dropped from 65 per cent in 1970 to 7 per cent in 2002 (Ragayah 2007, p. 12). Bumiputera life expectancy at birth increased from 62 in 1970 to 71 years in 2000, while Chinese life expectancy similarly rose from 69 to 75 years (Government of Malaysia 2000, pp. 138–39). Educational achievement also increased remarkably: in 1980, 20 per cent of the cohort aged 20–24 had completed eleven or more years of schooling; by 2000 the corresponding percentage had increased to 40 per cent (Lee, 2006, p. 235). In many ways, the objective of a bumiputera commercial and industrial class has also become a reality. It is now common to find Malays in business with degrees in engineering, computing and business administration. (See Table 4.5.) Harold Crouch’s (2001, p. 243) assessment completes this picture: Two decades of the NEP transformed Malaysian society …Because social restructuring had been carried out in a rapidly growing economy, the increase in Malay participation in the modern economy was accompanied by only a relative, not an absolute, Chinese decline. Similarly the official preference for Malay culture, language and religion did not prevent non-Malays from following their own ways of life, although many resented what they felt was the second-class status accorded them. [But] the NEP…did not bring justice for all. Chinese and Indians felt the brunt of official discrimination, while the benefits flowing to the Malay community were by no means distributed equally. Nevertheless, although government’s affirmative action policies did not put an end to ethnic rivalry, they did…blunt the sense of deprivation felt by many Malays, while discrimination against non-Malays was not permitted to reach a point at which most non-Malays would feel that they had nothing to gain from the existing social order. Largess flowed in large part to Malay individuals linked to the dominant party and thus further entrenched the UMNO’s [United Malay National Organization, Malaysia’s dominant political party] patronage network and its grip on power. But the UMNO always

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ensured that the non-Malays were not left out altogether and that they continued to have a stake in the system.

What this outcome suggests is not mutual incompatibility of growth and equity, but complementarity: harmony, rather than dissonance. Malaysia’s experience suggests that long-run, world-market oriented rapid growth may support social policy by generating more equitable occupational and class structures (middle class societies). At the same time, such growth greatly increases fiscal resources that can be used to remedy social shortcomings. Successful implementation of social policy may in turn promote political stability and social cohesion that are conducive to growth. In terms of the book’s unifying theme, the long-run effects of Malaysia’s dual growth/social policy were to increase national autonomy, rather than the contrary, and to increase capacity rather than constrain it. FACTORS IN MALAYSIA’S SUCCESS

Both government-controlled factors and some fortuitous events and trends contributed to Malaysia’s simultaneous success with economic growth and social restructuring, despite substantial policy constraints on growth imposed by social policies. Government-controlled Factors

1.

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Following Independence in 1957, the national government continued to promote capitalism and strongly rejected Communist and other state-centred approaches to industrialization. Hence Malaysia did not engage in the wrenching destruction of institutions then so common among newly independent nations, but built institutions compatible with the civil-liberty, market-driven, private-property economy that is its Merdeka inheritance. This remained the case even during early NEP implementation. Rather than nationalization and expropriation, the government paid market value for the firms that it purchased and brought under bumiputera management, leaving intact the private-property legal, financial and institutional frameworks dating from the colonial era. Hence Malaysia avoided a problem common among developing countries, namely that of the lost generation. It did not have to reverse course and start all over after decades of disastrous attempts to pursue non-performing strategies and programmes.

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2.

As part of this approach, throughout most of the period, private investment was accepted as legitimate. Moreover, acceptance of foreign investment as desirable was also the rule, at a time when many developing countries simply rejected foreign investment.

3.

From Independence forward, the National Front government developed and maintained a battery of economic policies to facilitate growth consistent with this broad strategy, including: • macro-economic stability with respect to exchange rate, money supply and fiscal balance; • Business-friendly policies; for example, unions were boxed in; social security and business taxes were kept low; with the exception of affirmative action programs, there were few legal limitations on employing and dismissing personnel; the legal framework supported private enterprise; • the state developed regulations and incentives for attracting foreign direct investment; for example, export processing zones; • NEP quotas and other requirements costly to foreign investors were reduced with the passage of time and temporarily rescinded during business downturns. During re-licensing discussions, foreign firms were usually able to get agreement on abrogation or reduction of certain NEP restrictions or quotas involving, for example, ethnic employment or capital participation requirements.

4.

Before 1970, Malaysia had already extended primary and secondary education to the majority of the population. Consequently the country had available an increasing supply of educated labour at low-wage cost that helped make foreign direct investment productive and profitable. Once full employment was achieved, the government permitted some two million immigrants to enter the country and find employment, mostly in construction, domestic service and manufacturing. Such immigration reduced wage pressure, helping to maintain an attractive environment for investment.

5.

The state planned, financed, and implemented the development of ample physical infrastructure (electric power, piped water, roads, ports, telecommunications) on a national scale of substantial value to foreign investors.

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83

Malaysia has usually sought to keep the peace with other nations, and defence expenditures have been low.

Fortuitous Positive Factors

Positive fortuitous factors — accidental and unexpected — also contributed to Malaysia’s successful simultaneous pursuit of rapid growth and social restructuring. 1.

Starting in the early 1970s, non-bumiputera faced de facto admissions quotas to Malaysia’s public university system. Those who could afford to do so sought education overseas. By the 1980s, the restrictions also encouraged development of private tertiary education to respond to largely non-bumiputera demand for tertiary education. At the time, this was a largely unprecedented market innovation. As Chapter 7 discusses, by the mid-1990s there were more than 600 private institutions responding to a wide range of needs for short- and long-term education, from clerical and vocational training to four-year degree programmes. Many of these schools are autonomous and free-standing, although twinning arrangements with recognized overseas universities are also common. Most graduates of these institutions were employed in Malaysia, contributing to the high rates of economic growth in the second half of the Period. In 1996, new legislation permitted the Ministry of Education to certify private schools at the tertiary level.

2.

Worldwide technological development (diffusion of computer and internet technology and reduction in cost and time of transportation and communication) enormously increased the returns to outsourcing and offshoring in the second half of the twentieth century, thus encouraging the foreign direct investment which dramatically increased employment and production in Malaysia.

3.

Many developing countries were resisting foreign investment, for example, China, when Malaysia made itself an attractive site for foreign direct investment. Foreign direct investment was lower in Japan, Korea and Taiwan at similar stages in their development than in Malaysia from 1970 to 2000. Had the competition for investment been as strong during the Period as it has now become, presumably less would have come to Malaysia.

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TABLE 4.1 Foreign Direct Investment in Malaysia, 1983–2005 (FDI in US$billions, Percentages) Year

Annual Average

1988 1989 1990 1991 1992 1993 1994 1995 1996

FDI

0.7 (1983–88)

0.7

1.7

2.3

4.0

5.2

5.0

4.3

4.1

5.3

FDI/GFCF

10.8 (1981–85)

8.3

14.8

18.0

22.6

23.7

22.1

15.3

15.0

17.0

Data Year:

1997

1998 1999 2000 2001 2002 2003 2004 2005

FDI

6.3

2.7

3.9

3.8

0.5

3.2

2.5

4.6

4.8

FDI/GFCF

14.6

14.0

22.5

16.4

2.5

14.5

10.8

19.1

15.2

FDI/GFCF: Foreign direct investment as a percentage of gross fixed capital formation Source: UNCTAD, selected World Investment Reports.

4.

As a result of new discoveries, production of petroleum and natural gas greatly increased by 1974. These industries have low costs relative to production value and generate very large cash surpluses. Before the collapse of primary-goods prices in 1985, they accounted for nearly a quarter of exports, and in recent years they have accounted for more than 10 per cent of total GDP. For example, in 2005, in addition to being a net hydrocarbons exporter, natural gas fuelled 70 per cent of electric power production (9MP 2006, pp. 72, 396–97, 399). Moreover, petroleum taxes accounted for 16 per cent of total taxation in 2005. Additional cash surpluses generated by Petronas, the national state-owned dominant hydrocarbons company, covered many off-budget expenditures, including some investments but also covering losses of certain state enterprises, for example, transfer of just under a billion Ringgit to Bank Bumiputra (a large government-owned bank) to help it recover from bankruptcy after the depression of 1986. FACTORS THAT ATTENUATED MALAYSIA’S SUCCESS

Despite Malaysia’s overall success, three factors (all government generated) slowed economic growth: certain NEP programmes per se; losses due to the growth strategy of promoting heavy industry with infant-industry

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FIGURE 4.1 Malaysia’s Six Industrialization Policies Lines 1957 Import Substitution (IS1)

1970

1980

1990

2000

2005

reduced tariff protection starting in ’80s

Public Enterprise & State Capitalism Export Oriented FDI Protected Heavy Industry Development (IS2) Patronage & Business Class Formation Privatization and World-Market Integration IS = Import Substitution Note: Each timeline indicates the periods of government promotion of the corresponding industrialization policy line. As indicated in the figure, no policy has been eradicated. Source: Constructed based on various policy documents.

protection; and the costs of National Front patronage and money politics. This section considers the financial dimensions of these attenuating factors. Since all three deeply involve Malaysia’s industrialization policy, it is helpful to start with an overview of the latter. Overview of Malaysia’s Industrialization Policy 5

Malaysia’s industrialization history entailed several distinct and not necessarily consistent lines of policy, as well as substantial policy changes and some reversals. Figure 4.1 schematically summarizes these policy lines and indicates their timing. In 1970, primary products (tin, rubber and palm oil) accounted for most exports. During the 1960s, “pioneer industry” investment for import substitution peaked, mostly financed by foreign firms responding to government incentives that rewarded capital intensive investment in import substitution. Some local businesses also received pioneer status, ensuring protection for local production of food, plastics, etc. (Gomez and Jomo 1999, p. 17). Import substitution and high rates of protection, that is, 60 per cent or more on value added (Tham, this volume), had

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limited impact on employment. Good possibilities for import substitution ran out long before high rates of open unemployment dwindled. The government shifted course, and by 1971 began to support export-oriented development and construction of the first free-trade zones. To implement the New Economic Policy, the national government bought out most large British-owned enterprises in Malaysia and established hundreds of new companies. By 1980, government organizations held majority shares in 656 firms. The total peaked in 1992, with 1,149 public enterprises, of which 315 were in manufacturing (Gomez and Jomo 1999, p. 31). However, even before the peak, UMNO’s leaders were questioning the wisdom of state capitalism, following widespread losses and bankruptcies of government-owned firms during the recession of 1985-86. The thirteen state governments had a similar history. In 1982, the State Economic Development Corporations held 314 companies, of which a third were profitable; at least 125 operated at loss: and 86 did not file statements (Crouch 1996, p. 202). By the mid-1980s, the central government decided to divest publicly owned enterprises as part of a return to a development model that relied primarily on private investment and production. A second major change, launched during the early 1980s, was the effort to establish the Heavy Industry Corporation of Malaysia (HICOM). Prodded by the new prime minister, Dr Mahathir Mohamad, this involved developing public enterprises “from the ground up”, protected by high tariff walls, producing motor vehicles, steel, cement, chemicals, paper and pulp. These industries never became internationally competitive. Meanwhile, by 1971, direct foreign investment to produce exports was becoming an important part of Malaysia’s overall investment. Foreign investment increased from decade to decade. It peaked in 1997, contracted during the Asian financial crisis (1998–99) but then recovered. (See Table 4.1.) Manufacturing expanded during the Period, much of it financed by foreign investment, to employ a third of the labour force by 2000, while the labour force itself greatly increased as hundreds of thousands of women entered wage employment. Manufacturing played a key role in moving to full employment and, later, generating demand for immigrant workers. In 1970, manufactured goods accounted for 10 per cent of exports; by the 1990s, they accounted for more than 80 per cent. Within manufacturing, electrical equipment, most of it produced by foreign firms, has accounted for more than two-thirds of total exports since the mid-1990s.6 Malaysia has become a globalizationmediated, government-guided, foreign-direct investment economy par

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excellence. Despite this broad picture, selected public industries continued to enjoy substantial protection. Malaysia’s multiple and changing industrialization policies reflected learning from experience, evolving international conditions, and new fortuitous opportunities such as petroleum discoveries. They also were a result of multiple objectives. Rather than single-minded concentration on economic development, the government also used industrialization programmes to promote NEP and patronage objectives. All told, during the Period, six objectives played important roles in Malaysia’s industrialization strategy: 1.

Promoting economic development.

2.

Restructuring society to end poverty and “identity of race with economic function”. (This goal led to the three derivative objectives listed immediately below.)

3.

Reducing wealth disparity between bumiputera and non-bumiputera, in part by achieving bumiputera ownership of 30 per cent of share capital.

4.

Reducing or closing the income gap between bumiputera and nonbumiputera.

5.

Creating a bumiputera entrepreneurial and industrial community.

6.

Supporting the patronage politics of UMNO and the National Front.

NEP-Driven Formation of the Bumiputera Commercial and Industrial Class

Beginning in the 1970s and as part of NEP implementation, the government developed an array of measures to jump-start establishment of a bumiputera business and entrepreneurial class, envisioned as a wealthy group that would invest productively to increase employment and output.7 Ideally this new class would become Malaysia’s “engine of development”, the source of most innovation and investment that would drive Malaysia toward the goal of full development later foreseen in Prime Minister Dr Mahathir’s Vision 2020 strategy. The measures included the following:

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• Privatization. As noted, during the 1970s and early 1980s, the government purchased many foreign firms and sponsored creation of new enterprises. By 1984, the national government (including ministries, trusts, agencies, etc.) owned more than a thousand public enterprises (Gomez and Jomo 1999, pp. 76–77). Most of these came under bumiputera management, while ownership functions resided within ministries, government boards, commissions, fiduciary trusts, or similar arrangements. The government liquidated or divested many of these firms between 1986 and 1994. The conditions of such privatization were frequently obscure, particularly with respect to choice of buyer and determination of selling price. However, many of the government’s largest acquisitions have remained mainly public: the government retained majority ownership even though the firms have been “corporatized” (restructured for incorporation into the private sector) and their shares are traded on the Kuala Lumpur Stock Exchange (Bursa Malaysia). In 2001, the government held a majority of shares in twenty-two of the largest 100 firms listed on the exchange, including six of the ten largest. (See Table 4.2.) • Purchase of Additional Firms. The state also provided subsidies to bumiputera, frequently favouring political leaders or business people well-connected to the political leadership. These subsidies typically took the form of loans to finance costs of buying into existing firms (including government firms being corporatized) or forming new conglomerates. Many such newly established firms were out of business by the end of the century. Either the firms had become financially insolvent or their owner(s) had fallen out of favour. Gomez notes that the “rise of most key businessmen was linked to the patronage of influential politicians [and] wealth accumulation depended on whether their patrons remained in power.”8 • Capital Participation Requirements. Under NEP rules, non-bumiputera firms were required to take in bumiputera partners (usually at 30 per cent of paid-in capital). “The Department of Trade and Industry opened a register of Malays interested in acquiring shares and special credit arrangements were put in place to provide the necessary funds to participants” (Crouch 2001, p. 234). Frequently, bumiputera partners resold their capital participation soon after acquisition, although in some cases they took an active role in firm management. • Pernas Subsidiaries. Pernas, a very large financial holding company of government-owned firms, set up many subsidiaries that operated in

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insurance, construction, commerce, real estate, mining, and engineering. It also set up joint ventures with foreign and Malaysian Chinese firms in agriculture, manufacturing, housing and other sectors. bumiputera took over management and large shares of employment in these firms. • Government Contracts. Government contracts for procurement, construction, transportation, concessions, etc. were extended almost exclusively to bumiputera businessmen, under terms that were often lucrative. Sub-contractors were usually non-bumiputera. Implementation along these lines proceeded throughout most of the Period. There is a consensus that by 2007, most large bumiputera firms had come into existence as the result of rents received from government by means of some combination of the measures listed above. A small part of the bumiputera commercial and industrial class (BCIC) that resulted is entrepreneurial in the sense of undertaking longterm investments for production in world markets. Many others focused their entrepreneurial efforts on finding and exploiting opportunities for profit (or rent seeking) among political patrons and elsewhere within government operations. Gomez and Jomo describe the class as “crony capitalists” who have “thrived with great assistance from the government and by acting as proxies for political patrons”. They assert that “Most new bumiputera capitalists have inevitably been criticized for being rentiers, rather than genuine entrepeneurs [sic] …. Moreover, most…have abused or wasted all the rents made available to them by the government” (Gomez and Jomo 1999, p. 51).9 Gomez provided much evidence to support these assertions. In 2003, he analysed the hundred largest firms listed on the Kuala Lumpur Stock Exchange as of 2001 to determine which ones played an important role in manufacturing. (See Table 4.2.) By that time, sixteen of the 100 listed firms were owned by bumiputera. This was a radical and much desired change. Although by 1980 government had purchased many large firms, not one of the largest 100 corporations listed on the Kuala Lumpur stock exchange was then bumiputera owned (Gomez 2004, p. 76). However, none of the sixteen firms was in manufacturing. Twenty of the 100 largest listed firms were primarily manufacturers, but they were either foreign or non-bumiputera owned. (Gomez 2003, pp. 93–94). This portrayal needs to be tempered. Another criterion of entrepreneurship was whether or not the bumiputera firm had a genuine

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partnership with a non-bumiputera owner, rather than the usual pro-forma arrangement. Lim Teck Ghee studied firms newly listed on the Kuala Lumpur Stock Exchange (Bursa Malaysia) in 1998. He judged that eight of twenty-nine were genuine partnerships between bumiputera and non-bumiputera. A second review of ownership patterns of all 757 firms whose shares traded on the stock exchange in 2000 “revealed that 18 or 2.4 per cent of these companies had [both] bumiputera and non-bumiputera owners” and twelve of the eighteen were in manufacturing (Lim 2006, p. 17). The largest firms majority-owned by the government are managed by bumiputera, who also play a major role in commerce, transportation, law and medicine. But the share of small and medium bumiputera-owned and managed manufacturing firms is still low. The overall conclusion is that there has been substantial development of a Malay business class. Much of it is directly dependent on the government, but a substantial part may be self-sustaining. Although it has not become a driving force in manufacturing and exporting, it manages a significant though still modest share of the private economy. This too is a sea-change from the Malaysia of 1970, when the bulk of the private and much of the public economy were still in foreign or non-bumiputera hands.

TABLE 4.2 Majority Ownership of Largest 100 Firms Listed on the Kuala Lumpur Stock Exchange, by Ethnicity or Government, 2001 Ranked by Size (Largest to Smallest)

1 to 10

1 to 50

51 to 100

1 to 100

Chinese

3

20

29

49

Government

6

18

04

22

bumiputera

07

09

16

Foreign

03

07

10

Indian

01

01

02

01

00

01

Multiple

1

Note: Firms are ranked from largest (1) to smallest (100), based on market valuation of shares. Source: KLSE Annual Companies Handbook, 2001 (vol. 23), in Gomez (2003), pp. 83–93 and 122–24.

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Composition of the Bumiputera Commercial and Industrial Class

The upper reaches of the BCIC include financiers skilled in mergers and acquisitions, and managers of large firms listed on the stock exchange but with government owning more than half of share capital. Among these firms are Petronas (hydrocarbons), Tenaga (the national electricpower utility), and Telecoms (the national telephone land-line company).10 (See Table 4.4.) A substantial number of other large listed firms are bumiputera-owned. But bumiputera own very little manufacturing capital. Moreover, most private large firms are not in bumiputera hands. The private national economy is not bumiputera-led, and the majority of capital in it is not bumiputera-owned. Prime Minister Dr Mahathir had envisioned a different outcome, reasoning that a bumiputera commercial and industrial class would acquire “expertise to build these rents” by investing surplus and creating new wealth, not just for themselves but also for the nation. Gomez concluded that “this was not usually the case. In most cases these bumiputera businessmen formed joint ventures or subcontracted their operation to foreign or local enterprises which had the expertise to get the job done” (Gomez and Jomo 1999, p. 119). This description is still valid. In 2006, the Entrepreneur Development Division of the Ministry of Public Works carried out a survey that found that 85 per cent of contracts awarded to bumiputera in 2006 ended in the hands of non-bumiputera (New Straits Times, 14 February 2007, p. 4). The fact that the public sector depended on the non-bumiputera community to carry out public investment and other public contracts is important in understanding why non-bumiputera wealth and income also increased very rapidly during the Period. During the period, UMNO also pursued “money politics” by virtue of patron-client relationships in which some individuals acquired enterprises and other assets by supporting politicians or parties. The main bumiputera beneficiaries of licences, share allocations, easy credit, and other “favours” were those with good connections to UMNO (Crouch 2001, p. 235). The result has been the rise of a business/political elite of the wealthy and powerful who play an important role in determining the behaviour of both government and the economy. Financial Costs of Multiple Objectives

During the Period, financial losses from public enterprises, infant-industry development of HICOM, attempts to generate a bumiputera business

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class, and patronage practices were huge. Some of these losses can be put down to the costs of developing new industries, but most losses were not warranted as development costs. Financial data from the Period are impressionistic but convey an idea of what the scale of total losses might have been. Comprehensive data are not available for many reasons. Audits of enterprises and conglomerates were the exception rather than the rule. Most public entities kept poor financial records. In 1984, for instance, the Ministry of Public Enterprises could report the annual returns of only 269 out of a total of 900 public enterprises. (Gomez and Jomo 1999, pp. 76–7). Ad hoc financial bailouts by cash-surplus Petronas are also part of this picture. Petronas provided billions of Ringgits to prevent bankruptcy of government-linked firms, e.g., Bank Bumiputra in 1999, or to complete expensive projects, such as UMNO’s office building in the centre of Kuala Lumpur. Much of the four-fold increase in public debt (in six years!) from RM27 billion (US$8.39 billion) in 1980 to RM101 billion in 1986 was caused by losses incurred by public enterprises. In 1987, such losses accounted for more than a third of public debt and 30 per cent of the corresponding debt service, although the “massive two-thirds of total government debt expenditure on public enterprises was attributed to only 27 of over 1,000 public enterprises.” (Gomez and Jomo 1999, p. 78). It is likely that the twenty-seven included highly protected enterprises of the Heavy Industry Corporation of Malaysia. Petronas underwrote a sizeable share of HICOM development costs, but HICOM led enterprises “suffered heavy financial losses” (Mid-Term Review of the Fifth Malaysia Plan, Malaysia 1989, p. 196). These continued well into the 1990s. In an effort to reverse the losses, the government brought in Japanese and Chinese-Malaysian managers to manage most of these industries. (Gomez and Jomo 1999, p. 78) A sizeable proportion of the hidden or “implicit” losses of HICOM firms took the form of pricing far above world market values. Proton, the national motor vehicle company, covered costs mainly by means of nominal tariff protection of 50 per cent or more. In 2006, it experienced heavy losses notwithstanding such tariff protection. The cement factories had a similar history of tariff-induced profitability in the 1990s, before they were sold off (Rasiah 2007, 9, p. 22). Between the mid-1980s and 1997, the steel producer Perwaja Steel Bhd. had been bailed out three times (Gomez and Jomo 1999, p. 194, citing Asian Wall Street Journal, December 1997). It closed down early in the twenty-first century.

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The financial costs of establishing the bumiputera commercial and industrial class were also very high.11 Assessing these class-establishment subsidies is complicated, because they are inextricably intertwined with UMNO’s political patronage costs. The former Bank Bumiputra, a government owned bank, provides a good illustration. Malaysians usually saw Bank Bumiputra as an institution which granted loans — seldom repaid — to bumiputera connected to the government. Between 1979 and 1982, Bank Bumiputra’s subsidiary, Bumiputra Malaysia Finance, operating in Hong Kong, lost just over US$1 billion in bad loans (Alatas 1999, pp. 74, 153–54). By 1998, Bank Bumiputra went through its third bankruptcy when the government took over 65 per cent of its non-performing loans and provided a capital injection of about RM1.2 billion to put it back into operation. In the same year, a second government-controlled bank, Sime Bank, declared losses of about RM1.8 billion before being divested by its parent company. Much of the non-performing lending in both banks presumably supported patronage or class-establishment goals (Gomez and Jomo 1999, pp. 193, 197). The Asian financial crisis of 1997–98 brought down thousands of individuals and firms, public and private, including many firms heavily indebted to banks. When the Ringgit was devalued and equities, property values, commodities, and other assets plunged in value, many bumiputera capitalists could not service their debts. In turn, many of their creditor banks collapsed, particularly banks that had borrowed heavily abroad. The debt to equity ratio of non-bumiputera firms was more conservative and a smaller share of such firms became insolvent. The government provided over RM60 billion (equivalent to 22 per cent of 1999 GDP) to repurchase depreciated assets from banks and to provide funding for rehabilitation, although not all of the provision was used. One estimate puts the total cost of bank restructuring during the crisis at 17 per cent of GDP (Hawkins and Turner 1999, Table 6, as cited by Chin 2004, p. 205). In addition to the costs and losses from the government’s purchase and sale of hundreds of enterprises, HICOM promotion and BCIC development, a fourth attenuating factor should be considered in the Malaysian success story: the impact of the NEP on non-bumiputera economic behaviour. In reaction to certain NEP policies and preferences for bumiputera, hundreds of thousands of Chinese emigrated from Malaysia with their skills and capital between 1970 and 1990. No doubt this exodus of the skilled and wealthy slowed growth.

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The same NEP policies that led to gargantuan financial losses also weakened institutions in other ways. In 1987, Malek Merican, distinguished economist, businessman and civil servant, raised concerns about the adverse impact of the NEP because it appeared to require “restrictive regulations that breed corruption that erodes not only Bumi society but begins to impact on Malaysian national integrity”. He noted that many tenders, awards, licenses and approvals of share allocations were made on the basis of connections rather than to the lowest, most efficient or on some other merit-related basis. [Some] worry that Bumis and non-Bumis are beginning to believe that they should aim to become power brokers and influence peddlers rather than dedicate themselves to become the most efficient managers, producers and manufacturers.12

Prime Minister Dr Mahathir had personally spearheaded many of the government’s most costly initiatives. In 2002, fifteen years after Merican’s statement, Dr Mahathir apparently reached similar conclusions, admitting “that his concerted attempt to develop Malay entrepreneurs had failed, a key factor precipitating his decision to step down as prime minister” (Gomez 2004, p. 3). Today similar practices persist and their negative impact on incentives and behaviour are widely perceived as a serious problem to which the government has assigned a high priority. Drawing the Balance on Attenuating Factors in the Malaysian Success Story

Notwithstanding these negative findings, one can conclude that on balance the NEP was constructive. Crouch’s assessment, cited earlier, may be valid. Despite its costs, in larger perspective the structural transformation promoted by the NEP has been a key condition for peaceful and synergistic cooperation among Malaysia’s ethnic communities. It contributed strongly to Malay security and self-confidence, while permitting the non-bumiputera communities to grow and prosper. The NEP also facilitated economic development by accelerating educational progress and other measures that reduced poverty, particularly within the agricultural community. These positive outcomes, plus the political stability that resulted from them, presumably outweighed the attenuating factors of the NEP.

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TABLE 4.3 The Three Sector Malaysian Economy, 2007 public sector = [government + government-owned firms] [economy − public sector] = private sector private sector = [national private sector + FDI private sector] Sector

Public Sector

FDI Private Sector

National Private Sector goods and services, including some exports

Nature of production

public and private goods and services

majority of exports

Management and control:

Government

Mostly Foreigners

Distribution of employment:

Mostly B and some NB

B and NB

B and NB

Percentage of employment

12 < ? < 30

6