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The Failed Promise of Malaysia's New Economic Policy The Failed Promise of Malaysia's New Economic Policy
by Murray Hunter
2021-05-18 07:13:43
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The Failed Promise of Malaysia’s New Economic Policy
The affirmative action program should have embraced entrepreneurship, not cronyism

In 1971, still smarting from disastrous race riots in 1969 that are believed to have taken the lives of hundreds of people on both sides, Malaysia’s government implemented a revolutionary affirmative action program for its ethnic Malay majority to attempt to bring them up to the commanding economic heights occupied by the minority ethnic Chinese.

This is the fiftieth year the so-called New Economic Policy has been in existence. It was supposed to end in success in 1990. But today the NEP’s goals remain unmet and instead it has sharpened racial tensions, distorted the economy, stultified business development, warped the education system and fostered depressingly prevalent corruption.

malaeco0001_400It is also the third rail of successive governments, with touching it risking political suicide. The previous two prime ministers Abdullah Ahmad Badawi and Najib Razak (commendably, despite his own immense corruption) both came into power determined to iron out its inefficiencies and inequities, only to learn that reducing Malay privilege was not politically possible.

The country’s massive – and misguided – focus on education has not created the externalities that the economy needs to move forward and maintain its relative place in the world. The Organization for Economic Cooperation and Development in its most recent ranking puts Malaysia’s education system at 63d out of 93 in the world.

The original objective of the NEP was about creating wealth, rather than redistributing it, and under the early stewardship of Prime Minister Tun Razak Hussein, set out on a quest to build rural infrastructure and develop sustainable incomes for poor Malays through agencies like the People’s Trust Council, known by its Malay acronym MARA, which offers loans to Bumiputera entrepreneurs, and the Federal Land Development Authority, or FELDA, which opened new lands to settlers, initially very successfully.

Prime Minister Mahathir Mohamed, who ran the country with an iron hand and who was the architect of the ruinous change in direction, went on to industrialize the country by fostering what later became known as unproductive white elephants. Like his predecessor, Mahathir held the belief that state participation was the best way forward and focused on getting Malaysia’s resources back into Malaysian hands.

The dawn London stock-market raids on the colonial plantation companies Guthrie and Sime Darby, with nationalistic undertones, set the pace for the formation of Government Linked Companies (GLCs) to lead across a number of industries. Mahathir went into steel, automotive industry, the financial, and the petrochemical sectors, building a massive network of GLCs.

From the 1980s onwards, Mahathir wanted to move away from sweatshop type manufacturing towards high-tech industries like semi-conductors. In order to develop the skills of local workers, a number of colleges, which were later designated as universities, were set up across the country.

These new universities were shaped on the premise they would provide “skilled human capital” rather than being centers of intellectual learning. Universities were strictly controlled by the Ministry of Higher Education, which selected and approved higher office bearers and dictated what courses should be taught.

The ministry also specified, in the first year, a swath of unrelated compulsory curriculum subjects, unrelated to each core degree be taught to every student. At the beginning of the millennium, the government focused on the precept that “big is beautiful” in higher education, and rapidly expanded the size of local public universities. Malaysia now has 20 public universities and 91 private university-colleges, universities, and foreign branch campuses, many in very poor financial condition.

The universities have overproduced graduates relative to the corresponding jobs available in the economy. There is a mismatch between geographical areas, graduates’ qualifications and available jobs, contributing to high youth unemployment, now standing at 11.72 percent, with more than 200,000 new graduates entering the labor pool each year.

The rise of the mega-university didn’t bring educational excellence. Actual courses have been aimed at the lowest denominator. Textbook culture has overtaken teaching, with students able to run to online essay mills for quick-fix assignment fulfillment. Teaching compliance systems like Objective Based Education (OBE), and faculty-based ISO accreditations have turned teachers into administrators, erasing teacher preparation, research and teaching time.

The education system is leaving students unemployed and in a crisis of debt to the government. Outstanding student debt to the government stood at RM39 billion (US$9.46 billion) in 2019, according to reports. The building up of the prestigious image of going to university and receiving a degree has raised student expectations beyond what current opportunities within the workforce can provide.

Taking up jobs now done by foreign workers is not an option, due to both the social stigma around the foreign worker sector jobs, and the low pay and poor conditions employers are willing to offer.

This leaves many youths idle. The traditional Malay route where children would take over small farm holdings or follow their fathers in the fishing industry is partly gone due to inheritance laws which have made farm plots uneconomic, and to high youth expectations of a post-graduate career in services or industry.

The system has failed to install a culture of independence and critical thinking within graduates although it has created two generations of students with unfulfillable middle-class aspirations.

While the push to industrialization did make Malaysia one of the world’s prime semiconductor manufacturers, it has failed to catalyze downstream industries such as information technology or telecommunications. The bulk of manufacturing industries rely on foreign labor, thereby bringing few benefits to local economies, especially with the long tax holidays most investors were given.

Malaysia developed a two-tier manufacturing economy, one side dominated by GLCs and the other by indigenous Chinese families who invested in mostly manufacturing industries to supply industrial and consumer products to primarily local markets. Former International Trade minister, Rafidah Aziz did develop Chinese manufacturing clusters to export specialty products like furniture, to some success.

Mahathir Mohamed and his then-deputy prime minister Anwar Ibrahim, pursued a policy of attempting to create successful Malay businessmen in the hope they would nurture a generation of Malay entrepreneurs, both downstream and upstream. These chosen Malays took over companies like Perwaja Steel and Malaysian Airline System, but failed dismally in Mahathir’s goal. The foray into trying to develop entrepreneurs only led to the development of a kleptocratic crony class.

The result of this was the creation of a derelict Malay business culture, full of middlemen, who crave a cut of the action, without adding any value to either the product or enterprise. This rent-seeking group became predators of hardworking Malays, with connections to politicians and civil servant, with access to government tenders, and/or difficult-to-get licenses and import permits. Who you know became the key to success rather than business acumen, creativity or innovation.

This has prevented Malaysia becoming any sort of innovative or knowledge-based economy, Talk of industry 4.0 is unrealistic in an economy based on crony connections. Some elite crony businessmen are so risk-adverse in their business decision making, large investments are often made without thoroughly evaluating markets.

This reckless practice has led to business failures, leaving creditors in debt. Bankruptcies in Malaysia numbered 945,000 in 2019, with 80,000 new cases each year. Malay bankruptcies make up 60 percent of this figure. Corporate debt is running at 93.3 percent of GDP, leaving a financially lethargic economy, with normal business to business payment terms out to 120-180 days. High debt and frugal lending practices by the state-controlled banking sector has the local economy under a continual credit squeeze.

The Malay political leadership bypassed its own cultural practices to espouse the benefits of western management and marketing gimmicks like Balance Score Card and Blue Ocean Strategy. Universities and technical colleges have ignored the fundamentals of how to start up, grow and manage an enterprise. Very few university graduates have been grounded in the practical side of entrepreneurship, and thus lack the skills and knowledge to become entrepreneurs.

The real core of the Malaysian economy are micro and SME enterprises, which make up 98.5 percent of businesses. Together they contributed 36.6 percent to 2016 GDP. SMEs also employ 66.2 percent of the workforce and are responsible for 17.3 percent of the nation’s exports. They have been ignored in favor of the Malay elite, smothered by the activities of the GLCs, restrictive trade legislation and difficult-to-navigate bureaucracy.

Its time for a major shift for the NEP if the Malaysian economy is to move forward and the people who it was meant to favor actually benefit. The SME sector is the future of the Malaysian economy. It’s the only driver in sight. The sector must be encouraged and entrepreneurship developed over cronyism and the current higher education framework. Markets must be freed of restrictions to develop a level playing field.

The higher education system needs urgent overhaul, with the big universities decentralized and re-aligned to teach relevant skills of entrepreneurship, trades, and appropriate technology for SMEs, rather than dreaming about the fallacy of industry 4.0, another inappropriate adoption from the west, in a still developing economy, where infrastructure and mindset not yet exist to develop these concepts. Education should go back to colleges and vocational schools to create new entrepreneurs, particularly among the ranks of the youth.

The obsession with big-is-beautiful must be swapped with small-is-the-most-appropriate. The GLCs have only created a privileged Malay professional class. The kampong (village)and daerah (district) must be reframed as a sustainable community, where entrepreneurs are nurtured to create businesses to serve locals in the district for food and other consumable needs. Trades can be re-created to add value in the kampongs and towns. Food must once again be seen as something derived locally, so smallholders can develop micro-businesses, rather than just work land and sell produce onto middlemen, who reap the profits.

Rather than trying to develop massive beef production systems and dairy farms, build operations that serve local communities. Successful concepts can be scaled up within the private sector. The public sector produced white elephants like the National Feedstock Corporation (NFC) which benefitted politicians and their families before failing in its mission, with millions diverted into luxury cars, condos, trips overseas and other unproductive perks.

The government can’t pick winners. Developing entrepreneurship is the best strategy to nurture more creativity and innovation into the economy to create value. This strategy is well suited to grapple with growing youth unemployment and growing poverty. Entrepreneurship would eventually develop much more egalitarian society. The class gap will close as those in no-income and lower income groups become more affluent.

The consequences of not changing the NEP or scrapping it all together for another approach would see Malaysia slide back further in its relative position within the ASEAN region. The economy is now unbalanced with lack of diversity, thus susceptible to any downturns. Reframing the education approach of the country towards entrepreneurship and vocational training in appropriate technology for SME startup will help create more value where the economy is currently weak.

This change in economic approach, if successful, will put pressure on the structure of Malaysia’s neo-feudal social structure for change, as the Malay mindset will be liberated.

Originally published in the Asia Sentinel

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