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Malaysia -- a trade war safe haven?

Country can compete for more investment but only with more structural reform

| Malaysia

Is Malaysia an unlikely safe haven as Donald Trump and Xi Jinping escalate their trade war?

Absolutely, says Finance Minister Lim Guan Eng. Well, what else is Malaysia's economic czar going to say? To some, though, the numbers back up Lim's optimistic spin. Economic growth is holding up nicely -- rising 4.5% from a year earlier in the first quarter. Foreign direct investment surged 95% year-on-year the three months to March to $5.18 billion.

Not a bad showing for Malaysia's newish government at the one-year mark.

"Investors like what they see," Lim told Nikkei in a May 28 interview. "They see strong fundamentals, but also they are reassured by the new government's commitment toward transparency and accountability."

Here, Lim is not exaggerating. It is breathtaking to consider where Malaysia was in May 2018, when Mahathir Mohamad trounced scandal-plagued Prime Minister Najib Razak. Even with the controversies surrounding Najib's nine years in power, his political machine was widely expected to return him to the premiership.

The upset by Mahathir, then 92, surprised Najib so much that he forgot to hide the suitcases of cash investigators confiscated from his residence. The billions missing from 1Malaysia Development Berhad, the state fund Najib created in 2009, spawned investigations from New York to Zurich and continues to keep Interpol busy.

Voters turned to Mahathir, who led the nation from 1981 to 2003, to restore calm, trust and fiscal probity. Lim, 58, is spearheading the economic recovery effort.

Entering Lim's sprawling office overlooking Putrajaya, one almost expects to have to step over crime tape. The exploits of Najib, who now faces corruption charges, could easily inspire a "CSI: Malaysia" crime serial.

Lim becomes quite animated when recounting his first day on the job. "It was shocking!" he tells me. "Completely without the knowledge of the public, we had fake files, we had hidden files, we recorded even fake accounts and creative accounting." His team "were shocked at the extent of the abuse of power, of financial malpractice. Daylight robbery! And that [Najib] could do it so blatantly, thinking he could get away with it."

The best Lim can say about the last nine years: "At least the government has not gone bankrupt."

One year is hardly time enough to reverse such neglect and alleged malfeasance. Lim reckons the cleanup will take two more years. Along with shining daylight on the previous government's "hanky-panky," Lim's first priority is reducing Malaysia's 1 trillion ringgit of public debt, or about $232 billion, which is equivalent to more than 50% of gross domestic product.

Progress is being made, Lim insisted, pointing to the jump in FDI as proof global investors know a good turnaround story when they see one. Over the last 12 months, Lim went about eliminating a goods-and-services-tax system Team Mahathir deemed unfair, policing infrastructure projects to save cash and moving to "open tenders" bidding to curb graft.

Yet Malaysia cannot let the safe-haven chatter go to its head. After a decade of scandal and complacency, it is still struggling to beat the "middle-income trap," when per capita incomes stall around $10,000, the level at which Malaysia finds itself today. "We must ensure that the economy can grow at a strong pace," both to reduce debt and create good-paying jobs, Lim says.

That means leveling the playing field not just for startups, but the private sector in general. The last several years saw Malaysia slide backward, enabling state-linked companies to maintain their dominance. Yet Lim's reform efforts have already put some key wins on the scoreboard. In 2018, Malaysia ranked 24th on the World Bank's ease-of-doing-business survey. It is now 15th thanks to successes simplifying the process of starting a business and securing permits for construction, electricity, property and cross-border trading.

"For us to escape the middle-income trap, it is important that we create an entrepreneurial state," Lim says.

The government is mulling additional moves to reduce red tape, enliven the venture capital scene and perhaps even cut corporate taxes at some point. Lim noted that the tech-startup successes in neighboring Singapore and Indonesia are increasing the urgency for change.

"To create unicorns, you must have the ecosystem," Lim said. Malaysia, he added, "has what it takes. We have the talent, we have the technology, we have a new government that is very tolerant of new ideas."

Yet this government has been slow to change race-based affirmative action policies benefiting the Malay majority. On the one hand, the appointment of an ethnically Chinese finance chief (Lim) is itself a sign of change. On the other, Mahathir has been slow to scale back preferential treatment Malays enjoy for jobs, government contracts, university spots and housing.

These quotas, which date back to 1970, turn off many foreign investors and undermine productivity. They also are responsible for a debilitating brain-drain. For example, Malaysian entrepreneur Anthony Tan launched Grab in Singapore, not at home.

While Lim acknowledges all this is a challenge, it is disappointing to hear him blame "sensational reporting" by foreign journalists hyping the issue.

Those banking on an economic miracle are feeling disappointed. But, it is hard not to marvel at the shift in sentiment toward Malaysia in just 12 months.

That said, there is still plenty for Mahathir and Lim to do. As well as mopping up after Najib, they must push overdue reforms and deal with the trade war.

Though Malaysia has come a long way since the 1997 Asian crisis, some of Mahathir's policy mistakes from that time in office still plague the nation. Back then, meltdowns in Thailand, Indonesia and South Korea resulted in wholesale reforms. Malaysia, by contrast, did more to wall itself off from markets than modernize the economy. It treated the symptoms of malaise rather than the underlying problems.

As for Trump's trade war, Lim derides it as a "mistake."

Speaking in Tokyo last week, including at the Nikkei Future of Asia conference, Mahathir called it "stupid."

But rhetoric is not enough. If Malaysia is to be seen as a "neutral ground away from the trade conflict," as Lim wants, the government must act more boldly to win additional foreign capital before global conditions shift, perhaps for the worse. If it does, "CSI: Malaysia" may just have a happy ending.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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