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Malaysia's unappetizing choice

A former Asian economic role model that lost its way is now a warning to others

| Malaysia

Politicians campaigning in Malaysia's parliamentary elections, held on Wednesday, have done their best to generate popular excitement with promises of tax cuts and economic handouts.

But the truth is that Malaysians face an unappetizing choice. Opinion polls suggest scandal-plagued Prime Minister Najib Razak will cling to power after nine years in office. The man hoping for an upset is Mahathir Mohammed, the 92-year-old opposition leader, a former prime minister who led the country for more than two decades. While they have achievements to their credit, both are responsible for failing to tackle one of Malaysia's root weaknesses, discriminatory policies which favor the ethnic Malay majority at the expense of the country's minorities.

Moreover, these two problematic figures have held power for much of the time when Malaysia's economy has declined from "Asian tiger" to Asian mediocrity. While the country has seen reasonable growth, it has lost its reputation as an innovative economic leader -- a reverse that holds warnings for other developing economies around the region.

That Malaysia is in a funk is hardly in doubt. Najib's rule has been marred by accusations of cronyism, most obviously the farrago over sovereign wealth fund 1Malaysia Development Berhad, in which $4.5 billion is alleged to have been siphoned off by managers and associates, according to a U.S. Justice Department probe. The prime minister denies wrongdoing.

Analysts once lauded Malaysia's lean export-driven growth and moderate Islamic politics. Now they worry about weak governance, creeping extremism and political opponents who languish in jail on charges that human rights activists say are politically motivated, notably in the case of Anwar Ibrahim, a prominent opposition figure. There has been a steady erosion of civil liberties too, including a new "fake news" law that seems carefully designed to stifle media freedom and constrain government opponents.

Much of the blame for this lies not with Najib but his aged rival, who led Malaysia between 1981 and 2003. Mahathir's autocratic style and investment-focused policies helped Malaysia recover after the 1997 Asian crisis. They brought impressive economic growth too, at least at first. But much of these economic spoils were funneled into divisive affirmative action schemes that favored the ethnic Malay majority with handouts, university places and jobs in rickety state enterprises. A toxic combination of graft and nativism became Mahathir's legacy.

By contrast, Najib has often proved a competent economic manager. A brief recession hit the country in the aftermath of the global financial crisis, but growth has averaged 5.4% annually since 2010, including last year, when it was boosted by debt-financed pre-election spending. The prime minister has introduced a much-needed nationwide sales tax. Investment in infrastructure has jumped too, partly as a result of Najib's canny cosying up to China, winning billions of dollars from Beijing in return.

Yet while Malaysia is no basket case its model still rests on entrenched clientelism and a racial system that disadvantages its minority Chinese and Indian populations. Annual gross domestic product per capita is stuck stubbornly below $10,000, while Singapore, its neighbor to the south, has soared to more than five times as high.

Rather than pushing fundamental reforms, Najib has merely deepened the many flaws that Mahathir created, focusing his energies on fiddling with election laws and using webs of patronage to cement his grip on power. As a result, a country once seen widely viewed a role model has lost its way, all but extinguishing hopes that it might soon escape the so-called middle-income trap and rise into the ranks of the rich industrialized countries. Once the envy of Southeast Asia, Malaysia now lags peers like Indonesia and Thailand in terms of growth rates and investment. Compared with what might have been, its record is undeniably disappointing.

At base Malaysia suffers three interconnected problems, argues economist Manu Bhaskaran, a Singapore-based director at Centennial Group, an advisory firm. First, it suffers from weakened institutions. Malaysia's remains an open, trading economy, with a number of reasonably good corporate performers, from state-backed oil giant Petronas to financial services group Maybank. But the last decade has also seen broad institutional decline in many other areas, from the police and judiciary to the central civil service. Malaysia's inability properly to investigate 1MDB is but one example of a state that now lacks independence and accountability.

Next, is the problem of social division, driven by the corrosive bumiputra -- "sons of the soil" -- ethnic preference system, which Mahathir expanded and which Najib has done almost nothing to dismantle. Originally designed to lift up a struggling Malay population, it has since created perverse incentives and stifled entrepreneurship. It has also developed in tandem with the spread of less tolerant Middle Eastern brands of Islam. Neighboring Singapore grew rapidly by building high-quality institutions and scrupulously protecting its minorities. Malaysia is doing the opposite.

The result is an economy in which public institutions have become political play things and the spoils of growth are divided by race rather than merit. What Bhaskaran describes as "an incentive structure that promoted corruption, cronyism and nepotism" has spread across Malaysia's economy.

Those watching from Delhi, Dhaka or Jakarta should take a number of lessons from Malaysia's struggles. The first and most obvious is that economic reform must be a constant process. Malaysia prospered with the model Mahathir created, in which the spoils of cronyism were used to develop export-focused manufacturing. Yet it has since largely failed to introduce policies that might help it move toward rich-economy status, for instance by building high-quality educational institutions or boosting labour productivity.

Second, Malaysia shows that the battle against corruption can actually become harder the wealthier you become. Where a leader of a poor country might extract cash from natural resources, senior figures in middle income economies can skim off much larger sums via financial shenanigans or dubious investment schemes. Without careful policies to counter it, crony capitalism will just adapt as a country develops, providing ever richer pickings for collusion among its elite.

Finally, and most importantly, however, countries need governments that do not favor one part of the population over another. Political scientist Francis Fukuyama often argues that the creation of a dispassionate, neutral state is perhaps the defining attribute of modern capitalist nations. It is also an important indicator of a country that will be able to build high-quality government institutions and support an economy that is based on productivity growth, flexibility and innovation.

Whichever of Malaysia's leaders wins this week, Malaysia itself seems unlikely to learn these lessons. The country's situation is far from irretrievable, but it is also far from optimistic. The bad-tempered election battle between Mahathir and Najib gives the impression of a nation facing a defining choice. Sadly, the more likely outcome is very little change at all.

James Crabtree is an associate professor of practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore, and a former Mumbai bureau chief for the Financial Times. His book on India, "The Billionaire Raj," will be published in mid-2018.

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