Nov 22, 2006

Financial Times - Ethnic policy blunts Malaysia

(FT) The Kuala Lumpur stock market, the Bursa Malaysia, recently reached its highest peak since early 2000.

That is perhaps unsurprising given that the country's energy and commodity sector is booming and mainstay electronics exports remain strong. Solid reserves, meanwhile, mean that Malaysia is not in danger of repeating the financial meltdown the country experienced in 1998.

But there is always the nagging feeling among investors that Malaysian stocks should be performing much better.

After all, the country boasts a well-balanced economy divided among natural resources (oil and gas, palm oil), manufacturing (electronics) and services (tourism).

So what is holding back the Malaysian equity market?

A lot of investors believe that it is the 35-year-old affirmative action programme for ethnic Malays, the country's largest racial group.

The policy to promote Malay interests was meant to compensate for the strong economic power wielded by the country's ethnic Chinese minority.

Malay resentment of Chinese business dominance led to race riots in 1969 and the subsequent introduction of what was called the New Economic Policy (NEP).

Malays were given preference for university slots and state jobs, while Malays were required to own at least 30 per cent of any local business.

Although the policy has succeeded in narrowing the ethnic divide, it has also fostered a culture of patronage that hasled to economic inefficiencies.

The effects are most evident in the state-owned companies that make up a third of the capitalisation of Bursa Malaysia.

When Abdullah Badawi become prime minister in 2003, he vowed to reform the state corporate sector. But progress has been slow. One reason is that state companies are heavy employers of Malays, which makes job cuts politically difficult.

Struggling national car maker Proton is a significant source of business for Malay-owned parts suppliers, who have lobbied against Proton being sold to a foreign competitor.

A debate over the affirmative action policy has flared up in the past few weeks with the release of a report by a respected local think-tank, the Asian Strategy and Leadership Institute (Asli), which claimed that Malays owned 45 per cent of corporate equity rather than the 19 per cent claimed by the government.

The report called into question the continuation of the NEP, which has been based on the premise that it should remain in force until Malays owned at least 30 per cent of corporate equity.

The Asli looked at shareholdings among listed companies rather than basing its estimate on registered companies as the government does to reach its conclusion.

The findings set off a political firestorm with the Asli forced to retract the report, cutting short what promised to be an overdue examination of the affirmative action policy.

The backlash underscored that the NEP is the "third rail" of Malaysian politics and unlikely to be scrapped.

Both Mr Abdullah and his predecessor, Mahathir Mohamad, have previously questioned some of the policy's tenets and tried to tinker with it.

But the two men are now engaged in a bitter political feud, which will only strengthen the hand of Malay hardliners who want to keep the policy unchanged.

The retention of the NEP threatens to undermine Malaysia's economic competitiveness.

One casualty could be the proposed bilateral trade agreement between Malaysia and the US because Washington is pushing for a relaxation of affirmative action requirements on public procurement.

Another warning sign was the release this week of the annual report on global investment by the United Nations Conference on Trade and Development.

It revealed that foreign direct investment in Malaysia fell by 14 per cent last year to $4bn (€3.2bn).

Its findings came as a surprise since Malaysia offers plenty of cheap land, a weak currency, an educated workforce and good infrastructure that normally would attract foreign investors.

Moreover, foreign manufacturers are exempt from NEP requirements.

But the increasingly polarised political climate fostered by the NEP is not conducive to correcting some of the economic problems created by it.

No wonder many foreign equity and manufacturing investors are giving Malaysia a pass.

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1 comment:

Alex said...

wat can i say.. these are the very same issues tat are being written over and over but the msian leaders just keep a closed eye. i wun be surprised if msia becomes smth like indonesia one day. how smoothly it is for them to just forget about the chinese's contribution to the msian economy.

p/s tats a humongous feed icon u got there :)