♠ Posted by Emmanuel in Southeast Asia at 5/05/2010 12:01:00 AMI've long been fascinated by Malaysia's affirmative action or bumiputra policies which have been implemented since 1971 via the New Economic Policy (NEP). These policies favour Malays compared to the economically dominant minorities of Chinese descent who hold similar pride of place in the firmaments of other Southeast Asian countries. While many local commentators believe that they have reduced racial tensions and inequality since then, those in the international financial community have taken a dim view of them as, you guessed it, barely disguised protectionism. One of those who believe they've done good in general is the LSE's Head of Department in Economics, Danny Quah.
Now, Professor Quah is the very definition of an infrequent blogger. But, when he does blog, you can be sure that he's well worth reading. In a recent post, he provides a magisterial overview of where Malaysian policy is headed. He also happens to be part of Malaysia's New Economic Advisory Council (NEAC) that is determining a set of policies to replace the NEP imaginatively called the, you guessed it, New Economic Model (NEM). Unsurprisingly, a driving force behind this change is money: especially with the rise of China and India, Malaysia has in some senses become a less attractive investment destination. Last year, the government started to relax the requirement that 30% of all foreign investment have ethnic Malay (bumiputra) joint ventures.
To bring everyone up to speed, let us begin with Professor Quah describing the aftermath of the 1971 race riots:
In 1971, following racial riots, declaration of a state of national emergency, and suspension of Parliament, the then-Prime Minister Tun Abdul Razak---father of the current Prime Minister---introduced the New Economic Policy (NEP). This policy sought to eradicate poverty regardless of race and to eliminate the identification of ethnicity with economic function. The enabler for both these goals would be rapid economic growth, the speedy expansion of the economic pie to divide across all Malaysians, so that no subgroup would feel absolutely disadvantaged. A key feature of the NEP was its effort to raise Bumiputra equity ownership from 2.4% in 1971 up to 30% within two decades.However, foreign investors have been rather unfriendly to the NEP:
The large facts I've just described seemed to me (and many other observers) precisely the ones raising the critical, first-order challenges for economic policy in Malaysia. The problem was how to organize them coherently and understand their resolution. But there is, further, the other critical, first-order challenge unmentioned so far: namely, Malaysia's 40-year-old program of affirmative action.And so I've been interested in reading the entire report on the New Economic Model. Particularly interesting is how the Malaysia government plans to create--I kid you not--'market-friendly affirmative action' in response to longstanding criticisms of foreign investors to the policy climate in Indonesia. Here are the relevant bits on p. 10:
I say unmentioned but of course that is not how the outside world viewed this. The international press emphasized most of all this dimension to Malaysia's policy framework; I will bring this out further in the discussion that follows. For now, however, I just note that some foreign financial houses I spoke to about NEAC [New Economic Advisory Council] work downplayed the significance of all the other problems I have mentioned. They said to me, "Malaysia needs to fix its affirmative-action program; everything else follows."
Inclusiveness is the second goal and a key part of the NEM. It is a prerequisite for fostering a sense of belonging. Pro-poor growth will warrant that no groups will be marginalised and the essential needs of the rakyat [ordinary citizens] will be satisfied. Families will be endowed with the opportunity and capabilities to pursue their aspirations in connected, sophisticated modern cities, townships and villages. They will live, work and study in localities free from the fear of crime, the indignity of discrimination, and the anxiety of need. Inclusiveness will enable all communities to contribute to and share in the wealth of the country. While perfect equality is impossible, an inclusive society will ensure that inequality does not worsen. Ethnically divided societies are more prone to violent conflicts. The multi-racial composition of the Malaysian population is still its outstanding feature and this ethnic diversity will always be with us. But the excessive focus on ethnicity-based distribution of resources has contributed to growing separateness and dissension.So there you have it. in a nutshell, NEM will involve capacity building among the most disadvantaged sectors of society in lieu of the NEP's system of quotas or targets. It will certainly be interesting to watch. In particular, I cannot help but salute their craftiness in moving towards (market-friendly) terminology of capacity-building and technical support.
A key challenge of inclusive growth is the design of effective measures that strike a balance between the special position of bumiputra and legitimate interests of different groups. Hence, the market-friendly affirmative action programmes in line with the principle of inclusiveness will:
- Target the assistance to the bottom 40% of households – of which 77.2% are bumiputera and many are located in Sabah and Sarawak;
- Ensure equitable and fair opportunities through transparent processes;
- Allow access to resources on the basis of needs and merit to enable improvement
in capacity, incomes and well-being;
- Have sound institutional framework for better monitoring and effective implementation;
Transparent and market-friendly affirmative action programmes focus on building capacity and capability of low-income households and small businesses, instead of imposing conditions to meet specific quotas or targets.
The ETP [Economic Transformation Programme] will provide for mechanisms to strengthen the capability of the bottom 40% so that they can take advantage of opportunities to secure better jobs, raise their productivity and grow their income. This group will be assisted with programmes to build skills so that they can use their entrepreneurial instincts
Needless to say, problems of social cohesion are not unique to Malaysia, and the progress of the NEM will be closely watched.