Malaysia’s looming general election: what it means for the economy

Malaysia’s looming general election: what it means for the economy

The upcoming elections will, arguably, be the most fiercely contested in the history of Malaysia since independence in 1957.

Najib Razak, Malaysia’s Prime Minister (PM) has set the date of the much-awaited general elections on May 5 after dissolving parliament on April 3. The build up to this election has been tense. A year ago, a third rally in the Bersih (called Bersih 3.0) movement that calls for the electoral reforms resulted in the riot police firing tear gas and water cannons on the crowd in central Kuala Lumpur.

NEM report

New Economic Model is Prime Minister Najib Razak’s hope to move Malaysia forward. The contested upcoming election may give him the chance.

The previous general election in 2008 set in motion huge changes in the political landscape as the ruling coalition, Barisan Nasional (BN) lost two-third of its parliamentary majority for the first time and ousted then-PM Abdullah Badawi in favour of Najib Razak. Standing in the face of the BN is the opposition coalition Pakatan Rakyat (PR) headed by its de facto leader, Anwar Ibrahim. PR has been gaining headway by chipping away significant chunks of support for BN and managing relatively successful administration in the four states of Kelantan, Kedah, Penang and Selangor.

The backdrop of this election is the economic landscape of Malaysia. Lauded as one of the most vibrant economies in Asia, the economic outlook of this Southeast Asian nation, however, is not etched in stone. While the government of Malaysia may change hands, tackling the economic challenges that the country face remains the imperative priority.

Malaysia is trying to avoid falling into what economists term as the middle income trap, a failure of fast-growing middle-income countries to ‘graduate’ into the class of their high-income counterparts. Vikram Nehru, an expert on Southeast Asian economics, said that uncompetitive wages coupled with a deficit in the skills and systems in Malaysia are amongst the top impediments. Malaysia’s debt-to-GDP ratio at 51 percent is also among the highest in Asia. The heavy burden of debt servicing places upward pressure on taxes and inflation, which deters consumption and investments that are crucial to economic growth. To address these issues, PM Najib launched the New Economic Model (NEM), which aims to double per capita income by 2020, with its two main pillars of Economic Transformation Programme and Government Transformation Programme. The NEM demonstrated a shift of emphasis in several dimensions: increased focus on investment in physical and human capital, rolling back of the state’s involvement in various sectors to encourage competition, skimming the bloated public sector, further opening up of the economy to foreign talent and overseas markets and striving for inclusive growth across different regions and communities. The home crowd has received the NEM favourably, a key reason that keeps PM Najib’s approval rating hovering above 60 percent.

Besides scoring political points, the NEM has also proved to be a successful economic project. A joint assessment report on the ease of doing business in 185 economies put Malaysia at the 12th spot, citing key improvements in the ease of registering property and getting credit, better procedures in dealing with construction permits and providing strong protection for investors. Malaysia’s economic competitiveness has also been improving, placing it amidst the ranks of Australia, South Korea and Luxembourg.

On the flip side of the coin, Malaysia continues to face serious impediments that could stall its economy. At the forefront is the large-scale and widespread corruption in the country. An investigative video by a London-based pressure group Global Witness shed light on the scale of corruption in the state of Sarawak in East Malaysia. The video, shot on hidden cameras by undercover investigators, unveiled how Sarawak’s Chief Minister Taib Mahmud have been abusing the state’s control over land allocations and forestry licensing for personal kickbacks (in millions of dollars) through sophisticated methods to evade taxes illegally via offshore accounts in Singapore. To many Malaysians, corruption in Malaysia is hardly breaking news, though the vivid display of criminality in the video infuriated many.

The annual Corruption Perception Index by Transparency International gave Malaysia a score of 49 (100 being corruption-free), a sign of a serious corruption problem. The country’s ranking also fell from 25 in 1995 to 54 in 2012, indicating the increasing entrenchment of corruption over the years. Corruption lowers investment vis-à-vis decreased confidence from investors, stunts economic growth and drains much-needed resources and tax revenue for important government spending.

The deeply-ingrained policy of affirmative action (the Bumiputera policy) for ethnic Malays and indigenous groups remains another roadblock to the country’s economic development. The Bumiputera policy grants Malays preferential access to jobs, education, real estate, procurement contracts and financial means. The rationale for having this policy was lay out in a highly controversial book, The Malay Dilemma, written by long-serving former PM Mahathir Mohamad. The book revolved around how the culture of Malays have caused them to become disadvantaged during the colonial period under the British and argued for an affirmative action policy to address this ‘systemic problem’.

Deviating from the principles of meritocracy, this policy has exacerbated inequality in Malaysia (both within and between ethnic groups). Some have argued that this policy is long outdated, permanently cripples the groups it originally intended to help and drew analogy to the raced-based system under the apartheid regime in South Africa. The Chinese and Indian Malaysians are increasingly disgruntled by the discrimination they faced in both private and public sectors. This has contributed to a serious problem of brain drain in Malaysia due to a “sense of social injustice… particularly among the younger population within the non-Bumiputera community”, with hundreds of thousands of skilled Malaysians migrating to Singapore, Australia, United States and the United Kingdom since the turn of the century. This has a negative effect on Malaysia’s effort to break through the middle-income trap as the supply of skilled labour rapidly diminishes. Equal opportunities in the civil service will also boost efficiency, effectiveness and credibility of the bureaucracy. The Bumiputera policy also created an awkward situation for PM Najib as it undermines his ‘1 Malaysia’ campaign slogan, losing valuable votes to the opposition which made eliminating racial discrimination a key theme in its recent election manifesto.

Regardless of which side wins, transformative changes await the rising economic star in the heart of Southeast Asia. PM Najib’s conscientious effort (sometimes almost out of the way) to win votes is underscored by an innate fear that the ruling BN will lose power this year. Such efforts consist of the ‘traditional’ election sweeteners such as cash handouts and subsidies for smartphones to PM Najib being featured as a skilled lion dance drummer in a Chinese New Year greeting video. If reelected, BN should seek to eliminate the Bumiputera policy and address the corruption endemic in Malaysia. PR stands a fair chance of getting into power, but huge challenges await an untested coalition on the national level, a completely different ball game compared to the state level. As of now, differences between the coalition parties in PR seem to be under wraps, but this may not be the case when the stakes are higher. Yet, while keeping in mind all these caveats, it should be noted that a democratizing Malaysia also means greater demand for a more transparent and accountable system of governance, adding to optimism in the economy.

Categories: Asia Pacific, Politics

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