Change is coming for the sons of the soil

The Spectator – Business

On June 30, in a ballroom in Kuala Lumpur’s Shangri-La hotel, Malaysia’s prime minister Najib Razak made a landmark announcement. It doesn’t sound much: the abolition of a long-standing rule that 30% of equity in new share offerings must be allocated to Bumiputras, or ethnic Malays. But both practically and symbolically, it was an important moment.

Najib, around 100 days into his office, had abolished part of the New Economic Policy (NEP), an affirmative action program put in place by his father, Prime Minister Tun Abdul Razak, in 1971. Implemented in an environment of increasing social tension in which the economic gap between the Malay majority and the Chinese minority (about 65 and 25% of the population respectively, with Indians making up most of the remainder) was becoming increasingly stark, the NEP sought to put 30% of the economy in Bumiputra hands through a range of measures from government job allocation to cheap housing. In its explicit expression that the country’s true locals needed protection and favouritism – the word Bumiputras means “sons of the soil” – it has become a key document in understanding Malaysia’s social fabric, and no step towards removing it is taken lightly.

But it has long been clear that the policy hasn’t done what it was supposed to, and the share allocation rule is a prime example – and a visible one internationally too, since 21% of Bursa Malaysia, the country’s stock market, is in foreign hands. The NEP might have put stock in Bumiputra hands but it didn’t stay there: it was just sold. And it didn’t enrich the disenfranchised anyway. “Share allocation during the NEP was more on the basis of who you knew rather than qualification,” says Dato Salleh Majid, who was president of Malaysia’s stock exchange for 19 years up to 2003 and is now a consultant and a senior fellow in the Faculty of Economics at National University Malaysia. “During that time, those with the power to allocate would rather pass it over to their people, supporters maybe, or division heads of the ruling party. The basis of allocation was not fair: some people were making a killing just by being allocated a healthy amount, and others didn’t even get a chance.”

It was bad for companies too. “If you have a private company and are thinking about going for listing, you’d have to find a Bumi partner to buy 30% of your business, and in order to sell that business to him you’d probably have to give him quite a good discount,” says Stephen Hagger, head of research at Credit Suisse in Kuala Lumpur. “In fact, you might even have to finance him to do it.” Since companies had to set aside a further 25% as a public shareholding spread, “by listing you could end up losing half your business and giving away a third of it. That’s a very unattractive proposition and one of the reasons there have been very few IPOs of late.” (Now 12.5% – half the public shareholding spread – must be offered to Bumi shareholders, but if they decline it, it goes back into the pot.)

Some entrepreneurs have no doubt been put off launching businesses in the face of this bureaucratic trudge, and still fewer have listed. Majid adds: “It’s very difficult for anyone to say that being forced to bring in this partner has enhanced the competitiveness of the company, because the partner doesn’t contribute: they don’t have the technology or the skills.”

More broadly, there is a growing acceptance that the NEP and similar policies, while understandable in the context of their time, have wrecked Malaysian competitiveness on a much bigger scale. Of Malaysia’s biggest state-owned companies, few could really be called national champions and some are embarrassing. It didn’t go down well when Jeremy Clarkson blew up a Perodua Kelisa car on Top Gear after calling it the worst car in the world, but he was on to something: neither Perodua nor the other national car manufacturer Proton has been able to hold its own on the world stage, and Proton in particular has been on life support for years. The obvious exception, oil and gas company Petronas, is notable because it is the one company for which the government has been firmly banned from any involvement. Many feel that the NEP created a crutch, a sense of entitlement which was tolerable in a domestic economy but has created companies that cannot compete in a globalised, borderless world. (Interestingly, the one State-backed company foreign investors unequivocally do like is CIMB, built from a modest investment bank to a powerful regional universal bank by its gifted CEO, Nazir Razak. If that name sounds familiar, it should: he’s the Prime Minister’s brother, though he’s made his name on merit. Nazir has been vocal about wanting to repeal the NEP and is considered so close to his brother’s ear that one observer calls him “the unofficial finance minister” – a powerful voice indeed and an important influence on these recent changes.)

The most recent shifts may help set a change in motion, but they won’t change the whole nature of Malaysian business, and it is useful to understand the context in which they have happened at all.

Najib came to power in a situation unique for a Malaysian leader: facing credible opposition. Malaysia has never strictly speaking been a dictatorship, but it has been a one-party government (the Barisan Nasional coalition led by the United Malays National Organisation, or UMNO) since Malaya’s independence in 1957 and its federation as Malaysia in 1963. The man who brought the first realistic possibility of change was Anwar Ibrahim, the former deputy prime minister of Malaysia under Mahathir Mohamad; Anwar fell out with Mahathir and spent six years in jail on sodomy and corruption charges widely questioned outside Malaysia. He was released after one of his convictions was overturned in 2004, but remained barred from public office until April 2008; since then he has shaken up the political process, forming a (sometimes shaky) coalition, becoming leader of the opposition, taking one third of the seats in Malaysia’s parliament, and winning five out of 12 state legislatures.

Anwar has watched developments with interest, since repealing the NEP was a key part of his election platform. “I think generally any measures to liberalise the economy and dismantle discriminatory policies are welcome,” he tells The Spectator. “But the measures are piecemeal in nature. The problem is not only affirmative action, but of good governance: government policies, tenders, the failure of the judiciary and now the commissions against corruption.”

There is little doubt that Anwar’s rise has triggered the changes to date. “Without the opposition in their current position none of this would have happened,” says Hagger. “And despite all the political uncertainty, which is unusual, you have a perfect position for change.”

But at the same time, credible opposition, and the consequent thrusting of affirmative action policies into mainstream debate, is exposing fault lines in Malaysian society. Rising tension is palpable, coming hand in hand with a heightened sense of Islamic nationalism in some parts of the population. The widely-reported conviction of a Muslim woman to strokes of the cane for drinking; the ban (since reversed) on Muslim Malays attending a Black Eyed Peas gig in Kuala Lumpur; Muslim protestors trampling on the severed head of a cow, the holy animal of Hinduism, to protest the opening of a new Hindu temple. Headlines like these temper the enthusiasm of foreign capital for this brave new reformed Malaysia. “So far so good: Najib’s moving in the right direction, though he has to take UMNO with him,” says Hugh Young at Aberdeen Asset Management, which manages around US$55.1 billion in Asia and US$1.9 billion in Malaysia. “It’s early days. I suspect, like us, most observers will be encouraged but want to see more and give it more time. Headlines about canings don’t help – or maybe they do, by forcing the pace of opening.”

Malaysia is one of the most moderate Muslim countries in the world but Najib’s measures so far have already triggered accusations of deserting the country’s Malay interests, and there are real doubts about the degree to which he can effect change within the framework of an UMNO party widely considered corrupt and unwilling to change. “This is a multiracial country and therefore there is a potential tinderbox here,” says one banker in Kuala Lumpur. “You have a large number of people who have had their snouts in the trough for such a long while, and suddenly that money/politics business model is potentially broken. They are not going to take it lying down.”

Anwar notes “there is a lot of anger” but believes political change can be effected without violence. “We have been extremely cautious and have chosen the constitutional legal process,” he says. “Our choice is peaceful transition.” He welcomes gradual reform in the ruling party but adds: “Look at the results. Look at all the rhetoric about One Malaysia [a key Najib slogan]. That’s not what you see. You see a more divisive Malaysia, and the corruption has just become more endemic.”

It’s hardly a surprise that Anwar lacks faith in Malaysia’s judicial process, and he is about to experience it again. As soon as his return to Malaysian public life was clear, more sodomy accusations came to light and they may have reached Malaysia’s courts by the time you read this. The findings of this trial, and the reaction of the population to its outcome and its credibility, may have a great impact on the country’s future. But Anwar believes change is coming whether or not he’s free to see or create it. “I’m aware that they are going after me, but we have to go on, I don’t have a choice,” he says. “They believe that with my absence in prison, the Coalition cannot hold. I think they have underestimated our capacity and our strategy. My ego might make me think I am indispensable, but I am realistic. I am dispensable.”

See a PDF of this article: Wright Malaysia