Malaysia a comfort zone for Chinese investors
Malaysiakini
Nov 10, 2006
James Wong Wing On

For first several of the 22 years of former Prime Minister Dr Mahathir Mohamad’s rule from 1981 to 2003, the government had adopted the Look East Policy (LEP) on the assumption and belief that the Japanese road to modernisation would provide a feasible and sustainable model of economic development for Malaysia.

However in 1990s, the collapse of Japan’s bubble economy coincided with a widespread reality or perception of the rise of China.

How true or is this perception that China is rising while Japan is declining? What are the implications, repercussions or impacts of the shifting balance of power between the two Asian giants on Malaysia as a Southeast Asian nation?

Malaysiakini recently conducted an email interview with Universiti Kebangsaan Malaysia professor Lee Poh Ping to seek answers to these questions.

Lee is a senior fellow of the university’s Institute of Malaysian and International Studies (Ikmas). He is also the president of the Malaysian Association of Japanese Studies (Majas).

[Interview Start]

Malaysiakini:
It is often and popularly believed in Malaysia that since 1990s, China has been a rising economic power while Japan, a stagnant or declining one. What factors have given rise and credence to this belief?

Lee Poh Ping: 
One important reason for the belief that Japan is a declining power is the collapse of the bubble economy that began from the early 1990s.

Before that the Japanese economy was seen as a juggernaut which was imbued with tremendous technological and managerial prowess and immense financial reserves, a juggernaut poised to dominate the world economy. The collapse eroded this belief. People began to realise that not only did the Japanese economy not really possess the strengths of a true juggernaut but that its collapsed bubble economy is also not easily revived.

Added to this is the fact that it has become increasingly clear that for all its economic strength, Japan has not been able to carve out a truly independent role in world affairs from the United States. And that dependence on the United States looks set to increase further.

China on the other hand is seen to be a rising power. The main reason is the tremendous growth of its economy which has been sustained from the time of Deng Xiaoping’s open door policy in the late 1970s up to now. Scholars and pundits talk of a Chinese economy even overtaking the US economy in some future date!

China's rise has become more evident to us in Southeast Asia beginning from a decade ago when economic relations between Southeast Asia and China were intensified and when China found it to its interest to engage the Asean countries. There is thus some basis for the notion of a declining Japan and a rising China.

It should however not be overblown. Japan is still, in US dollar terms, the second largest economy in the world (China is the fourth largest). And it is still much more technologically advanced than China.

Moreover, Japan, barring any unlikely profound social upheaval that might come from a nationalist revival, enjoys the social stability that has resulted from having industrialised whereas China faces the enormous problem of achieving social and political stability with a population of 1.3 billion coming to terms with modernisation.

But in a fundamental sense (large land mass, civilisational self-confidence, strategic depth, booming economy and so on), China has the greater potential to develop as a superpower than Japan.

What are the economic influences of China and Japan respectively in Malaysia currently?

If one were to take the three components of economic interaction, trade, investment and aid, China does not figure much in Malaysia with the third component - aid - as compared to Japan. As to the first component, trade, China is one of Malaysia's largest trader but the total volume of its trade with Malaysia is still not as large as that of Japan with Malaysia.

This could change in the next few years as Chinese trade intensifies with Malaysia.

As to investment, there is at present no comparison between Japan and China in Malaysia both in quantity and quality. The total volume of Chinese investment in Malaysia comes to only the millions of ringgit as compared to the billions of ringgit of Japanese investment in Malaysia. Also, Japanese investment has a higher technological content and a more sophisticated corporate structure than Chinese investment in Malaysia.

The worrying part for Malaysia as far as Japanese investment is concerned is its diversion to other low-cost countries, China in particular. On the other hand, Chinese investment in Malaysia may increase. But any spectacular increase in the near future will depend on whether China can find the natural resources in Malaysia it needs. The likely possibilities are in timber and natural gas.

Ex-premier Dr Mahathir Mohamad once implemented a Look East Policy, which was widely seen as a policy that made Japan as a developmental model, but it seems that the policy is no more in vogue. What is the alternative policy, if any, of PM Abdullah Ahmad Badawi as far as a developmental model is concerned?

This is a fascinating topic. The more I reflect on the Look East policy (LEP), the more I think it is an ideological justification for governmental intervention in the economy for NEP (New Economic Policy) ends, such as for example, those involving redistribution.

The NEP, as we know, was to be implemented in the context of an expanding pie. While the government has to some extent succeeded in this objective, the theoretical rationale is somewhat contradictory. Then in the 1970s and the 1980s, you have the dazzling success of the Japanese model, and scholars like Ezra Vogel and Chalmers Johnson, explaining the success of the Japanese economy as due to the intervention of an elite bureaucracy in the economy.

Thus through the practice of the developmental state, Japan has shown that governmental intervention in the economy cannot only bring social stability but an economic miracle to boot! I am not sure if Mahathir had read the writings of Johnson or of the literature on the developmental state (he could have met or heard of Vogel) but around the time of the launching of the LEP, there was already a lot of talk of the success of the developmental state model.

This could only give him and Malaysia the confidence that the LEP was backed up by a respectable theory of political economy.

Globalisation, among other reasons, has greatly dented the ability of the developmental state to produce an economic miracle. This can be seen in the failure of the Japanese model in Japan after the bubble economy collapsed and also in the aftermath of the Asian Financial Crisis when many Asian states, including those presumed to follow the developmental state model, could not control their economies.

To cut a long story short: few now believe the developmental state or the Japanese model can bring about an economic miracle. But there is that other aspect of the Japanese model that is concerned about socio-cultural stability.

This is that aspect of the LEP that will continue. A few years ago, at a time when most people were disillusioned with the Japanese model, Mahathir insisted that the LEP has brought about good race relations. This suggests that an important aim of the LEP was the promotion of the aims of which the NEP was supposed to achieve.

And that while the Japanese model can no longer bring about great economic growth it can at least help achieve social stability.

As to an alternative policy, it is hard to say as most developing countries are coping with the effects of globalisation. The Chinese model, especially in its ability to reduce poverty, has been promoted for the countries of Africa and Latin America. I doubt however it will catch on in Malaysia.

It has been observed that while Japanese investors in Malaysia are increasingly attracted by more lower-cost and more competitive economies like China and Vietnam. Is it true? If it is, what are the causes?

I said earlier there is some diversion of Japanese investment to China. This of course is not easy to prove statistically over a period of time but there is enough evidence of stated intentions of many Japanese investors preferring China over Malaysia and of anecdotal evidence to indicate this is so.

The reason is the declining Malaysian competitiveness (high wages and not very high skills) as compared to China.

Chinese investors are increasingly interested in Malaysia as its socio-cultural as well as language environment, including the presence of a large Chinese-speaking population and Chinese-language informational infrastructure (such as the Chinese-language media and the education system) as well as its deeper understanding of Islam (as China itself has about 20 million Muslims and 30,000 mosques and as Islam has a much longer history in China) can provide a psychological comfort zone. Is it true? 

Such factors as that of the Chinese Malaysian population and Chinese understanding of Islam, as you mentioned, can provide a psychological comfort zone for Chinese investors. However, I do not think these are crucial factors in determining Chinese investment.

The crucial factor in the near future is the Chinese need for energy and other natural resources. If they can find these in Malaysia, they will come in a big way. As to manufacturing investment, the Chinese will, until such time when they develop more sophistication in their production systems, will focus on small manufacturing activities in Malaysia

American political scientist Joseph Nye’s concept of Soft Power is now in vogue. What is 'soft power'? What are the soft powers of China and Japan respectively in Malaysia? What are the respective strengths and weaknesses of the soft powers of China and Japan?

Soft power in general is seen as the power that is not derived from military and economic might (such might constitutes hard power). It is in the main a result of cultural attraction. Among some of Japanese cultural attractions in Malaysia are things like comics, flower arrangement, sushi and so on.

Kungfu and Chinese food are examples of Chinese cultural and gastronomic attractions. But the complicating factor here is that these are already found in the Chinese Malaysian population and unlike the Japanese case, not recent cultural imports from China.

But as Joseph Nye states, a most potent example of soft power is the ability of a country to act as a model. And China, despite its impressive achievements, has not been emulated as a model by Malaysia, though, as mentioned earlier, it is increasingly pushed as a model for Africa and Latin America, especially in its ability to reduce poverty. Japan, as mentioned, had been and still is to some extent, a model for Malaysia.

Given the facts that Japan once invaded and occupied Malaysia (including Sabah and Sarawak) in the Pacific War as well as China once gave moral and ideological support to the armed struggle of the communists during the Cold War, what are the current thinking and attitudes towards these two countries in the security and defence community in Malaysia?

Malaysia will want both Asian giants to reduce their differences and to cooperate to help bring about an East Asian Community. While Malaysia welcomes China as increasingly a strategic partner, it will not want China to dominate Malaysia or Southeast Asia. That is why Malaysia welcomes the involvement of other powers such as the United States and Japan in Southeast Asia.

What is Malaysia’s official attitude or position on the US-Japan military alliance in the past and present in the context of Malaysia’s relations with China and Japan? Are there any changes from the administration of Mahathir to that of Abdullah in the attitude or position?

Malaysia does not object to the US-Japan treaty if it does not create instability in Asia. But in recent years it has become concerned that this treaty may become increasingly directed against China. Mahathir himself expressed his concern over the 1997 Defence Guidelines for the treaty as implying this.

And Abdullah in 2005 came out quite strongly against the February 2005 statement of the defence and foreign secretaries of the US and Japan to the effect that Taiwan was an important strategic objective of both countries. The open naming of Taiwan in a document with official Japanese participation was seen as unjustified by Malaysia.

Japan has been rather faithful and consistent in its support, including in terms of military logistics, for the US-led war in Iraq while China, together with Russia, France, Germany and other European powers, have been adopting more independent positions. How has the difference in alignment or non-alignment affected the Muslim-majority Malaysia as far as its foreign policies towards China and Japan are concerned?

Malaysia is not happy with the US invasion of Iraq which it saw as not having UN support. It is probably unhappy over the Japanese involvement in Iraq. But because the Japanese involvement is so minor (even if it has tremendous constitutional significance in Japan), it has not fundamentally affected Malaysian relations with Japan.