Malaysia's Economic Muddle

Asia Wall Street Journal - August 23, 2006
State-planning documents can be desperately dull affairs. But Malaysia's latest tome, the "Third Industrial Plan," is certainly worth a peek -- not for what's in it, mostly, but for what's left out.
The forward, penned by Prime Minister Abdullah Ahmad Badawi, offers a grand vision. Over the next 15 years, Malaysia should "attain developed nation status" and "become globally competitive," he writes.The next 760-odd pages set out a strategy to encourage domestic investment, the development of better human capital, and freer trade with foreigners, among other things.
The sense of urgency is palpable, and laudable. While Mr. Abdullah has tried to reform the country's government-linked companies, tackle corruption and liberalize the economy, his administration hasn't gotten very far. No significant reform measures in the areas of corporate tax, the labor market or privatization have flowered under
his three-year tenure. Malaysia's domestic government expenditure, as a percentage of GDP, still mimics that of Communist China. Kuala Lumpur may sign free-trade agreements, but these won't bear much fruit unless investors want to put their money into the country.
Recently, they haven't. In 2005, Malaysia received a measly $10.9 billion in foreign direct investment. While that's an improvement over, say, five years ago, it's still only a sixth of what China received, and less than what South Korea and Singapore took in.

Perhaps the money isn't coming because investors don't sense anything changing much. Kuala Lumpur announced last week that it's not ready to sell its shares in state-owned companies anytime soon, putting them firmly out of foreigners' control. Then there is Malaysia's corporate income tax rate, stuck at 28%, while Singapore's is 20% and Hong Kong's, 17.5%. The new plan doesn't propose changing that either.

Contrast this with Indonesia, where an aggressive, reform-minded finance ministry team is in place, and it's little wonder that Jakarta's stock market is up over 30% this year, while Kuala Lumpur's stock market is up little over 2% over the same period.

It's unfair to put all the blame on Mr. Abdullah. His ruling United Malays National Organization party hasn't put its full weight behind the prime minister's reformist agenda. That may help explain why the Third Industrial plan prominently highlights populist
affirmative-action programs for ethnic Malays. These include the familiar hiring quotas, and rules that say companies selling stock in Malaysia have to allocate at least 30% of the offer to Bumiputra, who are mostly ethnic, Muslim Malays.
It's hard to know just how much these policies have stifled economic innovation and scared away foreign investment. But it's safe to say that no affirmative-action program in history has ever resulted in the "resilient and competitive" economy that Mr. Abdullah desires.

The Third Industrial Plan does try to show what modern liberals might term "progressive" thinking. It nods to the potential contribution of non-governmental organizations and endorses concepts such as "corporate social responsibility," which it defines as "responsible business practices" that "government and business will work in tandem"
to achieve. Absent specifics, though, such fuzzy language also could become a recipe for more onerous regulation.
In short, Mr. Abdullah is trying to please everyone in the Third Industrial Plan. For instance, he wants "fair economic participation among all ethnic groups and regions in every sphere of development." A tall order that may not, in the end, produce very much at all.