SINGAPORE — The pace of social and economic reform in Malaysia is likely to slow over the coming months but the country remains committed to opening its heavily regulated economy to more competition in the long term, Prime Minister Najib Razak said Friday.
In a rare private interview, Mr. Najib said that steps he has taken since assuming power in April, including relaxing rules for foreign investment in business services and tourism, are “quite unprecedented” for Malaysia.
But more dramatic overhauls, including major restructuring of a race-based political system that reserves ownership of much of Malaysia’s economy for ethnic Malays, will likely have to wait.
“For the next few months, we want to deliver what we have promised” rather than focus on big new reforms, he said. Short-term efforts will include achieving “performance indicators” announced by the government this year to curb crime and improve government services and infrastructure — a program Mr. Najib hopes will further bolster the popularity of his government.
“I need the political support, I need the political base” if more dramatic reform is to be achieved, said the premier, who was chosen for the post by his predecessor, and installed by his party.
Like many emerging economies in Asia, Malaysia has seen its export-oriented economic model — it is Asia’s third-most trade-dependent economy after Hong Kong and Singapore — suffer badly over the past year. Growth contracted sharply in the first half of the year, and while there have been signs of a recovery, Malaysia’s position as one of Asia’s manufacturing hubs faces increasingly tough competition from China and Vietnam, where wages are often cheaper.
Malaysia also faces rising political discord after years of stability, with deep dissatisfaction over its affirmative-action program. Established in the 1970s to help put 30% of the economy in the hands of ethnic Malays, who make up 60% of Malaysia’s 27 million people, the program has left many ethnic Chinese and Indian residents feeling disadvantaged.
Dissatisfaction, led by opposition leader Anwar Ibrahim, spread last year, and the governing National Front coalition — which has ruled Malaysia since 1957 — lost its long-held two-thirds majority in Malaysia’s parliament. That forced former Prime Minister Abdullah Ahmad Badawi to accelerate a handover of power to Mr. Najib, his deputy.
The soft-spoken, British-educated son of Malaysia’s second prime minister surprised many investors by moving quickly to placate critics, despite having a reputation as a defender of Malay privilege.
Mr. Najib’s government relaxed rules requiring companies to allocate 30% of their equity to Malays when listing on the Kuala Lumpur Stock Exchange, and eliminated the need for foreigners to take ethnic Malay partners in certain sectors such as health and tourism.
“I read the signals from the last general election, and a responsible government has to respond,” Mr. Najib said in the interview Friday, held between meetings at the Asia-Pacific Economic Cooperation summit in Singapore. “I’ve made necessary changes,” he said.
But the changes didn’t include politically sensitive industries such as air travel, utilities and retail, and some investors have argued the government needs to force more competition.
The changes so far are “just PR spin,” says James Chin, a political-science professor at the Malaysian campus of Australia’s Monash University. “My impression is that this guy wants to do reforms but he cannot until he goes to an election and gets an election mandate.”
Mr. Chin says he suspects Mr. Najib will call an election next year if the economy recovers, though he isn’t obliged to do so by law until 2013.
Mr. Najib said he agrees Malaysia needs to take bolder steps eventually. He said he is planning to unveil a new economic plan to diversify the local economy. While he declined to say exactly what it would entail, he said Malaysia needs to boost the role of services and encourage more domestic consumption to reduce over-reliance on exports.
He said he would also like to promote niche industries such as Islamic finance, which now accounts for a sizable part of the country’s banking assets.
The government will also aim to rein in its sizable spending on consumer subsidy programs next year, potentially freeing up cash for more productive investments, he said. Malaysia allocates nearly $200 million a year subsidizing the price of sugar, for instance.
The government is working with a local bank to create “smart cards” that will allow it to direct subsidies only to low-income consumers who need them, he said, while redirecting government assistance away “from people who drive Ferraris.”
Whether these additional steps will be enough to appease investors is uncertain.
Mr. Najib’s ideas are “a good start,” says Ed Teather, an economist at UBS in Singapore, especially the bid to cut subsidies. “The concern is that the promises of the government aren’t always followed through on.” He says he believes Malaysia’s growth will rebound to 6% next year before easing to 5% the following year — lower than what some economists think Malaysia must maintain to significantly increase living standards.
Mr. Najib said he also intends to rein in corruption, which has long been an issue of concern for foreign investors. Corruption “is a problem,” Mr. Najib said, but added, “it’s a problem of many countries.”
The country’s progress on that front, he said, may well be judged on how it handles a few high-profile cases working through the system, including one in which a former transport minister and another top executive are accused of committing fraud during the development of a debt-ridden port and industrial facility. A parliamentary committee recently recommended that police and other authorities pursue investigations against the officials.
Mr. Najib said he would support prosecutions of the officials, if the investigations indicate such prosecutions are warranted. But “we cannot rush into it,” he said.
—Celine Fernandez contributed to this article.
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