He
noted barriers to non-bumiputras in the job market, starting and
growing businesses, purchasing housing, and educational opportunities
began a move of many well educated non-bumiputra Malaysians to
emigrate. The fact that 800,000 young Malaysians are now working
abroad, 300,000 having emigrated in the past 18 months, including
increasing numbers of ethnic Malays was recently noted in Parliament.
Malaysia's "brain drain" has begun to get the attention of policy
makers, according to Husni.
THE CORRIDORS OF POWER
Raja Petra Kamarudin
C O N F I D E N T I A L SECTION 01 OF 05 KUALA LUMPUR 000103
SIPDIS
STATE FOR EAP/MTS FOR DBISCHOF
STATE FOR EEB/IFD/OMA FOR BSAUNDERS AND AWHITTINGTON
STATE PASS USTR - WEISEL AND BELL
STATE PASS FEDERAL RESERVE AND EXIMBANK
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
SINGAPORE PASS SBLEIWEIS
USDOC FOR 4430/MAC/EAP/MHOGGE
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR
E.O. 12958: DECL: 01/19/2020
TAGS: ECON, EFIN, ENIV, EXIM, MY, PGOV
SUBJECT: MALAYSIA’S NEW ECONOMIC MODEL: ECONOMIC REFORM EFFORTS MAY MEET OPPOSITION
REF: A. 09 KUALA LUMPUR 303
B. 09 KUALA LUMPUR 318
C. 09 KUALA LUMPUR 887
1. (C)
Summary:
Prime Minister Najib Razak (Najib) introduced a first wave of limited
economic reforms (refs A and B) shortly after taking office in April
2009 and has promised more substantial economic reforms designed to
improve Malaysia's competitiveness (ref C).
To accomplish
this, Najib formed the National Economic Advisory Committee (NEAC) to
develop a New Economic Model (NEM), an economic policy roadmap which he
hopes will lead Malaysia from middle income to high income country
status.
Little has been revealed about the contents of the
NEM, but government officials say it is intended to address Malaysia's
"stagnating" economy, by improving education, reducing corruption,
strengthening weak public institutions, reconfiguring emigration,
cutting back on government over-involvement in the private sector, and
increasing low domestic investment rates.
Leading Malaysian
economists believe that Najib is sincere in his desire to address these
problems. However, they question his ability to make major changes in
the government's long-standing discriminatory Bumiputera preference
policies which have discouraged domestic investment and new business
formation and are driving the "brain drain" of young professional
Malaysians frustrated with limited opportunities under this system.
Economists
here expect Najib's effort to establish a policy framework that will
foster a more gradual move away from ethnic preferences to a merit-based
economy, but believe that may be insufficient. If PM Najib is unable
to deliver on NEM reforms, they expect the opposition will seize the
reform agenda as an issue for possible 2012 elections.
Executing
a robust NEM, however, will be even more difficult as the PM will
undoubtedly face steady opposition from within his own political party
(UMNO), particularly from members who fear their parliamentary seats may
be lost if the current patronage system is dismantled.
End Summary.
The New Economic Model: Reigniting High Growth
2.
(C) Since Prime Minister Najib Tun Razak (Najib) took office in April
2009, he has called for Malaysia to move from a low value-added,
manufacturing-for-export oriented middle income economy to a
knowledge-based service oriented high income economy. He has used the
rubric of former Prime Minister Mahathir's Vision 2020 goal of reaching
"high-income country" status by the year 2020 as his call to action to
justify developing a "New Economic Model" (NEM) to promote economic
transformation.
PM Najib quickly announced an investment
liberalization agenda and by April 2009 implemented a first tranche of
reforms aimed at reducing bumiputra (ethnic Malays and other non-Chinese
or Indian ethnicities) ownership requirements in 27 different
non-influential service sectors (e.g. veterinary services and ship
salvage and refloatation services) and allow foreign controlling
ownership interests in some types of financial institutions (Ref A).
PM
Najib announced a second tranche of reforms late in April including
reducing bumiputra ownership requirements on all listed companies from
30% to 12.5% and repealing Foreign Investment Commission guidelines on
new mergers and acquisitions by foreign firms (Ref B).
In
July, PM Najib formed the National Economic Advisory Committee (NEAC)
and charged the new body - made up of high profile Malaysian and
non-Malaysian economic figures - with developing the NEM. In his
October 23 budget speech (Ref C), PM Najib promised additional economic
reforms.
Financial Crisis and Capital Flight Push GOM to Reform
3.
(C) Najib has been forced to consider a broader reform program because
the Global financial crisis (GFC) has put tremendous pressure on the
underpinnings of Malaysia's economic growth. FDI has slowed to a
trickle, $15 billion of portfolio investment departed in 2009 and has
just begun to return, and there remain large domestic reverse investment
outflows as Malaysian conglomerates focus on overseas rather than
domestic investment.
According to a January 8 UBS Securities
report, Malaysia experienced net capital out flows in excess of $27
billion from mid-2008 to mid-2009. More telling, the UBS report states
Malaysia has not experienced net capital inflows in any one calendar
year since 1997. UBS cites domestic investors investing outside
Malaysia as the primary source of the outflows.
PriceWaterhouse
Coopers Consulting Malaysia (PWC) General Manager Pearlene Cheong
described Western multi-national corporate interest in investing in
Malaysia as "dormant" and that ethnic Chinese Malaysians had been taking
their money out of Malaysia ever since the Asian financial crisis. She
said that PWC's investor advisory business has seen primarily North
Asian investors working in the extractive industries focused in East
Malaysia and added, "This is not the knowledge-based type of employment
that the government is looking for to stimulate wage growth."
Bold Statements Calling for Change
4.
(C) The Najib administration has identified several areas of the
economy needing reform and has announced its intentions to carry out
reforms through the NEM. In a December 1 speech to the Malaysian
Institute of Economic Research, Finance Minister II Husni said
Malaysia's economy was "stagnating" and highlighted Malaysia's most
pressing economic issues needing to be addressed by the NEM as
education, corruption, GOM economic over-management, weak public
institutions, emigration, and low domestic investment rates.
Education:
Husni said, "Our universities are a disappointment." He cited Malaysia
as having its highest unemployment rate for recent college graduates
while adding that there is a severe shortage of skilled workers,
implying that large numbers of Malaysian recent college graduates are
unskilled. Malaysian sovereign wealth fund Khazanah reported that
skilled labor shortages and the poor quality of Malaysian graduates
costs Malaysian competitiveness 15% of GDP annually.
Corruption and Cronyism:
He cited the recently released Transparency International 2009
Corruption Perception Index, in which Malaysia fell to number 56 of 180
countries, its lowest rating in over 20 years, and continuing a fall
from number 26 in 2004.
Husni promised wholesale reform in
government procurement practices, controlled by the Ministry of Finance,
and an end to sole source contracts, except for the military.
GOM Over-involvement in the Economy:
Husni called for the transparent divestiture of GOM interests in
government-linked corporations (GLCs) and the restoration of the private
sector's role as the primary engine for growth. He also cited that the
GOM needs to discontinue open-ended protection of domestic industries,
allow market driven resource allocation including greater precision in
subsidy allocation, and foster better competition policies to spur
innovation.
Weak Public Institutions: Husni
criticized the lack of diversity in the civil service and proposed
strengthening public institutions through greater ethnic participation.
Brain Drain:
He noted barriers to non-bumiputras in the job market, starting and
growing businesses, purchasing housing, and educational opportunities
began a move of many well educated non-bumiputra Malaysians to
emigrate. The fact that 800,000 young Malaysians are now working
abroad, 300,000 having emigrated in the past 18 months, including
increasing numbers of ethnic Malays was recently noted in Parliament.
Malaysia's "brain drain" has begun to get the attention of policy
makers, according to Husni.
Low Domestic Investment:
Since 1997, domestic investment rates halved from 20-25% of GDP
annually to roughly 10% and have remained at reduced levels for the past
decade. Husni said that the 1Malaysia concept is intended to introduce
competition and move Malaysia to a more performance-based culture like
Japan, Korean, and Singapore, promoting an attractive investment and
working environment for all Malaysians.
NEM to be Broad and Wide-Ranging
5.
(C) The government and our contacts have released few details of the
upcoming NEM. However, PM Najib announced December 22 at the Finance
Ministry's "Media Night" that he had approved the NEM direction, and
that the final model will be presented to the Cabinet and made public by
the end of February 2010. The NEM will "set the direction of the
economy and make the economy more resilient", according to Najib.
NEAC
Acting Director of Research Tong Yee Siong, said the NEAC met the week
of February 1-5 to finalize its recommendations to the Cabinet for
approval and public release by the end of February. Tong told Econoffs
that the NEAC will produce goal papers and an economic model framework.
Tong expected the recommendations to be very broad, and would propose a
policy framework to address the most significant economic issues facing
Malaysia and improve its economic competitiveness.
Nicholas
Zefferies, the president of AmCham, and the only "foreign" member of the
NEAC, told Econ Counselor January 13 that NEAC reform recommendations
to PM Najib would be wide-ranging. Zefferies said that Najib was
planning to give NEAC powers similar to the Prime Minister's Special
Task Force to Facilitate Business (Pemudah), to enforce the planned
economic reform program on government Ministries.
Economic Reform Versus Ethnic Preferences
6.
(C) Tong told us that the NEAC is focused on removing disincentives to
domestic investment established in the New Economic Policy (NEP) as a
key to reinvigorating domestic and foreign investment. He added that
any basis for serious economic and investment reform efforts in Malaysia
involves dismantling old entrenched Bumiputra ethnic preferences
established since the Mahathir regime in the NEP.
Finance
Minister II Husni's speech was important for connecting Najib's
1Malaysia slogan to real economic reform, according to Malaysian
Institute for Economic Research Managing Director and long-time UMNO
economic advisor Mohamed Ariff.
However, as Husni criticized
Malaysia's longstanding ethnic preference policies, he qualified his
statements by asserting that "the government is not abandoning
bumiputras" and that the government will pursue reform in "a prudent and
cautious method" in an effort to allay bumiputra fears of economic
displacement.
Ariff told us that the Husni speech angered some
senior UMNO members who complained that Najib was opening the economy
too much and moving too fast toward reform. Opposition parliament
members praised the speech, according to Ariff.
PM Najib Seeks Incremental Reform
7.
(C) Our economic contacts close to PM Najib said they were convinced he
is sincere about wanting economic reform. Economic Planning Unit Deputy
Director General K. Govindan, who briefs PM Najib and the cabinet
weekly on Malaysian economic performance and economic policy, told us he
believes PM Najib understands in general terms the reforms needed to
improve human capital and productivity, increase trade and investment,
and reduce corruption.
Nevertheless, Govindan said he does not
make specific economic policy recommendations at those meetings for
fear of offending other Ministers in the meeting who oppose the reform
agenda.
Ariff also believes PM Najib legitimately seeks
economic reform. Ariff told us PM Najib's words to him were "change or
be changed" when referring to economic reform. But Ariff also said he
expected PM Najib to slowly pick away at the NEP without causing too
much economic and political disruption. This will require regularly
announcing small reforms rather than the sweeping reforms required to
transform the economy.
Ariff offered the February NEM release
and the June 2010 release of the 10th 5-year Malaysia Plan as two
upcoming opportunities for Najib to roll out more economic reforms.
Safe Won't Work
8.
(C) In the view of our economist contacts, PM Najib's "politically
friendly" incremental strategy to economic reform may end up being too
little too late. Tong projected that for reform to work, the PM will
need to make a bold announcement on major reforms and then rally public
support for change. Tong said that NEAC members are advocating that PM
Najib announce significant structural changes to Malaysia's economy as a
part of the NEM.
Govindan agreed that major structural
changes are needed for sustained economic growth. He added that a
series of small reform programs will eventually limit Malaysia to an
unacceptably low 3-4% annual growth rate that will keep the country
trapped in middle income status until "politics are removed from
education and the economy."
The critical point, Ariff said,
was that while Malaysia continued taking baby steps on economic reform,
its competitors for investment such as Indonesia, Thailand, and Vietnam
would be overtaking Malaysia as the first choice for foreign direct
investment.
Ruling Party May Block Aggressive Reform
9.
(C) Each of our contacts agreed that political will is the key to
reform, but none are convinced all of the coming announcements of plans
to reform Malaysia's economy will be backed by substantially broad
concrete measures.
Ariff told us that after early enthusiasm
for economic reform, some UMNO insiders do not want reform that would
take away the economic rents and patronage system they have relied on to
maintain the party's power base for over a generation.
Ariff
predicted that UMNO would not survive in power by moving to an open and
transparent system and that UMNO insiders would challenge Najib if he
moved too strongly on government reform.
Govindan sees
Malaysia's huge and largely ethnic Malay civil service, completely loyal
to UMNO, but increasingly incompetent, as PM Najib's largest obstacle.
He commented that the civil service has a very narrow worldview and
will oppose, even refuse to implement, reforms perceived as damaging
ethnic Malay interests, even if convinced of the long-run gains for
Malaysia.
Tong told us that achieving any of the goals
developed by the NEAC will require significant political buy-in to
operationalize the policy changes necessary to reinvigorate investment
and spur additional growth. However, Tong commented that NEAC members
are frustrated with a lack of high-level political commitment outside of
PM Najib as well as the slow responses from Ministries which impeded
progress on the NEM.
He added that some NEAC members are
concerned that the NEM maybe merely a public relations exercise that
will have no real long-term policy impact. Zeffries told us that he was
not confident that PM Najib has a sufficiently strong political
position to pursue the NEAC's upcoming proposals. Liew described the
opposition closely watching economic reform, offering that an inability
of the ruling coalition to implement promised economic reforms will
provide powerful political ammunition for use in upcoming federal
elections in 2012.
Ethnic Minorities Support Reform
10.
(C) Cheong sees her Malaysian private sector business clients as highly
supportive of the type of economic opening she believes PM Najib will
announce in the NEM and commented that ethnic Chinese, Indian, and urban
Malays not directly benefitting from UMNO patronage will strongly
support economic reform efforts, but that rural Malays, a strong UMNO
constituent base, will fear changes labeled as detrimental to Bumiputra
interests.
However, Cheong observed that Non-Bumiputras have
successfully competed in the open economy at a disadvantage to Bumiputra
and government linked businesses for over 30 years and that Malaysians
would patiently wait for change. She added that the lack of investment
is so obvious that the government is practically being forced to take
action.
KEITH