New Economic Policy @50: Looking back and forward

Professor Edmund Terence Gomez, Professor of Political Economy, Dean, Faculty of Economics and Administration, University of Malaya

Malaysia is one of the countries in which a majority ethnic group, the Malays—later classified as Bumiputera to incorporate indigenous ethnic communities in Sabah and Sarawak—were, in the main, socially excluded and economically disadvantaged relative to a minority ethnic group during British colonial rule. Impoverishment of the rural Malays resulted in feelings of dispossession, while international labour migration was instituted to aid foreign (mainly British) business interests that came to dominate the ownership of the country’s primary resource-based, export-oriented industries—tin and rubber.

At independence in 1957, Malaysia had a social structure predicated on an ethnic division of labour, where population groups were mainly confined to particular occupations and industries. Malays, Chinese, and Indians, by and large, lived and worked in separate geographical and economic spheres. A decade on, Bumiputera underrepresentation in tertiary education and upper occupational positions, as well as in the ownership and control of corporate equity, was stark, while some 60 per cent of the population remained in poverty.

The 13 May 1969 riots led to the inauguration of the 20-year New Economic Policy (NEP), a social engineering project to reconstruct an economic system that had perpetuated these inequities. The key remedy was extensive government intervention in the economy to eradicate poverty and to redistribute wealth more equitably, aiming to unify a nation torn asunder by the riots (EPU, 1971). The NEP was an opportunity to rectify ‘old wrongs’, eradicate injustices, extend benefits, and provide special preferences, to establish a level playing field for all ethnic groups in the long term through affirmative action (Gomez and Premdas, 2013).

Malaysia's 2nd Prime Minister Abdul Razak Hussein, sat here by his predecessor, Tunku Abdul Rahman, formulated the NEP
Source: The New Straits Times, 16 September 2018

To reduce the cycle of poverty, the NEP devoted considerable attention to improving access to, and the quality of, education for the poor. Large amounts of government resources were allocated to support the education of young Bumiputera in rural and urban areas, who were sent to well-equipped residential schools, and then offered preferential access to tertiary education either at local universities, using a quota system, or at universities overseas. Through this pathway of progressively expanded education opportunities, and several other affirmative-based poverty-reducing programmes, Malaysia experienced a substantial secular decline in absolute poverty, although there were serious negative impacts of the affirmative measures for talented non-Malay students and academics (Sultan Nazrin Shah, 2019).

Redistributing wealth: Institutions or individuals?

Malaysia’s mechanism to redistribute wealth equitably was the creation of public enterprises, trust agencies, and statutory bodies, to acquire corporate equity on behalf of Bumiputera (Faaland et al., 1990). Because 30 per cent equity of publicly listed firms had to be transferred to Bumiputera, these shares were channelled to government enterprises. By 1980, the volume of equity holdings owned by public institutions on behalf of Bumiputera had increased to 12.5 per cent, up from a mere 2.4 per cent a decade earlier (Table 1).

In 1981, a major shift occurred when prime minister Dr Mahathir Mohamad began promoting private Bumiputera entrepreneurship through privatization. Yet privatization was at odds with the collective or group-oriented goals of affirmative action, specifically those concerned with extra-economic criteria for inclusion and reducing poverty through social welfare provisioning. However, for Mahathir, equality was only to be attained when Malaysia had an equal number of Malay and Chinese millionaires, to be achieved by picking winners among Bumiputera individuals in whom corporate wealth would be concentrated.

Table 1 Ownership of share capital (at par value) of limited companies, 1969–2008 (per cent)

^a Figures for 1980, 2011, and 2015 represent the combined volume for all non-Bumiputera.
Sources of data:

For 1970: EPU, Third Malaysia Plan 1976–1980; for 1980: EPU, Fifth Malaysia Plan 1986–1990; for 1990: EPU, Seventh Malaysia Plan 1996–2000; for 2000: EPU, Eighth Malaysia Plan Mid-term Reviews 2001–2005; for 2008: EPU, Tenth Malaysia Plan 2011–2015, and for 2011 and 2015: Ministry of Economic Affairs–Malaysia, 2019.

This mode of policy implementation, with a shift in focus from institutions to individuals, marked the beginning of a patronage system in business that became a central feature of Malaysia’s political economy. Malaysia’s hive of privatizations from the 1980s aided the rapid creation of Bumiputera-owned business groups, leading to the development of a ‘new rich’ section of society.

However, the government’s plan to create a corporate system dominated by globally recognized Bumiputera-owned business groups was disrupted by the 1997 Asian financial crisis. Most of these enterprises were controlled through a pyramid of holding companies supported by government-owned financial institutions that had liberally dispensed huge loans. This crisis hurt such companies badly, and some were bailed out by being nationalized. Just before Mahathir retired as Prime Minister in 2003, he admitted that affirmative action–based patronage had led to a debilitating ‘crutch’ mentality.

New inequities, indefinite duration, societal response

By 1990, as the NEP neared its envisaged end, foreign ownership of corporate equity at just 25.4 per cent was well below its level in 1970 when it was at 69.3 per cent. And, while Bumiputera ownership of share capital had increased to just over 19 per cent, the Chinese share had almost doubled to 45.5 per cent (Table 1). The relatively low Bumiputera rate provided a basis for extending affirmative action indefinitely.

Sound education had resulted in the emergence of an independent Bumiputera middle class who had also secured representation in all professional areas of employment. Ethnic preferences to nurture Bumiputera entrepreneurship had been disproportionately used by those in urban and prosperous rural areas, creating new spatial divides and perpetuating poverty in rural areas. Other sets of policies were thus required to reduce overall social inequality, to equalize opportunities across classes and within and between ethnic groups, and to end racism. This call was evident in the Vision 2020 agenda that was introduced in February 1991, and contained a framework for achieving Malaysia's goal of becoming a developed nation by 2020 (Mahathir Mohamad, 1991).

At a Conference of the Malaysian Chamber of Commerce, Dr Mahathir presented a paper, Malaysia: Moving Forward, which became known as Vision 2020.

Source: The New Straits Times, 1 March 1991

But little change occurred to rectify these new inequities in society between 1991 and the turn of the century. The response by Malaysian society to these new injustices was seen in electoral outcomes. In the 2004 general election, after Prime Minister Abdullah Ahmad Badawi promised to create a country for all Malaysians, the Barisan Nasional coalition, led by his party, the United Malays National Organisation (UMNO), secured an overwhelming victory. When Barisan Nasional fared badly in the 2008 general election, losing for the first time its two-thirds majority in parliament, the results were attributed to Abdullah’s failure to deliver on this pledge. Indeed, his successor as prime minister, Najib Razak, introduced in 2009 his primary slogan, ‘1Malaysia’, stressing a national—not ethnic—identity to usher in a new era of inclusiveness. For Najib, this meant that his government would be race-blind and that there would be no more affirmative action.

However, when Najib’s race-blind approach was questioned by powerful Bumiputera interests, ostensibly because this agenda would sideline their concerns, affirmative action was recast by Najib’s government as one that would be ‘market friendly’. This change did not help the government deal with the problems exposed by the 2008 global financial crisis, specifically the poor quality of technological development, the country’s high dependence on foreign capital to generate growth, and the ineffectiveness of big business to drive industrialization (Gomez, 2012). By the government’s own admission, there was in society a ‘bottom 40 per cent’, who were in ‘dire need’ of public assistance (NEAC, 2010). This bottom 40 per cent comprised about 12 million Malaysians.

A range of public assistance programmes was introduced targeting vulnerable groups, though most were short term. The most prominent of these was Bantuan Rakyat 1Malaysia (BR1M, or One Malaysia People’s Assistance), a cash-transfer programme to support low-income individuals and families, regardless of their ethnicity. BR1M was introduced in 2012, just before the 2013 general election, allowing the opposition to claim that cash transfers through BR1M attracted electoral support from members of the bottom 40 per cent, particularly those in rural constituencies. And indeed in the election, Barisan Nasional lost further significant support, with UMNO’s primary support base—rural Bumiputera-majority constituencies—helping the coalition to retain power. In 2016, Najib's government promulgated the Bumiputera Economic Community policy, another affirmative action–based measure, to enhance the support of the Bumiputera, including through entrepreneurial financing mechanisms and deepening equity and wealth ownership (EPU, 2016).

In the run-up to the 2018 general election, the Pakatan Harapan opposition pledged that policies would be needs-based and that unproductive government-business networks would be dismantled, so as to promote equitable development and redress social inequities. This may have appealed to the electorate because, in May 2018, Barisan Nasional unexpectedly lost power. For the first time since independence, Malaysia had a government not led by UMNO, with power shifting to Pakatan Harapan, a multi-party coalition led by former UMNO president and prime minister Mahathir Mohamad.

Shared prosperity

Pakatan Harapan launched a 10-year roadmap—the Shared Prosperity Vision (SPV)—in 2019, stressing three objectives: Development for All, entailing restructuring the economy; Addressing Wealth and Income Disparities, where ‘no one would be left behind’; and Nation Building, to create a united, prosperous, and dignified nation (Ministry of Economic Affairs–Malaysia, 2019). The SPV’s objectives were strikingly similar to those of the NEP.

The SPV acknowledged the need to tackle stark wealth and income inequalities, as well as regional disparities between the industrialized south and underdeveloped north and east of the peninsula. There had been inadequate focus on rural industries, with the need for them to diversify beyond agriculture. The underwhelming 9 per cent contribution of small and medium-sized enterprises (SMEs) to GDP was acknowledged, though these enterprises constituted about 98 per cent of firms in the corporate sector. However, the longstanding emphasis on cultivating Bumiputera-owned SMEs remained in place. Since Pakatan Harapan enjoyed only limited rural Bumiputera support, it continued implementing initiatives that targeted them. What was absent from the SPV was a coherently structured industrial plan to cultivate entrepreneurial private firms.

Pakatan Harapan’s desire to retain power, having captured it unexpectedly, undoubtedly took precedence over the need to implement the crucial reforms Malaysia urgently required. The coalition was confronted with a dilemma similar to that faced by UMNO: if real change was to be instituted, this necessitated policy reforms that possibly undermined its capacity to draw Bumiputera support. In March 2020, when the Pakatan Harapan unexpectedly fell from power, one reason was that its promised reforms had not been instituted.

50 years on: Lessons learned

Affirmative action was justified in terms of compensation for past wrongs and on the basis that ethnically targeted remedies were to be implemented over only two decades. Affirmative action has delivered benefits to Bumiputera, specifically by creating a middle-income stratum, but it has also nurtured dependence on the government, primarily because the policy has been extended beyond the stipulated time limit. Evidently, the first lesson is that duration matters. Determining the length of affirmative action and abiding by this stipulation is imperative, as the long-term consequence is that ethnic identity has been reinforced in ways that have hindered social cohesion.

A second lesson is the need for fair access and participation. Affirmative action treats Bumiputera as a homogeneous community, but individuals’ abilities to take advantage of these incentives are not equal (Brubaker, 2004). Bumiputera elites garnered more of the benefits when affirmative action was extended beyond compensation to the creation of a new business class (Gomez and Saravanamuttu, 2013). If incentives are extended without accompanying measures that ensure similar chances for all Bumiputera, the policy shifts the competition from one between members of different ethnic groups to one between Bumiputera. Over time, class cleavages among Bumiputera have become pronounced. Since affirmative action involves redistribution of scarce resources, this has led to contests among the privileged, as well as between them and the underprivileged. This competition is manifested in such material areas as access to business opportunities, including government procurement, contracts, and licences.

A third lesson is that affirmative action in business has had dismal outcomes, even contributing to the bypassing of entrepreneurial non-Bumiputera firms (Jomo, 1990). The NEP’s promotion of Bumiputera capital involved intra-ethnic selective patronage, to identify and groom winners. By 2021, in spite of extensive government endeavours to create business groups, not even one Bumiputera individual had ownership of a top 20-quoted firm on the Kuala Lumpur Stock Exchange. Of the top 10 capitalized enterprises, the government had majority ownership of eight of them.

Serious problems first articulated in the NEP remain: equity ownership patterns in 2015 indicate that Bumiputera equity ownership is falling behind; there has been a perceptible fall in non-Bumiputera equity ownership, from its peak of 45.5 per cent in 1990 to 30.7 per cent in 2015; non-Bumiputera owned about the same volume of corporate equity in 2015 as they did in 1970; and foreign equity ownership has increased significantly since 1990 (Table 1). The impact of affirmative action on enterprise development thus raises a crucial question: Has this policy merely fostered unproductive rent-seeking and suppressed a dynamic domestic entrepreneurial base that could have helped generate growth?

Between 2003 and 2020, all Malaysian prime ministers have openly or tacitly acknowledged, at one time or another during their leadership, that they are aware that preferential treatment based on ethnicity should be discarded, or at least scaled back. However, all have lacked the political will to implement radical reforms. New inequities, as well as the corresponding increase in the powerlessness felt by disaffected and marginalized groups, have resulted in increasing discontent with the political system. There thus remains a pressing need to deal with social injustices affecting all Malaysians through reforms that dispense with policies fostering patronage and identity-based politics.

The fraction of Indians in Malaya’s population rose very sharply in the decades between 1901–1921, from just 6 per cent to 15 per cent, as rubber planting expanded and inflows were at their peak. But the Indian share of the population fell after 1931 and was just 11 per cent by 1947, as many Indian plantation workers were repatriated as a result of the rise in unemployment over the Great Depression years (Figure 1).

Beyond the plantations, Indians were recruited, inter alia, for public works, as police and guards, and also to serve in the lower ranks of the colonial bureaucracy. Most came from Tamil areas in south India. They were considered to be more accustomed to British rule, more amenable to discipline than the Chinese, and more willing to work for low wages. Access to low cost Indian labour migration helped ensure the rubber industry’s spectacular growth and profitability. Since there was work for wives and older children on the rubber estates, Indian migration included whole families. But low wages, indebtedness, poor social status, and physical isolation kept estate Indians apart and they tended to exercise little influence on Malayan society.