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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : New Economic Policy (Part 1)




As we have established in the earlier issues of i Capital, there are ways and means other than a policy like the NEP, which are far more effective in dealing with the issues of sustaining robust economic growth and inequality. Also, it was mentioned that the people who ousted Tunku Abdul Rahman and implemented the NEP did so under the pretext that his policies were the cause of the inter-ethnic economic imbalances. Yet, they also acknowledged that inequality is bound to rise in the initial stages of development before falling. Hence, it is only logical to question the actual underlying reasons for which the NEP was implemented.

Although Malaysians, at large, have been led to believe that the main rationale behind the NEP was to remove the inter-ethnic economic imbalances that eventually led to the May 1969 riots, a deeper examination of the events that unravelled prior to the riots would reveal that there is much more than what meets the eye.

While it is true that there was noticeable inter-ethnic income disparity, there were also many, many efforts, although the progress or success of the various measures was uneven, to mitigate this disparity prior to the NEP, particularly in the form of rural development. For example, in 1953, long before Independence, the Rural Industrial Development Authority (RIDA) was established with the aim of assisting rural small and medium scale Malay entrepreneurs to obtain capital and skill in order to either start their own businesses or participate in the buying and trading of shares. Additionally, most Malaysians have forgotten that the Federal Land Development Authority (FELDA) was established under Tunku's time, ie the First Malaya Plan 1956-1960, specifically to assist poor, landless Bumiputra. Moreover, to advance the interest of urban Bumiputra businessmen, the Ministry of Commerce and Industry was established in 1961 to allow Malay civil servants and professionals to buy shares allocated to them in the pioneer manufacturing companies, which were mostly foreign. Since i Capital has time and again highlighted the extensive and tireless efforts taken under Tunku's premiership to improve the economic conditions of the Bumiputra, this area will not be discussed further. Instead, we focus on the question of why Tunku was criticised for being overly liberal in his policies and allowing non-Bumiputras gain at the expense of Bumiputras.

As mentioned before, politics and economics are often intertwined, and the degree to which politics and economics overlap is well illustrated in the case of the NEP. While the NEP through its name may appear to be an economic policy in nature, the degree to which it functions as a political tool is overwhelming. As such, an examination of the political climate within UMNO prior to the outbreak of the 1969 riots provides some clues as to why Tunku was criticised for being overly liberal in his policies and allowing non-Bumiputras gain at the expense of Bumiputras.

The political stances of Tunku and Razak

First, let us examine the differences in policy stances between Tunku and Razak (his successor). By and large, Tunku was supported for his moderate communal policies. In a speech he delivered at the UMNO general assembly in Apr 1957, just before Independence, he addressed the issue of Malays who were unwilling to compromise with the other communities, and asked, "How can we seize all rights for ourselves alone? Will the other races keep quiet? Will the world allow us to make the other races suffer?" Also, in 1967, when introducing the National Language Bill, Tunku tried to delay the implementation of Malay as the official language and the demise of English as the official language. This caused Tunku's loss of popularity, and later led to his ousting and Malaysia's greatest loss.

Furthermore, Tunku attempted to foster national integration through racial harmony. He attributed the attainment of Malaysia's independence to the tremendous support from the other races, without which, independence would not have been possible. In his little known book "May 13: Before and After", which Tunku wrote shortly after the riots erupted, he stated:

"Let us not overlook the fact that before we became a nation, we were simply separate colonies. If all the races had not joined together in the cause of independence we would still be today a colony of Britain. As a result of the drive for independence, led by the Malays and shared and supported by other races, a wind of change swept over our land to drive out the colonial era and system....."
In an ironic twist, the 4th Prime Minister who played a key role in Tunku's removal, has pointed to the immense contributions made by the Chinese in building Malaysia. Unfortunately, Tunku's well-known moderate stance served somewhat as a double-edged sword. On the one hand, he received support from the other races, as well as the Bumiputras who believed in the necessity for all Malaysians to work hand-in-hand in order for the nation to advance as a whole. On the other hand, he received tremendous opposition from Bumiputras who favoured "Malay first" policies. Critics of Tunku's very far-sighted moderate stance, deemed his policies over-liberal and that by being over-liberal, he neglected the welfare of the Bumiputra community. Thus, they often used the manner in which he lived his personal life against him, criticising, for example, his liking for horse racing and the fact that he occasionally engaged in poker sessions. More than 3 decades after his forced retirement and given the bad shape that the Malaysian economy is in nowadays, Tunku must be having the last laugh.

In the 1960s, there was a rise of a nascent Bumiputra entrepreneur class from the rural Bumiputras who were predominantly peasants, petty traders and owners of small and medium cottage industries. Many of these Bumiputras benefited greatly from the endless development projects that Razak granted to them, comprising infrastructure projects and capacity-building projects. It was through these efforts that Razak obtained the image of a leader of economic development for the Bumiputras and gained tremendous support from the Bumiputra community who were in favour of "Malay-first" policies. Correspondingly, it was these very efforts that made non-Bumiputras fear that his policies would be detrimental to their welfare.

Furthermore, it has been argued that Razak, through his position as the Minister of Rural Development, implemented rural development programs, which eventually created a class of UMNO politicians who were not only more interested in the business of politics but also increasingly knowledgeable in the politics of business. This was because rural development programs that were often infrastructural in nature, often involved large amounts of construction and huge outlays. However, since the Chinese, who possessed the necessary expertise, dominated the construction industry, tenders and contracts for these projects were often won by UMNO politicians and subsequently, subcontracted to Chinese companies. As a result of such "benefits", young aspiring Bumiputra entrepreneurs were lured into politics, as it provided a shortcut route to material wealth, to climb the social ladder, and simultaneously, gave them power.

Because of the increasingly popular perception and understanding that politics provided a fast and easy route to riches and gold, it is only logical that the influx of such individuals into UMNO would change the political landscape in UMNO. These individuals would obviously be more in favour of Razak's policies than Tunku's since Razak's policies provided more opportunities for serving self-interests. Naturally, they would be much more inclined to side with Razak in the event of a split.

Since there was a divergence between the stance taken by Tunku and Razak, and Tunku clearly displayed that he was averse to "Malay-first" policies, he eventually lost popularity within the UMNO. The loss of popularity was further enhanced by the fact that the influx of individuals who saw politics as a shortcut route to riches tipped the balance between the "pro-Malay first" camp and the moderate camp within UMNO, ie Tunku's camp became relatively smaller because the new UMNO entrants were more inclined to join Razak's camp.

One may at this point, question the relevancy of discussing the internal conflicts within UMNO. It is relevant because contrary to popular perception, the May 1969 riots may not have been quite as simple as a tragedy that erupted as a result of the growing racial tensions that were caused by inter-ethnic economic imbalances. On the contrary, the riots (if they were not engineered by Tunku's opponents within UMNO), were a blessing in disguise for the Razak camp. In 1997, Shamsul wrote in The Developing Economies, "[The NEP] provided them a reason and an occasion to push forward the implementation of the nationalist economic agenda. Previously it was done under the political umbrella of "Malay dominance" but after 1969 it was carried out within a redefined and constrictive political ideology of "Malay hegemony"." Therefore, it is arguable that the underlying agenda behind the implementation of the NEP was not to foster national unity through the removal of economic imbalances, but rather, to promote narrow self-interests under the pretext of national unity.

The manner in which the New Economic Policy (NEP) was formulated
Efforts for the formulation of the NEP began almost immediately after normalcy was restored in 1969-1970. During the months that followed, the Prime Minister's Department and the Department of National Unity (DNU) drew up various documents, which were supported by Tan Sri Abdul Kadir Shamsuddin, the Chief Secretary of the Federal Government. These documents were used as part of the foundation in Tun Abdul Razak's search of an alternative development strategy, which provided the basic thrust for the NEP. While it was the DNU that initiated the NEP, it was the Economic Planning Unit (EPU) that finally put the plan together.

Scrutinising the manner in which the NEP was formulated will reinforce the argument that the NEP was misused as a tool to advance self-interest and to push forward "Malay-first" policies rather than to foster national unity. This was because the NEP was formulated in a manner whereby the input from the other races was kept at a bare minimum and even input from UMNO members who were not in support of "Malay-first" policies was limited. Also, a study that was conducted in the 70s showed that the NEP's numerical targets for restructuring were definitively unattainable unless the other races were severely deprived.

Limited non-Bumiputra participation
If the policymakers had in fact been sincere about fostering national unity, efforts to involve participation from all races would be evident. However, as mentioned, instead of facilitating participation of all races, there was evidence that efforts were made to keep involvement of other races in the NEP's formulation to a minimum. It was selected individuals who managed to maintain their crucial posts in policymaking (obtained prior to the change in premiership) who were in a position to safeguard the interests of other races. For example, Tun Tan Siew Sin was the Finance Minister and Dato' Thong Yaw Hong (now Tan Sri) was the Director-General of the Economic Planning Unit in the Prime Minister's Department. These individuals played crucial roles in safeguarding the rights of non-Bumiputras. In Tuni Tan Siew Sin's case, it was not until he retired in 1974 due to ill health that the NEP became fully institutionalised with the promulgation of the Industrial Coordination Act (ICA), which required non-Bumiputra businesses to comply with equity restructuring objectives. Additionally, despite the growing Malay economic nationalism, which called for intensive state interventionist actions to correct the economic imbalance between the Bumiputras and the non-Bumiputras, he successfully fended off Malay nationalist pressures in the urban sector.

As mentioned, although the DNU was given the responsibility of drafting the NEP, it was the EPU that finally put the plan together. The initial DNU document apparently contained extreme interventionist measures, which would have severely undermined Chinese business interests. However, a critical sentence was added to safeguard non-Malay interests : "[The government] will spare no efforts to promote national unity and develop a just and progressive Malaysian society in a rapidly expanding economy so that no one will experience any loss or feel any sense of deprivation of his rights, privileges, income, job or opportunity". In a second revision, the scope of poverty eradication was extended to benefit all groups, and not just the Bumiputras.

Without the efforts of key individuals like Tun Tan Siew Sin, the NEP would have caused severe detriment to the non-Bumiputras, although its overriding objective was supposedly national unity. Hence, the fact that input from the other races were kept to a bare minimum showed that national unity could not have been the NEP's underlying objective.

Disagreements within UMNO
Although the NEP's conception, legislation and promulgation took only 14 months, the implementation process was delayed because there was no consensus between the top leaders of UMNO itself on the methods and processes of implementation. When Razak came into power, the UMNO leadership was split into 4 main camps:
  1. Ex-President Tunku Abdul Rahman and his followers;
  2. Dato' Harun, whose constituency was Pemuda, UMNO's youth wing;
  3. Razak's supporters who had no power base of their own and whose intra-party positions were maintained through their personal relationship with Razak; and
  4. Another group of Razak's supporters who consisted of relatively young UMNO members who opposed Tunku's ethnic conciliation policy; in particular, his relatively more laissez-faire economic policies and his reluctance to impose more articulate Malay-first policies.
The lack of consensus was mainly due to the fact that the new Razak government was, in fact, a compromise between the Razak group and the preceding ruling group under Tunku, which as mentioned before, took different political stances. Thus, the main point of divergence among the 4 groups was how the NEP's Bumiputra nationalism would be translated into concrete policies. Group (iii), who were often known as Razak's inner circle, was the most articulate exponents of Malay nationalism. Meanwhile, group (ii), led by Dato' Harun, stressed the importance of job creation for the Bumiputra youth as a means of mitigating Bumiputra backwardness. However, the sharpest resentment was between group (i) and group (iv) and these conflicts were fairly obvious between 1971 and 1973. For instance, Khir Johari (from Tunku's camp), who was the Minister of Trade and Industry then stated that they were willing to go along with Razak's camp as far as Bumiputra employment was concerned but would oppose legislative steps on the equity ownership issue. On the other hand, Tengku Razaleigh (from the Razak camp), who was the president of the Associated Malay Chambers of Commerce then, favourably discussed the introduction of legislation for equity ownership restructuring. Nevertheless, despite the lack of general consensus within UMNO, the camp whose influence and power increased over the course of the NEP (the Razak camp) got its wish and the numerical target for Bumiputra equity ownership was formalised.

Despite the internal squabbles within UMNO, the policies which formed the NEP were eventually those proposed by Razak's "pro-Malay first" camp, and not those proposed by the more moderate camp. This puts into severe doubt over the real agenda behind the NEP.

The NEP's targets
A study conducted in 1976 showed that the NEP's restructuring targets with respect to employment would be unattainable unless the other races were severely deprived. The NEP aimed to restructure employment in the different sectors in order to reflect the ethnic composition of the Malaysian population. Since the Malaysian population then was 52.7% Malays, 35.8% Chinese, 10.7% Indians and 0.8% others, these would be the targeted employment ratios in the various sectors.

Table 21: Incremental Shares of Races in New Jobs in 1971-90 (%)

Table 21 above shows the rate at which employment of the respective races would need to change in the respective sectors in order to achievethe NEP's targets. Taking the example of the construction sector, it was shown that the NEP's employment targets could only be attained over the course of 20 years if the rate of employment growth was 5.1% per annum and 71.3% of the new jobs accrued to Malays. As for the mining and quarrying sector, the restructuring targets can only be realised by displacing the existing Chinese workers in the sector. Meanwhile, in order to attain restructuring targets in the agricultural sector, 90.4% of the new jobs would have to be taken up by the Chinese.

Proponents of the NEP may argue that the other races are not deprived because their loss in the mining and quarrying sector could possibly be compensated for by their gains in the agriculture sector. Due to various structural factors like the transferability of skills, the view that the loss experienced in one sector can be automatically offset by gains in another sector is unrealistic. Additionally, it is important to note that with the NEP, the proportion of new jobs set aside for Malays is substantially higher than that of the other races. Hence, the aim of restructuring employment in order to reflect the racial composition, and thereby, foster national unity is an oxymoron. This is because, while it is suppose to foster unity through increased inter-racial mingling, because of the extent to which it deprives the other races of employment opportunities, the exercise is likely to be counterproductive.

As the said study shows, in order to realise the NEP's targets, the Bumiputras would need to gain at the expense of the other races, an exercise that clearly undermines rather than fosters national unity. This therefore further reinforces the view that the NEP's actual objective was not national unity but to serve much narrower goals. There is much reason to believe that the underlying agenda behind the NEP was to utilise politics as an instrument to pursue narrow self-interest. Therefore, it is important to analyse the extent to which the NEP has either functioned as a catalyst for both national unity and economic advancement or whether it has been an impediment to the achievement of these two goals.


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