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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : New Economic Policy (Part 2)



The task of ascertaining the implications of the NEP on the country as a whole is an extremely complex one because analysis would have to be conducted from multiple perspectives in order to ensure objectivity. Nevertheless, this task is necessary because of the degree in which the government's social and economic policies over the years have been skewed towards achieving the objectives enunciated in the NEP. Hence, for the purpose of this discussion, the impact of the NEP will be evaluated from these perspectives:

  1. Its implication on national unity and removing economic imbalances and
  2. Its implication on economic growth.
The above 2 perspectives were selected as yardsticks because the NEP was implemented, supposedly, to foster national unity, while ensuring that economic growth was not jeopardised.

[1] Implication on national unity
The task of evaluating the NEP's impact on national unity is highly complex because national unity is extremely abstract, in the sense that quantifying or measuring it leaves much room for subjectivity, if one could quantify it in the first instance. Nevertheless, this task is highly necessary because of its said objective of fostering national unity.

(a) Absence of any major riot
Superficially, if the May 1969 riots were an illustration of disunity, then, one could argue that the fact that since no major riot has erupted since then, this shows that the NEP has successfully fostered national unity and is therefore successful. This in fact is one of the most common albeit spurious arguments used to defend the NEP. However, if the riots were in fact engineered by the anti-Tunku Abdul Rahman camp because it provided a 'reason' to oust Tunku and overturn his 'over-liberal' policies, the absence of any major riot since 1969 neither reflects any improvement nor deterioration in national unity because the 1969 riots were not a reflection of national disunity in the first place. This has been the argument of i Capital.

(b) Employment in the various sectors less fragmented
One of the supposed objectives of the NEP was to restructure employment to reflect the ethnic composition of the Malaysian population so as to foster national unity through increased inter-racial mingling and reduced identification of economic functions with race. As such, efforts were undertaken to increase the employment of non-Bumiputras in the agricultural sector and employment of Bumiputras in the secondary and tertiary sectors. Table 22 below shows the extent to which restructuring had occurred.

Table 22: Percentage employment in each sector, by race

By looking solely at table 22, one may presume that the NEP did justice to the Malaysian society by making it less ethnically fragmented. However, when the extreme actions that had to be undertaken to achieve the NEP's targets are examined, one would find that it is highly unlikely that the NEP in this case did any justice to national unity. In fact, it may have worsened the level of resentment among the races. In addition, serious and in-depth studies should be made on the adverse impact restructuring employment had on productivity and overall economic growth. How did policymakers restructure employment?

(b)(i) Create increased opportunities for Bumiputras in non-agricultural sectors
In order to make the NEP's restructuring targets remotely plausible, the other races had to be severely deprived because the creation of new opportunities was, by and large, reserved for the Bumiputra community. Furthermore, in extreme cases such as the mining and quarrying sector, NEP targets could only be attained in the event that a substantial portion of the existing non-Bumiputra workforce in the sector was displaced. Table 23 below shows the difference between the intended incremental shares of employment experienced by the Chinese and the Malays, and the Indians and the Malays.

Table 23: Difference between the intended incremental shares of employment (%)

As shown in table 23, the non-Bumiputras were given significantly fewer opportunities in all the sectors, except for the agriculture sector. Moreover, as mentioned earlier, the NEP's targets could only be attainable in the mining industry through the displacement of the existing Chinese workers. Additionally, it was also previously mentioned that it is highly unlikely that the opportunities created for the non-Bumiputra community in the agriculture sector would be taken up due to various factors like the transferability of skills, making the loss experienced by one sector being compensated by the gain of another sector unrealistic.

Since the NEP's targets were only remotely attainable as the policymakers had to rob Peter to pay Paul, it is much more probable that the NEP had aggravated rather than mitigated ethnic resentment.

(b)(ii) The Industrial Coordination Act (ICA) 1975
When the government implemented the Industrial Coordination Act (ICA) in 1975, there was no explicit mention of its coherence with NEP objectives. The ICA was supposedly a tool to facilitate an organised industrial policy and pave the way for industry-led economic development. However, in reality, the actual conditions imposed confirmed that the objective of the ICA was none other than to advance Bumiputra's well being (in line with the NEP's objectives) because of the lack of transparency in the licence-granting process. To guide the decision-making process of the issuing officer, the government issued a list of guidelines. Although the specific guidelines upon which the issuing officer utilised in the decision-making process were confidential, perusal of other indirect documentation confirms the ICA's coherence with NEP objectives.

In the Guidelines for Equity Participation under the Industrial Coordination Act, 1975 under the item, 'New Import-Substitution Industrial Projects' it was stated, 'for those projects where local technology is not sufficiently developed or available, up to 30% foreign equity participation will be allowed'. Therefore, under no other circumstances would foreign equity participation be allowed. In addition, detailed ethnic background of the owner/partners, as well as directors of business ventures, was required in the application form.

Furthermore, over the course of the NEP, the number of Bumiputra manufacturing projects approved under the ICA was significantly higher than that of non-Bumiputras (except in 1988 and 1989) - see figure 16. Perhaps one of the best confirmations of how detrimental the ICA was to the other races and the overall economy was the strong response of foreign direct investors when the conditions of the ICA had to be relaxed after the 1985/86 Malaysian Depression.

Figure 16: % of Approved Projects

(b)(iii) Other policies to promote Bumiputra participation in non-agricultural sectors
Government departments were explicitly directed to give preferences to Bumiputra suppliers in the consideration of tenders and quotations for the supply of goods and services. There was a minimum requirement ranging from 2% to 10% for supplies up to RM5 mln to be granted to Bumiputra firms/individuals. Furthermore, the Public Works Department, a major contract-issuing department of the Government, sets aside at least 30% of its contracts for Bumiputra contractors.

Therefore, because the government sought to attain its target of less ethnic fragmentation in the various sectors by giving far more opportunities to the Bumiputra community, it is unlikely that national unity was nurtured. Conversely, it is far more likely that inter-ethnic resentment only deepened because of the inequality of opportunities.

(c) Non-Bumiputra community less vocal in questioning special rights of the Bumiputra
Prior to the implementation of the NEP, the non-Bumiputra community was relatively vocal with regards to the questioning the special rights of the Bumiputras. Since the NEP was implemented, the degree of opposition displayed towards the special rights of the Malays has been extremely mild, relative to the degree of opposition prior to the implementation of the NEP. Why have criticisms of the special rights mellowed down? Is it due to greater national unity and lesser inter-ethnic resentment?

No. It is much more probable that criticisms against the special treatment of the Bumiputras have mellowed down due to the amendments in the Constitution. Prior to the amendments, non-Bumiputras were allowed to openly question and debate the special rights of the Malays. Alternatively, on 22 Sep 1970, amendments to the Constitution prohibited the questioning of : (i) the status of the Sultan; (ii) Islam as the state religion; (iii) Malay as the official language; (iv) the special position of the Malays; and (v) citizenship regulations. Also, the Seditious Act 1970 was introduced. These amendments made it punishable and illegal to question the provisions in the Constitution. Therefore, it is far more likely that criticisms against the special rights have mellowed down due to fears of being criminally punished rather than actual reduction in discontentment, ie the mellowing is not a reflection of any improvement in national unity.

(d) Reduction in inequality of income & wealth
From 1970 to 1990, inter-ethnic income inequality was significantly reduced - see tables 24 and 25.

Table 24: Mean income (M$)

Table 25: Income ratio

However, despite the fall in inter-ethnic inequality, intra-ethnic inequality within the Bumiputra community actually increased. Over the course of the NEP, the Gini coefficient, which measures the degree of equality, where 1 signifies extreme inequality and 0 signifies total equality, rose from 0.466 to 0.477 within the Bumiputra community. While numerically the increase in inequality may seem rather negligible, it is, nevertheless, noteworthy because intra-ethnic inequality rose although it should not have; the NEP was supposed to assist the Bumiputra community at large to remove the economic imbalances that existed across races. However, the rise in intra-ethnic inequality is an indication that it was specific groups that benefited from the NEP rather than the Bumiputra community at large.

More often than not, advocates of the NEP who deemed the NEP a success harped on the fact that inter-ethnic inequality had fallen, while the rise in intra-ethnic inequality was disregarded. Often, the fall in inter-ethnic inequality was automatically associated with greater national unity despite the fact that an examination of inequality in general (both inter and intra-ethnic inequality) would be a better reflection of national unity.

At this point, it is crucial to acknowledge that the reduction in inequality (be it inter-ethnic inequality, intra-ethnic inequality, or inequality in general) cannot be examined in isolation with regards to the issue of national unity. The manner in which improvement in equality is attained is crucial in determining the level of national unity achieved. Obviously, if equality is obtained through severe oppression of one race and giving extreme preferential treatment to another, it is unlikely that national unity in its true sense will be attained.

In Malaysia's case, through the NEP, it is undoubted that extreme preferential treatment was shown to the Bumiputra community. Preferential treatment was held to be necessary to assist the Bumiputra community in "catching up" with the non-Bumiputra community, in order to promote income equality and simultaneously, foster national unity. The preferential treatment included training, advisory assistance, reservation of shares in public listed companies, reservation of admissions into local universities, higher interest rates on savings, better credit facilities and preferential treatment for Bumiputra contractors and suppliers.

As for the non-Bumiputra community, although they were not explicitly deprived, as mentioned earlier, they were granted far fewer opportunities relative to the Bumiputras. Furthermore, a study conducted in 1976 also revealed that it is irrational to expect any set of policies implemented under the NEP to yield total equality in terms of income, as well as wealth. This is because, in the case of income, the level of income earned is/should be dependent on productivity, efficiency and effectiveness. Hence, because productivity and the rate at which new knowledge and new concepts are grasped vary across individuals, it is unreasonable to expect all individuals to be paid the same wage. Therefore, it is just as unreasonable to believe that complete income equality can be attained for a sustained period.

Similarly, in the case of wealth, it is largely dependent on (i) income and (ii) marginal propensity to save. As discussed above, it is unreasonable to expect the level of income across all individuals to remain the same over a sustained period. As for marginal propensity to save, research has shown that the non-Bumiputra community is much more inclined to save and thereby, this makes it much more difficult for the Bumiputra community to attain the same level of wealth. Thus, to promote the habit of saving within the Bumiputra community, they are given higher rates of return on their saving.

As our discussion has shown, the NEP's goal of removing economic imbalances (ie achieving greater equality) can only arise when all individuals, regardless of their contributions, are rewarded in the same manner, ie individuals receive the same wage regardless of their productivity levels. Conversely, in the case of savings, Bumiputras and non-Bumiputras are rewarded differently for the same practice of saving. Therefore, because the NEP strives to achieve greater equality by going in the extreme opposite direction, it is only rational to believe that the NEP is more likely to breed discontent rather than foster national unity.

(e) Change in national education system promotes national unity
In conjunction with the NEP, the government spelled out a timetable to convert all English medium schools into Bahasa Malaysia (now known as Bahasa Melayu) medium schools. The said rationale behind this policy was to proliferate the use of the national language to strengthen national unity.

However, when the conversion process began in 1971, Chinese demand for Chinese primary education gained momentum. In 1971, 78% (or 413,270) of the total number of Chinese students enrolled in primary education were enrolled in Chinese primary schools. By 1978, this figure had increased to 87.8% (or 498,311) and by 1985, the number was close to 600,000, far exceeding the number of Chinese students enrolled in the national primary schools. Similarly, at the secondary level, the number of students enrolled in independent Chinese schools progressively increased from 15,890 in 1970 to 25,047 in 1975, 44,600 in 1982 and 54,690 in 1990. Nevertheless, at the secondary level, the rate of increase in the enrolment of Chinese students in government schools exceeded that those in the independent Chinese secondary schools. This implies that it was common practice for Chinese parents to enrol their children in Chinese primary schools but subsequently, enrol them in national schools at the secondary level.

The driving force behind this common practice is likely to be due to the fact that the syllabus taught in independent Chinese secondary schools was not recognised by the Malaysian government. Unlike the students in the national secondary schools who sit for the Sijil Pelajaran Malaysia examination, students in the Chinese independent schools take the Unified Examination Certificate (UEC) examination. Despite the fact that the UEC has obtained accreditation not only from universities in Taiwan, Hong Kong, China and Singapore, but also, from universities in the US, Japan, Australia and the UK, the Malaysian government continues to oppose the recognition of the UEC. Hence, it is highly probable that the underlying push factor encouraging Chinese parents to enrol their children in the national secondary schools is to provide their children with a wider range of choices in terms of tertiary education and is not a reflection of greater national unity.

Thus, with reference to the change in the education system that was implemented in line with the NEP, it is likely to have led to the deterioration of national unity rather than promote it. Although the intention of the government may have been to unify the various races through a common national language, this exercise is likely to have been counterproductive. This is because the NEP induced an influx of Chinese students into Chinese schools, and led to increased separation of the two major Malaysian communities and increasing the degree of ethnic fragmentation in the Malaysian society.

Although the NEP supposedly strove to promote national unity through its infamous two-pronged strategy of eradicating poverty regardless of race and removing identification of race through economic function, as our discussion has shown, the level of national unity post-NEP is likely to have worsened compared with pre-NEP because of the manner in which the government and policymakers went about trying to attain its NEP targets.


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MEH: New Economic Policy (Pt3)>>