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Home > Articles > Malaysia's Economic History

Malaysia's Economic History - New Economic Policy (Part 3)



(2) Implications of the NEP on economic growth
Discussion on the effects of the NEP on economic growth is crucial because it is intertwined with a host of other factors, which affect the living standards of present and future generations of Malaysians. Hence, prior to analysing the effects of the NEP on economic growth, we will first examine the extent to which Malaysians' living standards have improved over the course of the NEP.

Table 26: Indices reflecting quality of life

Table 26 shows tremendous improvement in the living standards of Malaysians. As stated in the Second Outline Perspective Plan, such achievements were only possible due to the notable achievements in economic growth achieved over the course of the NEP - GDP growth averaged 6.7% per annum between 1970 and 1990. However, this was primarily due to Malaysia's economic structure, which greatly benefited from the sustained commodity boom of the Seventies - strip this away, Malaysia's GDP growth would have been pathetic. While policymakers have been quick in pouncing on this figure and claiming the success of the NEP, i Capital, on the contrary, would argue that it is because of the NEP that Malaysia's economic growth has been jeopardised.

Figure 17: GDP (1970 = 100)

First, although Malaysia achieved average growth of 6.7% per annum over the course of the NEP, her growth has lagged behind that of her East Asian counterparts during the same period. As shown in figure 17, while the GDP of countries such as South Korea have raced ahead, Malaysia is still lagging far behind. What is worse is the fact that when the NEP began in 1970, South Korea's GDP per capita was 6% lower than that of Malaysia but by 1990, her GDP per capita was 70% higher. i Capital believes that the NEP is the main culprit behind this relative loss of economic growth. Why?

(a) The NEP deprives deserving Malaysians of education
As part of the NEP's ostensible objectives of removing or mitigating inter-ethnic economic imbalances, the university quota system was implemented, whereby Bumiputras are given preferential treatment through admission quotas in higher education. The rationale behind this policy was that since academic credentials in modern societies are intricately linked with status, good jobs and higher income, education was held as a cornerstone for socio-economic restructuring. An article written by Shamsul Haque in 2003 contends that although the official quota of student intake is set at 55% for Bumiputras and the remaining 45% for non-Bumiputras, in practice, the quota in public universities may well be 75% and 25% respectively. Table 27 below shows the ethnic composition of enrolment in public universities in 1980.

Table 27: Ethnic composition of student enrolment (%) - 1980

The existence of the disproportionate university quota system means that non-Bumiputra students are not only required to perform significantly better than Bumiputra students to obtain admittance into local universities, they are also at risk of not being able to obtain entry into local universities despite having performed significantly better than their Bumiputra counterparts. Also, there is evidence that notable disparity exists between the university entry requirements for Bumiputras and the non-Bumiputras due to the great variation in the quality of graduates. The Chinese students consistently outperformed the Bumiputra students despite the fact that the medium of instruction and examinations were in Bahasa Malaysia, a situation that was perceived to help the Bumiputras. Therefore, it is not surprising that in 2001, the Education Ministry's statistics showed that 560 top scorers in the SPM examinations, all of whom were Chinese, failed to obtain entrance into local universities.

Hence, this results in 2 possible outcomes. One, non-Bumiputra students whose parents are unable to afford private higher education either (a) apply for scholarships and if they succeed in obtaining funding, they are given the opportunity to pursue higher education or (b) discontinue higher learning altogether. Two, non-Bumiputra students whose parents can afford the cost of private higher education seek entry into private universities, be it within Malaysia or abroad.

As a result of the NEP, the option whereby non-Bumiputra students whose parents are unable to afford private higher education and apply for scholarships to fund their higher education, this option is only available to a few non-Bumiputras. This is because in a study conducted by Ozay Mehmat and Yip Yat Hoong in 1985, which was based on a large-scale survey of 1982-83 graduates of 5 universities, only 1 in 5 scholarships was awarded to a non-Bumiputra, with the Chinese and Indians receiving only 14.4% and 4.3% of scholarships respectively. As such, numerous deserving non-Bumiputra students were put at risk of not having the opportunity to pursue higher education.

What is worse is that, the same study revealed that scholarships were granted in an extremely regressive manner, favouring the richer households in all ethnic groups. With regards to the non-Bumiputra community, the rich received 13 and 10 scholarships for every one scholarship granted to students from poor households in the Chinese and Indian communities respectively. The side effects of the NEP would then be reducing one imbalance while increasing other imbalances.

Recognising that the Malaysian education system puts the Chinese community at a grave disadvantage, in the late 1970s, the Chinese Education Movement (Dongjiaozong), took the initiative to establish Merdeka University, a privately funded Chinese medium university to cater to the Chinese community. This initiative received overwhelming support from the Chinese community. Unfortunately, the government constantly impeded these efforts. The rationale given was that the establishment of the Merdeka University would threaten national unity. In response, the Dongjiaozong collaborated with the Democratic Action Party (DAP) to file a suit against the government. The case was fought up till the Supreme Court level, Malaysia's highest court, which ruled in favour of the government.

Therefore, the Malaysian education system, which was intentionally changed and structured to be very much in line with the NEP's objectives, logically and inevitably leads to a massive loss of economic growth because of the manner in which it deprives deserving students, Bumiputra and non-Bumiputra, who have the potential to be major contributors to the country's economic growth, of higher education.

As for students whose parents can afford to send them abroad to pursue higher education, from an economic development perspective, this causes brain and economic losses that the Malaysian politicians and policymakers have not bothered to quantify or think about. Besides leading to an unnecessary outflow of funds, such losses in valuable human capital retard a country's growth, perhaps permanently.

(b) Wastage of resources

(b)(i) Priority given to Bumiputra contractors when awarding government contracts
As mentioned previously, preferential treatment is given to Bumiputra contractors under the NEP. This policy is deemed to be part and parcel of assisting Bumiputras in catching up with the non-Bumiputra communities. Of course, if the Bumiputra contractors were capable of performing their contractual duties effectively and efficiently, there would be no detriment to economic growth. However, more often than not, contracts were granted to the less deserving but the politically well-connected.

For example, the construction of the North-South Highway is a clear case where the NEP caused unnecessary wastage. In the mid 1980s, the government called for tenders for the construction of the North-South Highway. It received 4 tenders. United Engineers Malaysia (UEM), the least qualified, submitted a tender of RM3.2 bln. Unfortunately, despite being the least qualified, UEM, a company that was owned and controlled by UMNO, was awarded the contract. By the time UEM completed the project, its cost had inexplicably ballooned to RM6 bln, of which, the bulk was financed by a government soft loan. Thus, because the construction of the North-South Highway cost more than it would have in the absence of the NEP, the NEP led to wastage of precious resources, which in turn, subtracted the benefits of the highway construction.

(b)(ii) Preferential treatment given to Bumiputras in awarding scholarships for education
A noteworthy feature of the education policy, implemented under the NEP, was the wide use of public funds to provide scholarships to Bumiputra students to pursue their studies in either local or foreign universities. The rationale here was that since the relationship between education and income was a positive one, providing Bumiputras with easier access to funding would increase the likelihood of achieving the NEP's goal of greater equality. A study conducted by Ozay Mehmat and Yip Yat Hoong in 1985, which was based on a large-scale survey of 1982-83 graduates of 5 universities, revealed these:

  1. Almost 4 out of every 5 government scholarships were awarded to Malays, with the Chinese and Indians receiving only 14.4% and 4.3% of scholarships respectively;
  2. The value of Bumiputra scholarships, as a general rule, tended to be higher than that of non-Bumiputras; and
  3. The scholarships were granted in an extremely regressive manner, favouring the richer households in all ethnic groups, especially the Malays.
The study showed that the share of scholarships of poor households, with monthly income of less than M$300 was only 12.3%, against their population share of 49.4%. Within the Bumiputra community, students from poor households received only one scholarship for every 21 scholarships granted to the richer Bumiputra households. Similarly, in the Chinese and Indian communities, the rich received 13 and 10 scholarships respectively for every one scholarship granted to students from poor households.

The fact that the basis for granting the scholarships shows no correlation with meritocracy is daunting. However, what is worse is the fact that the NEP's ostensible objective of promoting greater equality was in no way served. Instead, since scholarships were awarded in a regressive manner, such policies inevitably worsened rather than reduced inequality. If the findings of the said study were in any way a reflection of reality, the negative implications on economic growth are tremendous. Why?

The monetary costs of providing higher education to the Bumiputras have been astronomical. For example, the total development expenditure spent on Bumiputra students through MARA (Majlis Amanah Rakyat) scholarships and loans, MARA Institute of Technology and other local institutions of higher learning was M$1,938.86 mln or 74.8% of total development expenditure under the 5th Malaysia Plan. Out of this M$1,938.86 mln, the M$690 mln that was spent on MARA scholarships and loans then was higher than the total development expenditure of the four local universities (Universiti Malaya, Universiti Sains Malaysia, Universiti Kebangsaan Malaysia and Universiti Pertanian Malaysia).

Due to the massive amount of funds dedicated to increasing the Bumiputra community's opportunities to have access to higher education, the number of Bumiputra enrolments in universities shot up after the NEP was implemented. Unfortunately, this was somewhat a pyrrhic victory since a study conducted by Richard Basham in 1983 showed that non-Bumiputra students continued to outperform Bumiputra students. Furthermore, it was shown that Bumiputra students continued to display lack of motivation to excel academically despite the extensive government efforts undertaken.

Also, as mentioned, the value of the scholarships awarded to Bumiputra students generally exceeded those awarded to non-Bumiputra students. Sadly, even one and a half decades after the NEP has supposedly lapsed and although the NEP has come at such immense costs, such patterns continue. In a recent release by Datuk Dr Abdullah Mat Zin, a Minister in the Prime Minister's Department, in Parliament and published in Sin Chew Jit Poh (shown in tables 28 and 29), it was clear that under the Jabatan Perkhidmatan Awam (JPA) scholarship program, Bumiputra applicants received a disproportionate percentage of the scholarships granted.

Table 28: Overseas JPA scholarships awarded

Table 29: Local JPA scholarships awarded

Hence, if an analogy that compares the hefty sum paid by the government to develop Bumiputra human capital with a normal investment is made, the results would imply that the government grossly overpaid for its investment. Unsurprisingly, a study conducted by Surjit Bhalla in 1989, which utilised the conventional human capital model, revealed that the rate of return to education had almost halved between 1970 and 1984. Such data reinforce i Capital's long held view that the policies of the NEP come at immense costs, costs that have not been thoroughly studied and examined by the policymakers or simply ignored by them.

(b)(iii) Creation of public enterprises to promote Bumiputra interests
The main purpose in the creation of public enterprises (PEs) was to facilitate the creation of a Bumiputra Industrial and Commercial Community (BCIC). Such objectives were coherent with the NEP's objectives of facilitating Bumiputra participation in the commercial sector through purchasing and creating corporate assets on behalf of the Bumiputras, as well as, providing discriminatory employment opportunities in favour of the Bumiputras. This move was held necessary since their participation remained low in spite of other government efforts.

The government had been so persistent in creating PEs that by the 1980s, Malaysia had one of the largest numbers of PEs in the world outside the centrally planned economies. The contribution of PEs progressively increased from 1970 to 1980 and peaked in 1981, contributing to 29% of GDP in 1971-1975, 31% in 1976-1980 and a massive and choking 48% in 1981. Similarly, the government's involvement in the overall economy rose from an already high 29.2% of GNP in 1970 to 39.9% in 1979 and peaked in 1981 at 58.4% with hardly any breathing room left for the private sector. By the time the NEP had lapsed in 1991, Pernas (a Bumiputra holding company), had more than 95 enterprises and MARA (Majlis Amanah Rakyat, a Bumiputra trust) had 64 enterprises. With so much state capitalism, it is truly amazing that Malaysia can be termed as a market-based economy and not a centrally planned economy.

Characteristically, there are 2 broad categories of Pes: [a]. Financial public enterprises (FPEs) and [b]. Non-financial public enterprises (NFPEs). However, discussion here will be focussed on the implications of NFPEs because : (i). The NFPEs were free from normal government controls; (ii). The NFPEs were not subjected to the same degree of parliamentary scrutiny as other government ministries or departments; (iii). Funds allocated for developing NFPEs were not required to be approved via the annual budget; and (iv). The NFPEs' ownership structure could be easily manipulated to meet the NEP requirements and thus, once financially viable, the shares could be transferred (either partially or fully) to Bumiputra individuals. Unfortunately, because of these features, which were supposed to facilitate flexibility, there was more room for inefficient utilisation and allocation of resources, thereby, contributing to Malaysia's economic underdevelopment.

Table 30: Profitable NFPEs

The financial performances of the NFPEs were far from satisfactory. Table 1 above, the accuracy of which is suspect, illustrates the high failure rate of the NFPEs. The figures shown in table 30 are based on estimates made by the Ministry of Public Enterprises. However, according to Bank Negara's estimates, the percentage of unprofitable NFPEs were far higher than that shown in table 30, with the reported percentage of NFPEs registering losses in 1984 standing at approximately 80%. Based on anecdotal evidence and the actual experiences of many Malaysians, Bank Negara's figures are closer to the shocking realities.

The high failure rate was due to numerous factors such as:

  1. A World Bank study identified the primary cause behind the high NFPE failure rate as poor management, due to government ignorance. Until the 1980s, the government remained ignorant of the basic activities of the NFPEs in which it was the major shareholder;
  2. The incentive structure was poorly designed, as there was lack of accountability. As neither of the controlling agencies, ie the Implementation Coordination Unit (ICU) and the Ministry of Public Enterprises (MPE), had a proper system to assess the performance of the management, the NFPEs enjoyed a great deal of unaccountable autonomy;
  3. Lack of transparency in the evaluation of management performance;
  4. Lack of clarity of objectives, and consequently, lack of direction since the NFPEs' objectives ranged from profitability to socio-economic objectives, such as prioritising Bumiputra employment; and
  5. Lack of profit orientation and over-dependence on government funding.
Due to the fact that the various NFPEs played major roles in their respective industries, the inefficiencies in the NFPEs had far reaching negative effects on the economic growth and development of the country as a whole. However, what is worse than the high failure rate of NFPEs itself is the fact that because the government devoted a significant amount of resources to the development of the NFPEs, the failure of the NFPEs posed considerable strain on government finances and Malaysia had to suffer very expensive opportunity costs. By 1982, the amount owed to the government by statutory bodies, PEs and the state governments was approximately M$17 bln or 37% of total government debt. Since the government lacked resources to fund the poorly performing NFPEs, it relied excessively on external sources of borrowing. Tables 31 and 32 below illustrate the considerable strain that the NFPEs posed on the Malaysian economy. Furthermore, between 1980 and 1982, the government's absolute debt obligations doubled from 45% of GDP to 93% of GDP. As for interest payments on loans, their share as a percentage of total operating expenditure jumped from 11.0% in 1970 to 25.1% in 1985.

Table 31: Outstanding debt (M$ mln)

Table 32: Debt servicing (M$ mln)

The inefficiencies of the NFPEs and the large amounts of external borrowings to fund the losses (along with the inability to accurately forecast exchange rate trends) later became major contributors to Malaysia's Depression in the mid-80s, whereby her GDP contracted for 2 consecutive years. To survive the major contraction, companies had to undertake massive reforms, consolidate and layoff workers. As a result, Malaysia's unemployment rate skyrocketed and exceeded 8%.

Therefore, as illustrated, despite the fact that the government dedicated much of its resources to develop the NFPEs in order to facilitate the development of a BCIC, this strategy achieved little success, came with a heavy cost and left a legacy that till today is choking the economy. Although Bumiputra participation in the commercial sector may have increased as a result of the creation of the NFPEs, it came at tremendous costs to the country and can at best be termed as a phyrric victory. The population, at large, suffered tremendously during the 1986 Depression just so that the hastily thought aims of the NEP could be achieved.


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