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Home > Articles > Malaysia's Economic History

Malaysia's Economic History : New Economic Policy (Part 7)



So far, i Capital has dealt with the impact of the NEP on national unity and economic growth. i Capital has also examined the overlooked social costs of the NEP. This issue, i Capital summarises what it has written on the NEP in the last 10 weeks.

A Summary
i Capital started a special series on Malaysia's economic history since the period of 1800. The purpose of this article is to recapitulate and summarise this long series. It began by providing a brief background of the Malaysian economy between 1800 and 1957. Subsequently, it examined the economic policies, adopted during Tunku's premiership and concluded that his policies were so far-sighted that many of Malaysia's politicians and policymakers were neither able to see nor understand. Unfortunately, despite the far-sightedness of his policies, Malaysians at large believed and still believe (although wrongfully) that his policies were the cause of rising inequality, the May 1969 riots which consequently, led to his ousting. Hence, the New Economic Policy (NEP) was held as a necessary tool to mitigate the rising inequality despite the fact that there would be an inevitable trade-off between the pace of economic growth, quality of economic development and equality. In response, i Capital studied the experiences of other countries, namely, China, Taiwan and Japan pertaining to the relationship between growth and income inequality over time. The study revealed that contrary to the view widely held by Malaysian policymakers, the relationship between growth and equality is fluid and constantly evolves in line with government policies implemented rather than the rate of growth per se. Therefore, it concluded that instead of implementing the NEP, which sacrificed massive economic growth and development for little equality, other forms of redistributive policies that allow economic growth, development and equality to go hand-in-hand should have been implemented.

Subsequently, i Capital devoted much of its attention to analysing the NEP from multiple angles, starting from the political perspective. The political environment prior to the eruption of the May 1969 riots was examined to show that it is unlikely that the NEP was implemented to serve only the goal of national unity. During Tunku's premiership, there was a divergence between his political stance and that of his deputy, Razak, who became his successor. While Tunku was well known for his moderate communal policies, Razak was in favour of "Malay-first" policies. As the Minister of Rural Development, Razak implemented rural development programs, which were often infrastructural in nature and often involved large amounts of construction and huge outlays. An unfortunate side-effect of this policy was that it allowed the relevant politicians to reap substantial financial gains in spite of having done nothing. As a result, the perception that politics provided a fast and easy route to riches developed rapidly and fuelled the influx of individuals who saw politics as a shortcut to wealth and power. This phenomenon tipped the balance between the "pro-Malay first" and the moderate camps within UMNO, ie Tunku's camp became relatively smaller. Due to the complications in the political environment, the eruption of the May 1969 racial riots may not have been quite as simple as being a result of growing racial tensions that were caused by inter-ethnic economic imbalances and may have even been engineered by the anti-Tunku camp.

Moreover, the manner in which the NEP was formulated further reinforces the view that national unity was only used as a pseudo objective and that there was likely to be a hidden agenda because: [i] Non-Bumiputra involvement in the NEP's formulation was kept to a bare minimum; [ii] UMNO was extremely divided over what policies would achieve national unity and that the different factions had differing notions of national unity; and [iii] It was impossible to attain the targets stipulated in the NEP unless the other races were severely deprived.

After establishing why it was unlikely that the promotion of national unity was the main objective behind the implementation of the NEP, i Capital examined the implications of the NEP from 3 perspectives, ie national unity, economic growth and social cost.

With regards to national unity, first, i Capital held that the absence of any major riot since 1969 is neither a reflection of an improvement nor deterioration in national unity because the riot was not a reflection of national disunity in the first place.

Second, i Capital held that although ethnic fragmentation in employment was less obvious after the NEP's implementation, the manner in which this target was achieved is more likely to have worsened national unity rather than improved it. This is because: [i] A significant proportion of the existing non-Bumiputra workers in industries such as mining and quarrying had to be displaced to achieve the NEP's restructuring targets; [ii] The non-Bumiputra community was terribly affected by the implementation of the Industrial Coordination Act (ICA), as numerous requirements pertaining to Bumiputra participation had to be fulfilled before licences were granted; and [iii] A host of other policies were implemented to grant preferential treatment to Bumiputras, such as explicitly directing government departments to give Bumiputra suppliers preference in the consideration of tenders and quotations for the supply of goods and services.

Third, although non-Bumiputras were not questioning the special rights of the Bumiputras, compared with prior to the implementation of the NEP, it was only because constitutional amendments were made and the Seditious Act 1970 was introduced, making it criminally punishable and illegal to question the provisions in the Constitution.

Fourth, intra-ethnic inequality within the Bumiputra community rose from a Gini coefficient of 0.466 to 0.477 although inter-ethnic inequality fell. The deduction that can be made from this development is that it was specific groups who benefited from the NEP rather than the Bumiputra community at large.

Fifth, i Capital examined the manner in which inter-ethnic inequality was reduced and found that it was achieved by giving extreme preferential treatment to the Bumiputra community. Hence, the reduction in inter-ethnic inequality in this case would have bred discontentment rather than reduced it.

Lastly, the education system was altered under the NEP to convert all English medium schools into Bahasa Malaysia medium schools to proliferate the use of the national language with the objective of strengthening national unity. However, the number as well as proportion of students enrolled in Chinese primary schools and independent Chinese schools surged, implying that the NEP only induced further fragmentation in the Malaysian society. This is because Chinese children who would have otherwise attended school and mingled with children of other races are now isolated and this is much more likely to increase racism. Therefore, contrary to the NEP's ostensible objective, national unity is likely to have deteriorated as a result of the NEP.

Thereafter, we examined the implications of the NEP on Malaysia's economic growth and found that the NEP led to relative loss of economic growth. Why?

First, the NEP deprives deserving Malaysians of higher education through the implementation of disproportionate university quotas. The existence of such quotas requires non-Bumiputra students to perform significantly better than Bumiputra students and even then, they are at risk of not being able to enter the local universities. In addition, the manner in which university scholarships were granted showed no correlation with merit. Despite the fact that non-Bumiputra students constantly outperformed Bumiputra students, only 1 in 5 scholarships were granted to them with the remaining granted to Bumiputras. Also, scholarships were granted in an extremely regressive manner, with poor Malay households only receiving 1 scholarship out of every 21 scholarships granted.

Second, the NEP led to wastage of resources because:

  1. Priority was often given to the relatively less capable Bumiputra contractors when awarding government contracts, with the politically well-connected receiving the bulk of the benefits;
  2. Bumiputras were granted the bulk of scholarships (4 out of 5) although non-Bumiputra students consistently outperformed them and the monetary costs of providing higher education to the Bumiputras have been astronomical. Unsurprisingly, a study that utilised the human capital model revealed that the rate of return on education had almost halved between 1970 and 1984, implying that the government overpaid for its investment; and
  3. Public enterprises (PEs) that were created to promote Bumiputra interests had extremely high failure rates. According to Bank Negara's estimates, the percentage of non-financial public enterprises registering losses in 1984 stood at approximately 80%, posing significant strain on government finances. 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, of which, the bulk of it was funded by external debt.
Third, the NEP resulted in brain drain, with 29.4% of persons with tertiary education having migrated to OECD countries by 1990. Moreover, the number of Malaysian migrants in the US and Australia surged after the implementation of the NEP. Through anecdotal evidence, the high rate of brain drain can be attributed to the blatant discrimination displayed by the policies that were implemented as part and parcel of the NEP and the lack of meritocracy in the reward and punishment system.

Fourth, the NEP deters FDI (foreign direct investment), which has far-reaching positive effects on economic growth and development, as it has been proven to increase the total factor productivity in the recipient country. However, because the implementation of the ICA imposed restrictions in foreign ownership, FDI plunged upon its implementation and only began to rise again after ICA requirements were relaxed in 1986.

Last, the NEP removes the factor of meritocracy. While the government quickly acquired foreign-owned enterprises, the acquisition of the necessary skills was not as straightforward and involved longer gestation periods. As foreign firms were required to advance Bumiputra employment, foreign management with the necessary expertise were phased out and replaced by less qualified Bumiputra individuals, inevitably causing loss of economic development. Furthermore, cronyism became entrenched, with 90% of Bumiputra directors having political affiliation in 1984. These phenomena led to loss of economic growth and development because cronyism, which is categorised as a subset of corruption, inevitably deters FDI.

In its last part, i Capital examined the social costs of the NEP, starting with the examination of social costs arising from depriving deserving Malaysians of higher education. We found that because of the wide range of benefits arising from higher education, which include lower crime rates, greater intergenerational social benefits and greater civic participation, depriving deserving Malaysians of higher education is likely to have resulted in higher crime rates, the enhancement of the vicious cycle of poverty and a higher proportion of Malaysians who are uninterested in politics.

Subsequently, it examined the social costs arising from emigration and found that family separation can have numerous negative repercussions such as causing emotional trauma, particularly, to parents who are separated from their children, the lack of child-parent respect, husband-wife relationships that are diminished and leading to marital problems. As a result of such phenomena, other social problems are likely to arise. In short, we concluded that while the social costs of family separation arising from the NEP are immeasurable, it is only because the bond between families is indeed PRICELESS and that it is an utter tragedy that in spite of the costs of family division, many Malaysians remain oblivious to what it is that they have lost. One of the very painful social costs of the NEP is aptly summed up as "Shattered Dreams, Scattered Families."

In conclusion, although the ultimate objective of the NEP was to mitigate inter-ethnic imbalances and thereby, promote national unity, it has failed miserably. As i Capital has argued, the NEP has come at the immense expense of many innocent Malaysians' well-being, in terms of economic, as well as, social costs. It is high time that our politicians and policymakers take a long, hard and honest look at the NEP's adverse implications on the country as a whole and acknowledge that the NEP has done and is still doing more harm than good to the Malaysian society. It is crucial that while there is still hope, the mindset of politicians and policymakers be urgently reformed, before Malaysia is driven to a point of no return and we become basket cases like Argentina and the Philippines. It is time for politicians and policymakers to come out with superior socio-economic policies.


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