Positive Discrimination?


Economic News

22 Jul 2010
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Just how the government's policy on positive discrimination has meshed with Malaysia's attempts to be globally competitive has been the subject of fierce debate in recent days.

Prime Minister Abdullah Ahmad Badawi has had to field a string of questions in parliament on the revival of the New Economic Policy (NEP), with argument raging on its pros and cons.

The policy came under particular attack from Kemaman deputy Ahmad Shabery, who asked the prime minister whether a proposal to include aspects of the former NEP in the upcoming Ninth Malaysia Plan (9MP) were racist and ultimately damaging to Malaysia's global competitiveness.

"The implementation of [the] NEP cannot be seen as a racial issue," said Abdullah in a written reply, which then said that policies like the NEP remained relevant while there were economic disparities between the races.

This inequality still exists, according to figures quoted by Abdullah. The prime minister said that on average, for every ringgit earned by an ethnic Malay (the largest ethnicity, know as Bumiputra), a non-Bumiputra earned RM1.80.

It was the results of such inequalities that inspired the introduction of the NEP.

In 1969, Malaysia experienced its worst ever racial rioting as Malays took to the streets against the Chinese minority. The perception at the time was that Malays (but not all Bumiputra) had been restless as a result of poverty and lack of opportunity.

Whilst the most impoverished group at the time were Indians, who did not riot, there was a noticeable underclass of Bumiputras. Government estimates in 1970 put Bumiputra ownership of the economy at 2.4%, whilst other races' ownership was 33%. The remaining 63% was in foreign hands.

With the aim of maintaining national unity and racial harmony, the NEP was introduced to try and eradicate poverty and begin economic restructuring. The qualitative aim was to "eliminate the identification of ethnicity with economic function", the quantitative aim to move the ratio of ownership between Bumiputra, other races and foreigners from 2.5:33:63 to an ambitious 30:40:30.

Criticism at the time was aimed at comprehension of the goals. Some pointed out that whilst 30% was an admirable target, the goal made no stipulation of distribution. Essentially, 29% could be held by one single Bumiputra with the remaining 1% in dire poverty.

Moreover, whilst the plan set a goal of 40% for other races' ownership, no special assistance or policy measures were introduced to help them achieve that.

Set to run over a 20-year period until 1990 in conjunction with the First Outline Perspective Plan (OPP), the NEP achieved some of its goals. By using government jobs to create employment, giving Bumiputras preference in government contracts and introducing quotas of Bumiputras for university places, their lot was improved.

Employment quotas were also enforced in certain industries and property developers were even required to sell a proportion of their developments to Bumiputras. Various soft loan schemes were also introduced to encourage business entrepreneurship and increase ownership.

One of the more controversial aspects of the scheme was to alter the pattern of ownership of corporate equity, with a measure introduced providing funds for the purchase of foreign-owned shares on behalf of the Bumiputra population.

A look at the figures does show a meaningful change in the economic conditions of Bumiputras over the course of the NEP.

The1970 poverty rate was 49% in peninsular Malaysia, but this had dropped to only17% by 1990, only 1% short of the 16% target.

During the period there were no more race riots, although this was not necessarily directly attributable to the NEP, although it was one of the desired outcomes. Another success was the emergence of a Bumiputra middle class, which took firm hold. To date, it is estimated that 30% of lawyers and 40% of doctors are Bumiputras.

However, the original plan to increase Bumiputra equity ownership to 30% was not achieved. The figure reached around 18% by 1990, from a 1970 figure of 2.5%.

June 1991 then saw the unveiling of the National Development Policy, which came in association with the Second OPP for 1991-2000. This in turn was followed by the National Vision Policy, linked to the Third OPP for 2001-2010.

These two subsequent plans put noticeably more emphasis on rapid growth, industrialisation and structural changes, but were widely perceived as having carried the torch of the NEP's main goals of addressing interethnic differences in economic conditions.

However, equity distribution barely moved over the period since 1991. Bumiputra ownership is currently estimated at a little over 20%, a figure that falls far short of the original target, although the 1997 Asian Financial Crisis is blamed for concentrating equities in foreign hands.

Moreover, Bumiputra-owned corporate equity is concentrated in the hands of private individuals, not trust agencies as envisioned in the original plan.

The arguments now surrounding the NEP agenda have shifted significantly away from questions of measurement though.

The challenges to it now are essentially that it encourages rent seeking whilst simultaneously "nannying" Bumiputras and not giving them the incentives to become dynamic agents in Malaysia's economic success.

In the equity ownership debate, the NEP is sometimes seen as creating a small group of extremely wealthy Bumiputras, but more often it is seen as damaging to competition and even to the economic prospects of Bumiputras, due to the apparent economic security offered.

With Bumiputras getting priority in winning government contracts, some firms employ sleeping partners to ensure their success. Deals are often said to be clinched in back room arrangements, not in open competition, and there is even a system whereby "shell" companies bid for and win contracts only to then subcontract to a non-Bumiputra company, sapping value out of the economy and driving up government costs.

At the same time, such shenanigans do no good for any latent resent among non-Bumiputra. Moreover, the policy can also cause unfavourable perceptions of legitimate interracial business partnerships which actually do embody the spirit of national unity.

Meanwhile, other aspects of the policy - such as quotas in higher education - have not necessarily had the desired effect.

With other races competing against Bumiputras with lower grades for the same university places, many non-Bumiputras have chosen to study abroad. Once abroad, many stay, as they become concerned about whether they can compete equally back home when facing employment quotas.

However, the prime minister says that the NEP proved that it did not interfere with efforts to enhance Malaysia's international competitiveness. He went on to add that if there were problems with the policies, then these stemmed more from its implementation.

"If the proposal... hastens a more balanced and just participation between all the races and... contributes to the national integration... there is no reason why the government would decline the proposal to return the NEP's spirit," he said.

For sceptics, monitoring the effectiveness of NEP-type policies comes down to creating devices for measurement and benchmarks for success.

However, it seems that the loudest voice for renewal comes from the youth wing within the ruling coalition's largest party, the prime minister's own United Malay National Organisation (UMNO).

The question of adding new life to the spirit of the NEP will not make many in the private sector happy though. With many at home and abroad watching the upcoming 9MP to see what kind of tack the administration takes on their first five-year plan, the only thing most agree is that the debate over the NEP is only just getting started.

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