Abdullah Relaxes Race-Based Rules to Spur Malaysian Development

Abdullah Relaxes Race-Based Rules to Spur Malaysian Development
Taken from Bloomberg

(Bloomberg) -- In the southwest corner of Malaysia, on a stretch of land between a mangrove swamp and a forest of dark green oil palms, groaning bulldozers are carving out a new city from red clay soil.

``This will be downtown Nusajaya,'' says Zamry Ibrahim, 39, a marketing manager for state-controlled developer UEM Land Sdn. who sells the site to foreign investors. ``In five to 10 years, the place will be totally different.''

Prime Minister Abdullah Ahmad Badawi has eased 36-year-old rules favoring the ethnic Malay majority to help woo 382 billion ringgit ($111 billion) in investments aimed at transforming the economy of the southern state of Johor. Investors say his decision demonstrates that the race-based program is outdated and needs to be scrapped as the Southeast Asian nation loses investment to faster-growing neighbors.

``It's an impediment,'' said Ian Beattie, who oversees $1.5 billion in Asian stocks at London-based New Star Asset Management Ltd. ``You're stopping the market from operating at its optimum level.''

Malaysia's system of racial preferences, originally called the New Economic Policy, was introduced after bloody clashes in 1969 between ethnic Chinese and Malays. The policy, which aimed to increase the wealth of Malays, gives them privileged access to government contracts, jobs and discounts on homes. Of the nation's 27 million people, about 60 percent are ethnic Malays.

Malay Voters

The prime minister is torn between his goal of boosting the Johor economy by easing the race-based program and his loyalty to the Malay voters whom the policy benefits, said Maznah Mohamad, a senior research fellow at the University of Singapore.

``He's unnecessarily trying to bend backwards,'' she said. ``To have the NEP policies and still allow these liberalizations, I would just call it incompetence.''

Abdullah reiterated the goals of the 1971 NEP the same day he announced the easing of rules in Johor. ``The disparity in income and wealth ownership among the ethnic races still persists and must be addressed,'' Abdullah told parliament in a statement in Malay on March 22.

Abdullah leads the United Malays National Organisation, or UMNO, the biggest political party in the ruling coalition, Barisan Nasional.

The Nusajaya project, a commercial and industrial development including homes, offices and a theme park, is set to become Malaysia's biggest property project.

Poorer Than Singapore

The so-called Iskandar Development Region, which includes Nusajaya, is three times larger than neighboring Singapore, but its residents earn $14,790, only half as much, according to the zone's Web site.

Malaysia's economy, among the fastest growing in Southeast Asia before the 1997-98 financial crisis, expanded 5.7 percent in the second quarter, the central bank said on Aug. 29. That's slower than Singapore's 8.6 percent, Indonesia's 6.3 percent and Vietnam's 7.8 percent.

To woo foreign money, Abdullah on March 22 said companies investing in tourism, financial services and certain industries in the Iskandar Development Region wouldn't have to allocate 30 percent equity to ethnic Malays. Those investments will also be exempt from income tax for 10 years, he said.

The government has said the Johor investments and commercial developments might generate more than 800,000 jobs in 20 years and boost growth in the state to an average of 7 percent in the 2005 to 2025 period compared with 5.5 percent without them.

Mideast Investment

Abdullah's easing of the NEP rules may be working. Kuwait Finance House and other Middle East companies on Aug. 29 agreed to spend $1.2 billion on a property project that includes homes, a medical center and a financial district in the Iskandar Development Region.

Malaysia experimented with easing the NEP with a similar project south of the capital, Kuala Lumpur, branded the ``Multimedia Super Corridor.'' Set up in 1995 by Abdullah's predecessor, Mahathir Mohamad, it sought to attract technology companies to the country.

As long as the Johor project reinvigorates the regional economy, Abdullah, 67, needn't be concerned about a backlash from ethnic Malays, said Ramon Navaratnam, a former finance ministry official and now president of anti-corruption group Transparency International Malaysia.

The government's race-based program is essential to maintaining stability in the country, Deputy Prime Minister Najib Razak said in a June interview. The 1969 riots occurred after opposition parties celebrated winning seats from UMNO in a general election.

`Political Realities'

``You have to realize there are political realities that we have to manage,'' Najib said. The government is prepared to make ``further adjustments'' to the policy if needed, he said.

Abdullah, who must hold an election by early 2009, is taking a gamble by easing the NEP in Johor, said Mohamed Mustafa Ishak, professor of politics at Universiti Utara Malaysia.

Johor elects 15 percent of UMNO's 110 members of parliament, according to the Malaysian parliament's Web site. Dropping the race-based program in every other state may be opposed by ethnic Malays.

``I don't think that will go down well,'' Mustafa said. ``I don't think they can do it.''