Once considered one
of the Asian dragons, foreign investors have largely forgot Malaysia in the decade
following the 1998 Asian financial crisis. However, there have been some
important recent reforms in business law in Malaysia as the government of Najib
Razak finds ways to push its liberalization agenda further in order to attract
more foreign capital in the form of market exchange
and direct investment.
The most
important recent reform has been the relaxation of rules requiring ethnic Malay
investors to have at least a 30% stake in any listed company. With the new law
“newly listed companies will now be required to make available only a 12.5%
stake to ethnic Malay investors without any obligation to achieve the quota if
the issue is not taken up by them,” reported the Financial Times. The new
regulation arguably aims to ease ethnic tensions and protectionism in favor of
Malays of ethnic minorities. The three major ethnic group s include Malays
(51%), Chinese (24%) and Indians (7%).
Back in the
early 1970s, while implementing various policies in order to attract
foreign investors, particularly those that could bring in technological
development, the Abdul Rayak government imposed legislation to the effect that Malays
(the major ruling ethnic group) must
own 30% of most local companies. This discriminatory condition, defended
four decades ago as “a genuine assault on poverty”, eventually helped embed a
system of privileges for well-connected insiders and widened the political gap
between the government and various business groups to the extent that various policies
can no longer be effectively implemented.
Like Thailand,
Malaysia has absorbed manufacturing FDI for many decades. However, during the
last decade, the rise of China, the impact of the Asian financial crisis and progress
in regional and global integration have forced the country into a new
developmental phase. Aside from attracting more foreign investment, improving
domestic capacity has become the cornerstone for continuing the development of
Malaysia; however, such “leveling up” efforts have for the most part been “excruciatingly
slow”, if not entirely unsuccessful.
The steps taken
by the Malaysian government in recent months have arguably come “more than a
decade too late”. Nonetheless, foreign investors remain cautiously optimistic. The
reforms in question are, by their nature, long-term; as such, eventual evidence
of success will hopefully tempt investors to return to the country: “The
Malaysian market was in danger of slipping off the edge of investors’ radar screens.
Now it has the potential of becoming more important again,” said the Financial
Times.
My impression is that external threats such as the rise of China, the
Asian financial crisis or the global integration of the Asia Pacific region can
only take partial responsibility for Malaysia’s economic standing. It is
probable that the bigger and less apparent problem lies in the fragmentation of
the political and social ties between the central government and various interest groups causing failures to
enforce or implement policy in recent years. For example, in the Malaysian government’s Second
Industrial Master Plan (“IMP2”) of 1996-2005, the concept of “manufacturing plus plus” correctly sets out, what a middle-income country such as Malaysia should do in
order to advance to the next stage of development. Yet Malaysia largely did not
succeed in meeting its own goals during the implementation period of IMP2. Whatever the cause of the social
and political fragmentation, it was not substantial enough to slow down the
growth process in the decades prior to the Asian financial crisis; and yet for
some reason, it appears that the crisis was a turning point after which the
internal problems of Malaysia began to hinder further development. Consequently,
any reform effort under the title of “liberalization” must offer adequate
attention to the internal conflicts of the country, or else the dragon may
continue to slumber.
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