Malaysia's back-to-the-future economic reform wave: Justin Fox

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(May 15): At the beginning of 1997, Malaysia appeared to be one of the world’s great success stories.

Economic growth had topped 9% in eight of the previous nine years (and was 8.9% in the other one). Foreign investment had been pouring in. The world’s tallest building had just topped off in the capital, Kuala Lumpur, and a spectacular new toll expressway now ran down the Malay Peninsula, from the Thai border in the north to Singapore in the south. 

Prosperity was broadly shared, with income inequality down since the 1960s, as the country’s Malay majority gained ground on the more affluent Chinese minority, thanks to one of the world’s most ambitious affirmative-action programs. Life expectancy had risen sharply. School enrollment too. By just about every development metric, it seems worth noting, Malaysia was the runaway leader among Muslim-majority nations, petro-states excluded.

Things were looking up on the political side as well. The long-ruling United Malays National Organization, in charge since independence from Britain in 1957, showed no signs of ceding power, but Prime Minister Mahathir Mohamad, in charge since 1981, was preparing to hand over the reins to his brilliant deputy, Anwar Ibrahim. 

Anwar had been a student activist as a youth, and had even been arrested for protesting against the government on behalf of poor farmers. As a minister, he railed against corruption. His rise seemed to presage an opening and maturation of Malaysian politics. As he was a devout Muslim with a unique ability to charm and reassure Western leaders, it seemed like it might presage even bigger things than that.

Then ... some stuff happened.

An Asian financial crisis that started in neighbouring Thailand in February 1997, soon spread to Malaysia. Anwar, who served as acting prime minister while Mahathir took a two-month holiday in the middle of the year and was finance minister all the way through, mostly followed the prescriptions of the International Monetary Fund, cutting government spending and attacking “cronyism.” 

His star continued to rise outside the country, with Newsweek naming him “Asian of the Year” in March 1998. A growing faction within the ruling party began to oppose his policies, though, and before long, Mahathir had openly turned on his protege. 

By the end of September 1998, Anwar was not only out of office but in jail accused of sodomy, a crime in Malaysia of which he was later convicted.

Mahathir had publicly egged on the prosecutors in Anwar’s case. He had also imposed currency controls and taken to blaming investor George Soros and various Jewish conspiracies for Malaysia’s troubles. He did eventually cede power in 2003, though to a relatively low-key party official named Abdullah Badawi, who after almost-but-not-quite losing an election to an opposition coalition led by freed-from-prison Anwar in 2008, handed over the prime ministership in 2009 to long-time cabinet minister Najib Razak.

The reason I'm reciting all this history, of course, is that in last week’s elections, for the first time in Malaysia’s history, an opposition coalition actually succeeded in defeating United Malays National Organization. The leader of the coalition and new prime minister of Malaysia, though, is none other than 92-year-old Mahathir Mohamad. And here’s the really amazing twist: Mahathir seemingly intends to hand the reins of government over to Anwar Ibrahim, sometime after the latter has been sprung from prison, where he has since 2015 been serving yet another sentence for, you got it, sodomy.

Isn’t Malaysia interesting? I sure thought so in early 1998, when I descended on Kuala Lumpur to write a story for Fortune about the causes of the Asian financial crisis. 

The day I arrived, I went to the annual meeting of Renong Bhd, the big Malaysian conglomerate (one of its subsidiaries built the aforementioned toll road) that had been at the epicentre of both the investment boom and the subsequent financial panic. I wasn’t allowed into the meeting room, but I learned a lot, hanging out with the gaggle of journalists outside. 

(As I remember, there was just one reporter who had been smart enough to buy a share of Renong stock beforehand; they let her in.) 

During the 10 days or so that I stayed in town, I never did get to talk to Renong’s Chief Executive Officer, Halim Saad. But I did spend some time with his mentor, Daim Zainuddin, a key architect of the Malaysian economic miracle who had served as finance minister from 1984 to 1991 and would reassume the post from 1999 to 2001. 

I also met Anwar Ibrahim after I got back to New York, as he visited Fortune’s sister publication Time during what was probably his last round of global hobnobbing as finance minister.

I haven’t been back to Malaysia since then, so my knowledge is clearly limited. But while I had thought it was totally out of date, recent events indicate that perhaps it is not.

Like most of the other high-powered East Asian economies of the time (profiled in the famous 1993 World Bank report “The East Asian Miracle”), Malaysia in the 1990s had what you might call a corporatist economy, in which the ruling party and large, often interlocked corporate groups collaborated to promote development and growth. 

The unique twist in Malaysia had to do with the country’s ethnic mix of Malays, Chinese and Tamils from India and Sri Lanka. 

Neighbouring Singapore has the same three main ethic groups, and was a Malaysian state for a time, but was kicked out in 1965, because its Chinese majority threatened to mess with Malaysia’s delicate political balance. But that’s another story, so let’s focus on the saga of Daim Zainuddin, as I told it in 1998:

Daim, a lawyer of ethnic-Malay origin, had some success as a property developer in the 1970s. That made him a novelty in the Malaysian business world, which had been dominated by the country's Chinese minority and by British-controlled corporations left from colonial days. So when Malay-rights advocate Mahathir Mohamad began his rise to political power in the late 1970s, he saw Daim as someone who could help fulfill his dream of lifting the bumiputras, the mostly rural ethnic Malays who make up about 60% of the population, to economic preeminence.

Mahathir, who became Prime Minister in 1981, first put Daim in charge of a government-owned property-development company called Peremba. Then he anointed Daim chairman of Fleet Holdings, the investment arm of the United Malays National Organization — the political party that has ruled Malaysia since independence. In 1984, Daim became Minister of Finance and treasurer of UMNO.

Up to then, the Malaysian government's economic strategy had been based on redistributing wealth to the Malay majority, through taxing and spending. 

In 1985, though, recession hit, brought on by price collapses in all the commodities upon which the Malaysian economy was based — rubber, tin, palm oil, and petroleum. 

"I then decided, if there was no growth, what is there to distribute?" Daim recalls. 

"Then I said, 'Look, it's no business of government to be doing business.'" Daim came up with a two-pronged strategy: Invite foreign corporations to open factories in Malaysia, easing restrictions on foreign ownership, while placing as many government projects and enterprises as possible in private hands. 

Not just any private hands, of course, but those of Malays.

Fleet Holdings later became Renong, the company I went to Malaysia in 1998 to investigate. And while Renong finally bit the dust in 2001 (it was acquired for a pittance by the government), one has to admit that these arrangements worked quite well before 1997, and that Malaysia overall hasn’t done terribly since. 

Growth never returned to its pre-crisis pace, but it’s been above 5% most years since 1998. With a 2016 per capita gross national income of US$26,900, adjusted for purchasing power parity, Malaysia is on track to become what the World Bank calls a high-income nation by 2020. 

And while its rise over the past half century hasn’t been as spectacular as South Korea’s or Singapore’s, it has done a lot better than neighbouring Indonesia and Thailand. 

Still, the less-attractive aspects of the Malaysian model seem to have grown only more prominent over the years. Its affirmative action policies, the University of Tasmania’s James Chin wrote in a Bloomberg Opinion article this weekend, had “created a class of Malay rent-seekers whose only role is to add 20% to 50% to the cost of projects.”

And as Daim himself wrote in an opinion article in The Edge Malaysia, a business weekly, in 2016:

It is as though systemic corruption has taken a hold of us and our nation, and we have accepted it.

The biggest corruption scandal has involved 1MDB, a state investment fund set up by then Prime Minister Najib in 2009 that has since attracted the attention of prosecutors and regulators around the world. 

I’m not going to try to explain 1MDB’s troubles here, other than to share the observation of Leong Hung Yee in Malaysia’s the Star newspaper in 2015 that they “remind one of the collapse of Renong Bhd in 2001.” 

Former Renong CEO Halim Saad must have then called the Star to complain, because a week later, it ran a story with the headline “Halim: Don’t compare Renong with 1MDB.”

So I won’t do that, other than to say that large, government-connected business entities that get in lots of trouble, clearly aren’t anything new in Malaysia. 

And now the politician pledging to clean things up is the same one who more or less created the modern Malaysian system. 
Maybe, as Chin argues, that makes Mahathir the perfect man for the job. 

My eyes will mainly be on Anwar, though. His has been one of the world’s strangest, saddest political stories of the past quarter century. 

Can it be that his moment has finally arrived, or will Mahathir somehow wrest away the opportunity, a la Lucy with Charlie Brown? 

And if Anwar does in fact take charge, can he really change how Malaysia works? — by Justin Fox, Bloomberg Opinion