Between Free Market and the State: Malaysian Economy

Malaysia’s economic policies caused quite a stir during the Asian financial crisis of 1997. Whilst foreign investors rushed to pull their money out of the region, Malaysia imposed capital controls and a fixed exchange rate for its currency, the ringgit. The then Prime Minister Mahathir refused help from the International Monetary Fund, or IMF. He was unwilling to bow down to its demands to liberalise the economy.

With hindsight, it seems like a reasonable decision: Whereas the economies of other Southeast Asian countries, such as Thailand and Indonesia, were set back years because of the IMF reforms, Malaysia came off lightly. Alexander Stedtfeld is the head of the German-Malaysian Chamber of Commerce and Industry in Kuala Lumpur:

“If we look back to what the IMF demanded of the Asian states at the time, it’s the exact opposite of what governments in the West are doing today. At that time, the international donor community insisted that interest rates should not be lowered, companies not capable of surviving on their own should not be saved and governments should not introduce any stimulus packages to boost their economies.”

Affirmative action policy

The Malaysian government also got involved in the economy by introducing ethnic quotas. About half of the Malaysian population is made up of ethnic Malays but for a long time they were insignificant players in the business world -- especially compared to the Chinese minority in the country. The quotas stipulated that 30 percent of the shares of a listed company must belong to ethnic Malays. Alexander Stedtfeld again:

“The programmes did not attain the original aim of getting the ethnic Malay population to have a 30 percent share of the national income, however there has been a significant increase over the past 20 or 25 years.”

Recently Prime Minister Najib Razak announced wide-reaching economic reforms, which would include an easing of the affirmative action policies. The economist Shankaran Nambiar from the Malaysian Institute of Economic Research thinks it would be counterproductive to continue the quotas:

“There is a greater need for competitiveness. And these policies probably get in the way of encouraging competitiveness.”

Pressure for reforms

The current global financial crisis, which has affected export-dependent Malaysia rather badly, has increased the pressure for reform. Malaysia needs to “reinvent” itself, says Nambiar:

“Malaysia now finds itself at a particular juncture, where it has to take itself up to another level. Right now it finds itself at a point where it no longer has the advantage of cheap labour. On the other hand, it isn’t sufficiently developed in terms of its technological resources. So Malaysia is somewhere in between.”

Reformers such as Nambiar argue that Malaysia -- like Japan -- has to make a new leap into the innovative hi-tech sector, similar to the first industrialisation drive of the 1970s. They think the role of the state should be to create the necessary conditions conducive to business and to remove bureaucratic restrictions on companies.

Author:Thomas Bärthlein
Editor:Anne Thomas