Malaysia’s back-to-the-future economic reform wave

At the beginning of 1997, Malaysia appeared to be one of the world’s great success stories. Economic growth had topped 9 percent in eight of the previous nine years (and was 8.9 percent 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. Then … some stuff happened.
An Asian financial crisis that started in neighboring 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 (IMF), 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 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 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.
Like most of the other high-powered East Asian economies of the time, 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. Neighboring 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, a key architect of the Malaysian economic miracle who had served as finance minister from 1984 to 1991.
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. 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. With a 2016 per capita gross national income of $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.

—Bloomberg

Justin Fox is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex
column. He was also an investment banker