UNRISD UNITED NATIONS RESEARCH INSTITUTE FOR SOCIAL DEVELOPMENT

Country Study: Malaysia

POLICY REGIMES AND THE POLITICAL ECONOMY OF POVERTY REDUCTION IN MALAYSIA

Edited by

Khoo Boo Teik

Commissioned for the UNRISD Flagship Report on Poverty

Project on Poverty Reduction and Policy Regimes

January 2010

The United Nations Research Institute for Social Development (UNRISD) is an autonomous agency engaging in multidisciplinary research on the social dimensions of contemporary development issues. Its work is guided by the conviction that, for effective development policies to be formulated, an understanding of the social and political context is crucial. The Institute attempts to provide governments, development agencies, grassroots organizations and scholars with a better understanding of how development policies, and processes of economic and social change, affect different social groups. Working through an extensive network of national research centres, UNRISD aims to promote original research and strengthen research capacity in developing countries. Research programmes include: Civil Society and Social Movements; Democracy, Governance and Well-Being; Gender and Development; Identities, Conflict and Cohesion; Markets, Business and Regulation; and Social Policy and Development. A list of the Institute’s free and priced publications can be obtained by contacting the Reference Centre.

UNRISD, Palais des Nations 1211 Geneva 10, Switzerland

Tel: (41 22) 9173020 Fax: (41 22) 9170650

E-mail: info@unrisd.org Web: http://www.unrisd.org

Copyright © United Nations Research Institute for Social Development (UNRISD). This is not a formal UNRISD publication. The responsibility for opinions expressed in signed studies rests solely with their author(s), and availability on the UNRISD Web site (www.unrisd.org) does not constitute an endorsement by UNRISD of the opinions expressed in them. No publication or distribution of these papers is permitted without the prior authorization of the author(s), except for personal use.

POLICY REGIMES AND THE POLITICAL ECONOMY OF POVERTY REDUCTION IN MALAYSIA

Edited by

Khoo Boo Teik

TABLE OF CONTENTS 1 Political economy of poverty eradication in Malaysia: An overview

Khoo Boo Teik and Khoo Khay Jin 1 2 Development Strategies and Poverty Reduction Khoo Boo Teik 25 3 Poverty and inequality Khoo Khay Jin 73 4 Welfare Regime, Social Protection and Poverty Reduction

Saidatulakmal Mohd 115 5 Welfare Regimes, Social Services and Poverty Reduction

Halim Salleh 148 6 Organized Groups, Development Strategies and Social Policies

Francis Loh Kok Wah 206 7 Developmental State Capacity and Institutional Reform

Abdul Rahman Embong 245

1

CHAPTER 1

Political economy of poverty eradication in Malaysia: An overview

Khoo Boo Teik and Khoo Khay Jin

The origin of this book lies in a Malaysia country study that was commissioned by the United Nations Research Institute for Social Development (UNRISD) for its project on Poverty Reduction and Policy Regimes. Since the study, comprising six reports, draws its research framework from the Project Proposal which, additionally, laid out its theoretical perspective and key concerns with admirable lucidity, it might be instructive at the outset to provide a liberal précis of the Project Proposal.

In setting out its point of departure for the study of poverty reduction (comprising lengthy studies of eight countries, supplemented by shorter reports of others), the Proposal makes the following significant observations:

• It is crucial to develop a coherent and consistent framework for connecting discussions of poverty and its reduction to strategic links among different dimensions of development, including governance, economic growth, stabilization, and security.

• Policy recommendations should draw substantially from the ideas, theories and experiences available from more successful records of poverty reduction, notably those attained by the Nordic late industrializers and the East Asian developmental states.

• It is necessary to go beyond ‘measuring things that people lack’ without ‘understanding why they lack them’ by investigating such aspects of poverty as ‘self-reinforcing vertical and horizontal inequalities’, and the impact of orthodox macroeconomic policies and the inequalizing tendencies of market forces on these inequalities.

• Equity being an integral component of poverty reduction, it is necessary not to isolate social policy from economic policy, but to analyse the macroeconomic policy and growth strategy that should be pursued in tandem with ‘poverty alleviation’ social policy.

• The notion of ‘participation’ in current poverty reduction strategies, stresses process rather than substance. By restricting the agenda of participation to empowerment at the micro level without tackling disempowerment or exclusion at the macro level, the notion ignores the dilemma that poverty is lived at the micro level but its reproduction, intensification or amelioration depend crucially on macro-level policies.

2

• A narrow focus on ‘poverty’ may be misleading since it assigns a residual role to social policy that is regarded merely as an instrument to correct some of the negative outcomes of macroeconomic policies.

I. Policy regimes: UNRISD research framework1

Guided by these observations, which incorporate its criticisms of certain approaches to poverty reduction, the Proposal adopts a ‘policy regime’ framework to examine how a ‘triad’ of social policy, economic policy and the political/institutional context affects the record of poverty reduction not merely in developing countries but developed ones, too.

Central to the concern with social policy is a recognition that the issue of equity should be restored as a critical aspect of economic policy analysis instead of maintaining, Washington consensus like, that governments did not require redistributive pro-poor policies but only ‘good policies’ ensuring high growth rates that would alleviate poverty by raising the income levels of the poor without changes to income distribution. Moreover, the Proposal suggests that poverty reduction is most effectively addressed by universalistic policies (rather than targeting approaches) although issues of prioritization, sequencing and instruments will have to be decided by a country’s initial conditions, resource endowments, position in the global economy, and the constellation of socio-political forces operating at the national level. Besides, in an era favouring privatization, rolling back the state, and a central role in the development process to the private sector and the market, it is crucial to examine the regulatory capacity of the state, the accessibility and affordability of privatized services, and the role of business in social protection. Finally, there is the issue of labour markets, which, although crucial in strategies to combat poverty and politically difficult manage under late industrialization, face pressures for deregulation and liberalization that discard former policy emphases on full employment, minimum wage legislation, and labour rights.

Two broad issues feature prominently in the stress on economic policy and its relationship to poverty. The first, regarding growth and stabilization, underscores the need for research on macroeconomic policies that support the redistributive and growth requirements of poverty eradication strategies. A major ingredient of strategies for the eradication of poverty is economic development that involves economic growth and structural changes. Growth has come to be seen as the derivate of stabilization and structural adjustment measures. Yet many policies designed to address these concerns are at variance with poverty eradication since some economic growth patterns accompanied by growing inequality may negate any potential pro-poor effects of growth. In particular, deflationary policies aimed at stabilization may undermine growth itself. In addition, fiscal policy – including public expenditure and ways of financing it – cannot be detached from development and social policy; instead fiscal policy must be accepted as influencing distribution and production and, therefore, poverty reduction. This view is quite opposite to a position of reducing fiscal policy to being the handmaiden of monetary policy that, 1 This section is drawn from UNRISD (2005: 2–3).

3

primarily concerned with stabilization, sees public expenditure as crowding out the private sector and regards taxation as a disincentive to private investors.

The political and institutional context for planning and implementing poverty reduction raises several important questions. For instance, how much ‘voice’ do the poor have in various policy regimes? What is their organizational strength? What are the impediments to their participation in politics? What is role of the multiplicity of identities of the poor when pursuing their economic interests qua poor? How are they affected by political arrangements that shield key economic decisions from politics sometimes in the name of protecting the poor from rent-seeking elites? In this regard, while a frequently highlighted feature of current poverty eradication strategies is the prominent role given to civil society non-governmental organisations (NGOs), yet NGOs have not played a central role in any successful case of poverty eradication. Indeed, the social movements that constructed ‘social pacts’ or formed the backbone for poverty eradication in the past differ substantially in form and programmatic focus from today’s NGOs. Social policies in the East Asian model, for example, were overwhelmingly introduced top-down by those in power. The elites heeded popular demands because geopolitics made them attentive to the radical discourses of regimes in neighbouring countries and forced the former to use social policies to pre-empt radical movements. To that extent, state capacity and institutional reform are critical whatever the character of the state because democratic and authoritarian regimes have both played a ‘developmental’ role in successful cases of fighting poverty. However, many present policies presume the demise of the ‘developmental state’ as reality and as aspiration, associate many of its institutions with failed strategies of industrialization, or condemn them for being ‘market distorting’, ‘interventionist’, clientelistic, and fiscally unsustainable. The state is expected to be ‘regulatory’, stripped of many of the instruments available to developmental states. In many cases, the state is principally expected to ensure a ‘level playing field’ and the protection of property rights such that dismantling developmental institutions is considered to be the sine qua non of effective policy reform and adjustment.

In summary, the Proposal’s ‘policy regime’ framework offers a coherent and systematic way to examine the role of institutions in poverty reduction and the effectiveness of reforms currently associated with good governance. It pays particular attention to institutions that underpin the policies of different ‘policy regimes’ and the ways that processes of institutional reform are shaped by path dependence, and local and national contexts. To that extent, the research may answer the pressing question, ‘How “portable” are such institutions?’

II. Growth and development in Malaysia: an overview

The political economy of Malaysia, no more and no less than that of any other

country, may be expected to illuminate many issues and dimensions of socio-economic development, including, generally, the formulation and implementation of economic policies, the efficacy of development planning, the maintenance of specific growth trajectories, the construction of state-market relations, the management of social

4

inequalities, etc. The choice of issues naturally depends on the core concerns and vantage points of analysis. Here, since this book grew out of the UNRISD’s project on Poverty Reduction and Policy Regimes, the overall analysis explores how poverty reduction has been attempted and achieved in Malaysia as a consequence of particular paths of socio-economic development that were taken, guided and bounded by various policy regimes. Around such a focus, Malaysian political economy since Merdeka (independence) from British colonial rule on 31 August 1957 provides an instructive example in three fundamental ways, each of which was, moreover, fraught with complexities.

First, the national economy is one of the rare successes of post-colonial

capitalism. In developmental terms, the economy has sustained high levels of economic growth and recorded meaningful degrees of structural transformation. Consequently, Malaysia has progressed from being one of many lowly, commodity-producing, underdeveloped countries to being one of the much vaunted East Asian newly industrializing economies, or what the World Bank once categorized as ‘high performing Asian economies’. Its strategies of economic growth and structural transformation were bound up with many other matters such as policy initiatives, modifications, turnarounds, and discards; internal institutional capabilities and weaknesses in planning and administration; changes in the balance of power between state, capital and labour; periodic alterations in the interfaces between the national and global economies; and even the impacts of largely fortuitous events that happened from time to time.

Second, the Malaysian state’s decisive conceptualization and unbroken

implementation of a vast social engineering project reduced the incidence of poverty from the high levels of its moment of decolonization to much lower levels three decades later. One critical objective of the social engineering project, officially promulgated in 1971 as the New Economic Policy (NEP), was ‘poverty eradication’ (to use official terminology) that was integrated into a series of economic plans long before development planning for poor countries was required to incorporate more limited ‘poverty reduction strategy papers’. Born of political crisis in 1969 and thereafter inseparable from public controversy, the NEP came to serve as the cause and effect of the transformation of the state from being relatively laissez faire to being highly interventionist. The state’s intervention in many socio-economic sectors relied on and justified the deployment of hugely increased public financial resources for economic, social and welfare development. At the same time, economic intervention catalysed an enormous expansion of the state’s technocratic capability and bureaucratic control of the economy that were subsequently regarded as limiting factors in further economic advance.

Third, bequeathed a legacy of a multiethnic society, and formed by a history of

political struggles that culminated in a peculiar configuration of interethnic power-sharing, the state implemented economic development and poverty reduction as a national project that was indispensable to long-term ‘national unity’. In practice, and however imperfectly, the state pursued (economic) growth with (social) distribution in parallel with a determined (political) management of the tensions so often endemic to a colonially constructed plural society that bore a rigid ethnic division of labour. Yet, the pursuit of rapid growth with equitable distribution demanded an ambitious juggling of

5

class interests and ethnic expectations – akin to what are politely if crudely called vertical and horizontal inequalities – that risked being pulled in conflicting directions. In time, the juggle was dominated by competing coalitions of class interests and political power whose rent-seeking activities violated ‘good governance’. In lean times, the painful short-term choices that were made ‘between growth and distribution’ were amenable to political manipulation that exacerbated ethnic anxieties and inter-ethnic rivalry.

In all these matters, a critical role was reserved for coherent development

planning that required the imagination, resolve and, indeed, the power of political leadership that made political stability the prerequisite for economic growth and vice-versa. Even so, the resultant strategies and policies, always having to be translated into practical measures and programmes, had to respond to changing historical conditions. Favourable or otherwise, those conditions largely lay beyond the control of the state. In the half-century that spanned Malaysia’s record of development, such constraining conditions were often framed by global events and phenomena that buffeted small and non-influential states – the wave of post-World War II decolonization; the geopolitics of the Cold War and its eventual end; the emergence of a ‘new international division of labour’; the imposition of the trading and financial accords of developed states; and the reshaping of global markets under the ideological influence of neoliberalism and the impositions made by supranational agencies.

Under such conditions (and in comparable conditions elsewhere), the triad of

social policy, economic policy and the political and institutional context for development planning and execution involved choices and decisions that were informed by expert input and technocratic advice; necessarily so. Even then, they were not neutral domains demarcated by considerations of expertise and technocracy alone, however well intended. They invariably bore a deeply conflictual character that is simply but amply revealed by the perennially pressing questions: Who decides, who manages, who benefits from, and who pays for the outcomes of policy, planning and implementation? Much of this conflictual and political character of development has, of course, been explored within many areas of academic debates – for example: the relative merits of import-substituting and export-oriented industrialization; bureaucratic authoritarian states and the control of labour; the East Asian developmental states and late industrialization; the neoliberal drive towards liberalization, deregulation and privatisation; the advent and management of the East Asian financial crisis; the emergence of new regimes of governance, and so on. Or, as the UNRISD Project Proposal succinctly put it, the study of the relationships between poverty reduction and policy regimes should draw connections between three broad fields of research literature, namely development theory, welfare regimes and democratization.

In Malaysia’s case, there has always been an intuitive public appreciation of the

profoundly political character of economic development. No doubt, this is partly due to the NEP’s overarching impact on the economy, society and political system. But it is also because mass expectations were invested in development as a nationalist-capitalist project, that is, ‘a nationalist project driven by capitalist impulses or a capitalist project imbued with nationalist aspirations’ (Khoo 2003). Different leaders at different times have accordingly sought to suffuse development with strong ideological tones. In 1971,

6

for instance, Prime Minister Tun Abdul Razak, the principal architect of the NEP, characterized the NEP as striving for a ‘nationalist socialism’ that went beyond ‘state participation’ and ‘welfarism’ (Khoo 2003: 196). Two decades later, Prime Minister Mahathir Mohamad, who launched a programme of heavy industrialization and promoted privatization, proclaimed a Vision 2020 that envisaged the nation’s arrival in the club of developed countries by dint of its continued economic growth. Between the one and the other was embedded many state-supplied ideological strands and political objectives – recapitulating, as it were, Alexander Gerschenkron’s note on ideological mobilization for late industrialization – including nation-building and national unity, inter-ethnic equity at home, inclusion in an East Asian regionalist triumph, and an eventual parity with the advanced economies abroad.

What, briefly, was achieved in that broad socio-historical context?

Table 1 Economic and Social Transformation, Selected Indicators 1960–2005

1960 1970 1980 1990 2000

GDP (RM million) 5,723 (1970 prices)

12,308 (1970 prices)

26,188 (1970 prices)

79,103 (1978 prices)

210,557 (1987 prices)

Shares of GDP (%) Agriculture 40.5 30.8 22.2 18.7 12.8Manufacturing 8.2 13.4 20.5 27.0 34.7Services 41.9 45.1 42.3 49.7

Shares of total export value (%) Top 5 primary commodities 66.1 56.0 39.2 18.8 4.8Manufacturing products 8.5 11.9 22.2 60.4 85.2

Shares of total employment (%) Agriculture 55.2 53.5 39.7 27.8 16.1Manufacturing 6.4 11.9 15.7 19.5 27.5Services 32.5 37.3 45.7 47.5

Employment, Poverty Unemployment rate (%) 7.8 5.3 6.0 5.5Incidence of poverty (%) 49.3 6.8 15.0 5.1

Shares of corporate equity (%) Malay/bumiputera 1.9 12.4 20.3 19.4Non-Malay 23.5 40.1 45.9 41.1Foreign 60.7 47.5 25.1 31.8

Human Development Index (HDI) 1985 1990 1995 2000 2005HDI value 0.696 0.721 0.760 0.790 0.811

Sources: BNM (1991: 233, Table 8.4); Jomo (1990: 43, Table 3.4; 79: Table 4.1); Malaysia (1965: 23–24, Table 2-2; 35, Table 2-10); Malaysia (1971: 40, Table 3-1); Malaysia (1973: 28, Table 2-3; 83, Table 4-7); Malaysia (1981: 33, Table 3-1; 18, Table 2-3; 81, Table 4-6; 176, Table 9-7); Malaysia (1986: 99, Table 3-4); Malaysia (1991: 14, Chart 1-5; 20, Table 1-2; 28, Table 1-7; 32, Table 1-8); Malaysia (1999: 41, Table 2-3; 67, Table 3-1; 80-81, Table 3-5; 89, Table 3-9; 208, Table 7.1); Malaysia (2003: 32, Table 2-3; 61, Table 3-2; 65, Table 3-5; 95, Table 4-2; 204, Table 7-3); UNDP (2007/2008: 235)

As the selected indicators (of economic and social transformation) in Table 1 suggest, the movement from initial postcolonial conditions to the current levels of statist

7

aspirations broadly entailed two kinds of achievement. The economy underwent a structural shift usually associated with a transition from an agrarian to an industrial society, as may be seen from the changing shares of the agricultural and manufacturing sectors in their respective contributions to Gross Domestic Product (GDP), the total value of exports, and total employment. For instance, between 1960 and 2000, the agricultural sector’s share of GDP declined from 40.5 per cent to 12.8 per cent, while the contribution from manufacturing rose from 8.2 per cent to 34.7 per cent. Economic transformation was accompanied by major social changes, including those peculiar to Malaysian society. Arguably the most important of these changes was the post-1969 record of poverty reduction guided by the NEP. The ‘Outline Perspective Plan 1971–1990’ of the Mid-Term Review of the Second Malaysia Plan 1971–1975 had expressly set a target for reducing the incidence of poverty from 49 per cent of all households in 1970 to 16 per cent in 1990. The first post-1990 five-year economic plan, the Sixth Malaysia Plan 1991–1995, gave an official 1990 poverty rate of 17.1 per cent (Malaysia 1991: 32, Table 1-8). By 2004, however, according to the current Ninth Malaysia Plan 2006–2010, the incidence of poverty had fallen to 5.7 per cent of all households (Malaysia 2006: 329, Table D), a rate that was projected to be halved by 2010 (Malaysia 2006: 340). A rough indication of the overall economic position is provided by Malaysia’s estimated PPP-adjusted GDP per capita of US$10,318 in 2005 (Malaysia 2006: 6).

Bolstered by this experience of development, then Prime Minister Mahathir Mohamad was led to proclaim in 1991 that if Malaysia built on its past 20 years of economic growth, the nation would attain ‘developed country status’ by the year 2020 (Mahathir 1991). This bold statement of a national goal, soon popularized as Vision 2020, was something of an ideological breakthrough for a society that had long regarded itself and been regarded as a member of the world of developing countries. Mahathir’s Vision 2020, which the present administration (under Abdullah Ahmad Badawi who became Prime Minister in November 2003) still claims as its ‘mission’, seemed to leave behind a period when newly independent Malaya was more or less a typical postcolonial, middle-income commodity producer. Even after Malaysia was formed in 1963 by the merger of Malaya with Singapore, Sarawak and Sabah (but with Singapore seceding in 1965), the economy was dependent on commodities, trade and limited import-substituting industrialization (ISI). The 1970s saw the progress of an active programme of export-oriented industrialization (EOI), based on the labour-intensive manufacture of textiles, garments and electronic products, that was led by multinational corporations (MNCs) and enthusiastically promoted by the state. The EOI has remained crucial to the economy despite its persisting dependence on foreign direct investment (FDI). In the early 1980s, the state launched a drive towards heavy industrialization (HI) within the automobile, cement and steel sectors but without achieving the performances the state had hoped to attain. Beginning with the late 1980s, however, a decade of high export-oriented and manufacturing-led growth, averaging over eight per cent annually, helped transform Malaysia into a newly industrializing economy (NIE), leading Mahathir to speak confidently of the future in strategic planning terms.

At the core of this record of economic transformation and poverty reduction lie

complex combinations of national developmental strategies, state-led social engineering,

8

national and global market forces, social pressures, and institutional changes (taking place at many levels of the state). Some parts of those combinations led directly to the design and implementation of innumerable measures and programmes of ‘poverty eradication’ since 1970. Others exerted their impacts, planned or fortuitous, on the progress or retreat in poverty reduction at different times, depending, for instance, on whether there was high growth or economic recession. III. NEP: a political economy of poverty eradication2

To trace and explain those combinations, their dynamics and their consequences in Malaysia, this book undertakes what may be regarded as a political economy of ‘poverty eradication’ in which the NEP occupies a central position. The NEP clearly was not and could not be everything even if many matters were readily attributed to or claimed for it. Yet no critical appreciation of Malaysian political economy is plausible without some knowledge of it. Hence, for readers who are not familiar with its deep and pervasive reach, a review of the NEP is offered at this point that has the additional advantage of permitting subsequent chapters in this book to connect the NEP to their arguments without repeating its basic points.

The NEP was officially launched in 1971 and ended in 1990. However, its

successor variants – the National Development Policy 1990−2000 (NDP) and the National Vision Policy 2000-2010 (NVP), and, with the prime ministerial transition in November 2003, the re-framing of the National Vision Policy as the New National Agenda (NNA) – continue to cleave to the core planks of the NEP.3 Formulated in the aftermath of the ethnic violence of 1969, the NEP drew from one major explanation for the violence, namely, interethnic disparity, principally between the Malays and Chinese, but further inflected as a disparity between indigenes and immigrants (and their descendants). At the same time, substantial poverty was recognized to be a contributory cause. Conveniently, the distribution of poverty dovetailed with the interethnic disparity argument since both poverty and Malays were predominantly rural. To forge a broad consensus, the major explanation for the violence translated into a two-prong strategy to avert its recurrence – ‘to eradicate poverty irrespective of race’, and ‘to restructure society to abolish the identification of race with economic function’. These were respectively abbreviated to ‘poverty eradication’ and ‘restructuring’.

Programmatically, this two-prong strategy was to be achieved via growth with

redistribution. In policy terms, the NEP established:

2 This overview of the NEP is drawn from Khoo Khay Jin (2008: 2–7). 3 Jomo (2004) provides a detailed summary and Shireen (1998: Ch 1) a more extensive discussion. Maznah (2005) argues that the NEP effectively ended in the mid-1980s and that the NDP signalled a further departure. It is true that the Sixth Malaysia Plan, 1991−1995, announcing the NDP, did not have a chapter on distribution and re-structuring; but the objectives were stated up front in the first chapter in the same terms as previously. The Mid-Term Review of the Sixth Malaysia Plan again had a chapter on distribution and re-structuring with the same headings as previously.

9

i. a target of 30 per cent Malay and other bumiputera4 (indigene) ownership of share capital by 1990, to be achieved by requiring all new issues and firms growing beyond a certain size to set aside the requisite proportion, through assistance to establish firms, government-established unit trust funds, government acquisition and transfer, and, in a later period, the privatisation of state-owned enterprises

ii. quotas for employment in the modern sector in line with the ethnic composition of the population

iii. ethnic quotas for admission into tertiary education, particularly for professional fields of study

iv. price and other forms of discrimination in support of Malay and other bumiputera businesses, and,

v. schemes for poor households, particularly those engaged in agriculture, by means of price supports and subsidised inputs5

Of course, it was more than possible to account for the raw facts of the disparities, including the distribution of income and wealth, at the time (and subsequently) in other than ethnic terms.6 However, the historically formed political economy, and the political evolution and alignments leading up to and beyond independence, which mirrored political subjectivities, probably made it impossible to account for the disparities in other terms without what would have amounted to a virtual revolution, or minimally a major political re-alignment. Such a re-alignment had been rendered impracticable by the defeat of the nationalist left and the repression of the labour movement, initiated by the colonial power and continued by the post-1957 government. Subsequently, the opportunities created by the NEP, particularly for the Malays, practically ensured the marginalisation of the left, and entrenched political subjectivities and alignments.7

Whatever the controversies about the NEP, these facts remain: aside from relatively minor incidents, there has been no significant outbreak of collective inter-ethnic violence since 1969, and Malaysia has become one of the few success stories of capitalist development in the former colonial territories.8 It has achieved this while managing a social interethnic transformation within a generation, the scale of which is probably without parallel in the world. In 1970, the rate of urbanisation was 27 per cent; by 2000, it was 62 per cent. In 1970, 52 per cent of the labour force was engaged in the agricultural sector, and this was predominantly Malay; by 2000, only 14 per cent was thus employed, although it was still predominantly Malay and other bumiputera. Meanwhile, the corresponding figures for manufacturing grew from 8 per cent to 22 per cent.9 Finally, this transformation was attained with a broad and significant raising of living standards:

4 In practice, the focus was on Malays, with the other indigenes often complaining of being left aside, or included as an afterthought. 5 A succinct summary can be found in Zainal (2005). But see also Ishak (2000) and Shireen (1998). 6 The major work on income distribution at the time of the riots (Anand, 1983) represents one such argument. He argued that the facts of income distribution could be better accounted for in terms of what may broadly be termed “class”, rather than ethnicity, given the relatively small contribution of ethnicity in accounting for the income disparities; see, below. 7 However, this apparently has begun to shift with the March 2008 elections. 8 A convenient summary of this success can be found in Leete (2007). 9 These figures are derived from the respective population censuses.

10

GDP per capita in 1993 PPP$ rose from $1,122 in 1975 to $8,927 in 200010 while the incidence of poverty was reduced from almost 50 per cent of households11 in 1970 to well under 10 per cent in 2000.

Nevertheless, such a policy can and has created a constituency, especially an elite constituency, having an interest to entrench it, thus resulting in elite policy capture that directed benefits upwards rather than downwards in the social hierarchy. The policy terms can be incessantly permuted, especially if parity is narrowly defined. This has arguably happened with the restructuring objective and wealth distribution, to the detriment of income distribution issues that impact more widely and, potentially, lower down the social hierarchy. The result is a type of path dependence that continues an adherence to a policy after its usefulness may have been exhausted.

Occupational restructuring was pitched to ethnic proportions in the population. At the lower end of the occupational hierarchy, such proportions were broad-brushed and more or less directed sectorally, other than in agriculture and at the broad occupational level. In fact, the occupational restructuring was relatively easily attained within the export-processing zones that were established in the context of the global re-organisation of capital through off-shoring. That may have been the single most important means of poverty reduction as it drew large numbers of the population out of agriculture and the rural areas, the principal loci of poverty.

At the higher end, the orientation was more narrowly targeted, with specific attention to the ‘registered’ professionals,12 that is, the professions with the better remuneration, as evident from the attention and specific reporting devoted to them in all the Malaysia Plan documents. All such occupations require tertiary education in which the number of available places for the relevant fields is limited. Thus, admissions and access to these fields have been a focus of attention and a source of tension. At the same time, employment in public sector institutions such as universities and secondary schools, principally of lecturers and teachers, was tailored to boost Malay proportions. Again, these are relatively high-paying and secure jobs. Hence, there was unavoidably much discontent, albeit ameliorated by the expansion of the economy and the availability of jobs at equivalent levels of qualification in the private sector.13 The same was broadly true of opportunities and employment in the category of ‘associate professionals’ generally requiring a diploma or certificate. This latter effort, too, has been largely successful, and has even brought about an ‘over-representation’ of Malays in some areas.

The expansion of education, in particular tertiary education, has also been largely successful, but again it has not been spared considerable acrimony and inequity. Still, within a generation, the participation rates in primary education have become near universal, despite significant pockets of deprivation, while transition rates into secondary

10 In constant 1990 USD, $964 in 1970 and $3758 in 2000; derived from the UNSD National Accounts database. 11 Actual numbers vary with different sources, but the orders of magnitude are the same. 12 Under the current Malaysian Standard Classification of Occupations (MASCO), these fall within the Major Group 2 and are occupations requiring certification by a professional body such as doctors, dentists, engineers, architects, lawyers and accountants 13 This has had a paradoxical effect as the equivalent public sector jobs, while offering greater security, paid less than then private sector ones. It has also had collateral impact on quality, see, Khoo (2008).

11

education are now pushing towards near universal. Tertiary education has been the central bone of contention. Another area of contention is minority rights and claims on government support for mother-tongue education, a topic which falls outside the ambit of this book.

Restructuring was focused on asset and wealth ownership in the so-called modern sector of the economy, setting percentage targets for ownership, initially for equities and real estate and, recently,14 for commercial properties.15 This quickly presented ample opportunity for rent-seeking. Although it represented the interests of a minority – the political and economic elite and those with close connections to them – restructuring provided many chances for ethnic posturing and mobilisation, despite its not having any obvious impact on the incomes or standard of living of the vast majority of all ethnic groups, given the inevitable concentration of wealth in a capitalist economy. For an ethnically divided society, however, the ownership of wealth and subjecting wealth ownership to restructuring policies can and do have an impact on collective ethnic sentiments of equity, justice and injustice.

It has been argued that the NEP resulted in a reduced growth rate. Although this is a criticism of policy, it is essentially an empirical argument about the past. It should not be confused with possible arguments about future growth prospects related to path dependence and other ‘distortions’ resulting from the NEP, or the beneficiary elite capture of policy resulting in resistance to necessary change. It is necessary to consider whether the NEP slowed growth because the policy was in fact premised on growth with redistribution, even if in practice the redistribution requirement – encapsulated in such regulations as the Industrial Coordination Act 1975 (ICA)16 – applied not only to ‘green field’ growth but to the growth of existing entities as well. In addition, the growth of opportunities in tertiary education, especially in the desirable professional fields, could not meet the growth in demand. Thus, the restructuring requirement meant the exclusion of qualified persons not belonging to the targeted group, resulting in an outflow of talent, not to mention a heightened sense of inequity amongst groups so discriminated.

Jesudason (1989) was probably the first to contend that the NEP had a deleterious impact on economic growth, a contention that found support in the apparent reluctance of some local capitalists to invest in the early 1980s, and in the government’s relaxation of redistributive requirements during the severe recession of the mid-1980s. More recently, especially in domestic circles, this argument has become more insistent as discontent with an apparently recidivist NEP under the current administration has heightened amidst relatively lacklustre growth following the East Asian financial crisis of 1997.17

14 This makes its first appearance in the Mid-Term Review of the Eighth Malaysia Plan 2001−2005, published in October 2003. 15 Land ownership is not part of the calculus. In the peninsula, much of the land is under Malay Reserve, with ownership restricted to Malays. 16 Among other things, the ICA required firms beyond a certain size to divest a 30 per cent share to bumiputera. The ICA was amended in 1987, raising the cut-off considerably. 17 This argument is often interwoven with the argument about the distributional and poverty reduction policies of the NEP. Despite current thinking about the linkage between growth and (in)equality (at the then and current levels of inequality, as measured by the Gini), it is in principle an empirical matter whether growth would have been higher or lower without the NEP, although the poverty-reducing impact of growth would probably have been significantly muted without an explicit poverty reduction approach. Regarding

12

While they do not give a rigorous demonstration, the following two charts suggest that the NEP did not appear to have had much of an impact on growth per se when viewed in the context of the East Asian region. Counter-factuals are notoriously difficult to refute (or prove); yet nothing in the charts suggests that Malaysia’s growth rates had suffered from the NEP. Besides, there is always the counter-argument that sans NEP, there would not have been the political stability necessary for growth. Such a view finds some support in Figure 1, which compares Singapore and Malaysia pre-1970, although it is likely Malaysia’s lacklustre performance had more to do with poor commodity prices and Singapore’s with re-positioning itself in the changing global economy.

Figure 1: GDP growth rate (% p.a.), World Bank estimates

Source: UN Statistics Division, Common Database, World Bank estimates http://unstats.un.org/unsd/cdb/cdb_advanced_data_extract.asp

post-crisis recovery, there has been at least one study from the World Bank stable suggesting that in the crisis-impacted countries there has been a down-shifting of the trend line (Hanson, 2005).

-15

-10

-5

0

5

10

15

20

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

MalaysiaKorea, Rep ofSingaporeThailand

13

Figure 2: GDP growth rate (%), 1990 constant prices, UN estimates

Source: UN Statistics Division, National Accounts Main Aggregates Database, UN estimates http://unstats.un.org/unsd/snaama/Introduction.asp

A comparison in terms of per capita GDP, in USD or PPP terms, shows the opening of a gap between Malaysia relative to Singapore, South Korea and Taiwan (and dramatically compared to the latter two). In all cases, the transition occurred around 1985, suggesting the role of prevailing global economic shifts, in particular that which followed the Plaza Accord. However, there should be other considerations of the initial inequalities in each country: Malaysia was among the most unequal while the other countries had much lower population growth rates than Malaysia. For instance, between 1970 and 2005, South Korea’s population growth rate was 1.2 per cent per annum compared to Malaysia’s 2.5 per cent, a degree of difference that accounted for more than half the Korea-Malaysia gap in per capita GDP.

Even so, even if Malaysia’s growth performance has been comparable with the other countries, the quality of that growth has lagged, especially in relation to South Korea and Taiwan.18 This has implications for future growth in an increasingly competitive world for the kinds of products that had accounted for Malaysia’s growth of the past 35 years. After the East Asian financial crisis, moreover, there has been a slowdown in private capital formation and foreign direct investment. Although this may be attributed to pre-crisis over-investment there are suggestions that the slowdown is due

18 For a recent comparative study on this, see Hulten & Isaksson (2007). Amongst the earliest to point to this was Young (1994). Milanovic (2006) produces a calculation suggesting that GDP growth between 1984 and 1997 was likely accompanied by negative total factor productivity growth.

-15

-10

-5

0

5

10

15

20

25

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

MalaysiaRep of KoreaTaiwan Prov of ChinaThailandSingapore

14

to concerns with the NEP in its current form. For the purposes of this book, it is unnecessary to enter this argument here.

Viewing political economy around a focus of poverty eradication serves two major purposes. First, it permits the book as a whole to proceed along the theoretical and thematic paths of the UNRISD Project’s policy regime approach and locate Malaysia within the typology of models proposed by the Project. To that extent, when evaluating the NEP’s significance, for example, the book will examine the ‘triadic’ connections between economic policy, social policy and political/institutional contexts that were, moreover, framed by the following parameters:

• a determined pursuit of a nationalist-capitalist project that has been fraught with internal and external tensions

• an underlying state concern with maintaining a stable configuration in the relations of power between the state and various factions and forms of domestic and global capital

• a discourse of ambitious economic planning that remains inseparable from an equally ambitious goal of social engineering

• an institutionalized convergence of poverty eradication – to ameliorate the extent of vertical inequality – with restructuring to narrow horizontal inequalities, and,

• a developed state capacity to implement its agendas and adapt its economic interventionism and vary its stances when facing ‘globalization’ and its drives towards liberalization and deregulation, particularly at moments of crises.

Second, the approach of the book facilitates the cohesion of the detailed treatment

made by different chapters of the socio-economic programmes and institutional changes that were often subsumed under NEP, whatever their origins in planning. On the one hand, these encompassed large-scale land resettlement; the promotion of MNC-led EOI; improvements to rural infrastructure and utilities; urbanization and improvements to urban housing; the expansion in education; the growth of state-owned enterprises (SOEs); and the use of legislative and administrative instruments to recompose structures of employment and investment. On the other hand, there were notable changes in state-capital relations during the crises of 1985–86 and 1997–98 which were expressed in ‘growth versus distribution’ or ‘state versus market’ debates that split the dominant party of the ruling coalition on more than one occasion. IV. Chapter summaries

In Chapter 2, Khoo Boo Teik suggests that Malaysia’s development may be seen as a process to overcome various postcolonial weaknesses – dependence on primary commodities, declining terms of trade, non-autonomous export-reliant growth, and foreign domination of key economic sectors. A developmental state carried out the process with intermediate success, benefitting from the geopolitical factors that favoured East Asian late industrialization. Multidimensional diversification, aided by a wide resource base and experience in planning, helped to equip different economic sectors with compensating degrees of competitiveness and resilience to withstand crises in the

15

world economy. The ruling coalition’s uninterrupted tenure gave a stable if increasingly authoritarian political system within which successive administrations garnered flexibility in strategic planning, policy implementation and economic management. Thus were established different policy regimes, ranging from the NEP’s interventionism and bureaucratic expansion to the Mahathirist state-capital alliance known as ‘Malaysia Incorporated’. Residual nationalist claims, the necessity of tackling an ethnic division of labour, and the NEP’s poverty eradication went some way to meet mass expectations of socio-economic improvement. Hence, even rent-seeking oligarchic aggrandizement had to be balanced by the continuation of redistributive social policies. Finally, some fortuitous factors played a part although it required institutional capacity and leadership to take advantage of those.

Khoo Khay Jin, in Chapter 3, focuses on poverty eradication and inequality, the latter being evaluated principally with reference to the distribution of corporate wealth, educational opportunities, occupations, and income. He shows the NEP’s record of social restructuring to be a formidable one for an ethnically divided society. In one generation, all groups had been lifted and the gaps between them reduced in health, education, occupation, and industry. Yet, the achievement has been uneven. Minority indigenous communities have fallen behind in education, and, with it, occupational opportunities, while the restructuring cost in education, particularly higher education, has been disproportionately borne by the Indian population. The record is less striking for income, and specifically interethnic income, restructuring. Mean incomes rose considerably while interethnic gaps narrowed but not as much as in non-income measures of health and education. Consequently, income, and specifically interethnic income, inequalities have been ‘sticky’ although there is no longer an Indian-Malay disparity and the Chinese-Malay disparity has been significantly reduced to about 25 per cent. In any case, the disparity reflects a likely class-ethnicity-location bias that has not been sufficiently targeted as part of a strategy to reduce overall inequalities. Nor have other biases been adequately addressed: gender earning differentials exceed interethnic earning differentials, while a ‘Malay premium’ persists in the government sector.

Saidatulakmal Mohd. argues in Chapter 4 that Malaysia’s welfare regime is more

economically driven or ‘productivist’ rather than being socially oriented. Social policy programmes are designed in accordance with national development strategies but economic expenditure receives priority over social services. The welfare regime’s mix of universalistic and targeting approaches is embodied in existing institutions of social protection, security and insurance. These include a civil service pension scheme, the Employees Provident Fund, Social Security Organisation, Workmen’s Compensation Scheme, the Armed Forces Fund, public welfare programmes, and complements to rural development schemes. Modified over several phases, the welfare regime has broadened its scope to include national policies for social welfare and for the elderly. Without a welfare state framework, such a regime presupposes a strong tradition of family support which may be weakening under the impact of industrialization and globalization. More recent concerns with social policy, welfare provisions and an ageing society have stressed the inadequacy – in coverage of the labour force, retirement income, and rates of return to contributions – of existing institutions of social protection and insurance. These

16

weaknesses require the reform of established forms of social insurance if they are to continue to contribute to poverty eradication in future.

Chapter 5 reviews the impact of health, education and water services on economic growth, social mobility and the wellbeing of the population. Tracing the state’s record of providing, regulating and maintaining these services, Halim Salleh discusses how policies, planning and development managed issues of adequacy, opportunity and equity especially when the state used social services to help attain the NEP’s objectives. Health and water services made important if indirect contributions to poverty eradication and restructuring, whereas education’s role was clear and massive if often controversial. Neoliberal influences and pressures from globalization, however, resulted in policy changes that permitted a steady privatization of social services. While the three social services are now subject to a public-private mix in their development, management and regulation, the commodification of formerly ‘pure public goods’ has retarded advances towards social equity. Operated in parallel, public and private institutions of health care and education – especially higher education – have not merely democratized ‘consumption’ patterns, but tilted the balance against vulnerable communities – the rural population, urban low-income residents, poor non-bumiputra students, and women in the private sector. To that degree, the social services, notably health and education, may be considerably better than those in other developing countries; yet their policy orientations remain elitist and selective, only their principal targeted beneficiaries may have changed owing to ethnic and political considerations.

The relationship of organized groups to social policy forms the core issue of Chapter 6. Francis Loh Kok Wah traces the decline of trade unionism as the long term consequence of state coercion and repression; divisions in union leadership; and segmentation of the work force by ethnicity, gender and national origin. In contrast the state has developed close ties with a well organized business class as the former privileged the private sector as the engine of growth from the 1980s. These trends undermine labour’s ability to secure more equitable benefits at the sites of production and work. Yet, poorer non-Malay social groups not targeted by the NEP, have been provided other forms of amelioration. The state has enabled the parties of the ruling coalition to undertake an unusual developmental role – to manage certain aspects of social service delivery, notably in local or community development, education and welfare. With this innovation, the state and its bureaucratic and political appendages have left little scope for the non-governmental organizations elsewhere known for their contributions to community development. Thus, a ‘repressive-responsive’ developmental state has woven a political and organisational setting in which few radical grassroots alternatives have been posited against the dominant mode of capitalist development.

In Chapter 7 Abdul Rahman Embong shows how the institutional combination of strong state capacity, clear administrative structure, powerful central planning agencies, and ample financial and human resources have enabled the state to plan and execute development policies and programmes, including poverty eradication, successfully. One indication of the strong state capacity was its maintenance of a well defined high-level structure of planning authority and decision-making that could guide key policy

17

directions and strategies. In addition to having an efficient revenue-generating and collecting system, the state has demonstrated the pragmatism needed to adapt to changing conditions, especially within the international market. When faced with crises, the state has been prepared to retain broad policy objectives while undertaking reforms and changes. Even so, many drawbacks, shortfalls and failures in the public delivery systems, seen during good and bad times, expose the prevalence of bureaucratic inefficiency and corruption. A critical area where a system of checks and balances has been weakened by executive interference is the judiciary. If the country is not to fall increasingly behind ‘peer countries’ in terms of ‘good governance’ and global competitiveness, concerted reforms will be as necessary as ensuring that the political system becomes more free, more responsive and less repressive. V. Locating Malaysia: Some lessons from the research

For its comparative study of policy regimes and poverty reduction, the UNRISD Project Proposal brings together two sets of concerns. The first set lays out various observations regarding social policy that were drawn from previous UNRISD studies of social policy, which may be summarized as follows

• To serve as a developmental instrument against poverty, social policy must be concerned with the redistributive effects of economic policy, protecting people from the vagaries of the market and the changing circumstances of age, enhancing the productive potential of members of society, reconciling the burden of reproduction with other social tasks, and sharing the burden of reproduction.

• Successful social policy is not limited to poverty eradication but has other

objectives such as national or social cohesion, and equity.

• Social policy is not an exclusive domain of advanced welfare states, to be attempted only after reaching a certain development threshold; it is, rather, a key instrument for economic and social development.

• Policy coherence is critical to achieve synergies among different areas of the

economy that make equity and growth mutually reinforcing. Redistributive polices are good for growth but their relationship requires conscious design of economic and social policies.

• Labour markets are not simply institutions for the static efficient allocation of

labour resources but are also sites for the realization of basic civil and social rights. Labour market institutions perform a developmental role, mobilizing savings, ensuring decent working conditions, and creating incentives to improve ‘human capital’.

• Universalistic policies are preferable to targeting practices for addressing issues of

poverty especially where poverty widespread poverty and institutional

18

underdevelopment tended to render targeting unnecessary and administratively costly and inefficient.

Joining the above to a second set of concerns – degrees of economic performance (showing high or low growth) and social performance (displaying high or low equality) as well as the character of political regime (whether democratic or authoritarian) – the UNRISD Project Proposal offers a four-model typology of policy regimes: Socialist, Nordic, Asian and SAP/PRSP (Structural Adjustment Program/Poverty Reduction Strategy Papers).

Where, based on our research, might Malaysia be located?

To the extent that poverty eradication in Malaysia has been successful on its own – that is, NEP, terms – it reaffirms the idea that poverty eradication policy must be ‘embedded in social and development policy’, and implemented ‘through the choice of patterns of growth, health, education, gender equality, labour market policies’ (UNRISD 2005: 4). The feasibility of the NEP as an overarching framework of social policy was predicated on economic growth and development that drew the landless into vast state-managed land resettlement schemes, and added a rural (and, significantly, female) component to a labour force engaged in an FDI/EOI-based structural transformation. Such industrial and land development strategies, premised upon planned rapid growth, were augmented by improvements to social services, notably in health and education, but also in public utilities and infrastructure not least for the poor rural population. At no time, not even at the launch of the NEP, was there an objective of installing a welfare state. Yet, there was a noticeably ‘welfarist’ cohesion to the institutions for the maintenance of protection which, as Chapter 4 shows, covered different state retirement and pension schemes, compulsory savings-contributory funds, workmen’s compensation benefits, and limited direct disbursements to specific disadvantaged or vulnerable groups. In production, significant efforts, backed by state expenditure and institutional support, were made to create new opportunities and improved services to raise rural and agricultural productivity (Chapters 2 and 7), while employment and urban development went together with manufacturing to relocate a substantial proportion of population from the rural ‘loci of poverty’ to urban industrial zones (Chapters 2 and 3). Attempts at redistribution covered many forms: state subsidies, improvements to rural, maternal and child health care, attainment of universal primary and near universal secondary education, and expansion of tertiary education (Chapter 5). In short, economic and development policies together offered some support for reproduction in the face of market vagaries, and changing personal, family and social circumstances.

Born of a near collapse of the political order, the NEP was imposed by fiat, justified by arguments of political stability, and implemented in the name of national unity. Against the last, portrayed as an inclusive national goal, the NEP’s restructuring component was always and for longer periods less acceptable than its objective of poverty eradication. Even so, the original conceptualization of the NEP was not mean-spirited. If anything, the core ideas of NEP-driven poverty eradication irrespective of race, restructuring to recompose an ethnic division of labour, and planned growth and state-support for industrialization – constituting, as it were, a social democratic- reformist

19

path of attaining development, interethnic equity and social cohesion – were part of the political discourse of an earlier radical generation best articulated by the work of James J. Puthucheary. Cynicism towards the ‘interethnic parity’ promise of restructuring grew when the ‘national ownership’ of NEP, admittedly flawed at the outset, was brazenly compromised by an elite capture of policy in the 1990s (Chapter 3) when, as it were, restructuring dethroned poverty eradication to favour aggrandizing rent-seeking coalitions of commercial and political interests.

That was, arguably, not the scenario the framers of the NEP had in mind. They were committed to state intervention to attain full employment, an expansion of education, an extension of rural health services, and an improvement in urban housing. Most of this was planned as part of state-led modernization of the agricultural sector and institution of land resettlement. Redistribution, whether poverty eradication and restructuring, had to be based on growth, the growth of a market economy epitomised by FDI-led EOI. In fact, three apparent binaries – state and market, growth and equity, and social policy and economic development – were bound to one another. In effect, social policy was not treated as a luxury of an advanced welfare state, to be deferred until a development threshold had been reached. A nexus between economic development and social policy was thus present in different ways. Institutionally, the state developed and expanded its capacity for planning, funding and implementing projects (manifest in an unbroken series of five-year plans) that fitted into a relatively coherent socio-economic strategy (Chapter 7). For example, health, education and water services were expected to be multidimensional in their beneficent effects (Chapter 5): ameliorating the conditions of the poor, investing for higher productivity, and consolidating political stability and legitimacy. In Penang, the centre of EOI, Chief Minister Dr Lim Chong Eu’s 1970–1990 strategy of ‘rural industrialization, rural urbanization, comprehensive urban redevelopment, promotion of tourism, and the development of an agro-horticultural industry’ held social policy to be the ‘partner’ of market-based development of manufacturing and services (Chapter 2), hence recalling on a smaller scale Singapore’s project in the 1970s of a ‘socialism that works’. Indeed Mahathir often claimed that since distribution was premised on growth, NEP induced more growth, not less, despite arguments to the contrary. When there was no growth in the mid-1980s, Mahathir chose to hold distribution (that is, restructuring) ‘in abeyance’ (Chapter 2).

The corollary to the economic development-social policy nexus was that social welfare provision was not narrowly conceived as starting and ending with the poor alone. Health, education, housing, infrastructure, utilities, and civic and social amenities were integrated with rural and urban development. And institutions of social security and insurance were integrated with the labour market, albeit a market regulated by regimes unsympathetic to organized labour. All that should have set a universalistic guide to social policy. But ‘targeting’ characterized a great deal of social policy implementation because of the NEP’s uneasy juxtaposition of poverty eradication ‘regardless of race’ and ethnically determined restructuring. As an example, development funding underwent a sort of ethnic rationing: ‘Malay’ rural areas benefitted while ‘Chinese’ New Villages and ‘Indian’ estates were not. In short, state-managed poverty eradication and restructuring targeted the bumiputra while the non-bumiputra poor were left to face the labour market. In time, the tensions between ‘universalism’ and ‘targeting’, virtually between poverty eradication and restructuring, had to be mediated through institutions set up to manage

20

social policy and NEP objectives. Many of these institutions, the bureaucratic appendages of the state, including state-owned enterprises, were increasingly affected by an elite capture of policy that was justified by claims to ‘interethnic parity’ among the ranks of the wealthy. Those were the institutions most beset by many administrative problems: ‘information distortion, incentive distortions, moral hazards and administrative costs, invasive loss and corruption’.

Another set of institutions, peculiar in their origin, purpose and achievements, were appendages of the ruling coalition, whose operations could only be appreciated in relation to labour market conditions and the effects of state policy implementation. By the time of rapid economic transformation, the labour market had been shaped by the defeat of a post-World War II insurgency, the repression of radical parliamentary opposition, the circumscription of active unionism in general and, in particular, the immunization of FDI’s labour-intensive manufacturing from organized labour (Chapter 6). As a result, labour was disadvantaged at critical moments when social compacts were struck – the beginning of NEP, the inception of FDI-led EOI, and the spurt towards late industrialization. Labour’s weak position was evident from the state’s refusal to enact minimum wages for plantation labour, reluctance to compel the substitution of capital and technology for low-cost labour, and acquiescence to the widening deployment of barely protected foreign labour. Organized labour, unlike organized big business, had an insignificant representation in high-level consultative councils. The state’s approach to labour’s welfare was practically defined by two goals: economic intervention to generate full employment, and social intervention towards some degree of redistribution. Improvements to the conditions of the working classes owed to tightening labour markets (especially in manufacturing, construction and agricultural commodities) at various points between the 1970s and 1990s, FDI’s higher ability to offer better terms of employment, and the social services provided by the state. However, since state social services inadequately served the lower-income reaches of the non-bumiputra communities, the ruling coalition’s ‘Chinese’ and ‘Indian’ political parties set up their own cooperatives, corporations and even universities (Chapter 5 and Chapter 6). When they worked, such constituency- or community-based institutions played a developmental role moderating the rough edges of the labour market, mitigating the state’s marginalising neglect, and reaffirmed the legitimacy of ‘an ethnic framework of power-sharing’.

Finally, the design and implementation of social policies bound up with the NEP

have had contradictory impacts on the political regimes. In the post-colonial era, mass politics meant, among other things, a democratization of socio-economic expectations – in a word, development that brought better living conditions. After 1969, the democratization of expectations – partially class and partially ethnic – was conceded via the NEP. In practical terms, though, much of poverty eradication was conflated with restructuring because of three factors. The ethnic division of labour left the Malays with the problem of ‘relative economic backwardness’. The Malays were the natural constituency of the dominant partner of the political regime. And, they constituted the cornerstone of the state’s ‘ethnic security map’ (Enloe). For the bumiputra, especially the Malays, therefore, NEP democratized access to higher incomes, better opportunities and improved living conditions, winning in return the legitimating support for the various regimes. In contrast, the non-Malay communities in general bore the burden of

21

restructuring. Any ensuing discontent was assuaged by a higher growth rate, a higher share of corporate wealth in 1990 (compared to that in 1970) and the freedom to emigrate. Beyond that was the repression of the state by legislative, administrative and police means – the anti-democratic face of NEP implementation. In times of rapid growth and plentiful opportunities for social mobility the validity of NEP’s premises was borne out: distribution with growth contained resentment. In lean times, social policies could not pre-empt social conflicts. Between the one and the other lay political struggles that met with increasing authoritarianism that has itself provoked more dissent. The outcome of those struggles lies beyond the scope of this book. But one wonders if social policy will yet affect the quality of democracy in the sense that the NEP’s overall acceptance and success have enabled a new Malay-led opposition to challenge UMNO and the ruling coalition on a range of issues that cannot be diverted along channels of ethnic rivalry.

To conclude, Malaysia’s experience falls in most closely with the ‘Asian model’ although, for obvious reasons, qualifications and deviations are unavoidable in this ‘fit’. The record shows moderate to high economic performance, high social performance in poverty reduction and, for a multiethnic society, restructuring, but inequalities of different kinds remain (Chapter 3). In development terms, comparing Malaysia to other countries that were roughly of similar socio-economic status in the late 1950s and early 1960s, the country now stands between the high-achieving Northeast Asian NIEs, on the one hand, and, on the other, the poorer countries of Southeast Asia, and the troubled East African states. That Malaysia is better off than the resource-endowed latter two groups but behind the natural resource-poor former says something about its relative achievement within the spectrum of capitalist development. Malaysia has successfully managed a path of diversified development, but not quite upgraded the manufacturing and service sectors requiring technological innovation and market competitiveness.

Malaysia, too, is not ‘Nordic’. Its welfare regime is weaker, and does not resemble a welfare state with more highly developed and more comprehensive forms of social insurance and protection. Nor is the welfare regime built upon social pacts between state, capital and labour reached by ideological political parties that programmatically captured the basic tenets and pillars of post-World War II Western social democracy. Malaysia’s regulation of the labour market in particular has weakened organized labour to the point of curbing rights to free association by different means. Despite a growing reliance on the market, the state has retained a developmental character shaped by strong economic intervention, the use of industrial policy, and large-scale socio-economic planning supported by complementary fiscal and financial policies. Even when certain regimes undertook market liberalization and deregulation and promoted privatization, they were driven to ‘pick winners’ according to political considerations rather than depend on supposed market efficiency and neoliberal frameworks of governance.

Not as democratic as the Nordic states, Malaysia’s political regimes have not been as ruthlessly repressive as the military dictatorships that oversaw late industrialization in some East Asian countries, or, for that matter, persistent underdevelopment in others. Here, democratic institutions, experiences and procedures have become increasingly illiberal towards dissent and the full exercise of civil liberties. In the past, Malaysia had been ideologically moved by a combination of goals – nation-building, social equity, advanced development, and economic nationalism – whose attainment was complicated

22

by ethnic tensions. Where it goes in the future will depend on whether its economic performance, social performance continue to be relatively high, at least high enough that demands for political pluralism cannot any longer be dismissed as anomalous claims.

23

REFERENCES

Entries for non-western names are cited and arranged alphabetically according to surnames or first names, without the use of commas, except where the first name is an honorific, or where the

name follows western convention in the original source.

Anand, Sudhir. 1983. Inequality and Poverty In Malaysia: Measurement and Decomposition. New York: Oxford University Press.

Hanson, James A. 2005. Post-Crisis Challenges and Risks in East Asia and Latin America: Where Do They Go From Here. World Bank Conference on The Financial Sector Post-Crisis: Challenges and Vulnerabilities. April 26-27, 2005, Brookings Institution, Washington, D.C. http://go.worldbank.org/EU9KFCYX20

Hulten, Charles R. and Isaksson, Anders. 2007. Why Development Levels Differ: The Sources of Differential Economic Growth in a Panel of High and Low Income Countries. National Bureau of Economic Research Working Paper 13469, Cambridge, MA.

Ishak Shaari. 2000. Economic Growth and Income Inequality in Malaysia, 1971-95. Journal of the Asia Pacific Economy, 5(1&2): 112-124.

Jesudason, J. 1989. Ethnicity and the economy: the state, Chinese business, and multinationals in Malaysia. Singapore: Oxford University Press.

Jomo K. S. 1990. Growth and Structural Change in the Malaysian Economy. Macmillan, London.

Jomo, K.S. 2004. The New Economic Policy and Interethnic Relations in Malaysia. Identities, Conflict and Cohesion Programme Paper Number 7, UNRISD.

Khoo Boo Teik. 2003. Beyond Mahathir: Malaysian Politics and its Discontents. Zed Books, London and New York.

Khoo, Boo Teik. 2008. Apex of Mediocrity: A Reflection on the State of our Public Universities. In Fong, C.W. & Yin, E.K., eds. Out of the Tempurung. Sydney, East-West Publishers.

Khoo Khay Jin. 2008. Poverty and Inequality, Malaysia Country Study Report No. 3, UNRISD Project on Poverty Reduction and Policy Regimes, November.

Leete, Richard. 2007. Malaysia from Kampung to Twin Towers: 50 years of economic and social development. Kuala Lumpur: Penerbit Fajar.

Mahathir Mohamad. 1991. “Malaysia: The Way Forward.” New Straits Times, 2 March

Malaysia. 1965. First Malaysia Plan 1966–1970. Kuala Lumpur.

_____. 1971. Second Malaysia Plan 1971–1975. Kuala Lumpur.

_____. 1973. Mid-Term Review of the Second Malaysia Plan 1971–1975. Kuala Lumpur.

_____. 1976. Third Malaysia Plan 1976–1980. Kuala Lumpur.

_____. 1981. Fourth Malaysia Plan 1981–1985. Kuala Lumpur.

24

_____. 1986. Fifth Malaysia Plan 1986–1990. Kuala Lumpur.

_____. 1991. Sixth Malaysia Plan 1991–1995. Kuala Lumpur.

_____. 1996. Seventh Malaysia Plan 1996–2000. Kuala Lumpur.

_____. 1998. National Economic Recovery Plan: Agenda For Action. Kuala Lumpur.

_____. 1999. Kajian Separuh Penggal Rancangan Malaysia Ketujuh 1996–2000 (Mid-term Review of the Seventh Malaysia Plan 1996–2000). Kuala Lumpur.

_____. 2001. Eighth Malaysia Plan 2001–2005. Kuala Lumpur.

_____. 2006. Ninth Malaysia Plan 2006–2010. Kuala Lumpur.

Maznah Mohammed. 2005. Ethnicity and Inequality in Malaysia: A Restrospect and a Rethinking. Centre for Research on Inequality, Human Security and Ethnicity (CRISE), Oxford, Working Paper 9. Accessed 8 May 2007: http://www.crise.ox.ac.uk

Milanovic, Branko. 2006. Inequality and Determinants of Earnings in Malaysia, 1984-1997. Asian Economic Journal, 20(2): 191-216.

Shireen, Mardziah Hashim. 1998. Income Inequality and Poverty in Malaysia. Lanham, MD: Rowman & Littlefield

United Nations Development Program. 2007. Human Development Report 2007/2008. New York.

United Nations Research Institute for Social Development. 2005. Poverty Reduction and Policy Regimes: A Project Proposal, Geneva.

Young, Allyn. 1994. Tyranny of numbers: confronting the statistical realities of East Asian growth experience. National Bureau of Economic Research Working Paper 4680, Cambridge, MA.

Zainal Aznam. 2005. Policy Case Study: New Economic Policy, Malaysia. Paper presented at the IADB’s Semana de Desarrollo Social, 24-27 Oct 2005. http://www.iadb.org/sds/semanasocial/Docs/Malaysia.doc .

25

CHAPTER 2

Development Strategies and Poverty Reduction

Khoo Boo Teik

The discussion of development strategies and policy regimes in this chapter will:

i. outline a trajectory of economic development and growth, and their various associated themes, mostly over the two decades of the 1980s and 1990s

ii. discuss development strategies and policies related to industrialization and the structural transformation of the economy

iii. examine changes in the character of the state and its relations to capital which shaped the institutional-corporate structure that emerged at the end of the 1990s, and

iv. discuss the relationship between the state’s trade and investment regimes and its divergent responses to the world economy at two moments of economic crisis.

On the whole, the chapter will discuss how the development strategies were

influenced by such concerns as a reliance on export-led growth, the recognition of the importance of diversification; the centrality of certain social policies; and a general postcolonial impulse to go beyond ‘underdevelopment’. In discussing the structural transformation of the economy, the chapter will examine policy changes that experimented with different programmes and orientations of industrialization. It is suggested that the state planned and administered the process of structural transformation guided by certain nationalist-capitalist impulses. Among other things, the state strove to maintain stable configurations of state-market relations, to adapt the openness of the small national economy to the ‘vagaries of the world economy’ but also to shape institutional-corporate structures particularly in times of economic crises.

Within this investigation of development strategies and policy regimes, the chapter

weaves together issues such as the effects of different programmes of industrialization, the relative success of trade and investment regimes, consequences of trade and financial liberalization, and the development of state capacity for managing economic crises. At the conclusion of the chapter is a summary perspective on the factors that have contributed to Malaysia’s particular trajectory and record of development. I. Regimes and transitions

As the overview of economic development and transformation in Chapter 1 has

shown, considerable progress had been made in poverty eradication according to the objectives and terms of the New Economic Policy (NEP). Nothing from the account given in Chapter 1 implied the end of poverty in its absolute, ‘hardcore’, or relative

26

forms, or its obsolescence as an important political issue.19 Nor had poverty been reduced exactly as planned, as if without resistance or retreat.20 Even so, ‘poverty eradication’ as a national objective became sufficiently embedded in a matrix of development strategies, social policies and state institutions that it would not be jettisoned by severe structural adjustments even amidst a recession in 1985–86 and the East Asian financial crisis of 1997–98. Minimally that was itself evidence that policy formulation was not captive to neoliberal arguments that credited a free and efficient market as the ultimate determinant of economic performance. In fact, the post-1969 administrations did not share the neoliberal faith in merely maintaining ‘market-augmenting’, ‘pro-growth’, ‘pro-investment’ and ‘pro-market’ macroeconomics. They prided themselves and persuaded others that they were pragmatically responsive to market demands. They kept the economy open to domestic private investment, attractive to FDI, and integrated with international trade and global markets. Yet, by ‘governing the market’, they brought about three key transitions in developmental terms, namely:

• the economy was transformed from a postcolonial commodity producer to an NIE • the state turned from being largely laissez faire to being actively interventionist,

and, • late industrialization recast the interventionist state as a variant of the ‘East Asian

developmental state’. Underlying those transitions was the social engineering project of the NEP

(Chapter 1). At its core, the NEP was designed to overturn an ethnic division of labour, a bane of Malaysian political economy that the Alliance regime (1957–69) could not overcome with its laissez faire approach to economic management. Lucidly described as a ‘part of a class structure [that] has crystallized along ethnic lines’ (Wheelwright 1965: 110), the ethnic division of labour was readily used to stoke interethnic recriminations whether it was correlated with poverty or with wealth. To the extent that NEP was in command, part of development strategy and economic policy was driven by social policy.

Yet, the NEP stood for a nationalist-capitalist project that terminated the pre-1969

regime and restructured a tripartite balance of power – between the state, domestic and foreign capital – that had long been critical to the stability of Malaysian political economy. Initially, the power restructuring led to a partial rupture between state and capital as the former imposed its new regime of interventionism and regulation. Not for nothing did Tun Abdul Razak, the NEP’s principal architect, who spoke of achieving ‘rapid economic transformation’ that was guided by concerns with ‘social equality’, call the NEP ‘nationalistic socialism’ that encompassed ‘state participation’ and the ‘doctrine of welfarism’ (Abdul Razak 1971). However, the nationalist-capitalist project underwent an important reorientation when Mahathir became Prime Minister at the start of the NEP’s second decade. Under Mahathir’s leadership, the character of the state changed 19 For example, only citizens are included in these enumeration exercises, despite a growing underclass of legal and illegal migrant workers. See Chapter 3 for an evaluation of the real extent of the state’s achievement in managing the reduction of poverty and other forms of inequality. 20 See Jomo (1990: 102–3) for a brief comment on the limitations of ‘partial planning’ for an open economy practicing a capitalist development strategy.

27

and so did its development strategies and policies. Having inherited an interventionist state, Mahathir attempted to refashion it as a local variant of the East Asian developmental state. Prime Minister for 22 years beginning in 1981, Mahathir laid out a fresh development strategy that restored the state-capital alliance in the name of ‘Malaysia Inc.’ Within the domestic setting, he did not replace the NEP but, as it were, he displaced it from the centre of the nationalist-capitalist project. He showed that the NEP could be flexibly balanced against, or realized through, other developmental goals in September 1986 when he suspended the NEP’s restructuring requirements, and again in 1990 when a National Development Plan was formulated to succeed the NEP. Within the global setting, certain of his ambitions and two economic crises compelled his administration to respond flexibly to global capital – by liberalizing and deregulating in the face of the 1985–86 recession, but by turning semi-autarkic in response to the East Asian financial crisis of 1997. Since the latter crisis and Mahathir’s retirement at the end of October 2003, those who lead economic planning have reinstated NEP restructuring in development policy, as shown by the Ninth Malaysia Plan 2006–2010 (Khoo 2007). Socio-political parameters

In short, there has been a complex and often unpredictable interplay between development strategies, economic transformation, social engineering, internal and global market forces, and institutional changes. The outcome from all this was a multiplicity of development strategies and policy regimes, the key features of which are summarized in Table 2 and Table 3. This Report focuses on the development strategies and policy regimes of the period when Mahathir was Prime Minister for the following reasons:

• being the longest, the ‘long Mahathirist regime’ has shaped development

strategies and policy regimes that remain today • part of the NEP period, it inherited certain paths which it substantially modified • two key transitions happened during this period – from EOI to HI, and from an

interventionist to a developmental state • the regime had to manage two crises which produced far-reaching responses, and • it is the basis for a transition the critical directions of which are not yet clear.

Strategies and policies are obviously not mere technical matters. They are highly

political as well. This Report discusses strategies, policies and outcomes as they are bound by several socio-political parameters.. First, the state has consistently sought to maintain a stable tripartite balance of power – between itself, domestic capital and global capital. Second, there was a determined pursuit, after 1970, of a nationalist-capitalist project that was itself fraught with internal and external tensions. Third, an ambitious goal of social engineering was tied to an equally ambitious discourse of economic planning. Fourth, there was an institutionalized convergence of poverty reduction (to reduce vertical inequality) with the NEP’s ethnically based restructuring (to narrow horizontal inequalities). Fifth, the state developed an ability to implement its agendas or alter its policies, not least in response to economic and political crises. Thus, an understanding of these parameters provides an overall conceptual framework for evaluating particular strategies and policies.

28

Table 1

Administrations, Policies and Regimes 1957–1990 Regime Period Ruling coalition /

administration Core political concerns

Economic policies Social policies Institutions and agents

1957 to

1969

Alliance

Decolonization, nation-

building, counter-insurgency

Laissez faire, competitive commodity production,

diversification, ISI, agricultural and infrastructural improvements

Ameliorative