Tuesday, October 24, 2006

Malaysia's `Riot' Bogey Quells Economic Debate

More C&P stuff for your holiday reading leisure. From Bloomberg:

Malaysia's `Riot' Bogey Quells Economic Debate: Andy Mukherjee

By Andy Mukherjee

Oct. 24 (Bloomberg) -- There is a touristy Malaysia, which beckons visitors to ``come experience the unique potpourri of Asia's great cultures -- Malay, Chinese, Indian and the many ethnic groups of Sabah and Sarawak.''

And then, there is the other Malaysia, the one that investors deal with, where cultural harmony is just a veneer; scratch it off and you are left with a tightly packed powder keg of racial politics and politicking.

In this Malaysia, it is somehow immoral to question a longstanding policy favoring the economic advancement of ``Bumiputeras,'' mostly Malays and some indigenous tribal peoples.

That's because politicians such as Musa Hitam, a former deputy prime minister, believe that debates, even academic ones, can turn emotional and degenerate into race riots, like the ones that took place between the Malays and the Chinese in 1969 and became the justification for subsequent affirmative action.

And that really was Malaysian economist Lim Teck Ghee's crime -- to dispute the government's claim that Bumiputeras, literally ``princes of the earth,'' own less than 19 percent of Malaysia's corporate equity, far short of the 30 percent target set for them by the New Economic Policy of 1970.

The rationale for the 30 percent target was to remove a root cause of social strife by ending the concentration of wealth in the hands of non-Malays -- especially, the ethnic Chinese -- who in 1970 owned 96 percent of the Southeast Asian nation's economy.

The Centre for Public Policy Studies, the Kuala Lumpur-based think tank that Lim headed before his resignation this month, argued in the study that corporate equity controlled by Malays may be as high as 45 percent.

Bouquets and Brickbats

The political significance of this finding is simple: If the policy for redistribution of wealth has more than met its target, raising Bumiputera economic ownership to 45 percent from a meager 2.4 percent in 1970, then let's discontinue it.

Prime Minister Abdullah Ahmad Badawi denounced the study as ``irresponsible.'' Mahathir Mohamad, former prime minister and Abdullah's most bitter critic, said a sudden end to affirmative action could cause political instability.

Mahathir's businessman son, Mirzan Mahathir, who indirectly controls the Centre for Public Policy Studies, apologized for the report and retracted it on Oct. 10.

Lim quit the next day, saying he stood by his study.

He now says he may not get another job in Malaysia, in which case, he will have no option except to leave the country.

And that would be a pity, not only because a good academic can't freely air views he believes to be true but also because the brouhaha about whether Bumiputera corporate equity is 19 percent or 45 percent -- or somewhere in between -- is irrelevant to the more pertinent issue raised by the study.

The Right Debate

``Economic policies based on race do not serve as an incentive to disadvantaged segments of society to participate in the economy,'' the study said. ``Equitable wealth distribution can only be achieved if the recipients are subjected to income and asset tests, regardless of race, a mechanism employed in countries that have adopted affirmative action.''

To me, this is really the crux of the report.

Publicly traded companies in Malaysia are required to have at least 30 percent Bumiputera holding.

Hypermarkets must allocate 30 percent of their shelf space to products made by Bumiputera companies.

Many government contracts require companies to have a Bumiputera partner owning at least 30 percent of the business.

Foreign-owned companies are nudged to hire more Bumiputera staff whether qualified candidates are available or not.

All of these are rather clumsy attempts at social justice. A dogmatic pursuit of the 30 percent rule creates entitlements for the rich and the middle classes, who then trade them away.

Government Wealth

If Malay investors use the equity acquired by them at initial share sales to buy real estate, does that mean there's no increase in Bumiputera wealth?

What mechanism is there to ensure that within the Bumiputera, the less privileged also benefit?

Lim's study also raises an important question about the government's wealth.

The four largest companies by market value in Malaysia are Malayan Banking Bhd., power producer Tenaga Nasional Bhd., ship owner MISC Bhd. and phone company Telekom Malaysia Bhd. In all four, the biggest shareholder is the Malaysian government, acting through investment holding companies and funds.

To which race should this wealth be attributable? Malays make up 60 percent of the country's population of 26 million; the Chinese account for a quarter.

Who's Right?

To be sure, the 45 percent figure arrived at by Lim's researchers can at best be called a guesstimate. It counts 70 percent of the market value of publicly traded government-owned companies as Malay corporate wealth and adds it to the official estimate of Bumiputera equity, valuing the latter as a fifth of the combined capitalization of all shares listed on Bursa Malaysia, the stock exchange.

Prime Minister Abdullah says he doesn't mind divulging how the 19 percent figure is calculated, but the opposition has to stop insinuating that the government's number is fudged.

Then again, it doesn't really matter whose estimate is right. The competitive landscape in Asia has changed a lot since 1970; Malaysia's appeal to investors has been dimmed by the emergence of China and India.

Malaysia must acknowledge the altered reality. Its focus on redistributing wealth may now be coming in the way of creating it. Taking on a Bumiputera partner or sub-contractor who brings nothing else to the table is a cost to a foreign investor.

Rather than shouting ``riot'' to quell discourse, politicians should encourage a debate.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

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