Malaysia’s Real Problem? It’s Indonesia

By WILLIAM PESEK
Barron’s Asia
July 22, 2016

Malaysia’s complacency and drift under Najib Razak may see Indonesia zoom past it in the years ahead.

Najib Razak faces an international crisis. Not just with Loretta Lynch, the U.S. attorney-general, calling out official corruption in his Malaysia and seizing more than $1 billion in assets. And not just with investors frustrated with the complacency undermining his economy. The real problem for the scandal-plagued prime minister is Indonesia.

As Najib’s government circles the wagons to protect their man from international pressures, Indonesia’s newish leader, Joko Widodo, is welcoming them. It’s taken Widodo, who’s known as Jokowi, some time to find his reformist groove. But at the 641-day mark, there’s ample evidence that Jokowi is proving to be the anti-Najib in ways that could enrich Indonesians at Malaysians’ expense.

Admittedly, it seems odd to refer to Jokowi as “newish” one year and nine months into the job. But considering the fantastically-entrenched vested interests this political outsider is up against, and how close Indonesia was to failed statehood just 18 years ago, consolidating power and finding ones footing in Jakarta takes time. Jokowi is now rolling up his sleeves to address impediments to growth, and it’s a heartening sight.

It’s also quite a contrast with the disheartening state of play in Malaysia. Lynch didn’t mention Najib by name in her tantalizing Wednesday press conference (he’s a key U.S. ally in Asia). But it doesn’t take much imagination to connect the dots between Washington’s “Malaysian official 1” and the prime minister’s office (there’s already a #MalaysianOfficial1 hashtag on Twitter). By linking Najib to vast sums of money allegedly siphoned from state fund 1Malaysia Development Bhd., U.S. prosecutors ensured that Malaysia’s annus horribilis just got worse.

Najib created 1MDB in 2009 to boost his economy. Instead, the corruption and dysfunction surrounding it is a huge weight pulling down its global reputation. The Justice Department’s assertions of $3.4 billion of a fraud are plenty embarrassing: 1MDB funds lavished on Monets, Van Goghs, high-end real estate, jets and even Leonardo DiCaprio’s “Wolf of Wall Street” film about dodgy financiers trying to hide riches abroad. This is, as Justice officials points out, “a case where life imitated art.” One of the alleged offenders, by the way, is Najib’s stepson.

The controversy is a microcosm of why Malaysia’s potential is dimming as Indonesia’s luster increases. In 2009, when he rose to the office his father entered 39 years earlier, Najib pledged to raise Malaysia’s game in an increasingly competitive neighborhood. That meant replacing his father’s affirmative-action system benefiting the Malay majority at the expense of innovation and productivity. Yet Najib deepened the economic apartheid imperiling the outlook and the insularity that pervades Putrajaya.

The 12 months since the Wall Street Journal’s award-winning feat following the money – including $700 million in Najib’s personal accounts – has been a lost period for progress. The previous six years were, too, but the last year of circling wagons, demonizing the foreign media for uncovering official misdeeds and trying to play the victim mark a troubling expansion in Malaysia’s damage-control modus operandi.

In 1997, when financial contagion shook its markets and currency, then-Prime Minister Mahathir Mohamad didn’t look in the mirror and strengthen fundamentals. He blamed George Soros and some shadowy cabal of Jews for trying to destabilizing his nation. Subsequent leaders used any number of conspiracy theories to justify draconian security laws. In 2014, Najib accused the global media of picking on his nation when Malaysia Airways lost a Boeing 777, proving with its botched response how unready his government was for primetime. And the year since the Journal’s 1MDB scoop has seen more finger-pointing in Putrajaya than soul searching.

That’s made for an awkward disconnect between Malaysia’s contention the scandal is over and widening investigations abroad. For Najib’s PR machine, it’s a game of whack-a-mole. Every time they smack down news of one probe in, say, Singapore, another pops up in Australia, France, Hong Kong, Switzerland, the U.K. or the U.S., where Lynch’s investigators are on the case. It’s shameful that the biggest 1MDB breakthroughs are coming from the outside, while Najib’s people claim to be shocked, shocked. They deny all wrongdoing and (of course) allege a geopolitical conspiracy to oust their man, somehow with a straight face.

The buzz in Jakarta couldn’t be more different. Unlike ultimate insider Najib, Jokowi is the first Indonesian leader who isn’t the scion of a political dynasty or from the military. His modest roots, community-organizer past and man-of-the-people persona drew comparisons to President Barack Obama. Early on, this youthful, interloper vibe had pundits buzzing about a regional “Jokowi effect.”

The excitement surrounding Jokowi’s rise to power, as Time wrote in April 2014 just before his victory, “is credited with ending voter apathy in elections being held in the world’s most populous Muslim nation.” The question is whether Jokowi’s rise might be emulated elsewhere in the region – in Malaysia, the Philippines or Thailand? – where connections and wealth are the main routes to power. In Malaysia’s case, that’s probably a no – not with the United Malays National Organisation that’s ruled the place since 1946 still in power and deflecting blame.

Malaysia’s complacency and drift may see to it that Indonesia zooms past it in the years ahead. Jokowi is accelerating efforts to privatize state-owned enterprises, so that they’ll no longer serve as “ATMs” for corrupt officials. His focus on improved infrastructure will increase economic efficiency, boost productivity and attract more foreign investment. A recent tax amnesty deal to encourage Indonesians to invest billions hidden overseas at home will fatten government coffers. Jakarta is working to support a nascent startup boom among its 250 million people. And Jokowi’s respected new national police chief, Tito Karnavian, suggests anti-corruption and anti-terrorism efforts are kicking into a higher gear.

It’s early days for Jokowi’s reform drive. And the determination of the vested interests standing in his way is fierce and menacing. But as Jokowi endeavors to drop the “kleptocracy” label Indonesia has worn for decades, Malaysia is earning its own. Perhaps that helps explain why the Jakarta Composite Index is up 14% this year, while the FTSE Bursa Malaysia KLCI Index is down 2%. In fact, Indonesia is the best-performing bourse in East Asia on a 12-month basis. Rupiah-denominated bonds are on a tear amid optimism Jokowi will strengthen the national balance sheet.

Markets don’t always provide insights or lessons to national leaders. But just as foreign journalists following the money are keeping the pressure on Najib’s Malaysia, the movement of capital toward Indonesia may indeed tell a bigger story.