NEP “outlived its usefulness” – does not make sense to keep an obsolete policy ticking along on life support

Malaysia’s Development Strategy Revisited (3)
by Dr. Mohamed Ariff*

The New Economic Policy: Pervasive Poverty in the Malay Community

Multi-racial Malaysia’s major structural problems are largely attributable to the New Economic Policy initiated in 1970 in the aftermath of the May 1969 racial riots. With its emphasis on ‘positive’ discrimination in favour of the then backward Bumiputeras (literally ‘sons of the soil’), the objectives of the policy were laudable, serious misgivings about its implementation notwithstanding. The New Economic Policy continued to exist after reincarnating itself in various forms beyond the original 1990 deadline. While it has undeniably helped narrow interethnic income differences, all is not well judging by the outcomes. While interethnic income disparity has narrowed considerably, intraethnic income disparity, especially within the Bumiputera community, has widened.

The growing income disparity within the Bumiputera community reflects the extremely uneven distribution of the benefits of the New Economic Policy. Arguably, all Bumiputeras have benefited in one way or another, but it is clear that the bulk, if not the lion’s share, of the benefits have accrued to the politically well-connected elites at the top. There is a perception that the New Economic Policy has been hijacked by cronyism and nepotism at the top, impairing its ability to improve the lives of the people at the bottom. How else can one explain the existence of pervasive poverty in the Malay community after four decades of affirmative action? Although Malaysia has made considerable progress in alleviating poverty, poverty among the Malays – which is not confined to rural areas – remains glaringly conspicuous, with numerous Malay households struggling below the poverty line. Malay households still account for nearly 75 per cent of the bottom 40 per cent earning RM2,000 or less per month.

To be sure, poverty is not confined to the Malay community, and there are many poor Indians, Chinese and others. But there is absolutely no reason why anyone should remain poor in a land of plenty. With poverty – in both relative and absolute terms – still prevalent among the masses, it is obvious that the New Economic Policy has outlived its usefulness. There is really nothing ‘new’ any more about the New Economic Policy. It does not make sense to keep an obsolete policy ticking along on life support.

As mentioned, the New Economic Policy has continually reincarnated itself beyond the 1990 deadline, in the National Development Policy, the National Vision Policy and, most recently, the New Economic Model. In both letter and spirit, it is the centrepiece of the much hyped New Economic Model, the only ostensible difference being a better focus and greater transparency this time round. Despite this, the New Economic Model has been slammed vehemently by the Malay Consultative Council – comprising 76 Malay non-government organizations – for not being unequivocally pro-Bumiputera.

This simply shows the woeful ignorance of the new realities that have rendered such a policy totally untenable and unsustainable, with public debt extrapolated to exceed 100 per cent of GDP in 2019. There is a perception that much of the corruption, rent seeking and cost overruns that place pressure on the country’s coffers are associated directly or indirectly with the manner in which the New Economic Policy has been implemented.

The proponents of the New Economic Policy claim that it was not a constraint on growth, citing the fact that the Malaysian economy was able to grow at near double-digit rates for many years. Some go so far as to credit the New Economic Policy with this impressive growth record. However, one wonders whether the economy was growing because of the New Economic Policy or in spite of it, and whether economic growth would have been even more impressive in the absence of such constraints. The strategy was only going to work if there was robust economic growth in the first place. To avoid the disruption caused by redistribution, it asserted that no one should get a smaller piece of the pie than previously – which was possible only if the pie continued to get bigger. It is no wonder, therefore, that the New Economic Policy was downplayed during economic downturns.

Empirical observation suggests that the government was not oblivious to the constraints imposed by the New Economic Policy, judging by the attempts over the years to liberalize the rules and guidelines governing domestic and foreign investment. The fact that these rules and regulations were slowly chipped away, in the guise of reform, is a manifestation of the recognition that the New Economic Policy was an obstacle to increased investment and faster growth.

Seen in these terms, Malaysia has unwittingly forgone faster growth and denied itself a quantum leap to a higher income trajectory. It is instructive to note in this regard that Singapore, South Korea and Taiwan – which were roughly on a par with Malaysia in the early 1970s – have overtaken Malaysia to gain high-income status thanks to their smarter growth strategies.

In the wake of the titanic shifts that have been taking place in the world economy, Malaysia needs to embrace major structural transformation. It needs to discover new sources of growth, enhance its competitiveness in the global arena, strengthen its regional linkages, energize its domestic sector, move up the value chain in manufacturing, make its services sector the main engine of growth and so forth.

(to be contd)