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Will Malaysia’s new economic model work?

March 30, 2010

By David Chance Thu Mar 18, 2010 9:49am IST

KUALA LUMPUR (Reuters) – Malaysia’s government is considering proposals to shake up its economic and social system to boost competitiveness and growth, a government source told Reuters.

Following is an assessment of the risks to the proposals that will be presented later this month and formally announced in June before becoming the 10th Malaysia Plan, an outline of how the country moves from developing nation to developed nation income status by 2020.

* INTRODUCING GOODS AND SERVICES TAX AND CUTTING SUBSIDIES

Malaysia was supposed to cut its fuel subsidy bill from May this year as part of the 2010 budget to tackle its budget deficit which in 2009 hit a more than 20 year high of 7.4 percent of gross domestic product. That measure was withdrawn as it was “unpopular” with voters.

Similarly, plans to debate a goods and services tax (GST) in the current parliamentary session were withdrawn due to the risk of hurting the government’s popularity as were proposals for electricity price hikes.

These measures are unlikely to be implemented before the next general election that must be held by 2013 at the latest, but could come in 2011.

An early election with early implementation by a government with a strong two-thirds majority in parliament would be positive for investors. If the government fails to win back the two-thirds parliamentary majority it lost in the 2008 polls, unpopular measures such as these could be delayed again.

There are no firm pledges on fiscal reform.

Economic growth targets are ambitious at 6.5 percent by some unspecified timeframe. In its “Vision 2020” drive to win developed nation status, then-premier Mahathir Mohamad projected 7 percent annual growth. The outcome from 1998-2008 was 5.5 percent. Malaysia is Asia’s third most trade dependent economy relative to its size. Any targets could be rendered meaningless if there is a double dip global recession or if demand for commodities or oil declines.

* REFORMS TO SOCIAL SYSTEM AND SUPPORT FOR MALAYS

The most controversial area of reforms. How far will Prime Minister Najib Razak go in unwinding the linchpin of Malaysia’s political and social system that gives a wide array of benefits to the 55 percent Malay population?

Although the proposals say that social support will shift to the poorest 40 percent of families after subsidies are cut, the issue of how far the rest of the social safety net for Malays will change has been fudged.

The “New Economic Model” planned by Najib is being marketed as the successor to the decades old “New Economic Policy” introduced by his father, Malaysia’s second prime minister, Abdul Razak Hussein, in the wake of race riots in the 1960s.

To please reformers and win back ethnic Chinese and Indian voters who deserted the National Front in 2008, Najib will have to embrace deep reform. In doing so, he would alienate Malays who are the core voters of his United Malays National Organisation (UMNO), the linchpin of the National Front coalition.

So far, Najib’s reforms have been welcomed by investors but have not gone far enough. Najib’s political style was described as at best “pragmatically cautious” by Bridget Welsh, a Malaysia expert at Singapore Management University.

Najib already faces a growing tide of Malay concern that has focused on religion and rights.

“ZERO TOLERANCE” ON CORRUPTION

Malaysia has long pledged to eradicate corruption, one of the reasons that voters deserted the government in the 2008 polls. Najib has made some efforts to clean up vote buying in UMNO by enlarging the franchise in party polls, but there have been no major arrests on graft charges.

Malaysia has fallen to a record low of 56th place among 180 countries in anti-graft watchdog Transparency International’s 2009 corruption perception index.

A billion dollar scandal over a port free trade zone that has rattled bondholders has seen a few minor company officials charged.

UMNO recently ran a state legislature candidate who was a former cabinet minister suspended from the party in 2004 for corruption, a move critics said showed it was business as usual for cronyism.

HIGH QUALITY EDUCATION FOR ALL

Crucial to Malaysia’s bid to win a stake in the global knowledge economy is its education system. At present, it turns out tens of thousands of graduates a year who learn by rote and are ill-equipped for the new economy.

Malaysia’s tertiary education enrolment ratio lags both Singapore and Thailand, according to U.N. data. A report from investment bank Morgan Stanley said its gross tertiary enrolment ratio and gross tertiary completion ratio are 7 percent and 6 percent lower than the average of economies with its level of GDP per capita.

Education has become increasingly politicised with the abandonment of a policy of teaching maths and science in English instead of Bahasa Malaysia.

It is also an issue that could trigger a racial backlash against the government.

(Editing by Ron Popeski)

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