The economy contracted by 1.7 per cent in 2009, after recording growth of 6.7 per cent and 4.5 per cent in 2007 and 2008 respectively, and the country was in a recession for the first three quarters of 2009, recovering only in the fourth quarter, as the government’s RM67 billion stimulus packages kicked in alongside a mild global economic recovery. But any suggestion that this represents a turn-around in Malaysia’s economic fortunes would be premature, as Malaysia’s economic fundamentals are all on a downward trend.

The BN government was shocked by the results of the 12th General Election. Prime Minister Abdullah Ahmad Badawi was rendered a lame duck as he fought both an incipient revolt within the United Malays National Organisation (UNMO), and Anwar Ibrahim’s threat to form a new government together with defectors from BN. These circumstances produced a populist RM205 billion 2009 Budget (an increase of 4.4 per cent compared to Budget 2008), announced in August 2008, that was geared to please the ‘Rakyat’ in the event a snap election was needed. The budget exacerbated Malaysia’s worsening fiscal balance but had little effect on the economy – Malaysia’s key economic indicators began to deteriorate (see the below table). Malaysia also recorded its 11th straight year of deficit spending.

After much criticism for its inaction on the GFC, the BN government introduced a RM7 billion stimulus package focusing on infrastructure in November 2008. The quantum was criticised as being too small (1 per cent of GDP) and poorly targeted to have any significant effect on the economy. A second stimulus package was announced in March 2009, but this was more of a strategy designed to strengthen the governmental grip on the Malaysian economy than a revival package. Nevertheless, at RM60 billion (approximately 9 per cent of GDP), the package was unprecedented in Malaysia. It was then followed by a RM191 billion Budget for 2010, announced in October.

Fundamentally, the major problem was that none of these policy responses were sufficiently focused on real solutions (e.g. providing sufficient capital for small and medium scale enterprises). Instead, they continued to strengthen the role of the government in the economy (the Prime Minister’s Department and Khazanah received the bulk of the allocation). Rather than focusing upon the welfare of the nation, the policies were directed at infrastructure projects and ‘goodies’ that made the Rakyat happy. Malaysia’s ensuing fiscal deficit in 2009, at 7 per cent, is the highest since 1987.

Unemployment increased by a relatively small amount to 4 per cent. But this apparently respectable rate masks the real impact of the GFC upon workers welfare. In fact, the brunt of Malaysia’s unemployment problem is faced by Malaysia’s migrant workers – estimated at about 20 per cent of the Malaysian labour force – who are often repatriated during a crisis and thus are not counted in official statistics. Further, changes in workplace arrangements (e.g. forced no paid leave, shorter working hours, change from permanent to contractual work) hid the real impact of the crisis on workers. Inflation reached a record high in 2008 as the government reduced costly fuel subsidies. The Rakyat countered, suggesting that BN first resolve corruption before removing subsidies. However, 2009 saw deflation as private sector spending collapsed.

Promisingly, when Najib Tun Razak, previously Malaysia’s Finance Minister, became Prime Minister, his first move was to introduce economic reforms designed to move Malaysia to a high income economy by 2020. Najib correctly realised that Malaysia’s economic problems were structural. Growth in exports, GDP and income per capita had been declining since the EAFC.

But after a flurry of insubstantial announcements, Najib hit a brick wall called Majlis Perundingan NGO Melayu (MPM) – a coalition of Malay/Muslim opportunists and supremacists who demanded that Najib’s New Economic Model contain affirmative action for Malays despite the consensus view that such affirmative action was the main reason behind Malaysia’s deteriorating economic fundamentals. The New Economic Model (NEM), due to be announced by Najib in March 2010 has been postponed to mid-year after protests from MPM. More worryingly, in focusing upon the services sector, Najib’s NEM ill advisedly destabilises Malaysia’s economic back-bone – manufacturing and resource based industries. This attempt to gain quick growth by ‘mining’ the services sector may result in unintended neglect – after all, such a fate befell the agriculture sector under Mahathir’s push for industrialisation.

Further, the NEM target of 5 to 6 per cent growth remains elusive as the global economy remains sluggish. To achieve this target, Malaysia will need to be a more efficient producer to both attract investment and remain competitive. Domestically, inward FDI does not show signs of major recovery as Malaysia’s reliance on low-cost strategy is untenable. With the rise of late movers such as Vietnam, China, Indonesia and India, Malaysia is no longer a favoured FDI destination in the region. Only drastic liberalisation measures (e.g. removal of subsidies, affirmative action policies, retreat of GLCs) and improvement its institutions can see Malaysia return to pre-crisis level growth rates.

After a brief fling with minor reforms, the two years since the March 8, 2008 political tsunami have seen Najib return to business as usual, succumbing to the pressure of Malay opportunists and fundamentalists. It is unlikely that Najib’s forthcoming NEM will address long term persistent decline in Malaysia’s economic performance as his attempts to ‘test the water of economic reforms’ have failed spectacularly. The only possible conclusion is that Malaysia will remain in the mud in the near future.

Gregore Lopez is currently pursuing a PhD in Economics at Australian National University and blogs at  malaysiasdilemma.wordpress.com. He also volunteers as the Editor of the Malaysia section of New Mandala.

This article first appeared in here in Malaysiakini.