Malaysians expressed a collective sigh of relief when Opposition Leader Anwar Ibrahim was acquitted of sodomy charges in early January.

Their groan of dismay over the prosecution’s subsequent decision to appeal was equally palpable.

For most Malaysians, despite being divided in their opinions of Anwar, the acquittal marked a chance to move away from the sleazy politics that has long dominated daily life. Now, they expect more of the same. Aware of public exasperation, Prime Minister Najib Razak was quick to seize on the not guilty verdict as proof of his ‘reformist’ agenda and Malaysia’s supposedly independent judiciary. But the appeal leaves him stranded, inclined to delay calling a general election, and acutely aware that he is under threat as much from within his own ranks as from the opposition. It seems likely that Najib will win the next election, but unless he scores big — which seems unlikely — his leadership could be at risk.

The old guard in Najib’s United Malays National Organisation (UMNO), the core of the Barisan Nasional coalition government, has been trying to have Anwar convicted of sexual misconduct for more than 13 years. His first sodomy trial in the late 1990s was regarded as a miscarriage of justice, and the recently completed second trial was just as dubious, according to international legal and human rights organisations. Kuala Lumpur has a thriving gay club scene and nightlife, and the police — to their credit — do not hound homosexuals. But Anwar was hauled into court twice on a charge of ‘carnal intercourse against the order of nature’, which carries a maximum sentence of 20 years imprisonment.

The government’s deliberate targeting of Anwar is obvious. His arrest in 2008 came soon after he led a revitalised opposition to unprecedented gains in a general election, depriving the UMNO-led Barisan Nasional of its usual two-thirds majority in parliament. Subsequently, Anwar has spent much of the past three years caught up defending himself in the sodomy trial, when he might have otherwise engaged in consolidating the opposition coalition.

Despite, or perhaps because of, these efforts, the trial has become a liability for Najib. The value in distracting Anwar and trying to knock him out politically has been offset by the damage to Najib’s reputation as a putative reformer. Conscious that the long-term electoral trend is running against the ruling coalition, which has held power since independence in 1957, Najib has positioned himself as an agent of change, who is in touch with Malaysia’s younger generation. He has attempted to roll back unpopular elements of an affirmative action program designed to benefit the country’s majority ethnic Malay community, liberalise press restrictions and replace controversial security laws, including detention without trial. Still, Najib is yet to convert the rhetoric of reform into reality, which he must do to win back the alienated centre of Malaysian politics, where cynicism and anger run deep.

Najib is encountering entrenched opposition within UMNO, particularly from conservatives who favour continued Malay privileges and the flow of patronage to the party faithful. These older UMNO Malays and their supporters in the business world and bureaucracy — especially the police and prosecutors — strongly objected to Anwar being freed and lobbied hard and successfully for the appeal. In the end, Najib will lose the most. It seems he failed to stand up to these factions — again — and lost the public relations gains from Anwar’s acquittal.

The loss of the momentum that Anwar’s freedom initially gave Najib may persuade him to wait until later this year to call an election, which must be held by March 2013. Najib must gamble that the electoral climate will improve by this time. But the economy could slow and more political scandals could emerge — rampant corruption involving UMNO politicians has already hurt his government.

Free to campaign, Anwar will lift the spirits of the three-party opposition Pakatan Rakyat coalition. But he is looking and sounding tired, and his own People’s Justice Party is rife with factionalism and squabbling. Although Anwar said recently: ‘My gut tells me we will win [the election]’, most analysts believe he will fall short, even if not by much.

While the opposition will surely live to fight another day, Najib may not have it so easy, even if he wins. Only the recovery of a two-thirds parliamentary majority will ensure his continued leadership of UMNO and Malaysia. Failing this, Najib could face pressure to step aside if he loses more seats, a fate that befell Abdullah Badawi, his predecessor.

Barry Wain is Writer-in-Residence at the Institute of Southeast Asian Studies, Singapore.

1. A low note for Malaysia as Anwar trial starts
2. Malaysia’s politics post-Anwar Ibrahim
3. Politics without priorities in Malaysia

Malaysia recently soared into the headlines after Opposition Leader Anwar Ibrahim was acquitted of sodomy charges — although the prosecution has already filed for appeal.

The case is entirely political and reflects the government’s willingness to use the judiciary for political ends. Malaysia is set to enter the most competitive elections it has ever faced — likely to be held before June or else pushed off until 2013 — and each side has a fighting chance to win.

Malaysian politics is dirty. Murder, sodomy, secret trysts, sex videos and conspiracy are all commonplace, and corruption scandals occur regularly. Both sides wallow in this political gutter, each trying to darken the reputation of the other, and not fully appreciating how much the system as a whole has been damaged. The acquittal provided the government with an opportunity to take the high road and move away from this negative approach to politics. Instead, it opted to appeal — despite the shabbiness of the evidence.

Concerns are now focusing on the integrity of the electoral process. The government is mooting reforms but the problems are vast, from the administrative neutrality to vote buying. As the system becomes more competitive, political institutions involved in anti-corruption and the rule of law have increasingly been compromised, with the government putting pressure on institutions such as the civil service to toe the line.

The upcoming election will revolve around the two leaders tapping into their own popularity bases, as politics in Malaysia is highly personalised. Both men have been damaged by character assassinations, and will have to work hard to win support. The test now is whether either candidate will move beyond a largely self-centred campaign and articulate the solutions his leadership can offer. The country’s problems are well known — including the need for economic reform and improved race relations, coupled with growing inequality — but, sadly, the policy options each side promise to pursue are unclear.

Anwar Ibrahim’s strength has been his charisma, and he succeeded in consolidating his support base through martyr politics. Nevertheless, Anwar’s reputation suffered during the trial, and he has a long road ahead to win over new supporters — especially in rural areas, where the government media remains dominant.

On the other hand, Prime Minister Najib Razak faces a trust deficit, which seems to be growing at the same rate as the inconsistencies in his reform policies. It remains unclear what he stands for, and his reliance on handouts to woo voters reflects weakness, not strength.

Malaysian politics is also highly polarised. Both sides can expect support from around 35 per cent of the electorate, with the remaining third in the middle. But in keeping their primary support bases happy, Malaysia’s leaders have alienated the center — and a strategy aimed at the middle ground risks alienating the base. To win the upcoming election, both leaders will need to meet the expectations of their support bases, while simultaneously reaching out to those who are ambivalent, tired of over-politicking and looking for more than negativity.

Najib in particular faces the challenge of preserving the loyalty of his own base, as many are resistant to change and adopt reactionary racial positions. They expect Najib to protect their interests, and have shown in recent years that they will remove any leader who fails their expectations. Najib’s attempts to reach the middle ground — in areas of political reform and ethnic relations — compromise the support of his base. He now has limited political space and the result has been inconsistency. In contrast, Anwar has more of an advantage in reaching out to the middle ground due to the fact that his support base wants change. Yet, he too, has to manage the growing anger of his supporters.

In this complicated terrain ethnic politics remain alive and well. Malaysia has three interconnected inter-ethnic dynamics. The first involves race relations between Malays and non-Malay minorities. Then there is the issue of religion, especially relations between Muslims and other religions. Finally, there is the issue of moderates and more extreme views of race and religion in the Malay community. Each of these has become more difficult to manage since the 2008 elections when Najib’s National Front lost its two-thirds hold on seats, and in some instances has led to acts of violence, such as the church bombings in January 2010.

Navigating these divisions is not easy, and the contenders for power ultimately need to include all Malaysians. For Najib, the challenge is to reach out to non-Malays as his coalition has lost the legitimacy to represent them. For Anwar, the challenge is to show that his coalition can represent the positions of different ethnic groups, while also incorporating the country’s Islamists. Especially challenging for both men is how to accommodate more extreme perspectives within a moderate framework, to move Malaysian politics from negativity and anger towards more inclusion and hope.

Bridget Welsh is Associate Professor of Political Science at Singapore Management University.

1. A low note for Malaysia as Anwar trial starts
2. Malaysia’s prime minister loses most from Anwar trial
3. Malaysia: Disputing elections

After stating in 2010 his vision to transform Malaysia, Prime Minister Najib’s task in 2011 was to turn vision into reality.

The Government Transformation Programme made some progress on this front, improving the delivery of some public services. A number of Economic Transformation Programme (ETP) projects also delivered higher private-sector investments and successful large property joint ventures between the government and the private sector, both of which helped revive the investment climate.

Despite the challenging global conditions, Malaysia’s economy is expected to meet its 2011 targeted growth rate of 5–5.5 per cent. Domestic growth was strong, owing primarily to the expansion of consumer demand, and this compensated for the lower-than-expected export growth of 6.8 per cent. Yet further expansion in household consumption is unlikely, given the already high level of household debt, which stands at 70 per cent. Similarly, the government’s fiscal expansion ability is increasingly constrained as public debt approaches 60 per cent of GDP.

The rising cost of living also remains a major economic and political issue. The prices of selected perishable goods jumped because of a supply shortage in the first quarter of 2011. And while general inflation remained low at 3.4 per cent, food prices increased by 6 per cent. The government took steps to reduce costs by building affordable housing, constructing the Mass Rapid Transit rail system in Kuala Lumpur, subsidising key food staples and capping road toll increases. In addition, the government made direct-transfer payments to low-income households, students and the rural population.

The ruling coalition, Barisan Nasional, found firmer ground in 2011. It won most by-election contests, reversing a previous losing trend. The opposition component parties, meanwhile, have yet to resolve their differences on fundamental issues, such as the Pan-Malaysian Islamic Party’s demand for an Islamic state and the implementation of Hudud law.

The government stole some thunder from the opposition, Pakatan Rakyat, in September when it repealed the Internal Security Act (ISA) and other emergency laws. But its efforts to improve human rights were marred when the government mishandled the Bersih 2.0 rally, where thousands protested to demand a clean and fair election. Further, the partial replacement of the ISA and the recently passed Peaceful Assembly Act have both been criticised by the legal fraternity as an attempt to control freedom of assembly and speech.

The continuing recession and potential financial meltdown in the euro zone are sure to dampen demand for Malaysian exports in 2012. Malaysia’s exports to the EU fell from 9.4 per cent of GDP during 2001–2008 to 7.4 per cent during 2009–2010, while exports to China grew from 6.7 per cent to 14.6 per cent. Hence, the weaker demand from the euro zone is a worry, but any slowdown in the Chinese economy would create more anxiety.

Wage issues may be contentious in 2012. As part of the push to become a high-income economy with correspondingly high productivity, a new public-sector remuneration scheme has been announced which includes higher wages and an exit policy for non-performers — but public-sector employees have not readily embraced the scheme. For the private sector, a decision on whether the government will announce a minimum wage is expected soon. Still, there is a lot to do to reconcile what trade unions want (the reduction of poverty and improved living standards) and what the employers feel they need (increased productivity and competitiveness).

The 13th general election, widely expected to be held in 2012, will be a game changer, likely to overshadow the possible negative impacts from the euro zone. In the run-up to the election, the government will probably tweak the economy to ensure favourable conditions. Programs to address issues like the rising cost of living, the crime rate, employment opportunities and the ETP’s implementation will be fast tracked. Conversely, macroeconomic measures such as normalising fiscal and monetary policies, as well as other structural reforms may be deferred until after the election.

Politically, 2012 will be a highly charged year. The announcement of the court verdict on Anwar Ibrahim will impact Pakatan’s prospects. Anwar is critical to the opposition coalition’s cohesiveness. Without Anwar, Pakatan would have been hard pressed to find a prime ministerial candidate who is acceptable to all Pakatan component parties and Malaysians.

Although Barisan Nasional has regained some political ground since 2008, it is still grappling with many issues. For example, in trying to win over non-Malay voters, the party is in danger of alienating Malays — its core supporters. The watch word now in use is that Barisan’s candidates must be ‘winnable’, meaning they must be seen as serving the interests of their constituents, have untainted reputations and be competent at their jobs. Human rights and governance issues will take centre stage for urban voters, but for rural areas, which are Barisan Nasional’s stronghold, development will win the most votes.

All things considered, economic growth in 2012 may not outperform the achievements of 2011, but it will be comfortable. We must also look beyond 2012 — what if the global economy recedes into a long period of very low growth? The solution will be to carry out potentially painful structural transformation to boost growth and competitiveness. Most importantly, the outcome of the keenly contested general election will determine Malaysia’s path in 2012 and beyond.

Mahani Zainal Abidin is Chief Executive at the Institute of Strategic and International Studies, Malaysia.

This is part of a special feature: 2011 in review and the year ahead.

1. Economic and political developments in Malaysia: new players new game?
2. Malaysia: the political tide runs out
3. Malaysia: A new way forward?

After registering an impressive 7.2 per cent growth in 2010, the Malaysian economy visibly slowed down in 2011. GDP growth moderated to 5 per cent in the first half of the year, due mainly to sluggish export growth, but increased to 5.8 per cent growth in the third quarter, thanks to commodity exports and domestic demand.

Manufactured exports, the main driver of growth, did not fare well over the year, owing to depressed demand conditions in the US and EU.

Malaysia should still be able to post 5 per cent growth for the year as a whole, but only if it can muster 4.2 per cent growth in the fourth quarter. This pall on the Malaysian economy is likely to worsen in 2012 with the export sector facing headwinds. Reputable think tanks and rating agencies have now revised down their 2012 GDP growth forecasts to a narrow range of 4.2 to 4.6 per cent.

The financial sector remained healthy throughout 2011, with stable monetary expansion, inflationary pressures notwithstanding. The consumer price index also edged up to 3.4 per cent year-on-year in September, a mild increase by regional standards. In the face of rising liquidity and bleak growth prospects, the central bank stopped raising the interest rate bar by keeping its official policy rate at 3 per cent.

But the fiscal side of the coin is tainted with perennial budget deficits spanning the last 14 years. In fact, Malaysia’s fiscal record is quite dismal; successive governments have pursued overwhelmingly pro-cyclical fiscal policies over the last five decades, without any serious effort to balance the books (with the exception of surpluses from 1993–97).

Government expenditure has risen disproportionately while tax revenue continues to trend down. About 40 per cent of government revenue comes from oil and gas, which is unsustainable in the long term. Federal revenue as a percentage of GDP has dropped from a 10-year average of 34 per cent of GDP to 22 per cent, a serious cause for concern, and attempts throughout the year to introduce a goods and services tax were scuttled by political expediency. The upshot of all this is the soaring government debt, hovering at around 54 per cent of GDP.

Looking to the future, Malaysia’s challenge is to free itself from the middle-income trap. Its vision is to achieve developed country status by 2020 with a per capita income of US$15,000. To be in the league of high-income economies, Malaysia needs to reinvent its economy and move up the value chain. This requires bold policy reforms, which do not sit well with the country’s powerful vested interests — the beneficiaries of the current order premised on patronage.

The country’s political landscape has changed dramatically since the 2008 general elections which deprived the ruling coalition of its traditional two-thirds majority. The opposition, led by former Deputy Prime Minister Anwar Ibrahim, poses a serious threat to the ruling coalition in Malaysia’s upcoming general elections, which must be held before 2013, raising their importance for the year ahead. This opposition is drawing large support from online media with unprecedented outreach, and is being fanned by numerous issues relating to governance and integrity. All indications are that Malaysia is moving toward a two-party system, with the opposition increasingly perceived as a credible alternative. But the ruling coalition of race-based component parties — which has ruled the country for 54 years since independence in 1957 — maintains a huge incumbency advantage, given its extensive control of the mainstream media and government machinery.

Be that as it may, gone are the days when Malaysia’s election results were a foregone conclusion, now that the constituencies are more demanding and discerning. It is estimated that there will be six million new voters at the next election, making the elections process a totally new ball game. Not surprisingly, the incumbents and the challengers are all out to win the hearts and minds of these young voters.

It is extremely difficult, if not impossible, to predict what will happen when Malaysia goes to the polls next — and where this will take the country after 2011. The ruling coalition, Barisan Nasional, is working hard to regain the two-thirds majority it lost in the 2008 elections. Yet the opposition, Pakatan Rakyat, is confident it can form the next federal government. While only time can tell, Malaysia is getting closer and closer to a tipping point. For now, only one thing is certain: politics in Malaysia will never be the same — and 2012 certainly will not be business as usual.

Mohamed Ariff is Professor at the Department of Economics and Governance, International Centre for Education in Islamic Finance, Malaysia. 

This is part of a special feature: 2011 in review and the year ahead.

1. Malaysia: a year of economic and political reversals
2. Prime Minister Najib – Fiscal discipline and efficiency for Malaysia first!
3. Malaysia: the political tide runs out

The present and future quality of Malaysia’s human capital is of considerable concern for the country’s policy makers.

Human capital is not improving as it should, and it threatens to constrain Malaysia’s growth objectives.

The Second Industrial Master Plan (IMP2) discusses at length moving up the value chain. This can have various meanings, but it must involve sophistication in production processes and an accompanying improvement in management methods.

The IMP2 covered the period 1996 to 2005. But the need for a skilled workforce is more pronounced now than it was 15 years ago when the IMP2 was drafted. This is especially true since multinational corporations can choose from a variety of locations within the region, like China, India and Vietnam. But even discounting the need to attract FDI by offering skilled labour, the development plans charted for Malaysia require high-quality workers.

The New Economic Model (NEM) for Malaysia (Part 1) unequivocally admits the country has a human capital deficit.

The NEM observes that Malaysia’s weak productivity growth ‘highlights the stark reality that Malaysia still lacks the sort of creativity and innovation that result in technological and technical progress’. Nothing can be more telling than to have a sub-section heading in the NEM Report which reads: ‘We are not developing talent and what we do have is leaving’.

However, the Tenth Malaysia Plan 2011–15 (10MP) was launched on the premise that Malaysia has an adequate supply of skilled labour.

The 10MP forwards ‘ten big ideas’ to move Malaysia into the high-income category, and two of these ideas are particularly pertinent to high-quality human capital. The 10MP also mentions ‘developing and retaining a first-world talent base’ as one of its five key thrusts.

In addition, the 10MP is supposed to focus on 12 national key economic areas (NKEAs), some of which are heavily dependent on the availability of skilled labour. Of these areas, financial services, information and communications technology, education, electrical products and electronics, business services, private healthcare, and greater Kuala Lumpur are the NKEAs that require a strong skilled labour force to achieve the targeted objectives.

For example, the ‘greater Kuala Lumpur’ NKEA is meant to transform KL into a world-class city and international financial district. But without skilled workers with international exposure — from top-level management supported by competent middle-level managers and, lower down, skilled officers — it will not be possible to have an international financial district.

Similarly, the indicators regarding the level of science and technology in Malaysia do not portray an encouraging picture.

Malaysia’s research and development expenditure, as a percentage of GDP, stands at 0.6 per cent. This lags behind Singapore’s expenditure of 2.3 per cent, South Korea’s 3 per cent and Japan’s 3.4 per cent. And while Malaysia had about 531 patent applications in 2006, Korea had 125,476 and Japan over 300,000. The number of journal publications is equally unimpressive: Malaysia had 808 published articles in 2007, eclipsed by Singapore’s 3792 and Japan’s 52,895.

But despite the Malaysian government’s concerns, surprisingly, very little is being done to rectify human capital issues.

Plans like the 10MP speak as if nothing is wrong. They are being drawn up on the assumption that skilled workers are readily available: the areas specified for moving up the value chain are those dependent on high-quality labour.

On top of all this, there are complaints that fundamental education reforms have diluted the spirit of nationalism and the rights of the majority.

Until 1976, English was the medium of instruction in Malaysia’s schools and universities. This was subsequently changed to Bahasa Malaysia, and remained so until 2002 when then-Prime Minister Mahathir Mohamad directed that science and mathematics be taught in English, with the medium of instruction otherwise remaining in Bahasa Malaysia. The reason for this sudden shift was so Malaysians could be better equipped to keep abreast of developments in science and technology, making Malaysia more globally competitive.

But now there are emotional suggestions that the teaching of science and mathematics should revert to Bahasa Malaysia. The arguments for this reversion are justified in a number of ways, primarily by appealing to nationalistic feelings and the imagined threat of the erosion of the Malay identity. Nevertheless, there is widespread acceptance that the general level of competence in English is declining. People ranging from industry leaders to former ambassadors are bemoaning this phenomenon. Again, the resulting implications for the development of human capital are not good.

A labour force that is educated, creative and innovative is the foundation for economic growth. Unless education reforms, including the teaching of science and technology in schools, are approached in a realistic and far-sighted fashion, it may be difficult to achieve substantial changes.

Shankaran Nambiar is an economist who consults for national and international agencies.  A version of this article first appeared in the Edge Financial Daily.

1. Can Malaysia graduate?
2. The ASEAN-China FTA: driving competitiveness in Malaysia
3. Imagining a new human rights strategy for Burma

In the aftermath of the Arab Spring, commentators on East Asia Forum have highlighted the moderate character of Southeast Asian Islam.

Bahrawi argues that contested interpretations of Islam are democratising Islam in Southeast Asia — but similar contests seem to be ineffective in countries like Pakistan. And van Bruinessen argues that large, resilient Islamic organisations are stabilising Indonesian democracy — but comparable organisations are failing to play such a role in other Islamic countries. So are local factors playing a bigger role in Southeast Asia than is usually suspected? Islamic countries in Southeast Asia can be treated as valid role models for other Muslim countries only if non-local factors can explain the existence of moderate Islam in Southeast Asia.

There are six major Muslim communities outside the Arab world: the immigrant Muslim communities in the West, Persian, Southeast Asian, South Asian, Sub-Saharan, and Turkic Muslim communities.

Since the 19th century, Arab Islam has claimed moderate Islam in northern and western parts of South Asia. But Islam in rest of South Asia continues to be moderate so that we can still speak of an Eastern Islam to refer to Islam in both Southeast Asia and parts of South Asia. Sub-Saharan Muslims are rarely taken seriously on ideological issues, and moderates within immigrant communities in the West are often denounced as sell-outs.

This leaves just four potential role models within the Islamic world — Arab, Persian, Turkic and Eastern Muslims, which can be further classified into two broad groups: those who use Arabic language and/or script for daily communication and those who do not. So far only the latter have proven to be largely moderate and conducive to relatively stable democratic states. Thus it is not surprising that, in the aftermath of the Arab Spring, moderate Muslim-majority countries in Southeast Asia are often suggested as role models for Muslim-majority countries in other regions.

Muslims in countries like Turkey, Bangladesh and Indonesia, and in provinces like Paschimbanga and Tamil Nadu in India, are ethno-linguistically rooted and only use Arabic for prayers and specialised religious studies. In these places, Muslims are more likely to read translations of the Quran in their mother tongue (and in a non-Arabic script). This has four salutary effects reinforcing the ethno-linguistic rootedness of believers.

First, the majority of people in these Muslim communities cannot directly participate in the religious discussions within the Arab world, and are less affected by such discussions.

Second, clerical control over religious discussions is largely confined to specialised debates. The routine debates most believers are exposed to are conducted in a linguistic medium which the clerics cannot claim exclusive control over. This helps limit the role of clerics to the religious sphere and isolate them from secular affairs.

Third, the favourable position of local language among the believers helps maintain links with local cultural heritage.

And finally, local languages allow engagement between believers and non-believers. Non-believers can access activity within the local Muslim community through a common language and make creative contributions.

These effects reinforce ethno-linguistic roots by strengthening the bond between the believers and their local cultural heritage, as well as the bond between the believers and non-believers who share that heritage. Ethno-linguistic rootedness in turn dampens the quest, if there is any, for global ideological and cultural dominance à la the jihadists. And secular bonds between believers and non-believers, and the marginalisation of clerics, shield the state from communal religious pressures.

Ethno-linguistically rooted communities in Pakistan have proven to be resilient to Wahhabi influence. Indian provinces like Paschimbanga and Tamil Nadu, where non-Muslims and Muslims alike use regional languages, are less prone to religious riots. Bangladesh, which separated from Pakistan to protect Bengali language and heritage, is actively contesting radical Islam and is known for democracy and the empowerment of women. In contrast, the Deobandis, who are the major ally of Wahhabis in South Asia and dominate the Pakistani military establishment, are opposed to all non-Deobandi Muslims and promote Arabic — ‘the religious and official language of Islam’ — at the expense of South Asian languages and scripts. The Taliban, who destroyed the cultural heritage of Afghanistan and adjoining parts of Pakistan, are products of Pakistani Deobandi seminaries.

The contrast between the Arab-dominated strains of Islam and Eastern Islam cannot be starker — a divide that is unlikely to be bridged. This divide is reinforced in West Asia and North Africa by the dominance of Arabic, which has long ago erased the linguistic and, to a lesser extent, cultural diversity of the region. To that extent, the moderate Eastern Muslim communities cannot serve as role models for the Arab world. The Arab world has to find its own solutions.

Vikas Kumar is Assistant Professor at Azim Premji University, Bangalore.

1. Worlds at stake in Arab Reform
2. Moderate Islam in Southeast Asia and Egypt
3. After the Arab Spring: A role for Northeast Asia?

As the US loses its AAA rating, and Japan takes a slide to AA-, can the Malaysian economy hold its candle in the global storm that is brewing?

In what is an already gloomy environment, there is no doubt that the weather ahead is likely to turn grey, and Malaysia’s credit rating slipping from A+ to A in early September 2011 is proving an ominous sign. The country does not have a track record of practicing fiscal discipline, and in the last two decades or so Malaysia has had federal budget deficits even in times when the economy was registering good rates of growth. Standard & Poor’s also said recently that Malaysia’s continually large government investments, spanning over more than a decade, are a rating constraint. If this was a problem previously, it is likely to be a thornier issue now.

The second quarter was an unhappy one for Malaysia as the manufacturing sector registered a growth rate of 2.1 per cent against a growth rate of 5.5 per cent in the first. Especially hurt here is the manufacturing sector, dealing with slumping demands for Malaysian exports from the US, Japanese and European markets. Global growth rates are expected to drop to a sedate 3.1 per cent for 2011, and China’s growth is also expected to fall, though marginally by 0.2 per cent. Under these circumstances, Malaysia’s decision to increase approvals for manufacturing investment applications to MYR16.4 billion (US$5.1 billion) for the second quarter of 2011 will matter little, though this figure is striking when compared to that of the second quarter of 2010 (MYR7.5 billion/US$ 2.3 billion). But given global uncertainties, high figures for approvals could give a false sense of comfort; what is more important is whether these figures are realised.

Prime Minister Najib remains undaunted. In mid-September  he forecasted a growth rate of 5–6 per cent for 2011. But, if the grim global outlook persists, a more realistic range for this year’s growth rate is somewhere between 4–5 per cent. If the external sector cannot be relied on to prompt vibrant growth rates though, how might these desired rates materialise? Many think the Economic Transformation Programme (ETP) will be the wand that will power the economy to the magic 6 per cent growth rate that Malaysia seeks. The burning question is whether the ETP can provide the impetus to drive aggregate demand high enough to compensate for the shortfall from external demand.

A related question concerns Malaysia’s fiscal condition. Having repeatedly used the deficit bullet, even when it need not have, to what extent can this tactic be used again? When Malaysia’s exports have fewer takers in the months to come, the ETP will undoubtedly be a potent weapon in the country’s arsenal. But it will be an instrument to moderate the Malaysian economy against other downward pressures — not an instrument to pull the country out of its middle-income trap.

The consequences of the lack of fiscal discipline will surface should the global economy take a turn for the worse. The first victim will be the federal government deficit. Soon after the 2008 crisis the deficit hit a high of 7 per cent of GDP, at which time there was a genuine need for such a high deficit. But when they are used freely, deficits become a source of worry. The government’s declaration that it wants to balance the books and reduce its continual policy of running deficits obviously cannot be realised under the imminent circumstances. The debt-to-GDP ratio, which was at about 42 per cent in 2007, ballooned after the crisis to about 54 per cent. And it will, in all likelihood, worsen as global conditions deteriorate or even remain as uncertain as they are.

A downturn in developed economies will reveal the cracks in the Malaysian economy. One of the issues that will emerge will be the return to a high value of public debt as a percentage of GDP. There are good reasons to be prudent and conservative in one’s approach to macroeconomic management. The faltering economies in Europe press that point home. When the flame flickers it gives us an opportunity to reflect on lessons that should have been learnt — but were not.

Dr Shankaran Nambiar is an economist who has consulted for national and international agencies.

An earlier version of this article appeared in The Edge Financial Daily.

1. Prime Minister Najib – Fiscal discipline and efficiency for Malaysia first!
2. The global financial crisis and short-run prospects for India
3. China’s response to the global financial crisis

The recent downgrade of the United States’ credit worthiness by Standard & Poor (S&P) rocked financial markets around the world, Malaysia’s included.

Yet a strange sense of confidence pervades Malaysia’s market observers. The impact of the downgrade by S&P from a rating of AAA to AA-plus is thought to have limited impact on the Malaysian economy.

A number of reasons might justify this smugness. First, it is claimed that Malaysia has delinked its exports from Europe’s financial centres. Second, Malaysia’s Economic Transformation Program is being bandied as the knight on the white horse that will save the economy. Third, the Malaysian economy is supposed to be sufficiently internally driven, able to withstand any external pressures emanating from the downgrade and its aftermath.

The reality is different. Malaysia is a small, open economy that is heavily export driven and reliant to a large extent on global demand emanating directly or indirectly from the US and Europe. When one considers that the Eurozone is in shambles that should add to a measure of worry.

Much of Malaysia’s hopes rest on economic growth in the developed world. It would be silly to deny China’s economic power; but it would be sillier to expect China to carry the burden of the global economy on her shoulders. China does not only produce for its domestic market. A lot of the production that takes place is China is driven by demand from the developed world.

And China has problems of her own, the most pertinent being rising inflation pushing up interest rates. With the rise of interest rates in China, production levels in China will ease; and with that so will demand for Malaysian exports.

One hopes the Economic Transformation Program will work. But with the lid being taken off, due to the global stage going soft, such expectations should be tempered with caution.

This, then, is the time for rebalancing strategies. I argued at an Asian Development Bank Institute conference soon after the 2008 crisis that Malaysia should consider implementing its own version of rebalancing. The darkening clouds over the horizon seem to indicate that it is worth reconsidering the usefulness of seeking different strategies than Malaysia is accustomed to.

Perhaps the single most important strategy to pursue is to encourage the growth of small and medium enterprises (SMEs). Korea and Taiwan offer valuable lessons on how the SME sector can contribute to economic development.

Malaysia’s efforts at encouraging domestic investment, especially in the manufacturing sector, have been half-hearted. The national car industry might have been a route that could have provided the required impetus for the SME sector. But the selection and continued protection of the automobile industry was, to start with, based on mistaken assumptions.

And there are innumerable areas begging for investment. Local transportation facilities are deeply inadequate; any office worker who uses public transport will testify to that. The roads in all the major cities, particularly in Kuala Lumpur and Penang, are perpetually congested.

Affordable housing is a burning issue that has almost turned into a festering wound in recent years. The rapidly increasing prices of residential property, the inflow of overseas residents and speculative investment have sharpened the problem.

There are many other issues that should grab the government’s attention. Developing an environmentally-friendly country, proper waste management and social safety nets are some of the questions that have been ignored for too long. Urban poverty and the squatter problem also demand attention.

It is true that some of these concerns are covered by the National Key Economic Areas (NKEAs). But the NKEAs are like paintings being hung on an old, jaded wall. The model of a Malaysia that will be driven by foreign direct investments (FDIs) and the export-oriented manufacturing sector has to be questioned.

This is not to suggest that Malaysia do away with trade and FDIs. It would be wrong to suggest that. But a look at the declining FDI inflows will easily convince even skeptics that there are other things that need to be done even as Malaysia tries to make itself more attractive as an FDI hub.

Present problems in the global and US economies may have a limited impact on the Malaysian economy, for the time being. But the signs are clear: there is a threat lurching in the shadows. The storyline has changed and rebalancing strategies should not be waved away dismissively.

Dr Shankaran Nambiar is an economist who has consulted for national and international agencies. A version of this article appeared in The Edge Financial Daily.

1. Malaysia’s New Economic Model as a rebalancing strategy
2. A holistic approach to reforming Malaysia’s economy
3. A sluggish recovery expected for Malaysia’s economy

The recent High Court of Australia decision effectively ended the Australian Government’s ‘Malaysia Solution’, where the incumbent Labor government of Prime Minister Julia Gillard had agreed on a bilateral deal with Malaysia that would see 800 asylum seekers coming to Australia by boat be taken to Malaysia.

In return, Australia would accept 4,000 already-processed refugees from Malaysia over four years. Importantly the High Court case exposed the weakness behind the Malaysia Solution and the faulty premise upon which it was established.

The High Court built its decision on last year’s judgment in Plaintiff M61/2010E v Commonwealth where the Court said:

… read as a whole, the Migration Act contains an elaborated and interconnected set of statutory provisions directed to the purpose of responding to the international obligations which Australia has undertaken in the Refugees Convention and the Refugees Protocol.

The effect of the M61 decision was that the entire Act must be interpreted with Australia’s international obligations in mind. On this basis it’s hard to understand how the government got the Malaysia Solution so wrong.

As it stands now, the Migration Act allows people who arrive at, or are intercepted travelling to, Australia’s excised territories such as Christmas Island to be taken to a specified country. In order to take them to Malaysia the Minister was required to make a declaration about Malaysia under section 198A(3) of the Migration Act. The High Court case focused on how the Minister made his decision regarding the declaration.

Under section 198A a declaration states that the country in question:

provides access, for persons seeking asylum, to effective procedures for assessing their need for protection … provides protection for persons seeking asylum, pending determination of their refugee status … provides protection to persons who are given refugee status, pending their voluntary repatriation to their country of origin or resettlement in another country … and meets relevant human rights standards in providing that protection.

The High Court determined that these requirements must be facts under law. The Minister cannot just be satisfied a country will act in a certain manner; instead a country must be under an obligation, either under international law or within its own domestic legislation or from a legally-binding agreement, to provide access and protection to persons seeking asylum. The Court found that these facts were not and could not be established and therefore the declaration was invalid.

Malaysia is not a signatory to the Refugee Convention. It hosts huge numbers of asylum seekers, tolerates the UNHCR presence whilst they are processed and allows refugees to be sent on to settlement countries. Malaysia does grant refugee status and with it permanent or temporary residency, but it does not allow asylum seekers or refugees access to work, housing or education. In addition there have been real concerns about the treatment of asylum seekers and refugees by police and government officials.

Similarly Nauru does not process asylum claims or recognise refugee status under its domestic law and Papua New Guinea, which has signed the Refugee Convention with significant reservations (exceptions or modifications to their obligations), does not have specific domestic legislation that relates to the determination of refugee status.

It is therefore unlikely that any of the countries currently touted as part of a solution to Australia’s perceived problems would qualify under the Act as it now stands.

Changing the Act to remove or amend section 198A is problematic. The High Court’s decisions clearly highlight Australia’s obligations under international law and the way they are reflected within the entire Act. These are not restricted to the Refugee Convention and could include other treaty obligations such as the UN Convention of Rights of the Child.

A regional solution to the problem of refugee flows is an admirable goal. What Australia cannot do is mistake a deterrent framework for a regional protection framework. An effective framework would be built on the premise that people in need of protection must have durable solutions. It would incorporate the principles of protecting human rights. It would burden-share with other countries in the region and in doing so expand opportunities for protection.

Ironically, Malaysia entered an agreement which placed more responsibilities upon Australia to protect refugees than it did on itself. Whilst the agreement looked like an exchange of 800 asylum seekers for 4,000 recognised refugees, the agreement to accept the 4,000 refugees was independent of any exchange.

It is an obligation that Australia cannot escape regardless of the fact the agreement was not legally binding. The political ramifications for Australia within the region would be diabolical if the government chose to renege on their end of the bargain.

It could therefore be argued that the failed Malaysian Solution has inadvertently exposed what may be the only solid plank in a Regional Protection Framework. That is the commitment of Australia to take large numbers of UNHCR-processed refugees from a country within our region. Lifting Australia’s quota from Indonesia and Malaysia, and investing in the work of these countries may actually impact on the flow of boats and ensure Australia upholds its legal obligations under international and domestic law.

Marianne Dickie is Sub-Dean of the Migration Law Program at the ANU College of Law, The Australian National University.

1. Australia’s refugee dilemma: The Malaysian solution
2. The future of Australia’s refugee policy
3. The Oceanic Viking and Australia’s refugee dilemma

The heart of Kuala Lumpur is usually chock full of traffic on a weekend. But on Saturday 9 July downtown KL was eerily empty of cars.

Police presence, however, was very noticeable, in the form of roadblocks positioned at major roads leading into the city, fire trucks equipped with water cannons, and helicopters hovering overhead. The police had virtually locked down the city in anticipation of a public rally organised by the Coalition for Clean and Fair Elections, better known as Bersih in Malay (or ‘Clean’ in English), a coalition of 62 non-governmental organisations which was formed to advocate for electoral reform.

The first rally in 2007, now referred to as Bersih 1.0, which attracted an estimated 30,000 people, was seen as instrumental in catalysing the historic 2008 general election results, where the ruling coalition lost its much vaunted two-thirds majority in Parliament and the legislatures in five states. This time, the authorities pulled out all the stops in order to prevent a repeat performance, including declaring the rally, Bersih 2.0, to be illegal and putting the city on high alert in the week leading up to the rally.

Slightly after noon, groups of marchers began to emerge in various locations around the city, all of them heading towards Stadium Merdeka (‘Independence Stadium’), the symbolic location where the first prime minister of Malaysia declared the country’s independence from the British. Many of the marchers had stayed overnight in the city in case the police lockdown prevented them from re-entering. Among the marchers were many middle class non-Malays, who generally eschew participation in these public marches, including a sizeable number of college-aged students. But the marchers never made it to their destination. For approximately 3 hours the police attempted to disperse these groups using tear gas, water cannons, batons and shields only for the marchers to run and regroup in various locations around KL. Finally, at 4pm, the time when the organisers said the rally would end, the marchers, in two separate locations, sang the national anthem and dispersed peacefully.

It is not easy to resist the temptation of drawing parallels between the political events which have taken place in the Middle East and North Africa with the graphic images of police violence against the peaceful marchers in KL on this Saturday. But Malaysia is not Tunisia or Egypt. There was no occupation of a Tahrir Square equivalent nor was there a symbolic ‘Mohammed Bouzizi sacrifice’ (the Tunisian fruit seller who set himself aflame). Most of the 1,600 people arrested, including some opposition party and rally leaders, were released at day’s end. There is little chance that the incumbent governing coalition, the Barisan Nasional (BN), in power for 54 years since independence, will be overthrown by a popular revolution.

This is not to say there are no electoral costs to pay. Popular support for the BN will decline, especially in the urban areas, where voters have greater access to online sources of information including numerous YouTube clips showing video evidence of police brutality contrasted with the resilience of the marchers.

The political awareness of the marchers, many of them first timers, has also been heightened by this event. The participation of the middle class is particularly significant in further signaling the lifting of the veil of fear associated with street marches, with memories of the racial riots of 13 May 1969, which also occurred in KL, fading into irrelevance.

The demonstration of solidarity extended beyond Malaysia’s shores where, for the first time in history, Malaysians in over 20 cities around the world, including Singapore, Hong Kong, Taipei, Osaka, Melbourne and London, gathered together wearing Bersih t-shirts and displaying banners in support of Bersih 2.0.

But the electoral impact of the backlash against the ruling coalition is likely to be limited. Residents in the urban areas, where much of this backlash is located, are already voting in constituencies with opposition representatives. Most Malaysians who work or study overseas — and are much more likely to support the opposition — also cannot cast postal ballots.

Residents in rural areas, on the other hand, who are over-represented because of the uneven distribution of voters, do not have the same kind of access to online sources of information and, hence, would less likely be swayed to vote for the opposition because of Bersih 2.0. Residents in the states of Sabah and Sarawak, in East Malaysia, which account for 25 per cent of total parliamentary seats, are even less likely to be moved by the events in KL because of the strong state-centric focus among voters in these states.

It is unlikely that Bersih will organise another public rally before the next general election since its leaders have expressed their preference to submit the list of their eight demands to the King through other channels.

What this means is that the next general election, anticipated to be held before the middle of 2012, will be fought based on already established political issues, including the state of the economy, rising inflation, corruption and the always present policies associated with race and religion. Bersih 2.0 may have left a lasting impression among those who participated and those who followed the events closely online, but its electoral impact will be nowhere as significant as the images from the YouTube clips — an impact, not confined by space or locality, that may prove substantial yet.

Ong Kian Ming holds a PhD in political science from Duke University. He currently teaches public policy at UCSI University, a private university in Kuala Lumpur. He counts himself among one of the first time rally participants. 

A version of this article first appeared in the China Daily Asia Weekly, 11 July 2011.

1. Malaysia: Disputing elections
2. Malaysia: the political tide runs out
3. A low note for Malaysia as Anwar trial starts