Najib Stalls on his New Economic Policy

As expected, Malaysian Prime Minister Najib Tun Razak unveiled his New Economic Model in an 8,000 word speech on March 30 to a national investor conference in Kuala Lumpur. And, as expected, despite the hype and favorable news stories in the international press, it contained virtually nothing of substance. The speech can be found here.

Najib remains caught between the need to eliminate costly subsidies enshrined in 40 years of economic policy that benefit ethnic Malays and the fact that eliminating them would alienate a major part of his United Malays National Organisation political base.

His pledge in the speech to eliminate rent-seeking is fraught with political danger, since UMNO has largely been built on party cadres who have made fortunes on government contracts or other arrangements. As Lim Kit Siang, the leader of the opposition Democratic Action Party, pointed out to Asia Sentinel, Najib's promise to end rent-seeking echoed speeches by his predecessor, former Prime Minister Abdullah Ahmad Badawi, who was unable to make any progress whatsoever in the face of implacable opposition from UMNO cronies.

The premier has been trying to walk the fine line between economic liberalization and alienating his base virtually since he took office a year ago, offering to unveil policies and then delaying. The details now have been delayed until the release of the 10th Malaysia plan, probably in June. Some, including veteran UMNO politician-turned-reformer Tengku Razaleigh Hamzah, whose speech appeared on March 24 in Asia Sentinel, have questioned whether it is possible to split the difference.

Last year, Najib quickly stoked ethnic Malay anger by removing a long-standing requirement mandating ethnic Malay participation in 27 economic sub-sectors as well as removing a requirement that 30 percent of shares in IPOs go to ethnic Malays. That, along with rising irritation in other ethnic parties, led to rallies across the country put on by the Malay Consultative Council, an umbrella group of 50 ethnic Malay non-government organizations, and its most active voice, an NGO called Perkasa.

While there has been no open break between Najib and the splenetic former Prime Minister Mahathir Mohamad, Mahathir has appeared several times at rallies to defend ketuanan Melayu, or Malay superiority. Some of the rallies have turned into near riots and have been likened to the Tea Party rallies in the United States that have roiled American politics. Mahathir is also close to Ibrahim Ali, a former UMNO wheel-horse who is a major force in Perkasa, leading some to believe Ibrahim is Mahathir's spear-carrier.

As Asia Sentinel reported on March 8, the widening gap between what Najib wants to do and what a major portion of his constituency wants is putting in jeopardy his so-called 1Malaysia campaign, designed to bring the country's alienated and fractious ethnic groups together, and to rebuild the Barisan Nasional, the ruling national coalition of ethnic political parties.

In his speech, Najib said the country could no longer rely on a few sectors like oil palm plantations and crude oil sales to drive growth. He called for the country to diversify and provide incentives in new strategic industries. The education system – which critics say now gives ethnic Malays virtually blanket passes with little academic rigor – must be reevaluated and improved, he said, to reward excellence and nurture talented graduates who excel in strategic and creative thinking, and entrepreneurial and leadership skills that will drive success in the decades ahead.

On Tuesday, the Malaysian Insider, an increasingly influential website, reported that the Malay Consultative Council is split over Najib's plans, with the council taking an unofficial stand to support them on condition that affirmative action features contained in the New Economic Policy, put in place after bloody ethnic riots in 1969, remain in place. Given that Najib's economic plans would remove many of those perks, it remains to be seen how he can convince the rank and file of their value.

Najib does have an improving economy working in his behalf. As he told the Invest Malaysia conference Monday, fourth-quarter 2009 Gross domestic product grew by a higher-than-expected 4.5 percent, that exports have rebounded, and foreign direct investment is picking up. The Industrial Production Index, he said, rebounded to 12.7 percent growth in January with exports, which traditionally have comprised more than 100 percent of GDP, exports rose 37 percent to RM52 billion and imports increased by 31 percent to RM40 billion. His decision last year to inject RM67 billion of stimulus funding provided a much-needed boost to the economy.

The government, he said, "can no longer tolerate practices that support the behavior of rent-seeking and patronage, which have long tarnished the altruistic aims of the New Economic Policy. Inclusiveness, where all Malaysians contribute and benefit from economic growth - must be a fundamental element of any new economic approach."

However, there is no better example of how closely tied Najib's own coat-tails are to rent-seekng than a contract to provide services and coordination for two Amaris submarines purchased for US$1 billion from DCNS, a French defense contractor, when Najib was defense minister. Najib and one of his closest friends, Abdul Razak Baginda, were intimately involved with the purchase of the submarines. Although many critics characterized the €114.96 million payment to a company called Perimekar, partly owned by Razak Baginda, as a bribe, Malaysia's defense ministry defended it in Parliament as a support services contract.

Perimekar was partly owned by the Armed Forces Superannuation Fund Board (the military retirement fund), Boustead Holdings Bhd, and KS Ombak Laut Sdn Bhd. Ombak Laut was in turn owned by Razak Baginda, who was tried for the murder of Mongolian translator Altantuya Shaariibuu and found not guilty in a controversial trial that saw two of Najib's own bodyguards convicted of the crime. Altantuya had served as a translator in France on part of the submarine transaction and was demanding US$500,000 from Razak, her former lover in what she herself called blackmail in a letter found after her death.

Yet there is another service contract as well. The submarines became controversial again in February when it was reported that the first one to be delivered had problems with its ballast system and couldn't submerge. Although that turned out to be a relatively minor problem, it brought to light questions over an additional service agreement between the government and a well-connected firm called Boustead DCNS, a joint venture between BHIC Defence Technologies Sdn Bhd, a subsidiary of publicly-listed Boustead Heavy Industries Corp Bhd, and the France-based DCNS SA, which built the subs. Originally Boustead told the Malaysian Stock Exchange that the service contract was for RM600 million (US$184.1 million) for six years, or US$30.68 million annually. However, the contract later ballooned to RM270 million per year. Boustead Holdings is partly owned by the government and has close connections with UMNO.

There are dozens of such contracts or other arrangements between the government and favored companies closely connected to either UMNO or the Barisan Nasional as a whole. One of the costliest scandals in Malaysian history blew up last year when it transpired that a plan to modernize Port Klang, a seaport 60 km west of Kuala Lumpur, had gone so far out of control that the costs skyrocketed from RM1.96 billion to a potential RM12.45 billion if the government has to pay all interest costs it is obligated to by guarantees. Although the scandal is mainly centered in the Malaysian Chinese Association, the second ethnic party in the Barisan Nasional, or national ruling coalition, it also implicates several leading members of UMNO as well, and there appears little appetite to prosecute any of them despite Najib's rhetoric.

"The government promised the world it would be announced by the end of last year," Razaleigh wrote. "It was put off to the end of this month. Now we are told we will be getting just the first part of it, and that we will be getting merely a proposal for the New Economic Model from the National Economic Advisory Council. Clearly, politics has intruded. The NEM has been opposed by groups that are concerned that the NEM might replace the NEP. The New Economic Model might not turn out to be so new after all."