JULY 2 — Two critical tests await the investment policy changes Prime Minister Datuk Seri Najib Razak announced on Tuesday.
First, market liberalisation will push the economy further towards international competitiveness. But will it succeed in attracting enough investment to help avoid a recession in the short term and encourage sufficient growth to transform Malaysia into a high-income nation in the long term?
Second, lowering the Bumiputera equity requirement effectively from 30 to 12.5 per cent will allow broader participation among the country's ethnic groups, but will it result in more equitable income distribution among all the communities, and also benefit the Bumiputera poor who continue to stagnate despite the affirmative action initially enshrined in measures such as the New Economic Policy?
The first is an economic question, the answer to which depends essentially on how competitive the Malaysian economy will become as the global downturn continues. The second is fundamentally a domestic political issue, in which Najib must balance between the possibility of a backlash from dissenters in his own party and a challenge from the opposition, whose agenda he is trying to appropriate. The prospects are fair if not completely encouraging, in the light of current public realisation and opinion.
Neither the economic necessity nor the political expedience of the measures takes away from their boldness. Although he did not scupper Bumiputera preferences entirely, Najib has given the change momentum a major boost less than three months since he assumed office. The pragmatism is as impressive as the motivation: It has become more realistic to grow the national economic pie with steps to encourage rather than limit foreign investment. Then re-distributed shares will absolutely be larger than if equity ownership is pre-required, even at high proportions. The equity rule has served its purpose after helping to reduce poverty from 49 to 4 per cent in nearly 40 years. It has become a relic that threatens to crimp growth.
A more inclusive approach in creating and redistributing wealth makes more sense now. With competitive distortions reduced, Malaysia can bid more effectively against other countries for investment to help propel its economy against the pull of recessionary gravity. While there is no guarantee of success, failure looms as a bigger risk if the country does not move with the globalised times. Najib deserves recognition for daring to take a calculated political gamble that the emerging consensus for such a strategy will solidify sufficiently to allow the transformation to continue apace.
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