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We appear to be stuck in the middle income trap. On one hand we are unable to compete with low cost countries such as China, India and Vietnam but on the other hand we are unable to move up the value chain to a high income knowledge based economy due to lack of skilled workers. We are unable to attract skilled foreigners to our shores while skilled Malaysians are leaving in droves. ANALYSIS What has happened to the Malaysian economy? We were once one of the most promising emerging economies in South East Asia and blessed with bountiful natural resources including oil and timber. In the 1970s Malaysia was on par with other developing countries such as Singapore, South Korea, Taiwan and Hong Kong but these countries have progressed far ahead of us.

Their per capita incomes and currency values are a few multiples of ours. For example Singapore and S. Korea’s per capita incomes are US$35,400 and US$16,700 respectively while Malaysia is lagging badly at a mere US$8000. S. Korea has also exceeded us in technological products and has many global brands while all we have is Proton which cannot compete outside its domestic protected market

We appear to be stuck in the middle income trap. On one hand we are unable to compete with low cost countries such as China, India and Vietnam but on the other hand we are unable to move up the value chain to a high income knowledge based economy due to lack of skilled workers. We are unable to attract skilled foreigners to our shores while skilled Malaysians are leaving in droves. Meanwhile we are importing masses of low skilled foreigners which depress our wages. As a result our wages have remained stagnant for the past 15 years while the cost of living has escalated. The net result is that the standard of living of ordinary Malaysians is regressing due to depreciation of real income while our income gap is the widest in Asia.

The economy of a country cannot be treated in isolation to its social, human and political factors. It is closely interrelated to education, meritocracy, corruption, natural resources, productivity, creativity, democracy and rule of law among others. A strong and robust economy is the net result of good governance, good policies and proper use of resources and is reflected in the happiness and wellbeing of its citizens. In this article I shall try to explain how Malaysia has stumbled and sowed the seeds of its economic decline.

If any single factor can be blamed for the poor health of the Malaysian economy it is racial policies. Meritocracy is the natural selection of the economy; it ensures that the best and brightest people and companies rise to the top just as natural selection in the ecosystem ensures that the strongest and fittest organisms survive and propagate for the wellbeing of the species. If race has replaced meritocracy as the qualifying factor it means that we are not making full use of our human and natural resources with detrimental effect on our competitiveness.

Even worse, racial policies as embodied in the NEP has encouraged rent seeking and created a culture of bumiputraism where rewards are expected by a privileged group without the requisite effort. It has also led to patronage in the form of negotiated and bloated contracts such as those given to IPPs and toll concessionaires which distort economic efficiency with consequent higher cost to consumers.

Exclusion of other races from government tender and procurement means that the government does not get the best price or the best vendors. The preferential treatment and government assistance given to bumiputra contractors, suppliers and entrepreneurs shield them from real market forces which would have made them stronger and more competitive.

The special economic privileges espoused by bumiputraism require the productivity of other races to sustain. The government cannot give something for free to anybody without taking it from someone else who must give it up for free. Essentially this means a lower overall productivity and an injured entrepreneur spirit among the minority races.

Unfortunately Malaysia’s racial policies cover more than just economic privileges, it also intrude into education, employment, sports, licensing, government linked investment funds, buying houses, petrol station dealerships and new share applications and indeed into every facet of human endeavour. It is sad to say that racial policies are woven into the very fabric of Malaysian society.

The Chinese have fared better under Malaysia’s racial policies due to various factors such as their emphasis on education, their clans, the large domestic Chinese economy and their entrepreneur spirit but the Indians have become an underclass. However if any community is held back from achieving its full potential the whole country suffers.

The difference in economic opportunities and the lack of meritocracy lead naturally to a brain drain as the best and brightest Malaysians disadvantaged by race take their talents overseas. In a globalized world the educated and the skilled are extremely portable as there is a huge competition for skilled labour. Although there are pull factors enticing them away the push factors originating domestically is no less compelling.

Education is the future of the county but unfortunately education in Malaysia has not been spared the deleterious effect of racial policies. As racial policies essentially mean that meritocracy takes a backseat to ethnic origin this is extremely injurious to education.

Students face race based policies after Form 5 when Malays are streamed to matriculation with a token 10% for other races while non-Malays either opt for Form 6 which is longer and harder route to university or private colleges which require considerable financial outlay. Those who go to matriculation save one academic year compared to those who go to Form 6.

Even more unfair is that the grades acquired in matriculation are taken as equivalent to the grades acquired in STPM (Form 6) for the purpose of university entry although they are in no way comparable. Matriculation students sit for segmented internal exams and a large portion of the final marks may come from projects done throughout the year while STPM students sit for a difficult final public exam which are marked externally.

After Form 6 non-Malay good achievers are confronted with unfriendly racial quotas at the gates of tertiary institutions. If they are accepted into public universities they are likely to be shunted into less popular courses with little commercial value such as fisheries, forestry and philosophy. This is despite many universities, colleges and technical schools reserved for one race only which is found in no other country in the world.

Pre-tertiary students in private colleges will continue their studies in local private institutions or overseas which again entail heavy financial commitment. Scholarships for non-bumiputras are hard to come by and every year we hear of heart-breaking stories of top students who fail to secure scholarships.
The upshot is that non-bumiputra parents have to spend a lot of money to educate their children to tertiary level. Those students who do not have well-off parents and not lucky enough to gain a place in public universities or win a scholarship are forced into the job market.

It is clear that standards in public universities have fallen drastically due to the lack of meritocracy in intake of students. This is compounded by race based preference in the employment and promotion of academic staff. Standards have also been marked down to make it easier for bumiputra students to graduate. Our universities have long dropped out of the ranking of the 200 best universities in the world. They are churning out low quality unemployable graduates who do not know how to speak proper English to join the bloated civil service or the ranks of the unemployed.

The result of our two tiered education policy is to contribute to the brain drain of young non-Malays incensed by the racial inequality in education opportunities. They head for the exit as soon as they have acquired their tertiary education while those who remain behind are a fertile breeding ground for opposition supporters. Parents have also been known to migrate in order to obtain affordable tertiary education for their children.

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About 20 people were killed today when the Israeli navy intercepted a convoy of aid ships that activists were trying to sail to the Gaza Strip, Israel’s Channel 10 private television network said. According to news reports, a Malaysian television crew were also on one of the ships that were boarded. Earlier, a spokesman for the Free Gaza Movement which organised the six-ship flotilla said at least two were killed. Casualties could hurt Israel’s international image and diplomatic relations, especially its long-time regional Muslim ally Turkey, whose flag some of the aid ships were flying.

Israel has said it was absolutely determined to maintain its blockade of the Islamist Hamas-controlled Gaza Strip, a Palestinian territory of 1.5 million. It has previously halted such activist ships, although others have reached Gaza before. Amid Israeli military censorship and a refusal of Israeli officials to comment on what appeared to be a continuing operation three hours after dawn broke over the Mediterranean, Channel 10 made clear it was not citing foreign sources. After initially reporting that at least 10 people were dead, it later said the death toll was between 14 and 16. It said commandos who had boarded the convoy were still conducting searches and encountering what it called violent resistance.

“Two people have been killed on board the Turkish boat and 30 or more were wounded,” said Mary Hughes Thompson, a spokeswoman for the Free Gaza Movement, which was behind the convoy. “As far as we know IDF (Israeli military) commandos descended on the boat from helicopters and took it over.” The convoy set off in international waters off Cyprus yesterday in defiance of an Israeli-led blockade of the Gaza Strip and warnings that it would be intercepted. The flotilla was organised by pro-Palestinian groups and a Turkish human rights organisation. Turkey had urged Israel to allow it safe passage and said the 10,000 tonnes of aid the convoy was carrying was humanitarian.

Turkey, long Israel’s best Muslim friend and a key ally in a hostile Middle East, was highly critical of Israel’s attack on Gaza 18 months ago, in which 1,400 Palestinians were killed. Relations between the two states are now distinctly chilly and bloodshed at sea will do nothing to improve them.

CNN showed pictures of a commando apparently sliding down a rope and clashing with a man wielding a stick. Other TV images showed what appeared to be rubber boarding launches. France 24 television aired video of a woman in a Muslim headdress holding a stretcher with a large bloodstain on it. Below her lay a man, apparently wounded, in a blanket. Israel had said it would prevent the convoy from reaching the Gaza Strip. Israel and Egypt tightened a blockade on Gaza after Hamas took over the territory in 2007. Israel launched a devastating military offensive in Gaza in December 2008 with the aim of halting daily rocket fire towards its cities.

Most of the 1.5 million Palestinians living in Gaza rely on aid, blaming Israel for imposing restrictions on the amount and type of goods it allows into the territory. The United Nations and Western powers have urged Israel to ease its restrictions to prevent a humanitarian crisis. They have been urging Israel to let in concrete and steel to allow for post-war reconstruction. Israel denies there is a humanitarian crisis in Gaza, saying food, medicine and medical equipment are allowed in regularly. It says the restrictions are necessary to prevent weapons and materials that could be used to make them from reaching Hamas. — Reuters

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Prime Minister Datuk Seri Najib Razak has reached a critical point after just over a year in office — will he enact economic reforms and cut subsidies and risk alienating his voter base, or will he back off? Poorer Malays could be hit initially by Najib’s pledge to reduce subsidies and roll back a controversial racial affirmative action policy. Many analysts believe the promised economic reforms, aimed at winning back foreign investment, will be delayed, watered down or abandoned to avoid losing votes.
Malaysian bonds have rallied this year, returning 4.99 per cent for dollar-based investors in the past three months, according to the industry benchmark JPMorgan Government Bond Index-Emerging Markets, outperforming the wider Asia index which rose 2.67 per cent. Malaysia’s outperformance is largely due to rate hikes and the ringgit’s proxy as a China revaluation play.

By contrast, Thailand is up 4.77 per cent and high-flying Indonesia scored a 6.81 per cent return in US dollars, although all markets are off their highs, roiled by global risk aversion. Following is a summary of key Malaysia risks to watch:


Political tensions spiked after the 2008 general election when unprecedented opposition gains transformed the political landscape. The Barisan Nasional (BN) coalition’s dominance through 52 years in power was dented as it lost control in five states and its once iron-clad two-thirds control of Parliament. The ruling coalition has since lost in several by-elections including one last month in its own bastion state of Sarawak. The political uncertainty has weighed on foreign investment with net portfolio and direct investment outflows reaching US$61 billion (RM201 billion) in 2008 and 2009 according to official data. While money has flowed into the bond market recently, according to central bank statistics, little has flowed into equities.

What to watch:

• Opposition leader Datuk Seri Anwar Ibrahim’s sodomy trial, which ends in late August. Anwar says the case is a political conspiracy, and a contentious verdict would anger his supporters. Any marked increase in political tensions could see more foreign money pulled from stocks, bonds and the ringgit. But with limited foreign portfolio investment still in the country, the impact will be muted.

• Elections in Sarawak which are expected by the end of this year. The BN’s shock defeat last month at a parliamentary by-election in Sarawak has raised doubts whether it can maintain its support levels in the state. A further weakening of Najib’s coalition in the coming Sarawak elections could spell more losses for the BN in the next general election which analysts say could be held as early as next year.


The government’s commitment to economic reform is being put to the test with a plan to cut subsidies presented to the public last month, with a decision expected in the coming months. Malaysia spent 15.3 per cent of total federal government operating spending on subsidies in its 2009 budget when its deficit surged to a 20-year high of 7 per cent of GDP. Key to investor confidence will be whether the government has the courage to significantly unwind the crippling subsidies amid a potential voter backlash. Najib’s political will to reform will also be tested by the “New Economic Model” (NEM), a blueprint to replace a four-decades-old Malay affirmative policy known as the New Economic Policy (NEP).

The controversial NEP was adopted after 1969 race riots and gave a wide array of economic benefits to ethnic Malays who make up 55 per cent of the population. Investors complain that abuse of the policy spawned a patronage-ridden economy, causing foreign investors to favour Indonesia and Thailand. Najib has rolled back elements of the NEP, and axed the rule that companies must offer stakes to indigenous ethnic Malays. But his plans face growing opposition from conservative Malay rights groups who want the NEP preserved, including Perkasa which is backed by a significant number of people within Najib’s own Umno party.

What to watch:

• The phased rollout of the NEM and how far Najib will accommodate conservative Malay pressure groups. The NEM’s broad outline was released on March 30 and public reaction will be sought before the final measures are announced. Markets barely shifted when it was announced, reflecting scepticism over implementation after some key reforms were put on hold.

• Moves to reduce crippling fuel and food subsidies. Past fuel price hikes have drawn an intense public backlash which Najib appears wary of attracting. 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 hit a more than 20-year high of 7 per cent of GDP in 2009, but the measure was withdrawn.

• The 10th Malaysia Plan, a five-year economic masterplan. Set to be tabled in Parliament on June 10, the plan will contain Malaysia’s revised growth and budget deficit forecasts.

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